oversight

Telecommunications: Impact of Sports Programming Costs on Cable Television Rates

Published by the Government Accountability Office on 1999-06-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report
                  Byron L.toDorgan,
                            the Honorable
                                    U. S. Senate



June 1999         TELECOMMUNICATIONS

                  Impact of Sports
                  Programming Costs on
                  Cable Television Rates




                           |~Accountabllity   * Integrity * Reliability

GAO/RCED-99-136
United States
General Accounting Office
Washington, D.C. 20548

Resources, Community, and
Economic Development Division

B-280705

June 22, 1999

The Honorable Byron L. Dorgan
United States Senate

Dear Senator Dorgan:

The rates that subscribers pay to receive cable television in the United
States have increased at several times the general rate of inflation over the
last few years. Cable operators have attributed these increases to inflation;
programming costs; system upgrades, including increases in the number of
channels; and other factors. However, some cable operators have
attributed increases to the cost of acquiring sports programming, in
particular. In terms of viewership, sports programming is among the
highest-rated programming on cable television.

This report responds to your request that we provide information on the
role that sports programming played in recent increases in cable rates.
Specifically, you asked us to provide information on (1) the extent to
which sports programming costs are contributing to higher cable
television rates; (2) how prices paid for sports programming differ for
small and large cable operators; (3) the extent to which sports
programmers require cable operators to bundle (i.e., combine) sports
programming with other cable programming and how this practice affects
cable rates; and (4) whether the salaries of players in major professional
sports have risen over the last 4 years, and if so, whether this has
contributed to increases in cable rates.

To respond to your request, we reviewed recent studies and public
documents and interviewed representatives from a cross-section of the
cable television industry, including cable companies, programming
networks, federal and state regulatory agencies, and industry trade groups.
Also, we interviewed representatives of major sports leagues. We reviewed
the Federal Communications Commission's (FCC) studies of cable industry
prices covering the years 1995 through 1998 and its 1998 inquiry into cable
rate increases. We analyzed programming cost information we obtained on
15 cable companies from the FCC'S and one state regulatory agency's public
files and convened a panel of experts to discuss issues that you raised. In
some cases, however, we were unable to provide a more definitive
response to the research questions because of limitations on the
availability of information on the costs cable companies incur for
programming, the terms and conditions of programming contracts, and



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                   certain details covering the sale of sports rights contracts. For a detailed
                   description of our methodology, see appendix I.


Results in Brief   The data we obtained on 15 cable systems and the results from the FCC's
                   nationwide 1999 Report on Cable Industry Prices indicate that sports
                   programming has had a limited impact on the rates subscribers pay for
                   cable television service. Data on the 15 cable systems show that sports
                   programming accounted for about 6.8 percent of the average monthly
                   amount that the cable systems charged subscribers during 1997. Also, the
                   FCC report indicates that sports programming accounted for 7.5 percent of
                   the increase in a subscriber's average monthly cable bill from July 1, 1997,
                   through July 1, 1998. However, some cable industry officials believe that
                   the impact of sports programming costs on cable rates may increase as the
                   result of recent contractual agreements between cable networks and
                   major sports leagues.

                   Because of the limitations on the availability of information on prices paid
                   for programming and on the terms and conditions of cable programming
                   contracts, we cannot provide definitive judgments on the differences in
                   what small and large cable operators pay for sports programming.
                   According to industry officials, in some cases, small cable operators pay
                   more than large cable operators for sports programming, such as when
                   programmers offer discounts based on the number of subscribers a system
                   has. However, not all cable networks that carry only sports or a
                   combination of major sports and general entertainment offer such
                   discounts. Furthermore, many small cable operators have been able to
                   lower their programming costs by participating in the National Cable
                   Television Cooperative-an organization that purchases programming on
                   behalf of its members, most of which are small cable operators. However,
                   officials of the Cooperative believe their organization does not always
                   receive discounts comparable to those given to similarly sized, large cable
                   companies.

                   Sports networks and networks that offer general entertainment and sports
                   events frequently require cable operators to bundle their networks with
                   other programming networks into service packages that are offered to
                   cable subscribers. Opinions on bundling vary among officials in the cable
                   industry, with some stating that bundling keeps cable rates down by
                   providing an economically efficient means of distributing programming
                   because it lowers transaction and equipment costs for both cable
                   operators and subscribers. Others, however, believe that bundling limits



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             the choices of cable customers and can result in higher cable rates for
             customers who are only interested in receiving certain types of
             programming.

             Over a 4-year period (1994-98), the average player's salary in each of four
             major professional sports leagues-the National Football League (NFL),
             Major League Baseball (MLB), the National Basketball Association (NBA),
             and the National Hockey League (NHL)-has increased by a range of 14 to
             64 percent, depending on the sport. During the same period, the prices
             cable networks pay to carry major professional sports events have also
             increased as have the rates subscribers pay for cable television. However,
             the opinions of sports and cable industry officials differ on the extent to
             which players' salaries have contributed to cable rate increases. Some
             officials believe the increases in salaries have caused the increases in the
             fees associated with the rights to televise sports events, which have in turn
             led to increases in cable rates. Others believe that players' salary increases
             are simply a reflection of increased consumer demand for sports
             programming and thus should be viewed as an effect, rather than a cause,
             of cable rate increases.


Background   Cable television is the major provider of subscription television
             programming in the United States, serving over 65 million subscribers as
             of June 1998. Overall, there are about 11,000 cable systems nationwide,
             most of which are owned by multiple system operators (Mso)-companies
             that own two or more systems. The top 10 MSOs serve more than 70
             percent of the subscription television video market and have from about
             1.3 million to 13.1 million subscribers. In contrast, many individual cable
             systems are quite small. Over 6,000 systems have fewer than 1,000
             subscribers. Cable television companies compete with other providers of
             subscription television services, such as direct broadcast satellite
             companies.'

             Sports is an important part of cable programming. Sports programming,
             such as MLB and NFL games, is referred to as "marquee programming"
             because of its attractiveness to cable viewers. Cable television systems
             carry sports programming aired by broadcast stations and by cable
             networks, including cable sports networks. Included among the 40 cable

             'Our forthcoming report, Telecommunications: The Changing Status of Competition to Cable
             Television (GAO/RCED-99-158), analyzes the status of competition in the subscription television
             market; the extent to which ties between cable companies and program suppliers may be affecting the
             development of competition; and the key factors that may influence the development of competition in
             the future.



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sports networks are national sports networks, such as ESPN; regional
sports networks that carry games of local sports franchises as well as
other sports programming, such as Fox Sports Northwest; specialized
sports networks, such as the Golf Channel; and sports news channels,
such as CNN/SI. (App. II provides a list of cable sports networks.) In
addition, other cable networks, such as the TNT and FX networks, offer a
mix of major sports programming and general entertainment. Cable
systems pay for programming they obtain through licensing fees that they
pay to cable networks and through copyright fees that they pay for
obtaining distant broadcast television signals.

Generally, sports programming, as well as most other cable programming,
is offered by cable operators as part of one or more bundled service
packages, or "tiers," with each tier consisting of additional channels
provided for an additional cost. The lowest-priced tier is called the basic
tier and includes the retransmission of local broadcast signals; public,
educational, and governmental channels; and any other channels chosen
by the cable operator. Many cable companies also offer one or more
"enhanced basic" tiers (also called cable programming services tiers) that
include advertiser-supported cable networks (such as ESPN, the USA
Network, and MTV) and may also include news and special interest
services. For an additional amount, cable operators also offer premium
services, such as Home Box Office or Showtime, and pay-per-view
services, such as professional boxing and movies.

From July 1995 through July 1998, cable television rates have increased
faster than the general inflation rate as measured by the Consumer Price
Index. 2 For example, according to the Bureau of Labor Statistics, between
June 1997 and June 1998, cable rates rose by 7.3 percent, while the
Consumer Price Index increased by 1.7 percent. However, because many
cable companies increased the number of channels they offered during
this period, increases in cable rates are lower on a per channel basis. For
example, according to the FCC'S May 1999 Report on Cable Industry Prices,
average monthly rates for cable companies not facing effective




2
 Rates for basic cable service are subject to regulation by states or localities. In some cases, the state
regulates cable television through a state commission or advisory board. In other areas, cable is
regulated by local government entities, such as a city cable commission, city counsel, or board of
supervisors. The FCC had authority to regulate the rates cable companies charged for the cable
programming services tiers; however, the authority expired on March 31, 1999.



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                       competition 3 increased by 6.9 percent during the 12 months ending July 1,
                       1998, but by only 1.6 percent when considered on a per channel basis. The
                       average monthly cable rate charged by noncompetitive companies as of
                       July 1, 1998, was $30.53, of which $27.88 was for programming services
                       and $2.65 for equipment rentals.4


The Extent of Sports   Available data on 15 cable systems in 1997 indicate that, in general, sports
                       programming accounted for about 29 percent of the cable system
Programming's Impact   operators' programming costs and about 6.8 percent of the monthly
on Cable Television    amount that the cable systems charged to their subscribers.5 ,6
                       Furthermore, recent FCC studies have found that increases in sports
                       programming costs have been a relatively minor contributor to higher
                       cable rates.7 However, sports programming costs may have a greater
                       impact in the future when the increased costs of recent contract
                       agreements with major sports leagues are more fully reflected in cable
                       operators' rates.




                       3
                        The Communications Act of 1934, as amended, directs the FCC to annually publish statistical reports
                       on the average rate of a number of items, including basic cable services, of cable systems that the
                       Commission has found are subject to effective competition compared with those that are not. Whether
                       effective competition exists is determined using any one of four criteria. For example, effective
                       competition is deemed to exist where the franchise area is served by at least two unaffiliated
                       multichannel video programming distributors, each of which offers comparable video programming to
                       at least 50 percent of the households, and at least 15 percent of the households subscribing to
                       programming services offered by a multichannel video programming distributor subscribe to services
                       other than those offered by the largest multichannel video programming distributor. 47 U.S.C.
                       543(k),().
                       4
                        The rate for programming services includes programming in the basic tier and most popular cable
                       programming services tier. Equipment rentals include charges for remote control units and converters
                       (electronic devices that shift channels transmitted by a cable system to other channels on a
                       subscriber's television set). According to the FCC's report, rates for competitive cable companies
                       increased by 5.8 percent overall during the 12-month period ending July 1, 1998, and by 3.6 percent
                       when viewed on a per channel basis. The average monthly cable rate charged by competitive
                       companies as of July 1, 1998, was $28.71, of which $26.12 was for programming services and $2.59 for
                       equipment rentals.

                       5 Detailed information on the fees that cable system operators pay for cable television programming is
                       difficult to obtain because of its proprietary nature. As a result, our ability to fully assess the impact of
                       sports programming costs on cable television rates was limited.

                       6 Total
                             programming costs accounted for about 23.8 percent of the monthly cable bills that the 15 cable
                       systems' subscribers paid. Aside from programming costs, subscribers' bills include costs for system
                       upgrades, channel additions, new equipment, and inflation.
                       7
                         We were unable to determine whether there were any changes in the quality of sports programming
                       that may be related to increases in the cost of sports programming for the 15 cable systems or for the
                       cable systems covered by the FCC's studies. However, according to the 1998 FCC report, the average
                       number of channels that noncompetitive cable systems devoted to sports programming increased from
                       2.6 to 2.9 (11.5 percent) between 1997 and 1998.


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Sports Programming                       For the 15 individual cable systems we reviewed, fees cable operators paid
Accounted for 29 Percent                 to obtain programming from cable sports networks accounted on average
of Programming Costs at                  for about 29 percent of total programming costs in 1997.8 The costs ranged
                                                                                                             9
15 Cable Systems                         from about 18.6 percent to about 46.2 percent, as shown by figure 1.



Figure 1: Sports Programming Costs as a Percentage of Total Programming Costs for 15 Cable Systems, 1997

          Percentage of programming costs
50


45

40

35

30

25

20    -

15    -

10    -




      0
            1   2    3    4   5     6    7      8     9     10     11     12      13     14     15
          Cable systems

                                         Source: Programming cost information from 15 individual cable systems.



                                         8
                                          Data on these systems are not necessarily representative of all cable systems.
                                         9
                                          The fees cable system operators pay for sports networks tend to understate the impact of sports on
                                         cable rates because sports are also carried by other networks. However, data were not available to
                                         determine the degree of the impact of sports on the programming costs of these other networks.


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                                       The monthly sports programming costs for operators of the 15 cable
                                       systems ranged from 74 cents to about $3.00 per subscriber per month.
                                       The number of sports networks carried ranged from one to four and
                                       included ESPN, ESPN2, regional sports networks; and the Golf Channel.

                                       As shown in figure 2, sports programming costs on average represented
                                       about 6.8 percent of the average monthly amount that the 15 cable systems
                                       charged to their subscribers for cable programming. The percentage
                                       ranged from about 3 percent at a system that carried only one sports
                                       network to over 12 percent at a system that carried four sports networks.
                                       Other programming costs accounted for an additional 17 percent of the
                                       monthly amount that the 15 cable systems charged subscribers.


Figure 2: Percentage of the Average
Monthly Amount That the 15 Cable                                               Sports
Systems Charged to Their Subscribers
That Was Attributable to Sports and                                        programming
Other Programming Costs, 1997                                                   costs
                                                                                6.8%
                                                                                                           Other
                                                                                                    programming
                                                                                                           costs
                                                                                                           17.0%




                                       Other
                                       76.2%



                                       Source: Monthly programming cost information on 15 cable systems.




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The FCC's Study Found a     In an effort to identify the sources of recent cable television cost
Similar Impact of Sports    increases, in 1998 the FCC conducted an inquiry of the top six MSOS that
Programming on Cable        provide services to approximately 67 percent of all cable subscribers. In
  Rates                     general, the FCC inquiry's results were similar to what we determined for
                            the 15 cable systems. The MSOS reported to the FCC that sports
                            programming, in general, accounted for 26.7 percent of the total
                            programming fees charged to cable system operators, compared with
                            about 29 percent for the systems we reviewed. While the FCC inquiry's
                            results did not include information on the extent to which sports
                            programming costs contributed to a subscriber's average monthly cable
                            bill, it did include an analysis of the extent to which sports and other
                            programming costs contributed to increases in subscribers' cable rates
                            from July 1, 1995, through July 1, 1996, and from July 1, 1996, through
                            July 1, 1997.10



Programming Costs Have      Data collected by the FCC indicate that total programming cost increases
Contributed to Cable Rate   have been a substantial contributor to cable rate increases. For example,
Increases, but the Impact   the 1999 Report on Cable Industry Prices shows that, on average, for
         s Pe, amminr
      IncSortas             noncompetitive systems, rate increases attributable to programming costs
  Sports Programming
  of                        were about 33.6 percent from 1997 to 1998 and 24.4 percent from 1996 to
Costs Was More Limited      1997.1 The FCC'S 1998 inquiry determined that between 1996 and 1997,
                            programming costs accounted for 28.2 percent of the increase in
                            subscribers' cable rates for four of the MSOS that responded.' 2 Both reports
                            also identified other factors that contributed to cable rate increases, such
                            as inflation, upgrades, and channel additions.

                            However, compared with the impact of programming costs on cable rate
                            increases, the impact of sports programming costs has been limited. The
                            1999 Report on Cable Industry Prices shows that for noncompetitive
                            systems, sports programming accounted for about 22.4 percent of the
                            increase in programming costs, or 7.5 percent of the increase in cable
                            rates, between 1997 and 1998. Between 1996 and 1997, sports
                            programming accounted for about 19.6 percent of the increase in
                            programming costs, or 4.8 percent of the increase in cable rates. Similarly,
                            the FCC'S 1998 inquiry showed that between 1996 and 1997, sports

                            '┬░Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming,
                            Fifth Annual Report, Appendix F (1998).

                            "Most of the respondents to the FCC's 1998 price survey were noncompetitive systems. Results were
                            similar for competitive systems.

                            '2While the FCC's inquiry included six MSOs, only four provided complete information covering the
                            topic.


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                                         programming accounted for about 5.3 percent of the total increase in
                                         rates. Other programming subcategories that both reports identified as
                                         contributing to cable rate increases included news, children's, and other
                                         types of programming.' 3

                                         Figure 3 shows the reasons cable systems reported for increases in
                                         subscribers' average monthly rates, according to the 1999 Report on Cable
                                         Industry Prices.


Figure 3: Factors Affecting Cable Rate
Increases, 1997-98                                                                                 Sports
                                                                                              programming
                                                                                                  costs
                                                                                                  7.5%




                                                                                                                                    Other
                                                                                                                                programming
                                                                                                                                    costs
                                                                                                                                   26.1%




                                         Other costs
                                             66.4%




                                         Note: Other costs include inflation, channel additions, system upgrades, and new equipment.

                                         Source: 1999 Report on Cable Industry Prices, FCC.




                                         l3The 1998 inquiry showed that news, children's, and other types of programming accounted for
                                         1.2 percent, 3.2 percent, and 17.6 percent, respectively, of the increase in rates from 1996 to 1997.


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                          In comparison, our analysis of programming cost increases for 12 cable
                          systems found that sports programming accounted for about 32.8 percent
                          of the total increased programming costs between 1996 and 1997.14 For
                          1998, the projected increases for sports programming at 14 cable systems'5
                          averaged about 24.1 percent of total programming cost increases.' 6


The Impact of Sports      While historically sports programming costs have generally had a limited
Programming Costs on      impact on cable television rates, the impact could increase in the future.
Cable Rates Could         As we describe later in this report, in the last 3 years, each of four major
Increase in the ]Future   sports leagues has signed contractual agreements that have increased the
                          amounts that cable networks pay for the cable rights to the leagues'
                          games. According to several MSO officials, the impact on costs of these
                          contractual agreements is beginning to be reflected in the prices MSOS are
                          being charged by the programmers for the sports events. For example,
                          ESPN's Executive Vice President for Administration told us that cable
                          operators were notified in April 1999 that ESPN would increase its
                          programming license fees on August 1, 1999. According to the official, the
                          August 1 increase is based on several factors, including the value of the
                          network to consumers and local advertisers; the increasing costs
                          associated with ESPN's obtaining the cable rights to highly valued sports
                          programming, such as NFL games; and the relatively high cost of producing
                          and televising live sports entertainment. The official stated that the net
                          impact of the rate increase on cable operators will depend on each
                          operator's contractual agreement with ESPN. These agreements include
                          varying discounts and incentives that enable cable operators to reduce
                          program licensing fees. In addition, to help offset licensing fee increases,
                          ESPN has increased the amount of advertising time that it makes available
                          to cable operators to sell during ESPN programming. ESPN estimates that
                          taking into account discounts, incentives, and the growing amount and
                          value of ESPN's local advertising sales inventory, the net impact of its
                          wholesale rate adjustments in each of the last 2 calendar years will
                          average about 10 cents per subscriber per month.




                          14Information for 1996 was available only for 12 of the 15 cable systems.

                          151nformation for 1998 was available only for 14 of the 15 cable systems.

                          '6 Information, similar to that in the FCC study, on the other factors affecting rates was not available to
                          us for the 15 systems.



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Small Cable Operators       Because of the limitations on the availability of information on prices paid
                            for programming and on the terms and conditions of cable programming
Sometimes Pay More          contracts, we cannot provide definitive judgments on the differences in
Than Large Operators        what small and large cable operators pay for sports programming.
for Sports                  According to interviews with industry officials, small cable operators
                            sometimes pay more for sports programming because the small number of
Programming                 their subscribers limits their ability to take advantage of volume discounts
                            or opportunities to obtain revenue, such as the sale of time used for
                            advertising during cable network programming. Not all networks that
                            carry only sports or a combination of sports and general entertainment
                            programming offer volume discounts, however. Also, many small cable
                            operators have been able to lower their programming costs by joining the
                            National Cable Television Cooperative (NCTC), which aggregates its
                            members' subscribers to collectively purchase programming. Nonetheless,
                            NCTC officials believe that NCTC does not always receive discounts that are
                            comparable to those given to similarly sized MSOS.


Small Cable Operators May   According to industry officials, small cable operators are likely to pay
Pay More If a Programmer    more for sports programming than large cable operators if a cable
Offers Volume Discounts     programming network offers price reductions, such as volume discounts,
                            based on the number of a system's subscribers." According to the
                            American Cable Association (ACA), 18 such discounts exist because large
                            cable operators have more negotiating power than small cable operators.
                            Programmers have an incentive to have their programming available to the
                            greatest number of subscribers possible because, as the number of
                            viewers increases, so do programmers' revenues from licensing fees and
                            advertising revenue. Therefore, cable operators with a large subscriber
                            base can obtain greater concessions, such as volume discounts, from
                            programmers than small cable operators.' 9



                            '7Aside from volume discounts, some sports programming networks offer other incentives that can
                            reduce programming costs. These include discounts for locating a programmer's network on the VHF
                            band (i.e., channels 2 through 13), locating a network next to another programming network offered by
                            the same company, and carrying on the channel lineup two or more affiliated networks that are owned
                            by the same programming company.

                            '8 ACA, formerly the Small Cable Business Association, is a nationwide trade association representing
                            approximately 300 small cable businesses that collectively serve more than 2.3 million subscribers.
                             9
                            m  According to comments submitted to the FCC by Ameritech New Media, Inc., regarding cable
                            television ownership rules, to be economically viable, a programming network needs to reach a critical
                            mass of viewers, which has been estimated to be approximately 20 million subscribers. To reach that
                            level, a programmer must reach agreement with one or more of the largest MSOs. As a result, the large
                            MSOs possess significant leverage in negotiating price reductions.



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                            Information we obtained indicates that the extent to which sports
                            programming networks offer volume discounts varies. For example, one
                            prominent sports programming network provided eligible cable operators
                            with volume discounts ranging from 1 to 6 cents per subscriber. The
                            lowest discount was for cable operators with 250,000 to 499,000
                            subscribers, and the highest discount was for operators with 1.5 million or
                            more subscribers. The network's programming must reach at least
                            95 percent of the cable operator's subscribers for the operator to be
                            eligible for a discount. Network officials told us that the number of
                            subscribers needed to qualify for the discounts was recently lowered to
                            assist cable operators in coping with programming cost increases.

                            However, another popular sports programming network and a few popular
                            networks that offer a combination of general entertainment and major
                            sports events 20 did not offer volume discounts as a way of reducing
                            programming service fees. According to an official representing one
                            regional cable sports programming network, the per subscriber
                            programming costs for small and large cable operators are essentially the
                            same because the network bases its licensing fees on the proximity of a
                            cable system's subscribers to the sports event and on the percentage of a
                            cable operator's subscribers receiving the service. Also, some industry
                            officials told us that several popular networks that offer a combination of
                            general entertainment and major sports events do not offer any volume
                            discounts because they are widely distributed and few cable systems could
                            afford not to carry them. The officials said that while volume discounting
                            is a fairly common practice among cable networks, it tends to be used
                            more by newer programming networks and those with limited distribution.


Small Cable Operators Are   According to industry officials, the net cost of sports programming may
Likely to Have Higher Net   also be higher for small cable operators because they take in less in
Program Licensing Costs     advertising revenue and are less able to take advantage of some of the
Than Larger Operators       other incentives that offset programming costs. Small and large cable
                            companies generally receive a portion of the advertising time that is
                            available within cable programming offered on their systems. For
                            example, one sports network provides cable operators with 2 minutes of
                            local advertising per hour during its programming, which represents a




                            2┬░Programming networks that offer a combination of general entertainment and major sporting events
                            include TNT, TBS, and FX



                            Page 12                      GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
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revenue source for cable operators. 21 According to network officials,
80 percent of cable operators sell advertising during each 2-minute period.
The officials also stated that to help cable operators cope with rising
programming costs, the network recently increased the number of
30-second advertising units available during a 1-hour period. It also
lowered the number of subscribers that cable operators' systems needed
to be able to take advantage of volume discounts.

However, according to officials representing small cable operators, the
size of their markets limits their ability to sell advertising during the time
allotted for local advertising. For example, NCTC officials estimate that a
cable system needs at least 5,000 subscribers to break even with the costs
incurred to develop an advertising sales and production department. They
noted that most of their members' cable systems have fewer than 5,000
subscribers.

 Net licensing fees for small cable operators may also be higher because
small cable operators have difficulty taking advantage of, or negotiating
for, some of the other incentives available to both small and large
 companies, such as marketing support-that is, funding to advertise
programming networks-and cash or other incentives. However, the
magnitude of these incentives is unclear. Representatives for small cable
operators we spoke with stated that it is difficult for small companies to
utilize marketing support money because they have limited markets and
few media outlets on which to spend promotion funding. An industry
official we spoke with also said that it is common practice in the cable
television industry for programming networks, including sports
programmers, to provide cash or other incentives to cable operators in
return for airing promotional advertising in the local market. The official
said that many small cable operators are unable to take advantage of these
incentives because they do not have a sufficient number of subscribers to
justify the investment necessary to sell, produce, and insert promotional
advertising into cable programming.




2t
  Total cable advertising revenues in 1998 were about $9.079 billion, including $2.214 billion for local
and spot cable advertising, $305 million for advertising on regional sports networks, and $6.560 billion
for advertising on network cable. For the six MSOs responding to the FCC's 1998 inquiry, the average
local advertising revenues represented 7.9 percent of the average revenues of regulated cable systems.



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Small Companies Can Now    Many small cable operators now purchase sports and other types of
Purchase Programming       programming collectively through NCTC, which negotiates master contracts
Through the National       with programming networks on behalf of its members. Currently, NCTC,
Cable Television           which has about 925 cable operator members representing 6,300 cable
                           systems, has contracts covering 85 programming networks. The combined
    Cooperative            amount of NCTC members' subscribers (10.5 million) would make it the
                           third largest MSO. By purchasing programming through NCTC, small cable
                           operators are capable of obtaining volume discounts comparable to those
                           acquired by large MSOS. But, according to NCTC officials, NCTC does not
                           always receive the discounts that a comparably sized MSO would receive.
                           Industry officials told us that NCTC is still limited in its ability to negotiate
                           the best possible terms with programming networks because large MSOS
                           can promise delivery of a certain number of subscribers while NCTC can
                           only promise to present offers to its members. In addition, according to
                           ACA, while buying groups such as NCTC have had some success obtaining
                           cost savings for national programming, they have not been successful in
                           obtaining cost savings for local or regional programming, such as regional
                           sports networks. Moreover, ACA has indicated that neither it nor NCTC has
                           any assurance that current programmers will renew their existing NCTC
                           contracts when they expire. Furthermore, some industry officials believe
                           that because many small cable operators continue to have fewer
                           opportunities for mitigating cost increases, in the near future, small cable
                           operators will pay more than large operators as the higher costs of
                           recently signed sports rights agreements are passed on to cable operators.


Cable Networks             Our discussions with cable industry officials and our analysis of
                           information provided by cable operators indicate that sports networks and
Generally Require          networks that offer a combination of general entertainment and sports
Bundling, but Views        events generally require the bundling of their programming with other
                           cable networks on the basic or enhanced tiers of service. However,
on Its Effect on Rates     opinions on the effect that bundling has on cable rates were mixed.
Vary
Limited Information        Information obtained from discussions with cable operators, cable
Indicates That Sports      programming networks, and other cable industry representatives indicates
Networks Frequently        that sports networks and networks that offer general entertainment and
Require Program Bundling   sports events frequently require their networks to be bundled with other
                           programming networks in specific tiers. For example, an official with a
                           large MSO stated that most of the cable programming networks, including
                           sports programming networks, require that their networks be located on
                           the basic or enhanced basic tier of service. An official of a large MSO and



                           Page 14                 GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
B-280705




major distributor of cable programming stated that sports programming
networks pressure cable operators to bundle their networks with other
programming networks because it increases the potential for viewers and,
thus, can increase the network's advertising revenue.

Information we obtained indicates that the specific bundling arrangements
required by networks vary. For example, one sports network required that
its programming be provided either on the operator's basic tier or on an
enhanced basic tier that contained no fewer than 10 other first-quality
cable programming networks. Another sports network required that its
programming be distributed as part of basic service, enhanced basic
service, or a third-tier service. If the programming was offered on the third
tier, the network required that the tier be received by at least 30 percent of
the operator's subscribers and that it contain at least four other cable
programming networks. However, the network also allowed the cable
operator to distribute the network on an a la carte basis 22 so long as the
system also offered the network as part of a third tier in which each other
programming network was also offered on an a la carte basis. Yet another
network that offers general entertainment and major sporting events
required that its programming be received by an aggregate of at least
90 percent of the total subscribers throughout all the MSO's systems and
that it not be offered solely as an a la carte service on any system. 23

In addition to having specific bundling requirements, sports networks and
networks that offer general entertainment and major sporting events also
frequently employ fee structures whereby the amount cable operators pay
for programming decreases as the percentage of subscribers who receive
the service increases, according to information we received. For example,
one network's fees were broken into three price levels. The lowest fee was
charged to a cable operator that provided the network's programming as
part of its service to 95 percent or more of the operator's subscribers. The
level increased by about 11 percent per subscriber if more than 85 percent
but less than 95 percent of subscribers received the network and by an
additional 18 percent if less than 85 percent of the operator's subscribers
received the network. Another network provided a discount if the total

22
  Programming offered on an a la carte basis allows cable subscribers to purchase channels
individually.

' 3Information we obtained from cable operators also indicates that some sports networks that
previously were available on an a la carte basis have tried to convince operators to move the networks
to the enhanced basic tier. A 1998 study conducted by Economists Incorporated also found that there
has been a migration of regional sports networks from a la carte programming to cable operators'
enhanced service tiers. How Bundling Cable Networks Benefits Consumers (Washington, D.C.:
Economists Incorporated, Feb. 28, 1998), p. 6.



Page 15                       GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
                           B-280705




                           number of cable system subscribers receiving the network was above
                           80 percent. The discount increased for each percentage point that the
                           number of subscribers exceeded the 80-percent level.


Differing Views Exist on   Views on the effect of bundling vary. According to many cable industry
the Effect That the        officials, the bundling of cable television programming is economically
Bundling of Cable          efficient. For example, an official representing a large MSO commented that
                           the bundling of cable networks is the most efficient means of providing
Programming Networks       cable programming for cable customers. Having numerous tiers of service
Has on Cable Rates         or a la carte programming would increase costs and, therefore, increase
                           cable rates, the official stated. A 1998 industry-sponsored study by
                           Economists Incorporated reported that without bundling, all subscribers
                           would have to pay the additional costs of adding and deleting channels
                           since the cable operator would likely have to add additional customer
                           support and technical staff to deal with the increased number of calls. The
                           study also reported that many cable subscribers would have to purchase
                           or rent additional pieces of equipment, like converter boxes, since cable
                           operators would probably scramble unbundled channels to prevent
                           unauthorized subscribers from viewing them. The study cited a National
                            Cable Television Association estimate that the rental rate of a converter
                           box is about $3.20 per month. A panel of experts we commissioned agreed
                           that the bundling of cable programming, to at least some extent, results in
                            economic efficiencies and thereby helps in minimizing cable rate
                            increases.2 4

                           The Economists Incorporated study, as well as some industry officials we
                           contacted, stated that unbundling cable programming would not be in the
                           best interest of cable subscribers. For example, one sports network
                           official indicated that unbundling would lead to fewer subscribers
                           receiving the network, which would result in decreased advertising sales
                           because a smaller audience share would be viewing the programming. The
                           loss in advertising sales could then lead to cable operators' raising cable
                           rates to make up the loss in revenue from advertising. An official of a
                           major broadcast network also indicated his concern by stating, "If forced
                           in an a la carte direction, the cost to the consumer of each individual
                           channel will necessarily go up, and the number of people subscribing to
                           various services will accordingly shrink."

                           Other officials believe that bundling limits the choices of cable customers
                           and that cable operators should seriously consider a la carte programming.

                           24
                                For a list of the expert panel members, see app. III.


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                            B-280705




                            For example, one of the experts on the panel we commissioned
                            commented that even if economic modeling indicates that bundling is
                            more efficient for cable operators and consumers, consumers do not feel
                            they are benefiting. The panelist commented that, after complaints about
                            rates, the lack of choice in the number and types of networks they receive
                            is consumers' second most frequent complaint about cable television.

                            An official of one large MSO indicated that the cable industry should take a
                            serious look at offering a la carte programming because "choice" is a
                            good marketing banner. Another official representing a large MSO
                            commented that his company would like to offer sports networks on an a
                            la carte basis because it could provide a more economical package of
                            other kinds of programming to non-sports fans. The official continued by
                            saying that the MSO might be able to add more subscribers if it could better
                            package its programming.


Differing Views Are Held    Some cable industry officials we talked with indicated that the
on the Future of Bundling   implementation of new technologies, such as digital cable, and the
                            increasing number of programming networks that a cable operator can
                            carry will lead to more tiers of service but not necessarily to a transition to
                            a la carte programming whereby subscribers can choose each channel
                            they want. For example, an official representing a large MSO commented
                            that as cable moves to a digital format, programming provided on smaller
                            tiers or a la carte will be easier for cable operators to offer because of the
                            new technology. However, another MSO official pointed out that even if a la
                            carte programming eventually becomes a reality, there would still be a
                            need for a basic tier of service; placing new programming networks on a
                            basic tier gives them an opportunity to attract an audience. According to
                            the panel of experts we commissioned, there is at least a moderate
                            likelihood that system upgrades and new technology will result in cable
                            operators' offering programming on an increased number of tiers within
                            the next few years. But even if additional tiering occurs because of digital
                            technology, it may not necessarily mean that existing networks, including
                            sports networks, will move into the new tiers-only that new
                            programming networks will be added to the additional service tiers.




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                                      B-280705




Players' Salaries Have                Players' salaries in four major sports leagues-the NFL,                 MLB, NBA,   and
                                      NHL-have increased during the last 4 years as have the amounts that cable
Increased, but Views                  system operators have paid to acquire the rights to air the leagues' games.
Differ on the Extent                  Cable subscribers' rates have also increased during this period. However,
                                      views differ on the extent to which players' salary increases have
to Which Salary                       contributed to rises in cable rates.
Increases Have
Contributed to Rises
in Cable Rates
Players' Salaries and Team            Data we obtained from the sports leagues indicate that average player
Payrolls Have Increased               salaries in each league increased between the 1994-95 and the 1997-98
During the Last 4 Years               seasons. However, as shown in table 1, the percentage of these increases
                                      varied widely from league to league. While average salaries for NHL players
                                      increased by 64 percent, average salaries for MLB players increased by only
                                      14 percent.

Table 1: Average Player Salaries in
Four Major Professional Sports                                     National              Major           National             National
Leagues                                                            Football            League          Basketball              Hockey
                                      Season                       League"           Baseballa        Association              League
                                       1994-95                     $588,000       $1.154 million        $1.8 million         $733,000
                                       1997-98                     $720,000       $1.314 million        $2.6 million       $1.2 million
                                      Percentage
                                      increase                             22%                14%                44%                   64%
                                      Note: Average player salaries are innominal dollars.
                                      aThe average salaries shown for the NFL and MLB are for the 1994 and 1997 seasons, which,
                                      with the exception of the NFL playoffs, extend through a single calendar year. The NHL and NBA
                                      seasons begin inthe fall of one year and end during the late spring of the following year.


                                      As shown in table 2, average team payrolls for the three leagues for which
                                      information was available also increased during the same period. The
                                      increases ranged from 19 percent for NFL teams to 47 percent for NBA
                                      teams. We were not able to obtain team payroll information from the NHL.




                                      Page 18                     GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
                                    B-280705




Table 2: Average Team Payrolls of
Major Professional Sports Leagues                                              National                 Major                 National
                                                                               Football                League               Basketball
                                    Season                                     League"              Baseballa b            Association
                                    1994-95                                $34.1 million        $31.377 million            $22.7 million
                                    1997-98                                $40.7 million        $38.775 million            $33.3 million
                                    Percentage increase                               19%                    24%                      47%
                                    Note: Average team payrolls are in nominal dollars. Payroll figures for the NFL include salaries,
                                    bonuses, and some standard league benefits. Figures for MLB and the NBA include salaries and
                                    bonuses only.
                                    aThe average payrolls shown for the NFL and MLB are for the 1994 and 1997 seasons, which,
                                    with the exception of the NFL playoffs, extend through a single calendar year. The NBA season
                                    begins in the fall of one year and ends during the late spring of the following year.
                                    bin 1997, there were 826 players on MLB's active roster, compared with 761 players on the active
                                    roster in 1994. Additional players were also on the disabled list in 1997.


                                    Much of the attention that has been given to increases in players' salaries
                                    may, however, stem from the increases in salaries received by the leagues'
                                    star players. The salaries for such players have, in some cases, increased
                                    at a much higher rate than average player salaries. For example, available
                                    data indicate that the average salaries received by the five highest-paid NBA
                                    and MLB players have more than doubled since 1994. According to one of
                                    the expert panelists, unlike in most markets, there are a limited number of
                                    top sports stars, which gives them an increased ability to raise the prices
                                    paid for their services.


Prices Paid by Cable                Since 1996, each of the four major sports leagues has signed new
Networks to Carry the               agreements with cable and broadcast networks for the rights to its games.
Major Sports Leagues'         It is difficult to compare precisely the amounts cable networks paid under
       GamesHave              the new and old agreements because the specific terms of the agreements
                      .ncreased
                                    are proprietary and the rights acquired may vary. However, the available
                                    information indicates that the amounts that cable networks paid under the
                                    new agreements are substantially higher than what they paid under the
                                    previous contracts. 25

                                    In August 1998, the NHL approved Disney's 5-year $600 million offer for the
                                    television rights to air NHL games on ABC and ESPN. It is expected that
                                    ESPN will pay approximately $70 million per season for this package.
                                    Under the prior agreement, ESPN is reported to have paid $100 million for
                                    seven seasons (about $14 million per season). According to an NHL

                                    25Teams also obtain revenues from cable networks and broadcast stations under other agreements for
                                    the local and regional rights to their games.



                                    Page 19                       GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
                             B-280705




                             representative, under the new agreement, ABC and ESPN have exclusive
                             rights to televise twice as many games as ESPN did under the previous
                             agreement.

                             In January 1998, ABC and ESPN, CBS, and Fox signed 8-year broadcast
                             and cable rights agreements totaling about $18.3 billion to air NFL games.
                             ABC and ESPN made a combined bid of $9.4 billion to air games from 1998
                             to 2005. Of this figure, $4.8 billion ($600 million per season) is allocated to
                             ESPN for the Sunday Night Football cable package, the NFL Prime Time
                             highlights show, and other related programming. Under the prior
                             agreement, which covered the 1994 through 1997 seasons, the rights to
                             televise NFL programming on broadcast and cable television sold for about
                             $4.4 billion.

                             In November 1997, the NBA entered into a 4-year broadcast rights
                             agreement with NBC Sports, Inc., and a 4-year cable rights agreement with
                             Turner Broadcasting System (TBS), Inc. Combined, these contracts totaled
                             $2.6 billion. This includes the cost paid by TBS-$890 million-an increase
                             of about 153 percent over the company's previous 4-year contract of
                             $352 million, which expired after the 1997-98 season.

                             In 1996, MLB signed 5-year agreements totaling about $1.7 billion with Fox,
                             NBC, and ESPN for the broadcast and cable rights to MLB games. Fox and
                             NBC collectively paid about $1.1 billion for the broadcast rights, and Fox
                             and ESPN collectively paid about $600 million for the cable rights. The
                             information needed to compare these amounts with the amounts that TBS
                             and ESPN paid for rights under the previous agreements with MLB was not
                             available.


Views Differ on the Effect   The views of the cable industry and sports league officials we talked with
of Players' Salaries on      differed on whether increases in players' salaries have contributed to rises
Cable Rates                  in cable rates. Some cable industry officials said they believed that the
                             salary increases have contributed to higher cable rates. While most stated
                             that they were not experts in this area, their observations of the sports and
                             cable television industries led them to believe that salaries have driven up
                             fees charged to televise sports, which in turn have driven up cable rates.
                             For example, one representative of a major MSO and programmer noted
                             that while sports stars' rising salaries were not the only cause of cable rate
                             increases, they were surely one of the causes.




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                  B-280705




                  On the other hand, most members of our expert panel, as well as some
                  cable industry officials, said that players' salaries should not be viewed as
                  a cause of increases in cable rates. More specifically, five of the seven
                  panel members believed that increases in players' salaries had caused
                  increases in cable rates to little or no extent, while one panelist believed
                  that they had caused increases to a moderate extent. In addition,
                  according to the NFL, players' salaries do not cause the NFL to charge higher
                  fees for televising professional football games because, under the league's
                  "salary cap" system, what teams spend on players is a direct function of
                  leaguewide revenues.2 6 For example, if television revenues increase in any
                  year, the salary cap increases and teams are able to spend more on
                  players' salaries. If television revenues remain constant, however, the
                  teams' spending on players is unchanged.

                  Several panelists pointed to the increases in broadcast and cable rights
                  fees and players' salaries as a reflection of increased consumer demand
                  for major professional sports. In this regard, one of our experts stated that
                  cable operators and programmers recognize the demand and try to satisfy
                  it, thereby bidding up the prices in the market, including players' salaries.
                  Another panelist agreed that increases were related to demand but said
                  that additional factors also come into play. For example, he said that while
                  movies and other types of programming are available on more outlets, the
                  major sports leagues have one product that can be broadcast one time,
                  thus giving them market power. In addition, he noted that with the
                  plethora of new cable channels, it has become more important for
                  individual networks to form distinct identities, such as being identified as
                  the carrier of a major sports league like the NFL. This, he believed, had
                  fueled competition among networks for the leagues' rights and had led to
                  the high prices paid. Thus, increases in players' salaries may be viewed as
                  an effect rather than a cause of cable rate increases.


Agency Comments   We provided the FCC with a draft of this report for its review and comment.
                  The FCC stated that our report was not inconsistent with the FCC'S own
                  research on the subject. The FCC also provided some technical comments,
                  which we incorporated into the report as appropriate. The FCC'S comments
                  appear in appendix IV.



                  26The NFL receives leaguewide revenues from a variety of sources, including the sale of broadcast and
                  cable rights for league games. These revenues are divided among the teams in the league. According to
                  the NFL, each year, each NFL team knows the amount of the salary cap available to it before it begins
                  to sign free agents or to draft players.



                  Page 21                      GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
B-280705




We performed our work from July 1998 through June 1999 in accordance
with generally accepted government auditing standards.

As arranged with your office, unless you publicly release its contents
earlier, we plan no further distribution of this report until 14 days after the
date of this letter. At that time, we will provide copies to William E.
Kennard, Chairman, Federal Communications Commission, and other
interested parties. We will also make copies available to others on request.

Please call me at (202) 512-7631 if you or your staff have any questions.
Major contributors to this report are listed in appendix VI.

Sincerely yours,




Judy A. England-Joseph
Director, Telecommunications Issues




Page 22                GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
Page 23   GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
Contents


Letter                                                                                                1
Appendix I                                                                                           26
Scope and
Methodology
Appendix II                                                                                          30
Cable Sports
Programming Services
Appendix III                                                                                         31
Expert Panel
Participants
Appendix IV                                                                                          32
Comments From the
Federal
Communications
Commission
Appendix V                                                                                           33
Sampling Error of
Estimates From FCC's
May 1999 Report on
Cable Industry Prices
Appendix VI                                                                                          34
GAO Contacts and
Staff
Acknowledgements
Tables                  Table 1: Average Player Salaries in Four Major Professional                   18
                          Sports Leagues




                        Page 24              GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
          Contents




          Table 2: Average Team Payrolls of Major Professional Sports                  19
            Leagues

Figures   Figure 1: Sports Programming Costs as a Percentage of Total                   6
            Programming Costs for 15 Cable Systems, 1997
          Figure 2: Percentage of the Average Monthly Amount That the 15                7
             Cable Systems Charged to Their Subscribers That Was
            Attributable to Sports and Other Programming Costs, 1997
          Figure 3: Factors Affecting Cable Rate Increases, 1997-98                     9




          Abbreviations

          ACA        American Cable Association
          FCC        Federal Communications Commission
          GAO        General Accounting Office
          MLB        Major League Baseball
          MSO        multiple system operator
          NBA        National Basketball Association
          NCTC       National Cable Television Cooperative
          NFL        National Football League
          NHL        National Hockey League
          TBS        Turner Broadcasting System


          Page 25              GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
Appendix I

Scope and Methodology


              To determine the extent to which sports programming costs are
              contributing to higher cable television rates, we reviewed reports from the
              Federal Communications Commission (FCC) on cable industry prices
              covering the years 1995 through 1998, reviewed its 1998 inquiry into cable
              rate increases for six multiple system operators (Mso), and analyzed
              information we obtained on 15 cable systems.

              The FCC'S Report on Cable Industry Prices collects data from a statistical
              sample of cable operators on a variety of fees and revenues associated
              with the provision of cable television programming services. While the FCC
              has issued the report since 1993, the 1999 report is the first one in which
              the Commission included questions about the cost of cable programming
              and associated advertising revenues by type (i.e., sports, news, children's,
              general entertainment). The FCC included questions about the cost of
              programming by type because of concerns about the impact of sports
              programming, in particular, on increases in cable rates. The 1999 Report
              on Cable Industry Prices covers the periods July 1, 1996, to July 1, 1997,
              and July 1, 1997, to July 1, 1998. The 1997 report covers the periods July 1,
              1995, to July 1, 1996, and July 1, 1996, to July 1, 1997. Because the FCC'S
              reports on cable industry prices are based on a sample of cable operators,
              rather than all operators, statistics in the report are subject to sampling
              error. The sampling errors for the statistics we used from the FCC'S reports
              are provided in appendix V.We did not independently verify the FCC'S
              estimates.

              The FCC'S 1998 inquiry into cable rate increases provided information on
              recent cost increases for cable television programming that the FCC
              collected from the nation's six largest MSOS. Collectively, the MSOS serve
              about 67 percent of all cable subscribers. With the inquiry, the FCC sought
              to build on information that was gathered in the 1997 Report on Cable
              Industry Prices. While all six MSOS responded, not all respondents provided
              complete information on every question. The participants provided several
              reasons for not responding fully, including the unavailability of the
              requested data, the inability of the MSOS to compile the data in the
              requested format, and the MSOS' unwillingness to share the requested data
              because of their proprietary or competitively sensitive nature. However, at
              least four respondents provided consistent information for most of the
              questions. The results of the inquiry, therefore, are largely based on four
              responses.

              From FCC public files and from public files at the state regulatory office in
              Massachusetts, we obtained data on the licensing fees that 15 cable



              Page 26               GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
Appendix I
Scope and Methodology




systems incurred for cable programming. The cable systems were part of
three large MSOS and one medium-sized MSO, which, combined, represented
about 28 percent of cable subscribers nationwide. The systems served
subscribers in six states. According to available data, the number of
subscribers for the 15 systems ranged from about 400 to over 90,000. The
information we obtained primarily covered the programming costs for the
basic tier and the cable programming service tier. The data reflect the
cable operators' programming costs for each of their channels on a per
subscriber, per month basis.

To determine the percentage of programming costs that were attributable
to sports programming for the 15 cable systems, we compared the
systems' monthly cost (on a per subscriber basis) for carrying the sports
networks included in their basic or enhanced basic tiers to the systems'
total cost of programming included in their basic and enhanced basic tiers.
The total programming costs that we used included both costs for cable
networks and for copyright fees. To compare sports programming costs to
subscribers' monthly bills, we compared the monthly cost (on a per
subscriber basis) that the cable systems incurred for carrying sports
networks included in their basic or enhanced basic tiers to the monthly
amount that the systems charged customers for subscribing to basic and
enhanced basic service. We used data from January 1997 for these
analyses. We obtained information on the ,rates paid by subscribers from
the FCC'S public files, from one state regulatory agency's public files, and
directly from cable operators and Msos. As discussed in the report, we
recognize that this analysis tends to understate the impact of sports
programming on programming costs and cable rates because sports are
also carried on other cable channels. To calculate the increases in
programming costs that are attributable to sports programming, we
compared the increases in the costs that cable systems incurred for
carrying sports networks to the total increases in costs for programming
that they included in their basic and enhanced tiers. We used data from
 1997 and 1998 for this analysis.

To provide information on differences in what sports programmers charge
small and large cable operators for programming, we interviewed
representatives of large and small cable companies, cable programming
networks, state and federal regulatory agencies, cable trade associations,
and a cable program buying cooperative and reviewed information they
provided. We also obtained information from a panel of seven experts we
convened on subscription television issues and analyzed data from the




Page 27                 GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
 Appendix I
 Scope and Methodology




 1999 Report on Cable Industry Prices on the impact of sports
 programming costs on small, medium, and large cable operators.

To determine the extent to which sports programmers require cable
operators to bundle sports programming with other cable programming
and the effects that the bundling of cable programming has on cable rates,
we interviewed and reviewed information provided by officials
representing cable companies, sports programming networks, over-the-air
broadcast networks, a cable association, and a cable program buying
cooperative. In addition, we reviewed documents of three cable
companies containing specific bundling requirements that cable
programming networks set forth in their agreements with these
companies. We also obtained information from the panel of seven experts
on the effects of bundling and obtained information from a study
conducted by Economists Incorporated that discusses how bundling
benefits cable subscribers.

To provide information on trends in players' salaries and their relationship
to cable rate increases, we interviewed cable industry officials and
obtained information from public sources, professional sports leagues,
and our expert panel. To obtain information on increases in average
players' salaries and team payrolls (1994-95 through 1997-98) for four
major sports leagues-the National Football League, Major League
Baseball, the National Basketball Association, and the National Hockey
League-and, recent prices cable networks paid for the rights to air games,
we used data from cable and broadcast industry trade periodicals and
sports Web sites. The leagues confirmed data we had obtained and
supplied correct or missing information.2 7 Also, during our expert panel,
we asked the seven participants to address the question of whether
salaries of players in professional sports had risen over the last 4 years
and, if so, whether this contributed to increases in cable rates. At the
conclusion of the panel, we administered a survey instrument that allowed
the participants to indicate the extent to which they believed players'
salaries contribute to increases in cable rates.

To accomplish our assignment, we also received assistance from Professor
Douglas Gomery of the College of Journalism, University of Maryland,
College Park, who specializes in media studies. Professor Gomery
reviewed and commented on our overall methodology. In addition, he
conducted research on sources of information on sports programming

27
  We were unable to obtain confirmation from Major League Baseball on prices cable networks paid
for the rights to air professional baseball games.



Page 28                      GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
Appendix I
Scope and Methodology




costs; differences in the prices small and large cable operators pay for
sports programming; cable programming bundling practices; players'
salaries and leagues' payrolls; and the impact of players' salaries on cable
rates. Professor Gomery also reviewed and commented on our final report.




Page 29                 GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
Appendix II

Cable Sports Programming Services


              American Sports Classics
              BAY TV
              Classic Sports Network
              CNN/SI
              Comcast SportsNet
              Empire Sports Network
              ESPN
              ESPN2
              ESPNews
              Football Channel
              Fox Sports Americas
              Fox Sports Arizona
              Fox Sports Bay Area
              Fox Sports Northwest
              Fox Sports Pittsburgh
              Fox Sports Rocky Mountain
              Fox Sports South
              Fox Sports Southwest
              Fox Sports West
              Fox Sports West 2
              Golf Channel
              Home Team Sports
              Jock Talk TV
              Little Leaguers Sports/News Network
              Madison Square Garden Network
              Midwest Sports Channel
              New England Sports Network
              NewSport
              NTN Entertainment Network
              PASS Sports
              Prime Network
              Speedvision Network
              SportsChannel Chicago
              SportsChannel Florida
              SportsChannel New England
              Sports Channel New York
              SportsChannel Ohio
              SportsChannel Pacific
              SportsChannel Philadelphia
              Sunshine Network

              Source: The Federal Communications Commission.




              Page 30                   GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
Appendix III

Expert Panel Participants


               Dale Hatfield, Chief, Office of Engineering and Technology, Federal
               Communications Commission

               Thomas W. Hazlett, Professor and Director of Telecommunications Policy,
               University of California at Davis, and Resident Scholar, American
               Enterprise Institute

               Gene Kimmelman, Co-Director, Washington Office, Consumers' Union

               Robert Pepper, Chief, Office of Plans and Policy, Federal Communications
               Commission

               Donald J. Russell, Chief, Telecommunications Task Force, Antitrust
               Division, U.S. Department of Justice

               David Waterman, Associate Professor, Department of
               Telecommunications, Indiana University

               Steven S. Wildman, Director, Telecommunications Science, Management
               and Policy Program, Northwestern University




               Page 31               GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
Appendix IV

Comments From the Federal
Communications Commission



                                        Federal Communications Commission
                                              Washington, D.C. 20554




                   May 18, 1999

                  Judy A. England-Joseph
                  Director, Telecommunications Issues
                  General Accounting Office
                  Washington, DC 20548




                  Dear Ms. England-Joseph:

                  Your draft report entitled Telecommunications: Impact of Sports Programming Costs on
                  Cable Television Rates (GAO/RCED-99-136, Code 385758) has been reviewed in the
                  Cable Services Bureau. It is my understanding that staff comments on the draft report
                  have been forwarded to you previously. We have no additional concerns with the report.
                  Its conclusions are not inconsistent with those found in the Commission's own research.
                  We appreciate very much the opportunity to review and comment on the draft report.

                  Sincerely,



                  Deborah A. Lathen, Chief
                  Cable Services Bureau




              Page 32                     GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
Appendix V

Sampling Error of Estimates From FCC's
May 1999 Report on Cable Industry Prices

               Because the FCC'S price survey is based on a nationwide sample of cable
               systems, estimates from the survey are subject to sampling error. The
               following table contains the sampling errors for all the estimates we used
               from the FCC's 1998 price survey. Some of these estimates and sampling
               errors were contained in the May 1999 Report on Cable Industry Prices.
               The table does not include sampling errors for competitive cable systems
               because, in conducting the price survey, the FCC sampled all available
               competitive cable systems.


                                                                                                     Sampling
                                                                                                       error of
               Description                                                           Estimate        estimated
               Percentage increase in rates for noncompetitive cable
               systems from July 1, 1997, through July 1, 1998                              6.9               0.5
               Percentage increase in rates per channel for
               noncompetitive cable systems from July 1, 1997, through
               July 1, 1998                                                                 1.6               0.7
               Average monthly cable rate for noncompetitive systems as
               of July 1, 1998                                                          $30.53              $0.35
               Average monthly programming services rate for
               noncompetitive systems as of July 1, 1998                                $27.88              $0.33
               Average monthly rate for equipment rentals for
               noncompetitive systems as of July 1, 1998                                 $2.65              $0.10
               Percentage increase in rates attributable to programming
               costs for noncompetitive systems from July 1, 1997, to July
               1, 1998                                                                     33.6               7.7
               Percentage increase in rates attributable to programming
               costs for noncompetitive systems from July 1, 1996, to July
               1, 1997                                                                     24.4               3.4
               Percentage increase in programming costs attributable to
               sports programming costs for noncompetitive systems from
               July 1, 1997, to July 1,1998                                                22.4               2.5
               Percentage increase in rates attributable to sports
               programming costs for noncompetitive systems from July
               1, 1997, to July 1, 1998                                                     7.5               2.3
               Percentage increase in programming costs attributable to
               sports programming costs for noncompetitive systems from
               July 1, 1996, to July 1, 1997                                               19.6               7.5
               Percentage increase in rates attributable to sports
               programming costs for noncompetitive systems from July
               1, 1996, to July 1, 1997                                                     4.8               2.1
               Note: Estimates from the May 1999 report.
               aSampling errors are stated at the 95-percent level of confidence based on standard errors
               provided by the FCC. They were computed as 1.96 times the standard errors provided by the
               FCC.




               Page 33                      GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates
Appendix VI

 GAO Contacts and Staff Acknowledgements


GAO Contacts      Judy A. England-Joseph, (202) 512-7631
                  Richard A. Hale, (202) 512-3090


Acknowledgments   In addition to those named above, Charles E. Wilson, Jr., Karen E. Bracey,
                  Richard C. LaMore, Andy C. Clinton, Michael R. Volpe, and Mindi G.
                  Weisenbloom made key contributions to this report.




(385758)          Page 34              GAO/RCED-99-136 Sports Programming Costs and Cable TV Rates