oversight

Telecommunications: The Changing Status of Competition to Cable Television

Published by the Government Accountability Office on 1999-07-08.

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

                  United States General Accounting Office

GAO               Report to the Subcommittee on
                  Antitrust, Business Rights, and
                  Competition, Committee on the
                  Judiciary, U.S. Senate

July 1999
                  TELECOMMUNICATIONS
                  The Changing Status of
                  Competition to Cable
                  Television




GAO/RCED-99-158
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community, and
                   Economic Development Division

                   B-281027

                   July 8, 1999

                   The Honorable Mike DeWine
                   Chairman
                   The Honorable Herb Kohl
                   Ranking Minority Member
                   Subcommittee on Antitrust, Business Rights
                     and Competition
                   Committee on the Judiciary
                   United States Senate

                   Despite congressional efforts to constrain cable television rates and
                   promote competition in the subscription television market,1 the average
                   bill for cable television has risen faster than the rate of inflation in recent
                   years.2 There is also continuing concern that competition in the market is
                   developing more slowly and in different ways than was expected after the
                   1996 Telecommunications Act and that shaping public policy in
                   telecommunications markets has become increasingly difficult as
                   technology rapidly redefines the industry. Consequently, you asked us to
                   provide information on (1) the status of competition in the subscription
                   television market, (2) the extent to which ownership ties between cable
                   companies and program suppliers (such as CNN) may be affecting the
                   development of competition, and (3) key factors that may influence the
                   development of competition in the future.

                   In order to evaluate these issues, we interviewed companies and trade
                   associations representing cable companies, their competitors, and
                   television programming networks. In addition, we convened a panel of
                   experts to discuss issues concerning competition in the market. The panel
                   included government officials, academic experts, and a representative of a
                   consumer group. Our methodology is discussed in more detail in appendix
                   I. Appendix II lists the names of the companies we interviewed, and
                   appendix III lists the experts who participated in our panel.


                   The cable industry maintains a high share of the subscription television
Results in Brief   market nationally and is currently not very competitive. However, the
                   satellite industry competes against cable companies throughout the United


                   1
                    This market comprises firms offering multiple channels of television programming for a subscriber
                   fee, such as that provided by cable and satellite companies.
                   2
                    Although average cable bills have been rising, the average number of channels offered to subscribers
                   has also been increasing during recent years.



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States, and its market share has increased considerably since the
introduction of a new generation of satellite television service, known as
direct broadcast satellite (DBS) service, in 1994. Satellite’s share of
customers purchasing subscription television service grew from 4 percent
in 1994 to 12 percent by mid-1998. During that same time period, the
market share of the cable industry declined from 93 percent to 85 percent.
Despite expectations of rapid entry into the subscription television
market, telephone companies have progressed more slowly and are
providing only limited competition to cable. Competitors to incumbent
cable companies are pursuing strategies to compete more effectively
through pricing, the number of channels offered, and customer service.
Partly in response to competition, cable companies are upgrading their
systems; improving service; and introducing new services, such as Internet
access. These behaviors by both incumbent cable companies and other
providers may indicate that the market is becoming more competitive
despite the continued high market share held by the cable industry.
However, some of these behaviors may have occurred even in the absence
of increased competition from other subscription television providers.

While many cable companies provide television programming throughout
the United States, the four largest cable companies as of June 1998
accounted for 55 percent of all television subscribers. In addition, the six
largest cable companies at that time had significant ownership interests in
program suppliers (that is, owners of subscription channels, such as HBO
and CNN). Most cable companies are following strategies to cluster their
operations geographically so that they operate most of the cable systems
in a particular city or region. These companies realize benefits from their
size, ownership interests, and clustering. Some industry participants have
expressed concerns about competitive advantages that the ownership
relationships may create for incumbent cable companies. For example,
some of our panel of experts noted that ownership relationships may
enable large cable companies to get more favorable terms when buying
programming and to restrict their competitors’ access to programming.

The likely future development of competition in the subscription television
market is difficult to predict, but certainly several key factors will
influence it. For example, the satellite companies’ continued growth will
be affected by their ability to provide subscribers with local network
programming (by ABC, NBC, CBS, etc.). Additionally, there is great
uncertainty about how the broadcasting industry will transition to a new
digital format because traditional television stations have a good degree of
flexibility in how they can use the increased capacity they have been



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                     granted for providing digital television. More broadly, the subscription
                     television market could be affected by developments in the larger
                     telecommunications market because other telecommunications
                     companies, such as telephone companies, are attempting to provide
                     consumers with “one-stop shopping”–that is, seeking to provide an array
                     of services including telephone service, subscription television service,
                     and Internet access. If several different types of companies—cable
                     companies, telephone companies, electric companies, and companies
                     using different kinds of “wireless” technologies—are successful in
                     bringing a “bundle” of telecommunications services to consumers,
                     competition among alternative delivery mechanisms—a cable wire, a
                     telephone wire, an electric wire, and wireless—may develop. However, if
                     one of the technologies that uses a wired connection to homes and
                     businesses emerges as the most efficient, it could become the dominant
                     means of delivering various telecommunications services, and greater
                     competition for subscription television and other telecommunications
                     services may not develop.3


                     About 98 percent of U.S. homes have at least one television set, and
Background           television service is delivered to the home in several ways. Currently, there
                     are three technologies4 that deliver most television service to individual
                     homes: over-the-air broadcasting, cable television, and satellite, each of
                     which is covered under a unique regulatory framework.5 Additionally, the
                     channels that viewers watch on television fall primarily into two
                     categories—broadcast channels (which include the broadcast networks
                     and independent local channels) and subscription channels.


The Over-The-Air     The broadcast industry has two key components. The first is composed of
Broadcast Industry   local television stations. All television stations in this country must be
                     licensed by the Federal Communications Commission (FCC). The FCC
                     license gives a station the right to use a specified portion of the radio

                     3
                      If a wireless technology is the most efficient for providing a bundle of services, monopolization is less
                     of a concern because of the potential for allocating additional spectrum to allow for additional
                     providers. However, there is a limited amount of spectrum, and spectrum is not fully flexible across
                     uses.
                     4
                     In addition, “wireless cable” systems provide competition in limited areas. Wireless cable systems use
                     microwave frequencies to transmit programming to receiving antennas.
                     5
                      Under the Communications Act of 1934, as amended, the Federal Communications Commission
                     (FCC) has the authority to regulate all interstate and foreign communication by wire or radio. (See 47
                     U.S.C. 151). The Department of Justice or the Federal Trade Commission conducts antitrust reviews of
                     certain mergers involving the telecommunications industry. FCC also reviews telecommunications
                     mergers.



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                                       spectrum to transmit video signals in a particular geographic area—that is,
                                       all TV stations have a license to operate in a particular local market.
                                       Because the video signal from a local TV station is broadcast through
                                       radiowaves or “over the airwaves,” this method of providing television is
                                       called “over-the-air,” or broadcast, TV. Figure 1 shows how a household
                                       can receive television signals over the air through a rooftop antenna.6


Figure 1: the Delivery of Television
Over the Air




                                                                                                                       Transmitter
                                                                                                                       for TV
                                                                                                                       station 2
                                                         Television antenna
                                                                                                         Transmitter
                                                                                                         for TV
                                                                                                         station 1




                                       Roughly 78 percent of the commercial television stations in the United
                                       States are owned by or affiliated with a broadcast network—the second
                                       component of the broadcast industry. There are seven major commercial
                                       broadcast networks today.7 These networks purchase and produce an
                                       array of programs such as news, situation comedies, dramas, sports
                                       shows, soap operas, and so forth. Broadcast networks themselves do not
                                       distribute the television programming they produce to individual
                                       households; it is the local TV stations that are owned by or affiliated with


                                       6
                                        Even an antenna on the back of a TV set—so-called “rabbit ears’’—may be sufficient to pick up
                                       over-the-air stations in many cases.
                                       7
                                       The seven networks are ABC, CBS, Fox Broadcasting Company, NBC, PaxTV, United Paramount
                                       Network (UPN), and Warner Brothers (WB).



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                     the networks that distribute the programs via the airwaves.8 Many TV
                     stations, whether affiliated with a network or not, also produce
                     programming, such as local news and other local-interest programming.

                     The broadcast industry is largely funded through the national, regional,
                     and local advertisements that are aired along with other programming on
                     local TV stations. Households that receive only over-the-air TV pay no
                     subscription fee for access to the signals of the TV stations in their
                     area—they need only to have a TV set and an adequate antenna. In most
                     cities, a typical home would be able to receive several over-the-air
                     stations: the local TV stations affiliated with the broadcast networks, a
                     public television station, and perhaps other independent local television
                     stations. Approximately 22 percent of all households in the United States
                     do not subscribe to cable or any other subscription television service but
                     rely exclusively on over-the-air technology for their television
                     programming.


The Cable Industry   Cable television originally developed as a means of providing the signals of
                     local television stations to rural and mountainous areas that could not get
                     adequate reception of those signals through conventional over-the-air
                     antennas. Early cable systems used large antennas to capture the signals
                     of nearby television stations and then retransmitted those signals to homes
                     through special wires (coaxial cables) owned by the cable companies.
                     Cable companies obtain a franchise license under agreed-upon terms and
                     conditions from a local authority, such as a county or township that grants
                     them the right to operate in a specified area and run cables along public
                     rights-of-way.9 Many aspects of cable companies’ operations are regulated
                     by the FCC. Additionally, a 1976 copyright law grants to cable companies a
                     permanent license allowing them to transmit over-the-air television signals
                     through their cable systems.10

                     During the 1970s, developments in satellite technology enabled video
                     signals to be transmitted economically via satellites, opening the door for

                     8
                      Some of the broadcast networks also have divisions that produce channels designed for distribution
                     solely on subscription television, such as CNBC and FOXNEWS.
                     9
                      In some cases, cable franchises are administered at the state level.
                     10
                       Under this copyright license scheme (17 U.S.C. 111), commonly referred to as a compulsory cable
                     copyright license, copyright owners are required to license their works to users at government-set
                     prices, terms and conditions. Generally, cable operators pay little or no copyright fees to carry local
                     signals. In the Cable Act of 1992, the Congress adopted statutory “must-carry” rules coupled with
                     “retransmission” consent provisions. Under these provisions, a cable operator may not carry a
                     broadcast station’s signal if the station has not elected must-carry status or if the station has not
                     granted prior consent (retransmission).



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                                            the development of new networks, such as HBO and CNN, designed
                                            primarily for the distribution of programming via satellite to cable systems
                                            throughout the country. Unlike the broadcast networks, which gain
                                            revenues largely through advertising, these subscription networks are
                                            supported through both advertising and fees paid by cable operators.
                                            Figure 2 illustrates how a household can receive television service from a
                                            typical cable system. The cable plant primarily receives two kinds of
                                            signals: (1) signals broadcast by local TV stations from TV towers in the
                                            area and (2) signals via satellite from subscription networks.11 These
                                            signals are all provided to subscribers through the cable system’s wires.


Figure 2: the Delivery of Television Via Cable



                                                               Subscription network
                                                                   via satellite
                                                                                                                                Over-the-air
                                                                                                                                 local TV




                                                                             Cable plant
                                Cable




                                            Once subscription networks were added to cable companies’ channel
                                            offerings, consumers faced the choice between having access to only the
                                            available over-the-air stations for free or paying a fee to obtain the
                                            broadcast stations as well as several new subscription networks over a
                                            cable system. Today, about 97 percent of homes in the United States have


                                            11
                                              Cable plants may also receive terrestrial (land-based) microwave transmissions.



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                         access to a cable system, and approximately 66 percent of these
                         households subscribe to a cable service.


The Satellite Industry   Satellite subscription television service emerged in the early 1980s as an
                         alternative to cable service in rural areas where over-the-air broadcast and
                         cable systems were inaccessible. Satellite systems obtain authorization
                         from FCC to place satellites in specific orbital locations from which they
                         can transmit video signals to all or much of the continental United States.12
                         Satellite companies transmit their programming directly to subscribers’
                         homes where satellite reception dishes (which subscribers purchase or
                         rent) are installed to capture the video signals and transmit them through a
                         wire to television sets. In 1994, a new type of satellite technology called
                         Direct Broadcast Satellite (DBS) was introduced that uses pizza-sized
                         satellite reception dishes that can be mounted on rooftops or window
                         sills.13 Satellite television is available nationwide, and each DBS company
                         generally offers the same programming packages and price throughout the
                         country. Since the introduction of DBS, satellite delivery of television has
                         become more popular in urban settings. The majority of satellite
                         subscribers today receive DBS from one of a few national companies
                         offering such service. Figure 3 shows how a household can receive
                         television service from a satellite company. Subscription television
                         networks transmit to a satellite (for example, CNN transmits much of its
                         programming from Atlanta, where it is produced), and then all
                         programming is transmitted directly to the subscriber’s satellite dish.




                         12
                          The International Telecommunications Union, an intergovernmental organization through which
                         countries coordinate the use of radio frequencies, apportions, on a global basis, radio spectrum and
                         orbital locations for DBS service. The United States was assigned eight orbital locations for these
                         satellites, three of which reach the entire continental United States.
                         13
                           Some households receive programming through a “home satellite dish,” which is similar to DBS
                         delivery but requires the use of a larger satellite dish. Home satellite dish delivery accounted for
                         approximately 2 million subscribers as of June 1998; however, its number of subscribers and market
                         share have been declining. The satellite association attributes this decline to households’ switching
                         from home satellite dish delivery to DBS delivery.



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Figure 3: the Delivery of Television Via
Satellite

                                                                                                                Satellite




                                                                         Satellite
                                                                         reception
                                                                         dish

                                                                                                                     Transmitter




                                           Because DBS uses a digital technology, these systems currently have a
                                           higher channel capacity and transmit clearer pictures and sound than
                                           many cable systems.14 However, there are some current legal limitations
                                           on when DBS companies may transmit network broadcast signals,15 which
                                           the Congress is seeking to address. As discussed later in this report, bills
                                           have passed both the House of Representatives and the Senate that would
                                           allow DBS companies to provide local broadcast signals to all customers
                                           within local broadcast areas.




                                           14
                                             Digital technology more efficiently uses radio spectrum, so more services can be provided with a
                                           given amount of radio spectrum. Also, because of the way that digital signals are transmitted, less
                                           degradation of the signals occur.
                                           15
                                             In particular, the Satellite Home Viewers Act establishes a copyright license allowing satellite carriers
                                           to provide network programming only to homes where the subscriber’s television reception of local
                                           broadcast stations via a standard rooftop antenna is not adequate (does not meet a certain signal
                                           intensity standard). In these cases, and if certain other conditions are met, the households are
                                           considered “unserved,” and the DBS operator can provide network broadcasts (usually from faraway
                                           markets) under its copyright license.



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                           The cable industry continues to serve 85 percent of the customers
Cable Maintains a          purchasing subscription television services. However, DBS companies
High Market Share,         compete against cable operators throughout the United States, and their
but New Entrants Are       subscriber base has increased considerably since the service was launched
                           in 1994. Local telephone companies, expected to begin providing
Becoming                   subscription television service after the enactment of the 1996
Increasingly               Telecommunications Act, have entered the market slowly and are
                           providing only limited competition to cable. DBS companies and other
Competitive                competitors to cable companies are pursuing strategies to compete with
                           incumbent cable firms on the basis of price, the channels and other
                           services offered, and customer service; cable companies are responding to
                           this increased competition.


Cable Continues to         According to June 1998 data reported by FCC, over 65 million households,
Maintain a High National   or 85 percent of all the households that have a subscription television
Market Share               service use cable television. Although its number of subscribers continues
                           to grow, the cable industry’s market share of subscribers has declined
                           slightly in each of the last 4 years, from a level of 93 percent of subscribers
                           in December 1994. Nearly all of the participants on our panel of experts
                           stated that although competition in this industry is beginning to develop in
                           earnest, the subscription television market is currently not very
                           competitive. Figure 4 shows cable’s and its competitors’ market shares of
                           households that pay for their television programming.




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Figure 4: Subscription Television
Providers’ Market Shares, June 1998
                                                                                        Satellite



                                                                12%                     3%
                                                                                        Other providers




                                                                                        Cable
                                                          85%




                                      Source: FCC, Dec. 1998.




                                      Despite the high national market share of the cable industry, competition
                                      in this industry really plays out in local markets. At the local level,
                                      competition varies more than the national data suggest. According to our
                                      discussions with industry participants, it appears that the degree of
                                      competition in the local markets varies on the basis of several factors
                                      related to the nature of each market.


Satellite Television Is a             DBS service has enjoyed very rapid growth since 1994, when the service
National Competitor to                first went on the market. Within the 12-month period between June 1997
Cable and Is Growing in               and June 1998, there were more than 2 million new DBS subscribers
                                      added—a 43-percent increase over the prior year’s total number of
Popularity                            subscribers—and as of June 1998, the market share of DBS companies and
                                      other satellite television providers together had grown to 12 percent of all
                                      households that have a subscription television service.16 DBS industry
                                      analysts told us they foresee continued growth in the DBS market.

                                      There are some aspects of DBS service that are very attractive to some
                                      subscribers. First, through the use of digital technology, DBS’ picture and
                                      sound quality is considered to be state-of-the-art, and surveys have found

                                      16
                                       According to a satellite industry association, 28 percent of DBS customers also subscribe to a cable
                                      service.



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these factors to be important to many. Second, DBS firms currently offer a
greater number of channels than most cable systems.17 For subscribers
who are interested in movies or sports, DBS may offer a more attractive
package of channels than most cable systems.

Although satellite systems offer a national service, their market
penetration varies significantly by local area. In particular, as figure 5
shows, DBS has enjoyed much greater penetration in more rural states. This
pattern of development may be due to the lack of cable systems in such
areas, to less channel capacity on the cable systems in some rural
locations, or simply to the early marketing strategies of satellite
companies.




17
 As cable systems upgrade to digital technology DBS’ advantage of a greater channel capacity over
cable will diminish.



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Figure 5: Satellite Subscribership, by State as of January, 1999




                                                                                  Percentage of TV households




                                            Source: Data from SkyTRENDS, 1999, a market research and data collection organization for the
                                            satellite industry.




Competition to Cable From                   As figure 4 indicates, subscription television service offered by telephone
Telephone Companies and                     companies, electric utilities, and other providers constitutes a relatively
Other Providers Is Limited                  small percentage of the national market. According to our discussions
                                            with industry participants, it appears that despite the small national
Nationally but Significant                  market share held by these competitors, their presence is important in
in Some Local Markets                       some local markets. Moreover, according to FCC, where cable companies
                                            face direct competition in local markets, consumers often receive benefits,




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including lower prices, additional channels at the same monthly rate,
improved customer service, and new services such as interactive
applications.

The 1996 Telecommunications Act eliminated a restriction on telephone
companies’ provision of television programming within their telephone
service areas. While telephone companies providing programming are not
generally using their telephone networks to compete with cable
companies, they have entered the market using other distribution
systems.18 One regional telephone company, Ameritech, has built a second
cable system in several cities that competes against the incumbent cable
operator’s system. Bell Atlantic has entered into a joint marketing
arrangement with a DBS company within its territory under which the
telephone company markets the DBS system under the telephone
company’s brand name. BellSouth has purchased some “wireless cable”
systems that use microwave technology to transmit television signals to
homes. Overall, FCC reports that telephone companies are not yet a
national presence in the subscription television market, but their
competitive presence is growing, and in certain areas, such as the
Midwest, they are already becoming significant regional competitors. FCC
has reported that Ameritech and BellSouth have acquired cable franchises
which give them potential access to more than 2.7 million homes.

The 1996 Telecommunications Act also contains provisions that effectively
allow public utility holding companies to enter telecommunications
markets, so these and other companies have also entered the subscription
television market in some local areas. FCC states that utilities have the
potential to become major competitors but thus far are not significant or
nationwide competitors in the subscription television market.
Additionally, some companies have focused their operations on the
multiple-dwelling-unit market, which includes apartment buildings and
condominiums. FCC also reports that investment in and the development of
Internet video service is continuing, and some video service is being
offered over the Internet, although the pictures are not of the quality
provided by subscription television.

The availability of free over-the-air broadcast television may also influence
the competitiveness of the subscription television market. For example,
some cable firms we spoke with noted that they feel competitive pressure
from the availability of free over-the-air television. In fact, some studies
have found that in addition to other factors, a greater number of free

18
  US WEST is using its telephone infrastructure to deliver video programming in Phoenix, Arizona.



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                               over-the-air TV channels in a particular city tends to reduce cable
                               subscriptions and rates.19 On the other hand, some members of our expert
                               panel noted that the small number of channels available through
                               over-the-air technology, as compared to a subscription service, does not
                               meet the needs of many consumers who currently choose to buy a
                               subscription service.


Competitors Are Adopting       To attract subscribers to their services, competitors to incumbent cable
Various Strategies to          firms are pursuing a variety of strategies to compete for subscribers,
Attract Subscribers            including (1) offering competitive pricing, (2) offering a greater number of
                               channels and expanding services, and (3) providing quality customer
                               service.

                           •   DBS companies are competing on price by reducing the up-front costs of
                               purchasing necessary equipment, such as satellite reception dishes,20 as
                               well as maintaining their programming package prices. According to one
                               DBS company, its programming package price has not changed in the past
                               few years, and in 1998 the company guaranteed its subscribers that no
                               price increase would take effect before 2000. In addition to offering
                               packages with extensive programming, DBS companies also offer
                               programming packages with fewer channels for reduced monthly
                               payments.21 Other competitors, operating second cable systems or
                               wireless cable systems, also told us that they have attracted subscribers by
                               offering their services at prices that are competitive with those of
                               incumbent cable companies.
                           •   Another means by which providers are seeking to compete with
                               incumbent cable systems is through the number of channels offered and
                               services provided. These competitors are seeking to attract new customers
                               with expanded channel selection, better picture quality and enhanced
                               sound. DBS providers said that they offer over 200 channels of digital video
                               and audio programming, which is a much larger selection than most cable
                               operators can provide. One of the wireless cable systems of a telephone
                               company is offering subscribers 160 channels of programming, also

                               19
                                Robert W. Crandall and Harold Furchtgott-Roth, Cable TV: Regulation or Competition? (Washington,
                               D.C.: Brookings Institution, 1996), p. 55; Mark M. Bykowsky and Timothy Sloan, “Competitive Effects
                               of Broadcast Signals on the Price of Basic Service,” NTIA Staff Paper (Apr. 6, 1990); James N.
                               Dertouzos and Steven S. Wildman, “Competitive Effects of Broadcast Signals on Cable,” paper
                               prepared for the National Cable Television Association, (Mar. 1, 1990).
                               20
                                 Some DBS promotions require subscription to particular programming packages. Also, subscribers
                               incur additional equipment costs to be able to view programming on more than one television set.
                               21
                                These include DBS programming packages such as 18 video channels and 31 audio channels for
                               $14.99 per month and 40 video channels for $19.99 per month.



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    considerably more than most cable systems’ programming, and a
    representative of an electric utility whom we interviewed told us that its
    system currently offers subscribers more channels than the cable
    competitors it faces. Additionally, many of these providers are offering
    other services along with subscription television service, such as Internet
    access.
•   Many providers also told us that they compete with cable operators
    through their customer service operations. For example, DBS companies
    told us they seek to provide quality customer service, and one company
    said that its customer service switchboard is open 24 hours per day, 7 days
    per week. Both telephone company and electric utility representatives we
    spoke with noted that one of their competitive advantages is the customer
    service reputation associated with their brand name.

    Nearly all cable operators we spoke with told us that they view the
    competition from new providers as significant and are pursuing strategies
    to retain and increase their subscriber base. Among these strategies are
    pricing modifications, an expansion of programming, new services, and
    improved customer service. Although cable companies have increased
    their prices, some cable companies told us that they price their
    programming packages to be competitive and, because of competition,
    have not increased their prices as much as they might have otherwise.
    Cable companies also told us that they have increased their prices because
    of the increased costs of programming, costs for upgrading, and the
    general increases in their business costs. Many cable companies explained
    that they are upgrading and rebuilding their systems to offer subscribers a
    greater number of channels. Also, most of these cable companies pointed
    out that their system upgrades are enabling them to offer new services,
    such as Internet access and telephone service. Cable infrastructure
    investments have totaled more than $20 billion during the period 1996
    through 1998. Although the cable industry maintains a high market share
    of television subscribers, the responsiveness of these firms in upgrading
    their systems and expanding services may indicate that the market is
    becoming more competitive than the data on market shares alone may
    indicate. Alternatively, it is also possible that these firms may have
    upgraded their services and expanded their service offerings in the
    absence of increased competition from other subscription television
    providers.




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                           Although there are more than 10,000 cable franchises throughout the
Cable Operators’           nation, the ownership of cable operations is fairly concentrated. In
Extensive Ownership        addition, there are ownership ties between cable systems and program
Ties Result in Some        suppliers, or subscription networks. Also, nearly all cable companies are
                           trying to cluster their operations in order to own most of the cable systems
Clear Efficiencies, but    in particular geographic areas. We found that ownership ties and
Ownership                  clustering strategies provide important cost savings as well as possible
                           competitive advantages to cable companies. To address concerns about
Relationships May          the effect that large cable companies might have on the terms competitors
Adversely Affect           receive when buying programming and the availability of programming to
Competition                the competitors, many companies we spoke with, as well as some of our
                           expert panelists, stated that additional steps to ensure competitors’ fair
                           terms for and access to programming should be considered.


Extensive Ownership Ties   The cable industry is a fairly concentrated industry and is also
Exist Among Cable          characterized by significant ownership ties among cable companies and
Operators and Between      related firms. There are three ownership issues that characterize the cable
                           industry: “vertical” relationships between cable operators and program
Cable Operators and        suppliers, or subscription networks; “horizontal” concentration and
Program Suppliers          relationships among cable operators; and clustered cable systems,
                           whereby cable operators consolidate ownership within geographical
                           areas.

                           The largest cable companies have ownership interests in subscription
                           networks, which create vertical ownership ties in the industry. Five of the
                           16 cable companies we interviewed have ownership interests in
                           subscription networks. In 1998, FCC reported that 95 of 245 subscription
                           networks were vertically integrated with some minimum ownership
                           interest by at least one cable operator. Cable companies, either
                           individually or collectively, owned 50 percent or more of 78 subscription
                           networks. Moreover, cable companies’ ownership interest in programming
                           included 29 of the top 50 most popular subscription networks. Figure 6
                           shows cable companies’ ownership interests in popular subscription
                           programming, as of July 1998.




                           Page 16                   GAO/RCED-99-158 Status of Competition to Cable Television
                                                  B-281027




Figure 6: the Six Largest Cable Companies’ Ownership of Popular Subscription Programming

                       Tele-
                                           Time
                  Communications,                            Media One             Comcast             Cablevision                   Cox
                     Inc. (TCI)           Warner



  Programming     Animal Planet (49%)                                                                                           Animal Plant (25%)
  in which
  more than       Court TV (50%)        Court TV (50%)
  one cable
  company has     Discovery                                                                                                     Discovery
  ownership       Channel (49%)                                                                                                 Channel (25%)

                  E! Entertainment                           E! Entertainment     E! Entertainment
                  (10%)                                      (10%)                (40%)

                                        Food Network (1%)    Food Network (5%)                                                  Food Network (1%)

                                                             Golf Channel (14%)   Golf Channel (43%)

                  QVC (43%)                                                       QVC (57%)

                  The Learning                                                                                                  The Learning
                  Channel (49%)                                                                                                 Channel (25%)

                  Travel Channel                                                                                                Travel Channel
                  (49%)                                                                                                         (25%)


  Programming     Black Entertainment   Cartoon Network                                                American Movie
  in which only   Television (35%)      (100%)                                                         Classics (75%)
  one cable
  company has     Box Worldwide         Cable News                                                     Bravo (75%)
  ownership       (78%)                 Network
                                        (CNN)(100%)                                                    Independent Film
                  FX (50%)                                                                             Channel (75%)
                                        CNN Headline
                  Home Shopping         News (100%)
                  Network (19%)
                                        Comedy Central
                  Odyssey Channel       (50%)
                  (33%)
                                        Turner Broadcast
                  Prevue Channel        System (100%)
                  (12%)
                                        Turner Network
                  Sci-Fi Channel        Television (100%)
                  (19%)
                                        Turner Classic
                  Sneak Prevue          Movies (100%)
                  (12%)

                  USA Network (19%)



                                                                                                                          (Figure notes on next page)




                                                  Page 17                         GAO/RCED-99-158 Status of Competition to Cable Television
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Notes: In addition, Jones Intercable has a 97-percent ownership interest in Knowledge TV.

Since the date of the data used in this figure, several changes have occurred in the industry. For
example, on March 9, 1999, AT&T announced that its merger with TCI was complete and that TCI
would become the AT&T business unit, AT&T Broadband & Internet Service. In addition, on
May 6, 1999, AT&T and MediaOne Group announced that it had entered into a definitive merger
agreement.

Source: FCC’s data as of Mar. 1998.




FCC’s data also reveal an industry that is fairly concentrated horizontally; in
particular, the top four cable companies as of July 1998—
Tele-Communications, Inc. (TCI), Time Warner, Media One, and
Comcast—accounted for 55 percent of all television subscribers.22 In
addition, some cable companies have ownership ties with other cable
companies. For example, in 1998, TCI owned 10 percent of Time Warner
Inc.; Media One owned 25 percent of Time Warner Entertainment (a
limited partnership of Time Warner Inc., which includes cable systems and
other entertainment business interests); and Comcast, the fourth largest
cable company, owned a controlling interest in Jones Cable, the eighth
largest cable company at that time.23 In addition, several of the smaller
cable companies we interviewed told us that larger cable companies hold
an ownership interest in them. While these companies generally do not
compete against each other in local markets—that is, consumers rarely
have a choice of cable operators—this level of concentration has more
significance for the market for program acquisition.

In recent years, cable companies have engaged in a clustering strategy in
order to consolidate their systems in and around particular cities or
regions, which have then become dominated by one company. FCC reports
that 34 million subscribers are located in clusters of 100,000 or more
subscribers in 1998. Figure 7 provides an illustration of how a cable
company might develop a cluster of systems in and around a particular
city. Before the clustering, cable systems’ ownership is geographically



22
  Industries are considered concentrated when a few firms account for most of the production of a
particular product. One common measure of concentration is the four-firm concentration ratio, which
measures the portion of the industry accounted for by the four largest firms. Therefore, measured by
subscribership, the national four-firm concentration ratio for the cable industry was 55 percent at the
time of these data, which would constitute a fairly concentrated industry. Since cable companies
typically have even higher market shares in local markets, experts believe that in many cases the
relevant concentration of the industry is higher than the national concentration indicates.
23
  Currently there are proposed mergers in the industry that would change the individual companies’
relative sizes.



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                                          B-281027




                                          dispersed in this hypothetical city, but in the second panel, one cable
                                          company has come to have most system franchises in this area.


Figure 7: Hypothetical Illustration of Geographic Clustering by a Cable Company


               Area Before Clustering                                             Area After Clustering




         Cable company 1

         Cable company 2

         Cable company 3




Cross-Ownership Among                     The various ownership ties that exist in the cable industry provide
Market Participants                       efficiencies to cable operators that help to decrease their cost of providing
Creates Efficiencies                      cable service. Our discussions with industry participants and the
                                          comments made by our expert panel revealed important efficiencies
                                          resulting from vertical integration, horizontal concentration, and the
                                          clustering of cable systems.

                                          One of the most important efficiencies of vertical integration between
                                          cable operators and program suppliers—that is, companies that develop
                                          programming and own subscription networks—comes from the reduced
                                          risk of program development. Developing new and innovative
                                          programming is costly and risky. Not only does the vertical relationship
                                          help to reduce costs of negotiating and enforcing long-term contracts



                                          Page 19                     GAO/RCED-99-158 Status of Competition to Cable Television
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between cable companies and program suppliers, but the relationship also
helps to ensure an outlet for newly developed programming. For program
suppliers, this minimizes the risk that programs will be developed but not
be marketable. From the cable operators’ perspective, ownership ties to
program suppliers help guarantee the continued availability of
programming. Several of the companies we interviewed told us that
subscription networks were largely developed through investments by the
larger cable companies. Even competitors to cable agree that the cable
companies’ vertical ties to program suppliers are largely responsible for
the development of the varied programming that now exists. All of the
expert panel members agreed that vertical relationships in this industry
have promoted efficiencies in the cable industry.

Benefits are also gained by the large size of some cable companies and
from horizontal relationships with other cable companies. Larger cable
companies may enjoy reduced programming costs and also have costs
savings in management and other overhead functions. For smaller cable
companies, an ownership link to a larger company may allow the smaller
company to obtain programming at reduced rates.24 Several of the smaller
cable companies we interviewed noted that even small ownership links to
larger cable companies could enable them to purchase programming at
reduced rates.

Finally, nearly all the cable companies we spoke with said that they had
engaged in clustering in order to consolidate their cable franchises in
specific geographic areas. The companies noted that they could obtain
greater economies of scale from doing this as compared to having cable
systems that were noncontiguous and more geographically spread out. In
particular, the clustering strategy enables firms to consolidate facilities for
receiving and transmitting programming, reduce the number of repair
crews, have regional customer service centers, reduce management, and
compete more effectively for local advertising dollars. In addition, the
companies said that clustering provides the critical mass of subscribers
necessary to support the huge capital investment needed to make system
upgrades designed to enable companies to enter other lines of
telecommunications services, such as Internet access and local phone
service.




24
  Smaller cable companies may also reduce the rates they pay for programming by purchasing through
a buying cooperative.



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                          B-281027




Ownership Ties May Have   Although there are efficiencies realized from the ownership relationships
Adverse Competitive       in the cable industry, there is also the potential for adverse market effects
Effects                   from these relationships. Certain federal laws and FCC rules have been
                          designed to ensure that vertically integrated cable companies make their
                          programming available to other market participants and to limit the extent
                          of horizontal concentration in the industry. Despite these safeguards,
                          several market participants we spoke with, as well as most of our expert
                          panel members, expressed concerns about potential harmful effects of
                          ownership ties and the concentration within the cable industry.

                          The Cable Television Consumer Protection and Competition Act of 1992
                          includes provisions aimed at, among other things, enhancing competition
                          in the subscription television market. As required by the act, FCC
                          developed rules—commonly referred to as the program access
                          rules—designed, in part, to ensure that vertically integrated cable
                          operators generally make their satellite subscription programming
                          available to competitors. Many of the firms we spoke with, as well as our
                          expert panel, noted that the program access rules were very important in
                          helping new competitors—particularly, the DBS firms—to get a foothold in
                          the subscription television market. Despite the success of the program
                          access rules, most of the “noncable” providers and competing cable
                          companies (who are “overbuilding” a cable system where an incumbent’s
                          system exists) we spoke with expressed concerns about access to
                          reasonably priced subscription networks that are owned by cable
                          companies.25 Such concerns include a perceived “loophole,” whereby
                          programs owned by cable companies that are delivered to cable systems’
                          facilities through means other than satellite, such as through fiber wires,
                          are not covered under the current program access rules. Although there
                          have only been a few complaints filed with FCC on this issue, there is
                          concern that such delivery of programs may become more widespread,
                          particularly as the clustering of cable systems increases. FCC has recently
                          agreed that this practice needs to be monitored, but the Commission noted
                          that the program access rules26 as written would need to be clarified to
                          provide clear authority to FCC over programming delivered in this manner.
                          Most of our expert panelists said that the rules requiring access to


                          25
                           Several of the noncable providers and smaller cable companies we spoke with also noted that they
                          believe significant price differentials exist for programming across subscription television providers of
                          different sizes and that, if true, these price differences are particularly problematic for new entrants
                          who are just beginning their operations. Current laws and regulations allow price differentials in some
                          cases. See our report, Telecommunications: Sports Programming Costs and Cable TV Rates
                          (GAO/RCED-99-136, June 22, 1999) for additional information on programming price differentials.
                          26
                           See 13 FCC Rcd 15822, 15856 P 71 (1998). The program access rules are found at 47 C.F.R. 76.1000
                          –76.1004.



                          Page 21                             GAO/RCED-99-158 Status of Competition to Cable Television
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                      programming should be broadened to include cable-owned programming
                      delivered to cable systems through means other than satellite.

                      The 1992 Cable Act directed FCC to place limits on the concentration of
                      ownership of cable systems nationwide. Under the limit that FCC has set,
                      generally no person or entity can own or have an attributable interest in a
                      cable system that reaches more than 30 percent of the homes with access
                      to cable nationwide.27 FCC has stated that with this limit, it is unlikely that a
                      cable company, or a combination of two cable companies acting together,
                      could thwart entry by a new subscription network. Some of the companies
                      we interviewed, however, expressed concerns that dominant cable
                      operators are winning price concessions and may have significant
                      bargaining power vis-à-vis subscription networks even when there is no
                      ownership link. According to these companies, a subscription network
                      needs its product to be carried by at least one of the two largest cable
                      companies in order to be economically viable—thus creating a dependence
                      on the larger cable companies and giving them significant influence over
                      the subscription network. In fact, most of our expert panel members
                      stated that program suppliers that are not vertically integrated (such as
                      MTV, A&E Network, and the Weather Channel) may be very dependent on
                      large cable companies. Some of the expert panel members stated that
                      programming of suppliers that are not vertically integrated should
                      generally be required to be made available to all competitors, as is
                      currently the case for programming owned by vertically integrated
                      suppliers.


                      Market participants, expert panel members, and others with whom we
Several Key Factors   spoke identified several issues that could affect the future development of
Could Affect Future   competition in the subscription television market. These key factors
Competition in the    include (1) DBS companies’ provision of network broadcasts, (2) rules
                      governing access to households in multiple dwelling units (e.g.,
Subscription          apartments and condominiums), and (3) the broadcast industry’s
Television Market     transition to a digital TV format. In addition, the subscription television
                      market could be affected by developments in the broader
                      telecommunications market. Because other telecommunications providers
                      are seeking to provide a bundle of services—telephone service,
                      subscription television, and Internet access—consumers may someday
                      have the choice of diverse providers and delivery mechanisms for the
                      many different telecommunications services they buy. However, if one

                      27
                        FCC is currently not enforcing this rule, pending the outcome of a court case in which the
                      constitutionality of the enabling statute and rules are being challenged. Meanwhile, FCC is reviewing
                      its rules and the method by which horizontal ownership is calculated.



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                              technology proves to be the most efficient means of providing bundled
                              services, it may become dominant and thwart competition in the
                              subscription television market.


DBS Faces Challenges in       DBS represents the single largest competitor to the cable industry, and its
Providing Network             growth is expected to continue. However, the DBS providers we spoke to,
Broadcasts                    as well as others, stated that DBS companies are disadvantaged by their
                              lack of network broadcasts in their DBS package. While the 1988 Satellite
                              Home Viewers Act grants a copyright license allowing satellite companies
                              to include television station signals (usually with so-called “distant
                              networks”—i.e., those from faraway markets) in their package,28 this
                              license is limited to providing these signals to “unserved” households.29
                              According to officials we spoke with, the purpose of limiting satellite
                              companies’ provision of network broadcasts to only unserved households
                              is to protect the local broadcast television stations from losing viewers,
                              which could happen if “served” households received network broadcasts
                              from faraway markets via satellite.

                              At the time that this act was passed, it worked well in helping satellite
                              providers fill in gaps in service for people in more rural locations.
                              However, since DBS was launched in 1994, new issues have arisen. With the
                              smaller DBS dish (compared to that for earlier satellite systems), DBS
                              providers have marketed their service towards more urban areas. As a
                              result, the lack of local broadcast networks has become a competitive
                              impediment for DBS firms. Given the current status of the law, satellite
                              providers have concerns about (1) how their subscribers can receive local
                              network broadcasts and (2) how an unserved household is defined.

                          •   Local Network Broadcasts. Market participants and our panel of experts
                              told us that DBS carriers would be more viable competitors to cable firms if
                              they provided network broadcasts from local television stations into local
                              markets across the country. Similarly, FCC reported in 1998 that a survey
                              conducted by an association of DBS providers showed that for 55 percent
                              of the shoppers who considered but chose not to purchase a DBS system,
                              the lack of local television station broadcasts was the reason cited for not
                              purchasing the system. In fact, 28 percent of DBS customers also subscribe


                              28
                               The act was amended in 1994 and 1997 and will expire at the end of 1999, unless extended by the
                              Congress.
                              29
                                An unserved household is defined as one that cannot receive adequate over-the-air television
                              reception (according to certain measures) and has not received cable service within the previous 90
                              days.



                              Page 23                           GAO/RCED-99-158 Status of Competition to Cable Television
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    to a cable service, indicating that DBS is not a fully competitive alternative
    to cable for some subscribers.

    Currently, DBS providers encourage their subscribers to obtain their local
    network broadcasts by using an over-the-air antenna, if possible. One DBS
    provider is attempting to include local network broadcasts by bundling,
    along with the DBS dish, an over-the-air television reception antenna. This
    will enable the firm to provide consumers with the subscription network
    channels transmitted to the dish while the over-the-air stations are
    transmitted to the standard antenna. No changes in current law are
    necessary to allow consumers to receive local network broadcasts along
    with DBS service in this fashion.

    At the time the Satellite Home Viewers Act was passed, satellite providers
    did not possess the technology to transmit the local signals in many
    markets throughout the country. Because of technological advances, it is
    now feasible for a DBS provider to transmit the local network broadcast
    signals in many markets, and DBS providers want to provide local network
    broadcasts using their satellites. Currently, one DBS provider offers local
    network broadcast packages for customers in 20 metropolitan areas, but it
    does so only for subscribers who qualify as unserved households in these
    areas. A bill, H.R. 1554, which passed the House of Representatives on
    April 27, 1999, would expressly provide DBS carriers a copyright license to
    carry local broadcast signals into local markets for all subscribers there,
    regardless of whether they can obtain network broadcasts using an
    over-the-air antenna.30 The Senate passed similar legislation (i.e., a
    different version of the House bill) on May 20, 1999.31

•   The Definition of an Unserved Household. The DBS providers we
    interviewed told us that the definition of unserved needs to be clarified
    and broadened. In particular, there is concern that the manner used to
    determine whether reception is “adequate” is not sufficient and that some
    households might be deemed to have adequate reception by this definition
    even if the viewers do not find the quality of the reception to be of high
    enough quality. In response to such concern, FCC recently adopted an

    30
      One of the most difficult policy debates surrounding DBS companies’ provision of local signals
    relates to whether the DBS carriers would be required to carry all local broadcast stations in the
    markets where they chose to provide local signals. Cable companies are generally required, depending
    on the capacity of their systems and other factors, to carry all broadcast signals in each local market
    under a provision of the 1992 Cable Act. An FCC official told us that this provision is generally
    interpreted as having been designed to help protect the economic viability of over-the-air television by
    ensuring that consumers who receive television through a cable wire will have access to all the local
    over-the-air stations.
    31
      Both the House and Senate versions of the bill would extend the copyright license by 5 more years.



    Page 24                            GAO/RCED-99-158 Status of Competition to Cable Television
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                          order, which according to the Commission, should foster more accurate
                          methods for determining the intensity of broadcast signals—the primary
                          element used in determining if a consumer is unserved—by providing a
                          uniform method of measuring signals’ strength at individual households.
                          Additionally, according to the companies, the requirement that a
                          household not receive cable service for at least 90 days to be considered
                          unserved is anticompetitive. In fact, both the House and Senate passed
                          bills would eliminate the 90-day waiting period.


Greater Choice for        Multiple dwelling units, such as apartments and condominiums, represent
Occupants May Increase    a profitable submarket for subscription television providers. First,
Competition in Multiple   multiple dwelling units are a densely populated market, where many
                          households may live in one building or housing complex, so serving
Dwelling Units            multiple dwelling units enables a provider to access many potential
                          customers. Second, serving the multiple-dwelling-unit market can, in some
                          cases, involve relatively low costs because companies can serve selected
                          buildings without any obligation, such as a cable company would have
                          under its franchise agreement, to invest in a broader infrastructure outside
                          the building or serve the broader community. This market also represents
                          a significant part of the overall market—FCC reports that multiple dwelling
                          units constitute 28 percent of U.S. households and that the cable industry
                          currently dominates this market.

                          FCC issued two orders in 1998 to help ease entry and access by competitors
                          into the multiple-dwelling-unit market and to provide individual
                          consumers with more choices with respect to their television
                          programming provider. One of the orders attempts to clarify the control of
                          the wires necessary to reach each unit in a building and may allow
                          noncable or other entrant firms, under certain conditions, to have access
                          to the existing wires. This access gives building owners and customers
                          more discretion in choosing a subscription television provider. The other
                          FCC order allows individual renters to install satellite dishes within the
                          space they rent that is under their exclusive control.

                          In its proceedings, FCC received several comments expressing concerns
                          about how effective these FCC orders will be in making the
                          multiple-dwelling-unit market more competitive. For example, because
                          existing contracts between incumbent cable companies and
                          multiple-dwelling-unit owners sometimes have no explicit expiration date,
                          potential entrants may never have an opportunity to serve the residents of
                          such buildings. Also, even when entrants have an ability to access a



                          Page 25                  GAO/RCED-99-158 Status of Competition to Cable Television
                           B-281027




                           building, laying additional wires within multiple dwelling units is costly
                           and disruptive, so building owners may not be willing to allow it in order
                           to change subscription television providers. Finally, the expansion of rules
                           allowing renters to install satellite dishes may not benefit all renters
                           because DBS transmissions require a clear line of sight from the reception
                           dish to the southern sky where the satellites are located.


Digital Broadcasting May   The broadcast industry has recently begun to transition to a new digital
Create Competitive         broadcast format. Local television stations across the country have been
Opportunities for          given additional radio spectrum over which they are expected to begin
                           transmitting digital video signals that will provide better-quality pictures
Broadcasters               and sound than traditional over-the-air TV. The transition to digital
                           broadcasting is currently scheduled to take until 2006, at which time
                           broadcasters are expected to return to the federal government that portion
                           of the radio spectrum that had previously been used to transmit traditional
                           over-the-air television signals.

                           The new digital technology opens up a variety of options to television
                           broadcasters. The additional capacity offered by the technology enables
                           broadcasters to either transmit one “high-definition” digital television
                           signal—a very high quality digital signal—or to transmit several channels of
                           standard-definition digital television, which will still constitute a
                           considerable improvement over the quality of traditional television. The
                           new system will also support the delivery of other services simultaneously
                           with television and audio programming, such as digital data services. FCC
                           has expressed a willingness to allow television broadcasters these flexible
                           uses of the new system (as long as the station broadcasts one free
                           over-the-air digital channel), and many industry representatives and
                           experts we spoke with indicated that if broadcasters use the spectrum to
                           transmit multiple channels, they may become more competitive with cable
                           television and other subscription television services. In fact, one of the
                           expert panel members noted that if broadcasters choose to focus only on
                           providing high-definition TV, this would “basically exclude . . . [them]
                           from being competitive.” At the same time, some of the panel members
                           noted that even if digital television poses a competitive threat to cable
                           companies, it is in the long term—perhaps 10 years from now.




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Changes in the Broader   The future status of competition in the subscription television market
Telecommunications       depends not only on the regulation of the market and the business plans
Market Will Affect       and strategies of the current players, but also on larger market forces. In
                         particular, the subscription television market is part of the broader
Competition to Cable     telecommunications industry, which is experiencing considerable
Television               diversification, consolidation, and technological advances. Markets for
                         video, voice, and data services are rapidly converging, as firms in
                         previously distinct industry segments are merging, deploying new
                         technologies and infrastructures, and introducing new communications
                         applications and services. These changes are evident from some recent
                         mergers, such as the recently approved merger between AT&T and TCI
                         (the largest cable company). The primary goal of this merger, according to
                         the companies, is to combine voice, television, and data services. Many of
                         the cable firms we spoke with are already providing or positioning
                         themselves to provide new services, such as high-speed Internet service
                         and telephone service, in addition to their subscription television service.

                         As with the subscription television market, a multitude of technological,
                         legal and regulatory, as well as economic issues are at the crux of the
                         transformation in the larger telecommunications industry. Therefore, the
                         convergence taking place among industry segments; the outcome of
                         technological and legal and regulatory changes; and the underlying
                         economics of the industry at large will likely have as much of an effect on
                         the subscription television market as the outcome of the issues within this
                         market. These larger changes may bring about a more competitive
                         subscription television market, as providers throughout the
                         telecommunications industry begin to provide packages of services that
                         may include television service. Ultimately, consumers may have a choice
                         of packages of services provided via many pathways to the home. At the
                         same time, if one technology—particularly if it is a “wired” technology32
                         —is most efficient at providing these telecommunications services, it may
                         become the dominant pathway to the home for delivering communications
                         services (voice, data, and video services), and greater competition in the
                         market may not develop.




                         32
                           If a wired technology becomes dominant, this can create a “bottleneck” in which providers of
                         telecommunications services can access homes and businesses only by transmitting through the wire
                         of another company. However, if a wireless technology is an efficient means of providing services,
                         concerns about a bottleneck may be reduced because there is less physical infrastructure needed to
                         access homes. Monopolization of the market is less of a concern because additional spectrum could be
                         allocated to allow for additional providers. At the same time, however, there are some limits on the
                         availability and flexibility of additional spectrum.



                         Page 27                           GAO/RCED-99-158 Status of Competition to Cable Television
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                  The dynamic nature and the many different technologies that constitute
Observations      the telecommunications market present a challenge to lawmakers and
                  regulators. It is difficult to foresee or predict what will develop in these
                  markets. Recent examples of developments that were not fully foreseen
                  include the significant growth in DBS and the importance of the Internet as
                  a communication and commerce tool. Also, some expected developments,
                  such telephone companies’ entry into the subscription television market in
                  a significant way, have not always happened, or at least not always in the
                  expected time frame. Our discussions with industry participants and
                  experts highlighted that markets often develop in unexpected ways, with
                  new competitors or new services coming on the scene seemingly out of
                  “left field.” In the long term, the subscription television market will
                  probably be most affected by how technologies converge and by how
                  many pathways to the home become viable means of delivering bundled
                  telecommunications services. The best hope for greater competition in this
                  and related telecommunications markets is for multiple means of
                  delivering bundled services to be feasible and economically viable.


                  We provided a draft of this report to the Federal Communications
Agency Comments   Commission (FCC), as well as to the members who participated in our
                  expert panel (see app. III). FCC provided technical comments that we have
                  incorporated, where appropriate. In its written reply, FCC said that our
                  conclusions are not inconsistent with those found in the Commission’s
                  own research (see app. IV for FCC’s complete reply). Five of the seven
                  expert panelists reviewed the draft and also provided comments that we
                  considered and incorporated, where applicable. These expert panelists
                  generally agreed with the overall findings of the report. In addition, four of
                  the five panelists agreed with the overall message of the report. One
                  panelist took issue with what he described as an overly optimistic view of
                  the level of competition in the market. In response to this concern and to
                  highlight our findings on the current status on competition in the industry,
                  we added into the “Results in Brief” material that appeared only later in
                  the draft report.


                  We conducted our review from July 1998 through May 1999 in accordance
                  with generally accepted government auditing standards.

                  As agreed with your offices, 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 send copies of this report to



                  Page 28                    GAO/RCED-99-158 Status of Competition to Cable Television
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interested congressional committees, the Chairman and Commissioners of
the Federal Communications Commission, the Federal Trade Commission,
the Department of Justice, and others who participated in this study.

Copies of this report will also be made available to others upon request. If
you or your staff have any questions about this report, please contact me
at (202) 512-7631. Key contributors to this report are listed in appendix V.




Judy A. England-Joseph
Director, Telecommunications Issues




Page 29                   GAO/RCED-99-158 Status of Competition to Cable Television
Contents



Letter                                                                                                 1


Appendix I                                                                                            32

Scope and
Methodology
Appendix II                                                                                           34

Market Participants
GAO Interviewed
Appendix III                                                                                          36

Members of the
Expert Panel GAO
Convened
Appendix IV                                                                                           37

Comments From the
Federal
Communications
Commission
Appendix V                                                                                            38

GAO Contacts and
Staff
Acknowledgments
Figures               Figure 1: The Delivery of Television Over the Air                                4
                      Figure 2: The Delivery of Television via Cable                                   6
                      Figure 3: The Delivery of Television via Satellite                               8
                      Figure 4: Subscription Television Providers’ Market Shares,                     10
                        June 1998
                      Figure 5: Satellite Subscribership, by State as of January, 1999                12
                      Figure 6: The Six Largest Cable Companies’ Ownership of                         17
                        Popular Subscription Programming




                      Page 30                   GAO/RCED-99-158 Status of Competition to Cable Television
Contents




Figure 7: Hypothetical Illustration of Geographic Clustering by a              19
  Cable Company




Abbreviations

DBS        direct broadcast satellite
FCC        Federal Communications Commission
GAO        General Accounting Office


Page 31                  GAO/RCED-99-158 Status of Competition to Cable Television
Appendix I

Scope and Methodology


             To respond to the objectives of this report—to provide information on
             (1) the status of competition in the subscription television market, (2) the
             extent to which ownership ties between cable companies and program
             suppliers may be affecting the development of competition, and (3) key
             factors that may influence the development of competition in the
             future—we gathered information from a variety of sources.

             We interviewed officials and obtained documents from the Federal
             Communications Commission, the Department of Justice, and the Federal
             Trade Commission. We also interviewed officials from the following
             industry trade associations: the National Cable Television Association; the
             Cable Telecommunications Association; the Small Cable Business
             Association; the Satellite Broadcasting and Communications Association;
             the National Association of Broadcasters; the Association of Local
             Television Stations; the Wireless Communications Association; the
             American Public Power Association; and the Edison Electric Institute.

             In addition, we designed a structured interview to obtain information from
             the relevant market participants: cable companies, direct broadcast
             satellite (DBS) companies, telephone companies, wireless cable companies,
             electric utilities, broadcast networks, and subscription networks. We
             completed 41 interviews with representatives from the various companies
             (see app. II). Of the 41 interviews, 16 were with cable companies.33 In
             order to obtain a diverse sample of cable companies representing a
             number of different views, our criteria for selection were based on the size
             of the cable firm-–large, medium-sized, small—as defined by the number
             of subscribers. Specifically, we selected the two largest cable companies,
             each of which had over 10 million subscribers. In addition, we selected
             four more large cable companies, which each had over 1 million
             subscribers. We also selected five medium-sized cable companies with
             71,000 to 905,000 subscribers and five smaller cable companies with 8,000
             to 70,000 subscribers. In addition, we conducted structured interviews
             with three DBS companies; five telephone companies (four Regional Bell
             Operating Companies and one competitive local exchange carrier); three
             wireless cable companies; two electric utilities; six broadcasters; five
             subscription networks; and one provider of private cable (specializing in
             service to multiple dwelling units). We analyzed the data collected from
             the structured interviews by industry and compared responses across
             industries.



             33
              We interviewed all of the cable companies using the structured questionnaire. Because of time
             constraints, we interviewed one of the remaining companies without the structured questionnaire.



             Page 32                           GAO/RCED-99-158 Status of Competition to Cable Television
Appendix I
Scope and Methodology




Furthermore, we convened an expert panel of seven individuals. The panel
included government officials, academic experts, and a representative of a
consumer group. (The names and affiliations of the panel members are
listed in app. III.) We held an all-day meeting with the panel at our offices
in Washington, D.C. Prior to the meeting, we provided each panel member
with a set of nine discussion questions. At the end of each discussion, we
asked the panelists to respond to a set of questions using an anonymous
ballot. We recorded and transcribed the meeting to ensure that we
accurately captured the panel members’ statements.

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 and provided
background on the telecommunications market and market participants.
He also reviewed and commented on our final report.




Page 33                   GAO/RCED-99-158 Status of Competition to Cable Television
Appendix II

Market Participants GAO Interviewed


Cable Companies              Anderson-Eliason Cable Group
                             Cable America
                             Charter Communications
                             Comcast Communications, Inc.
                             Eagle Communications
                             Jones Intercable
                             Intermountain Cable
                             Massillon Cable TV, Inc.
                             MediaOne
                             Raystay Co.
                             Renaissance Media Partners
                             TCA Cable TV, Inc.
                             Tele-Communications, Inc.
                             Telemedia
                             Time Warner Inc.
                             Triax Telecommunications Company, L.L.C.



Direct Broadcast Satellite   DIRECTV, Inc.
                             Echostar Communications Corporation
                             PRIMESTAR, Inc.


Telephone Companies          Ameritech New Media, Inc.
                             Bell Atlantic Video Services
                             BellSouth
                             Southwestern Bell Video Services, Inc.


Multipoint Multichannel      American Telecasting
Delivery System (Wireless    Heartland Wireless
Cable) Companies             People’s Choice TV

Electric Utilities           Boston Edison Company
                             Cedar Falls Utilities


Competitive Local            RCN Telecom Services, Inc.
Exchange Carrier




                             Page 34                  GAO/RCED-99-158 Status of Competition to Cable Television
                             Appendix II
                             Market Participants GAO Interviewed




Private Cable (Focusing      Optel
Mostly on Serving Multiple
Dwelling Units)
Broadcasters                 ABC, Inc.
                             CBS Worldwide, Inc.
                             FOX Broadcasting Company
                             National Broadcasting Company (NBC)
                             Sinclair Broadcasting Group, Inc.
                             Tribune Company (WB)


Programmer Suppliers         A&E Television Networks
                             The Golf Channel
                             The Military Channel
                             The Weather Channel
                             MTV Networks




                             Page 35                      GAO/RCED-99-158 Status of Competition to Cable Television
Appendix III

Members of the Expert Panel GAO
Convened

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

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

               Gene Kimmelman, Co-Director, Washington Office, Consumer’s Union

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

               Donald Russell, Chief, Telecommunications Taskforce, Antitrust Division,
               Department of Justice

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

               Steve Wildman, Director, Telecommunications Science, Management and
               Policy Program, Northwestern University




               Page 36                  GAO/RCED-99-158 Status of Competition to Cable Television
Appendix IV

Comments From the Federal
Communications Commission




              Page 37   GAO/RCED-99-158 Status of Competition to Cable Television
Appendix V

GAO Contacts and Staff Acknowledgments


                  Judy A. England-Joseph, (202) 512-7631
GAO Contacts      Amy Abramowitz, (202) 512-4936


                  In addition to those named above, Dennis Amari, Carol Bray, Harold
Acknowledgments   Brumm, Venkareddy Chennareddy, Karin Lennon, Daniel Meyer, Lynn
                  Musser, and Mindi Weisenbloom made key contributions to this report.




(385749)          Page 38                 GAO/RCED-99-158 Status of Competition to Cable Television
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