*Pages 1--99 from Microsoft Word - 24125.doc* Federal Communications Commission FCC 02- 338 Before the Federal Communications Commission Washington, D. C. 20554 In the Matter of Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming ) ) ) ) ) MB Docket No. 02- 145 NINTH ANNUAL REPORT Adopted: December 23, 2002 Released: December 31, 2002 By the Commission: Table of Contents Paragraph I. Introduction ............ ............................................................................................................ 1 A. Scope of this Report...................................................................................................... 2 B. Summary of Findings ................................................................................................... 4 II. Competitors in the Market for the Delivery of Video Programming........................................ 15 A. Cable Television Service .............................................................................................. 15 1. General Performance....................................................................................... 16 2. Financial Performance .................................................................................... 27 3. Capital Acquisition and Disposition............................................................... 32 4. Provision of Advanced Broadband Services .................................................. 35 B. Direct- to- Home Satellite Services ............................................................................... 53 1. Direct Broadcast Satellite Service .................................................................. 53 2. Satellite- Based Advanced Services ................................................................ 66 3. Home Satellite Dishes..................................................................................... 71 C. Wireless Cable Systems................................................................................................ 72 D. Private Cable Systems ................................................................................................. 75 E. Broadcast Television Service ....................................................................................... 79 F. Other Entrants .. ............................................................................................................ 88 1. Internet Video.................................................................................................. 88 2. Home Video Sales and Rentals....................................................................... 91 G. Local Exchange Carriers .............................................................................................. 95 H. Electric and Gas Utilities .............................................................................................. 99 I. Broadband Service Providers, Open Video System Operators, and Overbuilders ..... 102 1 Federal Communications Commission FCC 02- 338 2 III. Market Structure and Conditions Affecting Competition......................................................... 112 A. Horizontal Issues in the Market for the Delivery of Video Programming.................. 112 1. Competitive Issues in the Market for the Delivery of Video Programming . 113 2. Competitive Issues in the Market for the Purchase of Video Programming. 124 B. Vertical Integration and Other Programming Issues ................................................... 134 1. Status of Vertical Integration.......................................................................... 134 2. Other Programming Issues.............................................................................. 138 C. Technical Issues ............................................................................................................ 162 1. Cable Modems ................................................................................................ 163 2. Navigation Devices ......................................................................................... 167 3. Emerging Services .......................................................................................... 170 IV. Administrative Matters.. ............................................................................................................ 172 Appendices A. List of Commenters B. Horizontal Issues Tables C. Vertical Integration Tables I. INTRODUCTION 1. This is the Commission’s ninth annual report (“ 2002 Report”) to Congress on the status of competition in the market for the delivery of video programming. 1 Section 628( g) of the Communications Act of 1934, as amended (“ Communications Act”), requires the Commission to report annually to Congress on the status of competition in the market for the delivery of video programming. 2 Congress imposed this annual reporting requirement in the Cable Television Consumer Protection and Competition Act of 1992 (“ 1992 Cable Act”) 3 as a means of obtaining information on the competitive status of the market for the delivery of video programming. A. Scope of this Report 2. The 2002 Report updates the information in our previous reports and provides data and information that summarize the status of competition in the market for the delivery of video programming. The information and analysis provided in this report are based on publicly available data, filings in various Commission proceedings, and information submitted by commenters in response to a 1 The Commission’s previous reports appear at: Implementation of Section 19 of the 1992 Cable Act (Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming), (“ 1994 Report”), 9 FCC Rcd 7442 (1994); (“ 1995 Report”), 11 FCC Rcd 2060 (1996); (“ 1996 Report”), 12 FCC Rcd 4358 (1997); (“ 1997 Report”), 13 FCC Rcd 1034 (1998); (“ 1998 Report”), 13 FCC Rcd 24284 (1998); (“ 1999 Report”), 15 FCC Rcd 978 (2000); (“ 2000 Report”), 16 FCC Rcd 6005 (2001); and (“ 2001 Report”), 17 FCC Rcd 1244 (2002). 2 Communications Act of 1934, as amended, § 628( g), 47 U. S. C. § 548( g). 3 Pub. L. No. 102- 385, 106 Stat. 1460 (1992). 2 Federal Communications Commission FCC 02- 338 3 Notice of Inquiry (“ Notice”) in this docket. 4 To the extent that information provided in previous annual reports is still relevant, we do not repeat that information in this report other than in an abbreviated fashion, and provide references to the discussions in prior reports. 3. In Section II, we examine the cable television industry, existing multichannel video programming distributors (“ MVPDs”) and other program distribution technologies and potential competitors to cable television. Among the MVPD systems or techniques discussed are direct broadcast satellite (“ DBS”) services and home satellite dishes (“ HSD” or “C- Band”), wireless cable systems using frequencies in the multichannel multipoint distribution service (“ MMDS”), private cable or satellite master antenna television (“ SMATV”) systems as well as broadcast television service. We also consider other existing and potential distribution technologies for video programming, including the Internet, home video sales and rentals, local exchange carriers (“ LECs”) and electric and gas utilities, and broadband service providers (“ BSPs”). In Section III of this report, we examine market structure and competition. We evaluate horizontal concentration in the multichannel video marketplace and vertical integration between cable television systems and programming services. We also address technical issues, including cable modems, navigation devices, and emerging services. B. Summary of Findings 4. In the 2002 Report, we examine the status of competition in the market for the delivery of video programming, discuss changes that have occurred in the competitive environment over the last year, and describe barriers to competition that continue to exist. Overall, although competitive alternatives continue to develop, cable television still is the dominant technology for the delivery of video programming to consumers in the MVPD marketplace. As of June 2002, 76.5% of MVPD subscribers received their video programming from a franchised cable operator, compared to 78% a year earlier. 5. The total number of subscribers to both cable and non- cable MVPDs continues to increase. A total of 89. 9 million households subscribe to multichannel video programming services as of June 2002, up 1.8% over the 88.3 million households subscribing to MVPDs in June 2001. This subscriber growth accompanied a 1.2 percentage point decrease in MVPDs’ penetration of television households to 85.3% as of June 2002. 5 6. Since the 2001 Report, the number of cable subscribers continued to grow, reaching almost 68.8 million as of June 2002, up about 0.4% from the 68.55 million cable subscribers in June 2001. 6 The total number of non- cable MVPD subscribers grew from 19.3 million as of June 2001 to 21.1 million as of June 2002, an increase of more than nine percent. Although industry data reflect continued growth through June 2002, a number of major cable system operators have experienced significant subscriber losses during this period and calendar year 2002 may be the first year in which the industry as a whole has had a net loss of subscribers. 7. DBS subscribership has grown significantly and now represents 20.3% of all MVPD subscribers. Between June 2001 and June 2002, the number of DBS subscribers grew from almost 16 million households to about 18 million households, which is significantly higher than the cable subscriber 4 Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 02- 145, Notice of Inquiry (“ Notice”), 17 FCC Rcd 11579 (2002). Appendix A provides a list of commenters and the abbreviations by which they are identified herein. 5 The number of MVPD households reported here, and the associated percentages, may overstate actual values because a household that subscribes to more than one MVPD (e. g., cable and DBS) is included as a subscriber to both services. See 2001 Report, 17 FCC Rcd at 1247. 6 The source changed 2001 subscriber data. See Kagan World Media, Broadband Cable Financial Databook, July 2002, at 10. 3 Federal Communications Commission FCC 02- 338 4 growth rate. The continued growth of DBS is still, in part, attributable to the authority granted to DBS operators to distribute local broadcast television stations in their local markets by the Satellite Home Viewer Improvement Act of 1999 (“ SHVIA”), and an increase in the number of markets where such service is offered. DBS attracts former cable subscribers as well as consumers not previously subscribing to an MVPD. 8. Over the last year, the number of subscribers to MMDS and large dish satellite service (HSD) continue to decline. The participation of incumbent local exchange carriers in the distribution of video programming also continue to decline. The number of subscribers to open video systems (“ OVS”) and private cable has remained relatively stable, although their market share remains small. 9. During the period under review, cable rates continued to rise. According to the Bureau of Labor Statistics, between June 2001 and June 2002, cable prices rose 6.3% compared to a 1.1% increase in the Consumer Price Index (“ CPI”), which measures general price changes. Concurrently with these rate increases, the number of video and non- video services offered increased, and programming costs increased. We also note that cable operators’ pricing decisions may be affected by direct competition. Available evidence indicates that when an incumbent cable operator faces “effective competition,” as defined by the Communications Act, it responds in a variety of ways, including lowering prices or adding channels without changing the monthly rate, as well as improving customer service and adding new services such as interactive programming. A recent GAO study found that while the provision of local broadcast channels by DBS companies is not associated with lower cable prices, the provision of local broadcast channels by DBS companies is associated with non- price competition. In areas where DBS operators provide local channels, the GAO results indicate that cable companies offer subscribers approximately six percent more channels. According to GAO, this result indicates that cable companies are responding to DBS provision of local channels by improving their quality as reflected by the greater number of channels. 7 10. The Telecommunications Act of 1996 (“ 1996 Act”) removed barriers to telephone company or local exchange carrier (“ LEC”) entry into the video marketplace to facilitate competition between incumbent cable operators and telephone companies. 8 At the time of the 1996 Act, it was expected that LECs would compete in the video delivery market and that cable operators would provide local telephone exchange service. We previously reported that the four largest incumbent local exchange carriers (“ ILECs”) have largely exited the video business. This remains true today. A few smaller LECs continue to offer, or are preparing to offer, MVPD service over existing telephone lines. Alternatively, several cable multiple system operators (“ MSOs”) continue to offer telephone service. Cable operators are beginning to deploy Internet protocol (“ IP”) telephony solutions in addition to circuit- switched telephony offerings. Cable operators, such as Cox and AT& T, continue to deploy circuit- switched cable telephony. Others, like Cablevision and Comcast, continue to offer cable telephony where it has already been deployed, but generally are waiting for IP technology to become widely available before accelerating their rollout of telephone service. AT& T, AOL Time Warner, Comcast, Cox, and Charter are currently offering or continuing to test IP telephony products. 11. The most significant convergence of service offerings continues to be the pairing of Internet service with other service offerings. Cable operators continue to build- out the broadband infrastructure that permits them to offer high- speed Internet access. The most popular way to access the Internet over cable is still through the use of a cable modem and personal computer, though a small number of users continue to access the Internet through their television and a specially designed set- top box, rather than 7 U. S. General Accounting Office, Issues in Providing Cable and Satellite Television Services, GAO- 03- 130 (October 2002) (“ GAO 2002 Report”) at 9- 10. See also U. S. General Accounting Office, Telecommunications: The Effect of Competition From Satellite Providers on Cable Rates, GAO/ RCED- 00- 164 (July 2000). 8 Pub. L. No. 104- 104, 110 Stat. 56 (1996). 4 Federal Communications Commission FCC 02- 338 5 the personal computer. Virtually all of the major MSOs offer Internet access via cable modems in portions of their service areas. Like cable, the DBS industry is developing ways to bring advanced services to their customers. For example, DirecTV currently offers one- way and two- way satellite-delivered Internet service under the brand name DirecWay. Many MMDS and private cable operators also offer Internet access services. In addition, broadband service providers continue to build advanced systems specifically to offer a bundle of services, including video, voice, and high- speed Internet access. 12. Non- cable MVPDs continue to report that regulatory and other barriers to entry limit their ability to compete with incumbent cable operators. Non- cable MVPDs continue to experience some difficulties in obtaining programming from vertically- integrated cable programmers and from unaffiliated programmers which continue to make exclusive agreements with cable operators. In multiple dwelling units (“ MDUs”) potential entry may be discouraged or limited because an incumbent video programming distributor has a long- term and/ or exclusive contract. In addition, non- cable MVPDs report problems obtaining franchises from local governments and difficulties in gaining access to utility poles needed to build out their systems. 13. Our findings as to particular distribution technologies operating in the market for the delivery of video programming include the following: € Cable Systems: Since the 2001 Report, there has been only marginal cable television industry growth in terms of subscribership (a 0.4% increase from June 2001 to June 2002), with a number of individual operators facing actual subscriber declines. The industry has continued to grow in terms of revenues (an approximate 15.9% increase between 2000 and 2001), prime time audience shares (which rose from an average 51.9 share between July 2000 and 2001 to an average 56.5 share between July 2001 and June 2002), and expenditures on programming. The number of national satellite- delivered video programming services increased last year, from 287 to 308, between June 2001 and June 2002. € The cable industry has continued to invest in improved facilities. As a result, there have been increases in channel capacity, the deployment of digital transmissions, and non- video services such as Internet access and telephony. € Direct- to- Home (“ DTH”) Satellite Service (DBS and HSD): Video service is available from high power DBS satellites that transmit signals to small DBS dish antennas installed at subscribers’ premises (DBS service), and from low power satellites requiring larger antennas (HSD service). DBS has over 18 million subscribers, an increase of approximately 14% since the 2001 Report. Between June 2001 and June 2002, the number of HSD subscribers, measured as the number of HSD users that actually purchase programming packages, declined from one million to 700,000, a decrease of about 30%. DirecTV and EchoStar are each among the five largest providers of multichannel video programming service. In June 2002, DBS represented a 20.3% share of the national MVPD market and HSD represented another 0.8% of that market. € Wireless Cable Systems: Currently, the wireless cable industry (“ MMDS”) provides competition to the cable industry in limited areas. MMDS subscribership declined between June 2001 and June 2002 from approximately 700,000 subscribers to 490,000 subscribers. With the advent of digital MMDS and the Commission’s authorization of two- way MMDS service, it appears that most MMDS spectrum eventually will be used to provide high- speed data services. Wireless cable represented an approximately 0.6% share of the national MVPD market in June 2002. 5 Federal Communications Commission FCC 02- 338 6 € Private Cable Operators: Private cable operators, also known as SMATV operators, use some of the same technology as cable systems, but do not use public rights- of- way, and focus principally on serving subscribers living in MDUs. Private cable subscribership increased slightly from 1.5 million subscribers last year to 1.6 million subscribers as of June 2002, representing approximately 1.8% of national MVPD subscribership. € Broadcast Television: Broadcast stations and networks, and non- broadcast networks alike, must either produce programming or purchase programming from third- party producers. Broadcast networks and stations also are suppliers of content for distribution by MVPDs. In addition, they supply video programming directly to those television households that are not MVPD subscribers and to television sets in MVPD households that are not connected to such service. Since the 2001 Report, the broadcast industry has continued to grow in the number of operating stations (from 1,678 in 2001 to 1,712 in 2002). Broadcast stations and networks, like MVPDs and non- broadcast networks, derive revenue from advertising. Advertising revenues and audience levels, however, declined for broadcasters in 2001, though low advertising figures are partly attributable to the generally slow economy in 2001. In 2001, advertising revenues were approximately $36 billion, a 12% decrease over 2000 when advertising revenues were $41 billion. Audience levels continue to decline as they have for many years. During the 2001- 2002 television season, the broadcast television networks accounted for an average 59 share of prime time viewing for all television households, compared to an average 63 share a year earlier. Broadcast television stations continue to deploy digital television (“ DTV”) service. Ninety percent of the more than 1,300 commercial television stations have been granted DTV construction permits or licenses and 643 are on the air with DTV operation. € LEC Entry: The 1996 Act expanded opportunities for LECs to enter the market for the delivery of video programming. In the 2001 Report, we noted that ILECs have largely exited the video business. BellSouth, however, continues to operate some overbuild cable systems, and a number of smaller LECs that are offering, or preparing to offer, video service over telephone lines. Qwest Communications International (formerly US West) continues to offer video, high- speed Internet access, and telephone service over existing copper telephone lines using very high- speed digital subscriber line (“ VDSL”) in several markets. Reports indicate that 45 LECs, mostly small, also are using VDSL to offer a bundle of services, including video, over telephone lines. € Open Video Systems: In the 1996 Act, Congress established a new framework for the delivery of video programming – open video system (“ OVS”). Under these rules, a LEC or other entrant may provide video programming to subscribers, although the OVS operator must provide non- discriminatory access to unaffiliated programmers on a portion of its channel capacity. € Broadband Service Providers: Broadband service providers are entities that compete with existing cable systems using state- of- the- art systems that offer a bundle of telecommunications services, including video, voice, and high- speed Internet access. RCN is the largest BSP, serving approximately 507,000 subscribers. WideOpenWest (“ WOW”) is the second largest BSP with cable systems serving about 313, 000 subscribers. The third largest BSP is Knology, which currently serves approximately 120,000 subscribers. 6 Federal Communications Commission FCC 02- 338 7 € Internet Video: As of June 2002, an estimated 54 million Americans subscribed to an Internet access service, compared with 50 million as of June 2001. Real-time and downloadable video accessible over the Internet continues to become more widely available and the amount of content also is increasing. Despite the evidence of increased interest in Internet video deployment and use, the medium is still not seen as a direct competitor to traditional video service. € Home Video Sales and Rentals: We consider the sale and rental of home video, including videocassettes, DVDs, and laser discs, part of the video marketplace because they provide services similar to the premium and pay- per- view offering of MVPDs. About 90% of all U. S. households have at least one VCR. The number of homes with DVD players has grown rapidly since their introduction, with 14 million DVD homes by the end of 2001. The newest home video technology is the personal video recorder (“ PVR”). One source reports that one million homes currently have PVRs. € Electric and Gas Utilities: Several electric and gas utilities continue to move forward with ventures involving multichannel video programming distribution. Some of their characteristics, such as ownership of fiber optic networks and access to public rights- of- way, make them competitively significant. Some utilities offer telecommunications services on their own, while others partner with broadband service providers, such as Starpower, RCN’s joint venture with PEPCO. It also appears that utilities, particularly municipal utilities in rural areas, are willing to build advanced telecommunications networks to offer a full range of services where incumbent cable operators and telephone companies are not. Reports indicate that 450 public power systems offer communications services, up from 357 offering service last year. 14. We also find that: € Consolidation within the cable industry continues as cable operators acquire and trade systems. The ten largest operators served about 85% of all U. S. cable subscribers. In terms of one traditional economic measure, national concentration among the top MVPDs has decreased since last year as the largest MSOs continue to become more equal in size, and it remains below the levels reported in earlier years. 9 DBS operators DirecTV and EchoStar rank among the five largest MVPDs in terms of nationwide subscribership along with three cable MSOs. As of June 2002, slightly more than 52 million of the nation’s cable subscribers were served by systems that are included in regional clusters. € The number of satellite- delivered programming networks has increased from 287 in 2001 to 308 in 2002. Vertical integration of national programming services between cable operators and programmers decreased to 30%, after remaining steady at 35% over the last couple of years. In 2002, four of the top six cable MSOs held ownership interests in satellite- delivered programming services. Sports programming warrants special attention because of its widespread appeal and strategic significance for MVPDs. The 2002 Report identifies at least 86 9 Traditional economic measures (e. g., the Herfindahl- Hirschman Index or HHI) are based on market shares or the squaring of market shares such that large companies are weighed more heavily than small companies. The HHI (and apparent levels of concentration) decline with rising equality among any given number of companies in terms of market shares even if these firms individually have larger shares of the markets. See fn. 437 infra. 7 Federal Communications Commission FCC 02- 338 8 regional networks, 31 of which are sports channels, many owned at least in part by MSOs. There are also 32 regional and local news networks that compete with local broadcast stations and national cable news networks. € The program access rules adopted pursuant to the 1992 Cable Act, and recently extended by the Commission, were designed to ensure that other MVPDs can access vertically- integrated satellite delivered programming on non-discriminatory terms. We recognize that the terrestrial distribution of programming, including in particular regional sports programming, could have an impact on the ability of alternative MVPDs to compete in the video marketplace. € Cable operators and other MVPDs continue to develop and deploy advanced technologies, especially digital compression techniques, to increase capacity and enhance the capabilities of their transmission platforms. These technologies allow MVPDs to deliver additional video options and other services (e. g., data access, telephony, and interactive services such as video- on- demand) to subscribers. € There have been a number of technical developments regarding cable modems and navigation devices used to access a wide range of services offered by MVPDs. To date, CableLabs has certified over 224 DOCSIS 1.0 compliant cable modems and 48 DOCSIS 1.1 compliant modems. CableLabs continues to advance development of the specification, releasing version 2.0 in January 2002. CableLabs is also continuing its efforts to develop next generation navigation devices with its initiative for the OpenCable Application Platform (“ OCAP”) or “middleware” software specification. The specification, which was introduced in December 2001, is designed to enhance the ability of the consumer electronics industry to build and market integrated DTV sets, digital set- top boxes, and other navigation devices directly to consumers. One major television manufacturer, Panasonic, has signed the CableLabs POD- Host Licensing Agreement (“ PHILA”), allowing it to develop, manufacture, and market digital televisions that will be able to receive high definition and other digital programs via cable, including premium services, without the use of set- top boxes. COMPETITORS 8 Federal Communications Commission FCC 02- 338 9 II. COMPETITORS IN THE MARKET FOR THE DELIVERY OF VIDEO PROGRAMMING A. Cable Television Service 15. This section addresses the performance of franchised cable system operators during the past year. 10 We address four different areas of performance. First, we report on the general performance of the industry, including subscriber levels, availability of basic services, and viewership. Second, we discuss the cable industry’s financial performance, including its revenue, cash flow status, stock valuations, and system transactions. Third, we examine the cable industry’s acquisition and disposition of capital, including the amount of funds raised, and how these funds are being used to upgrade physical plant and to acquire new systems. Lastly, we address the growth of advanced broadband services, including high- speed Internet access services, digital video services, video- on- demand, and cable telephony that is offered in conjunction with, and over the same facilities as, video service. 1. General Performance 16. Since our last Report, the cable industry has continued to grow in terms of homes passed, 11 basic tier cable subscribership, 12 premium service subscriptions, 13 basic tier cable viewership, and channel capacity. 14 Basic tier cable penetration, the ratio of the number of cable subscribers to the total number of households passed by the system continues to decline. Deployment of advanced broadband service offerings continued to increase during 2001 and the first half of 2002. These services include offerings of digital video, high- speed Internet access services through cable infrastructure, interactive cable services, 15 and facilities- based cable telephony. 17. Cable’s Capacity to Serve Television Households. As we have previously noted, the most widely used industry measurement of cable availability is the number of homes passed expressed as a percentage of the number of U. S. homes with at least one television (“ TV households”). 16 In its 10 A franchise is an authorization supplied by a federal, state, or local government entity to own or construct a cable system in a specific area. 47 U. S. C. §§ 522( 9), 522( 10). A cable system operator is "any person or group of persons (A) who provides cable service over a cable system, and directly or through one or more affiliates owns a significant interest in such cable system; or (B) who otherwise controls or is responsible for, through any arrangement, the management and operation of such a cable system." 47 U. S. C. § 522( 5). 11 Homes passed is the total number of households capable of receiving cable television service. 12 We refer to all cable programming networks offered as a part of program packages or tiers as "basic cable networks." The primary level of cable television service is commonly referred to as "basic service" (“ BST”) and must be taken by all subscribers. The content of basic service varies widely among cable systems but, pursuant to the Communications Act, must include all local television signals and public, educational, and governmental access channels and, at the discretion of the cable operator, may include other video programming services. One or more expanded tiers of service, known as cable programming service tier (“ CPST”) for purposes of rate regulation, and often known as expanded basic, also may be offered to subscribers. These expanded tiers of service usually include additional video programming channels. 47 U. S. C. § 543( b)( 7), (l)( 2). 13 Premium services are cable networks provided by a cable operator on a per channel basis for an extra monthly fee. Pay- per- view (“ PPV”) services are cable networks provided on a per program basis. PPV service is a separate category from premium service. 47 U. S. C. § 543( b)( 7), (l)( 2). 14 Channel capacity is number of channels dedicated to video use based on other use considerations. Video channel capacity can be decreased on any given system simply by using bandwidth for other services, such as high- speed Internet access services or cable telephony. 15 The interactive cable services discussed here include video- on- demand (“ VOD”), interactive guides, and interactive television (“ ITV”). 16 2001 Report, 17 FCC Rcd at 1254; Nielsen Media Research. 9 Federal Communications Commission FCC 02- 338 10 comments, NRTC again argues that the widely- used measure of availability (homes passed as a percentage of television households) is fundamentally flawed. 17 NRTC states that not only is the data for homes passed inflated, but that cable’s availability varies depending on whether the comparison is based on TV households, all households, all occupied housing units, or all housing units in the United States, as some have suggested might be the better comparison. 18 NRTC suggests that the measurement of the availability of cable be based on the number of housing units and not TV households. 19 NRTC states that cable’s availability could be as low as 78%. 20 18. As NRTC’s comments indicate, the calculation of cable availability has been and remains a subject of controversy. 21 The number of homes passed depends on the data source used, and the percentage of homes passed varies based on the universe used for the comparison. In our order designating the EchoStar- DirecTV merger application for hearing, we observed that significant discrepancies can arise, for example, upon comparison of the Kagan 2001 homes passed figure with one from Warren Communications News. 22 These differences suggest that the Kagan data should be used with a good deal of caution and that they are most reliable as a trend indicator, rather than a precise estimate for any one year. In fact, homes passed data evaluated in the context of our review of the proposed DBS merger indicated that the number of homes not passed by cable in fact may vary from the 4% claimed by the two DBS operators to 21. 28% using alternative estimation methods. 23 Based on the available data, however, the Commission was unable to determine whether either of these values or another value correctly estimates the percentage of homes passed. Thus, because of the significance of this calculation in terms of the potential competitive harms posed by the merger of the two DBS operators, the issue of the precise measure of cable availability was designated for hearing. 24 19. Since we are unable to resolve this factual question, for purposes of this Report, we continue to use, as we have in the past, data derived from Kagan World Media and Nielsen Media Research for historical consistency. We present these data to indicate trends, rather than an absolute measure of cable availability. As shown in Table 1 below, cable availability was estimated to be approximately 97.6% of TV households, as of June 2002, up 0.3% from year- end 2001. Regardless of whether cable availability is ultimately determined to be 97.5% or 78%, it is reasonable for purposes of this Report to conclude that the share of television households passed by cable is very high and has been rising gradually over time. 17 NRTC Comments at 5- 7; see also 2001 Report, 17 FCC Rcd at 1254. 18 NRTC Comments at 5- 7. 19 Id. 20 Id., at 5. See also NRTC Comments in Application of EchoStar Communications Corporation, General Motors Corporation, and Hughes Electronics Corporation, Transferors and EchoStar Communications Corporation, Transferee, CS Docket No. 01- 348, Feb. 24, 2002, at 6- 14. 21 2001 Report, 17 FCC Rcd at 1254; See also Application of EchoStar Communications Corporation, General Motors Corporation, and Hughes Electronics Corporation, Transferors and EchoStar Communications Corporation, Transferee, CS Docket No. 01- 348, Hearing Designation Order (“ EchoStar- Hughes HDO”), FCC 02-284 (rel. Oct. 18, 2002), ¶¶ 122- 25 (designating for hearing the issue of the precise number of households that are not served by a cable operator, the number served by a low- capacity cable system, and the number served by a high-capacity cable system). 22 EchoStar- Hughes HDO ¶ 124 and n. 356. 23 Id. 24 Id. 10 Federal Communications Commission FCC 02- 338 11 TABLE 1: Cable Television Industry Growth: 1997 - June 2002 (in millions) 25 Television Households (“ TH”) Homes Passed (“ HP”) Basic Subscribers (“ Subs”) Year- End Total % Change Total % Change Total % Change HH Passed by Cable (HP/ TH) HHs Subscribing (Subs/ TH) U. S. Penetration (Subs/ HP) 1997 98. 0 1.0% 94. 6 1.0% 64. 8 2.0% 96. 5% 66. 1% 68. 5% 1998 99. 4 1.4% 96. 0 1.5% 66. 1 2.0% 96. 6% 66. 5% 68. 9% 1999 100.8 1.4% 97. 4 1.5% 67. 3 1.8% 96. 6% 66. 8% 69. 1% 2000 102.2 1.4% 98. 8 1.4% 68. 5 1.8% 96. 7% 67. 0% 69. 3% 2001 105.4 3.1% 102.0 3.2% 68. 6 0.1% 96. 8% 65. 1% 67. 3% June 2002 26 105.4 27 0.0% 102.8 0.8% 68. 8 0.3% 97. 5% 65. 3% 66. 9% 20. Subscribership. As shown in Table 1, the number of subscribers and the number of homes passed are increasing. 28 Since its peak at year- end 2000, cable penetration (i. e., subscribers as a percentage of homes passed) has declined because the number of homes passed has increased at a faster rate than the number of subscribers. The percentage of TV households subscribing to cable also declined during 2001, before increasing 0.2 percentage points in the first half of 2002 because the number of television households grew at a faster rate than the number of homes subscribing. 29 25 Nielsen Media Research; Kagan World Media, Cable TV Investor, May 24, 2002, at 9; Kagan World Media, Broadband Cable Financial Databook, July 2002, at 10. Historical data included in this table may differ from those previously reported because some data have been updated by the source. 26 Homes Passed and Subscribers June 2002 data are based on a 2002 year- end estimate. 27 Nielsen Media Research estimates the number of television households annually, and industry practice is to use this figure throughout the television broadcast season, which begins in September and ends in August of the following calendar year. Thus, the figure for TV households in June 2001 is the same as the figure for December 2000. 28 The number of subscribers reported by some MSO has been the subject of recent controversy. For example, in June 2002, Adelphia revised its 2001 basic subscriber figures from 5. 81 million down to 5.76 million, citing “inaccuracies in previously reported data.” See Adelphia Restates Results After Dismissing Deloitte, The New York State Society of CPA’s, at http:// www. nysscpa. org/ home/ 2002/ 2week/ article14. htm. Charter Communications announced in November 2002 that it is participating in an informal SEC inquiry into how it accounts for its customers, and is also the subject of a similar Justice Department investigation involving a grand jury. Riva D. Atlas and Geraldine Fabrikant, Large Cable Operator to Restate Its Results for 2000 and 2001, NEW YORK TIMES, Nov. 20, 2002, at C1. In addition, some MSOs are reporting a decline in subscribership due to subscriber churn. AT& T Broadband reported 13. 6 million subscribers as of year end 2001 and 13. 2 million subscribers as of June 2002. AT& T Broadband, AT& T Group Earnings Commentary: Fourth Quarter 2001, Jan. 30, 2002, at 14; AT& T Broadband, AT& T Group Earnings Commentary: Second Quarter 2002, July 23, 2002, at 12. AT& T’s subscriber loss is attributable to churn. See Letter from. Letter from James L. Casserly, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P. C., to Marlene H. Dortch, Secretary, FCC, MB Docket No. 02- 70 (Nov. 13, 2002), at 1- 2. 29 The increase in the percent of TV households subscribing to cable after the previous year’s decline could be based on the static measurement of TV households between year- end 2001 and June 2002. 11 Federal Communications Commission FCC 02- 338 12 21. The number of homes subscribing to one or more premium cable services continues to increase, as shown in Table 2 below. The number of premium services to which homes are subscribing (also known as "pay units") also continues to increase. In addition, the average number of subscriptions per premium subscriber is increasing, from an average 1.66 subscriptions per subscriber at year- end 2000 to an average 1.79 subscriptions per subscriber at year- end 2001, to an estimated average of 1.82 subscriptions per premium subscriber as of June 2002. TABLE 2: Premium Cable Services: 1997 - June 2002 (in millions) 30 Premium Cable Service Subscribers (Pay HH) Premium Cable Service Subscriptions (Pay Units) Year End Year End Total % Change Year End Total % Change 1997 31.7 3.6% 49.1 2.3% 1998 32.8 3.5% 49.3 0.4% 1999 34.2 4.3% 50.5 2.4% 2000 35.6 4.1% 59.9 18.6% 2001 36.1 1.4% 64.8 8.2% June 2002 31 36.4 0.8% 66.2 2.1% 22. Channel Capacity. Cable operators have invested substantial sums of money over the past decade to upgrade channel capacity, both by expanding bandwidth, and by employing digital compression technologies. Previously, channel capacity was reported as the number of analog channels available for use by a cable system. 32 With recent technological advances, channel capacity is now a function of the amount of bandwidth a cable operator chooses to use for video services based on a number of considerations. Thus in the absence of information on the number of channels devoted to digitally compressed signals and the precise compression ratio used, it is not possible to infer from available data the number of video channels available to cable subscribers, even on average. 23. The Commission’s 2001 Price Survey Report 33 provides figures on the cable system capacity and channel allocation for cable systems responding a Commission survey, as shown in Table 3. It shows 30 Kagan World Media, Cable TV Investor, May 24, 2002, at 9; Kagan World Media, Broadband Cable Financial Databook, July 2002, at 10. Historical data included in this table may differ from those previously reported because some data have been updated by the source. 31 June 2002 data is based on a year- end estimate. 32 2001 Report, 17 FCC Rcd at 1254. 33 Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, Statistical Report on Average Prices for Basic Service, Cable Programming Services, and Equipment, MM Docket No. 92- 266, Report on Cable Industry Prices (“ 2001 Price Survey Report”), 17 FCC Rcd 6301 (2002). Section 623( k) of the Communications Act, as amended by the Cable Television Consumer Protection and Competition Act of 1992 (“ 1992 Cable Act”), requires the Commission to publish annually a statistical report on cable prices, or more specifically, average rates for the delivery of basic cable service, cable programming service, and equipment. Section 623( k) was adopted as Section 3( k) of the 1992 Cable Act, Pub. L. No. 102- 385, 106 Stat. 1460, codified at 47 U. S. C. § 543( k); See 47 U. S. C. § 543( k). The 1992 Cable Act defines basic cable service as the tier of service that includes the retransmission of local television broadcast signals. See 7 U. S. C. § 543( b)( 7). Cable programming service is defined as any video programming other than video programming carried on the basic service tier, and video programming offered on a per channel or per program basis. See 47 U. S. C. § 543( k)( 1)( 2). Equipment refers (continued....) 12 Federal Communications Commission FCC 02- 338 13 that approximately two- thirds of the sampled cable systems (both competitive and non- competitive systems) 34 have facilities that provide bandwidth of 750 MHz or above. 35 The average system capacity in the Survey is approximately 650 MHz. As discussed above, capacity is allocated among the various services that cable operators provide, including video services. The average system in the survey devotes 82.5 channels or 495 MHz to video delivery to be divided among analog channels and digitally compressed channels. TABLE 3: Channel Capacity Competitive Group Noncompetitive Group July 2000 July 2001 July 2000 July 2001 Average system capacity (MHz) 630 666 623 652 Percent of systems with capacity of: 330 MHz and below 10.0% 8.5% 9.0% 8.3% 331 through 749 MHz 31.7% 22.8% 36.9% 28.5% 750 MHz 58.3% 68.7% 54.1% 63.2% Number of 6 MHz activated channels: Devoted to analog service 69.2 72.0 67.7 69.9 Devoted to digital service 6.7 11.3 7. 0 11.8 Total number of channels 75.9 83.3 74.4 81.7 24. Viewership. Viewership, when measured in audience shares of cable networks, 36 continues to grow, while viewership shares of broadcast television stations 37 continue to decline. 38 Audience share 39 statistics for total day viewing, 40 show that cable audience shares rose from an average 54.2 share (... continued from previous page) to a converter box, remote control, and other equipment necessary to access programming. See 47 U. S. C. § 543( b)( 3). 34 2001 Price Survey Report, 17 FCC Rcd at 6313, Table 11. The Survey enables the Commission to compare prices charged by samples of two groups of cable operators: (1) operators that are deemed to face effective competition (referred to as the “competitive group”) and (2) operators that do not face effective competition (the “non- competitive group”). Within the non- competitive group, information was collected from both regulated and unregulated operators. Operators in the competitive group are limited to those operators that have sought and obtained a Commission finding of effective competition. As a result, within the non- competitive group, there may be operators that face competition but have not filed a petition with the Commission seeking a finding of effective competition. Similarly, there may be operators within the competitive group that may have met the criteria for a finding of effective competition at the time the finding was made, but because of changed circumstances, may not meet the statutory criteria currently. See id. at 6304- 05. 35 According to NCTA, approximately 74% of all cable homes (or approximately 51 million cable homes) were passed by systems with a capacity of at least 750 MHz, and approximately 68% of homes passed (or 70 million households) were passed by activated two- way plant. NCTA Comments at 26. These data differ from data reported in the 2001 Price Survey Report. This is likely due to differing measurement methodologies. 36 Cable network shares include basic (BST and CPST), premium, and PPV cable networks. 37 “Broadcast” shares include network affiliates, independent, and public television stations. 38 See 2001 Report, 17 FCC Rcd at 1256. 39 A share is the percent of all households using television during the time period that are viewing the specified station( s) or network( s). The sum of reported audience shares exceeds 100% due to simultaneous multiple set viewing. 40 Total day viewing is 24 hours, 6 am - 6 am. 13 Federal Communications Commission FCC 02- 338 14 between July 2000 and June 2001, to an average 58.3 share between July 2001 and June 2002. 41 Broadcast television audience shares for total day viewing decreased from an average 56.8 share from July 2000 through June 2001, to an average 53.0 share between July 2001 and June 2002. 42 Audience share statistics for prime time 43 show that cable audience shares rose from an average 51.9 share between July 2000 and June 2001, to an average 56.5 share between July 2001 and June 2002. 44 Broadcast television audience shares for prime time viewing decreased from an average 63.8 share from July 2000 through June 2001, to an average 59.4 share between July 2001 and June 2002. 45 25. Cable Networks. As discussed in Section III. B., the number of nationally delivered basic cable networks available for delivery by cable operators increased over the last year from 287 networks as of June 2001 to 308 in June 2002. 46 In addition, there also were 85 regional cable networks available for carriage by cable system operators as of April 2002, and about 59 planned networks. 47 26. Programming Costs. Cable system operators spent nearly $9.3 billion on programming in 2001. 48 Of that $9.3 billion, more than $7 billion was spent to acquire basic cable network programming. 49 Programming expenses incurred by cable operators for copyright fees for broadcast signal carriage pursuant to Section 111 of the Copyright Act 50 amounted to approximately $121.7 million in 2001. 51 It is estimated that cable operators will spend more than $10 billion to acquire programming in 2002. 52 2. Financial Performance 27. Cable industry revenue and cash flow indicate increasing industry growth over the last year and a half, after several years of slow growth. Stock prices, however, continue to decline, signaling investor apprehension. 41 Nielsen Media Research, Total Day 24 Hours 6 am - 6 am: Total US Ratings By Viewing Source July 2000- June 2002, Oct. 2002. Last year, we compared only non- premium cable viewing shares to all broadcast television station viewing shares. This year, we include viewing trends from all cable network sources. For broadcast season (September to August) viewing trends, see ¶ 80 infra. 42 Id. 43 Prime time viewing is Monday through Saturday 8 pm- 11 pm and Sunday 7 pm- 11 pm. 44 Nielsen Media Research, Primetime Monday- Saturday 8- 11 PM Sunday 7- 11 PM: Total US Ratings By Viewing Source July 2000- June 2002, Oct. 2002. For broadcast season (September to August) viewing trends, see ¶ 80 infra. 45 Id. 46 See 2001 Report, 17 FCC Rcd at 1309- 10. Last year, we estimated the number of national programming services at 294. NCTA notes in its latest Cable Developments, that there were errors in this calculation, and that the number of national programming networks was actually 287. See NCTA, National Video Programming Services: 1994-2001, Cable Developments 2002, May 2002, at 23. 47 See Appendix C, Table C- 3 and C- 4. 48 NCTA Comments at 37. 49 Kagan World Media, Basic Cable Network Economics 2002, at 27; Kagan World Media, Pay TV Newsletter, July 2002. 50 Copyright Act, 17 U. S. C. § 111 et seq. 51 Copyright Office, Library of Congress, Licensing Division Report of Receipts, Nov. 27, 2002. Copyright fees, are due on a specific date, but are collected on a rolling basis. We report the most current figures reported by the Copyright Office. 52 NCTA Comments at 37. 14 Federal Communications Commission FCC 02- 338 15 28. Cable Industry Revenue. As Table 4 shows, annual cable industry revenue grew 15.9% during 2001, reaching more than $43.9 billion in total revenue, with growth in every revenue segment. Both video and non- video advanced services constitute the greatest increases in revenue for cable operators during 2001. Analysts estimate that by year- end, cable operator total revenue for 2002 will reach nearly $50 billion, with video and non- video services again estimated to constitute the greatest increases for cable operators. 29. Cable Industry Cash Flow. Cash flow (generally expressed as earnings before interest, taxes, depreciation, and amortization, or “EBITDA”) is often used to assess the financial position of cable firms and other capital intensive companies. Cash flow from operations is the net result of cash inflows from operations (revenue) and cash outflows from operations (expenses). Cash flow from operations does not include non- cash charges to net income such as depreciation and amortization. Cash flow from operations indicates a firm's ability to meet its net finance and investment obligations. As Table 4 shows, cash flow from operations increased during 2001, though cash flow as a percentage of revenue (cash flow margin) declined for the second year in a row. That is, revenues are increasing at a greater rate than cash flow, indicating that cable operator expenses have increased faster than revenues over the last year. TABLE 4: Cable Industry Revenue and Cash Flow: 1998 – 2002 53 1998 1999 98- 99 2000 99- 00 2001 00- 01 2002 01- 02 Total Total % Change Total % Change Total % Change Estimated Year- End Total % Change Basic Subscribers (mil) 66. 1 67. 3 1.8% 68. 5 1.8% 68. 6 0.1% 69. 0 0.6% Revenue Segments (mil.) Basic Service and CPST Tiers $21,831 $23,135 6. 0% $24, 729 6.9% $27,031 9. 3% $28,492 5. 4% Premium (Pay) Tiers $4, 758 $4, 696 -1. 3% $5,115 8. 9% $5, 617 9. 8% $5, 533 -1. 5% Pay- Per- View $514 $721 40. 3% $751 4. 2% $993 32. 2% $1, 143 15. 1% Local Advertising $1, 675 $2, 000 19. 4% $2, 430 21. 5% $2, 430 0.0% $2, 503 3.0% Home Shopping $175 $205 17. 1% $239 16. 6% $260 8.8% $284 9.2% Advanced Analog and Digital Tier $445 $919 106.5% $1, 088 18. 4% $2, 365 117.4% $3, 379 42. 9% High- speed Internet access, cable teleph. & interactive svcs $133 $542 307.5% $1, 164 114.8% $2, 835 143.6% $5, 602 97. 6% Equipment and Install $2, 631 $2, 424 -7. 9% $2, 451 1.1% $2, 463 0.5% $2, 491 1.1% Total Revenue (mil.) $32,162 $34,642 7. 7% $37, 967 9.6% $43,994 15. 9% $49,427 12. 3% Revenue Per Subscriber $486. 57 $514. 74 5. 8% $554. 26 7. 7% $641. 31 15.7% $716. 33 11.7% Operating Cash Flow (mil.) $14,900 $15,597 4. 7% $15, 764 1.1% $16,683 5. 8% $18,806 12. 7% Cash Flow per Subscriber $225. 42 $231. 75 2. 8% $230. 13 -0.7% $243. 19 5. 7% $272. 55 12.1% Cash Flow/ Total Revenue 46. 3% 45. 0% -2. 8% 41. 5% -7. 8% 37. 9% -8. 7% 38. 0% 0. 3% 30. Cable System Transactions. Over the last several years, as Table 5 shows, the number of system acquisitions and exchanges between MSOs has declined. Several mergers among large operators 53 Kagan World Media, Cable TV Investor, May 24, 2002, at 9; Kagan World Media, Broadband Cable Financial Databook, July 2002, at 10 and 144. Historical data included in this table may differ from those previously reported because some data have been updated by the source. 15 Federal Communications Commission FCC 02- 338 16 which involve the transfer and exchange of numerous systems, however, are not reflected in Table 5. 54 In addition, the industry benchmark average “value per subscriber” has declined from its peak of an average value of more than $5, 700 per subscriber in 2000, to an average of approximately $2,200 as of June 2002. 55 TABLE 5: System Transactions: 1999 - June 2002 56 1999 2000 99- 00 % Change 2001 00- 01 % Change Jan- Jun 2002 Number of Systems Sold 92 45 -51.1% 36 -20.0% 12 Total Number of Subscribers Sold 18, 288, 706 11, 469, 090 -37.3% 17, 958, 375 56. 6% 388,120 Average Number of Subscribers per System Sold 198,790 254,869 28. 2% 498,844 95. 7% 32, 343 Total Number of Homes Passed Sold 28, 345, 972 18, 990, 621 -33.0% 31, 657, 221 66. 7% 666,216 Average Number of Homes Passed per System Sold 308,108 422,014 37. 0% 879,367 108.4% 55, 518 Total Dollar Value (mil.) $73,070 $66,008 -9. 7% $87,499 32. 6% $852 Average Dollar Value (mil.) of System Sold $794 $1, 467 84. 8% $2, 431 65. 7% $71 National Average Dollar Value Per Subscriber 57 $3, 995 $5, 755 44. 1% $4, 872 -15.3% $2, 196 Dollar Value Per Home Passed $2, 578 $3, 476 34. 8% $2, 764 -20.5% $1, 281 Cash Flow Multiple 16. 7x 19. 5x 16. 8% 19. 3 -1.0% 11. 2 31. Stock Prices. Cable stock prices, as measured by the Kagan MSO Average, declined 14.5% in 2001, whereas the S& P 500 declined 13% in 2001, and the NASDAQ declined 21%. 58 In the first half of 2002, the Kagan MSO Average declined 38% over year- end 2001. The delisting of Adelphia Communications in May 2002 contributed to this decline. 59 Despite recent declines, however, many Wall 54 Merger transactions are not reflected in Table 5. Mergers over the last couple of years, however, have involved the transfer of many cable systems. See e. g., Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from MediaOne Group, Inc., Transferor, to AT& T Corp., Transferee, 15 FCC Rcd 9816 (2000); Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations by Time Warner Inc. and America Online, Inc., Transferors, to AOL Time Warner Inc., Transferee, 16 FCC Rcd 6547 (2001); Applications for Consent to the Transfer of Control of Licenses, Comcast Corporation and AT& T Corp., Transferors, to AT& T Comcast Corporation, Transferee, Report and Order (“ AT& T- Comcast Merger Order”), FCC 02- 310, (Nov. 14, 2002). 55 The value of cable subscribers is not uniform nationwide, but instead varies by system. Subscribers in certain systems are more valuable based on considerations such as the capacity of the system, the average number of services purchased by subscribers in a given system, or the cash flow generated by the operations of a given system. System sale prices also vary from year to year based on supply and demand factors as well as industry access to capital and the relative cost of such capital. 56 Kagan World Media, Cable TV Investor, Jan. 25, 2002, at 11; Kagan World Media, Cable TV Investor, July 18, 2002, at 9. Historical data included in this table may differ from those previously reported because some data have been updated by the source 57 See fn. 55 supra. 58 Kagan World Media, Broadband Cable Financial Databook, July 2002, at 89. 59 Id. 16 Federal Communications Commission FCC 02- 338 17 Street analysts expect that the cable industry will outperform the S& P 500 and media stocks in general in 2002- 2003. 60 3. Capital Acquisition and Disposition 32. Industry Financing. The cable industry typically has relied on combinations of private and public financing, with the distribution of these combinations varying greatly from year to year. These year- to- year fluctuations in financing sources appear to be based on the availability of acceptable financing rates through private investors or capital lending institutions, and the attractiveness of debt and equity offerings. Table 6 shows the amount raised per year by source. TABLE 6: Acquisition of Capital: 1994 - June 2002 ($ in millions) 61 Private Debt Net New Public Debt Private Equity (Pvt. Placement/ VC) Public Equity (Common/ Preferred) Year Amount Raised % of Total Raised in Year Amount Raised % of Total Raised in Year Amount Raised % of Total Raised in Year Amount Raised % of Total Raised In Year Total Capital Raised in Year 1994 $7, 454 91. 2% $155 1.9% $100 1.2% $461 5.6% $8, 170 1995 $9, 688 51. 5% $4, 495 23. 9% $1,191 6. 3% $3, 419 18. 2% $18, 793 1996 $5, 837 58. 0% $2, 355 23. 4% $49 0.5% $1, 818 18. 1% $10, 059 1997 $2, 933 27. 4% $6, 252 58. 4% $1,292 12. 1% $230 2. 1% $10, 707 1998 $5, 421 39. 1% $6, 299 45. 5% $200 1.4% $1, 927 13. 9% $13, 847 1999 $34,358 51. 9% $18,610 28. 1% $5, 385 8.1% $7, 799 11. 8% $66, 151 2000 $2, 755 60. 3% $4, 288 35. 7% $101 0.8% $380 3.2% $12,024 2001 $6, 668 31. 4% $10, 678 50.2% $623 2. 9% $3, 282 15. 4% $21, 251 June 2002 $2, 157 19. 9% $5, 070 46. 8% $0.0 0. 0% $3,608 33. 3% $10, 834 Total Raised: 1994- June 02 81, 769 $58, 202 8, 941 22, 923 $171, 835 Avg Raised Per Year $9, 620 47. 6% $6, 847 33. 9% 1,052 5.2% 2,697 13. 3% $20,216 33. Capital Expenditures/ Capital Investment. Since 1996, cable operators have invested more than $65 billion to upgrade systems in order to deploy higher quality television and advanced two- way broadband services. 62 The rebuilding of more than a million miles of cable plant, which is nearly 80% complete, has translated into numerous new services, such as digital video, digital music, high- speed Internet access, cable telephony, video- on- demand, and other interactive applications. 63 In 2001, the 60 Richard Bilotti and Benjamin Swinburne, New Ratings System, Morgan Stanley, Mar. 18, 2002; Adelphia Aside: Financial Analysts Tell NCTA Cable’s Day Will Come Again, Comm. Daily, May 8, 2002, at 6; Spencer Wang, John Blackledge, and Thomas Sheehan, Media & Entertainment: Media Mosaic 2002- A Manifesto for Media Investing in 2002, ABN- Amro, Jan. 3, 2002, at 4. 61 Kagan World Media, Cable TV Finance, Feb. 8, 2002, at 8; Kagan World Media, Cable TV Finance, Aug. 21, 2002, at 7. Historical data included in this table may differ from those previously reported because some data have been updated by the source. 62 NCTA Comments at 4. 63 Id. 17 Federal Communications Commission FCC 02- 338 18 cable industry spent a total of $17.8 billion in capital expenditures. 64 Cable operators spent approximately $850 million on the construction of new plant, $4.1 billion on upgrades, $2.4 billion on rebuilds, $6.5 billion on new equipment, and $4.0 billion on maintenance of new and existing equipment. 65 This represents a 14.6% increase over the $15.5 billion spent in 2000. 66 Analysts expect that operators will spend an estimated $17.6 billion in 2002, a decrease of 0.9% over 2001. 67 Of the $17.8 billion to be spent industry- wide, it is estimated that approximately $823 million will be spent on construction of new cable plant, $2.2 billion on rebuilds, $3.5 billion on upgrades, $7.1 billion on equipment and $4.0 billion on maintenance. 68 34. MSOs continue to spend substantially on maintenance, upgrades, rebuilds, and new services, though with industry upgrade goals near completion, many cable operators have already begun to spend less on capital improvements. 69 For example, Comcast reported capital expenditures of $2.2 billion in 2001, and is expected to spend approximately $1.5 billion in 2002. 70 As of June 30, 2002, Comcast had spent about $789 million. 71 Cablevision reported total capital expenditures of about $1.3 billion in 2001 ($ 900 million of which was for cable television services), and is expected to spend $1 billion in 2002. 72 Cox reports capital spending of $2.2 billion on capital expenditures in 2001. 73 As of June 2002, Cox had spent approximately $1 billion, and expects that by year- end it will have spent a total of $2 billion. 74 Charter reported cable capital expenditures of $3 billion in 2001, and is expected to spend approximately $2.5 billion during 2002. 75 As of June 30, 2002, Charter had already spent $1.1 billion in capital 64 Kagan World Media, Cable TV Finance, June 7, 2002, at 3; see also NCTA Comments at 25. As a result of these expenditures, approximately 74% of all cable homes (or approximately 51 million cable homes) were passed by systems with a capacity of at least 750 MHz, and approximately 68% of homes passed (or 70 million households) were passed by activated two- way plant. NCTA Comments at 26. 65 Kagan World Media, Cable TV Finance, June 7, 2002, at 3. "Rebuilds" are significant improvements made to existing systems that do not retain much of the old system plant and equipment. "Upgrades" are improvements to existing cable systems that do not require the replacement of the entire existing plant and equipment. See also NCTA Comments at 25. 66 Kagan World Media, Cable TV Finance, June 7, 2002, at 3. 67 Id. See also NCTA Comments at 25. 68 Kagan World Media, Cable TV Finance, June 7, 2002, at 3. 69 NCTA estimates that the rebuilding of cable plant is nearly 80% complete. NCTA Comments at 4. For example, Cablevision envisions “completion of the company’s entire network upgrade to 750 MHz in 2003.” Cablevision Systems Corp., Cablevision Systems Corporation Announces Fully- Funded Growth Plan (press release), Aug. 8, 2002. 70 Comcast Corp., SEC Form 10- K for the Year- Ended December 31, 2001, at 25 and 41. Comcast’s merger with AT& T could affect Comcast’s year- end expenditures. See fn. 78 infra. 71 Comcast Corp., SEC Form 10- Q for the Quarter- Ended June 30, 2002, at 4. 72 Cablevision Systems Corp., Cablevision Systems Corporation Reports Fourth Quarter 2001 Financial Results for Cablevision NY Group and Rainbow Media Group (press release), Feb. 14, 2002. Cablevision expects completion of the company’s entire network upgrade to 750 MHz by year- end 2003. Cablevision Systems Corp., Cablevision Systems Corporation Announces Fully- Funded Growth Plan (press release), Aug. 8, 2002. 73 Cox Communications, Inc., SEC Form 10- K405/ A For the Year- Ended December 31, 2001, at 3. 74 Cox Communications, Inc., SEC Form 10- Q For the Quarter- Ended June 30, 2002, at 12; Cox Communications, Inc., Cox Communications Announces Second Quarter Financial Results For 2002 (press release), July 31, 2002. 75 Charter Communications, Inc., SEC Form 10- K405 for the Year- Ended December 31, 2001, at 46. As a result of these expenditures, 75% of Charter subscribers were served by systems with a capacity of 750 MHz or greater, with 34% of Charter subscribers served by systems with a capacity of 850 MHz, and more than 78% of Charter subscribers are served by systems with two- way capability. Charter expects by year- end 2002, nearly 85% of its (continued....) 18 Federal Communications Commission FCC 02- 338 19 expenditures. 76 AOL Time Warner spent $2.2 billion on cable- related capital expenditures during 2001, and has spent $975 million on cable- related capital expenditures during the first half of 2002. 77 AT& T Broadband reported capital expenditures of approximately $3.3 billion in 2001, of which $1.5 billion was related to the growth and support of advanced services and $583 million was for network construction and upgrade. 78 As of June 2002, AT& T Broadband reported capital expenditures of $1.7 billion, of which $695 million was related to the growth and support of advanced services and $482 million was for network construction and upgrade. 79 4. Provision of Advanced Broadband Services 35. Advanced services continue to be deployed at a rapid pace. With most systems able to deliver digital video, and many systems able to deliver cable modem and/ or cable telephone service, MSOs are beginning to commercially deploy other advanced service offerings such as video- on- demand (“ VOD”), high- definition television (“ HDTV”), and Internet protocol (“ IP”) telephony over cable systems. 36. Digital Video Services. Most major cable operators currently offer a selection of digitally- compressed video channels to analog subscribers on a “digital tier.” 80 Digital compression technologies allow anywhere from four to 12 video channels to be compressed into the capacity previously used to provide just one standard six MHz analog channel. Most cable operators offer two tiers of digitally compressed service; one that offers programming similar to programming available on the basic cable tier, and a second that offers programming similar to programming on the premium tier of service. This additional programming is offered in stand- alone packages, or in combination with PPV and VOD. 81 Currently there are about 90 networks available for carriage on cable systems’ digital tiers, offering a wide range of genres, including sports, music, movies, children’s, family, and foreign- language programming. 82 37. As of year- end 2001, it was estimated that there were more than 15.2 million digital video subscribers industry- wide. 83 As of June 2002, there were an estimated 16.8 million digital video (... continued from previous page) subscribers will be served by systems with broadband capacity of 750 MHz or greater. Charter Communications, Inc., SEC Form 10- Q for the Quarter- Ended June 30, 2002, at 28. 76 Id. at 27. 77 AOL Time Warner, Inc., SEC Form 10- K for the Year- Ended December 31, 2001, at F- 16. 78 AT& T Broadband, AT& T Group Earnings Commentary: Fourth Quarter 2001, Jan. 30, 2002 at 12. As of December 31, 2001, 59% of AT& T’s cable plant had been upgraded to a capacity of at least 750 MHz; Applications for Consent to the Transfer of Control of Licenses, Comcast Corporation and AT& T Corp., Transferors, to AT& T Comcast Corporation, Transferee: Applications and Public Interest Statement (“ AT& T- Comcast Merger Application”), MB Docket No. 02- 70, Feb. 28, 2002, at 18. 79 AT& T Broadband, AT& T Group Earnings Commentary: Second Quarter 2002, July 23, 2002 at 11; AT& T Broadband, AT& T Group Earnings Commentary: First Quarter 2002, April 24, 2002 at 11. 80 The digital tier offers programming that is digitally compressed for efficient delivery. The programming is then demodulated from digital to analog format for display on subscribers’ analog television receivers. This so- called “digital tier” does not provide programming for display on subscribers’ digital receivers with 16 by 9 format or high- definition resolution. 81 NCTA Comments at 29. 82 Id. 83 Id; see also NCTA, What is Digital Cable?, at http:// www. ncta. com; See also Kagan World Media, Broadband Cable Financial Databook, July 2002, at 78. 19 Federal Communications Commission FCC 02- 338 20 subscribers. 84 The cable industry estimates that by 2006, the number of digital subscribers will increase nearly three- fold over 2002 levels, to more than 48 million digital cable subscribers. 85 38. As of year- end 2001, Cox reported approximately 1.4 million digital video subscribers, and more than 1.6 million subscribers as of June 2002. 86 As of June 2002, Comcast reported nearly two million digital video subscribers and expects to end 2002 with as many as 2.7 million digital video subscribers. 87 As of year- end 2001, AOL Time Warner had more than 3.3 million digital video subscribers. 88 By June 2002, AOL Time Warner had as many as 3.9 million subscribers. 89 As of year-end 2001, AT& T reported 3.5 million digital video subscribers. 90 As of June 2002, AT& T reported 3.9 million digital video subscribers. 91 Charter Communications provided digital video service to approximately 2.1 million subscribers as of year- end 2001 and 2.4 million subscribers as of June 2002. 92 Charter expects to have as many as 2.7 million digital video subscribers by year- end 2002. 93 Cablevision began providing digital video service commercially in September 2001. 94 By year- end 2001, Cablevision had 17, 200 digital video subscribers, and by June 2002, Cablevision had 42,670 digital video subscribers. 95 Cablevision expects digital video to be available to as many as 3.4 million subscribers by year- end 2002. 96 39. Video- on- Demand. Cable operators continue to focus on video on demand (“ VOD”) service offerings and local content, with each of the top ten cable operators testing or offering a commercial VOD service. 97 Unlike pay- per- view services, VOD services allow the subscriber to select at any time 84 NCTA, What is Digital Cable?, at http:// www. ncta. com. 85 Id. 86 Cox Communications, Inc., SEC Form 10- K for the Year- Ended December 31, 2001, at 4; Cox Communications, Inc., Cox Communications Announces Second Quarter Financial Results For 2002: Summary of Operating Statistics (press release), July 31, 2002. 87 Comcast Reply Comments at 2. 88 AOL Time Warner, Inc., AOL Time Warner Provides Update on 2002 With Consolidation of AOL Europe; Company Reports Preliminary Results for 2002 (press release), Jan. 7, 2002. 89 AOL Time Warner, Inc., SEC Form 10- Q for the Quarter Ended June 30, 2002, at 12. 90 AT& T Comcast, Merger Proposal – Joint Proxy Statement/ Prospectus, May 14, 2002, at VII- 28. 91 AT& T Broadband, AT& T Group Earnings Commentary: Second Quarter 2002, July 23, 2002, at 12. 92 Charter Communications, Inc., SEC Form 10- K for the Year- Ended December 31, 2001, at 13; Charter Communications, SEC Form 10- Q for the Quarter- Ended June 30, 2002, at 15. 93 Charter Communications, Inc., SEC Form 10- K for the Year- Ended December 31, 2001, at 13. 94 Cablevision Systems Corp., Cablevision Systems Corporation Reports Fourth Quarter 2001 Financial Results (press release), Feb. 14, 2002. 95 Id; Cablevision Systems Corp., Cablevision Systems Corporation Reports Second Quarter 2002 Financial Results (press release), Aug. 8, 2002. 96 Cablevision Systems Corp., Cablevision Systems Corporation Announces Fully- Funded Growth Plan (press release), Aug. 8, 2002. 97 Jennifer Lee, Interactive TV is Finally Here, Sort Of, NEW YORK TIMES, Apr. 4, 2002, at E1. See also Richard Bilotti, Broadband Cable: Truth, Lies and Truck Rolls: Understanding Product Profitability, Morgan Stanley, Oct. 4, 2002 (“ Morgan Stanley Oct 4 th Report”), at 63. Morgan Stanley notes that “most of the developments in the VOD space . . . have been content related rather than deployment specific” indicating that cable operators are focusing on ensuring they have saleable popular content to offer subscribers. Id. See also Kagan World Media, Broadband Cable Financial Databook, July 2002, at 79; Andrea Figler, Movies Lead, All Others Follow, (continued....) 20 Federal Communications Commission FCC 02- 338 21 programming they wish to view from a large selection of titles and categories stored on a remote server. 98 VOD systems run on a server located in the cable operator’s headend, which delivers programming as it is demanded by individual subscribers at virtually any time, with VCR- like controls such as pause, rewind, forward and stop, and for an extended period of time, usually 24 hours. Some operators are opting to offer VOD via the subscription model (“ SVOD”), in which the subscriber pays one monthly fee for unlimited access to a library of pre- selected programming. By 2005, VOD revenues are projected to range between $278 million and $3 billion. 99 40. NCTA comments that “the battleground between cable and DBS” is moving into the VOD arena, but that cable companies have differentiated approaches to providing this service. 100 EchoStar agrees with NCTA’s assessment regarding VOD, but states it cannot compete effectively with cable’s VOD offerings because cable is able to cache content at servers throughout a franchise area. EchoStar states that DBS operators must rely on limited bandwidth on satellite frequencies, with on- demand programming available at staggered intervals throughout the day. 101 Some cable MSOs report that VOD has contributed to increased demand for and reduced churn of digital services. 102 Comcast states that its VOD deployments have provided consumers with increased control over their viewing choices and have helped drive demand for digital services. 103 41. Cox provides VOD in its Hampton Roads and San Diego markets, and announced the launch of the first advertiser- supported VOD channel in its San Diego market in August 2002. 104 By the end of 2002, Cox plans to have VOD capability deployed for 30% of homes passed. 105 Comcast reports that it has launched VOD in 15 markets covering over 3.2 million homes and expects to make VOD available to (... continued from previous page) CABLEWORLD, Oct. 28, 2002, at http:// www. kagan. com/ archive/ cableworld/ 2002/ 10/ 28/ cwd02102806. shtml (visited Oct. 29, 2002). 98 Pay- per- view is pay television programming for which cable subscribers pay a one time fee for each program viewed. The programming is generally available at pre- set times and in some cases is timeshifted across several channels to increase the opportunity for viewing. Once initiated, the program cannot be paused, rewound or fast-forwarded. The programming is cablecast from the operator’s headend to all subscribers but only descrambled for those who order the programming. See CableLabs, at http:// www. cablelabs. com/ news/ glossary. html# P (visited Oct. 29, 2002). 99 See Emarketer, Interactive TV: Reality & Opportunity (“ 2002 Emarketer Study”), March 2002, at 135. 100 NCTA Comments at 31. 101 EchoStar Reply Comments at 6. 102 See Matt Stump, Cable Ops Touting VOD as Anti- Churn Weapon, BROADBAND WEEK, Mar. 4, 2002, quoting a Cox executive: “VOD will drive digital penetration;” and a Charter executive: “In regions where we’ve launched VOD for over 18 months, we see [digital churn] diving well below four percent per month, compared to typical digital churn rates in the range of 6- 8 percent.” Id. 103 Comcast Comments at 5; Comcast Reply Comments at 3. Comcast believes that, although VOD is thought of as a way to deliver movies to consumers for a fee, Comcast is increasingly focusing on delivering other VOD content, including games, distance learning, how- to programs, and foreign language programming, at no additional charge as a means of driving sales of digital video. Id. at 3- 4. 104 Cox Communications, Inc., Cox Communications Announces Launch of First- Ever Advertising- Focused Video On Demand Channel (press release), Aug. 20, 2002; NCTA Comments at 32. See Kagan World Media, Broadband Cable Financial Databook, July 2002, at 79; 105 Staci Kramer, Revenue Good, Churn Bad, CABLEWORLD, Oct. 28, 2002. Cox does not yet offer SVOD to its customers. Id. 21 Federal Communications Commission FCC 02- 338 22 nearly 50% of its homes passed by year- end 2002. 106 Comcast charges customers $3.95 for new releases on- demand and $2.95 for library content, but it includes SVOD services at no additional charge for those subscribing to premium programming, such as HBO, Showtime and Starz. 107 Charter offers VOD in 12 markets and has stated it will launch nine additional markets by year- end 2002, building a VOD “footprint” of approximately 1.1 million customers, or 40% of its total digital base. 108 AOL Time Warner has launched VOD in 32 of its 34 divisions, covering at least eight of its markets. 109 In addition to offering HBO, Starz Encore, and Showtime SVOD services and HBO on Demand, AOL Time Warner offers free content from Scripps Networks, including HGTV, Food Network and the BBC. 110 AT& T has launched VOD in four major markets, and has begun a trial in two of those markets to test StarzEncore and Showtime SVOD services. 111 Cablevision offers VOD over its iO digital service in select parts of its franchise area. 112 Approximately 26% of Cablevision’s iO customers have signed up for at least one SVOD service. 113 In September 2001, Cablevision launched a VOD service called Mag Rack, offering special interest video content in the form of “video magazines.” 114 Each selection from the “video magazine rack” provides in- depth information and expert advice in a specific field of interest. 115 As of June 2002, Cablevision was offering 27 “video magazines,” and it anticipates having between 35 and 40 106 Comcast Reply Comments at 3; NCTA Comments at 31. Comcast has deployed Wink technology in systems totaling 1.5 million Comcast customer homes in Florida, Virginia, Maryland, and Delaware, which provides viewers with free interactive programs and advertisements. Comcast Reply Comments at 5. Comcast also has deployed Worldgate’s ITV services in Huntsville and Tuscaloosa, Alabama, which includes a variety of content including updated weather forecasts, horoscopes, recipes, stock quotes, headline news stories, entertainment links, and sports scores. Id. 107 Comcast Reply Comments at 3; NCTA Comments at 31; Staci Kramer, The Stakes Just Got Higher, CABLEWORLD, Oct. 28, 2002. 108 Charter Communications, Inc., SEC Form 10- K for the Year Ended December 31, 2001, at 15; Staci Kramer, Ready, Set, Launch, CABLEWORLD, Oct 28, 2002. Charter has approximately 250 titles on VOD and SVOD and plans to roll out Mag Rack in January 2003. Charter charges $3. 99 for new releases, $2. 99 for library content, and $3. 99 per month for SVOD. 109 NCTA Comments at 32; Kagan World Media, Broadband Cable Financial Databook, July 2002, at 79; AOL Time Warner, Inc., SEC Form 10- K for the Year Ended December 31, 2001, at 10; Mavis Scanlon, Kicking Into High Gear, CABLEWORLD, Oct. 28, 2002. AOL Time Warner charges $3. 95 for new programming releases and $1. 95 for “library” content. The company also offers subscription VOD of HBO, Cinemax, Showtime and the Movie Channel catalogues for $6. 95 per month. 110 Id. 111 AT& T Broadband, AT& T Broadband Launches Trial of Subscription Video- On- Demand in Los Angeles (press release), May 1, 2002; AT& T Broadband, AT& T Broadband To Launches Video- On- Demand With DIVA (press release), Oct. 3, 2000. 112 Cablevision Systems Corp., Cablevision Systems Corporation Reports Second Quarter 2002 Financial Results (press release), Aug. 8, 2002. Cablevision offers over 700 titles per month; 30 hours of children’s programming and movies; Mag Rack, a collection of video magazines covering specific fields of interest; encores of cable network programming; wrestling and classic sports matches; and 300 hours of “ITV clips,” including local news, movie trailers and TechTV stories. See Mavis Scanlon, The Upside of Going Slow, CABLEWORLD, Oct. 28, 2002. Cablevision charges $4.95 per new release on- demand and $2.95 for library titles; SVOD is $4.95 per month and requires separate subscription to premium channels. Id. 113 Id. 114 Cablevision Systems Corp., Cablevision Systems Corporation Reports Second Quarter 2002 Financial Results (press release), Aug. 8, 2002. Charter and Insight have also agreed to carry Cablevision’s Mag Rack VOD service in several of their systems. CableFAXDaily, Sept. 4, 2002, at 1. 115 NCTA Comments at 32. 22 Federal Communications Commission FCC 02- 338 23 distributed by year- end 2002. 116 Insight continues to build its VOD deployment in ten markets and now has 225,000 subscribers capable of buying VOD programming. 117 42. Digital Television (“ DTV”) and High- Definition Television (“ HDTV”). During the past year, the amount of digital and HDTV programming offered by cable operators has increased. Cable operators are now offering high definition digital programming, which is delivered to subscribers with digital receivers for display in digital format and resolution. Several MSOs, including Comcast, AOL Time Warner, Cox, Charter, AT& T, Adelphia, Cablevision, Mediacom, Insight, and CableOne now offer HDTV on cable systems in selected markets. 118 In addition, the top ten cable operators (representing more than 85% of subscribers nationwide) will offer to carry the signals of up to five digital broadcast stations or other programming networks that provide HDTV during at least 50% of their prime time schedule or a substantial portion of their broadcast week by January 1, 2003. 119 43. Comcast offers HDTV service to more than 1.3 million subscribers. 120 In addition to providing access to high- definition broadcasts of ABC, NBC, CBS, HBO, and Showtime in selected areas, Comcast will also offer HDTV signals for certain local PBS stations and its own Comcast SportsNet. 121 AOL Time Warner has launched HDTV in more than 40 markets including high- definition broadcasts of ABC, CBS, NBC, and PBS, as well as HBO and Showtime in certain areas. 122 Cox offers HDTV services in two markets with seven additional market launches planned before year- end 2002. 123 Cox’s initial lineup includes local ABC and PBS stations, as well as HBO HD, Showtime HD and Discovery HD Theater. 124 Charter has announced that it will provide HDTV programming from HBO and Showtime it several of its markets. 125 44. Internet and High- Speed Data Services. Dial- up Internet access is still the most widely- used mode of accessing the Internet. As of year- end 2001, approximately 80%- 82% of all Internet households 116 Cablevision Systems Corp., Cablevision Systems Corporation Reports Second Quarter 2002 Financial Results (press release), Aug. 8, 2002. 117 Shirley Brady, Getting Back in the Game, CABLEWORLD, Oct. 28, 2002. VOD access is available as part of Insight’s Digital Gateway service. Insight charges $3. 99 for new releases, $2. 99 for library titles, and $9. 99 for a children’s unlimited programming package. 118 NCTA Comments at 33- 35. Linda Moss, Ops’ HD Query: Can We Levy Fee?, MULTICHANNEL NEWS, Nov. 25, 2002, at 6. 119 See Letters from Michael K. Powell, Chairman, FCC, to The Honorable Ernest F. Hollings, Chairman, Committee on Commerce, Science and Transportation, U. S. Senate, and The Honorable W. J. “Billy” Tauzin, Chairman, Committee on Energy and Commerce, U. S. House of Representatives, Attachment (Proposal for Voluntary Industry Actions to Speed the Digital Television Transaction) (Apr. 4, 2002) (“ Voluntary DTV Plan”); see also Letter from Robert Sachs, President NCTA, to Chairman Powell, May 1, 2002. 120 Comcast Reply Comments at 4; Comcast Corp., Comcast To Debut HDTV In Major Markets By End of 2002 (press release), Mar 14, 2002. 121 Comcast Corp., Comcast Launches HDTV (press release), Oct. 29, 2001; Comcast Corp., Comcast To Debut HDTV In Major Markets By End of 2002 (press release), Mar 14, 2002; AT& T- Comcast Merger Application, at 10. 122 NCTA Comments at 33; AOL Time Warner, Inc., SEC Form 10- K for the Year- Ended December 31, 2001, at 10. 123 Cox Communications, Inc., Cox Communications Launches HDTV in Phoenix (press release), Sept. 4, 2002. 124 Id. 125 Charter Communications, Inc., Charter High Definition Service Debuts n Five Markets (press release), May 29, 2002. 23 Federal Communications Commission FCC 02- 338 24 were accessing the Internet using dial- up modems. 126 It is projected that telephone dial- up will remain the principal means of accessing the Internet until about 2005- 2006, when it is expected that less than 50% will use dial- up access, with the remaining accessing the Internet through broadband facilities. 127 45. Cable modem access is currently the primary means of accessing the Internet over broadband networks, although cable’s share of the broadband Internet access market has decreased over the last several years. 128 DSL remains the most significant broadband competitor to cable modem service. As of year- end 2001, high- speed Internet access services provided over cable were available to more than 50 million homes, and there were between approximately 6.9 and 7.4 million subscribers, whereas there were between 3 and 3.3 million residential DSL subscribers. 129 At that same time there were about 200,000 subscribers to other broadband technologies, including satellite and wireless. 130 46. The Internet service providers (“ ISPs”) used in cable modem service are selected by the cable provider. 131 Some cable operators offer only one ISP to customers in a given system, 132 and others offer consumers a choice among multiple ISPs. AOL Time Warner currently carries Road Runner and the 126 JP Morgan estimates that as of year- end 2001, 81. 5% of Internet households used dial- up connections. Morgan Stanley estimates that as of year- end 2001, 80% of Internet households used dial- up connections. Spencer Wang and John Blackledge, Media Markets: Back to Basics, JP Morgan Securities, Aug. 19, 2002 (“ JP Morgan Aug. 19 th Report”), at 155; Richard Bilotti, Benjamin Swinburne, Megan Lynch, and Scott Babka, NUTS! The Last One Standing Wins, Morgan Stanley, July 10, 2002 (“ Morgan Stanley July 10 th Report”), at 65. 127 JP Morgan estimates that as of year- end 2005, 44% of Internet households will use dial- up connections, while 55. 5% will use broadband connections. Morgan Stanley estimates that as of year- end 2006, 48% of Internet households will still use dial- up connections while 52% will use broadband connections. Id. Broadband technologies include cable modem, telephone company digital subscriber line (“ DSL”), broadband wireless, and broadband satellite. Broadband technologies allow users to access the Internet at much greater speeds than are available over traditional dial- up connections. See 1999 Report, 15 FCC Rcd at 1003- 04. 128 See Morgan Stanley Oct 4 th Report, at 46- 7. Cable’s share of the broadband market remained relatively stable between year- end 2001 and June 2002, and some analysts expect cable’s share will increase slightly at year- end 2002, though it is expected to remain over ten percentage points below 1999 levels. Id. 129 Based on information from five top cable operators, Bear Stearns estimates more than 50 million marketable homes as of year- end 2001. Cable modem service is likely available to many more homes than that. Raymond Lee Katz, Gloria Radeff, and Bryan Goldberg, Cable TV & Broadband, Bear Stearns, May 2002 (“ Bear Stearns May Report”), at 14. JP Morgan estimates that as of year- end 2001, there were 6.9 million cable modem subscribers. Bear Stearns estimates that as of year- end 2001, there were more than 7. 35 million cable modem subscribers, and Morgan Stanley estimates that as of year- end 2001, there were more than 7. 38 million cable modem subscribers. Bear Stearns May Report, at 14; JP Morgan Aug. 19 th Report at 155; Morgan Stanley July 10 th Report, at 65. Bear Stearns estimates that as of year- end 2001, there were 3 million residential DSL subscribers, and Morgan Stanley estimates that as of year- end 2001, there were more than 3. 3 million residential DSL subscribers. Bear Stearns May Report, at 14; Morgan Stanley July 10 th Report, at 65. 130 JP Morgan estimates that as of year- end 2001, there were 200, 000 subscribers to satellite and wireless broadband technologies. Bear Stearns estimates that as of year- end 2001, there were 225,000 subscribers to satellite and wireless broadband technologies. Bear Stearns May Report, at 14; JP Morgan Aug. 19 th Report. at 155. 131 Many cable providers offer cable modem service through proprietary ISPs. See 2001 Report, 17 FCC Rcd 1266-67; see also Inquiry Concerning High- Speed Access to the Internet Over Cable and Other Facilities, Internet Over Cable Declaratory Ruling, Appropriate Regulatory Treatment for Broadband Access to the Internet Over Cable Facilities, CS Docket No. 02- 52, GN Docket No. 00- 185, Declaratory Ruling and Notice of Proposed Rulemaking (“ High- Speed Access Declaratory Ruling and NPRM”), 17 FCC Rcd 4798 (2002). 132 For example, Cablevision offers high- speed Internet access service under the brand Optimum Online only, and Charter offers high- speed Internet access services under the brand name Charter Pipeline only. Cox offers high-speed Internet access services under the brands Cox Express and Cox High Speed Internet, however, each system offers only one ISP to its subscribers. 24 Federal Communications Commission FCC 02- 338 25 AOL Internet service, as well several unaffiliated national or regional ISPs, including Earthlink. 133 Comcast, AT& T, and AT& T Comcast (Comcast) have entered into an agreement with Microsoft, 134 which provides that, for a specified period of time, if AT& T Comcast offers a high- speed Internet service agreement to any third party on any of its cable systems, AT& T Comcast will be obligated to offer an Internet service agreement on non- discriminatory terms with respect to the same cable systems to Microsoft’s ISP, The Microsoft Network (“ MSN”). 135 AT& T and Comcast have also agreed to carry the AOL ISP service on the combined AT& T and Comcast systems (Comcast), serving up to one- third of the MSO’s subscribers. 136 AT& T has already entered into contracts with several national or regional unaffiliated ISPs including EarthLink, and Comcast has entered into a contract with unaffiliated ISP, United Online. 137 47. As of year- end 2001, Cox had approximately 884,000 high- speed Internet access subscribers, and by June 2002, had approximately 1.1 million subscribers. 138 Analysts forecast that Cox could have as many as 1.3 million high- speed Internet access subscribers by the end of 2002. 139 As of year- end 2001, Comcast had 948,000 high- speed Internet access subscribers, and by June 2002, Comcast had approximately 1.2 million high- speed Internet access subscribers. 140 As of year- end 2001, AT& T had approximately 1.5 million high- speed Internet access subscribers, and as of June 2002 AT& T had approximately 1.8 million subscribers. 141 As of year- end 2001, Cablevision had 506,675 high- speed Internet access subscribers. 142 By June 2002, Cablevision had 610,505 subscribers. 143 As of year- end 2001, Charter had 607,700 high- speed Internet access subscribers and it expects that by year- end 2002 it will have as many as 1.25 million high- speed Internet access subscribers. 144 As of June 2002, Charter had 133 AOL Time Warner Inc., SEC Form 10- K for the Year- Ended December 31, 2001, at 10- 11. 134 See AT& T- Comcast Merger Order, fn. 54 supra at n. 370. 135 See id. This obligation applies for a period of five years following the spin- off of AT& T Broadband. AT& T-Comcast Merger Application, at 8. AT& T, Comcast, and Microsoft also agreed to a term sheet providing for a trial of an ITV platform including set- top box middleware. Id. at 8. 136 In connection with the TWE Restructuring Agreement, AT& T and Comcast will enter into a three- year non-exclusive agreement with AOL Time Warner under which AOL high- speed Internet access service would be made available on AT& T Comcast cable systems. AT& T Corp. and Comcast Corp., AOL Time Warner, AT& T and Comcast Agree to Restructure Time Warner Entertainment Partnership (press release), Aug. 21, 2002. 137 Prior to its merger with Comcast, AT& T entered into third- party ISP agreements with Galaxy Internet Services, Earthlink, Net1Plus, and Internet Central. See Letter from James R. Coltharp, Senior Director, Public Policy, Comcast Corp. and Betsy J. Brady, Vice President, Federal Government Affairs, AT& T Corp., to Marlene H. Dortch, Secretary, FCC, MB Docket No. 02- 70 (Nov. 6, 2002), at 1. See also Letter from A. Renee Callahan, Lawler, Metzger & Milkman, LLC, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 02- 70 (July 2, 2002), at 19- 20 (responding to Document and Information Request by the Chief, Industry Analysis Division, Media Bureau, FCC, (June 11, 2002)). 138 Cox Communications, Inc., SEC Form 10- K for the Year- Ended December 31, 2001, at 5; Cox Communications, Inc., Cox Communications Summary of Operating Statistics, at 13. 139 Bear Stearns May Report, at 14. 140 Comcast Reply Comments at 5; AT& T- Comcast Merger Application, at 12. 141 AT& T Broadband, AT& T Group Earnings Commentary: Fourth Quarter 2001, Jan. 30, 2002 at 14; AT& T Broadband, AT& T Group Earnings Commentary: Second Quarter 2002, July 23, 2002, at 12. 142 Cablevision Systems Corp., Cablevision Systems Corporation Reports Fourth Quarter 2001 Financial Results for Cablevision NY Group and Rainbow Media (press release), Feb. 14, 2002. 143 Cablevision Systems Corp., Cablevision Systems Corporation Reports Second Quarter 2002 Financial Results for Cablevision NY Group and Rainbow Media (press release), Aug. 8, 2002. 144 Charter Communications, Inc., SEC Form 10- K for the Year- Ended December 31, 2001, at 14. 25 Federal Communications Commission FCC 02- 338 26 905,500 high- speed Internet access subscribers. 145 As of June 2002, AOL Time Warner had 2.5 million subscribers to its cable modem service. 146 48. As we have reported in the past, a few cable operators offer Internet access services delivered through a television receiver rather than a personal computer. 147 Many of these products are available on a stand- alone basis and can be used independently of a cable television subscription. Many, however, are co- marketed through the cable television provider. 148 Nationwide providers of television- based Internet access services include Microsoft, which provides MSN- TV (formerly WebTV), Worldgate, and America Online, which provides AOLTV. 149 49. Telephone Services Offered by Cable Operators. Since our last report, several cable operators have begun to test IP telephony in addition to the traditionally- deployed circuit- switched telephony. 150 Most cable operators deploying IP telephony, however, are electing to deploy telephony as second- line service. Second- line service is not self- powered and thus does not guarantee that the telephone will function in the event of a power failure. In some cases second- line service is not connected to the customer’s existing telephone wiring. Instead, customers are required to plug their telephone units into their cable modems and run their own wiring or elect to use wireless handset units in their homes. 50. Cox and AT& T continue to deploy circuit- switched cable telephony, and others, such as Cablevision, Comcast, and Charter offer circuit- switched cable telephony where it has already been deployed. Several MSOs, including AT& T, AOL Time Warner, Cox, Comcast, and Charter, are currently testing, or have commercially deployed IP telephony. As of June 2002, cable operators served approximately 2.1 million local residential IP and circuit- switched telephone customers. 151 51. AT& T and Cox remain the leaders in the provision of primary- line, circuit- switched cable telephony. As of year- end 2001, Cox provided residential, facilities- based, circuit- switched cable telephony services in nine markets to nearly 500,000 subscribers nationwide. 152 As of June 2002, Cox had 578,321 subscribers. 153 In addition, Cox is running an IP telephony trial in its Oklahoma City, 145 Charter Communications, Inc., SEC Form 10- Q for the Quarter Ended June 30, 2002, at 16. 146 AOL Time Warner, Inc., SEC Form 10- Q for the Quarter Ended June 30, 2002, at 12. 147 2001 Report, 17 FCC Rcd at 1269. 148 For example, as of year- end 2001, Charter offered television- based Internet access using WorldGate to approximately 557,000 homes with over 9,000 subscribers, and offered advanced interactive television services using Diego to more than 558, 000 homes. Charter Communications, Inc., SEC Form 10- K for the Year Ended December 31, 2001, at 15; Charter Communications, Inc., Digeo and Moxi Merge (press release), Mar. 29, 2002. 149 For an explanation of how the WebTV and Worldgate services operate, see 1998 Report, 13 FCC Rcd at 24315- 6. 150 A circuit- switched cable telephony voice call and an IP telephony voice call both begin with special equipment that connects a household's twisted pair infrastructure with the cable infrastructure. Cable circuit- switched telephony, however, eventually turns the call over to traditional "circuit switched" processing, while IP telephony eventually turns the call over to the Internet for IP processing. IP telephony processes voice telephone calls much like data are processed on the Internet; that is, digitized pieces of data are divided into discrete packets and are transported over the Internet following any path that does not resist transfer. See 2001 Report, 17 FCC Rcd at 1269. 151 NCTA, Telephone Services, at http:// www. ncta. com. 152 Cox Communications, Inc., Cox Communications Announces Fourth Quarter Financial Results for 2001 (press release), Feb. 12, 2002; Cox Communications, Inc., Cox Timeline for Telephony (news release), Apr. 16, 2002. 153 Cox Communications, Inc., Cox Communications Announces Second Quarter Financial Results for 2002 (press release), July 31, 2002. 26 Federal Communications Commission FCC 02- 338 27 Oklahoma system. 154 AT& T offers its residential, facilities- based, circuit- switched telephony product in 16 markets, and as of June 2002, had over 1.2 million subscribers. 155 AT& T has also been pursuing IP telephony solutions. As of July 2002, AT& T was conducting a hybrid circuit- switched- IP telephony trial in its Boulder, Colorado system. 156 52. Other MSOs are also providing telephony in certain service areas. For example, Comcast provides primary- line circuit- switched telephony services to more than 40,000 subscribers in several of its systems, continuing telephone operations associated with certain cable systems it acquired in the last several years. 157 In June 2002, Comcast announced that it has begun to install equipment for the initial deployment of residential, primary- line IP telephony service in the Philadelphia area, with plans to begin service in the second quarter of 2003. 158 Comcast has also announced its intention to deploy IP telephony in Detroit, though in October 2002, Comcast said that after consummation of its merger with AT& T, it plans to temporarily put any additional cable telephony plans on hold so that it can focus on rebuilding AT& T’s basic cable subscribership. 159 As a result of its acquisition of certain AT& T cable systems, Charter Communications provides circuit- switched cable telephony to more than 17,600 subscribers. 160 Charter has been testing IP telephony in several field trials. 161 AOL Time Warner plans to launch IP telephony in 2003. 162 Cablevision offers limited facilities- based, residential circuit- switched telephony in New York to approximately 13,400 subscribers. 163 B. Direct- To- Home Satellite Services 1. Direct Broadcast Satellite Services 53. DBS service is a nationally distributed subscription video service that delivers video and audio programming via satellite to a small parabolic "dish" antenna located at the viewer’s home. To date, the Commission has licensed four companies to provide DBS service: DirecTV, EchoStar (marketed as the DISH Network), Dominion Video Satellite, Inc. (marketed as Sky Angel) and Cablevision’s 154 Morgan Stanley July 10 th Report, at 69. 155 AT& T Comments at 16- 17. 156 Morgan Stanley July 10 th Report, at 69. 157 Comcast Corp., Comcast Announces Plans For Residential Primary- Line IP Phone Service In Portion Of Philadelphia Market (press release), June 27, 2002. 158 Id. 159 AT& T- Comcast Merger Application, at 38; In Detroit, Comcast is implementing a hybrid IP- circuit switched approach, In this approach, IP technology is used in the connection between the customer’s home and the headend, after which the signal is converted and processed through Comcast’s existing switch. See Letter from James L. Casserly, Mintz, Levin, Cohen, Ferris, Glovsky and Popeo, P. C., to Marlene H. Dortch, Secretary, FCC, MB Docket No. 02- 70 (Aug. 20, 2002). David Lieberman, Comcast Plans Focus on Cable Subscriptions, USA TODAY, Oct. 29, 2002, at B3; Peter Thai Larsen, Comcast Pledges to Stop “Churn,” FINANCIAL TIMES, Oct. 29, 2002, at 18. 160 Charter Communications, Inc., SEC Form 10- Q for the Quarter- Ended June 30, 2002, at 37. 161 Charter Communications, Inc., Charter Communications and High Speed Access Corp. Announce Trial of True IP Switched Local Voice Service Over Cable (press release), Dec. 14, 1999. 162 Peter Grant, More Consumers Answer Cable’s Call on Phone Service, WALL STREET JOURNAL, Sept. 5, 2002, at B1. 163 Cablevision Systems Corp., Cablevision Systems Corporation Reports Fourth Quarter 2001 Financial Results for Cablevision NY Group and Rainbow Media Group (press release), Feb. 14, 2002. 27 Federal Communications Commission FCC 02- 338 28 Rainbow DBS. 164 Three of these companies – DirecTV, EchoStar and Dominion -- currently provide service. 165 54. Rainbow DBS is in the process of constructing a DBS satellite, “Rainbow 1 DBS,” from which it expects to initiate service in December 2003. 166 Rainbow expects to deploy a spot- beam satellite and eventually use high- compression MPEG- 4 technology to increase the amount of programming that can be distributed. 167 Rainbow states that its 11 allocated channels 168 can be used to deploy 21 spot beams capable of reaching 143 DMAs, 169 including 76 of the top 100 and 67 of the remaining 110. 170 55. A potential new U. S. entrant, Compass Systems, Inc., a company 100% owned by Northpoint Technologies, Ltd., has filed an application for a construction permit for a DBS system and 164 R/ L DBS Company, L. L. C. (“ Rainbow DBS”) is a 100% wholly- owned subsidiary of Rainbow Media Holdings, Inc., the programming subsidiary of Cablevision Systems Corporation, and holds the license for 11 channels at the 61.5° W. L. orbital location. In March 2002, Rainbow Media Holdings, Inc. acquired Loral Space and Communications, Ltd. 's 50% interest in R/ L DBS Company, LLC. This purchase increased Rainbow Media Holdings' ownership of R/ L DBS to 100%. See Cablevision Systems Corp., SEC Form 10- Q for the Quarterly Period Ended June 30, 2002, at I- 6, Note 6. On December 28, 2000, the Commission granted a 36- month extension of time to R/ L DBS to construct and launch a satellite. See Petition of R/ L DBS Company, L. L. C. For Extension of its Direct Broadcast Satellite Construction Permit, 16 FCC Rcd 9, 10- 11 (2001). 165 Dominion is the licensee of eight channels at 61. 5° W. L. orbital location. Dominion was issued a construction permit in 1982. Under a 1996 agreement, Dominion leased capacity on EchoStar’s EchoStar III satellite for its eight licensed channels, six of which it has sub- leased to EchoStar, which uses them for Dish Network programming, and two of which it uses to transmit its Sky Angel services. See Dominion Video Satellite, Inc. Application for Minor Modification of Authority to Construct and Launch and to Continue Construction and Launch of Planned Satellite at 61. 5 ° W. L.; Application for Additional Time to Construct and Launch Direct Broadcast Satellites; Application for Launch Authority, 14 FCC Rcd 8182 (1999) (granting Dominion authority to commence operation of a DBS service using EchoStar’s EchoStar III satellite in the 61. 5° W. L. orbital location). See also http:// www. skyangel. com. Dominion plans to launch two satellites in the 2004- 2005 timeframe. See The Carmel Group, 2002 DBS North America Databook (“ 2002 Carmel Report”), at 247. 166 See Cablevision Systems Corp., SEC Form 10- K for the Year Ended December 31, 2001, at I- 38- 39. In December 2000, the International Bureau granted an extension to R/ L DBS’ construction permit, requiring it to commence service offerings no later than December 29, 2003. See Petition of R/ L DBS Company, LLC for Extension of its Direct Broadcast Satellite Construction Permit, 16 FCC Rcd 9 (IB 2000). 167 See Letter from Howard J. Symons, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P. C. on behalf of Cablevision and R/ L DBS Co. to Marlene H. Dortch, Secretary, FCC, Attachment at 3- 7 (Sept. 18, 2002). 168 On March 26, 2002, Rainbow filed an application requesting authorization to use channels 23 and 24 at 61. 5ş W. L. See Application of R/ L DBS Company, LLC to Modify Existing DBS Authorization to Add Channels 23 and24 at 61. 5 W. L. Currently, these channels are unassigned, but used by EchoStar pursuant to a grant of Special Temporary Authority (“ STA”). See also Direct Broadcasting Satellite Corporation Application for Special Temporary Authority to Operate a Direct Broadcast Satellite over Channels 1- 21 (odd) and23- 32 (odd and even) at 61. 5 W. L., 13 FCC Rcd 6392 (IB 1998); Direct Broadcasting Satellite Corporation Application Authority of a Direct Broadcast Satellite, Application for Modification and Request for Special Temporary Authority to Test, 13 FCC Rcd 10080 (IB 1998). 169 Designated Market Areas (“ DMAs”) are used by Nielsen Media Research to identify TV stations whose broadcast signals reach a specific area. A DMA consists of all counties whose largest viewing share is given to stations of that same market area. Non- overlapping DMAs cover the entire contiguous 48 states, Hawaii, and parts of Alaska. There are currently 210 DMAs throughout the United States. See http:// www. nielsenmedia. com/ FAQ/ index. html. 170 Id. 28 Federal Communications Commission FCC 02- 338 29 for authorization for a terrestrial platform in the DBS frequencies (“ Southpoint Application”). 171 The Southpoint Application has four parts: (1) an application for authority to construct a DBS system; (2) a request for the Commission to exercise its discretion to grant immediately an “interim assignment” of unassigned DBS channels at each of the U. S. DBS positions of 166° W. L. and 157° W. L. for the applicant’s proposed DBS satellites; 172 (3) a request for immediate authorization of a multichannel video and broadband service through an “integrated terrestrial platform” located in the United States; and (4) a discussion of future plans for providing DBS service to the United States, Canada, and Mexico and for providing fixed satellite service to other nations. 56. Foreign- licensed Satellites Seeking Access to the U. S. Market for DBS and DTH. The Commission has several requests from foreign- licensed satellite operators seeking access to the U. S. market to provide DBS and DTH services. 173 On April 25, 2002, SES Americom filed an application to provide service in the United States using a satellite licensed by Gibraltar at the 105.5° W. L. orbital location. 174 SES Americom states that its service, Americom2Home, will offer a platform on which a variety of content providers can lease capacity to offer programming directly to consumers, as opposed to directly offering retail services to consumers. 175 57. There are also two pending requests to use a Canadian- licensed satellite to provide DBS and DTH services in the United States. The first is Digital Broadband Applications Corp. (“ DBAC”). DBAC filed its application on January 8, 2002, for authority to operate earth stations to communicate with the Canadian- licensed DBS space stations Nimiq at 82ş W. L. orbital location and Nimiq 2 at 91ş W. L. orbital location. DBAC proposes to offer interactive two- way broadband video and data services in the United States. The second applicant is WSNet Holdings, Inc. (“ WSNet”), which filed its application on November 21, 2001. WSNet requests authority to operate earth stations that will communicate with both Nimiq satellites to provide DBS in the United States. 58. Subscribership. DBS has become the largest competitor to cable in the MVPD market. DBS subscribership grew by almost 13% from approximately 16.1 million subscribers as of June 30, 171 See Application of Compass Systems, Inc. for Authority to Construct an International Direct Broadcast Satellite System (filed Mar. 20, 2002). 172 The 157° W. L. orbital position is a non- full continental United States (“ CONUS”) slot with 32 unassigned frequencies. The 166° W. L. orbital location is a non- full CONUS slot and has 32 frequencies, eight of which have been assigned to R/ L DBS. The 101° W. L., 110° W. L. and 119° W. L. orbital locations have 32 frequencies each and are the only slots with what the Commission considers full CONUS coverage. Currently, EchoStar and DirecTV have been assigned all full CONUS frequencies. EchoStar is assigned 29 frequencies at 110° W. L. and 21 frequencies at 119° W. L. DirecTV is assigned 32 frequencies at 101° W. L., three frequencies at 110° W. L., and 11 frequencies at 119° W. L. 173 These requests will be evaluated under the framework established in DISCO II. See Amendment of the Commission's Regulatory Policies to Allow Non- U. S. Licensed Satellites Providing Domestic and International Service in the United States, 12 FCC Rcd 24094 (1997) (DISCO II). Because the United States exempted DBS from its commitment in the World Trade Organization Basic Telecommunications Agreement, this evaluation includes an analysis of the effective competitive opportunities U. S. satellite operators have in the country licensing the foreign satellite (the “ECO- SAT test”), in addition to a technical/ interference analysis. The United States does not require the foreign DBS satellite to acquire a separate and duplicative U. S. license for the satellite. The Commission requires foreign- licensed companies to file for authority to “land” their signals by seeking an earth station license or to file a petition for declaratory ruling to provide service to earth stations in the United States. 174 File No. SAT- PDR- 20020425- 00071. 175 SES Americom Reply Comments at 2. See also SES Americom, Inc., SES Americom Files FCC Petition for New Satellite Television and Internet Platform (press release), Apr. 25, 2002. According to SES, the Americom2Home system could be operational as early as 2004. Id. 29 Federal Communications Commission FCC 02- 338 30 2001 to approximately 18.2 million subscribers as of June 31, 2002. 176 EchoStar and DirecTV subscribers comprise 20.3% of total MVPD households. 177 Analysts believe that DBS industry growth is attributed to reductions in the price of hardware, low- or no- cost installation promotions, and aggressive program marketing. 178 Analysts are projecting a consolidated annual growth rate for the DBS industry of 7– 8% from 2002 to 2008. 179 59. DirecTV is the nation’s leading DBS operator, and third largest MVPD provider, reporting approximately 10.7 million subscribers as of the end of June 2002, an increase of just over 10% from the 9.6 million subscribers reported as of June 30, 2001. 180 EchoStar is the second largest DBS provider, and sixth largest MVPD overall, with 7.6 million subscribers as of July 30, 2002. 181 Dominion’s Sky Angel service is a self- described Christian and family- oriented DBS service, offering 20 video and 16 radio channels for $9 a month. 182 Although Dominion’s transponders are currently located on an EchoStar satellite, Sky Angel subscribers must use a separate dish antenna to receive DISH Network programming. 183 Sky Angel does not report its subscriber numbers on an annualized basis, but one analyst estimates that Sky Angel is distributed to over one million subscribers. 184 60. According to one study, in overall customer satisfaction performance, DirecTV ranked highest among 14 major providers of satellite and cable TV services nationwide, achieving a score 18 index points higher than the cable TV service average. 185 EchoStar ranked second in the study. 186 According to the SBCA, 57% of DBS households have subscribed to cable previously, an increase from 176 SkyReport, National DTH Counts July 2001 to July 2002, at http:// www. skyreport. com/ dth_ counts. shtm. See also SBCA Reply Comments at 6, Table 1. 177 See Appendix B, Table B- 1 infra. 178 Kagan World Media, Inc., The State of DBS 2002 (“ DBS Databook”), Nov. 2001, at 13. 179 See 2002 Carmel Report at 8. See also Douglas Shapiro, Michael Savner, and Jeffrey Toohig, Equity Research: Initiating Coverage of DBS Sector, Banc of America Securities, Sept. 19, 2002, at 3, Figure 1. 180 DirecTV Comments at 11. DirecTV has entered into an exclusive distribution relationship in certain territories with the National Rural Telecommunications Cooperative (“ NRTC”) which acquires and supports subscribers. The NRTC, its partner Pegasus, and several smaller resellers are reported to account for approximately 1.75 million subscribers of the 10. 74 million total reported by DirecTV. See Hughes Electronics Corporation, Hughes Second Quarter 2002 Results Driven by Strong DirecTV U. S. Financial Performance (press release), July 15, 2002. DirecTV states that, compared to cable subscribers, DBS subscribers are more likely to live in single family homes, and more likely to live in rural areas. DirecTV Comments at 12. DirecTV states that approximately 55% of DirecTV’s subscribers (including those of distributor NRTC) live in larger urban areas, defined by A. C. Nielsen as “A” counties (those counties in the 21 largest metropolitan areas) and “B” counties (all counties with more than 85, 000 households under 1990 Census that are not included as “A” counties), and 45% live in smaller, rural counties. Id. at 12– 14. 181 SkyReport, National DTH Counts July 2001 to July 2002, at http:// www. skyreport. com/ dth_ counts. shtm. 182 Sky Angel, at http:// www. skyangel. com/ HTML% 20Site/ Body% 20Pages/ FAQ/ faq. htm. 183 Id. 184 2002 Carmel Report at 245. 185 J. D. Power and Associates, J. D. Power and Associates Reports: Satellite TV Grows in Consumer Popularity, Cable Service Sees Slight Decline (press release), Sept. 5, 2002. DirecTV ranked highest in all six categories studied: cost of service, credibility/ billing, program offerings, equipment and service capabilities, customer service, and reception quality. 186 Id. 30 Federal Communications Commission FCC 02- 338 31 48% in 2000. 187 Three percent of DBS households also concurrently subscribe to cable, the most common reason being to have access to local broadcast stations that are not offered via satellite. 188 61. Availability of Local Broadcast Stations. DBS operators continue to expand their delivery of local broadcast television stations in their local markets (“ local- into- local service”). 189 As of December 2002, DirecTV offered subscribers in 51 DMAs a $5.99 per month package of local broadcast stations including commercial and noncommercial stations. 190 As of December 2002, EchoStar also offers a similar package of commercial and noncommercial broadcast stations for $5.99 per month in 52 DMAs. 191 EchoStar and DirecTV also make available to customers who are not within a DMA where 187 SBCA Comments at 6. 188 Id. 189 As required by the Satellite Home Viewer Improvement Act of 1999 (“ SHVIA”), the Commission established rules to implement carriage of broadcast signals, retransmission consent, and program exclusivity with respect to satellite carriage of broadcast stations. SHVIA provides DBS carriers with the opportunity to carry local stations in a DMA pursuant to a statutory copyright license similar to the one provided cable operators. If a DBS operator selects this option in a DMA, however, effective January 1, 2002, it must carry all the local stations in the DMA that request carriage pursuant to the Commission’s rules. See 47 C. F. R. §76. 66. See Implementation of the Satellite Home Viewer Improvement Act 1999: Broadcast Signal Carriage Issues, Retransmission Consent Issues, 16 FCC Rcd 1918 (2000); Implementation of the Satellite Home Viewer Improvement Act of 1999: Broadcast Signal Carriage Issues, 16 FCC Rcd 16544 (2001); Implementation of the Satellite Home Viewer Improvement Act of 1999: Retransmission Consent Issues: Good Faith Negotiation and Exclusivity, 16 FCC Rcd 15599 (2001). The satellite industry challenged and sought review of the Commission’s Order implementing the statute and appealed a June 19, 2001, judgment of the United States District Court for the Eastern District of Virginia, which granted the government’s motion to dismiss their complaint challenging the SHVIA. On December 7, 2001, the United States Court of Appeals for the Fourth Circuit denied the petitions for review and affirmed the District Court’s opinion. See DirecTV, EchoStar, SBCA v. FCC & USA, No. 01- 1151 (Fourth Circuit). See also Satellite Broadcasting and Communications Association v. FCC, No. 01- 1151 et al (4 th Cir. 2001). The Supreme Court declined to review the 4 th Circuit’s opinion. See Satellite Broadcasting Communications Assoc v. FCC, 275 F. 3d 337 (4 th Cir. 2001), cert. denied, 122 S. Ct. 2588 (2002). 190 See SkyReport, Local TV Channels Available by Satellite: Available on DirecTV and EchoStar’s DISH Network, at http:// www. skyreport. com/ local. shtm (visited Oct. 4, 2002). DirecTV consumers in Hartford, Connecticut; Las Vegas, Nevada; Providence, Rhode Island; Buffalo, New York; Grand Rapids, Michigan; Knoxville, Tennessee; Norfolk, Virginia; Oklahoma City, Oklahoma; New Orleans, Louisiana; and Jacksonville, Florida markets need a special set- top receiver and an 18 x 24- inch, oval shaped satellite dish to access local channels from DirecTV’s satellite at the 119° W. L. orbital location. SBCA Comments at 6; DirecTV, Inc., Local Channels Availability, at http:// www. directv. com/ DTVAPP/ LocalChannelsAction. do. 191 See DISH Network, Inc., at http:// www. dishnetwork. com/ content/ programming/ locals/ index. shtml. EchoStar uses its CONUS satellites to deliver signals of local commercial and noncommercial broadcast stations to subscribers. Any remaining stations in a market not carried on CONUS satellites are carried on EchoStar’s secondary satellites, operating from 61.5° W. L. and 148° W. L. orbital locations. In order to receive these local stations from EchoStar’s secondary satellites, subscribers are required to obtain and install additional equipment, including a second dish antenna. As of August 23, 2002, EchoStar reported that it had received 116,348 second dish requests from subscribers, 100, 880 of which have been installed, with 15, 468 requests outstanding. See EchoStar’s Local Station Carriage Compliance Plan: 150 Day Report, CSR- 5865- Z (filed Sept. 3, 2002). See also National Association of Broadcasters and Association of Local Television Stations; Request for Modification or Clarification of Broadcast Carriage Rules for Satellite Carriers (“ Two- Dish Order”), 17 FCC Rcd 6065, 6081, 6084 (MB 2002), recon. pending. EchoStar has launched two satellites, EchoStar VII and EchoStar VIII, both of which it reports have allowed it to transition some markets from a two- dish to a single- dish local- into- local service offering and to introduce several new markets with a single dish solution. The lawfulness of EchoStar’s two- dish approach is on review. See Applications for Review, Two- Dish Order, filed by WLNY- TV Inc. and Golden Orange Broadcasting Co. (May 3, 2002), Association of Public Television Stations and the Public Broadcasting Service (May 6, 2002), and Paxson Communications Corporation (May 6, 2002). 31 Federal Communications Commission FCC 02- 338 32 EchoStar carries local broadcast stations a Distant Broadcast Network package including ABC, CBS, NBC, FOX and PBS. 192 Of the 210 DMAs, local- into- local service is offered by at least one DBS operator in 62 markets. In 41 of those markets, local- into- local service is offered by both EchoStar and DirecTV. SBCA claims that, taken together, EchoStar and DirecTV offer local- into- local service to approximately 67% of U. S. television households. 193 EchoStar states that the addition of local channels has made DBS more competitive with incumbent cable providers and has led to an increase in DBS subscribership and a restraint on cable prices. 194 DirecTV reports that, as of June 30, 2002, over 60% of all residential customers took local programming packages (where available), an increase of 13 percentage points from the 47% it reported last year. 195 62. EchoStar- Hughes Merger. On December 3, 2001, the Commission received the application (the “Application”) 196 of EchoStar, General Motors Corporation (“ GM”), and Hughes Electronics Corporation (“ Hughes”) (collectively, the “Applicants”) for consent to transfer control of various Commission authorizations, including DBS and fixed satellite space station authorizations, earth station authorizations, and other related authorizations held by their wholly- or majority- owned subsidiaries to EchoStar (“ New EchoStar”). The proposed transaction involved the split- off of Hughes from GM, followed by the merger of the Hughes and EchoStar companies. The proposed merged entity, New EchoStar, would have a new ownership structure and would have continued to provide DBS subscription television service under the DirecTV brand name. The proposed merger would have combined operations of the two major DBS providers in the United States – EchoStar and Hughes’ DirecTV – into a single entity. 197 63. On October 9, 2002, the Commission declined to approve the transfer of licenses from EchoStar and Hughes Electronics to New EchoStar and designated the application for a full evidentiary hearing before an Administrative Law Judge. 198 The Commission found that EchoStar and Hughes failed 192 See DISH Network, Inc., Distant Broadcast Networks, http:// www. dishnetwork. com/ content/ programming/ locals/ index. shtml (visited Oct. 4, 2002). See DirecTV, Inc., at http:// www. directv. com/ DTVAPP/ learn/ NonLocalFeed. jsp. 193 SBCA Comments at 6. 194 EchoStar Comments at 5. 195 DirecTV Comments at 13. See also 2001 Report, 17 FCC Rcd at 1273- 74. 196 See Consolidated Application of EchoStar Communications Corporation, General Motors Corporation, Hughes Electronics Corporation, Transferors, and EchoStar Communications Corporation, Transferee, for Authority to Transfer Control, Dec. 3, 2001 (“ December 2001 Filing”); Letters to William F. Caton, Acting Secretary, Federal Communications Commission from Pantelis Michalopoulos, Counsel for EchoStar and Gary Epstein, Counsel for Hughes providing information pursuant to Section 1.65 of Commission Rules, filed Dec. 18, 2001 and Feb. 21, 2002 (“ December 2001 Amendment Letter” and “February 2002 Amendment Letter”). The term, “Application,” includes the December 2001 Filing, December 2001 Amendment Letter, and February 2002 Amendment Letter. 197 EchoStar and Hughes also submitted a joint application requesting authority to launch and operate NEW ECHOSTAR 1, a direct broadcast satellite that would be located at the 110° W. L. orbital location (the “Satellite Application”). See EchoStar Satellite Corporation and Hughes Electronic Corporation, Application for Authority to Launch and Operate NEW ECHOSTAR 1 (USABBS- 16), S2435, File No. SAT- LOA- 20020225- 00023 (Feb. 25, 2002); Letter to William F. Caton, Acting Secretary, Federal Communications Commission from Pantelis Michalopoulos, Counsel for EchoStar, and Gary Epstein, Counsel for Hughes, providing supplemental Technical Annex (Mar. 28, 2002); and Letter to Marlene H. Dortch, Secretary, Federal Communications Commission from Pantelis Michalopoulos, Counsel for EchoStar, and Gary Epstein, Counsel for Hughes (providing complete copy of supplemental Technical Annex) (May 30, 2002). 198 See fn. 21 supra. Section 309( e) of the Communications Act provides that if the FCC “for any reason” is unable to make a finding under Section 309( a) that the public interest would be served by the granting of a license transfer application, then “it shall formally designate the application for hearing on the ground or reasons then obtaining.” See EchoStar- Hughes HDO ¶ 289 for list of issues designated for hearing. 32 Federal Communications Commission FCC 02- 338 33 to meet their burden of proof to show that, on balance, the proposed merger is in the public interest, and found that the record indicates that substantial potential public interest harms may result from the transaction. 199 In its order, the Commission stated that the record demonstrated that the proposed transaction would eliminate a current viable competitor from every market in the country, whether those markets are served by cable systems or are markets in which no cable systems exist, at best resulting in a merger to duopoly, and at worst a merger to monopoly. 200 The Commission’s analysis of the potential competitive harms to the MVPD market indicated that the proposed merger would significantly increase concentration in an already concentrated market, and thus the merger should be presumed to create or enhance market power or facilitate its exercise, substantially reduce competition, and harm consumers. 201 Based on these and other conclusions, the Commission was unable to find that the public interest, convenience and necessity would be served by approving the transfer of control to New EchoStar of the licenses and authorizations controlled by GM/ Hughes, DirecTV and EchoStar. 202 64. On October 31, 2002, the United States Department of Justice filed a civil action in US District Court to enjoin the merger of EchoStar and Hughes. 203 The Department of Justice alleged that the proposed acquisition would cause significant harm to competition in numerous local markets for MVPD services throughout the United States, creating a monopoly for millions of households, and a duopoly for tens of millions of households. 204 DOJ also alleged that the merger would lead to higher prices and lower service quality for approximately 95% of U. S. television households that would be the case absent consummation of the merger. 205 65. On November 27, 2002, the Applicants submitted an amendment to their applications to ameliorate the competition concerns identified in the HDO. 206 The Applicants requested that the Commission approve their merger contingent on the execution of a divestiture agreement that would include the divestiture of licenses and assignment of rights to certain frequencies to Rainbow. 207 The Applicants also requested that the hearing be suspended pending review of the amended application. 208 199 Id. ¶ 275. 200 Id. 201 Id. ¶¶ 104– 187. 202 Id. ¶ 289. 203 United States vs. EchoStar Communications Corp, Hughes Electronics Corp., General Motors Corp., and DirecTV Enterprises, Inc., No. 1: 02CV02138 (D. C . filed Oct. 31, 2002). 204 Id. at 6. 205 Id. 206 See EchoStar- Hughes HDO ¶ 295. 207 See Application of EchoStar communications Corporation, General Motors Corporation, Hughes Electronics Corporation, Transferors, and EchoStar Communications, transferee, For Authority to Transfer Control; Application of EchoStar Satellite Corporation and Hughes Electronics Corporation for Authority to Launch and Operate NEW ECHOSTAR 1 (USABBS- 16), Amendment to Consolidated Application for Authority to Transfer Control (Nov. 27, 2002). See also EchoStar Communications Corporation, General Motors Corporation, and Hughes Electronics Corporation File Amendment to Transfer of Control, Public Notice, DA 02- 3358 (Dec. 4, 2002). 208 Application of EchoStar communications Corporation, General Motors Corporation, Hughes Electronics Corporation, Transferors, and EchoStar Communications, transferee, For Authority to Transfer Control; Application of EchoStar Satellite Corporation and Hughes Electronics Corporation for Authority to Launch and Operate NEW ECHOSTAR 1 (USABBS- 16), Petition for Suspension of Hearing (Nov. 27, 2002). 33 Federal Communications Commission FCC 02- 338 34 On December 10, 2002, the Applicants notified the Commission that they had agreed to terminate the proposed merger and asked to have their applications withdrawn and the hearing terminated. 209 2. Satellite- Based Advanced Services 66. Broadband Satellite Services. Last year, we reported that both DirecTV and EchoStar offered two- way Internet access services to their subscribers. 210 DirecTV offers one- way and two- way Internet service under the brand name DirecWay. 211 As of June 30, 2002, DirecWay had over 123,000 residential and small office/ home office subscribers in North America, compared to 74,000 one year ago. 212 EchoStar previously offered satellite- based Internet services through its investment in Starband, in conjunction with satellite operator Gilat, but, in April 2002, EchoStar ended its joint marketing and operations agreement with Starband. 213 Starband entered into bankruptcy protection in June 2002. 214 Starband has approximately 40,000 customers. 215 67. According to the SBCA, economic conditions have hindered the development of consumer- based satellite high- speed services. 216 EchoStar questions whether under current economic conditions any stand- alone DBS provider can realistically provide an affordable, competitive, satellite-based, two- way high- speed Internet broadband service to residential customers. 217 68. High- Definition Television. DirecTV and EchoStar provide subscribers with high-definition television (“ HDTV”) programming. DirecTV offers three channels of high definition 209 Letter from Gary M. Epstein, Counsel for Hughes Electronics Corporation and General Motors Corporation and Pantelis Michalopoulos, Counsel for EchoStar Communications Corporation, to Marlene H. Dortch, Secretary, FCC (Dec. 10, 2002). 210 2001 Report, 17 FCC Rcd at 1275. 211 Hughes Electronics Corporation introduced one- way high- speed Internet access in 1997 under the DirecPC brand name. The return path is provided via dial- up modem. It launched a two- way version in December 2001, allowing consumers to receive and send data via the dish antenna. Hughes also sold DirecDuo, a single dish antenna capable of supporting high- speed Internet access and video programming from DirecTV. In August 2002, Hughes introduced the DirecWay brand, folding one- and two- way DirecPC products and the DirecDuo product under this single brand name. Some retailers continue to use the DirecPC and DirecDuo product names in their marketing promotions and advertisements. See http:// www. hughes. com/ consumer/ Direcway. xml and http:// www. directv. Direcway. comdirecpc. com. DirecTV also offers Internet access through its DirecTV Broadband affiliate, DirecTV DSL. See DirecTV Broadband, Inc., at http:// www. DirecTVdsl. com. 212 SBCA Comments at 9. 213 See EchoStar Communications Corp., SEC Quarterly Report Pursuant to Section 13 or 15( d) of the Securities Act of 1934 for the Period Ended June 30, 2002, at 9. 214 Andy Pasztor, EchoStar Will No Longer Offer Web Via Satellite, WALL STREET JOURNAL, Apr. 5, 2002, at B5. See also Starband Communications, Inc., Starband Files for Chapter 11; Gilat Commits Interim Financing (press release), June 3, 2002. 215 Starband Communications, Inc., Starband Wraps Up 2001 as America’s Leading Consumer Satellite Internet Provider (press release), Jan. 7, 2002. 216 SBCA Comments at 9. 217 EchoStar Comments at 7. 34 Federal Communications Commission FCC 02- 338 35 programming: HDNet, 218 HBO’s HBO HD, and Showtime’s SHO HDTV. 219 EchoStar carries seven channels of HD programming: HBO HD, SHO HDTV, CBS, 220 Discovery HD Theater, Dish- On- Demand Pay- Per- View in HDTV format, and an HDTV demo channel. 221 According to the SBCA, DBS providers are working to meet the voluntary milestones set by Commission Chairman Powell in April, 2002. 222 69. Emerging Services. In early 2002, EchoStar introduced a channel called Dish Home, which acts as a “portal” for all Dish Network interactive channels, such as customer support services, including account review and bill payment, entertainment, games, sports, and news and weather information. 223 All navigation is controlled by the remote control. Certain functions, such as bill payment, require a phone line connection. 224 DirecTV is conducting trials of SVOD service with StarZ Encore Group, providing a small catalogue of programming accessible via a DirecTV set- top box with a TiVo PVR built in. The programming is automatically downloaded to the PVR’s hard drive and can be accessed at any time by the customer. 225 70. Access to Programming. On June 13, 2002, the Commission adopted an Order extending for five years, until October 5, 2007, the statutory prohibition on exclusive contracts for satellite- delivered cable or satellite- delivered broadcast programming between cable operators and their affiliated programmers. 226 In the Order, the Commission rejected requests to expand the prohibition to terrestrially delivered programming or non- vertically integrated programming. 227 SBCA states that, 218 HDNet is a national, all- high- definition television network broadcasting 16 hours a day, seven days week, offering a wide range of entertainment and sports programming. 219 To receive DirecTV’s HDTV service, subscribers must purchase either an HDTV set with a built- in DirecTV receiver, or a separate decoder box, and a second satellite dish that is capable of receiving the signals. See DirecTV, High Definition Television Programming from DirecTV, at http:// www. DirecTV. com/ DTVAPP/ imagine/ HDTV. jsp. 220 EchoStar carries the high definition signal of WCBS in New York and KCBS in Los Angeles. To qualify to receive these signals, in addition to subscribing to a local- into- local programming package, the customer must live in one of the 17 market areas served by the CBS owned and operated stations and the customer must not be in range of the signals of a CBS affiliate from a nearby city. See EchoStar Communications Corp., at http:// www. dishnetwork. com/ content/ programming/ locals/ cbshd/ index. shtml. 221 EchoStar Communications Corp., at http:// faq. dishnetwork. com. EchoStar subscribers must use certain set- top boxes and they need a second dish antenna pointing to EchoStar’s satellite at 61. 5° W. L. orbital location. In addition, EchoStar charges $7. 99 per month to subscribe to Discovery HD Theater and requires the use of EchoStar’s $499 Model 6000 HDTV receiver, and EchoStar’s $99 “Enhanced HD Adapter.” 222 SBCA Comments at 9. On April 4, 2002, Commission Chairman Michael Powell proposed that by January 3, 2003, DBS providers carry the signals of up to five digital programming services that are providing value- added digital programming during at least 50% of their prime time schedule. See Voluntary DTV Plan, fn. 119 supra. 223 Steve Caulk, EchoStar’s Portal Sees Quiet Success, ROCKY MOUNTAIN NEWS, Aug. 19, 2002, available at http:// 216.239.51.100/ search? q= cache: A3CF4zUnmPcC: www. rockymountainnews. com/ drmn/ technology/ article/ 0,1 299, DRMN_ 49_ 1333908, 00. html+ EchoStar% 27s+ Portal& hl= en& ie= UTF- 8. Access to the service is dependent upon the type of set- top box used by the customer. EchoStar charges a fee for access to certain content. For example, games cost $4.99 per month for unlimited access. See also EchoStar Communications Corp., EchoStar to Launch New Interactive TV Features Offering Games, Movie Reviews and Customer Support for Dish Network Satellite TV Customers (press release), Jan. 9, 2002. 224 See EchoStar, Dish Home, at http:// www. dishnetwork. com/ content/ technology/ itv/ dish_ home/ index. shtml. 225 See DirecTV, DirecTV to Test Starz On Demand SVOD Service on DirecTV Receivers with TiVO (press release), May 23, 2002. 226 Implementation of the Cable Television Consumer Protection and Competition Act of 1992, Development of Competition and Diversity in Video Programming Distribution: Section 628( c)( 5) of the Communications Act (“ Program Access Order”), 17 FCC Rcd 12124 (2002). See ¶ 140 infra. 227 See id. at 12126. 35 Federal Communications Commission FCC 02- 338 36 although the five year extension on program access rules will result in increased competition and continued growth of consumer choice, by not extending the prohibition to terrestrially- delivered programming, vertically- integrated cable companies will continue to circumvent the program access rules by switching the delivery of their programming away from satellite to terrestrial- only means. 228 SBCA states that 43% of new DBS subscribers named “more channels” as an important reason for choosing DBS as their multichannel video provider, and, if it were not for vertically integrated companies withholding “highly- desirable regional programming,” DBS could become an even stronger competitor to cable. 229 DirecTV argues that technological advances that have diminished the costs of delivering programming terrestrially, coupled with the efforts of cable MSOs to cluster or trade their systems to form broad, contiguous service areas, have created an environment in which terrestrial distribution has become a more viable method of delivering regional and national programming from production facilities to cable headends. 230 DirecTV urges the Commission to monitor the effects of terrestrial distribution of vertically- integrated programming by cable operators. EchoStar argues that the “terrestrial loophole” be eliminated either by regulation or an act of Congress. 231 NCTA disputes the notion of a “terrestrial loophole” and suggests that DirecTV and EchoStar each have the resources and subscriber base to develop their own basic and premium programming, both for their own use and for sale to other MVPDs. 232 3. Home Satellite Dishes 71. The home satellite dish (“ HSD”) or C- band segment of the satellite industry continues to experience a decline in subscribership. 233 Between June 30, 2001, and June 30, 2002, C- band subscribership fell from 1, 000,074 subscribers to 700,641 subscribers, a decline of over 30% with an average loss of close to 27,000 subscribers per month. 234 SBCA states that the pace of de- authorizations of C- band service is slowing and satellite programmers are committed to offering programming to this sector. 235 Motorola has introduced two new set- top boxes that enable C- band subscribers to access up to 228 SBCA Comments at 17. See also DirecTV Comments at 10; EchoStar Comments at 10- 11. 229 SBCA Comments at 17. SBCA states that in Philadelphia, Comcast, which owns sports teams and related programming properties, uses terrestrial delivery of that programming to prevent DBS companies from showing local team sports programming, resulting in a less competitive market in Philadelphia, where DBS penetration is 3.9%, or half of the rest of the top twenty DMAs where it is 9.3% on average. Id. at 17- 18; EchoStar Comments at 10- 11 and n. 24. Comcast counters EchoStar stating that: (1) as compared to Philadelphia, DBS penetration is no higher in several other major markets including San Diego and Boston, where there is no terrestrially- delivered, cable affiliated regional sports network, than it is in Philadelphia; (2) the two- year growth rate for DBS in Philadelphia (141%) is the highest of any top 10 market; and (3) the three- year DBS growth rate in Philadelphia (217%) is the third- highest of the top 39 DMAs. Comcast Reply Comments at 21, n. 80. 230 DirecTV Comments at 10. 231 EchoStar Comments at 11. 232 NCTA Reply Comments at 14. 233 C- band subscribers generally have access to approximately 30 satellites, accessible using a rotational dish antenna. Numerous programmers offer varying packages of programming, but generally there are over 600 channels of video and audio programming, with approximately 200 of them available free of charge. For a list of the type of programming available via C- band, including many of the more popular cable networks as well as national broadcast feeds, see Motorola 4DTV, at http:// www. 4dtv. com/ Programming/ programming. html. 234 SkyReport, National DTH Counts June 2001 - June 2002, at http:// www. skyreport. com/ dth_ counts. htm. See also SBCA Comments at 8, Table 1. 235 SBCA Comments at 7. The spokesman for SuperStar/ Netlink Group and Turner Vision, a major C- band operator, stated that he believes that C- band subscriptions will bottom out between 300, 000 and 400, 000 subscribers, although he provided no time frame for this to happen. SATELLITE NEWS, Big Dishes Diminish, Aug. 12, 2002, at http:// www. tripled. com/ sattimes/ sattimes. htm (visited Oct. 3, 2002). 36 Federal Communications Commission FCC 02- 338 37 200 channels of digital programming in addition to the 300 or more analog channels currently available to them. 236 C- band subscribers also now have access to high- speed Internet services. In September, 2002, Skyvision, Inc. and Internet Satellite Platform, Inc. announced the formation of CbandNet, a high- speed Internet service, offering monthly service packages ranging in price from $29.95 to $44.95. 237 There are now four remaining C- Band programming distributors, Gemstar- TV Guide Superstar/ Netlink Group, DSI Distributing, Satellite Receivers, Ltd., and the NRTC. 238 C. Wireless Cable Systems 72. Multipoint distribution service (“ MDS”) and instructional television fixed service (“ ITFS”) are authorized to operate in the 2.5- 2.69 GHz band. In addition, MDS entities have licenses in the 2.15- 2.162 GHz band. Wireless cable systems combine multiple MDS (i. e., multichannel MDS) frequencies and ITFS frequencies to transmit video programming and high- speed Internet access to residential subscribers in limited areas. This delivery technology is also known as multichannel multipoint distribution service (“ MMDS”). 73. In 1998, the Commission released the Two- Way Order permitting MDS/ ITFS licensees to construct digital two- way systems that could provide high- speed, high- capacity broadband service, including two- way Internet service via cellularized communication systems. 239 In 2001, the Commission adopted a First Report and Order and Memorandum Opinion and Order in the New Advanced Wireless Services proceeding, which made the spectrum used by MMDS services potentially available for advanced mobile and fixed terrestrial wireless services, including third- generation (“ 3G”) and future generations of wireless systems. 240 The Commission decided not to relocate the existing licensees or otherwise modify their licenses. The Commission recognized that it would have to explore the service rules that would apply to permit mobile operations in the 2. 5- 2.69 GHz band in a separate, future proceeding. On October 17, 2002, the Wireless Telecommunications Bureau sought comment on an industry proposal requesting further rule changes to facilitate provision of two- way fixed and mobile services, while allowing others to continue to provide one- way video services. 241 236 Motorola, Inc., Motorola’s 4DTV Digital Sidecar Provides System Upgrade for C- band Subscribers (press release), Apr. 12, 2002. See also Motorola 4DTV, http:// www. 4dtv. com/ Products/ products. html (visited Oct. 3, 2002). Motorola offers a stand- alone set- top box functioning as both analog and digital receiver and a so- called side- car set- top box which adds digital functionality to existing analog receivers. In addition, 4DTV offers the DigiCipher II HDD- 200 set- top box which allows for the receipt of high definition programming. Id. 237 SATELLITE NEWS, High- Speed Internet for the Big Dish, Sept. 24, 2002, at http:// www. tripled. com/ sattimes/ sattimes. htm (visited Oct. 3, 2002). See also CbandNet, http:// www. cband. net (visited Oct. 3. 2002). The company offers Internet services, software, modems, satellite dishes, low noise blockers (“ LNB”), dish movers, and accessories. 238 Satellite Receivers Buys Disney’s C- Band Subscribers, Satellite Business News FAXUpdate, June 15, 2001. 239 Amendment of Parts 21 and 74 to Enable Multipoint Distribution Service and Instructional Television Fixed Service Licensees to Engage in Fixed Two- Way Transmissions, 13 FCC Rcd 19112 (1998), recon., 14 FCC Rcd 12764 (1999), further recon., 15 FCC Rcd 14566 (2000). 240 See Amendment of Part 2 of the Commission’s Rules to Allocate Spectrum Below 3GHz for Mobile and Fixed Services to Support the Introduction of New Advanced Wireless Services, Including Third Generation Wireless Systems, 16 FCC Rcd 17222 (2001). The 3G advanced wireless services may include new data and broadband services such as Internet access, electronic mail, and short messaging services. Id. at 17223- 4. 241 See Wireless Telecommunications Bureau Seeks Comment on Proposal to Revise Multichannel Multipoint Distribution Service and the Instructional Television Fixed Service Rules, Public Notice, DA 02- 2732 (WTB rel. Oct. 17, 2002). The Public Notice sought comment on a paper entitled, A Proposal for Revising the MDS and ITFS Regulatory Scheme, filed by the Wireless Communications Association International, Inc., the National ITFS Association and the Catholic Television Network (Oct. 7, 2002). 37 Federal Communications Commission FCC 02- 338 38 74. MMDS Households and Subscribership. Over 2,650 MDS and MMDS licenses have been issued in the U. S. 242 Four companies – Sprint, WorldCom, Nucentrix and BellSouth – hold more than half of the licenses. 243 Collectively, these four companies can potentially reach 75% of the U. S. population. 244 The number of MMDS subscribers, however, has declined to approximately 490,000 from 700,000 last year. 245 MMDS has never become a significant competitor in the market for the delivery of video programming, 246 rather many MMDS providers are focusing on data transmission rather than video service. 247 Moreover, the future of these services may depend on the ability of these companies to develop better technology. 248 Sprint announced that it has put MMDS deployment on hold until substantial progress is made on second- generation MMDS technology. 249 The future competitive impact of MMDS is further clouded by the bankruptcy filings of two of the major companies (WorldCom and Nucentrix), each holding about 17% of MMDS licenses. 250 In March 2002, Nucentrix announced that it had entered into agreements to convert the majority of its video customers in markets in Oklahoma, Texas, and the Midwest to DBS programming provided by DirecTV and Pegasus, and in central Texas to Time Warner Cable, as a replacement for its MMDS video service. 251 Nucentrix plans to use its MMDS spectrum to provide broadband Internet and other advanced wireless services. 252 WorldCom has indicated that, as part of its strategy to improve its financial outlook, it may consider selling part or all of its MMDS business. 253 D. Private Cable Systems 75. Private cable operators (“ PCOs”), also known as private communication operators or satellite master antenna television (“ SMATV”) systems, are video distribution facilities that use closed transmission paths without using any public right- of- way. 254 PCOs receive programming via a master satellite antenna and distribute television signals via terrestrial wiring to urban and suburban multiple 242 BIA Financial Network, The MMDS Industry: A Look Into the Industry’s Most Significant Operators, September 2002, at 5. 243 Id. 244 Id. at 6. 245 NCTA Comments at 12. 246 MMDS subscribers have never represented more that approximately a 1.5% share of all MVPD households. See 2000 Report, 16 FCC Rcd at 6110, Appendix C, Table C- 1. 247 FCC, OPP Working Paper #37, Broadcast Television: Survivor in a Sea of Competition, September 2002, at 63. 248 BIA Financial Network, The MMDS Industry: A Look Into the Industry’s Most Significant Operators, September 2002, at 12. MMDS must have a “line- of- sight” path between transmitter and receiver. Technical limitations include signal strength and blockage by terrain. 249 Sprint, Sprint to Terminate ION Efforts; Announces Additional Actions to Improve Competitive Positioning and Reduce Operating Costs in FON Group (press release), Oct. 17, 2001. Sprint has begun field trials of second generation technology in its Houston, Texas market. Kevin Fitchard, Sprint Revives MMDS Plans, TELEPHONY, May 13, 2002. 250 BIA Financial Network, The MMDS Industry: A Look Into the Industry’s Most Significant Operators, September 2002, at 12. 251 Nucentrix Broadband Networks, Nucentrix Announces Conversion of Video Subscribers (press release), Mar. 19, 2002. 252 Id. See also Nucentrix Broadband Networks, Nucentrix Applauds MDS/ ITFS Proposal for Next Generation of Broadband Wireless Services (press release), Oct. 7, 2002. 253 Sue Marek, Sidgmore: All Wireless Assets for Sale, WIRELESS WEEK, July 3, 2002. 254 47 U. S. C. § 522( 7). 38 Federal Communications Commission FCC 02- 338 39 dwelling units (“ MDUs”) and commercial multiple tenant units (“ MTUs”). PCOs are in direct competition with franchised cable operators. They generally offer the same basic service tiers as their competitors. 255 PCOs are continuing to combine analog antenna and DBS systems in order to provide more service offerings. In addition, digital video and high- speed Internet access offerings are becoming increasingly important to landlords who are seeking new tenants, or are responding to the demands of their current tenants. 256 76. PCOs are not regulated as traditional cable operators. 257 Some PCOs’ systems use microwave transmissions and wires to serve multiple buildings that are not commonly owned. 258 Where a PCO crosses public rights- of- way, that operator becomes a cable operator as defined by the Communications Act, including the franchising obligations of Section 621. 259 On May 16, 2002, the Commission adopted a Report and Order expanding eligibility for licenses in the Cable Television Relay Service (“ CARS”) to include all MVPDs, including private cable operators. The Order also increased the number of frequencies available to PCOs by permitting the use of 12.70- 13. 20 GHz band (“ 12 GHz CARS band”) by all MVPDs for delivering programming services to their subscribers. 260 In that proceeding, several commenters contended that use of the lower CARS band of 12.70- 31.20 will help PCOs compete with cable MSOs. 261 77. PCOs consist of hundreds of small and medium- sized firms throughout the United States. 262 During the late 1990s, a number of large PCOs, including OpTel, SkyView, and Cable Plus, declared bankruptcy. 263 OpTel, one of the largest PCOs, has emerged recently from Chapter 11 255 Larry Kessler, Boring? Not Any More. Exclusive and Perpetual Contracts, Private and Wireless Broadband, December 2001, at 18. 256 Jay Hartz, Post Wiring Properties for Broadband Connectivity: Keeping up With Resident Demands, Broadband Properties, April 2002, at 12. 257 1996 Act, sec. 301( a)( 2), 47 U. S. C. § 522( 7). In addition, private cable and SMATV operators (a) do not pay franchise and Federal Communications Commission subscriber fees; (b) are not obligated to pass every resident in a given area; (c) are not subject to rate regulation; and (d) are not subject to must carry and local government access obligations. 1997 Report, 13 FCC Rcd at 1085. 258 Id. In 1991, the Commission held that microwave transmissions do not “use” public rights- of- way and made 18 GHz technology available for the point- to- point delivery of video programming services, allowing operators to free themselves from large networks of coaxial or fiber optic cable and amplifiers. Amendment of Part 94 of the Commission’s Rules to Permit Private Video Distribution Systems of Video Entertainment Access to the 18 GHz Band, 6 FCC Rcd 1270, 1271 (1991). In 2000 the Commission adopted a Report and Order affirming the allocation of the 18 GHz band for SMATV providers, concluding that “private cable operators using the 18 GHz band, for both current and future operations, will not be able to compete effectively against franchised cable operators if we redesignate the 18.3- 18. 55 GHz band . . . .” See Redesignation of the 17.7- 19. 7 GHz Frequency Band, Blanket Licensing of Satellite Earth Stations in the 17. 2- 20. 2 GHz and 27. 5- 30.0 GHz Frequency Bands, and the Allocation of Additional Spectrum in the 17. 3- 17.8 GHz and 24. 75- 25. 25 GHz Frequency Bands for Broadcast Satellite- Service Use, 15 FCC Rcd at 13450 (2000). 259 Entertainment Connections, Inc., Motion for Declaratory Ruling, 13 FCC Rcd at 14277 (1998). 260 Amendment of Eligibility Requirements in Part 78 Regarding 12 GHz Cable Television Relay Service, 17 FCC Rcd 9930 (2002). 261 See, e. g., OpTel, Inc., Comments, CS Docket No. 99- 250, at 2- 3; RCN Telecom Services, Inc., Comments CS Docket No. 99- 250, at i, 3- 4. 262 For a list of private communications operators, see the Independent Multi- Family Communications Council’s web site under Private Communication Operator (“ PCO”) at http:// www. imcc- online. org/ membership. 263 Larry Kessler, Winning the Battle and the War: What Does It Take? Private and Wireless Broadband, July 2000, at 10. 39 Federal Communications Commission FCC 02- 338 40 bankruptcy under the name TVMAX. 264 Many PCOs serve approximately 3,000- 4,000 subscribers, but the larger operations serve as many as 15,000- 55,000 subscribers each. 265 As of June 2002, PCO subscribership increased by 100,000 subscribers, reaching 1.6 million subscribers, or 1.7% of the MVPD market. 266 78. The Commission has issued a Second Further Notice of Proposed Rulemaking seeking comments on the advantages and disadvantages of exclusive and perpetual contracts in promoting a competitive environment, and whether there are circumstances in which the Commission should adopt restrictions on exclusive and perpetual contracts in order to promote competition in the MDU market. 267 In that pending proceeding, PCOs, real estate interests, and some telecommunications entities support exclusive contracts for video programming services, asserting that exclusives enable alternative MVPDs to gain a foothold in the MDU market, and enable alternative and new MVPDs to obtain financing, recoup costs, and expand operations in the MDU market. 268 The Independent Multi- Family Communications Council (“ IMCC”), the trade organization representing PCOs, states that exclusive contracting by PCOs is essential to their ability to compete with franchised cable operators and should not, therefore, be capped. 269 If caps are adopted, IMCC and other PCO advocates endorse long- term caps of ten to 15 years. 270 IMCC urges the Commission however, to implement rules that would allow property owners to renegotiate or reject perpetual contracts so that residents can enjoy the benefits of service from competing providers. 271 E. Broadcast Television Service 79. Broadcast networks and stations supply video programming over the air directly to consumers who do not subscribe to an MVPD service. Some consumers receive broadcast signals via over- the- air transmission whereas others receive signals via their cable, DBS, or other MVPD service. Since the 2001 Report, the number of commercial and noncommercial television stations increased to 1,712 as of June 30, 2002, from 1,678 as of June 30, 2001. 272 The recession of 2001 affected total television broadcast advertising revenues, which declined to $35.9 billion in 2001, a 12% decrease from 264 Larry Kessler, Santa or the Grinch: Who’s Visiting You Next? Broadband Properties, January 2002, at 18. 265 1999 Report, 15 FCC Rcd at 1023. See also Ten Largest Private Cable Operators/ Multiple System Operators, Private Cable & Wireless Cable, Dec. 1999, at 4. 266 NCTA Comments at 12. 267 Telecommunications Services Inside Wiring, Customer Premises Equipment, Implementation of the Consumer Protection and Competition Act of 1992: Cable Home Wiring, Report and Order and Second Further Notice of Proposed Rulemaking (“ Inside Wiring Order”), 13 FCC Rcd 3659 (1997). A perpetual contract runs for the term of a cable franchise and any extensions thereof. Exclusive contracts specify that only a particular MVPD, and no other, may provide video programming and related services to residents of an MDU. 268 Community Associations Institute Comments in CS Docket No. 95- 184, at 2; Wireless Cable Association Comments in CS Docket No. 95- 184, at 1- 8; Real Estate Alliance Ex Parte in CS Docket No. 95- 184, May 24, 2000, at 1- 3; Building Owners and Managers Association International Further Joint Comments in CS Docket No. 95- 184, Intelicable Ex Parte in CS Docket No. 95- 184, June 16, 2000, at 1- 3; OpTel Comments at 4- 6; GTE Comments in CS Docket No. 95- 184, at 3. See ¶¶ 120- 122 infra. 269 IMCC Comments in CS Docket No. 95- 184 at 4. 270 Id. at 4- 9. 271 Id. at 11. 272 Compare Federal Communications Commission, Broadcast Station Totals as of June 30, 2002, FCC News Release (Aug. 26, 2002) with Federal Communications Commission, Broadcast Station Totals as of June 30, 2001, FCC News Release (July 13, 2001). 40 Federal Communications Commission FCC 02- 338 41 $40.8 billion in 2000. 273 Advertising revenues for the seven most widely distributed broadcast networks (ABC, CBS, Fox, NBC, PAX, UPN, and WB) fell 8% from $20.3 billion in 2000 to $18.6 billion in 2001. 274 In contrast, cable programming networks experienced a 3.8% increase in advertising revenue in 2001, earning $10.7 billion in advertising revenue compared to $10.3 billion in 2000. 275 80. During the 2001- 2002 television season, 276 broadcast television stations, 277 accounted for a combined average 58.9 share of prime time viewing among all television households, 278 compared to 63 share in the previous season. 279 For total day (24- hour) viewing, broadcast television stations accounted for a combined 52.4 share of viewing in all TV households, also down from a 56.2 share the previous season. During the 2001- 2002 television season, non- broadcast networks, 280 accounted for a combined average 57 share of prime time viewing among all television households, up from 52.6 share the previous season. For total day (24- hour) viewing, cable networks accounted for a combined 58.8 share of viewing in all TV households, also up from a 54.7 share last season. 81. We previously reported on consolidation in the broadcast industry and on “repurposing,” which continues to become more common. Repurposing deals between NBC and PaxTV, ABC with Lifetime and VH- 1 and Fox with FX were reported in last year’s report. 281 This season, Fox and Warner Bros. have struck repurposing deals with MTV; Disney is repurposing ABC sitcoms on its ABC Family network; NBC is experiencing success with first run Law and Order and Criminal Intent rebroadcasts on USA network; and Comedy Central rebroadcasts NBC’s Late Night with Conan O’Brien the next day at 1 p. m. and 7 p. m. 282 In reverse examples of repurposing, NBC is showing episodes of Court TV’s original Forensic Files and ABC is airing USA network’s Monk on Monday nights after USA airs it on Friday. 283 82. As we previously reported, DTV could enhance the ability of broadcasters to compete in the video marketplace. DTV allows broadcasters to transmit an HDTV signal, several standard definition television (“ SDTV”) signals (“ multicasting”), or ancillary services in addition to video programming. 284 As of September 25, 2002, two of the top- four network affiliates in the top ten television markets were broadcasting DTV service. 285 In television markets 11- 30, 75 of 79 stations were broadcasting DTV 273 Television Bureau of Advertising, Local Broadcast Revenues Off Last Year (press release), Apr. 17, 2002. 274 Id. 275 NCTA, Cable Advertising Revenue: 1984- 2001 (In Millions), Cable Television Developments 2002, at 12. 276 September 2001 to August 2002. 277 Includes network affiliates, independent stations, and public broadcast stations. 278 See fn. 39 supra. 279 Nielsen Media Research, Primetime: Total US Ratings By Viewing Source September 2001- August 2002, Oct. 2002; Nielsen Media Research, Total Day 24 Hours 6 am - 6 am: Total US Ratings By Viewing Source September 2000- August 2001, Oct. 2001. 280 Includes basic (BST and CPST) networks, as well as premium and PPV networks, distributed by MVPDs. 281 2001 Report, 17 FCC Rcd at 1283 (2002). “Repurposing” generally involves a re- run of broadcast content on a different network (cable or broadcast) shortly after it airs originally on network affiliate stations. 282 Paige Albiniak, Steve McClellan and Dan Trigoboff, A Season of Seeing Double, BROADCASTING & CABLE, Sept. 30, 2002, at 7. 283 Id. 284 See 2001 Report, 17 FCC Rcd at 1283. 285 For an updated list on the status of DTV broadcasts, see Summary of DTV Applications Filed and DTV Build Out Status, at http:// www. fcc. gov/ mb/ video/ files/ dtvonairsum. html. 41 Federal Communications Commission FCC 02- 338 42 service. Ninety percent of the more than 1,300 commercial television stations have been granted a DTV construction permit or license, and 643 are on the air with DTV operation. 286 83. Current use of DTV spectrum involves HDTV transmissions of programs that are also broadcast in standard NTSC analog format over paired analog facilities. 287 For instance, ABC is broadcasting all of its prime time scripted series and theatrical movies in HDTV during the 2002- 2003 TV season. 288 CBS states that each of its 18 prime time dramas and comedies are broadcast in HDTV in partnership with digital television set manufacturers Samsung and Zenith. 289 NBC broadcasts ten prime time shows in HDTV, and PBS offers one or two HDTV programs per week. 290 The WB network offers four HDTV programs this season. 291 84. In Compatibility Between Cable Systems and Consumer Electronics Equipment, the Commission directed the cable and consumer electronics industries to report every six months until October 2002 on the progress implementing the February 2000 Program and System Information Protocol (“ PSIP”) agreement between NCTA and the Consumer Electronics Association (“ CEA”). 292 Recently, an extension was granted for the filing of the October 2002 progress reports based on the representations of the cable and consumer electronics industries that they were engaged in constructive discussions regarding compatibility between cable systems and digital television sets, and filing the reports would detract from that effort. 293 85. It has been alleged that the lack of a comprehensive copy protection regime also has slowed the DTV transition. Since 1996, an inter- industry group called the Copy Protection Technical Working Group (“ CPTWG”) has served as a discussion forum for general copy protection issues. On November 28, 2001, the Broadcast Protection Discussion Subgroup (“ BPDG”) was formed under the auspices of CPTWG in order to specifically address digital broadcast copy protection. The BPDG recently announced a consensus on the use of a “broadcast flag” standard for digital broadcast copy protection. This consensus would require use of the Redistribution Control Descriptor, as set forth in ATSC Standard A/ 65A (the “ATSC flag”), to mark digital broadcast programming so as to limit its improper use. Despite the consensus reached on the technical standard to be implemented, final agreement has not been reached on compliance requirements, enforcement mechanisms, or criteria for approving the use of specific protection technologies in consumer electronics devices. On August 8, 2002, the Commission adopted a Notice of Proposed Rule Making to explore whether it could and should mandate use of the “broadcast- flag” or some other copy protection mechanism for DTV to protect digital broadcast content from unauthorized copying and redistribution. 294 286 Id. While over 600 stations are providing a DTV signal, many consumers within those service areas are unable to view the DTV format either because they do not have DTV receivers or because they are subscribers to a MVPD that does not carry the DTV signal. 287 In his Voluntary DTV Plan, Chairman Powell requested that the four largest broadcast networks (i. e. ABC, CBS, Fox, and NBC) provide HDTV, or other “value- added DTV programming,” during at least 50% of their prime time schedules beginning with the 2002- 2003 season. See fn. 119 supra. 288 Mass Media, Comm. Daily, Aug. 29, 2002, at 6. 289 HD News, CableFax Daily, Aug. 29, 2002, at 4. 290 See http:// www. nbc. com/ nbc/ footer/ FAQ.. shtml; see http:// www. pbs. org/ digitaltv/ dtvsched. htm. 291 Networks to Air More Shows in HDTV, USA TODAY, Sept. 29, 2002, at D1. 292 Report and Order, 15 FCC Rcd 17568 (2000). See also 2001 Report, 17 FCC Rcd at 1284. 293 Letter from W. Kenneth Ferree, Chief, Media Bureau to Michael Petricone, Consumer Electronics Association and Neil Goldberg, National Cable and Telecommunications Association, PP Docket No. 00- 67 (Nov. 21, 2002). 294 Digital Broadcast Copy Protection, 17 FCC Rcd 16027 (2002). 42 Federal Communications Commission FCC 02- 338 43 86. In 2001, the Commission adopted rules resolving a number of technical and legal matters related to the cable carriage of digital broadcast signals. In its Report and Order, it noted that MSOs are currently undertaking significant cable system upgrades, including digital build- outs. 295 It stated that a commercial or noncommercial digital- only television station can immediately assert its right to carriage on a cable system. The Commission also said that a television station that returns its analog spectrum and converts to digital operation must be carried by cable systems. The Commission stated that Section 614( b)( 4)( A) of the Communications Act of 1934, as amended by the 1996 Act, 296 requires that cable operators shall provide the same “quality of signal processing and carriage” for broadcasters’ signals as they provide for any other type of signal. A broadcast signal delivered in HDTV must be carried in HDTV. 297 The Report and Order also contains an initial determination that the requirement for cable operators to carry “primary video” refers to a single digital programming stream and “program- related” content. 298 Petitions to reconsider this decision are currently before the Commission. 87. CEA reports the sale of DTV products is gaining momentum. DTV unit sales for the year 2002 through September totaled near 1.6 million, 83% higher than for the same period in 2001. 299 As a result, broadcasters continue to engage in tests of various DTV products, such as HDTV, multiple SDTV services, ancillary services, or some combination. 300 It is difficult to assess the competitive impact of DTV service on the MVPD market at this time, other than to observe that the potential for a positive competitive impact remains. F. Other Entrants 1. Internet Video 88. In addition to the more traditional video services, video programming also is provided over the Internet. In some cases, the video is available only for downloading onto a computer hard drive for later viewing, and in other cases, it is provided in real- time (also known as “streaming video”). Broadcast- quality streaming video service requires a high- speed broadband connection of about 300 Kbps or higher, and high- speed Internet access still is limited, with just over 14 million broadband subscribers as of June 2002. 301 Furthermore, most Internet video content currently available has been intentionally degraded to facilitate streaming at 56 Kbps or slower, so that dial- up access users can download it. 302 89. Nevertheless, the number of homes with access to the Internet continues to grow, and many of those continue to access video content via the Internet. As of the June 2002, an estimated 54 million Americans subscribed to either a dial- up or a broadband Internet access service, compared with 50 million 295 Carriage of Digital Television Broadcast Signals (“ DTV Must Carry Order”), 16 FCC Rcd 2598 (2001). 296 Id; see also 47 U. S. C. § 534. 297 See DTV Must Carry Order. 298 Id. 299 CEA, September DTV Products Sales Make New Record (press release), Oct. 10, 2002. Factory to dealer sales of DTV units are projected to over four million units for 2003. See http:// www. ce. org/ publications/ vision/ janfebmar 2002/ p03b. asp. 300 See 2001 Report, 17 FCC Rcd at 1285. 301 Richard Bilotti, Benjamin Swinburne, Megan Lynch, Truth, Lies and Truck Rolls: Understanding Product Profitability, Morgan Stanley, October 4, 2002, at 46- 7. 302 Matthew York, A New Way to Share Video, Videomaker, Jan. 2002, at http:// www. findarticles. com. The maximum speed of an analog telephone dial- up modem is currently 56. 6 kbps. 43 Federal Communications Commission FCC 02- 338 44 as of June 2001. 303 Additionally, as of July 2002, approximately 51% of those online have accessed streaming audio or video at least once before, and 23% of those online have accessed streaming audio or video within the last month. 304 These usage patterns are similar to those observed the previous year. 305 90. Today, most Internet video that is widely distributed is shorter in length than traditional television programming. As we have reported in the past, many traditional television programmers continue to offer Internet video versions of their programming. 306 Sports and news programming remain the most common categories of streaming video programming currently available over the Internet, but other genres of video programming (e. g., comedy, drama, informational) are also available. As the technology improves, and access to such technologies increases, we expect the type and amount of video available over the Internet will increase as well. 2. Home Video Sales and Rentals 91. The sale and rental of home video, including videocassettes, DVDs, and laser discs, are part of the video marketplace because they provide services similar to the premium and pay- per- view offerings of MVPDs. 307 As such, they offer some level of competition to DBS, broadcast television and cable television for the consumer’s time and money. Cable video- on- demand also is an emerging competitive service to home video. 308 92. Approximately 93 million U. S. households, or about 90% of all households, have at least one VCR, with nearly 46 million households owning at least two VCRs. 309 By the end of 2001, the number of homes with DVD players reached approximately 13.7 million, and it is estimated that over 26 million homes will have DVD players by the end of 2004. 310 In addition, about two million homes have laser disc players. 311 U. S. consumers are expected to spend over $26 billion renting and buying prerecorded video in 2002, almost a 17% increase over the $22.5 billion spent in 2000. 312 Total rental revenue is projected at $11.4 billion for 2002 compared to $10.9 billion in 2000, an increase of 4.4%. 313 Total revenue from video sales is a projected $14.8 billion in 2002, up from $11.6 billion in 2000, an 303 Richard Bilotti, Benjamin Swinburne, Megan Lynch, Truth, Lies and Truck Rolls: Understanding Product Profitability, Morgan Stanley, October 4, 2002, at 46- 7. 304 Arbitron, Inc., Arbitron Internet 9: The Media and Entertainment World of Online Consumers, Sept. 5, 2002, at http:// www. arbitron. com. 305 See 2001 Report, 17 FCC Rcd at 1285. 306 Id. at 1286- 87. 307 See, e. g., 2001 Report, 17 FCC Rcd at 1288. See also Competition, Rate Regulation and the Commission’s Policies Relating to the Provision of Cable Service, 5 FCC Rcd 4962, 5019- 20 (1990). See also Comcast Reply Comments at 16 (citing newspaper stories quoting consumers who say they use DVD subscription services, such as Netflix, instead of buying pay- per- view movies from an MVPD or otherwise watching television). 308 See ¶¶ 39- 41 supra. 309 Mass Media, Comm. Daily, Aug. 18, 2002 at 7. Other sources provide alternative estimates of VCR penetration ranging from approximately 85% to 95% of all television households. See, e. g., Frank Ahrens and Dina El Boghdady, It’s the Final Reel for the VCR, WASHINGTON POST, June 21, 2002, at A1. 310 Veronis Suhler, Communications Industry Forecast 2001 (“ Veronis Suhler”), at 6, 18, 192, and 194. 311 Tom Shales, Shall We Dance? With DVD, Indeed, WASHINGTON POST, June 2, 1999, at C1. 312 Veronis Suhler at 192 and 194. 313 Id. 44 Federal Communications Commission FCC 02- 338 45 increase of 13%. 314 By the end of 2002, DVDs will have increased their share of the video rental and sales markets to 34%, up from about 20% in 2000. 315 93. As reported last year, the home video sales and rental industry is considered competitive, with almost 20,000 video specialty stores selling or renting home video programming. 316 There also are more than 8,000 retail outlets, primarily supermarkets and drug stores that rent videos. 317 In addition, mass merchandise stores (e. g., Wal- Mart and Target) and electronics chain stores (e. g., Best Buy and Circuit City) compete with specialty video stores in the sale of videos. 318 In recent years, the home video sales and rental industry has undergone a period of consolidation, with many independent operators selling to larger retail outlets or closing their businesses. 319 The Internet also has become a source for video rentals 320 and sales. 321 94. Another home video technology is the personal video recorder (“ PVR”). 322 This device is capable of pausing, recording and rewinding live TV in digital form on an internal hard drive instead of videotape. It also has the capacity to record as much as 60 hours of programming, outperforming the average six- hour videotape tenfold. 323 One source reports that more than one million homes have PVRs, and that number will grow to 15 million homes in five years. 324 There are several companies offering PVRs, including SonicBlue, TiVo, Inc., and Microsoft. SonicBlue, maker of the ReplayTV line of PVRs, is offering a service option of $9.95 monthly or a one- time service fee of $250 to use its units. That is in addition to the box purchase, which ranges from about $400 to $1300. 325 TiVo, with about 460,000 subscribers, 326 is working on adding digital music capabilities and technologies that allow TiVo boxes to organize and display digital- photo collections. TiVo plans to offer AOL’s instant- messaging service and TV- based party games. 327 TiVo service costs $12.95 a month or a $250 lifetime subscription. 328 PVR functionality also is included in the set- top boxes of some MVPDs. DirecTV offers a combination DBS 314 Id. 315 Id. 316 See 2001 Report, 17 FCC Rcd at 1289. 317 Id. 318 Id. 319 Id. at 1290. 320 For example, for a monthly fee of $20, Netflix allows consumers to rent DVDs from its Internet site, with the movies sent to the consumer and returned to the company through the mail. Over half a million people have signed up for this service. See Leslie Walker, Movies by the Mail, WASHINGTON POST, Apr. 11, 2002, at E1. In addition, consumers in several markets can search Blockbuster’s inventory over the Internet and reserve videos online before going to the store to pick them up. See http:// www. blockbuster. com. 321 For example, Best Buy and Amazon. com sell video programming through their Internet sites. See http:// www. bestbuy. com and http:// www. amazon. com. Express. com is limited to the sales of DVDs. See http:// www. express. com. 322 These devices also are referred to as Digital Video Recorders (“ DVRs”). 323 Daniel Greenberg, Giving Your Television a Brain, WASHINGTON POST, June 6, 2002, at H7. 324 See Mass Media, Comm. Daily, June 23, 2002 at 8. 325 See ReplayTV Adds Monthly Fee Option, Multichannel News Day, Aug. 30, 2002, at 2. 326 See TiVo Narrows Loss, Multichannel News Day, Aug. 23, 2002, at 1. 327 Daniel Greenberg, Giving Your Television a Brain, WASHINGTON POST, June 2, 2002, at H7. 328 Id. 45 Federal Communications Commission FCC 02- 338 46 receiver/ digital VCR, based on TiVo’s digital technology. 329 In addition, EchoStar offers set- top boxes, the DISHPVR 501/ 508 and DishPVR 721, with varying PVR capabilities. 330 Approximately 40% of new EchoStar subscribers purchase a PVR capable set- top receiver. 331 G. Local Exchange Carriers 95. The 1996 Act amended Section 651 of the Communications Act in order to permit telephone companies to provide video services in their telephone service areas. According to the statute, common carriers may: (1) provide video programming to subscribers through radio communications under Title III of the Communications Act; 332 (2) provide transmission of video programming on a common carrier basis under Title II of the Communications Act; 333 (3) provide video programming as a cable system under Title VI of the Communications Act; 334 or (4) provide video programming by means of an open video system (" OVS"). 335 96. As reported last year, the four largest incumbent LECs have largely exited the traditional cable service business. 336 BellSouth alone continues to operate some overbuild cable systems. 337 Thus, LEC- operated wireline MVPD service is not a widespread competitor to cable. A number of smaller incumbent LECs, however, are offering, or preparing to offer, MVPD service over existing telephone lines. Smaller incumbent LECs, in individual communities, may offer competition to incumbent cable providers. 97. In- Region Cable Franchises. Three of the four largest incumbent LECs have shut down or sold their in- region cable franchises. 338 The exception is BellSouth, which currently holds 20 cable 329 The unit sells for $199, and the monthly fee DirecTV will charge will be $4. 99, or half the regular TiVo subscription fee, for customers subscribing to Total Choice and Total Choice Plus packages, $31. 99 per month and $35.99 per month, respectively, and no charge for customers subscribing to the Total Choice Premier package, which is $81. 99 per month. See DirecTV Inc., at http:// www. directv. com/ DTVAPP/ imagine/ TIVO. jsp. See also DirecTV Pushes Play on New TiVo Box, SATELLITE BUSINESS NEWS, Aug. 9, 2002, at 2. 330 See EchoStar Communications Corp., at http:// www. dishnetwork. com/ content/ technology/ receivers/ index. shtml (visited Nov. 13, 2002). 331 Duffy Hayes, PVR in Satellite’s Sights… Is It in Cable’s?, CED MAGAZINE, July 2002, available at http:// www. cedmagazine. com/ ced/ 2002/ 0702/ id6. htm. 332 47 U. S. C. § 571( a)( 1). 333 47 U. S. C. § 571( a)( 2). 334 47 U. S. C. § 571( a)( 3). 335 47 U. S. C. § 571( a)( 3)-( 4). 336 2001 Report, 17 FCC Rcd at 1291. Some of the four largest LECs are, however, offering bundles of telecommunications service which include resold DBS service. See, e. g., Jon Van, SBC Looks for Joy in Bundled Services, CHICAGO TRIBUNE, Nov. 18, 2002. 337 In the 2001 Report, the Commission reported that BellSouth was “reselling DBS service.” BellSouth was not at that time nor is it now reselling any DBS service. BellSouth was merely transitioning its MMDS customers to EchoStar or other video providers in connection with the restructuring of its MMDS business. See 2001 Report, 17 FCC Rcd at 1250, 1291. 338 2001 Report, 17 FCC Rcd at 1291- 2. Verizon, which inherited systems in California and Florida when it purchased GTE, is attempting to sell those properties. Verizon entered into purchase contracts with Adelphia to sell its video properties. Because of Adelphia's financial difficulties, however, some of those agreements were cancelled and some are now subject to litigation. E- mail from Clint E. Odom Director, Federal Regulatory Affairs, Verizon Communications, Inc., Nov. 21, 2002. 46 Federal Communications Commission FCC 02- 338 47 franchises with the potential to pass 1.4 million homes, and provides cable service in 14 of its franchise areas. This is unchanged from last year. 339 98. VDSL. Qwest Communications International offers video, high- speed Internet access and telephone service over existing copper telephone lines using very high- speed digital subscriber line (" VDSL") in Omaha, Nebraska; Phoenix, Arizona; and Boulder and Highlands Ranch, Colorado. 340 Small LECs continue to deploy VDSL, although deployment has slowed in the face of financial difficulties in the telecommunications industry and the economy as a whole. Forty- five LECs, mostly small, are using VDSL technology to offer video and data, with roughly 108, 000 video subscribers, a growth of 8, 000 subscribers in the last year. 341 For example, Hometown Online, Inc., a subsidiary of Warwick Valley Telephony Company, offers digital video service using VDSL in several communities on the New York- New Jersey border. 342 We previously reported on companies investigating deployment of video over the lower bandwidth asymmetric digital subscriber line service (“ ADSL”), 343 but this appears to remain in the trial stage. 344 H. Electric and Gas Utilities 99. Electric and gas utilities possess some assets, such as access to public rights of way, existing telecommunications facilities, and existing relationships with customers, that appear to make them potential entrants into the MVPD market. Some utilities continue to move forward with ventures involving multichannel video programming distribution. As with LECs, however, utilities are not yet widespread competitors in the telecommunications or cable markets. Mainly, it appears that utilities will provide MVPD competition in scattered localities. This is potentially most beneficial in rural areas where cable operators and telephone companies may not be willing or able to provide the full range of advanced telecommunications services. 345 100. Some utilities build systems on their own, and others enter joint ventures with other companies. Starpower, a joint venture between RCN and Potomac Electric and Power Company (“ PEPCO”) in the Washington, D. C., area, offers competitive cable, telephone, and data services. It serves 23,780 customers and reportedly has spurred competitive responses from the incumbent cable 339 E- mail from Rick DeTurk, Manager – Regulatory, BellSouth Corp., Oct. 21, 2002. The active franchises are located in: Vestavia Hills, Alabama; St. John’s County, Miami- Dade County, Davie, and Pembroke Pines, Florida; Counties of Cherokee, Cobb, Dekalb, and Gwinnett and Cities of Chamblee, Duluth, Lawrenceville, Roswell, and Woodstock, Georgia. 340 NCTA Comments at 22. See also http:// www. qwest. com/ vdsl/. 341 E- mail from Roger Bindl, Director, Engineering & Consulting Companies, Next Level Communications, Oct. 6, 2002. 342 See, generally, Hometown Comments. Hometown reports difficulty with acquiring programming and difficulty dealing with local and state regulatory agencies, and states that this indicates a need for federal intervention to open the market to competition. 343 2001 Report, 17 FCC Rcd at 1292- 3. 344 E- mail from Roger Bindl, Director, Engineering & Consulting Companies, Next Level Communications, Oct. 6, 2002. 345 For instance, Kutztown, Pennsylvania, is building a fiber- to- the- home system to offer its 2,230 residents a complete package of advanced telecommunications services. The municipal utility states that the efficiencies that come from owning an existing network and the equipment necessary to maintain the network will allow the utility to offer service where others are unable. Matt Stump, Kutztown, Pa., Muni Has Lots of Fiber, Broadband Week, Mar. 25, 2002. Cable competitors contend, however, that these municipal overbuilds often achieve lower prices or offer more advanced services by subsidizing their rates with revenues from their utility operations. See, e. g., Municipalities Seek Greater Role in Rural Broadband Rollout, Comm. Daily, Jan. 16, 2002, at 5- 6. 47 Federal Communications Commission FCC 02- 338 48 provider. 346 Siegecom is offering bundled video, voice, and data services in Evansville and Newburg, Indiana, as does Seren Innovations in St. Cloud, Minnesota and Contra Costa County, California. 347 Everest Connections Communications Corporation and Ex- Op of Missouri, Inc., collectively owned by the energy company Aquila, Inc., offer more than 300 channels of cable service and high- speed Internet service in Lenexa, Shawnee, and Overland Park, Kansas, and Kansas City and Kearney, Missouri. 348 101. The American Public Power Association (“ APPA”) performed a survey of its members at the end of 2001, finding that 450 public power systems offer some kind of broadband services. Of those, 91 offered video service, 59 cable modem service, and 29 local telephone service. 349 I. Broadband Service Providers, Open Video Systems, and Overbuilders 102. Last year we addressed a new class of providers, BSPs. 350 BSPs attempt to overcome the historical difficulties of overbuilding by building state- of- the- art systems in communities with favorable demographics and by offering bundles of services to increase per subscriber revenue and decrease churn. Even with this strategy, as we reported last year, BSPs face considerable challenges. 351 BSPs cite “significant barriers to entry” (discussed below) as well as “the current telecommunications industry recession and the limited capital markets” as factors causing BSPs to curtail growth and investment plans. 352 103. RCN is the largest BSP in the country, and the 13 th largest MVPD. For the year ending June 30, 2002, RCN’s revenue increased by 22%; its number of marketable homes increased by eight percent to 1.5 million; and the number of network connections increased by 22% to almost one million. 353 At the end of June 30, 2002, RCN reported a total of 506, 700 video subscribers. 354 This year, RCN introduced a “supercharged” cable modem service, with download speeds of up to three megabits per second, double the speeds of standard cable modem and ADSL service. 355 Like all BSPs, however, RCN has experienced trouble acquiring financing and, as a result, has scaled back expansion plans and focused 346 BSPA Comments at 24. 347 NCTA Comments at 22. 348 Utilicorp Comments at 1. 349 APPA, Public Power: Powering the 21 st Century with Community Broadband Services (fact sheet), June 2002. 350 “Broadband service provider” is the term used by these new entrants to describe the range of services they offer and is not intended to imply anything with respect to Commission policy or proceedings that might involve broadband services. Usually, these services can be purchased separately as well as in a bundle. We have defined “broadband providers” as, “newer firms that are building state- of- the- art facilities- based networks to provide video, voice and data services over a single network.” 2001 Report, 17 FCC Rcd at 1294. 351 2001 Report, 17 FCC Rcd at 1295. 352 BSPA Comments at iv. 353 RCN Corp., RCN Announces Second Quarter 2002 Results (press release), Aug. 7, 2002. The number of “marketable homes” consists of homes passed minus households inaccessible due to other constraints such as inability to enter an MDU. The number of “network connections” counts each service received as one network connection. Thus, a household that signs up for video, local telephone, and high- speed Internet access service counts as three network connections. Long distance service is not counted as a separate network connection. 354 Id. The current number of video subscribers is 80, 000 less, because RCN sold incumbent cable systems it owned in August. RCN Corp., RCN to Receive $245 Million for Non- Strategic New Jersey Cable Systems (press release), Aug. 27, 2002. 355 RCN Corp., RCN Launches “Super- Charged” High- Speed Internet Access Service in Company’s San Francisco and Los Angeles Markets (press release), July 2, 2002. 48 Federal Communications Commission FCC 02- 338 49 on marketing to existing passed homes. 356 With these changes, RCN has been successful in reducing expenditures and is narrowing its losses. 357 104. WideOpenWest (“ WOW”) is the second largest overbuilder. 358 WOW is the 15 th largest MVPD and, as of June 2002, served 310,000 subscribers. 359 WOW serves 107 communities in Colorado, Indiana, Illinois, Michigan, and Ohio. 360 WOW suspended build- out commitments due to financial difficulties. 361 The third largest BSP is Knoxville, Tennessee- based Knology, which operates in the Southeast. As of June 2002, Knology was the 28 th largest MVPD, and had 124,700 video subscribers, a 12% increase over the previous year. 362 As with other BSPs, Knology experienced financial troubles in the last year, and filed a pre- packaged Chapter 11 bankruptcy that allows it to continue service uninterrupted. 363 Grande Communications merged with Clearsource, another overbuilder in July 2002, and now has 42 franchises in Texas. 364 Western Integrated Networks (“ WIN”) was serving Sacramento and building its system there, but subsequently suspended its activities in March 2002. It declared bankruptcy and was acquired by SureWest Communications, which plans to continue construction of the system. 365 105. In total, BSPA reports that its members serve over one million subscribers. They compete with incumbent cable operators, other MVPDs, and with incumbent LECs and competitive 356 See, e. g., TR Daily, RCN Corp. in Talks with Bank Lenders, Forecasts Reined- In Business Plan, Feb. 8, 2002, at http:// www. tr. com/ online/ trd/ 2002/ td020802/ index. html; Kathy Bergen, RCN’s Cable Future Looks Fuzzy, CHICAGO TRIBUNE, Mar. 15, 2002, at http:// www. chicagotribune. com/ business/ chi- 0203150373 mar15. story? coll= chi% 2Dbusiness% 2Dhed; TR Daily, RCN Amended Bank Lines Tapped Out, But Cash Holdings Still Total $650M, Mar. 26, 2002, at http:// www. tr. com/ online/ trd/ 2002/ td032602/ index. html. 357 RCN, Corp., RCN Announces Second Quarter 2002 Results (press release), Aug. 7, 2002. 358 WOW acquired many of its subscribers when it purchased Ameritech New Media’s overbuild systems. Ameritech’s systems are not technically “BSP systems” because they do not provide a bundle of services. See WOW, WOW Acquires Ameritech’s 310,000 Cable TV Subscribers (press release), Dec. 3, 2001. 359 Paul Kagan Assoc., Inc., Top Cable System Operators as of June 2002, Cable TV Investor, Sept. 30, 2002, at 9- 10. 360 For a full list of communities served, see http:// www. wideopenwest. com/ whatwedo_ avail. html. 361 CableFAX Daily, In the States, Mar. 11, 2002 at 2. 362 Paul Kagan Assoc., Inc., Top Cable System Operators as of June 2002, Cable TV Investor, Sept. 30, 2002, at 9-10. See also Knology, Inc., Knology Reports Growth in Connections, Revenue and EBITDA (press release), Aug. 12, 2002. According to its web site, Knology serves cities in Alabama, Florida, Georgia, Tennessee, and South Carolina. For a complete list, see http:// www. knology. com/ services/ cities. cfm. 363 Knology, Inc., Knology Broadband Proceeds with Reorganization; Operations and Customer Service Will Continue Uninterrupted (press release), Sept. 18, 2002. 364 Grande Communications, Inc., Grande Communications, ClearSource Close Deal to Become One Company (press release), July 2, 2002. Currently, the company serves parts of Austin, San Marcos, and San Antonio, Texas; see http:// www. grandecom. com/ About/ construction. jsp. 365 SureWest Communications, SureWest Communications Acquires WINfirst Assets – U. S. Bankruptcy Court Order Issued Wednesday for $12 Million Acquisition (news release), July 15, 2002. SureWest owns several telecommunications companies, including the incumbent LEC of a neighboring community, Roseville Telephone. WIN had been awarded a franchise in Los Angeles, and had franchise applications pending in Seattle, Washington; Portland, Oregon; San Francisco and Oakland, California; Las Vegas, Nevada; Phoenix, Arizona; and San Antonio, Austin, Dallas, and Houston, Texas (see 2001 Report, 17 FCC Rcd at 1296), but the SureWest web site makes no mention of building beyond the Sacramento area. 49 Federal Communications Commission FCC 02- 338 50 LECs. They have franchises that authorize them to serve over 17 million homes, and have deployed over 32,000 miles of fiber. 366 106. Advanced Services. BSPs are offering advanced services such as VOD. RCN offers VOD throughout its greater Philadelphia service area. 367 In addition to offering SVOD content, Los Angeles- based Altrio Communications is using VOD technology to make voter education information available to residents of Los Angeles County’s San Gabriel Valley, including eight information videos on candidates running for Congress and the California Assembly, and on two propositions. 368 Astound Broadband, which operates in Concord, California, Trevose, Pennsylvania, and St. Cloud, Minnesota, is deploying WorldGate’s ITV service to its digital cable subscribers, one feature of which will be “channel hyperlinking” that allows viewers to interact with television programs by instantly linking to and presenting on the TV related web content. 369 107. OVS. BSPs, primarily RCN, continue to be the only significant holders of OVS certifications or local OVS franchises. BSPA reports that “BSPA members typically provide service under traditional cable franchises, although several BSPA members are using OVS for a relatively few number of systems, and others may explore doing so in the future.” 370 BPSA states that the court’s decision in City of Dallas v. FCC allowing cities to require local franchises for OVS operators reduces the attractiveness of OVS. 371 BSPA indicates that members use whatever regulatory regime offers the least resistance to market entry, but that this “is in direct contradiction to the rationale originally underlying the Commission’s adoption of the OVS regulations and policies.” 372 108. Competitive Responses. In the Notice, we requested case study information concerning the effects of actual and potential competition in local markets where consumers have a choice among video programming distributors. 373 Typically these choices are among incumbent cable operators, BSPs and other overbuilders, and DBS operators. BSPA described some cases where the incumbent cable operator faces competition from a new entrant. 109. For example, BSPA states that in Washington, D. C., Starpower provides competitive cable, telephone, and high- speed Internet services to 23,780 subscribers. 374 BSPA notes that after Starpower entered the market Comcast began providing programming which was previously available only through Starpower. According to BSPA, Comcast has invested $72 million to upgrade its system, 366 BSPA Comments at iii. 367 RCN, RCN Launches Video- On- Demand to Its Entire Greater Philadelphia Service Area (press release), Sept. 17, 2002. See also Matt Stump, RCN Offers VOD on Comcast’s Turf, Broadband Week, Dec. 24, 2001. 368 Cable Overbuilder, Altrio, Offers Voter VOD Service, InteractiveTV Today, Oct. 28, 2002. See also Altrio Communications, Altrio Communications Becomes First Competitive Broadband Provider Committed to Deploy Subscription VOD, Chooses StarZ On Demand (press release), May 30, 2002. 369 Astound Broadband, Astound Broadband Launches ITV (press release), Aug. 28, 2002. 370 BSPA Comments at 22. The pace of OVS certification filing has slowed significantly this year. We have received only four in 2002, compared to dozens in previous years. For a complete list of OVS certifications, see http:// www. fcc. gov/ mb/ ovs/ csovscer. html. 371 BSPA Comments at 23. See also City of Dallas v. FCC, 165 F. 3d 341 (5thCir. 1999) [No. 96- 60502, Jan. 19, 1999]. 372 BSPA Comments at 23. 373 Notice, 17 FCC Rcd at 11579. 374 Subscriber counts are for the District of Columbia only. See BSPA Comments at 24. 50 Federal Communications Commission FCC 02- 338 51 and has significantly upgraded its customer service. 375 BSPA also relates that in Columbus, Ohio, and Louisville, Kentucky, incumbent, Insight began offering advanced services after competition from WideOpenWest and Knology entered the market, and that it now offers VOD on the lowest digital tier, thus improving service offerings to customers. 376 110. Barriers to Competition. In addition to difficulties with the OVS regime, BSPs report barriers to competition in the MVPD market. First, BSPA alleges that cable operators are engaging in predatory pricing to answer BSP entry, often in secret, thus purportedly thwarting the Commission’s uniform rate regulations. 377 BSPA also indicates that cable industry trends of horizontal concentration, clustering, and the inapplicability of the Commission’s program access rules to terrestrially- delivered programming increase the possibility that cable operators will foreclose access of BSPs to vital programming owned by cable operators, including essential regional programming. 378 BSPA contends that “long- term exclusive MDU contracts are pervasive” and that this may interfere with BSPs’ ability to obtain necessary economies of scale, “possibly threatening competitive entry into entire geographic markets.” 379 BSPA also charges that incumbent cable operators are denying BSPs access to essential inputs, such as VOD equipment and contractor services for installation, and have attempted to foreclose access to digital set- top boxes. 380 111. BSPA also reports additional problems in delivering programming to subscribers. BSPA indicates that its members are having problems gaining access to utility poles and to public rights of way so that they can build out their systems. 381 Utilicorp, which is both a BSP and a utility, also reports 375 Id. 376 Id. at 25- 26. 377 Id. at 10- 11. We reported on complaints of similar practices last year. See 2001 Report, 17 FCC Rcd at 1297. We also have resolved or have cases before us concerning predatory pricing. See Altrio Communications, Inc. v. Adelphia Communications Corp., DA 02- 3172 (MB rel. Nov. 15, 2002) (dismissing Altrio's uniform pricing and predatory pricing complaint to the presence of effective competition); and Everest Midwest License, LLC d/ b/ a Everest Connections Corporation v. Kansas City Cable Partners d/ b/ a Time Warner of Kansas City, CSR 5845 (pending complaint for violation of 47 C. F. R. Section 76. 984). Reports of alleged predatory pricing have also been made in the press. See, e. g., Kirk Ladendorf, Time Warner Cable Discounts Draw Fire From City, Competitor, AUSTIN AMERICAN- STATESMAN, Feb. 7, 2002, at A- 1; Comm. Daily, Localities Accuse Cable On ‘Predatory Pricing’ Strategy, Mar. 4, 2002, at 3- 4. Press reports also indicate that the Department of Justice is investigating allegations of incumbent cable operator predatory pricing. See Paul Davidson, Regulators Scrutinize Cable Costs, USATODAY, Sept. 23, 2002, at http:// www. usatoday. com/ money/ media/ 2002- 09- 22- cable- probe_ x. htm. Comcast disputes these charges, and states that it is aware of no evidence of such practices. Comcast Reply Comments at 19- 20. See also AT& T Reply Comments at 9; KCCP Reply Comments at 1- 2. In addition, RCN raised the same issue in the AT& T- Comcast merger review proceeding. See AT& T- Comcast Merger Order fn. 54 supra ¶¶ 117- 119. 378 BSPA Comments at 11- 16. Comcast disputes these facts, stating that overbuilders have been able to gain access to terrestrially- delivered programming, and that there is no evidence of a trend toward migration to terrestrial delivery. Comcast Reply Comments at 21- 22. See also NCTA Reply Comments at 7- 14; KCCP Reply Comments at 2- 3. BSPA notes that VOD/ SVOD services will be a major part of future revenue streams, and urges that the Commission’s program access rules should apply to VOD/ SVOD services. BSPA Comments at 15- 16. 379 BSPA Comments at 16- 17. BSPA urges the Commission to prohibit incumbent cable operators from entering into new long- term agreements, and to review existing long- term exclusive agreements. See also ¶¶ 120- 122 infra. 380 BSPA Comments at 17- 19. Comcast states that charges like these have been answered in the record of the AT& T- Comcast merger, and that there is no credible evidence that overbuilders have been unable to hire labor or gain access to technologies. Comcast Reply Comments at 20. See also AT& T Reply Comments at 9. 381 BSPA Comments at 20- 22. According to BSPA, these difficulties result from intransigence, excessive fees, and slow action on the part of pole owners and local governments. 51 Federal Communications Commission FCC 02- 338 52 problems as an entrant in these markets, including difficulties in entering MDUs, gaining access to poles, and gaining access to programming. 382 III. MARKET STRUCTURE AND CONDITIONS AFFECTING COMPETITION A. Horizontal Issues in the Market for the Delivery of Video Programming 112. In this section, we review changes in the market for the distribution of video programming, including changes in the level of competition in that market between July 2001 and June 2002. 383 As we explained in earlier reports, the video programming market is comprised of a downstream market for the distribution of multichannel video programming to households, and an upstream market for the purchase of video programming by MVPDs. In our discussion of competition in the distribution of video programming to households, we also examine developments unique to MDUs, a significant sub- set of the market. We then review the market for the purchase of video programming by MVPDs, and examine the effects that changes in concentration among MVPDs at the regional and national levels have had on this market in the last year. 1. Competitive Issues in the Market for the Distribution of Video Programming 113. The market for the delivery of video programming to households continues to be highly concentrated. 384 For most consumers the choices are over- the- air broadcast, cable, two DBS providers, and, in limited cases, an overbuilder or other delivery technology. 385 Several commenters point to lack of competition in the MVPD market and argue that true competition in the MVPD market can emerge only when substantial barriers to entry are removed. 386 According to commenters, these barriers to entry include: (a) predatory conduct including “predatory pricing”; (b) strategic behavior by an incumbent to raise its rival’s costs by limiting the availability of certain popular programming as well as equipment; and (c) local and state level regulations, including delay in gaining access to local public rights- of- way as well delay in getting cable franchises. 387 114. During the past year, DBS has continued to make inroads in the MVPD market. DBS, the major wireless MVPD technology that is available to subscribers nationwide, saw its share of MVPD subscribers increase by two percentage points between June 2001 and June 2002. NCTA contends that competition between cable and DBS is robust and highly viable, and that in many states DBS penetration 382 Utilicorp Comments at 6- 10. 383 See, e. g., 2001 Report, 17 FCC Rcd at 1298. See also EchoStar- Hughes HDO fn. 21 supra. 384 See Appendix B, Table B- 1. As of June 2002, approximately 77% of MVPD subscribers were served by cable MSOs. 385 Some sources indicate, however, that some percentage of households cannot receive one or both DBS providers due to line of sight issues. For instance, EchoStar reports that, “Estimates are that anywhere from 15% to 30% of the potential subscribers in the Northeast cannot receive EchoStar service due to line of sight issues.” Application of EchoStar Communications Corporation, General Motors Corporation, Hughes Electronics Corporation, Transferors, and EchoStar Communications Corporation, Transferee, For Authority to Transfer Control; Application of EchoStar Satellite Corporation and Hughes Electronics Corporation for Authority to Launch and Operate NEW ECHOSTAR 1 (USABBS- 16), CS Docket No. 01- 348, Amendment to Consolidated Application for Authority to Transfer Control (Nov. 27, 2002) at 13. 386 BSPA Comments at 7- 19; DirecTV Comments at 8- 11; EchoStar Comments at 4. 387 BSPA Comments at 9; DirecTV Comments at 8- 9; EchoStar Comments at 4; Utilicorp at 4- 5; Hometown Comments at 1- 3; OPASTCO Reply Comments at 3. 52 Federal Communications Commission FCC 02- 338 53 exceeds 15%. 388 DBS, according to NCTA, has proven to be an enduring competitor to cable by providing an array of exclusive sports programming, advanced and interactive services, and by bundling video and non- video services. 389 Anecdotal evidence suggests that competition between cable and DBS is having an effect on cable prices. 390 The 2001 Price Survey Report, using a regression equation, however, indicated that in areas where there is significant DBS penetration, the presence of DBS competition had no statistically significant effect on the demand for cable services or on cable rates. 391 In a recent study, GAO found that it appears that DBS is able to compete more effectively for subscribers with cable in areas where the DBS companies offer local channels than in areas where the DBS companies do not offer local channels, although this competitiveness had not led to lower cable prices in 2001. 392 115. Relatively small percentages of consumers have a second wireline alternative, such as an overbuild cable system. Of the 33,246 cable community units nationwide, 671, or approximately two percent have been certified by the Commission as having effective competition as a result of consumers having a choice of more than one wireline MVPD. Between June 30, 2001, and June 30, 2002, the Commission granted eight petitions for effective competition, representing 75 communities, based on competitive entry from LECs or their affiliates and DBS providers. The differences between the effect of competition and general market responses based on technological advances, improved marketing, and new service opportunities are not always easy to distinguish. In cases where incumbent cable operators faced competition from a new wireline entrant, however, commenters contend that incumbents have responded to competition by reducing their monthly charge for cable programming services and equipment, by offering additional channels, or by offering Internet and other telecommunications services. 393 116. Several wireless MVPD technologies, other than DBS, provide services that are much smaller in both scope and scale than services provided by an incumbent cable operator. For example, the service area covered by a SMATV system usually covers only a small portion of a cable system’s franchise area. MMDS systems, on other hand, often serve larger areas than SMATV service, but offer fewer channels and require line- of- sight for reception. Thus, these services offer consumers alternatives to incumbent cable services only in limited areas. 117. As of June 2002, RCN, which operates a large number of overbuild systems, was offering video service to approximately 506,700 basic subscribers. 394 Another wireline overbuilder, WideOpenWest, had 310,000 basic subscribers as of June 2002. BSPA contends that its members provide facilities based broadband including video services to approximately one million subscribers in all major regions other than the Pacific Northwest. 395 AT& T contends that it faces competition from BSPs in over 20 markets with approximately 2.2 million subscribers. AT& T further contends that BSPs 388 NCTA Comments at 13. 389 NCTA Comments at 18- 19. 390 Peter Grant, The Cable Guy Cuts His Rates, WALL STREET JOURNAL, Sept. 25, 2002, at D1. 391 2001 Price Survey Report, 17 FCC Rcd 6301. Northpoint Technology contends that despite DBS’s 18% share, it does not compete with cable in terms of price. See Northpoint Technology Comments at 2; see also DirecTV Comments at 1. 392 Issues in Providing Cable and Satellite Television, GAO Report to the Subcommittee on Antitrust, Competition, Business and Consumer Rights, United States Senate, October 2002. 393 BSPA Comments at 25; Everest and Utilicorp Comments at 4. The 2001 Price Survey Report also supports this view, 17 FCC Rcd 6301. 394 Kagan World Media , Top Cable System as 0f June 2002, Cable TV Investor, Sept. 30, 2002, at 9- 10. 395 BSPA Comments at 5. 53 Federal Communications Commission FCC 02- 338 54 will continue to be vigorous competitors because they have received higher rate of customer satisfaction than cable and that BSPs have moved closer to financial stability and are dependent less on venture capital. 396 118. Recent Developments in the MDU Market. A significant segment of many local MVPD markets is multiple dwelling units (“ MDUs”). MDUs are comprised of a wide variety of high- density residential complexes, including high and low- rise rental buildings, condominiums, and cooperatives. Historically, cable and SMATV operators were the primary providers of MVPD services to MDU residents. According to one estimate, 20% to 23% of a cable operator’s income comes from MDU subscribers. 397 More recently, however, DBS providers have begun to supply programming to operators that serve MDUs and to MDU residents directly. 398 119. Competitive Issues in the MDU Market. Commenters raise a number of issues that they contend adversely affect their ability to serve the MDU market. These include exclusive contracts, access to MDU inside wiring, and the Commission’s over- the- air- reception devices (“ OTARD”) rules. 399 120. Exclusive and Perpetual Contracts. Exclusive contracts are those that specify that video service in an MDU will be provided by a particular MVPD and no other. Perpetual contracts are those which grant an MVPD the right to provide service for indefinite or very long periods of time. Some commenters suggest that exclusive and perpetual contracts between incumbent MVPDs and MDU owners represent a barrier to entry in the MDU market. 400 According to commenters, such contracts often were entered into before the arrival of alternative MVPDs in the MDU market, and the continued existence of these contracts prevents the MDU owners and/ or their tenants from having an opportunity to select among competing providers. 401 121. BSPA contends that competitive broadband service providers cannot serve most MDUs because incumbent cable operators have established exclusive agreements with the owners of these MDUs. 402 BSPA further argues that some BSPs will not enter certain markets where MDUs comprise a significant portion of the franchise due to the exclusionary contracts in place. 403 DirecTV argues that MDU residents have limited choices among MVPD providers because exclusive contracts or exclusive “rights of entry” between incumbents and property owners either discourage new entrants or make it impossible for them to enter the market. 404 DirecTV argues that cable operators are able to thwart competition in the MDU market by resorting to exclusive service contracts or exclusive rights to entry that prohibit MDU property owners or residents from obtaining video programming services from an alternative service provider. 405 Comcast responds that most of its MDU contracts are exclusive marketing 396 AT& T Comments at 9- 10. 397 Larry Kessler, Good Night, Gorilla Good Morning, Guerilla, Broadband Properties, March 2001, at 12. 398 DirecTV claims that approximately 20% of its subscribers live in places other than single family homes. See DirecTV Comments, 2001 Report, at 12. See also ¶ 75 supra. 399 BSPA Comments at 16- 17; DirecTV Comments at 19; Utilicorp Comments at 6. 400 Id. 401 See BSPA Comments at 10- 11. See also ¶¶ 78, 110 supra. 402 BSPA Comments at 16. In particular, BSPA cites a survey conducted by Carolina Broadband that found that at least 90% of all MDU residents living in Charlotte and Raleigh, for example, are prohibited from choosing a competitive wireline competitor due to exclusive agreements between incumbents and MDU owners. 403 BSPA Comments at 17. 404 DirecTV Comments at 19. 405 Id. 54 Federal Communications Commission FCC 02- 338 55 agreements, not exclusive access agreements, and that overbuilders enter into the same kind of exclusive arrangements. 406 NCTA argues that the Commission may not abrogate existing contracts unless it has clear statutory mandate or authorization to do so; and any future restriction on exclusive contracts should apply to all MVPDs on a non- discriminatory basis. 407 Several parties in the Inside Wiring proceeding suggest that exclusive contracts may represent the only way, because of financial or other requirements, that competitive MVPDs may enter an MDU market and present an alternative to incumbent MVPDs in that market. 408 122. BSPA and Utilicorp contend that incumbent cable operators also have agreements with “evergreen” provisions, such that they are automatically renewed every time the franchise is renewed. 409 Since the majority of franchise agreements are renewed automatically, agreements with such provisions are commonly referred to as perpetual contracts. IMCC contends that 30% of all MDU properties in the U. S. fall under perpetual contracts. 410 The Real Access Alliance, representing leading real estate trade organizations, conducted a survey of 4,795 property owners in an effort to gauge the frequency of perpetual contracts. 411 The Real Access Alliance found that only 3.8 to 4.8% of MDUs are subject to such contracts today and that none of them were executed within the past five years. 123. OTARD Rules. 412 DirecTV asserts that the Commission’s OTARD rules should be expanded to cover common areas for MDU residents. 413 DirecTV states that while the Commission’s OTARD rules have encouraged some MDU landlords and owners to use a single dish for reception to prevent “dish clutter,” the rule should be extended to common areas so that renters and owners who do not have exclusive use of areas suitable for satellite reception will also be able to receive DBS service. 414 2. Competitive Issues in the Market for the Purchase of Video Programming 124. Buyers in the market for the purchase of video programming are MVPDs, including cable operators and other video programming providers, and the sellers are primarily non- broadcast programming networks. 415 This market tends to be regional or national since programmers seek to reach 406 Comcast Reply Comments at 20. 407 NCTA Reply Comments at 15; See also KCCP Reply Comments at 2. 408 See Comments of the Community Associations Institute (December 23, 1997) and the Building and Managers Association International (December 23, 1997) filed in Telecommunications Services, Inside Wiring, Customer Premises Equipment; Implementation of the Cable Television Consumer Protection and Competition Act of 1992: Cable Home Wiring (“ Inside Wiring proceeding”), 13 FCC Rcd 3659 (1997). 409 BSPA Comments at 16; Utilicorp Comments at 6. 410 Larry Kessler, One Fish, Two Fish, Red Fish, Blue Fish, Broadband Properties, April 2002 at 18. 411 The Real Access Alliance submitted the results of its surveys, dated February 1, 2002, of large and small MDUs to the Commission in the Inside Wiring proceeding. The large MDU survey covered a total of 4,795 MDU properties, which represented a total of 1,207, 184 units. Of those, only 241 properties, which represented 58, 208 units or 4. 8% of the total units surveyed were subject to perpetual contracts. The survey of small MDUs covered a total of 74 randomly selected properties. Of those, only two properties, or 3.8%, were subject to perpetual contracts. 412 47 C. F. R. § 1.4000. 413 DirecTV Comments at 20. 414 Id. 415 1998 Report, 13 FCC Rcd at 24362. In this section, we refer to programming that is packaged as one or more 24-hour video programming network( s), rather than the individual shows and series that non- broadcast networks and broadcast networks purchase and package into 24- hour networks. Purchasing content and packaging it into networks represent two steps in the process of delivering programming to consumers which, when combined with a means of distribution, result in the programming choices consumers have. See Implementation of Section 11 of the (continued....) 55 Federal Communications Commission FCC 02- 338 56 a much broader audience than could be provided by a local franchise area. For example, some programming services are intended for a nationwide audience (e. g., CNN, USA) while others seek a regional audience (e. g., New England Sports Channel). 125. AT& T argues that the Commission should include purchasers of all video programming, and not just multichannel video programming, when considering the market for the purchase of video programming. 416 AT& T argues that broadcast stations and networks compete with MVPDs in the program purchase market as well as in the advertising and program distribution markets. The Commission is currently considering these issues in its rulemaking concerning cable horizontal and vertical limits. 417 a. The Regional Programming Market 126. For the past several years, cable operators have engaged in a regional strategy called “clustering.” Many of the largest MSOs have concentrated their operations by acquiring cable systems in regions where the MSO already has a significant presence, while giving up other holdings scattered across the country. This strategy is accomplished through purchases and sales of cable systems, or by system “swapping” among MSOs. 127. Competitive Issues Related to Clustering. AT& T contends that clustering of cable systems can create greater economies of scale and scope, and enable cable operators to offer a wider variety of broadband services at lower prices to customers. In addition, AT& T contends that clustering enables cable operators to: (a) spread costs over a number of systems and a larger subscriber base; (b) deliver a higher quality of signal to consumers; (c) offer more local and regional programming for consumers; (d) provide better customer service and fewer outages; (e) create more efficient interconnections that enhance educational and governmental uses; (f) develop more attractive joint consumer promotions and discounts with area retailers and others; and (g) increase advertising revenues, which can, in turn, be used to offset a portion of programming and system upgrade expenses. 418 128. Several commenters assert harmful effects of clustering and regional concentration on program distribution with regard to vertically- integrated incumbent cable operators. 419 Specifically, these commenters contend that cable operators have “migrated” programming, and will to a greater extent in the future, migrate programming from satellite delivery to terrestrial (fiber optic) delivery because only satellite- delivered programming is subject to the program access rules. 420 These commenters contend that a vertically- integrated incumbent may be able to prevent competitors from gaining access to certain (... continued from previous page) Cable Television Consumer Protection and Competition Act of 1992, Implementation of Cable Act Reform Provisions of the Telecommunications Act of 1996, the Commission’s Cable Horizontal and Vertical Ownership Limits and Attribution Rules, Review of the Commission’s Regulations Governing Attribution of Broadcast and Cable/ MDS Interests, Review of the Commission’s Regulations and Policies Affecting Investment in the Broadcast Industry, Reexamination of the Commission’s Cross- Interest Policy (“ Cable Ownership Notice”), 16 FCC Rcd at 17312 (2001). Video programming also is purchased from program producers and suppliers by non- broadcast networks as well as broadcast stations and networks, but we do not address that market here. 416 AT& T Comments at 10- 11. 417 See Cable Ownership Notice, 17 FCC Rcd at 17326- 7. 418 AT& T Comments at 14- 17. 419 BSPA Comments at 14- 15; DirecTV Comments at 10- 11; EchoStar Comments at 9- 11; SBCA Comments at 17. 420 Id. 56 Federal Communications Commission FCC 02- 338 57 programming because it is terrestrially delivered. 421 NCTA replies that DBS, at least, is large enough to negotiate for carriage of virtually all satellite- delivered networks and that DBS has its own exclusive arrangements for programming. 422 NCTA also states that requiring sharing of all cable- owned programming with competitors would remove incentives to invest in and to create such programming. 423 129. System Mergers and Acquisitions. The most important merger of the past year was that of the largest MSO, AT& T, with the third largest MSO, Comcast. 424 No other large cable mergers occurred or were proposed over the past year. Between July 2001 and June 2002, a total of 28 transactions were announced having an aggregate value of approximately $73.3 billion and involving 14.3 million subscribers. 425 Removing the AT& T- Comcast deal, the aggregate value of the remaining deals was only $1.2 billion, and involved only 500,000 subscribers. 426 In addition, the price per subscriber in these deals dropped dramatically. 427 At the end of 2001, there were 107 clusters with approximately 52 million subscribers compared to 108 clusters and approximately 54 million subscribers at the end of 2000. In the largest cluster size category (over 500,000 subscribers), the number of clusters decreased between 2000 and 2001, from 34 to 32, and the number of subscribers in these clusters decreased also. 428 130. System Trades. Very little system trading, or swapping, occurred in the last year. Between the July 2001 and the end of 2001, none occurred. 429 In 2002, three swaps have occurred, between Mediacom and U. S. Cable Corp., between Insight and AT& T, 430 and between CableOne and Time Warner. 431 b. The National Programming Market 131. Concentration Among Buyers of National Video Programming. Cable operators still are the primary purchasers of multichannel video programming targeted to a national audience. Cable 421 DirecTV, for example, notes that it cannot carry Comcast SportsNet in Philadelphia because Comcast has denied access to it. DirecTV Comments at 15. Utilicom states that it cannot carry Metro Sports, a Kansas City- area sports network, because its owner, Kansas City Cable Partners, refuses to allow Utilicom access. Utilicom Comments at 9. AT& T replies that only three out of 24 vertically- integrated regional sports networks have been distributed terrestrially, so there is no basis for extending program access rules to terrestrially- delivered programming. AT& T Reply Comments at 8- 9. See also Cablevision Reply Comments at 6- 7; Comcast Reply Comments at 22. 422 For example, NCTA cites DirecTV’s NFL “Sunday Ticket” football package. NCTA Comments at 16. AT& T states that there is no evidence that cable operators have used clusters to act anti- competitively. AT& T Comments at 18- 19. 423 NCTA Reply Comments at 7. 424 See AT& T- Comcast Merger Order fn. 54 supra. 425 Kagan World Media, Cable System Sales Summary, Cable TV Investor, August 29, 2001, at 8; January 25, 2002, at 11; and August 29, 2002, at 8. 426 When announced, the AT& T- Comcast deal involved 13. 8 million subscribers at a value of more than $71 billion. 427 Id. 428 See Appendix B, Table B- 2. 429 Kagan World Media, Cable System Exchanges 2001, Broadband Cable Financial Databook 2002, July 2002, at 181 430 Kagan World Media, Announced/ Proposed Cable System Sales, Cable TV Investor, July 18, 2002, at 7; Oct. 31, 2002 at 9. 431 Mass Media, Comm. Daily, Nov. 15, 2002, at 13. 57 Federal Communications Commission FCC 02- 338 58 operators served approximately 76.5% of MVPD subscribers. 432 At the same time, non- incumbent MVPDs continued to increase their share of the MVPD market, which translates into increased purchasing in the programming market. For example, DirecTV’s share of the MVPD market increased from 11.38% in 2001 to 11.99% in 2002. Similarly, EchoStar’s share increased from 6.87% in 2001 to 8.3% in 2002. 433 132. Continuing a recent trend, the share of subscribers of the top four MVPDs has declined slightly over the past year. 434 In 2001, the four MVPDs with the largest subscribership served 51.68% of all MVPD subscribers. 435 In 2002, the top four MVPDs served 50.48% of all MVPD subscribers nationwide. 436 However, the share of subscribers served by the top ten MVPDs increased slightly from 84.29% in 2001 to 84.44% in 2002. 133. To compare and assess the concentration in the market for the purchase of programming over a period of time, we employ the Herfindahl- Hirschman Index (“ HHI”). 437 We use the reported MVPD subscriber shares to calculate HHI figures. 438 The HHI for the national market for purchase of programming is 884 – considered “unconcentrated” under the Merger Guidelines. 439 Since the larger 432 See Appendix B, Table B- 1. This year, NCTA submitted a statement by Dr. Debra J. Aron regarding cable market share and its relationship with market power. NCTA and Dr. Aron state that to focus on market shares is simply wrong and that what determines market power is the extent to which competitive alternatives are available or poised to be available, to which customers could turn if the firm attempted to raise price. NCTA maintains that it is the availability of competitive alternatives, not a competitor’s current market share, which is relevant to assessing competition. NCTA Comments at 7. See also AT& T Reply Comments at 5- 7; Comcast Reply Comments at 7; NCTA Reply Comments at 6- 7. Dr. Aron argues that high rates of growth in prices do not in general create an economic inference of market power and that market share is not determinative of market power, and is not even the primary determinant. NCTA Comments, Statement of Dr. Aron at ¶¶ 7- 8 and ¶¶ 25- 26. In reply, EchoStar argues that Dr. Aron’s analysis is based on a false premise. It contends that DBS has not constrained cable prices and that cable price increases are not simple cost pass- throughs, consistent with economic theory that suggests that the extent to which cost increases are passed on is directly related to the degree of market power present. See EchoStar Reply Comments at 2- 4. 433 DirecTV is the third largest MVPD with 10, 775, 000 million subscribers; EchoStar is the fifth largest MVPD with 7,465,000 million subscribers. See http:// www. sbca. com/ mediaguide/ factsfigures. htm (visited Oct. 16, 2002). See also ¶¶ 58- 59 supra. 434 The top four MVPD purchasers of video programming for distribution to the households or the MDU market are AT& T (with a share of 14. 75% of all MVPD subscribers), Time Warner (with a share of 14. 29%), DirecTV (with a share of 11.99%), and Comcast (with a share of 9.46%). These percentages are derived from publicly- available data and are not the result of application of the Commission’s attribution rules. 435 2001 Report, 17 FCC Rcd at 1341, Appendix C, Table C- 3. 436 See id. at 1341- 1343, Appendix B, Tables C- 3 and C- 4. 437 1998 Report, 13 FCC Rcd at 24363 n. 562. The HHI is a measure of concentration that is calculated by summing the squared market shares of the participants in the market. It is a measure of concentration that takes account of the distribution of the size of firms in the market. The HHI varies with the number of firms in the market and degree of inequality among firm size. Generally, the HHI increases when there are fewer and unequal sized firms in the market. HHI is usually employed to examine concentration in markets in which products are sold directly to consumers, not intermediate markets like the market for cable programming networks, but a comparison of HHIs from previous years shows a general trend in ownership concentration. 438 The HHI calculation is based on the MVPD shares of cable companies serving over 91% of all subscribers and the two largest DBS operators. The addition of the shares of other cable operators and smaller MVPDs would add little to the total HHI. We do not include broadcast television or home video in the MVPD HHI because comparable penetration figures are not available. 439 The United States Department of Justice and Federal Trade Commission consider markets with HHI below 1000 as “unconcentrated;” markets with an HHI between 1000 and 1800 as “moderately concentrated;” and markets with (continued....) 58 Federal Communications Commission FCC 02- 338 59 firms in the calculation are more equal in size, the HHI for 2002 is 21 points lower than the HHI of 905 reported last year. B. Vertical Integration and Other Programming Issues 1. Status of Vertical Integration 134. Vertical integration occurs where a video programming distributor has an ownership interest in a video programming supplier or vice versa. These vertical relationships may have beneficial effects, 440 or they may deter competitive entry in the video marketplace and/ or limit the diversity of programming. 441 Since our last Report, the total number of national programming networks has increased and cable operators continue to consolidate and develop new ownership interests. The proportion of vertically- integrated networks, however, has decreased since last year. In 2002, there were 308 satellite-delivered national programming networks, an increase of 21 networks since 2001. 442 Of the 308 networks, 92 networks, representing approximately 30%, were vertically integrated with at least one cable MSO. 443 Last year, we reported the proportion of vertically- integrated networks as 35%. 444 135. Four of the top six cable MSOs hold ownership interests in satellite- delivered national programming networks. 445 One or more of these companies has an interest in 79 of the 92 vertically integrated national satellite- delivered programming networks. 446 These four companies are AOL Time (... continued from previous page) HHI above 1800 as “highly concentrated.” See 1998 Report, 13 FCC Rcd at 24363. None of the calculations above include the AT& T- Comcast Merger, which was completed after June, 30, 2002, which is the date we use. 440 Beneficial effects can include efficiencies in the production, distribution, and marketing of video programming, and providing incentives to expand channel capacity and create new programming by lowering the risks associated with program production ventures. See, e. g., H. R. Rep. No. 862, 102nd Cong., 2d Sess. 56 at 41- 43 (1992). 441 See 1995 Report, 11 FCC Rcd at 2135; Implementation of Section 11( c) of the Cable Television Consumer Protection and Competition Act of 1992 Vertical Ownership Limits, MM Docket 92- 264, 10 FCC Rcd 7364, 7365 (1995). 442 In our last report, we counted 294 satellite delivered national programming networks. We overstated that number by seven networks, double counting between the Starz! and Encore channels. See 2001 Report, 17 FCC Rcd at 1345, 1346. 443 We count each unique programming service of a multiplexed package separately. We do not, however, count services that are not unique, as in a multiplexed programming service that is merely time shifted. See 1998 Report, 13 FCC Rcd at 24376. See also 2000 Report, 16 FCC Rcd at 6079. 444 If we had not overstated our count of satellite- delivered national programming networks in our last report, 34% of the networks would have been vertically integrated. 445 We derive our information concerning vertically- integrated networks from various sources, such as NCTA listings in its Cable Developments publication, comments filed in this proceeding, various publications, and SEC filings. We recognize that our calculations may not be perfectly accurate because the ownership issue is so complex. For example, our tables do not reflect that Vulcan Programming, Inc., an entity controlled by Mr. Paul Allen, owns approximately 31% of Oxygen Network. We also note, as an example, that Liberty holds an attributable interest in News Corporation, which is the owner of cable networks operated by the Fox Cable Networks Group and Fox News Channel. In addition, we note that Charter Holding Company will receive unregistered shares of Oxygen Media common stock on, or prior to, February 2, 2005. Mr. William Savoy, a director of Charter and Charter Holding Company sits on Oxygen Network’s board of directors. 446 The top six MSOs are AOL Time Warner, Comcast Cable Communications, Charter Communications, Cox Communications, Adelphia Communications, and Cablevision Systems. See NCTA, Industry Overview, Cable Developments 2002, at 9. We have combined the programming interests of AT& T Broadband and Comcast because AT& T Broadband combined with Comcast Corporation on Nov. 18, 2002. See Ted Hearn and Mike Farrell, Cleared for Takeoff, Comcast Seals Cable’s Biggest Merger, Multichannel News, Nov. 18 at 1. 59 Federal Communications Commission FCC 02- 338 60 Warner, which has interests in 39, or 13% of all national programming networks; Cox, which has an ownership interest in 25, or 8% of all national programming networks; Comcast which has ownership interests in nine programming networks, which account for 3% of all national programming networks, and Cablevision, through its programming subsidiary, Rainbow Media, which owns five national programming networks, or 2% of all national programming networks. Liberty Media is the only other cable operator that owns national programming networks. 447 It has interests in 41 national networks, or 13% of all national programming networks. 448 136. Vertical integration is not only associated with the largest cable system operators, but also the programming networks with the largest number of subscribers. Currently, eight of the top 20 video programming networks (ranked by subscribership) are vertically integrated with a cable MSO. This figure represents a slight increase from 2001 when seven of the top 20 networks were vertically integrated. 449 Additionally, it appears that a significant amount of video programming is controlled by 14 companies, including cable MSOs, broadcasters, and other media entities. 450 Almost all (i. e., 18) of the top 20 programming networks in terms of subscribership are owned by one or more of these 14 companies, with nine of these networks vertically integrated with cable MSOs. 451 137. This year, we found 60 programming services that have been planned but are not yet operational, a 17% increase from the 2001 Report’s count of 51 planned services. 452 The planned services count includes some overlap from previous years because it can often take several years from the announcement of a new programming network to its launch and initiation of service. 2. Other Programming Issues 138. As in previous years, this year’s Notice requested comment on a number of programming issues apart from vertical integration and the status of existing and planned programming services. 453 We sought comment about the effectiveness of our program access, program carriage, and channel occupancy rules that govern the relationships between cable operators and programming providers. We also requested information about: local and regional channels, including sports and news services; public, 447 We include Liberty Media’s programming networks in our determination of the share of national programming networks that are vertically integrated because it is covered by the provisions of the 1992 Act and the Commission’s rules relating to program access, channel occupancy, and program carriage rules. See 47 U. S. C. § 548; 47 C. F. R. §§ 76. 1000- 76. 1003. These rules apply to any party that owns a cable system and a satellite- delivered national programming network. Liberty Media remains a cable operator through its ownership of Cablevision of Puerto Rico and, as such, it is appropriate to include its networks in calculating the share of vertically- integrated national programming networks. 448 If we did not count Liberty Media as being vertically integrated, the ratio of vertically integrated channels would decrease from 34% in 2001 to 20. 6% in 2002. See Appendix C., Table C- 5. 449 Appendix C, Table C- 6. See also 2001 Report, 17 FCC Rcd at 1310. 450 The 14 companies are: AOL Time Warner, Cablevision, Comcast, Cox, Disney, E. W. Scripps Co., General Electric, Hearst, Liberty Media, MGM, Newhouse, News Corp., Viacom, and Vivendi. See Kagan World Media, Major Owners of Cable Networks: Sept. 2001, Cable Program Investor, Sept. 11, 2001, at 4. 451 C- SPAN, C- SPAN2, WGN, and the Weather Channel are the four unaffiliated programming networks among the top 50 programming networks. Cable affiliates provide 95% of the funding for, but have no ownership or program control interests in C- SPAN and C- SPAN2. DBS licensees provide the other 5% of funding, and also have no ownership or program control interests. None of the 14 companies listed in footnote 450 supra have any ownership interest in WGN or the Weather Channel. See Kagan World Media, Network Census: July 30, Cable Program Investor, Sept. 11, 2001, at 10. 452 See Appendix C, Table C- 4. See also 2001 Report, 17 FCC Rcd at 1311. 453 See Notice, 17 FCC Rcd at 11582- 11584. 60 Federal Communications Commission FCC 02- 338 61 educational and governmental (“ PEG”) access channels; leased access programming; compliance with the DBS public interest programming obligations; packaging of programming services; programming costs; closed captioning and video description; and electronic programming guides (“ EPGs”). 139. Regulatory Issues Relating to Program Access and Carriage Rules. The Commission’s rules concerning competitive access to cable programming seek to promote competition and diversity in the multichannel video programming market by preventing vertically- integrated programming suppliers from favoring affiliated video distributors over unaffiliated MVPDs in the sale of satellite- delivered programming. 454 The program access rules apply to cable operators and to programming vendors that are affiliated with cable operators and deliver video programming via satellite to an MVPD. The rules prohibit any cable operator that has an attributable interest in a satellite cable programming vendor from improperly influencing the decisions of the vendor with respect to the sale or delivery, including prices, terms, and conditions of sale or delivery, of satellite- delivered programming to any competing MVPD. The rules also prohibit vertically- integrated satellite programming distributors from discriminating in the prices or terms and conditions of sale of satellite- delivered programming to cable operators and other MVPDs. In addition, cable operators generally are prohibited from entering into exclusive distribution arrangements with vertically integrated- programming vendors. The Commission has concluded that the statutory access requirements apply only to satellite- delivered and not to terrestrially- delivered programming. 455 140. Under the Communications Act, the prohibition on exclusive contracts enacted as part of the program access provision in the 1992 Act was set to sunset on October 5, 2002, unless the Commission determined the rules were still necessary. On June 13, 2002, the Commission adopted a Report and Order extending the prohibition until October 5, 2007. In the Report and Order, the Commission decided that this prohibition continues to be necessary to preserve and protect competition and diversity in the distribution of video programming. 456 In the same proceeding, the Commission concluded that the language of section 628( c) expressly applies to satellite programming, and that terrestrially- delivered programming is not covered. 457 141. Cable’s competitors, including BSPA, DirecTV, and EchoStar, suggest that the program access rules should be broadened to include terrestrially- delivered programming. 458 Several commenters maintain that, despite the presence of the program access rules, lack of access to programming, especially sports programming, remains a significant barrier to entry and an impediment to the successful development of a competitive MVPD business. 459 EchoStar maintains that terrestrially- delivered programming is bound to increase while demand for local and regional programming, which cable operators tend to withhold from DBS, will also increase. 460 454 47 U. S. C. § 548. 455 Implementation of the Cable Television Consumer Protection and Competition Act of 1992, Petition for Rulemaking of Ameritech New Media, Inc. Regarding Development of Competition and Diversity in Video Programming Distribution and Carriage, 13 FCC Rcd 15822, 15856- 7 (1998). 456 Implementation of the Cable Television Consumer Protection and Competition Act of 1992, Development of Competition and Diversity in Video Programming Distribution: Section 628( c)( 5) of the Communications Act, 17 FCC Rcd 12124 (2002). 457 Id. at 12158. 458 BSPA Comments at 13; DirecTV Comments at 10; EchoStar Comments at 11. 459 Utilicorp Comments at 9; SBCA Comments at 17- 18. 460 EchoStar Comments at 10- 11. 61 Federal Communications Commission FCC 02- 338 62 142. DirecTV expresses concern about the Commission’s failure to apply the program access rules to programming that was formerly delivered by satellite and subsequently was migrated to terrestrial delivery. It also maintains that technological advances, which have lessened the costs of developing terrestrially- delivered programming, combined with clustering, have made terrestrial distribution of programming a much more viable method for delivery of both national and regional programming. 461 It urges the Commission to carefully monitor the effects of terrestrial distribution of vertically- integrated programming by cable operators. 462 143. Cable operators are opposed to the extension of the program access rules to include terrestrially- delivered programming. Comcast states that consumers in its service areas have at least two and sometimes three or more additional choices of MVPD. It maintains that competition is so robust that cable companies must develop and deploy new technologies to support new services or lose their subscribers to competitors. 463 Comcast also disputes BSPA’s claims that incumbent cable operators have both the opportunity and the incentive to refuse their terrestrially- delivered programs to competitors. Comcast states that it has always made Comcast Sports Net available to overbuilders, and points out that RCN has carried Comcast SportsNet since it was launched. 464 AT& T takes issue with DirecTV’s allegation that incumbent cable operators have begun to use terrestrial delivery in order to insulate themselves from the program access requirements. 465 NCTA denies EchoStar’s assertion that there is a “terrestrial loophole” in the program access statute. It states that Congress never intended to require cable operators to share all programming with competitors and deliberately limited the access requirement to satellite- delivered programming. 466 144. Pursuant to section 613( f) of the Communications Act, 467 the Commission also adopted channel occupancy rules that restricted the number of channels on a cable system that may be occupied by programmers affiliated with the owner of the system. 468 On March 3, 2001, the United States Court of Appeals for the D. C. Circuit reversed and remanded Commission’s channel occupancy limits. 469 The Commission has sought and received comment on, among other things, how changes in the MVPD market and in the level of vertical integration for cable MVPDs may have affected MSOs’ ability to favor affiliated over unaffiliated programming. 470 145. Sports Programming. Regional sports programming continues to be an important segment of programming for all MVPDs. According to many commenters, local and regional programming holds high value for subscribers. 471 Of the 86 regional cable channels counted in this year’s report, 31, or 36%, are sports channels. 472 The most widely distributed sports programming network, ESPN, which is owned by Disney, reaches almost 86 million television households through a variety of 461 DirecTV Comments at 10. 462 Id. at 11. 463 Comcast Comments at 9. 464 Comcast Reply Comments at 22. 465 AT& T Reply Comments at 8. 466 NCTA Reply Comments at 7. 467 Section 613( f) was added to the Communications Act as part of the 1992 Cable Act. 47 U. S. C. § 533( f). 468 47 C. F. R § 76. 504. See 1994 Report, 9 FCC Rcd at 7521. 469 Time Warner Entertainment Co. v. FCC, 240 F. 3d 1126 (D. C. Cir. 2001). 470 See Cable Ownership Notice, fn. 415 supra. 471 BSPA Comments at 14; EchoStar Comments at 10- 11; Utilicorp Comments at 9- 10; Hometown Comments at 1. 472 See Appendix C, Table C- 3. 62 Federal Communications Commission FCC 02- 338 63 MVPD technologies. While ESPN dominates national sports programming, regional sports distribution is dominated by Fox Sports Net, which owns 60% (18 of 30) of all regional sports networks. Fox Sports Net, jointly owned by News Corp. and Cablevision, reaches 50 million television households. 473 146. EchoStar asserts that regional sports programming is the type of programming that cable operators tend to withhold from DBS operators. 474 Commenters note that vertically integrated entities may have an incentive to shift regional sports networks from satellite to terrestrial distribution and thereby evade the program access rules. 475 In addition, BSPA alleges that when a regional sports network is not vertically integrated, a video programming distributor may enter into an exclusive contract with the program provider, which deprives rivals of the programming. 476 147. DirecTV lists 24 regional sports networks (including 18 Fox sports networks) that are carried on its system. 477 DirecTV carries regional sports networks in every regional sports market except Philadelphia, where it was refused access to Comcast’s SportsNet. 478 Cablevision notes that DBS providers promote the advantages of their own exclusive sports programming and report to analysts that it is because of this advantage that cable’s market share is declining. 479 148. News Programming. Local news channels have been on cable since at least 1986, when Cablevision launched News 12 Long Island. This year, of the 86 regional programming networks counted, 37% (32 networks) are regional news networks. Unlike sports programming, regional and local news networks have a more diverse ownership. Some regional news networks are vertically integrated with cable MSOs, but many are not. 480 149. Most regional news networks cover a single city or other limited geographic market, or subsections of that market. There are at least seven local news networks in separate sections of the New York City area. 481 A handful of regional news networks, however, have elected to broaden their coverage. Statewide news channels are operating in Florida, Massachusetts, Texas, and Ohio. New England Cable News (“ NECN”) is the most widely distributed regional news network. NECN reaches more than 2.7 million households, approximately 69% of cable homes in the six- state region it serves. 473 NCTA, Regional Cable Networks, Cable Developments 2002, at 171- 194. 474 EchoStar Comments at 10- 11. 475 DirecTV Comments at 10; EchoStar Comments at 10- 11; SBCA Comments at 17; BSPA Comments at 15. 476 BSPA Comments at 15. 477 DirecTV Comments at 14. 478 Id. at 15. See also Application for Review of Orders of the Cable Services Bureau Denying Program Access Complaints, 15 FCC Rcd at 22802 (CSB 2000). This Order consolidates several proceedings involving Comcast, DirecTV, and EchoStar. In separate proceedings, DirecTV and EchoStar filed program access complaints alleging that Comcast violated sections 628( b) and (c) of the Communications Act and the Commission's regulations by engaging in discrimination and unfair practices in the distribution of satellite cable programming. The Cable Services Bureau denied the complaints. Subsequently, DirecTV and EchoStar each requested Commission review; the Commission consolidated the proceedings and denied the applications for review. EchoStar appealed the Commission’s decision and in EchoStar Communications Corporation v Federal Communications Commission and the Unites States of America, No. 01- 1032, 2002 (D. C. Cir. Jun. 11, 2002) the court upheld the Commission’s decision. 479 Cablevision Comments at 7. 480 Cablevision, the seventh largest MSO, owns news networks, including MSG Metro Traffic and Weather in New York and the News 12 group of regional news services in Connecticut, New Jersey, and Westchester County and Long Island, New York. See also Appendix C, Table C- 3. 481 Appendix C, Table C- 3. 63 Federal Communications Commission FCC 02- 338 64 150. Other Programming. In the Notice, we sought information regarding public, educational and government (“ PEG”) channels, leased access programming, and programming provided by DBS operators in compliance with the public interest programming obligations. 482 Local franchising authorities may request, as part of the franchising process, that operators devote a certain amount of channel capacity and equipment to PEG programming. 483 Approximately 15% of all cable systems carry PEG programming. 484 Larger cable systems tend to have PEG channels so that the percentage of subscribers that receive PEG channels is much higher than the percentage of systems providing PEG channels. Cable operators do not have ownership interests in PEG access programming, although some franchise agreements require that they provide services, production facilities, and equipment for the production of local programming. PEG programming is not, therefore, considered vertically integrated. Comcast reports that all of its systems carry PEG and/ or leased access programming. Comcast states that about 2.7% of its channel capacity is devoted to local and federal requirements, not counting must- carry. If it includes digital channels, about 1.1% of total channels is devoted to local and federal requirements. 485 151. DBS operators are required to reserve four percent of their channel capacity for “noncommercial programming of an educational or informational nature.” 486 DirecTV states that it currently carries 11 channels pursuant to this requirement as well as additional educational channels that it does not include as part of its compliance with the rules. 487 EchoStar states that it currently carries 21 channels pursuant to this requirement, as well as additional educational channels that it does not include as part of its compliance with the rules. 488 DBS providers are charging some noncommercial programmers for carriage on their systems to the extent allowed by the Commission’s rules. 489 152. Packaging of Cable Programming Services. In the Notice, we sought information on whether cable operators are changing the way they package programming. We sought comment on the extent to which cable operators are restructuring their programming tiers to offer lifeline tiers and how many customers subscribe only to the lifeline tier. We asked if operators are shifting services to create uniform program offerings across regions or clusters. We also asked if cable operators are restructuring their programming tiers as a result of actual or potential competition and if such restructuring is intended to differentiate cable service from other MVPD services. 490 482 Notice, 17 FCC Rcd at 11583. 483 47 U. S. C. § 531. Local franchise authorities are allowed to establish procedures under which the cable operator may utilize unused PEG channel capacity for other services. 47 U. S. C. § 531( d)( 1). 484 http:// www. alliancecm. org/ about/ info. htm. PEG channels are intended to provide community- specific information, such as bulletin boards for local activities, local civic meetings, and local governmental activities. In addition to PEG channels, some cable operators are also providing local and regional sports, weather, and news programming. 485 Comcast Reply Comments at 7 n. 22. 486 See Implementation of Section 25 of the Cable Television and Consume Protection Act of 1992, Direct Broadcast Satellite Public Interest Obligations, 13 FCC Rcd 23254 (1998). 487 This programming includes C- SPAN, Trinity Broadcasting Network, PBS Lifelong Learning, WorldLink TV, Eternal Word Television Network, Clara+ Vision, Inspirational Life, NASA- TV, RFD- TV, The Word, and BYU-TV. It does not count C- SPAN2 or the PBS KIDS channel towards this obligation. DirecTV Comments at 15. 488 Letter from David R. Goodfriend, Director, Legal and Business Affairs, EchoStar Satellite Corporation, to W. Kenneth Ferree, Chief, Media Bureau, FCC (Nov. 19, 2002). 489 Under our rules, a DBS provider may charge no more than 50% of the direct costs involved in making capacity available to carry a qualified noncommercial programmer counted in satisfaction of the set- aside rule. See 47 C. F. R. § 25. 701( c)( 5). 490 Notice, 17 FCC Rcd at 11582. 64 Federal Communications Commission FCC 02- 338 65 153. Comcast states that over 95% of its cable systems have been upgraded to two- way, digital communications. It says that its digital services have been exceptionally successful. Comcast also relates that it can now offer its customers an array of video content designed to meet virtually every identified viewing interest. 491 It maintains that VOD functionality will further stimulate the demand for digital services, and provides subscribers with even more control over their viewing choices. 492 154. According to NCTA, digital cable has moved beyond the introductory phase and is now a permanent fixture in many households. The expanded capacity made possible by digital compression technology has enabled programmers to launch more than 90 digital channels, offering a wide range of genres, including sports, music, movies, children’s, family, and foreign language programming. 493 Digital services may be packaged as stand- alone packages of digital video channels, or in combination with pay-per- view and VOD. NCTA states that most cable systems offer a choice of two to four analog and digital tiers of video programming consisting of broadcast and satellite- delivered networks. They also offer multiple packages of premium service and four or more pay- per- view networks. 494 The transition from pure analog systems to combination analog- digital systems has resulted in some repackaging and re-tiering of services to provide more options for customers, e. g., AT& T Broadband modified its digital tiers by reconfiguring its digital packages to add more non- premium programming for subscribers who do not want digital services. 495 155. The 1992 Cable Act generally prohibits cable operators from requiring subscribers to purchase a particular service tier, other than the basic service tier, in order to obtain access to video programming offered on a per- channel or per- program basis. 496 Cable systems that lack addressable set top boxes, or are restricted by other technological limitations, were afforded a ten- year grace period to come into compliance with the “tier buy- through requirement.” 497 As of October 5, 2002, cable operators are no longer able to require subscribers to purchase cable programming service tiers in order to access premium or pay- per- view channels because of lack of equipment or technological limitations. In the absence of effective competition or a waiver, all cable operators are now subject to this “tier buy- through” prohibition. 156. Programming Costs. The Commission’s most recent report on cable industry prices (“ 2001 Price Survey Report”) asked cable operators to describe factors that led to changes in their rates. Competitive and noncompetitive cable operators attributed 50.7% and 46.1%, respectively, of their rate increases to increases in programming costs. 498 NCTA states that cable network programming 491 Comcast Comments at 3- 4. 492 Id. at 5. 493 NCTA Comments at 29. 494 Id. at 30. 495 Id. at 31. 496 Some “per channel” services are offered on a “multiplexed” basis. That is, the subscriber receives essentially the same programming repeated on several channels on a different time schedule. For rate regulation purposes, Congress has indicated that such multiplexed services are to be treated as if a single channel service were involved. H. R. Rep. No. 628, 102d. Cong., 2d Sess. 80 (1992) (“ The Committee intends for these ‘multiplexed’ premium services to be exempt from rate regulation to the same extent as traditional single channel premium services when they are offered as a separate tier or as a stand- alone purchase option.”) The Commission has indicated that the same treatment would be appropriate for purposes of the tier buy- through prohibition. See Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, 8 FCC Rcd 2274, n. 9 (1993). 497 Reminder of Tier Buy- Through Requirements for Cable Operators, 16 FCC Rcd 17728 (MB 2001). 498 Inflation, channel additions, and system upgrades, were also said to account for a large portion of rate increases. See 2001 Price Survey Report, 17 FCC Rcd at 6311. 65 Federal Communications Commission FCC 02- 338 66 expenditures have increased. It also indicates that the cable industry is purchasing higher quality programming. NCTA also notes that there has been a phenomenal growth in programming networks. 499 It is unclear from NCTA’s comments whether the increased expenditures are the result of higher quality programming, increased programming purchases, or an increase in the price of individual programming networks. 500 157. Closed Captioning and Video Description. In the Notice, we sought information regarding video programming providers’ experiences offering closed captioning and video description. 501 In August of 2000, the Commission adopted rules requiring certain larger broadcasters and video programming distributors to provide “video descriptions” for some of their programming. Video descriptions are descriptions of key visual elements in a television program, inserted into the natural pauses in the program’s audio, distributed in the program’s second audio channel. These descriptions are intended to make television programming more accessible to people who are blind or visually impaired. 502 ABC, CBS, Fox, NBC, PBS, as well as the top five cable networks, Lifetime, Nickelodeon, TBS, TNT, and USA network, and Turner Classic Movies, among others, have been providing described programming either on their own or pursuant to these rules. Described programs include, for example, CSI: Crime Scene Investigation on CBS, Boston Public on Fox, Law & Order on TNT, Lifetime movies, television premieres of theatrical films and specials on ABC and USA Network, and Rugrats and Blues Clues on Nickelodeon. 503 Video descriptions are also made available on DVD versions of some feature films. On November 8, 2002, the U. S. Court of Appeals for the D. C. Circuit vacated the Commission’s video description rules finding that they exceeded the Commission’s authority. 504 158. Closed captioning requirements also exist and are specifically provided for in the Communications Act. 505 Among the parties commenting in this proceeding, DirecTV states that it provides closed captioning on every channel that notifies it that it carries closed captioning. 506 DirecTV states that it has 46 local channels for which it has added the Second Audio Program channel to carry video description. Comcast reports that it is in full compliance with the closed captioning and video description rules. 507 It notes that its programming agreements require programmers to meet or exceed the Commission’s requirements and that each programmer must provide it with quarterly certifications demonstrating that it is complying with the rules. During 2002, Discovery Communications discovered that it had failed to close caption the number of hours of programming it was required to provide pursuant to contracts with its programming distributors on four of its cable networks. This was, in part, a consequence of the rescheduling of already captioned programs. Discovery took steps to both make up 499 NCTA Comments at 37. 500 According to Kagan World Media, programming expenses have increased from $7. 2 billion in 2001 to $7. 9 billion in 2002. See Economics of Basic Cable Networks 2002 at 433. 501 Notice, 17 FCC Rcd at 11584. 502 See Video Description of Video Programming, 15 FCC Rcd 15230 (2000). 503 See e. g. www. washear. org/ dailylogs. htm. 504 Motion Picture Association of America v. FCC, 2002 WL 31487186 (2002). 505 47 U. S. C § 613. 506 DirecTV Comments at 15. DirecTV argues that it faces ever- increasing regulatory burdens on its system capacity. It mentions that it now must provide video description services for certain programming along with closed captioning, comply with political broadcasting rules, and set aside four percent of its channel capacity for noncommercial programming of an educational or informational nature. Id. at 8- 9. 507 Comcast Reply Comments at 7 n. 22. 66 Federal Communications Commission FCC 02- 338 67 the captioning shortfall for each channel and to substantially exceed the captioning requirements in the subsequent quarter. 508 159. Electronic Programming Guides. Several commenters report on the use of EPGs. 509 Gemstar provides two different EPGs – Guide Plus+ and TV Guide Interactive. 510 Guide Plus+ is available to all television viewers, whether or not they subscribe to an MVPD because it is transmitted over the vertical blanking interval (“ VBI”) of at least one broadcast station in most markets. A consumer needs a TV receiver that contains the hardware and software needed to receive and interact with this guide. Several TV manufacturers include this technology in their TV receivers and about seven million such TVs have been purchased. 511 Gemstar’s provides its second EPG, TV Guide Interactive, to MVPDs using satellite distribution. Cable operators marketing TV Guide Interactive, often under their own brand name, generally make it available only to digital tier subscribers. 512 Gemstar also licenses its technology to competing EPGs, including Ultimate TV and AOL TV. Gemstar’s revenues are generated though advertising and license fees from manufacturers and others using its technology. 513 160. Comcast reports that it has entered into a long- term agreement with Gemstar to provide EPGs to a majority of its subscribers. It also uses TVGateway, a joint venture of Comcast and other cable operators, on several systems, including Mobile, Alabama, and Lower Merion and Willow Grove, Pennsylvania. 514 DirecTV states that all of its subscribers receive a fully interactive EPG, which is produced nationally but can be locally customized. 515 DirecTV’s EPG was developed by and is owned by the company and is specific to its technology. DirecTV does not charge for its EPG, nor is it supported by advertising. 516 Utilicorp states that it currently offers two different EPGs to its subscribers. 517 161. Gemstar further addresses regulatory issues related to EPGs and requests that the Commission adopt a policy that will promote a competitive EPG market. 518 It argues that incumbent cable operators have the ability and incentive to discriminate against unaffiliated EPGs in favor of their own services. As it stated in its comments in the ITV proceeding, Gemstar urges the adoption of rules that prohibit discrimination by MVPDs against unaffiliated EPGs or the stripping of EPGs carried on the VBI of broadcast stations. 519 Moreover, it contends that a Commission prohibition of interference with unaffiliated EPGs not only will ensure the extent of competition in the EPG market, but it also will ensure whether the programming market is fully competitive. 520 508 Discovery Communications, 17 FCC Rcd 14600 (2002). 509 Notice, 17 FCC Rcd at 11584. 510 Gemstar Reply Comments at 1, 3, 6- 7. 511 Id. at 4. 512 Id. at 4- 5. 513 Id. at 5. Gemstar states that it collects subscriber fees from approximately 17,000 subscribers who previously received EPG service from StarSight, a company Gemstar purchased. 514 Comcast Reply Comments at 5. See also Gemstar Reply Comments at 7. 515 DirecTV Comments at 18. 516 Id. 517 Utilicorp Comments at 10. 518 Gemstar Reply Comments at 8- 12. 519 See Nondiscrimination in the Distribution of Interactive Television Services Over Cable (“ Interactive Television Notice”), 16 FCC Rcd 1321 (2001). 520 Gemstar Reply Comments at 11- 12. 67 Federal Communications Commission FCC 02- 338 68 C. Technical Issues 162. In this section, we update the information provided in the 2001 Report regarding navigation devices and cable modems. 521 1. Cable Modems 163. Cable modem service allows cable subscribers to access high- speed data services, including the Internet, Internet Protocol (“ IP”) telephony, and video conferencing. Cable modem deployment continues to increase, with manufacturers shipping 1.46 million cable modems in North America during the first quarter of 2002. 522 Cable modem prices have declined, ranging in price from $69-$ 120, depending on features. 523 The percentage of purchased modems has increased substantially relative to leased modems, with one analyst estimating that by 2004, approximately 32% of cable modem service customers will purchase rather than lease cable modems, up from 10% in 2001. 524 164. DOCSIS. We continue to report on the progress of the CableLabs Certified Cable Modem Project (formerly known as Data Over Cable Service Interface Specification or DOCSIS), which defines interface requirements for cable modems and cable modem termination systems (“ CMTS”) used for high- speed data distribution over DOCSIS cable systems. CableLabs provides a method for certifying that cable modems available for retail sale are in compliance with the DOCSIS specifications. 525 The DOCSIS 1.0 specification allows cable operators to deliver high- speed Internet services on a “best effort” basis simultaneously over the same plant as core video services. 526 CableLabs has certified 224 DOCSIS 1.0 modems and 28 DOCSIS 1.0 CMTS. 527 165. CableLabs continues to improve upon DOCSIS services for the cable industry. It developed DOCSIS 1.1 to provide quality of service (“ QoS”) functionality allowing operators to offer such products as IP telephony and tiered services, by using techniques known as data fragmentation, concatenation, and payload header suppression. IP telephony (also called “voice- over- IP” or “VoIP”) is expected to be an important service offering from cable operators. To date, CableLabs has certified 42 high- speed cable modems that comply with the DOCSIS 1.1 specification, and it has certified eight DOCSIS 1.1 CMTS. 528 In January 2002, CableLabs completed specifications for DOCSIS 2.0, the next 521 See 2001 Report, 17 FCC Rcd at 1318- 23. 522 NCTA Comments at 48. For example, Comcast distributed cable modems though 1,200 retail outlets at the end of 2001, and Cox distributes through 498 retail locations, including major electronics retailers CompUSA, Circuit City, Best Buy, Office Depot, Radio Shack and Gateway. Some manufacturers distribute their DOCSIS certified modems directly to consumers. Motorola distributes cable modems directly to over 2,000 retail outlets throughout the United States. In addition, over 100 on- line retailers sell cable modems. Id. 523 Id. 524 Id. at 50. 525 2000 Report, 16 FCC Rcd at 6092. See also CableLabs, at http:// cablemodem. com. 526 “Best effort” is a term for a quality of service class with no specified parameters and with no assurances that the traffic will be delivered across the network to the target device. Newton’s Telecom Dictionary, 17 th Edition, at 88. 527 CableLabs, DOCSIS Certified/ Qualified Product Availability Continues to Grow (press release), Sept. 26, 2002. CableLabs initiated certification testing of DOCSIS modems in 1999 and has since conducted 23 waves of certification, with the latest concluding September 20, 2002. 528 Id. CableLabs states that equipment built to comply with the DOCSIS 1. 1 specification is capable of supporting IP- based cable services offered by cable providers, including home networking, packet telephony and multimedia services. For a list of DOCSIS certified and qualified cable modem manufacturers, see CableLabs, Certification & Qualification, at http:// www. cablelabs. com/ certqual/ whoiscertified. html (visited Oct. 18, 2002). For a list of (continued....) 68 Federal Communications Commission FCC 02- 338 69 version, which builds upon the capabilities of DOCSIS 1.0 and DOCSIS 1.1 by adding throughput and robustness in the upstream portion of the cable plant, from the consumer out to the Internet, and creating a network that has 30 megabit per second (“ Mbps”) capacity in both directions. 529 This increase in upstream capacity is achieved by use of higher- order modulation, improved protection from RF impairments, higher symbol rates, and multiple modulation and access schemes (“ A- TDMA” and “S-CDMA”). 530 Both DOCSIS 1.1 and 2.0 will be compatible with all previous versions of DOCSIS cable modems and CMTS. 166. PacketCable. PacketCable, another CableLabs project, is intended to develop interoperable interface specifications for delivering advanced, real- time multimedia services over two-way cable plant. Built on top of the DOCSIS cable modem infrastructure, PacketCable will use IP technology to enable a wide range of services, including IP telephony, multimedia conferencing, interactive gaming, and general multimedia applications. 531 In late 2001, CableLabs established the PacketCable test program to begin qualifying vendor equipment over the course of four certification waves in 2002. 532 More than a dozen MSOs are conducting technical trials based on the PacketCable specifications, and commercial deployments are expected to begin in late 2002 and into 2003. 533 2. Navigation Devices 167. Section 629 of the Communications Act directed the Commission to adopt rules that would allow consumers to obtain “navigation devices,” such as cable set- top boxes, remote control units, and other equipment, from commercial sources other than their cable providers. 534 In 1998, the Commission adopted rules that require MVPDs to unbundle security from other functions of the navigation device and, by July 1, 2000, to make available point- of- deployment modules (“ PODs”), or other equipment, to separately perform the conditional access function. 535 On reconsideration, the Commission deferred application of the rules requiring a separate security module for analog- only devices. 536 Thus, an MVPD subscriber will be able to obtain a set- top box without the security features (... continued from previous page) DOCSIS- certified CMTS manufacturers, see CABLE DATACOM NEWS, DOCSIS CMTS Vendors, at http:// www. cabledatacomnews. com/ cmic/ docsiscmts. html (visited Oct. 18, 2002). 529 CableLabs, CableLabs Completes DOCSIS 2.0 Specs, Enabling More Advanced Modems (press release), January 16, 2002. Under this specification, capacity is tripled, facilitating enhanced services such as video- conferencing and peer- to- peer applications. 530 See CED MAGAZINE, at http:// www. cedmagazine. com/ ced/ 2002/ 0602/ 06wc. htm (visited Nov. 7, 2002). 531 See CableLabs, at http:// www. packetcable. com (visited Oct. 18, 2002). 532 CableLabs, PacketCable Qualification Process Ready for 2002 (press release), Nov. 6, 2002. More than 40 vendors have submitted products for experimentation and assessment. Id. CableLabs has not yet certified any vendor’s equipment. See Karen Brown, PacketCable Tests Firm Up Cable’s IP- Telephony Link, BroadbandWeek. com, at http:// www. broadbandweek. com/ news/ 020603/ print/ 020603_ telecom_ three. htm (visited Oct. 18, 2002). CableLabs established the specifications in late 2000. See CableLabs, Cablelabs Releases New Interim PacketCable Specifications (press release), Nov. 28, 2000. 533 NCTA Comments at 51. 534 47 U. S. C. § 549. 535 47 C. F. R. §§ 76. 1202 and 76. 1204. See Implementation of Section 304 of the Telecommunications Act of 1996, Commercial Availability of Navigation Devices (“ Navigation Report and Order”), 13 FCC Rcd 14775 (1998). 536 Implementation of Section 304 of the Telecommunications Act of 1996, Commercial Availability of Navigation Devices, 14 FCC Rcd 7596 (1999); see 47 C. F. R. § 76. 1204. 69 Federal Communications Commission FCC 02- 338 70 (“ host device”) from retailers and will need the MVPD to provide a card- sized POD module for security functions. 537 168. Through the OpenCable project, CableLabs has developed specifications for the POD module as well as the interface that a host device needs to accommodate the POD. 538 CableLabs also developed the POD- Host Licensing Agreement (“ PHILA”) to provide manufacturers with the necessary technology to make PODs work in host devices. 539 The Consumer Electronics Association contends that although technical experts in the consumer electronics (“ CE”) and cable industries have developed the necessary minimal standards for digital cable- compatible equipment, there remain issues that the industries have yet to resolve, including copy protection, digital connectors, support for pay- per- view functions, certification process and Electronic Program Guides. 540 The CE industry proposes a non-exclusive agreement and suggests a number of alternative provisions to the existing PHILA. 541 One major television manufacturer, Panasonic, has signed the PHILA, allowing Panasonic to develop, manufacture, and market digital televisions that will be able to receive high definition and other digital programs via cable, including premium services, without the use of set- top boxes. 542 169. CableLabs is continuing its efforts to develop next generation navigation devices with its initiative for the OpenCable Application Platform 1.0 (“ OCAP”) or “middleware” specification. The specification, completed on December 21, 2001, is designed to enhance the ability of the consumer electronics industry to build and market integrated DTV sets, digital set- top boxes, and other navigation devices directly to consumers. 543 OCAP 1. 0 provides specifications for the downloading and execution of applications, such as program guides and interactive content, to any OCAP- enabled devices by any cable system supporting OCAP. 544 Six MSOs have indicated that their systems will support CableLabs-certified, OCAP- enabled devices once such equipment becomes commercially available. 545 In February 2002, major electronics manufacturers including Panasonic, Philips, Samsung, Sharp, and Sony participated in the OCAP Developers’ Conference. 546 Fourteen companies have indicated they will build 537 The POD requirement is intended to permit portability among set- top boxes, which will increase the market base and facilitate volume production. Navigation Report and Order, 13 FCC Rcd at 14793- 4. 538 See CableLabs, at http:// www. opencable. com (visited Oct. 18, 2002). 539 Set- top box manufacturers Motorola and Scientific Atlanta have signed the PHILA, and CableLabs is engaged in negotiations over the PHILA with other manufacturers. Letter from William A. Check, Vice President, Science and Technology, NCTA, to Magalie R. Salas, Secretary, FCC, Oct. 31, 2001. 540 See Letter from Michael Petricone, Vice President, Technology Policy, CEA, to W. Kenneth Ferree, Chief, FCC Media Bureau (Sept. 11, 2002), at 1. 541 Id. 542 Panasonic, Panasonic is First Major TV Manufacturer to Sign PHILA Agreement with CableLabs (press release), Oct. 17, 2002. See also Bill McConnell, Plug- and- Play is On the Way, BROADCASTING & CABLE, Oct. 28, 2002, at 42. 543 CableLabs, CableLabs Publishes OCAP Middleware Specifications (press release), Jan. 3, 2002. OCAP 1.0 supports a JAVA- based Execution Engine (EE). 544 NCTA Comments at 44. 545 See Letter from William A. Check, Vice President, Science & Technology, NCTA, to Michael K. Powell, Chairman, FCC (Dec. 26, 2001), Attachment. Adelphia, AT& T Broadband, Charter, Comcast, Cox, and AOL Time Warner indicated their support. 546 CableLabs, Nearly 90 Firms Attend OCAP Developers’ Conference, Interoperability Testing Event (press release), Feb. 27, 2002. See also NCTA Comments at 46. 70 Federal Communications Commission FCC 02- 338 71 platforms using the specification. 547 In May 2002, CableLabs released OCAP 2.0, which is designed to support additional interactive applications in consumer devices. 548 The Consumer Electronics Retailers Coalition has expressed concerns that the OCAP specification contains technical requirements that are not consistent with the Commission rules prohibiting MVPDs from precluding the addition of features or functions in navigation devices. 549 3. Emerging Services 170. We continue to monitor development of interactive television (“ ITV”) technologies and services. The Commission has described ITV as a service that supports subscriber- initiated choices or actions that are related to one or more video programming streams. 550 Such services may include VOD, 551 PVR, gaming, e- mail, TV- based e- commerce (“ t- commerce”), interactive advertising, Internet access, and program- related enhanced content. 552 Cable MSOs and DBS operators continue to develop these services as measures to increase subscribership, develop new streams of revenue, and reduce churn. We note that to date commercial two- way interactive service deployments have been very limited. 553 According to one analysis, there were 12.7 million ITV households, or 11.8% of total households (“ THH”), at the end of 2001, and projected estimates of 22.1 million (20.3% THH) by year end 2002, 33.4 million (30.4% THH) in 2003, 45.7 million (41.1% THH) in 2004, and 58.2 million (51.9% THH) in 2005. 554 Revenue projections for ITV vary, depending on the services included in the mix, but one analysis estimates revenues increasing from $467.8 million in 2001 to over $11.5 billion in 2005, with 547 CableLabs, 14 Companies Respond to CableLabs Software RFP (press release), Sept. 30, 2002. The purpose of the RFP was to solicit industry implementations of OCAP to hasten the ability of cable operators to launch new services made possible by OCAP. Id. 548 CableLabs, CableLabs Publishes OCAP 2. 0 Middleware Specifications (press release), May 6, 2002. OCAP 2. 0 extends the specification by adding support for web- based Presentation Engines, such as xHTML, XML, and ECMAScript. 549 See Consumer Electronics Retailers Association, Answers of Consumer Electronics Retailers Coalition to Hoedown Questions Regarding Cable Industry’s Draft POD Host Interface License Agreement, filed June 6, 2002 in CS Docket No. 97- 80. 550 See Interactive Television Notice fn. 519 supra. The Commission sought comment on whether rules are necessary to prevent anticompetitive behavior and to promote diversity and capital investments in the ITV market. 551 See ¶¶ 39- 41, 69, and 106 supra for discussions of VOD developments. 552 2000 Report, 16 FCC Rcd at 6088. One analyst defines ITV as two- way interactive services designed for the TV offered by any type of TV operator – cable, satellite, terrestrial broadcast – with a return path via cable, wireless or dial- up. See 2002 Emarketer Study, fn. 99 supra, at 36. NCTA defines ITV as a combination of television with interactive content and enhancements, providing a richer entertainment experience as well as information, blending traditional viewing with the interactivity of a personal computer. ITV features can include graphics, Internet access, e- mail, chat, instant messaging, home shopping, home banking, interactive games, on- demand services such as weather and financial information, pay- per- view, and video on demand. See NCTA, Cable Developments 2002, Volume 26, Number 1, at 239. 553 Jennifer Lee, Interactive TV is Finally Here, Sort Of, NEW YORK TIMES, Apr. 4, 2002, at E1. 554 2002 Emarketer Study at 105. This forecast counts households using stand- alone PVRs and web/ Internet TV services as well as interactive program guide services that use a return channel. In addition, this forecast is based on several assumptions: 1) that the growth of ITV households directly correlates with the growth of digital TV households, particularly digital cable services; 2) that the demand for premium digital content and a corresponding demand for interactive program guide and PVR functionality will drive digital TV and ITV services; and 3) that cable companies will need to offer additional interactive services in order to raise the average revenue per subscriber and prevent churn to DBS providers. Id. 71 Federal Communications Commission FCC 02- 338 72 subscription services accounting for nearly half of all revenues, followed by interactive advertising and e-commerce. 555 171. A number of companies are involved in developing the technical standards, equipment and software necessary to provide ITV services. 556 CableLabs has recommended that cable operators include the European Digital Video Broadcast- Multimedia Home Platform (“ DVB- MHP”) application program interface in the OCAP specification in order to support ITV software applications in the United States. 557 In terms of production of ITV content and applications, the multiple but incompatible platforms in use today have slowed their development. In May 2002, the ITV Production Standards Initiative, led by GoldPocket, released version 1.0 of its “XML” specification for writing interactive television programs. 558 TVXML Forum was formed in June 2002, but its focus is primarily on potential ITV messaging applications and the goal of unifying communications protocols between television, mobile phone and home PC platforms. 559 The group is planning to release its first specification sometime in 2003. 560 Over the past year, there has been consolidation among the major ITV middleware developers. 561 Major cable operators, DBS operators, and some overbuilders have agreements with companies such as Liberate, Wink, Open TV, Worldgate, and GoldPocket. IV. ADMINISTRATIVE MATTERS 172. This 2002 Report is issued pursuant to authority contained in sections 4( i), 4( j), 403, and 628( g) of the Communications Act of 1934, as amended, 47 U. S. C. §§ 154( i), 154( j), 403, and 548( g). 173. It is ORDERED that the Office of Legislative Affairs shall send copies of this 2002 Report to the appropriate committees and subcommittees of the United States House of Representatives and the United States Senate. 555 2002 Emarketer Study at 109. Myers Mediaenomics estimates that revenues will reach $4.5 billion in 2005, from $378 million in 2001; McKinsey Consulting estimates revenues of $17.5 billion in 2005 (but provides no forecast from 2001– 2004); and ABN- AMRO estimates revenues of $20 billion in 2005, from $359.5 million in 2001. Id. at 109- 110. 556 Major ITV middleware and content providers include Liberty’s OpenTV, ACTV and Wink; Liberate; Worldgate; and GoldPocket Interactive. 557 CableLabs Adopts Set- top ITV Specs, BROADCASTING & CABLE, Nov. 16, 2001. CableLabs believes that by adding this specification to the OCAP compliant digital set- top boxes, ITV producers will be able to develop content in a common format for worldwide distribution. Id. 558 ITV Standards, Full Specification of ITV Content Production Standards Published at Cable 2002 Conference (press release), May 6, 2002. According to ITV Standards, the production standards, based on extensible markup language (“ XML”), establish a method for content production for interactive programs, by specifying a common nomenclature and method for describing the timing and content of interactive assets such as trivia games, polls, interactive advertising, leader boards, and other interactive content, across set- top box middleware platforms. See ITV Standards, at http:// www. itvstandards. org/ iTVPublic/ overview. aspx. 559 Karen Brown, Forum Seeks Common ITV Message, BROADBAND WEEK, June 3, 2002. See also Duffy Hayes, ITV End Game, CED MAGAZINE, Aug. 2002 available at http:// www. cedmagazine. com/ ced/ 2002/ 0802/ id1. htm (visited Nov. 15, 2002). The forum counts over 100 member companies operators, equipment vendors, content providers, and third party application developers. 560 Id. 561 See, e. g., Christopher Saunders, Liberty- Backed OpenTV Acquires ACTV, Wink, INTERNETNEWS. COM, Sept. 26, 2002, available at http:// www. internetnews. com/ IAR/ article. php/ 1470941 (visited Nov. 15, 2002). 72 Federal Communications Commission FCC 02- 338 73 174. It is FURTHER ORDERED that the proceeding in MB Docket No. 02- 145 IS TERMINATED. FEDERAL COMMUNICATIONS COMMISSION Marlene H. Dortch Secretary 73 Federal Communications Commission FCC 02- 338 74 APPENDIX A List of Commenters Initial Comments AT& T Corp. (“ AT& T”) Broadband Service Providers Association (“ BSPA”) Comcast Corporation (“ Comcast”) DIRECTV, Inc. (“ DirecTV”) EchoStar Satellite Corporation (“ EchoStar”) John Emerson (“ Emerson”) Hometown Online, Inc. (“ Hometown”) National Cable & Telecommunications Association (“ NCTA”) National Rural Telecommunications Cooperative (“ NRTC”) Satellite Broadcasting and Communications Association (“ SBCA”) South Dakota Network, LLC (“ South Dakota”) State of Hawaii (“ Hawaii”) Utilicorp Communications Services, Everest Connections Corporation, and Ex- Op of Missouri, Inc. (“ Utilicorp”) Reply Comments AT& T Corp. (“ AT& T”) Cablevision Systems Corporation (“ Cablevision”) Comcast Corporation (“ Comcast”) DIRECTV, Inc. (“ DirecTV”) EchoStar Communications (“ EchoStar”) Gemstar- TV Guide International (“ Gemstar- TV Guide”) Hometown Online, Inc. (“ Hometown”) Kansas City Cable Partners d/ b/ a Time Warner Cable KCCP (Kansas City Cable Partners”) National Association of Broadcasters (“ NAB”) National Cable & Telecommunications Association (“ NCTA”) National Rural Telecommunications Cooperative (“ NRTC”) Northpoint Technology (“ Northpoint”) Organization for the Promotion and Advancement of Small Telecommunications (“ OPASTCO”) Satellite Broadcasting and Communications Association (“ SBCA”) SES Americom (“ SES”) 74 Federal Communications Commission FCC 02- 338 75 APPENDIX B TABLE B- 1 Assessment of Competing Technologies (i) Technology Used June 98 June 99 June 00 June 01* June 02 (1) TV Households Percent Change 98, 000, 000 1.03% 99, 400, 000 1.43% 100, 801,720 1.41% 102, 184,810 1.37% 105, 444,330 3.19% (2) MVPD Households (ii) Percent Change Percent of TV Households 76, 634, 200 4.06% 78. 20% 80, 882, 411 5.54% 81. 37% 84, 423, 717 4.38% 83. 75% 87, 830, 074 4.60% 86. 42% 89, 890, 641 1.79% 85. 25% (3) Cable Subscribers Percent Change Percent of MVPD Total 65, 400, 000 1.95% 85. 34% 66, 690, 000 1.97% 82. 45% 67, 700, 000 1.51% 80. 19% 68, 500, 000 1.18% 77. 99% 68, 800, 000 0.00% 76. 54% (4) MMDS Subscribers Percent Change Percent of MVPD Total 1,000,000 -9. 09% 1.30% 821,000 -17.90% 1.02% 700,000 -14.74% 0.83% 700,000 0.0% 0.80% 490,000 -30.00% 0.55% (5) SMATV Subscribers Percent Change Percent of MVPD Total 940,000 -19.14% 1.23% 1,450,000 54. 26% 1.79% 1,500,000 3.45% 1.78% 1,500,000 0.0% 1.71% 1,600,000 6.67% 1.78% (6) HSD Subscribers Percent Change Percent of MVPD Total 2,028,200 -7. 15% 2.65% 1,783,411 -12.07% 2.20% 1,476,717 -17.20% 1.75% 1,000,074 -32.28% 1.14% 700,641 -29.94% 0.78% (7) DBS Subscribers Percent Change Percent of MVPD Total 7,200,000 42. 66% 9.40% 10, 078, 000 39. 97% 12. 46% 12, 987, 000 28. 86% 15. 38% 16, 070, 000 23. 74% 18. 30% 18, 240, 000 13. 66% 20. 29% (8) OVS Subscribers (iii) Percent Change Percent of MVPD Total 66, 000 2100. 00% 0.09% 60, 000 -9. 09% 0.07% 60, 000 0.0% 0.07% 60, 000 0.0% 0.07% 60, 000 0.0% 0.07% * - The source revised the number used for cable subscribers as of June 2001. This column has been modified accordingly. Notes: (i) Some numbers have been rounded. (ii) The total number of MVPD households is likely to be somewhat less than the given figure since some households subscribe to the services of more than one MVPD. See 1994 Report, 9 FCC Rcd at 7480. However, the number of households subscribing to more than one MVPD is expected to be low. Hence the given total can be seen as a reasonable estimate of the number of MVPD households. (iii) The decline in OVS subscribers since 1998 reflects the conversion of portions of some OVS systems to franchised cable systems over the last three years. 75 Federal Communications Commission FCC 02- 338 76 Sources: (1) Television households: 1998 from Nielsen Media Research as cited in Broadcasting & Cable, June 29, 1998, at 70; 1999 from Nielsen Media Research as cited in Broadcasting & Cable, June 28, 1999, at 26; and 2000 - 2002 from Nielsen Media Research. (2) Total MVPD households: The sum of the total number of subscribers listed under each of the categories of the various technologies. See note (ii) above. (3) Cable subscribers: 1998 from Paul Kagan Associates, Inc., Paul Kagan’s 10- Year Cable TV Industry Projections, Cable TV Investor, August 10, 1998, at 4; 1999 from Paul Kagan Associates, Inc., Cable Industry 10- YearProjections, Cable TV Investor, June 25, 1999, at 6; 2000 from Paul Kagan Associates, Inc., Cable Industry 10- YearProjections, Cable TV Investor, June 19, 2000, at 6; 2001 from Kagan World Media, Kagan’s 10- Year Cable TV Industry Projections, Broadband Cable Financial Databook 2001, July 2001, at 10; and 2002 from Kagan World Media, Kagan’s 10- Year Cable TV Industry Projections, Broadband Cable Financial Databook 2002, July 2002, at 10. (4) MMDS subscribers: The 1998 and 1999 subscribers estimated by the FCC; 2000 subscribers from NCTA Comments for the 2000 Report at 9; 2001 subscribers from NCTA Comments for the 2001 Report at 7; and 2002 subscribers from NCTA Comments at 12. (5) SMATV subscribers: 1998 subscribers from NCTA 1998 Comments at 6; 1999 subscribers from NCTA Comments for the 2000 Report at 5; and 2001 subscribers from NCTA Comments for the 2001 Report at 9; and 2002 subscribers from NCTA Comments at 12. (6) HSD subscribers: 1998- 2000 from SkyReport. com at http:// www. skyreport. com/ dth_ us. htm; 2001 from SBCA Comments for the 2001 Report Table 1 at 4; and 2002 from SkyReport. com at http:// www. skyreport. com/ dth_ us. htm. (7) DBS subscribers: 1998 from Minal Damani and Jennifer E. Sharpe, U. S. DBS Marketplace: 1998, The Strategis Group, July, 1998 at 6; 1999- 2000 from SkyReport. com at http:// www. skyreport. com/ dth_ us. htm; 2001 from SBCA Comments for the 2001 Report, Table 1 at 4; and 2002 from SkyReport. com at http:// www. skyreport. com/ dth_ us. htm. (8) OVS subscribers: OVS subscriber count for 1997 through 2002 estimated by the FCC. 76 Federal Communications Commission FCC 02- 338 77 TABLE B- 2 Number and Subscriber Size of Major Cable System Clusters (Cumulative Figures) 1998 1999 2000 2001 Range of Clustered Subscribers (thousands) Clusters Subscribers (millions) Clusters Subscribers (millions) Clusters Subscribers (millions) Clusters Subscribers( (millions) 100- 199 33 4.6 41 5.4 26 3.6 30 4.3 200- 299 25 6.3 16 4 13 3.2 17 4.2 300- 399 20 6.7 20 6.8 22 7.4 18 6.1 400- 499 7 3.2 9 3.9 13 5.9 10 4.4 >500 21 19. 6 28 23. 8 34 34. 3 32 33. 3 Total 106 40. 4 114 43. 9 108 54. 4 107 52. 3 Sources: Paul Kagan Associates, Inc., Major Cable TV Systems/ Clusters, The Cable TV Financial Databook, 1997, at 39- 41; 1998, at 38- 42; 1999, at 50- 55; 2000 from Kagan World Media, Major Cable TV Systems/ Clusters, Broadband Cable Financial Databook 2001 at 36; and 2001 from Kagan World Media, Major Cable TV Systems/ Clusters, Broadband Cable Financial Databook 2002 at 38. 77 Federal Communications Commission FCC 02- 338 78 TABLE B- 3 2002 Concentration in the National Market for Purchase of Video Programming (1) Rank Company Percent of Subscribers (2) 1 AT& T 14.75 2 Time Warner 14.29 3 DirecTV 11.99 4 Comcast 9.46 Top 4 50.48 5 EchoStar 8.30 6 Charter 7.55 7 Cox 6.95 8 Adelphia 6.07 Top 8 79.35 9 Cablevision 3.33 10 Mediacom 1.76 Top 10 84.44 Top 25 90.26 Top 50 92.05 HHI 884 (3) Notes: (1) MSO subscriber totals as of June 2002, and reported in Top Cable System Operators as of June 2002, Kagan World Media, Cable TV Investor, Sept. 30, 2002, at 9- 10. There is no double counting of subscribers. If a cable operator is partially owned by more than one MSO, its subscribers are assigned to the largest MSO. Subscribers for DirecTV and EchoStar are based on SkyReport. com at http:// www. skyreport. com/ dth_ us. htm. (2) The total number of MVPD subscribers used to calculate the HHI is 89,890,641 from Table B- 1. (3) The HHI is calculated on the basis of market shares for the top 60 companies. Because all of the remaining MVPDs have very small shares of the market, an HHI calculation that included all cable system operators could only be slightly higher (no more than 2- 3 points) than the given HHI. 78 Federal Communications Commission FCC 02- 338 79 TABLE B- 4 Concentration in the National Market for the Purchase of Video Programming 1999- 2002 Percent of MVPD Subscribers Market Share 1999 2000 2001 2002 Top Share 20.50 19.07 16.44 14.75 Top 2 36.45 33.99 30.79 29.04 Top 3 45.68 44.27 42.11 41.03 Top 4 53.94 52.70 51.64 50.48 Top 10 74.95 83.90 84.29 84.44 Top 25 84.92 89.75 89.70 90.26 Top 50 89.58 92.14 91.38 92.05 HHI 923 954 905 884 Sources: Data for 1999 through 2001 were taken from Reports, 1998- 2001. Data for 2002 are from Table B- 3. 79 Federal Communications Commission FCC 02- 338 80 APPENDIX C TABLE C- 1 MSO Ownership in National Video Programming Services Programming Service Launch Date MSO Ownership (%) Action Max Jun- 98 AOL Time Warner (100) American Movie Classics (AMC) Oct- 84 Cablevision (60) Animal Planet Oct- 96 Liberty Media (39.2), Cox (19.7) @Max May- 01 AOL Time Warner (100) Black STARZ! Feb- 97 Liberty Media (100) Canales ń (6 digital channels) * Oct- 98 Liberty Media (90) Cartoon Network Oct- 92 AOL Time Warner (100) Cinemax Aug- 80 AOL Time Warner (100) CNN Jun- 80 AOL Time Warner (100) CNN En Espańol Mar- 97 AOL Time Warner (100) CNN Headline News Jan- 82 AOL Time Warner (100) CNN International Jan- 95 AOL Time Warner (100) CNNfn Dec- 95 AOL Time Warner (100) Comedy Central Apr- 91 AOL Time Warner (50) Court TV Jul- 91 Liberty Media (50) AOL Time Warner (50) Discovery Channel Jun- 85 Liberty Media (50), Cox (24.6) Discovery Civilization Oct- 96 Liberty Media (25), Cox (12.3) Discovery En Espańol Aug- 98 Liberty Media (50), Cox (24.6) Discovery Health Jul- 98 Liberty Media (50), Cox (24.6), Comcast (20) Discovery HD Theatre Jun- 02 Liberty Media (50), Cox (24.6). Comcast (20) Discovery Home & Leisure Oct- 96 Liberty Media (50), Cox (24.6) Discovery Kids Oct- 96 Liberty Media (50), Cox (24.6) Discovery Science Channel Oct- 96 Liberty Media (50), Cox (24.6) Discovery Wings: The Aviation and Adventure Network Jul- 98 Liberty Media (50), Cox (24.6) * Canales ń, Liberty Media’s digital package of Spanish- language channels, consists of FoxSportsAmericas, CBS Telenoticias, CineLatino, BoxTejano, BoxExitos, and Canal 9. 80 Federal Communications Commission FCC 02- 338 81 Programming Service Launch Date MSO Ownership (%) E! Entertainment Jun- 90 Comcast (50) Encore Apr- 91 Liberty Media (100) Encore Action Sept- 94 Liberty Media (100) Encore Love Stories Jul- 94 Liberty Media (100) Encore Mystery Jul- 94 Liberty Media (100) Encore True Stories Sept- 94 Liberty Media (100) Encore WAM! America's Youth Network Sept- 94 Liberty Media (100) Encore Westerns Jul- 94 Liberty Media (100) 5StarMax May- 01 AOL Time Warner (100) FoxSports (2) channels Various Cablevision (50) Fox Sports Latin America Nov- 96 Liberty Media (50) G4 Video Gaming Network Jun- 02 Comcast (94) GEMS International Television Apr- 93 Liberty Media (100) Golf Channel Jan- 95 Comcast (91) Hallmark Channel (formerly Odyssey) Oct- 93 Liberty Media (32.5) HBO (Home Box Office) Nov- 72 AOL Time Warner (100) HBO Latino Nov- 00 AOL Time Warner (100) HBO 2 Oct- 98 AOL Time Warner (100) HBO Signature Oct- 93 AOL Time Warner (100) HBO Comedy May- 99 AOL Time Warner (100) HBO Family Dec- 96 AOL Time Warner (100) HBO Zone May- 99 AOL Time Warner (100) Home Shopping Network Jul- 85 Liberty Media (20) iN Demand Nov- 85 Comcast (55), AOL Time Warner (33), Cox (11) Independent Film Channel Sep- 94 Cablevision (60) International Channel Jul- 90 Liberty Media (90) MoreMAX Aug- 91 AOL Time Warner (100) MoviePlex Oct- 94 Liberty Media (100) 81 Federal Communications Commission FCC 02- 338 82 Programming Service Launch Date MSO Ownership (%) Much Music USA Jul- 94 Cablevision (75) Outdoor Life Network Jul- 95 Comcast (100) OuterMax May- 01 AOL Time Warner (100) Ovation: The Arts Network Apr- 96 AOL Time Warner (4.2) PIN (Product Information Network) Apr- 94 Cox (45) Prevue Channel Jan- 88 Liberty Media (51) QVC Nov- 86 Comcast (57), Liberty Media (43) Sci- Fi Channel Sept- 92 Liberty Media (20) Sneak Prevue (TV Guide) May- 91 Liberty Media (12) Starz! Feb- 94 Liberty Media (100) Starz! Cinema May- 99 Liberty Media (100) Starz! Family May- 99 Liberty Media (100) Starz! Theater Mar- 96 Liberty Media (100) Style May- 99 Comcast (50) TBS Dec- 76 AOL Time Warner (100) TLC (The Learning Channel) Nov- 80 Liberty Media (50), Cox (24.6) Thriller Max Jun- 98 AOL Time Warner (100) TNT (Turner Network Television) Oct- 88 AOL Time Warner (100) Travel Channel Feb- 87 Liberty Media (50), Cox (24.6) Turner Classic Movies Apr- 94 AOL Time Warner (100) USA Network Apr- 80 Liberty Media (20) Viewers Choice 1- 10 and Hot Choice (11 multiplexed channels) Nov- 85 Cox( 20), AOL Time Warner (17) WE Jan- 97 Cablevision (60) WMAX May- 01 AOL Time Warner (100) Sources: NCTA, Directory of Program Services, Cable Developments 2002, at 29- 141. Liberty Media Corp., at http:// www. libertymedia. com/ our_ affiliates/ video_ programming. htm 82 Federal Communications Commission FCC 02- 338 83 TABLE C- 2 National Video Programming Services Not Affiliated With a Cable Operator Programming Service Launch Date A& E (Arts & Entertainment) Feb- 84 ABC Family (formerly Fox Family Channel) Apr- 77 ACNTV (America’s Collectibles Network) Oct- 93 All News Channel Nov- 89 America's Store Sep- 86 ANA Television Network Dec- 91 ART (Arab Radio & Television) 1999 Beauty Channel Sep- 02 BBC America Mar- 98 BET Jan- 80 BET Action Pay Per View Sep- 90 BET Gospel Jul- 02 BET Hip Hop Jul- 02 BET Jazz: The Jazz Channel Jan- 96 BET Movies Feb- 97 Biography Channel Dec- 98 Black Belt TV: The Martial Arts Network Jun- 02 Bloomberg Television Jan- 95 B Mania Nov- 00 Boating Channel Nov- 98 Box Music Network Dec- 85 Bravo Feb- 80 Buzztime Entertainment 1984 Canal Sur Aug- 91 CCTV- 4 (China Central Television) 1995 CelticVision Mar- 95 Church Channel Jan- 02 Classic Arts Showcase May- 94 CMT (Country Music Television) Mar- 83 CNBC Apr- 89 CNET: The Computer Network Jan- 95 College Entertainment Network Jan- 97 Crime Channel Jul- 93 83 Federal Communications Commission FCC 02- 338 84 Programming Service Launch Date C- SPAN Mar- 79 C- SPAN2 Jun- 86 C- SPAN3* Sep- 97 Deep Dish TV Jan- 86 Disney Channel Apr- 83 Do- It- Yourself Channel Sep- 99 Dream TV Network Nov- 96 Ecology Communications Nov- 94 Enlace Nov- 96 ESPN Sep- 79 ESPN Classic Sports (formerly Classic Sports Network) May- 95 ESPN2 Oct- 93 ESPNEWS Nov- 96 ESPN EXTRA Sep- 99 ESPN NOW Sep- 99 ESPN Today Jun- 01 ETC (The Erotic Network) Jul- 00 EWTN: Global Catholic Network Aug- 81 Extasy Feb- 98 Filipino Channel Apr- 94 Fine Living Mar- 02 Flix Aug- 92 Food Network Nov- 93 Fox Movie Channel Nov- 94 Fox News Channel Oct- 96 Fox Sports World Nov- 97 Fox Sports Espańol Feb- 99 FX Jun- 94 Free Speech TV (FSTV) Jun- 95 Galavision Oct- 79 Game Bank Nov- 95 Game Show Network Dec- 94 Golden Eagle Broadcasting Nov- 98 Goodlife Television Network (formerly Nostalgia Channel) Jun- 98 Great American Country Dec- 95 Hispanic Television Network Aug- 01 84 Federal Communications Commission FCC 02- 338 85 Programming Service Launch Date History Channel Jan- 95 History Channel International Dec- 98 Home & Garden Television Dec- 94 Hot Choice Jun- 86 Hot Net Mar- 99 Hot Zone Mar- 99 HTV Aug- 95 Idea Channel Jan- 92 Inspirational Life Television (I- LIFETV) Jun- 98 Inspirational Network (INSP) Apr- 90 Interactive Channel Nov- 93 Liberty Channel Sep- 01 Lifetime Movie Network Jun- 98 Lifetime Real Women Aug- 01 Lifetime Television Feb- 84 Lightspan Partnership, Inc. Feb- 95 Locomotion Channel Nov- 96 MBC Movie Network Nov- 98 Meadow Racing Network Nov- 84 MSNBC Jul- 96 MTV Espańol Aug- 98 MTV Hits May- 02 MTV Jams 2002 MTV Networks Latin America (formerly MTV Latino) Oct- 93 MTV: Music Television Aug- 81 Mun2 Apr- 93 My Pet TV Sep- 96 NASA Television Jul- 91 National Geographic Channel Jan- 01 National Jewish Television May- 81 Newsworld International Sep- 94 Nick At Nite’s TV Land Apr- 96 Nick Too Jan- 99 Nickelodeon Gas- Games & Sports Network Mar- 99 85 Federal Communications Commission FCC 02- 338 86 Programming Service Launch Date Nickelodeon/ Nick at Nite Apr- 79 Noggin Feb- 99 Oasis TV Sep- 97 Outdoor Channel Apr- 93 Oxygen Media Feb- 00 Pax TV Aug- 98 Playboy TV Nov- 82 Pleasure Channel Jun- 99 Power TV Zhong Tian Channel 1995 Praise Television Dec- 96 Proto X 1997 Puma TV 1997 RAI International 1999 Recovery Network Feb- 97 Russian Television Network of America Aug- 00 Saigon Broadcasting Network Feb- 02 Scandinavian Channel Oct- 99 SCOLA Aug- 87 Shop at Home Jun- 86 Shop NBC Oct- 91 Short TV Jan- 99 Showtime Jul- 76 Showtime Beyond Sep- 99 Showtime Event Television (SET) 1979 Showtime Extreme 1998 Showtime Family Zone Mar- 01 Showtime Next Mar- 01 Showtime Showcase Jul- 01 Showtime Too 2001 Showtime Women Mar- 01 Skyview World Media 1992 SoapNet Jan- 00 Speed Channel Jan- 96 Spice 1 May- 89 Spice 2 Unknown 86 Federal Communications Commission FCC 02- 338 87 Programming Service Launch Date Sun TV Aug- 96 Starnet Jan- 89 Sundance Channel Feb- 96 TechTV May- 98 Telemundo Cable Mar- 00 Telemundo Communications, Inc. Jan- 87 The Erotic Network (TeN) Aug- 98 TMC (The Movie Channel) Dec- 79 True Blue Feb- 98 TNN (The National Network) Mar- 83 Toon Disney Apr- 98 Trinity Broadcasting Network (TBN) May- 73 TRIO Sep- 94 TV 5 – USA Inc. Jan- 98 TV Asia Apr- 93 TV Games Network Unknown TV Japan Jul- 91 TVN Entertainment Corporation (33 digital pay- per- view channels) Feb- 98 TVR (TV Russia Network) 1995 TV Guide Channel Jan- 88 TV Guide Interactive Oct- 96 TV Guide Sneak Preview 1991 TVN Direct Jan- 96 Universal Torah Broadcasting Network Dec- 98 Univision Dec- 98 UVTV/ KTLA Mar- 88 UVTV/ WGN Nov- 98 UVTV\ WPIX May- 84 ValueVision Oct- 91 VH1 (Music First) Jan- 85 VH1 (Classic) Aug- 98 VH1 Soul Aug- 98 VHI Country Aug- 98 VH1 Megahits May- 02 VH UNO Nov- 99 87 Federal Communications Commission FCC 02- 338 88 Programming Service Launch Date Video Rola Jan- 01 Vivid TV Mar- 99 Weather Channel May- 82 Weather Channel/ Latin America Nov- 96 Weatherscan Apr- 98 Weatherscan Local May- 99 Wisdom Television Jul- 97 Word Network Feb- 00 Worship Network Sep- 92 X Cubed Unknown Z Music Mar- 93 ZEE TV 1999 Note: * Cable affiliates provide 95% of the funding for C- SPAN, C- SPAN2, and C- SPAN3, but have no ownership or program control interests. DBS licensees provide the other 5% of the funding and also have no ownership or program control interests. Source: NCTA, Directory of Cable Networks, Cable Developments 2002, at 29- 141. 88 Federal Communications Commission FCC 02- 338 89 TABLE C- 3 Regional Video Programming Services Programming Services Launch Date MSO Ownership (%) Arabic Channel Apr- 91 Arizona News Channel Nov- 96 Automotive Television Network (ATN) Sep- 95 Bay News 9 Sep- 97 Bonjour USA Sep- 94 Cable TV Network of New Jersey Jul- 93 California Channel Feb- 91 Casa Club TV Jul- 97 Central Florida News 13 Oct- 97 AOL Time Warner (50) ChicagoLand Television News (CLTV) Jan- 93 CN8 – The Comcast Network 1996 Comcast (100) Comcast SportsNet Oct- 97 Comcast (78) Comcast SportsNet Mid Atlantic (formerly Home Team Sports) Apr- 84 Comcast (100) Comcast Sports South East Apr- 84 Comcast (72) County Television Network San Diego Jul- 96 Cox Sports Television Oct- 02 Cox (100) Ecumenical Television Channel 1983 Empire Sports Network Dec- 90 Adelphia (67) Comcast (33) Florida's News Channel Sep- 98 Fox Sports Net Arizona Sep- 96 Cablevision (45) Fox Sports Net Bay Area Apr- 90 Cablevision (45) Fox Sports Net Chicago Jan- 84 Cablevision (45) Fox Sports Net Cincinnati 1989 Cablevision (45) Fox Sports Net Detroit Sep- 97 Cablevision (45) Fox Sports Net Florida 1989 Cablevision (45) Fox Sports Net Midwest Sep- 97 Cablevision (45) Fox Sports Net New England Jan- 88 Cablevision (50), AT& T (50) Fox Sports Net New York 1989 Cablevision (45) Fox Sports Net North Mar- 89 Cablevision (22.5), Liberty Media (50) Fox Sports Net Northwest Nov- 88 Cablevision (41.5) Fox Sports Net Ohio Feb- 89 Cablevision (45) Fox Sports Net Pittsburgh Apr- 86 Cablevision (45) 89 Federal Communications Commission FCC 02- 338 90 Programming Services Launch Date MSO Ownership (%) Fox Sports Net Rocky Mountain Nov- 88 Cablevision (45) Fox Sports Net South Aug- 90 Cablevision (45) Fox Sports Net Southwest Jan- 83 Cablevision (45) Fox Sports Net West Oct- 85 Cablevision (45) Fox Sports Net West 2 Jan- 97 Cablevision (45) Hip Hop Network Jan- 97 International Television Broadcasting (ITV) Apr- 86 Las Vegas One News Apr- 98 Local News on Cable Feb- 97 Madison Square Garden Network (MSG) Oct- 69 Liberty Media (18), Cablevision (41.5) MediaOne News Dec- 95 Liberty Media (100) Metro Sports Channel AOL Time Warner (50), AT& T (50) MGM Networks Latin America Jul- 97 Michigan Government Television Jul- 96 Midwest Sports Channel Mar- 89 MSG Metro Guide Aug- 98 Cablevision (100) MSG Metro Learning Channel Aug- 98 Cablevision (100) MSG Traffic and Weather Aug- 98 Cablevision (100) Neighborhood News L. I. Unknown Cablevision (75) New England Cable News Mar- 92 Comcast (50) New England Sports Network (NESN) Mar- 84 New York 1 News Sep- 92 AOL Time Warner News 12 Connecticut Jun- 95 Cablevision (75) News 12 Long Island Dec- 86 Cablevision (75) News 12 New Jersey Mar- 96 Cablevision (75) News 12 Bronx Jun- 98 Cablevision (75) News 12 Westchester Nov- 95 Cablevision (75) News 8 Austin Sep- 99 News 14 Carolina 2002 AOL Time Warner News Channel 5+ Sept- 96 News 14 Carolina AOL Time Warner News Now 53 Jun- 97 Cox (50) News on One Oct- 97 90 Federal Communications Commission FCC 02- 338 91 Programming Services Launch Date MSO Ownership (%) News Watch 15 Oct- 99 Newschannel 8 Oct- 91 NGTV (National Greek Television) Dec- 87 Nippon Golden Network Jan- 82 NorthWest Cable News Dec- 95 Ohio News Network May- 97 PASS Sports (Pro- Am Sports System) Apr- 84 Pennsylvania Cable Network (PCN) Sep- 79 Pittsburgh Cable News Channel (PCNC) Jan- 94 Comcast (30) Rarities Exchange Dec- 98 San Diego’s News Channel 15 Jan- 97 Six News Now Jul- 95 Soundtrack Channel (STC) Mar- 02 South Florida News Channel 1998 SportsChannel Florida Dec- 87 Liberty Media (6), Cablevision (13.5) Sunshine Network Mar- 88 Liberty Media (34.5), Cox (5.3) Texas Cable News Jan- 99 Turner South (STC) Mar- 02 AOL Time Warner TV33 Dec- 95 WSBK Feb- 88 Yankee Entertainment Sports Network (YES) Mar- 02 Sources: NCTA, Regional Cable Networks, Cable Developments 2002, at 171- 194. DirecTV Comments at 14. 91 Federal Communications Commission FCC 02- 338 92 TABLE C- 4 Planned Programming Services Programming Service Planned Launch Date, If Announced American Legal Network TBA America National Network TBA AMC’s American Pop TBA American West Network TBA Anthropology Programming and Entertainment TBA Anti- Aging Network TBA Applause TBA Auto Channel TBA BET World Music Beat TBA Bingo TV TBA Black Women’s Television 4Q02 Booknet 2003 Caribbean Visions Television TBA CFN- Children’s Fashion Network 4Q02 Chop TV TBA Collectors Channel TBA CSTV (College Sports Television) 1Q03 Diversity Network 4Q02 Documentary Channel TBA EXPN (Action Sports on Demand) 1Q03 Fad TV (Fashion & Design Television) 2Q03 Fashion Network TBA Fifth Avenue Channel TBA Fox Enhanced TV TBA GETV Network 1Q03 Global Village Network TBA Gospel Network TBA Hobby Craft Interactive TBA Honey Vision TBA Investment TV TBA Local News Network TBA 92 Federal Communications Commission FCC 02- 338 93 Programming Service Planned Launch Date, If Announced Martial Arts Action Network TBA MEN (Maverick Entertainment Network) 1Q04 Military Network 4Q03 Moore TV Network TBA Moviewatch 1Q03 Noah’s World International 2Q03 Opportunity Television Network TBA Orb TV TBA Outlet 2Q03 PCOM (Native American Nations Network) 1Q03 Performance Showcase TBA Premiere Horse Network TBA Puppy Channel 4Q03 RadioTV Network 2Q03 Real Estate Network (TREN) TBA Romanceland TBA Seminar TV Network (Seminar TV) TBA Senior Citizens Television Network 4Q02 Si TV 2Q03 Skywatcher Channel TBA Sundance Documentary Channel 3Q03 TeN BLOX 1Q03 TeN Blue 1Q03 The Football Channel (TFN) TBA The World Cinema Channel TBA Theater Channel TBA The Tennis Channel 4Q02 UBC (Urban Broadcasting Company) TBA TBA U. S. Military Television Network TBA World Cinema TBA Youth Sports Broadcasting Channel TBA 93 Federal Communications Commission FCC 02- 338 94 Sources: NCTA, Planned Services, Cable Developments 2002, at 151- 170. Operators Want Hardcore Porn, Multichannel News at http:// www. tvinsite. com/ multichannelnews/ index. asp? layout= print_ pate& doc_ id= 104331, Oct. 10, 2002. R. Thomas Umstead, Service Goes to Extremes, Multichannel News, Apr. 29, 2002, at 3. R. Thomas Umstead, Bedol: Sports Tiers Are Fine With Us, Multichannel News, Nov. 4, 2000, at 14. Linda Moss, New Nets Eye Outlets for Men, Gays, Multichannel News, Nov. 18, 2002 at 3. 94 Federal Communications Commission FCC 02- 338 95 TABLE C- 5 MSO Ownership in National Programming Services 1 Subs. (mil) Liberty Media AOL Time Warner Comcast Cox Cablevision Systems Action Max * 2 100.0% AMC 82.6 60% Animal Planet 77.0 39.2% 19.7% @Max * 100.0% Black Starz! * 100.0% Canales ń (6 channels) * 90.0% Cartoon Network 79.5 100.0% Cinemax 38.1 100.0% CNN 85.6 100.0% CNN Espańol 10.5 100.0% CNN Headline News 81.7 100.0% CNN International 3 10.0 100.0% CNN fn 18.0 100.0% Comedy Central 78.2 50.0% Court TV 68.1 50.0% 50.0% Discovery 86.0 50.0% 24.6% Discovery Civilization 7.0 50.0% 24.6% Discovery En Espańol * 50.0% 24.6% Discovery Health 33.7 50.0% 20.0% 24.6% Discovery HD Theatre * 50.0% Discovery Home& Leisure 7.0 50.0% 24.6% Discovery Kids 10.0 50.0% 24.6% Discovery Science 10.0 50.0% 24.6% Discovery Wings 7.0 50.0% 24.6% E! Entertainment 77.2 50.0% Encore 18.0 100.0% Encore Action * 100.0% 95 Federal Communications Commission FCC 02- 338 96 Services 1 Subs. (mil) Liberty Media AOL Time Warner Comcast Cox AT& T Cablevision Systems Encore Love Stories * 100.0% Encore Mystery * 100.0% Encore True Stories * 100.0% Encore WAM! * 100.0% Encore Westerns * 100.0% 5Star Max * 100.0% Fox Sports (2 channels) 16.4 50.0% Fox Sports Latin America 10.3 50.0% GEMS International TV 6.4 50.0% G4 Video Gaming Ntwk * 94.0% Golf Channel 35.0 91.0% Hallmark Channel 43.5 32.5% HBO 38.1 4 100.0% HBO Latino * 100.0% HBO 2 * 100.0% HBO Signature * 100.0% HBO Comedy * 100.0% HBO Family * 100.0% HBO Zone * 100.0% HSN 74.0 20.0% iN Demand 28 33.0% 55.0% 11.0% 44.0% Independent Film Channel 21.8 60.0% International Channel 11.8 90.0% More Max 38.1 100.0% Movie Plex 8.0 100.0% Much Music USA 44.0 75.0% Outdoor Life 40.0 100.0% Outer Max * 100.0% Ovation 5.0 4.2% PIN 35.0 45.0% Prevue Channel * 51.0% 96 Federal Communications Commission FCC 02- 338 97 Services 1 Subs. (mil) Liberty Media AOL Time Warner Comcast Cox AT& T Cablevision Systems QVC 79.6 42.0% 58.0% Sci- Fi 75.0 20.0% Sneak Prevue 34.0 12.0% Starz! 13.0 100.0% Starz! Cinema * 100.0% Starz! Family * 100.0% Starz! Theater * 100.0% Style 17.0 50.0% 10.0% TBS 87.0 100.0% TLC 83.2 50.0% 24.6% Thriller Max 37.0 100.0% TNT 85.5 100.0% Travel Channel 60.9 50.0% 24.6% TCM 49.3 100.0% USA 85.6 20.0% Viewers Choice 1- 10 * 17.0% 20.0% WE (formerly Romance) 25.0 60.0% Wmax * 100.0% Notes: AT& T ownership interests are shown in the Comcast column because Comcast acquired AT& T Broadband on Nov. 18, 2002. 1 In addition to cable, other services such as MMDS (wireless cable), SMATV (satellite master antenna television), satellite, including DBS (direct broadcast satellite) and HSD (home satellite dish), broadcast television, and LPTV (low power television) may distribute these signals. Subscriber figures may include these non- cable services. 2 Indicates that subscribership count is unknown or not available. 3 CNN International subscribership of 10 million includes domestic US subscribers only. CNN International has 129 million subscribers outside the U. S. 4 HBO subscriber numbers include HBO Latino, HBO Plus, HBO Signature, HBO Comedy, HBO Family, HBO Zone, and Cinemax, 5 Star Max, @ Max, MoreMax, ActionMax, Outer Max, Thriller Max and W Max. Sources: NCTA, Directory of Cable Networks, Cable Developments 2002, at 29- 143. http// foxsports. lycos. com/ content/ view? contentID= 541079 97 Federal Communications Commission FCC 02- 338 98 TABLE C- 6 Top 20 Programming Services by Subscribership Rank Programming Network Number of Subscribers (Millions) MSO Ownership Interest in Network (%) 1 TBS 87.0 AOL Time Warner (100) 2 Discovery Channel 86.0 Liberty Media (49), Cox (24.6) 3 ESPN 85.9 4 CNN 85.6 AOL Time Warner (100) 5 USA Network 85.6 Liberty Media (21) 6 TNT 85.5 AOL Time Warner (100) 7 Nickelodeon/ Nick at Nite 85.3 8 C- SPAN 85.0 9 A& E 85.0 10 TNN 84.9 11 Lifetime Television 84.6 12 ABC Family Channel 84.1 13 The Weather Channel 83.9 14 MTV 83.4 15 TLC 83.2 Liberty Media (49), Cox (24.6) 16 AMC 82.6 Cablevision (75) 17 ESPN2 82.6 18 CNBC 82.3 19 VH1 81.7 20 CNN Headline News 81.7 AOL Time Warner (100) Notes: In addition to cable, other services such as MMDS (wireless cable), SMATV (satellite master antenna television), satellite, including HSD (home satellite dish) and DBS (direct broadcast satellite), broadcast television and LPTV (low power television) may distribute these signals. Subscriber figures may include these non- cable services. Cable affiliates provide 95% of the funding for C- SPAN, but have no ownership or program control interests. DBS licenses provide the other 5% of the funding and also have no ownership or program control interests. Source: NCTA, Top 20 Cable Networks, Cable Developments 2002, at 21- 22. 98 Federal Communications Commission FCC 02- 338 99 TABLE C- 7 Top 20 Programming Services by Prime Time Rating Rank Programming Service MSO with Ownership Interest (%) 1 Lifetime Television 2 TNT AOL Time Warner (100) 3 Nick at Nite 4 TBS AOL Time Warner (100) 5 Cartoon Network AOL Time Warner (100) 6 USA Network Liberty Media (20) 7 Disney Channel 8 ESPN 9 A& E 10 FX 11 Fox News Channel 12 Discovery Channel Liberty Media (50), Cox (24.6) 13 MTV 14 TNN 15 TLC Liberty Media (50), Cox (24.6) 16 CNN AOL Time Warner (100) 17 ABC Family Channel 18 History Channel 19 Sci- Fi Channel Liberty Media (20) 20 Court TV Liberty Media (50), AOL Time Warner (50) Source: Kagan World Media, Day Part Ratings Averages, Prime Time (May), Cable Program Investor, July 29, 2002, at11. 99