*Pages 1--146 from Microsoft Word - 35378* Federal Communications Commission FCC 04- 5 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. 03- 172 TENTH ANNUAL REPORT Adopted: January 5, 2004 Released: January 28, 2004 By the Commission: Chairman Powell issuing a separate statement; Commissioners Copps and Adelstein concurring and issuing a joint statement. TABLE OF CONTENTS Paragraph I. INTRODUCTION ..................................................................................................................................... 1 A. Scope of this Report.................................................................................................................. 2 B. Summary of Findings .............................................................................................................. 4 1. Overview of the Past Decade: 1993- 2003 .................................................................. 4 2 General Findings ......................................................................................................... 6 II. COMPETITORS IN THE MARKET FOR THE DELIVERY OF VIDEO PROGRAMMING ...... 18 A. Cable Television Service ....................................................................................................... 18 1. General Performance................................................................................................. 20 2. Capital Acquisition and Disposition ......................................................................... 35 3. Provision of Advanced Services ............................................................................... 39 B. Direct- to- Home Satellite Services ......................................................................................... 61 1. Direct Broadcast Satellite.......................................................................................... 61 2. Home Satellite or Large Dish Service ...................................................................... 73 3. Satellite- Based Advanced Services........................................................................... 75 C. Broadband Service Providers ................................................................................................. 78 D. Wireless Cable Systems.......................................................................................................... 85 E. Private Cable Systems ............................................................................................................ 89 F. Broadcast Television Service ................................................................................................. 93 G. Other Entrants ....................................................................................................................... 104 1. Internet Video.......................................................................................................... 104 2. Home Video Sales and Rentals............................................................................... 108 H. Local Exchange Carriers...................................................................................................... 112 I. Electric and Gas Utilities ..................................................................................................... 119 1 Federal Communications Commission FCC 04- 5 2 III. MARKET STRUCTURE AND CONDITIONS AFFECTING COMPETITION ........................ 123 A. Horizontal Issues................................................................................................................... 123 1. Competitive Issues in the Market for the Distribution of Video Programming..... 124 2. Competitive Issues in the Market for the Purchase of Video Programming ......... 130 B. Vertical Integration and Other Programming Issues............................................................ 141 1. Status of Vertical Integration .................................................................................. 141 2. Other Programming Issues...................................................................................... 147 C. Technical Issues .................................................................................................................... 177 1. Cable Modems......................................................................................................... 178 2. Navigation Devices ................................................................................................. 183 3. Emerging Services................................................................................................... 187 IV. FOREIGN MARKETS ..................................................................................................................... 193 V. ADMINISTRATIVE MATTERS .............................................................................................................. 197 APPENDICES Appendix A List of Commenters Appendix B Horizontal Issues Tables Appendix C Vertical Integration Tables I. INTRODUCTION 1. This is the Commission’s tenth annual report (“ 2003 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. In previous years, we have focused only on the current state of competition and changes in the competitive environment since the prior year’s Report. This year, however, represents a landmark, as we present the tenth report. Thus, in the 2003 Report, we have decided to take a broader view of the video marketplace, and to examine changes in the industry over the year since the last report, and in the 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); 2001 Report, 17 FCC Rcd 1244 (2002); and 2002 Report, 17 FCC Rcd 26901 (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 04- 5 3 period since the first report in 1994. We offer information and analysis regarding changes in the market since the 2002 Report, over the last five years (i. e., since 1998), and in the decade since 1994. We report on trends in the market and on the factors that have facilitated or impeded changes in the competitive environment over these time periods. 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 Notice of Inquiry (“ Notice”) in this docket. 4 We do not require data submissions nor do we audit data provided. We report data and anecdotes as submitted by the commenters and note that we did not receive information on a number of issues raised in the Notice (e. g., data on the benchmarks specified in Section 612( g) of the Communications Act, also known as the 70/ 70 Rule, and information on non- English programming). 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”), broadband service providers (“ BSPs”), 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. 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 1. Overview of the Past Decade: 1993- 2003 4. The 2003 Report examines the status of competition in the market for the delivery of video programming, over the past ten years and at various intervals in between. We discuss changes that have occurred in the competitive environment over the last year, the last five years and the last decade, explain these changes to the extent possible, and describe barriers to competition that existed at the time of our first Report and those that continue to exist. Competition provides consumers with choice, better services, higher quality, and greater technological innovation. Overall, due, in part, to Congressional efforts made over the past decade, technological advances and investment in new platforms for delivering video programming, the vast majority of Americans enjoy more choice, more programming and more services than any time in history. 5 In addition to an increase in the number of video channels, cable operators and other MVPDs also now offer advanced video services and many non- video advanced services. Cable television, however, remains the predominant technology for the delivery of video programming. Ten years ago, cable operators served almost 100% of the nation’s subscribers. Today, cable’s share has fallen to approximately 75% of all MVPD subscribers. Competitive alternatives to 4 Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, 18 FCC Rcd 16042 (2003) (“ Notice”). Appendix A provides a list of commenters and the abbreviations by which they are identified herein. 5 We do not propose to make any determinations in this Report as to the amount of source or viewpoint diversity available. 3 Federal Communications Commission FCC 04- 5 4 incumbent cable operators have been available throughout this period to varying degrees and continue to develop, although not always as envisioned. For example, Congress and the Commission expected LEC video systems to become the primary competitors to cable systems. In 1992, the Commission established the video dialtone framework that permitted LEC entry into the video marketplace consistent with statutory prohibitions. Subsequently, Congress amended the Communications Act to permit LEC entry in their telephone service areas under one of four statutory frameworks, including the open video system (“ OVS”) framework. 6 Despite these efforts to foster competition, significant LEC entry into the video marketplace has failed to materialize. 5. On the other hand, DBS, which was first authorized by the Commission in 1988, and took until 1993 to begin offering MVPD services, has become the most significant national competitor to cable. Today, most consumers have the additional choice of at least two national DBS providers. As DBS equipment prices have declined and DBS offerings have become more comparable to cable service (including the provision of advanced video and non- video services), and pursuant to Congress’s authorization of the retransmission of local broadcast signals, DBS subscribership has grown rapidly. DBS now serves the second largest share of MVPD subscribers. Today, other delivery technologies (i. e., private cable systems, wireless cable systems, overbuilders) continue to serve small numbers of subscribers in limited areas with competitive alternatives to cable systems as they have over the last ten years. In 1998, for example, competing franchises had been awarded to broadband service providers with the potential to pass 7.2 million homes. In the five years since we began reporting on BSPs, competing franchises have grown, and today BSPs hold franchises that authorize them to serve over 17.7 million homes with state of the art facilities offering voice, video, and data. BSPs cite barriers to entry and, thus, their service is limited to a few markets, as noted in a recent GAO study. 7 Also, while some LECs (such as Ameritech) have exited the business, other LECs are still providing services (including those co- marketing with DBS providers), but are not expanding much beyond limited local areas. 2. General Findings 6. As was the case ten years ago, most MVPD subscribers continue to receive their video programming from a franchised cable operator, although cable’s market share has declined steadily over this period. At year- end 1993, 94.89% of MVPD subscribers received their video programming from a franchised cable operator, and by June 2003, 74.87% of MVPD subscribers received their video programming from a franchised cable operator. The decline over the past ten years has been fairly steady with a 9.5 percentage point decrease in the first five years of our Report and an additional 10.5 percentage point decrease in the second five years since our 1994 Report. 7. The total number of subscribers to both cable and non- cable MVPDs has increased significantly over the last ten years and continues to increase incrementally each year. A total of 60.3 million households subscribed to multichannel video programming services as of year- end 1993, where as of June 2003, 94.1 million households subscribed to MVPDs, an increase of more than 56% over the last ten years. Five years ago, 76.6 million households subscribed to MVPDs, an increase of more than 27% over 1993. This subscriber growth over the last five and ten years accompanied 14.2 and 21.26 percentage point increases respectively in MVPDs’ penetration of television households to 88.29% as of 6 Pub. L. No. 104- 104, 110 Stat. 56 (1996). 7 See U. S. General Accounting Office, Issues Related to Competition and Subscriber Rates in the Cable Television Industry, GAO- 04- 8 (Oct. 2003) at 10 (“ 2003 GAO Report”). 4 Federal Communications Commission FCC 04- 5 5 June 2003. 8 MVPD penetration of television households was at its highest in June 2001, when 86.42% of television households subscribed to an MVPD. 8. Since our first Report, the number of cable subscribers continues to grow, reaching almost 65.9 million subscribers as of June 2003, up from the 57.2 million cable subscribers at year- end 1993, and up from the 65.4 million cable subscribers at June 1998. In the last several years, however, cable subscribership has declined such that as of June 2003, there were approximately the same number of cable subscribers as there were at year- end 1999. Over the last five years, subscribership has only grown by half a million subscribers. Despite recent declines in subscribership, cable subscriptions have increased 2.5% in the past year. The total number of non- cable MVPD subscribers grew from 3.1 million as of year- end 1993, to 11.23 million as of June 1998, to 23.7 million as of June 2003, a significant increase over 1993. DBS subscribership has grown significantly since its introduction ten years ago in 1993, and now represents 21.63% of all MVPD subscribers. Since its introduction, the DBS growth rate has exceeded the growth rate of cable by double digits in every year except in the past year, when DBS growth exceeded cable growth by 9.16 percentage points. Between June 2002 and June 2003, the number of DBS subscribers grew from about 18.2 million households to more than 20.4 million households. The most significant growth for DBS came between June 1997 and 1998, when DBS grew more than 42.6% over the prior year. 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. Since its introduction, DBS has attracted former cable subscribers as well as consumers not previously subscribing to an MVPD. 9. Over the last year, the number of subscribers to MMDS and large dish satellite service (HSD) continued to decline, the participation of incumbent local exchange carriers in the distribution of video programming also continued to decline, and the number of subscribers to open video systems (“ OVS”) and private cable has remained relatively stable, although their market share remains small. We reported in our 1994 Report that as of year- end 1993, subscribers to HSD services were nearly 2.7% of all MVPD subscribers, and subscribers to MMDS services were almost one percent of all subscribers. At its peak at year- end 1995, subscribers to HSD services were nearly 3.5% of all MVPD subscribers, and at its peak at year- end 1996, subscribers to MMDS services were more than 1.6% of all MVPD subscribers. By June 2003, MMDS subscribers comprised only about 0.2% of all MVPD subscribers while HSD comprised only about 0.5% of all MVPD subscribers. Although subscribership to these services have been steadily declining over the last several years, the deployment and use of these services has contributed significantly to the early acceptance of non- wireline alternatives to traditional MVPD service, and has inspired current iterations of all- digital, wireless DBS services. 10. During the period under review, cable rates have risen significantly. 9 According to the Bureau of Labor Statistics, between year- end 1993 and the end of June 2003, the Consumer Price Index 8 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 n. 6. 9 While the components of cable and satellite prices differ and direct comparisons cannot be made, it appears that the average price difference between cable and satellite television service has narrowed significantly over the past five years, with average monthly expenditures for satellite service falling below cable for the first time. A study by J. D. Power and Associates found that “average monthly expenditures for satellite television service is $48.93 – (continued….) 5 Federal Communications Commission FCC 04- 5 6 (“ CPI”), which measures general price changes, increased approximately 25.5%, while cable prices, also measured as a subcategory of the CPI, rose approximately 53.1%. Between June 2002 and June 2003, the cable price component of the CPI rose 5.1% compared to a 2.1% increase in the overall CPI. 10 Concurrently with these rate increases, however, the number of video and non- video services offered increased, including a substantial increase in the number of video channels, increased use of cable (as measured by a substantial increase in cable viewership), and the addition of advanced service offerings, which, of course, are paid for separately by consumers. Cable operators attribute rising costs to increased programming costs and higher labor costs that have risen faster than inflation, as cable operators have increased the size and proficiency of their customer service workforce. GAO found that several additional factors are putting upward pressure on cable rates. The primary cost factors found by GAO are programming costs (which GAO observed, are partially recouped through the sale of advertising), and the costs associated with infrastructure investments. Increased spending by cable operators on customer service was also found to be a factor. GAO notes that industry representatives believe that certain factors related to the nature of ownership affiliations may also indirectly influence cable rates through their influence on cable operators’ choice of which cable networks to carry. As suggested by GAO, some of the increase in cable prices is the result of costs to operators from system upgrades. Upgraded systems allow cable operators to provide improved video services (i. e., an increased number of channels on analog tiers, and advanced video services such as digital tiers, video on demand, and interactive television), and non- video advanced services such as telephony and high- speed Internet access, so the costs associated with upgrades are joint costs that support a variety of services. 11 NCTA has posited that high rates of growth in cable prices do not infer market power. In addition, NCTA believes that while overall cable rates have increased, price per viewing hour has actually declined over time and consumers are receiving more for their money than they were ten years ago. 11. We note that in certain locales, cable operators’ pricing decisions may be affected by direct competition. Also, 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 (Continued from previous page) up 8% from 1998,” but “cable spending has increased 41% in the same time period, moving from an average of $35.15 per month in 1998 to $49.62 per month in 2003.” 10 Using a different methodology and covering a different mix of cable services and a different time period, the Commission’s annual survey of cable industry rates found that the monthly rate for basic service, the most highly subscribed cable programming service tier (often referred to as expanded basic or CPST), and equipment (consisting of an addressable analog set- top box and a remote control) rose by 8.2% between July 1, 2001, and July 1, 2002. Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, Statistical Report on Average Rates for Basic Service, Cable Programming Service, and Equipment, 18 FCC Rcd 13284, 13296- 98, Tables 9, 10, and 11 (2003) (“ 2002 Price Survey Report”). BLS bases the cable CPI on a survey of items on consumers’ monthly cable bills, and includes such items as premium services (i. e., pay-per- channel) and installation costs, which are not included in the Price survey’s methodology. Also, when an item shows a significant change in price, and there is a concomitant change in the nature of the product or service, BLS attempts to make a quality adjustment. BLS may increase or decrease the observed price of an item, depending on whether the change deteriorated or improved the quality of the particular product or service. In the case of cable service, the addition of channels is sometimes perceived as an improvement in quality, but not always, and thus sometimes lowers the reported percentage increase in the price index. 11 Even though all of these advanced services are offered to and paid for separately by consumers, in many cases they are also offered as bundled services and as such, may provide some discount on basic or expanded basic service. 6 Federal Communications Commission FCC 04- 5 7 prices or adding channels without changing the monthly rate, as well as improving customer service and adding new services such as interactive programming. For example, a recent GAO study found that where wire- based competition is available, cable rates are lower by about 15%. GAO further found that in markets where DBS companies provide local broadcast stations, rates are only slightly lower, but cable operators are more likely to improve the quality of their service in response to DBS competition. 12 12. Cable television has, in fact, greatly evolved since the first report, providing more choice, greater flexibility, and more control. Ten years ago, cable television was an analog transmission, but as a result of the introduction of the all- digital DBS technology and its widespread acceptance by the public, cable television operators began replacing much of their original coaxial cable infrastructure with hybrid fiber and coaxial cable (“ HFC”) networks. This migration to digital transmission has not only enabled cable operators to transmit high- quality video signals to their customers and to offer such additional enhancements as HDTV, but it also has enabled cable operators to provide vastly more channels of video programming to consumers. Digital technology also has furthered the ability of cable operators to offer more service options, including advanced two- way services 13 such as high- speed Internet access, cable telephony, and video- on- demand. Many of these services enable consumers to maintain more control over what, when, and how they receive information. 13. We first noted in our 1997 Report that several cable multiple system operators (“ MSOs”) were beginning to offer resale, and in some cases, facilities- based telephone service. The Commission anticipated that telephone service offered by cable operators would become a significant source of competition to incumbent LECs. The most promising indication of which was the merger of cable company TCI Communications and telephone company AT& T Corp. Today some cable MSOs are offering circuit switched telephony. Most cable MSOs, however, are waiting for IP technology to become widely available before accelerating their rollout of telephone service. Some of these cable operators are currently offering, or continuing to test, IP telephony products. 14. The most significant convergence of service offerings continues to be the pairing of Internet access services with video programming services. We first reported in our 1997 Report that cable operators were beginning to offer a bundle of services to include high- speed access to the Internet via cable modem. By year- end 1998, there were approximately 500,000 subscribers. 14 Some cable operators offered access to the Internet through the subscriber’s television and a specially designed set- top box, but the most popular way to access the Internet over cable was, and still is, through the use of a cable modem and personal computer. A very small number of users continue to access the Internet through television-based services. Today, virtually all of the major MSOs offer Internet access services via cable modems in large portions of their service areas and about one half of all mid- sized and small cable operators provide this service. As of June 2003, there were more than 13.8 million cable modem high- speed Internet access subscribers. Like cable, the DBS industry is continuing to develop ways to bring advanced services to their customers. For example, DirecTV currently offers one- way and two- way satellite- delivered Internet 12 See 2003 GAO Report at 3- 4. See also U. S. General Accounting Office, Telecommunications: The Effect of Competition From Satellite Providers on Cable Rates, GAO/ RCED- 00- 164 (July 2000). 13 The advanced broadband services discussed here include cable telephony and Internet Protocol (“ IP”) telephony, Internet access through cable modems, digital video, video- on- demand (“ VOD”) and near- video- on-demand (“ NVOD”), and interactive guides/ interactive programming. 2000 Report, 16 FCC Rcd at 6015, n. 11. 14 Figures represent primarily residential subscribers, though may also include some small business. See fn. 135 infra. 7 Federal Communications Commission FCC 04- 5 14 II. COMPETITORS IN THE MARKET FOR THE DELIVERY OF VIDEO PROGRAMMING A. Cable Television Service 18. Ten years ago, cable operators served almost 100% of the nation’s MVPD subscribers. 18 Today, most consumers have the additional choice of two national DBS providers, and cable’s share of the MVPD market has fallen to approximately 75% of all MVPD subscribers. 19 Competition in the MVPD market has been accompanied by technological innovation and the introduction of new products and services. In 1994, most cable operators offered 30 to 53 analog video channels. 20 Today, after investing tens of billions of dollars to rebuild and upgrade cable systems, cable operators offer, on average, 70 analog video channels, 120 digital video channels, high- definition television programming, video- on- demand, and non- video services, such as high- speed Internet access service, and telephone service. 19. This section provides a snapshot of the cable industry five and ten years ago, and addresses the performance of franchised cable system operators during the past year. 21 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 are offered in conjunction with, and over the same facilities as, video service. 1. General Performance 20. Since our last Report, the cable industry has grown in terms of basic tier cable viewership, channel capacity, 22 and premium service subscriptions. 23 Homes passed 24 continues to increase. Basic 18 NCTA Comments at 2. In the 1994 Report, the Commission found that “for most households, cable television is the only provider of multichannel video programming.” 1994 Report, 9 FCC Rcd at 7449 ¶ 13. 19 NCTA Comments at 7. 20 1995 Report, 11 FCC Rcd at 2162, Table 3. 21 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). 22 Channel capacity is bandwidth dedicated to video use. 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. 23 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. 14 Federal Communications Commission FCC 04- 5 15 tier cable subscribership 25 and basic tier cable penetration, the ratio of the number of basic cable subscribers to the number of residential cable homes passed, declined in 2002 and is estimated to have declined further in the first half of 2003. Deployment of digital video programming, HDTV programming, video- on- demand, and non- video services, such as high- speed Internet access service and telephone service continued to increase during 2002 and the first half of 2003. 21. Cable’s Capacity to Serve Television Households. 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”). 26 The calculation of cable availability has been a subject of controversy. 27 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. 28 NRTC argues that approximately 23 million households in smaller and rural markets do not have access to cable services, and only have access to DBS for MVPD services. 29 In contrast, the cable industry argues that cable operators serve all but the most sparsely populated areas. 30 Thus, there remains a disagreement regarding the number of households where there is competition between cable and DBS. NRTC asserts that the benefits of competition between DBS and cable are not yet available in many smaller and rural markets because households in these markets do not have access to cable service. 31 The cable industry contends that the MVPD market is “fully competitive” since consumers nationwide have a choice among several (Continued from previous page) 24 Homes passed is the total number of households capable of receiving cable television service. 25 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); 47 U. S. C § 543 (k)( 2). 26 2002 Report, 17 FCC Rcd at 26909 ¶ 17; Nielsen Media Research, U. S. Television Household Estimates, Sept. 2003, at 1. 27 2002 Report, 17 FCC Rcd at 26910 ¶ 18; See also Application of EchoStar Communications Corporation, General Motors Corporation, and Hughes Electronics Corporation, Transferors and EchoStar Communications Corporation, Transferee, 17 FCC Rcd 20559, 20611- 12 ¶¶ 122- 25 (2002) (“ EchoStar- Hughes HDO”) (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). 28 Homes passed data evaluated in the context of our review of the EchoStar- DirecTV merger application indicated that the number of homes not passed by cable may vary from 4% to 21.28% depending on the estimation methods. EchoStar- Hughes HDO, 17 FCC Rcd at 20612 ¶ 124 and n. 356. 29 NRTC Comments at 4; NRTC Reply Comments at 2. See also EchoStar- Hughes HDO, 17 FCC Rcd at 20612 ¶ 124 and n. 356. 30 NCTA Comments at 25. 31 NRTC Reply Comments at 2. 15 Federal Communications Commission FCC 04- 5 16 fully competitive facilities- based MVPD alternatives. 32 Comcast argues that consumers in almost every corner of America have a choice of three or more facilities- based MVPDs (i. e., at least two DBS systems and a cable system). 33 Because cable systems differ in their capacities and capabilities, there has also been disagreement as to whether low- capacity and analog cable systems are good substitutes for DBS or whether only high- capacity cable systems should be considered as good substitutes for DBS. 34 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, over the past ten years, the number of homes passed by cable systems grew from 91.6 million in 1994 to 95.6 million in 1998, and to an estimated 103.5 million in June 2003. Cable availability was estimated to be approximately 96.3% of TV households at year- end 2002. 22. Section 612( g) of the Communications Act provides that at such time as cable systems with 36 or more activated channels are available to 70% of households within the United States and are subscribed to by 70% of those households, the Commission may promulgate any additional rules necessary to promote diversity of information sources. 35 Previously, it was argued that the benchmark had not yet been met. 36 Based on the most current figures from Warren Publishing, as of December 1, 2003, there were 82,506,311 homes passed by cable systems with 36 or more channels. The Census Bureau estimates that, as of July 2002, there were 119.3 million households in the United States. The figure for December 2003 is likely to be greater than 119.3 million. Thus, cable systems with 36 or more channels are available to at most 69.2% of households in the United States. In addition, according to Warren Publishing, 56,859,607 households subscribe to cable systems with 36 or more channels. Thus, about 68.9% of households to which 36 or more channels are available actually subscribe. 32 NCTA Reply Comments at 7. NCTA states that “alternatives to cable television are virtually universally available to consumers.” Id. at 1. 33 Comcast Comments at 12; NCTA Comments at 24- 27. 34 EchoStar- Hughes HDO, 17 FCC Rcd at 20606- 8 ¶¶ 108- 112. 35 47 U. S. C. § 532( g). 36 See 2000 Report, 16 FCC Rcd 6084 ¶ 193. 16 Federal Communications Commission FCC 04- 5 17 TABLE 1: Cable Television Industry Growth: 1994 - June 2003 (in millions) 37 TV Households (“ TH”) 38 Homes Passed (“ HP”) 39 Basic Subscribers (“ Subs”) 40 Year Total % Change Over Prior Yr Total % Change Over Prior Yr Total % Change Over Prior Yr HH Passed by Cable (HP/ TH) HHs Subscribing (Subs/ TH) U. S. Penetration (Subs/ HP) 1994 95.4 1.3% 91.6 1.1% 59.5 4. 0% 96.0% 62.4% 65.0% 1998 99.4 1.4% 95.6 1.7% 65.1 1. 4% 96.2% 65.5% 68.1% 1999 100.8 1.4% 97.6 2.1% 65.9 1. 2% 96.8% 65.4% 67.5% 2000 102.2 1.4% 99.1 1.5% 66.6 1. 1% 97.0% 65.2% 67.2% 2001 105.4 3.1% 100.6 1.5% 66.9 0. 5% 95.4% 63.5% 66.5% 2002 106.7 1.2% 102.7 2.1% 66.1 -1.2% 96.3% 61.9% 64.4% June 2003 106.7 0.0% 41 103.5 0.8% 42 65.9 -0.3% 43 97.0% 61.8% 63.7% 23. Subscribership. Over the past decade, the number of cable subscribers grew from 58.4 million in 1994 to 65.1 million in 1998, peaked with 66.9 million subscribers in 2001, and then declined to an estimated 65.9 million in June 2003, as shown in Table 1 above. The number of subscribers first declined in 2002 and is estimated to fall further in 2003. For example, Cablevision lost 15,552 basic 37 Historical data in this table may differ from those previously reported because some data have been updated by the source. 38 The 2002 and estimated June 2003 TV Household numbers are reported by Kagan World Media as total U. S. TV households. The numbers are derived from Nielsen Media Research and Kagan estimates. Kagan World Media, Broadband Cable Financial Databook, Aug. 2003, at 11 (“ Cable Databook”). 39 The 1994 through 2002 homes passed numbers are reported by Kagan as residential cable homes passed. The June 2003 homes passed estimate is an average calculated from the 2002 and 2003 projection of occupied cable homes passed. Cable Databook at 9, 11. 40 The 1994 through 2002 basic subscriber numbers are reported by Kagan as basic subscribers. The June 2003 basic subscriber estimate is an average calculated from the 2002 and 2003 projection of total basic cable subscribers. Cable Databook at 9, 11. According to NCTA, there were 70.49 million cable subscribers at the end of June 2003. NCTA Comments at 8. NCTA’s estimate of cable subscribers is more than the number of basic subscribers reported in Table 1 above. This is likely due to differing measurement methodologies and data. 41 Percentage change from December 2002 to June 2003. 42 Id. 43 Id. 17 Federal Communications Commission FCC 04- 5 18 subscribers between year- end 2002 and September 30, 2003, 44 Charter lost 149,500 basic subscribers over the same 12 month period, 45 and Time Warner lost 10,000 basic subscribers in the third quarter of 2003. 46 Recent declines in the total number of cable subscribers have been attributed to the number of cable subscribers switching to DBS and changes in reporting by MSOs. 47 As the number of homes passed increased, and the number of subscribers declined, cable penetration (i. e., subscribers as a percentage of homes passed) continued to decline in 2002, and is estimated to decline further in the first half of 2003. As the number of homes passed and number of TV households increased, and the number of subscribers declined, the percentage of TV households subscribing to cable also continued to decline in 2002, and is estimated to decline further in the first half of 2003. 24. The number of homes subscribing to premium cable services increased from 27.7 million in 1994 to 32.9 million in 1998, peaked at 36 million in 2001, and declined to 35.3 million in 2002, as shown in Table 2 below. Thus, at the end of 2002, approximately 53% of cable’s 66.1 million subscribers also subscribed to premium services. It is reasonable to assume that a majority of the cable subscribers that switched to DBS also subscribed to premium cable services. This may explain the recent decline in the number of homes subscribing to premium cable services. The number of homes subscribing to premium cable services was projected to increase, however, to 35.4 million in June 2003, as shown in Table 2. The expected increase in 2003 will come from fewer basic subscriber losses and an increase in the sale of premium services to the approximately 30 million basic cable subscribers that do not subscribe to premium services. The number of premium services to which homes are subscribing (also known as “pay units”) has risen steadily over the past ten years from 46.5 million in 1994, to 58.6 million in 1998, to 81.1 million in 2002, to an estimated 82 million in June 2003. Although cable systems are selling premium cable services to fewer homes, the average number of subscriptions per remaining premium subscriber increased, from an average 1.8 subscriptions per subscriber at year- end 2001 to an average 2.3 subscriptions per subscriber at year- end 2002. 48 44 Cablevision Reported a 3 rd -Quarter Loss of Nearly $104.6 Million, COMMUNICATIONS DAILY, Nov. 13, 2003, at 13. 45 Charter Communications, Inc., Charter Communications Reports Third Quarter 2003 Results (press release), Nov. 3, 2003. 46 Mike Farrell, Mixed Results at Time Warner, MULTICHANNEL NEWS, Oct. 17, 2003. 47 NCTA Comments at 7. See also Caroline Wilbert, Cable Takes Aim at Satellite Customers, THE ATLANTA JOURNAL- CONSTITUTION, June 12, 2003, at E3. Adelphia lowered its subscriber counts for basic cable, digital cable, and high- speed Internet service reported in 2002 following a review of company accounting practices. Holly M. Sanders, Adelphia’s Restatement Reduces Number of Subscribers, BLOOMBERG NEWS, May 28, 2003, at http:// www. philly. com/ mld/ philly/ business/ 5955785. htm. Charter Communications also reduced the number of subscribers it counts in its subscriber base in response to an investigation of the its method for counting subscribers. See Charter Communications Under Investigation, REUTERS, Aug. 16, 2002, at http:// www. usatoday. com/ money/ media/ 2002- 08- 16- charter- probe_ x. htm. 48 Cable Databook at 8. 18 Federal Communications Commission FCC 04- 5 19 TABLE 2: Premium Cable Services: 1994 - June 2003 (in millions) 49 Premium Cable Service Subscribers (Pay HH) 50 Premium Cable Service Subscriptions (Pay Units) 51 Year Total % Change Over Prior Yr Total % Change Over Prior Yr 1994 27.7 4.9% 46.5 7.6% 1998 32.9 3.5% 58.6 6.0% 1999 34.3 4.3% 60.2 2.7% 2000 35.7 4.1% 65.9 9.5% 2001 36.0 0.8% 75.4 14.4% 2002 35.3 -1.9% 81.1 7.6% June 2003 35.4 0.3% 52 82.0 1.1% 53 25. Channel Capacity. In 1994, 78% of all cable systems had the bandwidth to provide 30 or more analog video channels. 54 By 1998, 84.6% of all cable systems had the bandwidth to provide thirty or more analog video channels, and 20.7% of all cable systems had the bandwidth to provide 54 or more analog video channels. 55 Subsequent investments by cable operators in hybrid fiber/ coaxial transmission lines and digital technologies increased both the bandwidth and versatility of cable systems. Although each analog video channel requires six MHz bandwidth, digital technologies facilitate the delivery of multiple digital video channels using six MHz bandwidth. The Commission’s 2002 Price Survey Report provides figures on the cable system bandwidth and the number of analog and digital video channels being delivered by cable systems responding to a Commission survey (see Table 3). 56 It shows that 49 Historical data included in this table may differ from those previously reported because some data have been updated by the source. 50 The 1994 through 2002 premium cable service subscribers (“ Pay HH”) numbers are reported by Kagan as pay subscribers. The June 2003 premium cable service subscribers estimate is an average calculated from 2002 and 2003 projections of average pay TV households. Cable Databook at 9, 11. 51 The 1994 through 2002 premium cable service subscriptions (Pay Units) numbers are reported by Kagan as the sum of premium units and mini- pay units (defined as a service or pay TV that programs less than 8 hours per day). The June 2003 premium cable service subscriptions estimate is an average calculated from 2002 and 2003 projections of total pay TV units, including mini- pay. Cable Databook at 9, 11. 52 Percentage change from December 2002 to June 2003. 53 Id. 54 1995 Report, 11 FCC Rcd at 2162, Table 3. 55 1999 Report, 15 FCC Rcd at 990 ¶ 22. 56 2002 Price Survey Report, fn. 10 supra, 18 FCC Rcd 13284, 13296- 98, Tables 9, 10, and 11. Section 623( k) of the Communications Act requires the Commission to publish annually a statistical report on cable prices, or more (continued….) 19 Federal Communications Commission FCC 04- 5 20 approximately 73% of the sampled cable systems (both competitive and non- competitive systems) 57 have facilities with bandwidth of 750 MHz or above. 58 The average bandwidth of systems in the Survey is approximately 680 MHz. Although the increased cable system bandwidth may be allocated among video and non- video services, some of the increased bandwidth has been used to increase the amount of video channels, especially the number of digital video channels. 59 The systems in the Survey devoted an average of approximately 507 MHz bandwidth to video service. 60 Today, cable operators are choosing to provide, on average, 70 analog video channels and approximately 120 digital video channels, with enough additional bandwidth to provide high- definition television, video- on- demand, and Internet access services. As shown in Table 3, from July 2001 to July 2002, the total number of video channels (analog plus digital) increased from 178 to approximately 199 for the competitive group, and from approximately 171 to 189 for the noncompetitive group. (Continued from previous page) specifically, average rates for the delivery of basic cable service, cable programming service, and equipment. See 47 U. S. C. § 543( k). Basic cable service includes local television broadcast signals. See 47 U. S. C. § 543( b)( 7). Cable programming service includes 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)( 2). Equipment refers to a converter box, remote control, and other equipment necessary to access programming. See 47 U. S. C. § 543( b)( 3). 57 2002 Price Survey Report, 18 FCC Rcd at 13298, 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, and likely are, 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 13285. 58 According to NCTA, by year- end 2002, 79 million homes were passed by systems with 750 MHz or higher capacity and approximately 86 million households were passed by systems that provided two- way services, such as cable modem, interactive television, and IP telephony. NCTA Comments at 44- 45. If we assume that there were 102 million occupied TV households passed by cable systems, NCTA’s reported numbers for June 2003 suggest that approximately 77.4% of these homes had access to cable systems with 750 MHz or higher and 84.3% of these homes had access to activated two- way plant. NCTA’s calculations for homes passed by 750 MHz cable systems differ from data reported in the 2002 Price Survey Report. This is likely due to differing measurement methodologies and data. 59 Comcast reports that a typical Comcast upgraded 750 MHz plant is designed to provide 84 analog video channels, 216 digital video channels, eight HDTV channels, VOD service for 400 digital video customers at any one time, high speed data service for 400 subscribers, and telephone service for 300 customers. Comcast Comments at 15. 60 Each analog channel requires six MHz bandwidth, so it takes approximately 420 MHz bandwidth to deliver the 70 analog channels. Multiple digital channels, however, can be delivered on six MHz bandwidth. We assume that an average of 8.6 digital channels are delivered for each six MHz bandwidth. The average number of digital channels in the survey is 124, so it takes approximately 87 MHz of bandwidth to deliver the 124 digital channels (124/ 8.6 x 6 MHz = 86.5 MHz). It would take more bandwidth if some of the digital channels were delivering HDTV programming. 20 Federal Communications Commission FCC 04- 5 21 TABLE 3: Channel Capacity 61 26. Viewership. The combined audience share 63 for total day viewing of all cable networks 64 was 29 in the 1993- 1994 television season. 65 The share grew to 42 by the 1997- 1998 television season. 66 Since then, cable networks have increased their combined audience, such that by the 2002- 2003 television season, all cable networks combined received higher total day and prime time audience shares than broadcast television. Audience share statistics for total day viewing indicate that all cable networks combined increased their audience share from 53 in the 2001- 2002 television season to a 55 share in the 2002- 2003 television season. The total day viewing audience share of broadcast television 67 fell from a 47 share in the 2001- 2002 television season to a 45 share in the 2002- 2003 television season. Audience share statistics for prime time 68 show that all cable networks combined increased their share from 50 in the 2001- 2002 television season to a 51 share in the 2002- 2003 television season. The prime time viewing share of broadcast television fell from a 50 share in the 2001- 2002 television season to a 49 share in the 2002- 2003 television season. Although the most popular cable networks receive a lower audience share for total day viewing and prime time than any of the major broadcast television networks, there are 61 2002 Price Survey Report, 18 FCC Rcd at 13296- 98, Tables 9, 10, and 11. 62 In previous years, we have reported the total number of channels in terms of the bandwidth (specifically, the estimated number of six MHz channels) needed to carry the analog and digital channels. See fn. 60 supra. 63 A share is the percent of all households using television during the time period that are viewing the specified station( s) or network( s). Nielsen reports audience shares that exceed 100% when totaled due to simultaneous multiple set viewing. We have normalized audience shares to equal 100%. 64 Cable network shares include basic (BST and CPST), premium, and PPV cable networks. As discussed in paras. 141- 142 infra, the number of nationally delivered cable networks available for delivery by cable operators and other MVPDs went from 99 in 1993, to 187 in 1998, to 339 in June 2003. 65 Nielsen Media Research, Broadcast Calendar (TV Season) Share of Audience Report, Primetime and Total Day, 1984- 85 to 2002- 03, Sept. 2003. 66 Id. 67 “Broadcast” shares include network affiliates, independent, and public television stations. 68 Prime time viewing is Monday through Saturday, 8 pm- 11 pm, and Sunday, 7 pm- 11 pm. Competitive Group Noncompetitive Group July 2001 July 2002 July 2001 July 2002 Average system capacity (MHz) 650.3 677.3 656.5 695.7 Percent of systems with capacity of: 330 MHz and below 9.8% 8.1% 7.8% 5.8% 331 through 749 MHz 24.8% 19.2% 29.4% 20.8% 750 MHz 65.4% 72.7% 62.8% 73.4% Total number of channels 62 178 198.6 170.9 189.0 Total number of analog channels 72.0 70.3 69.9 70.1 Total number of digital channels 106.0 128.3 101.0 118.9 21 Federal Communications Commission FCC 04- 5 22 a growing number of cable networks and their popularity is increasing, such that all cable networks combined have higher audience shares than all broadcast networks combined. 69 27. Cable Industry Revenue. Despite the decline in cable subscribers in recent years, cable industry revenue increased in every year of the past decade. Ten years ago, almost all revenue came from the provision of video services. In 2003, over 12% of revenue will come from Internet access and other non- video services. 70 The cable industry generated $22.9 billion total revenue in 1993, $32.7 billion in 1998, and is estimated to generate $51.3 billion in 2003, with high- speed Internet access service a principal driver of revenue growth. 71 As Table 4 shows, annual cable industry revenue grew 6.5% during 2002, reaching $46.8 billion in total revenue. Not all revenue categories increased. Revenue from premium tiers, pay- per- view, and equipment/ miscellaneous fell during 2002. These declines were offset by growth in revenue from local advertising, home shopping, advanced digital tiers, and high- speed Internet access and other non- video services. 28. 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. 72 Cash flow from operations is the net result of cash inflows from operations (revenue) and cash outflows from operations (expenses). Cash flow from operations 69 For the 2002- 2003 TV season, Nielsen Media Research reports that the top- rated cable network for all- day audience was Nickelodeon/ Nick- At- Nite with a 4 share compared to a 7 share for Fox affiliates, the lowest rated of the four major networks during the 2002- 2003 TV season. ABC, CBS, and NBC affiliates received all- day shares greater than 7 for the 2002- 2003 TV season. Similarly, the top- rated cable network in primetime was TNT with a 3 share compared to the Fox’s primetime share of 8. On a January through December basis, ad- supported cable networks combined received a 50.3 share through December 14, 2003, while the seven broadcast networks combined received a 44.6 share. Allison Romano, Basically, Cable Wins ’03, BROADCASTING & CABLE, Dec. 22, 2003, at 4. Although broadcast networks ratings tend to be large compared with any single cable channel, it is getting more common for a cable show to garner audiences similar to broadcast network shows. For example, five Sunday Night Football telecasts on ESPN attracted more than 10 million viewers each. In addition, shows like Trading Spaces, The O’Reilly Factor and SpongeBob SquarePants have attracted more than 7 million viewers. Id. 70 Cable Databook at 7. High- speed data service now generates 18% of Cablevision’s revenues. John M. Higgins, Cablevision Rolling Out IP Phone Service, BROADCASTING & CABLE, Nov. 17, 2003, at 12. 71 Jessica Reif Cohen and Keith Fawcett, Cable Television, Merrill Lynch, July 2, 2003, at 1. 72 For close to twenty years, the cable industry has used a cash flow valuation model. Cash flow valuation has been an effective tool for valuing companies that have negative net income because they are building out capital infrastructure and accruing significant long- term debt early in their life- cycle. The traditional measurement of cash flow, a measure of operating profit, has evolved into EBITDA which ignores the expenses of interest, taxes, depreciation and amortization, whereas the standard valuation model, net income, includes them. In the past year, free cash flow (“ FCF”) has largely replaced EBITDA as a critical valuation metric of choice among industry analysts. Although a standardized definition of FCF does not exist, FCF essentially takes into account the periodic interest that must be paid on debt. Some analysts more recently have proffered that the cable industry should be valued on the traditional net income model, and not cash flow or its various proxies (EBITDA or FCF) because the industry has now reached a stage of maturation that would justify use of more traditional valuation metrics. Tom Kerver, Happy (?) Anniversary to the Followers of Cash- Flow Valuation, MULTICHANNEL NEWSDAY, Sept. 30, 2002, at 3. Richard Bilotti, Scott Babka, and Kay Sheils, The Six Degrees of Separating Free Cash Flow, Morgan Stanley, Jan. 2, 2003, at 2- 3 and 8- 9. Douglas S. Shapiro, Michael L. Savner, and Jeffrey R. Toohig, Free Cash Flow, Revisited, Banc of America Securities, Apr. 28, 2003, at 20- 1. 22 Federal Communications Commission FCC 04- 5 23 indicates a firm's ability to meet its net finance and investment obligations and thus does not include non-cash charges to net income such as depreciation and amortization. As Table 4 shows, cash flow from operations increased during 2002. 73 Table 4 also shows that revenue per subscriber is expected to grow from $705 in 2002 to $778 in 2003. In addition, cash flow as a percentage of revenue (cash flow margin) increased over the same period. That is, cash flow increased at a greater rate than revenue, indicating that revenues grew faster than operating expenses during 2002. TABLE 4: Cable Industry Revenue and Cash Flow: 1994 – 2003 74 1994 1998 2001 2002 01- 02 2003 02- 03 Total Total Total Total % Change Estimated Total % Change Basic Subscribers (mil.) 57.2 65.1 66.9 66.1 -1.2% 65.7 -0.6% Revenue Segments (mil.) Basic Service and CPST Tiers $15,173 $21,574 $26,324 $27,690 5.2% $28,926 4.5% Premium (Pay) Tiers $4,680 $4,521 $5,201 $5,226 0.5% $5,192 -0.7% Pay –Per- View $484 $514 $993 $793 -20.1% $887 11.9% Local Advertising $1,077 $1,675 $2,430 $2,978 22.6% $3,246 9.0% Home Shopping $127 $175 $260 $289 11.2% $308 6.6% Total Digital Tier $0 $98 $1,980 $2,764 39.6% $3,408 23.3% High- speed Internet $0 $103 $1,878 $4,494 139.3% $6,362 41.6% Installation $328 $400 $433 $426 -1.6% $437 2.6% Miscellaneous 75 $698 $1,217 $1,893 $2,202 16.3% $2,529 14.9% Total Revenue (mil.) $22,567 $30,277 $41,392 $46,862 13.2% $51,295 9.5% Revenue Per Subscriber $394.53 $465.08 $618.71 $708.96 14.6% $780.75 10.1% Operating Cash Flow (mil.) $10,549 $14,176 $16,553 $18,610 12.4% $21,050 13.1% Cash Flow per Subscriber $184.42 $217.76 $247.43 $281.54 13.8% $320.40 13.8% Cash Flow/ Total Revenue 46.7% 46.8% 40.0% 39.7% -0.8% 41.0% 3.3% 29. Programming Costs. Programming costs have increased at double digit rates in recent years. 76 Yearly programming expenses, on a per- subscriber basis increased from $122 in 1999 to $180 in 73 Kagan World Media reports that it was high- margin, high- speed- data service that drove operating cash flow growth in 2002. Cable Databook at 7. 74 Pay- per- view, local advertising, and home shopping data for 1994, 1998 and 2001 come from the 1995, 1999, and 2002 Reports. All other data come from the Cable Databook at 8- 13 and 142. Historical data included in this table may differ from those previously reported because some data have been updated by the source. 75 Miscellaneous revenue include: advanced analog, equipment charges, residential cable phone service, and new services. Cable Databook at 8. 76 Richard Bilotti, Benjamin Swinburne, and Megan Lynch, Cable & Satellite: The Copernicus Theorem, Morgan Stanley, July 2, 2003, at 48 (“ Copernicus Theorem”); NCTA Comments at 36– 37. 23 Federal Communications Commission FCC 04- 5 24 2002, a 48% increase. 77 Sports programming appears to be a major contributor to higher programming costs. 78 The average license fees for a sports network increased by 59% in the three years between 1999 and 2002, while the average license fees for a non- sports network increased 26% over the same three year period. 79 In addition, the average license fees for the sports networks were substantially higher than the average license fees for non- sports networks. 80 Some of the increase in sports programming costs is attributable to competition among sports networks and the rising players’ salaries that lead to increased television rights fees. 81 Other reasons for increasing programming costs include: more intense competition among networks which has bid up the cost of key inputs (such as writers and producers), an increase in the amount of original content shown on cable networks, the addition of new cable networks, and improved quality of programming generally. 82 30. Cable operator programming expenditures 83 were $4.4 billion in 1994 and $7.5 billion in 1998. 84 Programming costs for 2003 will exceed $9 billion. Between 1998 and 2002, analysts estimate programming expenditures for cable operators grew an average of 11- 13%. 85 Part of this increase was from fee increases paid to cable networks and part was from the addition of channels. 86 Analysts expect programming expenditures to continue to increase at a slower rate than in recent years. 87 31. Expenditures by basic cable networks for original programming and program acquisition increased from approximately $7.9 billion in 2001 to approximately $9.2 billion in 2002. 88 Expenses for 77 2003 GAO Report, fn. 7 supra, at 21. 78 Id. at 22. 79 Id. 80 Id. 81 NCTA Comments at 36- 37. See also para. 171 infra. 82 NCTA Comments at 23. 83 Programming expenditures include analog, premium, pay- per- view, and digital programming costs. 84 NCTA, Industry Statistics, Cable Developments 2003, at 13. 85 Copernicus Theorem at 48. 86 NCTA Comments at 34- 37. 87 The projected decline in the rate of growth of programming expenditures is based on an assumed shifting in the balance of power from programmers to cable operators. See Douglas Shapiro and Michael Savner, Cable Industry Quarterly: 3Q03 Preview and Industry Outlook, Banc of America Securities, Oct. 22, 2003, at 32- 3; and Copernicus Theorem at 47. Morgan Stanley expects programming costs to increase 6– 8% annually. Copernicus Theorem at 47. Smith Barney reports that Cox’s total programming costs will increase by 11.5% in 2004. Niraj Gupta, Cable: MultichannelBeat: Fox Deal Looks Good for Cox, Citigroup- Smith Barney, Dec. 8, 2003, at 1. USB reports that Comcast’s recently signed multi- year agreement with Viacom cable networks provides for annual rate increases of 6- 8%, well below USB’s 2004 estimated programming expense increase of 9.2% for Comcast. Aryeh B. Bourkoff, Cable TV/ Satellite News & Views, UBS, Dec. 19, 2003, at 1- 2. 88 NCTA Comments at 35. 24 Federal Communications Commission FCC 04- 5 25 copyright fees for broadcast signal carriage pursuant to Section 111 of the Copyright Act 89 fell 0.9% from $121.9 million in 2001 to $120.8 million in 2002. 90 32. Cable System Transactions. The aggregate value of cable systems sold in any year depends on the number of transactions, the size of the entities involved, and the price paid. As such, the aggregate value of cable systems sold will vary from year to year. The aggregate value of cable systems sold was about $14 billion in 1994 and $64.6 billion in 1998, as shown in Table 5 below. One analyst explained that had it not been for the AT& T- Comcast merger, “2001 would have been the slowest year for cable deals” since 1982. 91 With the AT& T- Comcast merger, however, the aggregate value of cable systems sold peaked at $87.5 billion. 92 As shown in Table 5, the number of system acquisitions and exchanges between MSOs slowed in 2002 and the aggregate value of cable systems sold was only $1.4 billion. Through June 2003, there have been only 21 cable systems sales valued at approximately $422 million. According to one analyst, that is the lowest deal volume since 1982. 93 Several mergers among large operators which involve the transfer and exchange of numerous systems, however, are not reflected in Table 5. 94 One reason given for the recent slowdown in cable system transactions is that debt reduction has become a high priority for cable companies. 95 Another reason given for the slowdown is that cable stocks have fallen from their peaks and cable buyers do not want to use their shares to finance acquisitions, while cable sellers still hope to receive prices similar to those being paid in the late 1990s. 96 33. The “average value per subscriber” was $1,869 in 1994, and remained fairly constant until 1998 when it grew to $2,877, as shown in Table 5. The value per subscriber continued to increase until 2000 when it reached a peak of $5,755. 97 By 2002, it had fallen to $2,357 and was approximately $2,500 for systems sold in the first half of 2003, as shown in Table 5. The rise and subsequent decline in the 89 Copyright Act, 17 U. S. C. § 111 et seq. 90 Copyright Office, Library of Congress, Licensing Division Report of Receipts, Oct. 9, 2003. 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. 91 Kagan World Media, Broadband Cable Financial Databook, July 2002, at 177. 92 Id. 93 Id. at 5. 94 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) (“ AOL Time Warner Order”); Applications for Consent to the Transfer of Control of Licenses, Comcast Corporation and AT& T Corp., Transferors, to AT& T Comcast Corporation, Transferee, 17 FCC Rcd 23246 (2002) (“ AT& T- Comcast Merger Order”). 95 Cable Databook at 5. 96 John M. Higgins, A Pause in Consolidation, BROADCASTING & CABLE, Nov. 10, 2003, at 32. 97 Cable Databook at 179. 25 Federal Communications Commission FCC 04- 5 26 value per subscriber parallels the rise and decline in the cash flow multiple paid for systems sold. In 1994, systems were selling for 10.3 times cash flow, as shown in Table 5. It hit a low in 1997 at 9.2, then began to rise and peaked in 2000 at 19.5. 98 By 2002, systems were selling for 11.6 times cash flow, and 11.0 times cash flow in the first half of 2003, as shown in Table 5. In the late 1990s, the increase in prices paid for subscribers parallels the consolidation of the cable industry and the clustering of cable systems. 99 TABLE 5: System Transactions: 1994 - June 2003 100 1994 1998 2001 2002 01- 02 % Change Jan- Jun 2003 Number of Systems Sold 64 114 36 23 -36.1% 21 Total Number of Subscribers Sold 7,504,177 22,458,157 17,958,375 607,446 -96.6% 168,748 Average Number of Subscribers per System Sold 117,253 197,001 498,844 26,411 -94.7% 8,036 Total Number of Homes Passed Sold 12,492,997 36,387,196 31,657,221 1,158,765 -96.3% 298,723 Average Number of Homes Passed per System Sold 195,203 319,186 879,367 50,381 -94.3% 14,225 Total Dollar Value (mil.) $14,025 $64,608 $87,499 $1,432 -98.4% $421.8 Average Dollar Value (mil.) of System Sold $219 $567 $2,431 $62.3 -97.4% $20.1 National Average Dollar Value Per Subscriber 101 $1,869 $2,877 $4,872 $2,357 -51.6% $2,500 Dollar Value Per Home Passed $1,123 $1,776 $2,764 $1,236 -55.3% $1,412 Cash Flow Multiple 10. 3 13. 1 19. 3 11. 6 -39. 9% 11. 0 34. Stock Prices. Cable stock prices, as measured by the Kagan Cable MSO Average, declined 54.7%, in 2002, whereas the S& P 500 declined 23.4% and the NASDAQ declined 31.5%. 102 Analysts reported that having invested billions to rebuild and upgrade cable plant, investors appeared to be 98 Id. 99 See paras. 132- 134 infra for a discussion of consolidation and clustering in the cable industry. 100 Data for 2002 come from Kagan World Media, Cable TV Investor, Jan. 31, 2003, at 9. Data for January- June 2003 come from Kagan World Media, Cable TV Investor: Deals & Finance, July 30, 2003, at 20 (“ Deals & Finance July 2003”). Historical data included in this table may differ from those previously reported because some data have been updated by the source. 101 The value per 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. 102 Percentage changes are derived from 2001 and 2002 year- end closing prices. Cable Databook at 89. 26 Federal Communications Commission FCC 04- 5 27 concerned about the ability of cable operators to prosper against DBS. 103 Analysts also reported that cable stocks were depressed in 2002 because of accounting irregularities and legal challenges. 104 In the first half of 2003, the Kagan Cable MSO Average increased 25.5%, the S& P increased 11.0% and the NASDAQ increased 21.7%. 105 Analysts reported that cable stock prices climbed on news of moderating basic subscriber losses, encouraging trials of new technologies, strong revenue growth, and strength in the local cable advertisement market. 106 2. Capital Acquisition and Disposition 35. 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. 103 Kagan World Media, Cable TV Investor, December 20, 2002, at 1. 104 Kagan World Media, Cable TV Investor, May 30, 2003, at 1; Cable TV Investor, June 30, 2003, at 1. Kagan World Media states that cable operators spent 2002 “mired in a sea of investor distrust.” Cable Databook at 4. 105 Percentage changes are derived from 2002 year- end and June 27, 2003, closing prices. Deals & Finance July 2003 at 23. Kagan World Media states that “The provision of new services driving cash flow growth, declines in upgrade spending, and a refreshing lack of major corporate financial/ managerial scandals have helped cable shares recover from their dishonor- driven depths of 2002.” Cable Databook at 5. 106 Kagan World Media, Cable TV Investor: Deals & Finance, June 30, 2003, at 1. 27 Federal Communications Commission FCC 04- 5 28 TABLE 6: Acquisition of Capital: 1994 - June 2003 ($ in millions) 107 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% $250 1.8% $1,927 13.9% $13,897 1999 $34,358 51.9% $18,610 28.1% $5,385 8.1% $7,799 11.8% $66,152 2000 $7,255 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% $21,250 2002 $2,545 25.2% $3,942 39.0% $15 0.1% $3,608 35.7% $10,110 June 2003 $1,791 41.8% $2,376 55.5% $116 2.7% $0.0 0% $4,283 Total Raised: 1994- June 03 $83,950 $59,450 $9,122 $22,924 $175,444 Avg Raised Per Year $8,837 47.9% $6,258 33.9% $960 5.2% $2,413 13.1% $18,468 36. Capital Expenditures/ Capital Investment. In the mid- 1990s cable companies began accelerating investments to rebuild and upgrade their cable systems. 108 Since 1996, cable operators have spent approximately $74 billion on capital expenditures. 109 Approximately $40 billion was invested to: (1) extend cable systems; (2) rebuild cable systems by replacing coaxial cable with fiber optics; 110 and (3) upgrade cable systems by adding digital capabilities. 111 Approximately $22 billion was invested in set- top 107 Data for 2002 come from Cable Databook at 147. Data for January- June 2003 come from Deals & Finance July 2003 at 21. Historical data included in this table may differ from those previously reported because some data have been updated by the source. 108 Comcast argues that these capital investments have been in response to the emergence of DBS. Comcast Comments at 9. See also Cox Comments at 6; Time Warner Comments at 2; NCTA Comments at 9. 109 Kagan World Media, Cable TV Investor: Deals & Finance, Aug. 28, 2003, at 8 (“ Deals & Finance Aug. 2003”). Major capital expenditure categories include new builds, rebuilds, upgrades, and consumer premise equipment. 110 NCTA Comments at 42. 111 Deals & Finance Aug. 2003 at 8. "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. “Digital capabilities” include Internet services as well as digital television capabilities. 28 Federal Communications Commission FCC 04- 5 29 boxes, modems, converters, and inventory. 112 These investments make possible premium movie services, pay- per- view programs, high- definition programming, high- speed Internet access services, CD- quality music, and cable telephony. 113 In 2002, NCTA estimated that the rebuilding of cable plant was nearly 80% complete. 114 This year, NCTA estimates that the rebuilding is nearly 83% complete. 115 As the rebuilding of analog cable systems into advanced broadband platforms nears completion, capital expenditures for most cable operators continue to be reduced. In addition, falling prices for converters and modems are contributing to lower capital expenditures. 116 37. Capital expenditures peaked in 2001, when cable operators spent an estimated $16 billion. 117 Capital expenditures declined in 2002 to approximately $14.5 billion, and are estimated to fall again in 2003 to $11.1 billion. 118 For 2003, analysts estimate that approximately 25% of capital outlays will be spent for maintenance; 27% for plant build out, rebuild, and upgrade; 34% for set- tops, modems, converters, inventory, and scalable infrastructure; 12% for support; and 2% for commercial (i. e., non-residential) purposes. 119 38. Comcast reported capital expenditures of $2.2 billion in 2001 and $2 billion in 2002. 120 For the first six months of 2003, Comcast reported $724 million in capital expenditures. 121 Comcast reports that, prior to the acquisition of AT& T Broadband, over 95% of its systems were already upgraded. 122 112 Id. 113 NCTA Comments at 42. 114 2002 Report, 17 FCC Rcd at 26917- 18 ¶ 33 and n. 69. 115 Staff conversation with Gregory L. Klein, Senior Director, Economic & Policy Analysis, NCTA, Nov. 12, 2003. Kagan World Media states that “With capital upgrade programs in their waning years, and some operators already free cash flow- positive, attention is shifting to what cable’s $75 billion in capital expenditures since 1996 can deliver, vs. what it cost.” Cable Databook at 4. 116 Deals & Finance Aug. 2003 at 5. 117 Id. at 7- 8. 118 Id. Morgan Stanley reports that the cable industry’s total residential capital expenditures were $18.3 billion in 2001, $15.3 billion in 2002, and estimates $12.2 billion in 2003. Although Morgan Stanley’s numbers are higher than those reported by Kagan, the general decline in capital expenditures, and percentage allocation of total capital expenditures to rebuilding and upgrading, is similar. Copernicus Theorem at 11. 119 Deals & Finance Aug. 2003 at 8. 120 Comcast Corp., SEC Form 10- K for the Year- Ended December 31, 2002, at 40. 121 Comcast Corp., SEC Form 10- Q for the Period Ending June 30, 2003, at 4. In its comments, Comcast says that for 2003 the company expects to spend approximately $4 billion on capital improvements, with $1.3 billion dedicated to upgrading cable systems. In the second quarter of 2003, Comcast says that the company spent $1.1 billion in capital improvements, so that more than 89% of Comcast’s networks have been upgraded to provide two- way digital and high- speed Internet services. Comcast Comments at 14. Comcast uses the term “capital improvements” which may differ from “capital expenditures” reported in the company’s quarterly and annual reports to the SEC. 122 Comcast Comments at 14, n. 27. 29 Federal Communications Commission FCC 04- 5 30 When Comcast acquired the AT& T Broadband systems in 2002, only 66% of those systems had a capacity of 750 MHz or greater. Currently, 85% of the acquired systems have a capacity of 750 MHz or greater and have been upgraded to provide two- way digital cable and high- speed Internet access service. 123 Cox reports that over 90% of its cable infrastructure currently has capacity of 750 MHz or more, and approximately 96% of the homes passed by Cox are able to receive two- way digital video services and high- speed Internet access. 124 Cox reported capital expenditures of $2.2 billion in 2001 and $1.9 billion in 2002. 125 As of June 2003, Cox had spent approximately $662.9 million on capital expenditures. 126 Time Warner reported cable- related capital expenditures of $1.8 billion in 2001 and 2002 and $773 million in the first half of 2003. 127 Time Warner has upgraded virtually all of its cable architecture with hybrid fiber- coax cable plant capable of supporting two- way, digital communications and anticipates a decrease in capital expenditures during the full year 2003 as compared to 2002. 128 Cablevision reported cable- related capital expenditures of $934 million in 2001, and $945 million in 2002. 129 For the first six months of 2003, Cablevision reported cable- related capital expenditures of $374 million. 130 Cablevision reports that all of its upgraded cable systems utilize fiber optic cable and expects that by the end of 2003, 100% of its cable systems will be 750 MHz capable two- way interactive. 131 Charter reported cable capital expenditures of $3 billion in 2001, and $2.2 billion during 2002. 132 As of June 30, 2003, Charter spent $264 million in capital expenditures. 133 Charter expects to spend between 123 Id. at 19. 124 Cox Comments at 4. 125 Cox Communications, Inc., SEC Form 10- K for the Fiscal Year Ended December 31, 2002, at 55. 126 Cox Communications, Inc., SEC Form 10- Q for the Quarterly Period Ended June 30, 2003, at 5. 127 AOL Time Warner, Inc., SEC Form 10- K for the Fiscal Year Ended December 31, 2002, at F- 35. AOL Time Warner, Inc., SEC Form 10- Q Quarterly Report for the Period Ended June 30, 2003, at 27. 128 Time Warner Comments at 3; AOL Time Warner, Inc., SEC Form 10- Q Quarterly Report for the Period Ended June 30, 2003, at 27. 129 Cablevision Systems Corp., Cablevision Systems Corporation Reports Fourth Quarter 2002 Financial Results (press release), Feb. 11, 2003. 130 Cablevision Systems Corp., Cablevision Systems Corporation Reports Second Quarter 2003 Results (news release), August 5, 2003. 131 Cablevision Systems Corp., SEC Form 10- K for the Fiscal Year Ended December 31, 2002, at 6. 132 Charter Communications, Inc., SEC Form 10- K405 for the Year- Ended December 31, 2001, at 46. Charter Communications, Inc, Charter Announces 2002 Operating Results and Restated Financial Results for 2001 and 2000; Company Will Extend Filing of Form 10- K (news release), April 1, 2003, at 2. 133 Charter Communications, Inc., Charter Communications Reports Second Quarter 2003 Financial Results (news release), July 31, 2003, at 40. 30 Federal Communications Commission FCC 04- 5 31 $800 million and $925 million in 2003 and reports that the significant decline in capital expenditures in 2003 compared to 2002 is the result of its network being upgraded and rebuilt in prior years. 134 3. Provision of Advanced Services 135 39. A decade ago, cable operators provided only analog video services. Today, most cable operators offer subscribers a number of advanced services, including digital video, high- speed Internet access, video- on- demand (“ VOD”), high- definition television (“ HDTV”), and Internet protocol (“ IP”) telephony over cable. Mid- sized and smaller cable operators also are deploying advanced services. 136 A December 2002 survey of mid- sized and smaller cable operators shows that more than half were providing digital cable and high- speed cable Internet service, and most of the other half planned to launch the services in the near term. 137 The advanced services provided, or planned, by mid- sized and smaller cable operators appear to be similar to those offered by large cable operators. 138 134 Charter Communications, Inc., Charter Communications Reports Second Quarter 2003 Financial Results (news release), July 31, 2003, at 40. 135 Subscription data for advanced services shown in this Report are primarily for residential service, but may also include some small business service. For example, Comcast offers a business Internet service for teleworkers called Comcast Teleworker, and a business Internet service for small businesses with up to five computers called Comcast Pro. Similarly, Time Warner also offers a business Internet service called Road Runner Business Class to small and medium- sized businesses and telecommuters. Subscribers to these services are included in the reported numbers. 136 American Cable Association, ACA Members Say High- End Services Key to Future Growth, but Programming Problems Must be Resolved Promptly (press release), June 30, 2003. See also NCTA, Operators of Mid- Size, Small and Rural Cable Systems Detail Broadband Deployment for FCC (press release), Feb. 4, 2003. 137 Id. See also The Carmel Group, The Telecom Future of Independent Cable, Survey of American Cable Association Concerns and Issues, June 30, 2003, at 16. Some respondents to the survey plan to provide advanced services in 3- 5 years. For example, 14% plan to provide digital cable in 3- 5 years, 5% plan to provide high- speed Internet access in 3- 5 years, 33% plan to provide HDTV in 3- 5 years, 32% plan to provide VOD in 3- 5 years, and 22% plan to provide DVR in 3- 5 years. Some respondents to the survey have no plans to provide advanced services. For example, 7% have no plans to deploy digital cable, 22% have no plans to deploy high- speed Internet access, 11% have no plans to deploy HDTV, 19% say they will never deploy VOD, and 28% say they will never deploy DVR. Id. 138 For example, Buckeye Cable System serves approximately 151,000 subscribers and advertises a “state- of- the-art fiber optic network,” with digital cable including HDTV, and high- speed Internet access with 2 Mbps download speed. Buckeye Cable System, at http:// www. buckeyecablesystem. com. Sunflower Broadband, which serves Lawrence, Eudora, and Douglas County, Kansas, provides digital cable with HDTV, high- speed internet access, and digital telephony. Cebridge Connections, which serves approximately 350,000 subscribers in primarily suburban, small- town, and rural communities in nine states, states that it “is committed to bringing these customers a level of service that matches what their urban- based counterparts enjoy.” Cebridge Connections, Classic Communications Becomes Cebridge Connections: Name Change is Part of Large Makeover for Small-System Operator (news release) Oct. 6, 2003. Cebridge expects to begin deploying cable telephony in early 2004. Cebridge Connections, Net2Phone to Provide Cable Telephony Services for Cequel III’s Cebridge Connections (news release), Nov. 18, 2003. 31 Federal Communications Commission FCC 04- 5 32 40. Digital Video Services. In 1997, several cable operators were beginning to provide digital video, data, and voice services over their cable systems. 139 Today, all major cable operators offer digitally- compressed video channels to cable subscribers on a “digital tier.” 140 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. The programming available on digital tiers includes a variety of genres, such as sports, movies, children’s, and foreign- language programming. 41. In 1998, 740,000 cable homes subscribed to digital cable service. 141 At the end of 2001, approximately 15.2 million cable homes subscribed to digital cable service. 142 At the end of 2002, the number of subscribers grew to 19.2 million. 143 The cable industry reports that at the end of June 2003, digital cable service was available to approximately 90% of all cable subscribers and the number of subscribers to digital video service grew to 20.6 million. 144 42. As of June 30, 2003, Comcast offered digital cable service to all of its 21.4 million subscribers and had seven million digital cable subscribers. 145 Comcast offers two digital tiers (not including movie tiers or pay- per- view). 146 Comcast also offers two Spanish- language tiers in markets with large Hispanic populations. 147 As of June 30, 2003, Cox digital cable was available to 98% of its 6.3 million basic cable subscribers and had 1.9 million digital cable subscribers. 148 Cox offers several digital tiers from which a subscriber may pick and choose, including, for example, a movie tier, a variety tier, a sports and information tier, a TeleLatina tier, and a Discovery tier. 149 Cox also offers a series of multiplexed premium digital tiers, including HBO, Showtime, and international premium services, such as TV Asia and Washington Korean TV. 150 As of June 30, 2003, Time Warner had 11.1 million basic 139 1997 Report, 13 FCC Rcd at 1063- 64 ¶¶ 45- 46. The MSOs beginning to offer digital video service included Cablevision, Comcast, Cox, and Time Warner. Id. 140 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. 141 Cable Databook at 8. 142 NCTA Comments at 52. 143 Id. 144 Id. at 51- 52. 145 Comcast Comments at 15. 146 Id. at 23. 147 Id. at 24. 148 Cox Comments at 8; Cox Communications, Inc., Cox Communications Announces Second Quarter Financial Results for 2003 (press release), July 30, 2003. 149 Cox Comments at 8. 150 Id. 32 Federal Communications Commission FCC 04- 5 33 cable subscribers and over 4.1 million digital cable subscribers. 151 Time Warner’s digital cable service offers up to 200 video and audio channels. 152 By year end 2002, Cablevision had approximately 3.0 million basic cable service subscribers and 216,500 digital video subscribers. 153 At the end of June 2003, the number of Cablevision’s digital video subscribers had grown to 597,600. 154 Charter provided digital video service to approximately 2.7 million subscribers as of year- end 2002, and reported a loss of 31,700 digital video subscribers in the first quarter of 2003, and a loss of 47,200 digital video subscribers in the second quarter of 2003. 155 43. Incentives to expand the provision of digital video services were recently furthered by the Commission’s approval of rules to implement an agreement between consumer electronics companies and cable operators that will provide consumers with digital television sets that connect to digital cable without a set- top box. 156 The potential availability of a single “plug and play” standard between digital television and digital cable systems is expected to help speed the transition from analog to digital television. 157 44. Video- on- Demand. Time Warner launched a commercial trial of video on demand (“ VOD”) service in 1994, but abandoned the operation in 1997. 158 In 1999, cable operators began market trials of video- on- demand through digital set- top boxes. 159 Today, most of the major cable operators, including Cablevision, Charter, Comcast, Cox, Insight, Mediacom, and Time Warner are testing or actively deploying video on demand services. 160 One analyst estimates that about seven million homes had access to VOD at the end of 2002, up from three million in 2001. 161 Unlike pay- per- view services, VOD allows consumers to order video programming from a central server at any time of the day, and to fast- forward, 151 Time Warner Comments at 5; Time Warner, AOL Time Warner Reports Second Quarter 2003 Results (press release), July 23, 2003. 152 Time Warner Comments at 6. 153 Cablevision Systems Corp., Cablevision Systems Corporation Reports Fourth Quarter 2002 Financial Results (press release), Feb. 11, 2003. 154 Cablevision Systems Corp., Cablevision Systems Corporation Reports Second Quarter 2003 Results (press release), Aug. 5, 2003. 155 Charter Communications, Inc., SEC Form 10- K for the Year- Ended December 31, 2002, at 12; Charter Communications Reports First Quarter 2003 Operating Results (press release), May 7, 2003; Charter Communications Reports Second Quarter 2003 Financial Results (press release), July 31, 2003. 156 Implementation of Section 304 of the Telecommunications Act of 1996, Commercial Availability of Navigation Devices, Compatibility Between Cable Systems and Consumer Electronics Equipment, 18 FCC Rcd 20885 (2003). 157 NCTA Comments at 50. See paras. 101, 184 infra. 158 For a discussion of the 1994 Time Warner VOD trial see para. 191 infra. 159 1999 Report, 15 FCC Rcd at 1002 ¶ 52. 160 NCTA Comments at 53. 161 Id. 33 Federal Communications Commission FCC 04- 5 34 rewind, and pause the programming. 162 In addition to VOD, some cable operators offer subscription video- on- demand (“ SVOD”), in which the subscriber pays one monthly fee for unlimited access to a library of pre- selected programming. 163 45. Comcast’s VOD service, ON DEMAND, is available to 20% of Comcast’s subscribers. 164 Comcast expects to make it available to 50% of its subscribers by the end of 2003. 165 Time Warner provides VOD service in all of its cable operating divisions. 166 Time Warner provides three different VOD services: (1) iControl Movies allows subscribers to select from a collection of more than 120 movies, with about one- third of the selection changed each month; (2) iControl Premiums is a SVOD for premium channels, including Cinemax, HBO, Showtime, and the Movie Channel, allowing subscribers to view programs shown on these channels; and (3) iControl Favorites provides subscribers with access to select programming on a number of popular channels, including Biography, Comedy Central, and the Food Channel. 167 Cox’s Entertainment on Demand is available in four markets. 168 The service gives subscribers access to more than 250 hours of movies and allows the customer to control the content using full VCR- like functionality. 169 Another example of VOD service is Cablevision’s Interactive Optimum (“ iO”), which is the first VOD service to make high- definition programming available to iO subscribers. 170 46. High- Definition Television (“ HDTV”). In 2001, Comcast announced the launch of an HDTV service to more than 1.3 million customers. 171 Also in 2001, Time Warner agreed to carry the HDTV signals of broadcast television stations in its operating areas, and the HDTV versions of HBO and 162 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 time shifted 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. 9, 2003). 163 See 2002 Report, 17 FCC Rcd at 26920- 23 ¶¶ 39- 41. 164 Comcast Comments at 15. 165 Id. 166 Each of Time Warner’s cable operating divisions is a cluster of cable franchises, see http:// www. timewarner. com/ companies/ time_ warner_ cable_ index. adp (visited Dec. 8, 2003) and http:// www. timewarner. com/ companies/ clusters. adp (visited Dec. 8, 2003). 167 Time Warner Comments at 7. 168 Cox Comments at 9. 169 SeaChange International, Cox Communications Selects SeaChange for Video- on- Demand Rollouts Next Year (press release), Oct. 15, 2003. 170 Cablevision Systems Corporation, Cablevision Introduces First High- Definition Video On Demand Service (news release), Sept. 2, 2003. 171 2001 Report, 17 FCC Rcd at 1265 ¶ 42. 34 Federal Communications Commission FCC 04- 5 35 Showtime in certain areas. 172 Today, cable operators are deploying HDTV nationwide. 173 Over 60 million television households are passed by cable systems offering HDTV, including 83 of the top 100 designated market areas and 39 markets beyond the top 100. Cable systems are carrying the digital signal of 231 broadcast television stations, as well as non- broadcast HD programming networks. 174 47. Comcast offers at least five HDTV channels in markets such as Los Angeles, California; Chicago, Illinois; Philadelphia, Pennsylvania; San Francisco, California; the Washington, D. C., metropolitan area; Detroit, Michigan; and Atlanta, Georgia, and will soon launch HDTV service in Denver, Colorado. 175 In addition, Comcast and Best Buy have partnered to sell HDTV sets and Comcast Digital Cable in several major cities. 176 In Chicago, Comcast reached similar HDTV marketing deals with 20 local retailers including Abt Electronics. 177 Comcast has similar relationships with Tweeter, Staples, Gateway, RadioShack, and Circuit City. 178 Cox currently offers HDTV service to subscribers in Omaha, Nebraska; Las Vegas, Nevada; Phoenix, Arizona; Fairfax County, Virginia; San Diego California; Oklahoma City, Oklahoma; and Cleveland, Ohio. 179 Time Warner has introduced HDTV in most of its markets, including New York, New York; Houston, Texas; Raleigh, North Carolina; Orlando, Florida; and Minneapolis, Minnesota. 180 Time Warner’s HDTV service has attracted over 120,000 subscribers. 181 In 2003, Cablevision began offering HDTV set- top boxes to most of its New York- area subscribers. 182 Charter Communications offers HDTV in 14 markets. 183 48. In addition to the larger markets, cable operators are providing HDTV in some mid- sized and smaller markets and rural areas including Austin, Texas; Portland, Maine; Raleigh- Durham, North Carolina; Omaha, Nebraska; Green Bay, Wisconsin; Las Vegas, Nevada; Little Rock, Arkansas; Toledo, Ohio; Louisville, Kentucky; Indianapolis, Indiana; Fresno, California; and Columbus, Ohio. 184 Smaller 172 Id. 173 Comcast Comments at 26; NCTA Comments at 46. 174 NCTA Comments at 46. 175 Id. at 47. 176 Comcast Comments at 17. Cities include Philadelphia, Pennsylvania; Baltimore, Maryland; Knoxville, Tennessee; Nashville, Tennessee; and Washington, D. C. 177 Comcast Comments at 17. 178 Id. at 17- 18. 179 Cox Comments at 8; NCTA Comments at 47. 180 Time Warner Comments at 9; NCTA Comments at 46. 181 Time Warner Comments at 10. 182 NCTA Comments at 47. 183 Id. 184 Id. 35 Federal Communications Commission FCC 04- 5 36 and rural markets where HDTV is available include Batavia, New York; Fargo, North Dakota; Palm Desert, California; Sherman, Texas; Waco, Texas; Twin Falls, Idaho; Pittsfield, Massachusetts; Biloxi, Mississippi; New Ulm, Minnesota; Lima, Ohio; Idaho Falls, Idaho; East Cartage, New York; Greenwood, Mississippi; and Youngstown, Ohio. 185 49. NCTA states that cable networks are the leading producers of HDTV content. 186 HBO, for example, provides 70% of its programming in HDTV, and Showtime provides most original movies and many original series in HDTV. 187 Discovery HD Theater offers Discovery’s most popular programming in HDTV. 188 A& E Television Networks 189 is producing original series and specials in HDTV. 190 In July 2003, Bravo launched Bravo HD+, featuring music concerts, ballet, theater, and opera in HDTV. 191 A new HDTV channel is also being introduced by Starz Encore. 192 Cinemax HD also is scheduled to offer HDTV before the end of 2003. 193 In 2003, iN DEMAND began providing some movies in HDTV, and plans to launch two new HDTV channels (iNHD and iNHD2) featuring movies, sports and general entertainment. 194 HDNet provides a 24 hour movie network called HDNet Movies and a 24 hour general entertainment network called HDNet, exclusively in high- definition. 195 50. The amount of HDTV sports programming continues to increase. In March 2003, ESPN launched an HDTV channel to carry 100 baseball, hockey and football games in the next year, and it plans to convert all of ESPN’s other programming to the technical equivalent of HDTV. 196 Madison Square Garden Network offers many of the New York teams’ home games in HDTV. 197 In the Philadelphia and Baltimore/ Washington, D. C., markets, Comcast SportsNet is offering more than 200 professional sporting events in HDTV annually. 198 FoxSportsNet produces over 150 games each year in 185 Id. at 47- 48. 186 Id. at 48. 187 Id. 188 Id. at 49. 189 These include The History Channel, The Biography Channel, and History Channel International. 190 NCTA Comments at 49. 191 Id. 192 Id. 193 Id. at 50. 194 Id. 195 Mark Cuban, HDNet Presentation, Chairman’s Distinguished Speaker Series, FCC, June 12, 2003. 196 NCTA Comments at 50. 197 Id. at 49. 198 Comcast Comments at 26. 36 Federal Communications Commission FCC 04- 5 37 HDTV. 199 In 2003, USA Network carried the U. S. Masters Tournament (Golf) and the U. S. Open Tournament (Tennis) in HDTV. 200 51. Internet High- Speed Data Services. In 1996, cable operators were beginning to combine their video service offerings with Internet access. 201 Also in 1996, a number of cable operators had announced large orders for cable modems. 202 Today, cable’s high- speed Internet access service is the principal driver of industry growth – contributing approximately half of cable operators’ revenue growth. 203 52. Dial- up Internet access remains the most widely- used mode of accessing the Internet. 204 As of year- end 2002, approximately 74% of all Internet households were accessing the Internet using dial- up modems. 205 It is projected that telephone dial- up will remain the principal means of accessing the Internet until 2005, when it is estimated that 49% will use dial- up access, with the remaining 51% accessing the Internet through cable modem, DSL, and other broadband facilities. 206 53. Cable modem access, however, remains the primary means of accessing the Internet over broadband networks. DSL remains the most significant broadband competitor to cable modem service. The cable industry expects industry- wide upgrades enabling the provision of broadband Internet access to residential customers will be completed soon. 207 As of year- end 2002, high- speed Internet access services provided over cable were available to 87.5 million homes. 208 As of year- end 2002, there were 11.6 million subscribers to cable’s high- speed internet access service, and at the end of June 2003, there were 199 NCTA Comments at 49. 200 Id. 201 1996 Report 12 FCC Rcd at 4416 ¶ 108. 202 Id. 203 Jessica Reif Cohen and Keith Fawcett, Cable Television, Merrill Lynch, July 2, 2003, at 1. Kagan World Media asserts that in 2003, they expect high- speed data service “to contribute 12.4% to total residential revenue, the largest piece of the revenue pie after basic service.” Cable Databook at 7. 204 Dial- up Internet access does not refer to high- speed Internet access. For an overview of networks and technologies used to deploy advanced telecommunications services, including high- speed Internet services, see Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable And Timely Fashion, and Possible Steps To Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, 17 FCC Rcd 2844 (2002). 205 Copernicus Theorem at 43. 206 Id. at 44. 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 ¶¶ 55- 56. 207 NCTA Comments at 56. 208 Copernicus Theorem at 38. 37 Federal Communications Commission FCC 04- 5 38 an estimated 13.8 million subscribers. 209 This compares with 5.8 million residential DSL subscribers at the end of 2002, and an estimated 7 million DSL subscribers at the end of June 2003. 210 In addition to cable modem and DSL, there were nearly two million subscribers to other broadband technologies, including satellite and wireless, at year- end 2002. 211 Over the past few years, the cable industry’s share of all high- speed Internet access subscribers has been fairly consistent, with 63- 65% of all high- speed Internet access subscribers using cable modems. 212 54. Some cable operators offer one Internet service provider (“ ISP”) to customers in a given system. 213 For example, Cablevision offers high- speed Internet access service under the brand Optimum Online, Charter offers this service under the Charter Pipeline brand, and Cox offers this service under the Cox High Speed Internet brand. Other cable operators offer consumers a choice among multiple ISPs. For example, Time Warner’s cable modem subscribers may select from Road Runner, AOL for 209 NCTA Comments at 57. Morgan Stanley reports 11. 1 million high- speed cable modem subscribers at year- end 2002 and estimates 13.4 million subscribers by June 30, 2003. Copernicus Theorem at 38. 210 Id. at 43. 211 Federal Communications Commission Releases Data on High- Speed Services for Internet Access, News Release, June 10, 2003, at 2. See also NCTA Comments at 58. 212 Copernicus Theorem at 31- 34. 213 Many cable providers offer cable modem service through proprietary ISPs. See 2001 Report, 17 FCC Rcd at 1266- 67 ¶¶ 46- 47 and n. 136; 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, Declaratory Ruling and Notice of Proposed Rulemaking, 17 FCC Rcd 4798 (2002) (“ High- Speed Access Declaratory Ruling and NPRM”). In the High- Speed Access Declaratory Ruling and NPRM, the Commission concluded that “cable modem service, as it is currently offered, is properly classified as an interstate information service, not as a cable service, and that there is no separate offering of telecommunications service.” High- Speed Access Declaratory Ruling and NPRM, 17 FCC Rcd at 4802. In a previous case, the U. S. Court of Appeals for the Ninth Circuit concluded that cable broadband service was not a “cable service” but instead was part “telecommunications service” and part “information service.” AT& T v. City of Portland, 216 F. 3d 871 (9th Cir. 2000). In a more recent case, the U. S. Court of Appeals for the Ninth Circuit found that the Commission’s Declaratory Ruling agreed with the Court’s conclusion that cable broadband service is not “cable service,” but disagreed with the Court’s conclusion that it is in part “telecommunications service.” As such, the Court affirmed in part, vacated in part, and remanded to the Commission for further proceedings the High- Speed Access Declaratory Ruling and NPRM. Brand X Internet Services v. FCC, 345 F. 3d 1120 (9 th Cir. 2003) [No. 02- 70518, Oct. 6, 2003]. 38 Federal Communications Commission FCC 04- 5 39 Broadband, Earthlink, and in many areas several smaller ISPs as well. 214 Comcast has agreed to deals with a total of six ISPs, 215 including Earthlink for distribution in Seattle and Boston, 216 AOL for 214 Time Warner Comments at 11- 12. Time Warner explains that its “provision of the AOL For Broadband service and its obligation to make multiple ISP services available to its customers are subject to compliance with the terms of the FTC Consent Decree and the FCC Order entered in connection with the regulatory clearance of the AOL- Time Warner Merger.” AOL Time Warner Inc., SEC Form 10- K for the Fiscal Year Ended December 31, 2002, at 10- 11. The capability to use multiple ISPs is only available in certain Time Warner systems. 215 These deals were entered into while seeking, and following, the regulatory approval of Comcast’s merger with AT& T Broadband. Christopher Stern, Cable’s Closed Connections, THE WASHINGTON POST, Oct. 11, 2003, at E1 and E2. AT& T- Comcast Merger Order, 17 FCC Rcd at 23296- 97 ¶ 130. 216 Christopher Stern, Cable’s Closed Connections, THE WASHINGTON POST, Oct. 11, 2003, at E1 and E2. 39 Federal Communications Commission FCC 04- 5 40 Broadband, 217 and Microsoft. 218 55. As of year- end 2002, Comcast had 3.6 million high- speed Internet access subscribers, and by June 2003, Comcast had nearly 4.4 million high- speed Internet access subscribers. 219 Cox had approximately 1.4 million high- speed Internet access subscribers at the end of 2002, and nearly 1.7 million subscribers by June 2003. 220 Time Warner had 2.5 million high- speed Internet subscribers at year- end 2002, and 2.9 million subscribers by June 2003. 221 As of year- end 2002, Cablevision had 770,100 high- speed Internet access subscribers, and by June 2003, Cablevision had 921,100 subscribers. 222 Charter had 1.1 million high- speed Internet access subscribers at the end of 2002, and 1.3 million subscribers at the end of June 2003. 223 56. In previous reports, we have reported that a few cable operators offered Internet access services delivered through a television receiver rather than a personal computer. 224 Some of these 217 AT& T and Comcast have entered into a three- year non- exclusive agreement with Time Warner under which AOL for Broadband is being made available on AT& T Comcast cable systems. The AOL ISP agreement between AT& T Comcast and AOL Time Warner was made in connection with a restructuring agreement by and among AOL Time Warner, Inc., AT& T Corp. and Comcast Corp., Aug. 20, 2002. For a discussion of the AOL ISP agreement, see AT& T- Comcast Merger Order, 17 FCC Rcd at 23296- 99 ¶¶ 130- 134. For a discussion of the restructuring agreement, see id. at 23273- 75 ¶¶ 73- 77. See also 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. Although the terms of the AOL ISP agreement have not been made public, news reports indicate that AOL will pay Comcast roughly $38 per subscriber; AOL will not compete with Comcast’s digital cable content, such as streaming video; and AOL’s ISP will have access to a limited number of Comcast’s cable systems. See Diane Mermigas, Comcast makes out: AOL TW works it out, ELECTRONIC MEDIA, Sept. 16, 2002 at http:// www. tvweek. com/ deals/ 091602dicolumn. html (visited Nov. 21, 3003). Currently, AOL charges $54.95 per month for its AOL for Broadband- Cable/ DSL Plan. America Online, Choose by Plan: Select the Right Price Plan, at http:// free. aol. com/ microsite/ choose_ plan. adp? promo= 456341& session_ id= 496004268 (visited Nov. 21, 2003). 218 AT& T- Comcast Merger Order, 17 FCC Rcd at 23296- 97 ¶ 130. Comcast has agreed to offer Microsoft an access agreement on terms no less favorable than those provided to other ISPs with respect to specified cable systems. See also Comcast Corporation, SEC Form 10- K, for the Fiscal Year Ended December 31, 2002, at 8. 219 Comcast Holdings Corp., SEC Form 10- K for the Fiscal Year Ended December 31, 2002, at 4; Comcast Reports Second Quarter 2003 Results (press release), July 31, 2003. 220 Cox Communications, Inc., SEC Form 10- K for the Year- Ended December 31, 2002, at 6; Cox Communications Announces Second Quarter Financial Results for 2003 (press release), July 30, 2003. Cox data subscribers can establish up to seven different e- mail addresses. 221 AOL Time Warner, Inc., SEC Form 10- K for the Fiscal Year Ended December 31, 2002, at 8; AOL Time Warner Reports Second Quarter 2003 Results (press release), July 23, 2003. 222 Cablevision Systems Corp., SEC Form 10- K for the Fiscal Year Ended December 31, 2002, at 5; Cablevision Systems Corporation Reports Second Quarter 2003 Financial Results (press release), Aug. 5, 2003. 223 Charter Communications, Inc., SEC Form 10- K for the Year- Ended December 31, 2002, at 12; Charter Communications Reports Second Quarter 2003 Financial Results (press release), July 31, 2003. 224 2002 Report, 17 FCC Rcd at 26926 ¶ 48. 40 Federal Communications Commission FCC 04- 5 41 products were available on a stand- alone basis and could be used independently of a cable television subscription. Others, however, were co- marketed through the cable television provider. Using the television as an Internet device has not always been commercially successful. 225 For example, American Online announced that effective November 30, 2003, it would no longer offer the AOLTV television-based Internet access service; 226 and WorldGate sold its interactive television property rights to TVGateway which focuses on interactive programming guides, rather than Internet access services. 227 Microsoft’s MSN- TV (formerly WebTV) continues to offer Internet access services using a television. 228 57. Telephone Services Offered by Cable Operators. Some cable companies, which currently serve 2.5 million residential subscribers with traditional circuit- switched telephony, are pursuing IP telephony. 229 These companies include Comcast, Cox, Time Warner, Cablevision, Charter, Insight Communications, and Armstrong Cable. 230 To ensure interoperability between vendors of IP telephony equipment, CableLabs created PacketCable to develop an open architecture that would manage delivery of IP services over cable modem networks. 231 Cable operators differ as to whether their telephone service will be a primary service with back- up powering in case of a power outage, or a secondary line service without back- up powering. 232 Analysts expect these cable companies will begin to position the service as a primary line service using battery back- up powering, rather than network powering. 233 225 For example, in 2001, Charter was using WorldGate television- based internet access service to provide service to 9,000 TV- based Internet subscribers. Charter Communications, Inc., SEC Form 10- K for the Year Ended December 31, 2001, at 15. At the end of 2002, however, Charter reported that it offered television- based Internet access service in a very limited number of markets. Charter Communications, Inc., SEC Form 10- K for the Year Ended December 31, 2002, at 14. 226 AOLTV Shutdown Notice, at http:// www. aoltv. com (visited Nov. 17, 2003). 227 For a summary of WorldGate’s business plans, see http:// www. wgate. com/ company/ about_ Wgate/. For a description of TVGateway’s services, see TVGateway releases upgraded version of its IPG, July 10, 2002, http:// www. indiantelevision. com/ tec/ y2k2/ july/ julytec7. htm (visited Nov. 17, 2003). 228 For a description of the MSN TV service, see http:// www. msntv. com/ pc/ default. aspx. 229 NCTA Comments at 22. 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. 230 Id.; Copernicus Theorem at 45. 231 Id. During 2003, PacketCable has focused on testing and certifying IP telephony products. See para. 182 infra. 232 Richard Bilotti, Megan Lynch, Benjamin Swinburne, and Simon Flannery, Cable/ Satellite & Telecom: Cross-Industry Insights: IP Telephony, Morgan Stanley, Oct. 9, 2003, at 4 (“ Cross- Industry Insights”). 233 Id. Some believe the ubiquity of wireless phones reduces the need for a back- up powered landline service and the cost of a battery for back- up power has declined. Id. Battery back- up powering is less expensive than (continued….) 41 Federal Communications Commission FCC 04- 5 42 58. Cox began offering local circuit- switched telephone service in 1997 to 1,500 subscribers in Orange County, California. 234 As of June 30, 2003, circuit- switched telephone service was available to nearly 4.6 million subscribers, and over 800,000 subscribed. 235 Cox Digital Telephone is facilities- based and network powered, offering backup in the event of power outages. 236 With more than one million residential access lines in 11 markets, Cox is the 12th largest local telephone company, the third largest in California, and the second largest in many of the states in which it operates. 237 Cox averages 18.4% penetration in areas where the company’s telephone service has been marketed, and processes 29 million calls a day. 238 Cox also offers a long- distance package and at the end of March 2003, 77% of Cox Digital Telephone subscribers chose Cox’s long distance service. 239 As of June 30, 2003, Comcast offered circuit switched telephone service to 9.2 million homes and had 1.4 million subscribers. 240 In some areas, Comcast uses its upgraded cable network to provide circuit- switched local telephone service and to resell third- party long distance service to its telephone subscribers. 241 Cablevision sells its Cablevision Optimum Telephone Service to approximately 11,700 residential subscribers in New York City, Long Island, and Connecticut. Charter has approximately 23,700 cable telephony subscribers. 242 59. Although most cable operators are testing IP telephony, a few cable operators have made the service commercially available on part or all of their cable systems. 243 Cablevision began testing its Optimum Voice service in Nassau County in January 2003, started selling the service on Long Island, New York, in September 2003, and made the service available to all its cable broadband subscribers in metropolitan New York in November 2003. 244 Cablevision’s IP telephony service is tied to its Optimum (Continued from previous page) network powering, and the latter requires that the cable operator commit the entire footprint to telephony. Copernicus Theorem at 45. 234 Cox Comments at 11. 235 Id. 236 Id. at 11– 12. 237 Id. at 11. 238 Id. 239 Id. at 12. 240 Comcast Comments at 15. 241 Comcast Corporation, SEC Form 10- K for the Fiscal Year Ended December 31, 2002, at 6. 242 NCTA Comments at 23. 243 Jessica Cohen and Keith Fawcett, Cable Television, Merrill Lynch, July 2, 2003, at 1. With the exception of Cablevision, Morgan Stanley does not expect cable operators to make IP telephony widely available in their cable systems until late 2004 at the earliest. Copernicus Theorem at 45. 244 Ben Charny, Cablevision Adds VoIP to Broadband Menu, CNET NEWS. COM, Nov. 11, 2003, at http:// news. com. com/ 2100- 7352- 5106133. html (visited Nov. 25, 2003); Yuki Noguchi, Identity Crisis: Internet Services Challenge Definition of ‘Phone Company’, THE WASHINGTON POST, Oct. 23, 2003, at E1; John H. Higgins, Cablevision Rolling Out IP Phone Service, BROADCASTING & CABLE, Nov. 17, 2003, at 12. 42 Federal Communications Commission FCC 04- 5 43 Online high- speed Internet service, which 33% of its basic subscribers currently take. 245 Time Warner began deploying a commercial IP telephony service, which it markets as Digital Phone service, in Portland, Maine, in May 2003. 246 Time Warner recently announced an agreement with Sprint and WorldCom Inc. to offer IP telephony to all its subscribers. Sprint and WorldCom Inc. will assist Time Warner in providing Digital Phone, termination of IP telephony to the public switched telephone network, delivery of enhanced 911 service, local number portability, and carrying long distance traffic. 247 In December 2003, Cox introduced IP telephony in Roanoke, Virginia. 248 Cox explains, however, that its telephone offerings will remain a hybrid, with circuit switches serving as a backbone for a national architecture and IP telephony serving smaller markets. 249 Comcast is testing IP telephony in Philadelphia and plans to offer IP telephony in three markets in 2004 250 Charter began an IP telephony technical trial in Wausau, Wisconsin, in early 2003 and plans to test the service in other markets later this year. 251 Analysts, however, do not expect Charter to commercially deploy IP telephony for at least a couple of years. 252 60. Digital Video Recorders. Digital Video Recorders (“ DVRs”), also called Personal Video Recorders (“ PVRs”), allow video programming to be stored on a hard disk, which can then be played back at any time. DVR features include fast- forward, pause, and the ability to pause live television. Stand- alone DVRs are available. 253 Cable operators are integrating DVR functionality into digital set- top boxes. Time Warner is the most aggressive at deploying DVR service, will have 250,000 subscribers by the end of September 2003, and expects to have 500,000 subscribers by the end of 2003. 254 Comcast is testing DVR capabilities in Philadelphia and markets around Washington, D. C., and plans to integrate 245 For $34.95, subscribers get unlimited local and long distance minutes, call waiting, caller ID, call forwarding, call return, and three- way calling. The service, however, is not life- line service since it will fail if the power goes out in a subscriber’s home. John H. Higgins, Cablevision Rolling Out IP Phone Service, BROADCASTING & CABLE, Nov. 17, 2003, at 12. 246 Time Warner has signed up 5,500 subscribers. Yuki Noguchi, Identity Crisis: Internet Services Challenge Definition of ‘Phone Company’, THE WASHINGTON POST, Oct. 23, 2003, at E1. 247 Brigitte Greenberg, Time Warner Cable Rolling Out VoIP with Help from MCI, Sprint, COMMUNICATIONS DAILY, Dec. 9, 2003, at 1- 2. 248 Brigitte Greenberg, Cox Switches from Circuit- Switch to VoIP in New Telephony Debut, COMMUNICATIONS DAILY, Dec. 16, 2003, at 3. 249 Id. 250 Brigitte Greenberg, Wall St. Analysts Told of Cable’s New Push into Telephony, COMMUNICATIONS DAILY, Dec. 12, 2003, at 1- 2. 251 NCTA Comments at 23. 252 Cross- Industry Insights at 2. 253 TiVo and Replay TV both offer stand- alone DVR services that are compatible with cable, broadcast, and DBS. Time Warner Comments at 8- 9. 254 Alex Zavistovich, DVRs Integrated with Set- Tops to Bloom by 2007, CT PIPELINE, Nov. 4, 2003, at http:// www. broadband- pbimedia. com/ pipeline/ previous/ pipe110403. html (visited Nov. 21, 2003). 43 Federal Communications Commission FCC 04- 5 44 DVR capabilities into its VOD service. 255 Comcast plans to begin offering DVR service in the fourth quarter of 2003 and to have DVR service available to all subscribers by the end of 2004. 256 Comcast’s DVR service will priced at $9.95 per month. Cox has launched its DVR service in Gainesville, Florida and Northern Virginia and will begin offering in San Diego, Santa Barbara and Humboldt, California; Phoenix, Arizona; Las Vegas, Nevada; and Cleveland, Ohio. 257 This will make Cox’s DVR service available to 35% of Cox’s subscribers by year- end 2003. 258 Cox’s DVR service will cost $9.99 plus lease price of the integrated DVR digital set- top box. 259 In July 2003, Charter ordered 100,000 digital media center boxes with DVR capability. 260 DVR penetration is projected to reach 24.7 million homes by 2007, with 10.9 million homes subscribing to cable- based DVR service. 261 B. Direct- to- Home Satellite Services 1. Direct Broadcast Satellite 61. DBS service is a nationally distributed subscription service that delivers video and audio programming via satellite to a small parabolic “dish” antenna located at the subscriber’s residence. The Commission first authorized DBS service in 1988. 262 DBS service was not introduced until 1990 when PrimeStar launched a medium power satellite and began offering 11 channels in 1991. 263 In 1993, Hughes launched the first U. S. high power DBS service, and in 1994 began marketing its service under the DirecTV brand name, distributing over 50 channels of subscription and pay- per- view programming. 264 255 Comcast Comments at 30. 256 Comcast Adds 472,000 Cable Modem Subscribers in Q3, CONVERGE NETWORK DIGEST, Oct. 30, 2003, at http:// www. convergedigest. com/ DSL/ lastmilearticle. asp? ID= 9252 (visited Nov. 24, 2003). 257 Cox Comments at 8; Jeff Baumgartner, Cox Bullish on the DVR, CED Broadband Direct, Oct. 24, 2003, at http:// www. cedmagazine. com/ cedailydirect/ 1003/ cedaily031024. htm# 3 (visited Nov. 21, 2003). 258 Jeff Baumgartner, Cox Bullish on the DVR, CED Broadband Direct, Oct. 24, 2003, at http:// www. cedmagazine. com/ cedailydirect/ 1003/ cedaily031024. htm# 3 (visited Nov. 21, 2003). 259 Id. 260 Digeo Newsletter, August 2003, at http:// www. digeo. com/ newsroom/ newsletter. jsp (visited Nov. 21, 2003). 261 DBS- based DVR service and consumer electronics’ retail sales of DVRs are projected to account for the remaining 13. 8 million homes with DVR service. Alex Zavistovich, DVRs Integrated with Set- Tops to Bloom by 2007, CT PIPELINE, Nov. 4, 2003, at http:// www. broadband- pbimedia. com/ pipeline/ previous/ pipe110403. html (visited Nov. 21, 2003). 262 For a chronology of DBS developments, see Kagan World Media, The State of DBS 2002, Nov. 2001, at 39- 72 (“ Kagan State of DBS 2002”). 263 PrimeStar initially offered seven “superstations” (FCC licensed, non- network broadcast stations), three pay-per- view stations, and one foreign language station. See Implementation of Section of the Cable Television Consumer Protection and Competition Act of 1992, Direct Broadcast Satellite Public Service Obligations, 8 FCC Rcd at 1591 (1993). PrimeStar was a joint venture between six cable MSOs and GE American Communications. In 1994, PrimeStar began using digital technology to provide approximately 70 channels to subscribers, and by 1997 it began offering 160 channels. 264 1994 Report, 9 FCC Rcd at 7474 ¶63. 44 Federal Communications Commission FCC 04- 5 45 USSB later entered the market using transponders on Hughes’ satellite, but sold only premium subscription content, such as HBO and Cinemax. In 1996, EchoStar initiated its digital service using a single satellite. DirecTV acquired PrimeStar in April 1999 and USSB in May 1999. Presently, DirecTV provides service from a fleet of seven satellites, and EchoStar provides service from a fleet of nine satellites. 265 62. Currently, four operators hold licenses to provide DBS service: EchoStar (marketed as the DISH Network), DirecTV, Dominion Video Satellite, Inc. (marketed as Sky Angel), and Cablevision’s Rainbow DBS (marketed as Voom). 266 All four currently offer subscription services. 267 Voom initiated its commercial service on October 15, 2003. 268 The service is delivered from the 61.5° degree orbital slot, which will allow it to cover the easternmost part of the continental United States. 269 Voom is attempting to distinguish itself from its competitors by accentuating its high- definition programming. Voom will include 39 high- definition channels, 28 cable channels and over- the- air local digital channels. 270 Voom’s 265 DirecTV Comments at 1. For information regarding EchoStar’s satellite fleet, see Dish Network, at http:// www. dishnetwork. com/ content/ aboutus/ satellites/ index. shtml. 266 Last year, we reported that Compass Systems, Inc., a company 100% owned by Northpoint Technologies, Ltd., filed an application for a construction permit for a DBS system and for authorization for a terrestrial platform in the DBS frequencies. On May 30, 2003, Compass Systems’ application was found unacceptable for filing and was dismissed without prejudice. See Letter from Don Abelson, Chief, International Bureau, FCC, and John Muleta, Chief, Wireless Telecommunications Bureau, FCC, to Antoinette Cook Bush, Vice President, Compass Systems, Inc. (May 30, 2003). 267 Dominion holds licenses for eight channels at 61.5° W. L. orbital location. 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). 268 Cablevision, Cablevision’s Rainbow DBS Introduces Voom – Nation’s First Television Service Designed to Meet Demand of Growing Underserved HDTV Market (press release), Oct. 15, 2003 (“ Voom Press Release”). 269 Cablevision launched its Rainbow 1 DBS spot- beam satellite on July 17, 2003. Cablevision asserts that by using spot- beam technology, the satellite can reach 143 DMAs, including 76 of the top 100 and 67 of the remaining 110. See also Mavis Scanlon and Shirley Brady, Cablevision Calls It Voom, CABLE WORLD, Sept. 15, 2003, at http:// www. cableworld. com/ ar/ cablevision_ calls_ voom (visited Oct. 6, 2003). 270 Voom states that 21 of these channels are exclusive commercial free channels supplied by Cablevision’s Rainbow Media subsidiary. In addition to the HD channels, Voom will offer several cable channels, including Disney Channel, A& E, FX, and AMC, as well as over- the- air digital local broadcast channels delivered in standard definition. Voom states that by February 2004 its programming will include 39 HD channels and 88 standard definition channels. See Voom Press Release. 45 Federal Communications Commission FCC 04- 5 46 equipment package costs $750, which includes a satellite dish, set- top receiver, remote control, digital off- air antenna, and installation charge. Monthly service fees begin at $40 per month. 271 63. Foreign- licensed Satellites Operators Seeking Access to the U. S. Market for DBS and DTH. On May 7, 2003, the International Bureau granted the application of Digital Broadband Applications Corp. (“ DBAC”) to provide two- way broadband video and data services from two Canadian DBS satellites and one American fixed satellite service (“ FSS”) satellite. 272 The Commission’s approval of this application is the first authorization for DBS service in the United States from Canadian satellites. The Commission declared that it hoped to stimulate competition in the U. S. DBS and FSS markets, reduce prices and further technological innovation. 273 As a condition of its authorization, DBAC may not provide DBS programming to U. S. customers that it obtains through exclusive agreements entered into with Canadian space station operators, program suppliers, and/ or program distributors. 274 WSNet Holdings, Inc. also proposes to uplink programming from an earth station in New York to two Canadian DBS satellites to provide services to approximately one million subscribers in the United States. 275 This application remains pending. 64. On August 14, 2003, the International Bureau authorized SES Americom to provide DTH service using its existing FSS satellites. 276 SES Americom also has pending a Petition for Declaratory Ruling, filed April 25, 2002, to provide DBS services in the U. S. market from a satellite at 105.5° W. L. licensed by Gibraltar. 277 SES Americom seeks to offer satellite capacity for third party direct- to- home services to consumers in the United States. The petition is pending. 271 Voom is waiving these fees until February 2004. See Bill Lammers, New Satellite Service Promises More Choices for HDTV Owners, THE PLAIN DEALER, Dec. 4, 2003. 272 See Digital Broadband Applications Corp. Consolidated Application for Authority to Operate U. S. Earth Stations with a U. S.- Licensed Ku- Band FSS Satellite and Canadian- Licensed Nimiq and Nimiq 2 Satellites to Offer Integrated Two- Way Broadband Video and Data Services Throughout the United States (Call Sign E020010), File No. SES- LIC- 20020109- 00023, 18 FCC Rcd 9455 (2003). DBAC network is expected to consist of one hub earth station and one million satellite home terminals that will access the Canadian Nimiq and Nimiq 2 satellites and the U. S. FSS satellite Galaxy XI. 273 Id. at 18 FCC Rcd 9463- 64 ¶ 18. 274 Id. at 9464 ¶ 19. The Commission prohibits exclusive service arrangements made by both U. S. and non- U. S. satellite operators providing any services in the United States. See Amendment of the Commission’s Regulatory Policies to Allow Non- U. S. Licensed Satellites Providing Domestic and International Services in the United States, 12 FCC Rcd 24094 (1997). 275 WSNet Holdings, Inc., Application for a Fixed Transmit/ Receive Earth Station, File No. SES- LIC- 20011121- 02186 and Call Sign E010320 (Nov. 21, 2001), and Amendment, File No. SES- AMD- 20020102- 00029 (Jan. 2, 2002); Application for Receive Only Earth Stations, File No. SES- LIC- 20020111- 00075 and Call Sign E020022, and One Request for Waiver, File No. SES- MSC- 20020111- 00074 (Jan. 11, 2002). 276 See SES AMERICOM, Inc. Applications for Modification of Fixed- Satellite Service Space Station Licenses and Columbia Communications Corporation Applications for Modifications of Fixed- Satellite Service Space Station Licenses, Order and Authorization, 18 FCC Rcd 16589 (2003). 277 Satellite Space Applications Accepted for Filing, Public Notice, Report No. SAT- 00100 (rel. May 17, 2002). 46 Federal Communications Commission FCC 04- 5 47 65. Subscribership. As of June 30, 2003, approximately 20.4 million households in the U. S. subscribed to DBS services. 278 This represents an increase of 12% over the 18.2 million DBS subscribers we reported last year. 279 DBS comprises approximately 20% of all MVPD subscribers. 280 These rates of growth are attributed to competitive pricing, wide programming selection, higher levels of customer service, expansion of local- into- local service, and the introduction of new products such as personal video recorders. 281 As a relatively new service, DBS continues to attract consumers who never subscribed to MVPD services, as well as consumers switching from cable service. DirecTV states that according to its internal subscriber data, approximately 70% of its customers were cable subscribers at the time that they first subscribed to DirecTV. 282 66. Historically, DBS has experienced very strong growth. At the end of its first calendar year of service, DBS service had approximately 600,000 subscribers. 283 One year later, there were more than 2.2 million subscribers. 284 In 1996, EchoStar attracted over 350,000 subscribers within its first year of operation. 285 In 1998, there were 8.7 million DBS subscribers. 286 67. Presently, DirecTV is the leading DBS operator and the second largest MVPD provider with 11.6 million subscribers as of June 2003, an increase of 8% from the 10.7 million subscribers as of June 2002. 287 EchoStar is the second largest DBS operator and fourth largest MVPD, with 8.8 million 278 SBCA Comments at 4. 279 See 2002 Report, 17 FCC Rcd at 26930 ¶ 58. 280 SBCA Comments at 4. 281 See, e. g., Richard Bilotti, Benjamin Swinburne, and Megan Lynch, The Shifting Winds of Pay- TV Market Share, Morgan Stanley, Oct. 5, 2003; New Selling Season, New Products, SKY RESEARCH, June 2003; Seth Schiesel, Cable or Satellite? Please Stay Tuned, THE NEW YORK TIMES, July 31, 2003. 282 DirecTV Comments at 11. With respect to former digital cable subscribers, DirecTV claims that much of its subscriber growth over the last year was from customers who had tried digital cable but were dissatisfied with it. According to DirecTV, its subscriber research finds that approximately 45% of its new customers have subscribed to digital cable. See Despite Loss, DirecTV, Hughes Play Up Third Quarter Results, SATELLITE BUSINESS NEWS, Oct. 15, 2003. 283 Kagan State of DBS 2002 at 34. At the end of 1994, DirecTV had 350,000 subscribers and PrimeStar had 231,000. Of DirecTV’s subscriber count, approximately 118,000 also subscribed to USSB’s service. Id. 284 Id. 285 Id. 286 Id. 287 DirecTV has entered into an exclusive distribution relationship in certain areas of the United States with the National Rural Telecommunications Cooperative (“ NRTC”), which acquires and supports its own subscribers. The NRTC, its partner Pegasus, and several smaller resellers are reported to account for approximately 1.6 million rural households out of DirecTV’s reported 10.7 million subscribers. See Hughes Electronics Corp., SEC Quarterly Report Form 10- Q Pursuant to Section 13 of 15( d) of the Securities Act of 1934 for the Quarterly Period Ended June 30, 2003, at 37 (“ Hughes 2 nd Quarter 2003 10- Q”); NRTC Comments at 2. 47 Federal Communications Commission FCC 04- 5 48 subscribers as of June 30, 2003, an increase of almost 16% over last year’s 7.6 million. 288 Sky Angel does not report its subscriber numbers on an annualized basis. 289 68. Equipment Pricing: To receive DBS service, subscribers require a satellite dish and a set- top box. In 1994, we reported that DirecTV sold its home receiving equipment for $699 and subscribers paid either $150-$ 200 for professional installation or they could purchase the installation equipment for $69.95. 290 Following EchoStar’s entry into the marketplace in 1996, DBS equipment pricing dropped to as low as $199 plus installation costs. 291 In 1998, equipment and installation costs had dropped to $49. 292 Today, standard equipment and installation are generally offered free of charge, but usually with the requirement that the subscriber commit to a one year programming package contract. 293 DBS equipment has also incorporated more functionality, such as digital video recorders and HDTV, but this equipment is generally not offered for free. 294 69. Availability of Local Broadcast Stations. Since 2000, DBS operators have been authorized to deliver local broadcast television stations in their local markets (“ local- into- local service”). 295 288 EchoStar Communications Corp., SEC Quarterly Report Form 10- Q Pursuant to Section 13 of 15( d) of the Securities Act of 1934 for the Quarterly Period Ended June 30, 2003, at 20. 289 Last year we reported one analyst estimate that Sky Angel had approximately one million subscribers. See 2002 Report, 17 FCC Rcd at 26930 ¶59. 290 1994 Report, 9 FCC Rcd at 7475 ¶65. The $699 DirecTV subscriber unit allowed a subscribing household to watch one channel at a time. In order to view two different channels on different television sets, a subscriber had to purchase an $899 unit and purchase a $649 decoder for the second television set. Id. 291 See 1997 Report, 13 FCC Rcd at 1073- 74 ¶60. EchoStar offered equipment for $199 to customers who signed up for a full year’s programming at $300. In response to EchoStar’s offer, DirecTV offered a $200 rebate to subscribers that purchased any brand of its equipment and a one- year subscription to its “Total Choice” programming package. Id. 292 See 1998 Report, 13 FCC Rcd at 24330 ¶73. 293 For example, as of October 15, 2003, DirecTV was running a promotion to provide a two or three room standard equipment installation and four months free of a programming package beginning at $39.99 or above for a new customer subscribing to DirecTV’s NFL Sunday Ticket and a one year contract. DirecTV valued the promotion at $350. Similarly, EchoStar’s Dish Network offers several promotions that center around free equipment. 294 Dish Network offers its DISH 721 set- top box with two tuners, integrated digital video recorder and 120 GB hard drive for $600. It also offers a $700 high- definition television receiver. See Dish Network, at http:// www. dishnetwork. com/ content/ products/ receivers/ dishpvr721/ index. shtml (visited Oct. 15, 2003). DirecTV offers a $400 high definition television system and a $99 personal video recorder set- top box. See DirecTV, at http:// www. directv. com/ DTVAPP/ imagine/ Landing. dsp (visited Oct. 15, 2003). 295 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 Designated Market Area (“ 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, it must carry all the local stations in the DMA, effective January 1, 2002. See Implementation of the Satellite Home Viewer Improvement Act 1999: Broadcast Signal Carriage Issues, Retransmission Consent Issues, 16 FCC Rcd 1918 (2000); Implementation of (continued….) 48 Federal Communications Commission FCC 04- 5 49 According to SBCA, in 2000, approximately 19% of DBS subscribers received local signals via DBS. 296 As of December 2003, local- into- local service is offered by at least one DBS operator in 106 of 210 television markets (i. e., designated market areas, or DMAs), which cover 86% of all U. S. television households. This represents an increase of 65% from last year’s reported 64 markets. SBCA estimates that approximately 58% of DBS subscribers elect to receive broadcast signals from their DBS provider, either through local- into- local service or via distant network signals. 297 As of December 2003, EchoStar offered subscribers in 101 DMAs a package of local broadcast stations including commercial and non-commercial stations. 298 DirecTV offers local- into- local service in 64 DMAs. 299 70. News Corp.- Hughes Transaction. On May 2, 2003, General Motors Corporation (“ GM”), Hughes Electronics Corporation (“ Hughes”) and The News Corporation Limited (“ News Corp.”) submitted a joint application to the Commission seeking consent to transfer control of various Commission licenses and authorizations, including its DBS and fixed satellite space station, earth station, and terrestrial wireless authorizations held by Hughes and its wholly- or majority- owned subsidiaries to News Corp. 300 71. On December 19, 2003, the Commission adopted a Memorandum Opinion and Order (“ Order”) approving the joint application subject to several conditions designed to ensure the public interest benefits and remedy any potential public interest harms. 301 The transaction combines the News (Continued from previous page) 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). 296 SBCA Comments at 9. 297 Id. According to an SBCA DBS Subscriber Study completed in April 2003, approximately 54% of DBS subscribers obtain local broadcast stations, while seven percent receive distant network signals. According to SBCA, some subscribers receive both local- into- local and distant networks signals. Id. DirecTV states that, as of June 30, 2003, over 75% of its residential customers subscribe to the local programming packages in markets in which they are available. DirecTV Comments at 14. 298 EchoStar Communications Corp., Dish Network Satellite Television Brings Local TV Channels to Savannah, GA (press release), Dec. 22, 2003. For a current list of markets where EchoStar offers local- into- local service, see http:// www. dishnetwork. com/ content/ programming/ locals/ index. shtml. Where EchoStar delivers all available local channels offered by ABC, CBS, Fox, NBC, PBS, UPN, and WB, it charges $5.99 per month in addition to other subscriber package charges, and $4.99 in markets where one or more of the local stations is not available for retransmission. DirecTV prices its local broadcast packages similarly. 299 DirecTV Comments at 2. 300 See General Motors Corporation and Hughes Electronics Corporation, Transferors, and The News Corporation Limited, Transferee, Consolidated Application For Authority to Transfer Control, MB Docket No. 03- 124 (May 2, 2003). The proposed transaction involved the split- off of Hughes from GM, with Hughes becoming a separate and independent company, followed by a series of transactions where News Corp., an Australian corporation, through its majority- held U. S. subsidiary, Fox Entertainment Group, would acquire a 34% interest in Hughes. The remaining 66% interest in Hughes would be held by three GM employee benefit trusts (managed by an independent trustee), which combined would hold an approximately 20% interest in Hughes, and by the general public, which would hold an approximately 46% interest in Hughes. 301 The Commission approved the Application and imposed the conditions pursuant to Sections 4( i) and (j), 303( r), 309, and 310( d) of the Communications Act of 1934, as amended, 47 U. S. C. §§ 154( i), 154( j), 303( r), 309, (continued….) 49 Federal Communications Commission FCC 04- 5 50 Corp. ’s programming assets with DirecTV’s nationwide multichannel video programming distribution platform. 302 The Commission determined that the transaction would likely generate several public interests benefits, including the introduction of new services such as interactive television from DirecTV; that consumers should benefit from stronger competition in the MVPD market; and that the Commission’s goals of promoting localism and competition would be furthered. Nevertheless, the Commission found that the transaction posed several potential public interest harms related to access to programming and discrimination against unaffiliated programmers and imposed the following conditions to mitigate those potential harms. 72. First, News Corp. is required to offer its existing and future cable programming services on a non- exclusive basis and non- discriminatory terms and conditions, for as long as the FCC’s program access rules are in effect. Second, by the end of 2004, DirecTV must offer local broadcast television service packages in an additional 30 designated market areas beyond what had been previously funded, projected or planned. 303 Third, News Corp. must extend its commitments regarding non- discriminatory MVPD access to cable programming to any broadcast television station that News Corp. owns and operates, or on whose behalf it negotiates retransmission consent. In addition, the good faith and exclusivity requirements of the 1999 Satellite Home Viewer Improvement Act, due to sunset at the of 2005, are extended for as long as the program access rules are in effect. Fourth, News Corp. and DirecTV must enter commercial arbitration to resolve disputes with other MVPDs over retransmission consent of News Corp. ’s broadcast stations and carriage of its regional sports networks (“ RSNs”). 304 Finally, the Commission established rules for MVPDs meeting the Commission’s definition of “small cable company,” allowing those entities to appoint an agent to bargain collectively on its behalf and that of other small MVPDs in negotiating for carriage of regional sports networks and retransmission consent for broadcast stations with News Corp. 305 2. Home Satellite or Large Dish Service 73. The home satellite dish (“ HSD”) or large dish segment of the satellite industry is the original satellite- to- home service offered to consumers, and involves the home reception of signals transmitted by (Continued from previous page) and 310( d). See Subject to Conditions, Commission Approves Transaction Between General Motors Corporation, Hughes Electronics Corporation and The News Corporation Limited, Public Notice, FCC 03- 328 (rel. Dec. 19, 2003). 302 Following approval of the transaction, on December 22, 2003, GM, Hughes, and News Corp. completed the split- off of Hughes from GM and the acquisition by News Corporation of 34 percent of the outstanding common stock of Hughes. See Hughes Electronics, GM, Hughes, and News Corporation Complete Hughes Transactions (press release), Dec. 22, 2003. 303 Under this condition, an aggrieved MVPD may file a program access complaint for any alleged violation of the program access conditions. 304 This condition applies to any RSN that News Corp. manages or in which it owns or holds a controlling interest. It also applies to retransmission consent agreements for any broadcast station in which News Corp. owns or holds an attributable interest, or independently- owned Fox network affiliates for which it negotiates retransmission consent. This condition will expire six years after the release of the final Order. 305 When dealing with small MVPDs with fewer than 5,000 total subscribers, News Corp. must either elect “must-carry” status or negotiate retransmission consent for its owned and operated stations without any requirements for cash compensation or carriage of programming other than the broadcast signal. 50 Federal Communications Commission FCC 04- 5 51 satellites operating generally in the C- Band frequency. 306 Unlike DBS, which uses small dishes, HSD antennas are between four and eight feet in diameter and can receive a wide range of unscrambled (free) programming and scrambled programming purchased from program packagers that are licensed to facilitate subscribers’ receipt of video programming. 307 There are approximately 30 satellites operating in the C- band, which carry over 500 channels of programming combined; approximately 350 channels are available free of charge and 150 are scrambled and require a subscription. 308 74. In 1994, there were an estimated 4.5 million active HSD users, roughly half of whom subscribed to one or more programming services. 309 HSD subscribership peaked in 1995 at 2.4 million subscribers. 310 Over the past eight years, HSD has experienced a continued decline, with 502,191 households receiving C- band service as of June 30, 2003, a decrease of over 28% from the 700,641 we reported as of June 2002. 311 Overall, C- band has experienced a decline from a high of 2.3 million in 1995 to approximately 590,000 at the end of 2002. 312 In addition, approximately 3,500 hotels and 3,000 SMATV locations employ C- band dishes to receive programming. 313 The decline in subscribership is caused principally by HSD subscribers switching to DBS because of the smaller, less expensive and easier to use equipment, 314 and the advent of local- into- local programming following the enactment of the SHVIA. In addition, some popular programming is no longer offered to C- band subscribers. For 306 Satellites in the C- band frequency are primarily used to transmit programming to cable operators via C- band receiving dishes at the cable operator’s central technical facility or “headend.” 307 Subscribership is measured by the number of authorized VideoCipher modules, which provide subscribers with access to scrambled programming. 308 For an overview of the type of programming and packages made available by C- band programmers, see, e. g., National Programming Service, at http:// www. dsinps. com; Motorola, at http:// www. 4dtv. com. 309 How Many DTH Households Are Out There Anyway?, SKYREPORT, Oct. 1994, at 1. 310 SBCA Comments at 15. 311 Id. at 4. 312 Despite the significant decline, a small number of consumers newly subscribe to C- band service every month. In September, although 13,324 VideoCipher modules were “de- authorized,” 144 were newly authorized. See C-band Slips Faster in September, SATELLITE BUSINESS NEWS, Oct. 6, 2003. 313 See Letter from Benjamin J. Griffin, Counsel, Coalition of C- band Constituents, to Marlene Dortch, Secretary, FCC, Attachment at 8 (June 30, 2003). 314 To receive one or more scrambled channels, an HSD owner must purchase an integrated receiver- decoder from an equipment dealer and then pay a monthly or annual subscription fee to a program packager. HSD systems are typically designed to receive programming from several different satellites at several different orbital locations. Most HSDs include motors that permit the receiving dishes to rotate and receive signals from these many satellites. Space considerations and zoning regulations restrict many viewers’ ability to install the large antenna needed for HSD reception. 51 Federal Communications Commission FCC 04- 5 52 example, in May 2003, the National Football League informed C- band subscribers that its NFL Sunday Ticket programming package would no longer be made available to them. 315 3. Satellite- Based Advanced Services 75. Broadband Satellite Services: Last year, we reported that DirecTV and EchoStar offered two- way Internet access services to their subscribers. DirecTV continues to do so, but Hughes reports that it does not intend to increase the subscriber base aggressively for the DirecWay consumer business. 316 As of June 30, 2003, DirecWay had approximately 166,000 consumer subscribers in North America, compared to 123,000 as of June 30, 2002. 317 DirecWay costs $600 for the hardware ($ 400 for the equipment and $200 for installation) and $60 per month subscription fee with a 15- month service contract commitment. 318 DirecTV and BellSouth have entered into a strategic marketing alliance, part of which will explore the integration of digital satellite and DSL technology. 319 EchoStar, which had offered satellite- based Internet access services through its investment in Starband, no longer provides a satellite-based broadband solution. 320 It has entered into a co- marketing agreement with SBC, under which its video programming is sold in “bundled” packages with various SBC products and services, including its DSL services. 321 EchoStar is also pursuing satellite- based services via two separate initiatives. First, in March 2003, EchoStar entered into a satellite service agreement with SES Americom for all of the 315 See National Football League, at http:// ww2. nfl. com/ ticket/ letter. html. The NFL attributed its decision to the “substantial decline in the number of C- band dish owners overall, and that decline has been mirrored in a substantial decline in the number of C- band NFL Sunday Ticket subscribers.” According to the NFL, at the time of its decision, C- band NFL Sunday Ticket subscribers had dropped to 10% of their original level. Id. 316 See Hughes 2 nd Quarter 2003 10- Q at 34. Hughes cites operating losses occurring over the last several years and the high cash requirements for subscriber acquisition costs. 317 Id. at 38. 318 See DirecWay, at http:// www. getdway. com/ htb_ two. html. DirecWay also offers a $100 per month plan under a 15- month service contract allowing subscribers to spread out the cost of the equipment. This plan requires a $100 up front fee. 319 BellSouth Corp., BellSouth and DirecTV Announce Agreement to Sell Digital Satellite Television Service As Part of BellSouth Answers Bundle (press release), Aug. 27, 2003. DirecTV and BellSouth plan to offer their joint services plans beginning in early 2004. See also DirecTV, BellSouth Predict Good Things From Marketing Deal, SATELLITE BUSINESS NEWS, Sept. 2, 2003. 320 See 2002 Report, 17 FCC Rcd at 26934 ¶ 66. In 2002, EchoStar terminated its distribution agreement with StarBand. Starband has been in receivership since it declared bankruptcy in 2002, but on November 12, 2003, it received permission from the U. S. Bankruptcy Court in Delaware to emerge from Chapter 11 protection. It continues to support approximately 40,000 subscribers to its two- way, satellite delivered data services. See Starband Moves Closer to Leaving Bankruptcy, SATELLITE BUSINESS NEWS, Oct. 8, 2003. See also Starband Communications, Inc., Starband Communications Inc. Cleared to Exit Bankruptcy (press release), Nov. 12, 2003. 321 See EchoStar Communications Corp., SBC Communications, EchoStar Forge Strategic Partnership, Will Offer SBC Dish Network Television Service (press release), July 21, 2003. As part of the agreement, SBC invested $500 million in EchoStar. 52 Federal Communications Commission FCC 04- 5 53 capacity on a FSS satellite to be located at the 105° W. orbital location. 322 Second, in August 2003, EchoStar launched its EchoStar IX satellite, which includes two Ka- band transponders, on which EchoStar will test the commercial viability of broadband services. 323 EchoStar also agreed to lease all of the capacity on an existing in- orbit FSS satellite at the 105° orbital location beginning August 1, 2003. EchoStar states that it intends to use the capacity on the satellites to offer a combination of video programming, including local broadcast television channels in additional markets and expanded high definition programming, together with satellite- delivered, high- speed Internet access services. 324 76. Advanced Services. EchoStar and DirecTV continue to provide a range of advanced services and products to their subscribers, with continued attention paid this year to increasing their digital video recorder (“ DVR”) 325 and HDTV offerings. 326 Although cable operators have introduced VOD in major markets, the spectrum capacity constraints and lack of two- way connectivity currently limit DBS operators’ ability to offer video- on- demand services. Instead, EchoStar and DirecTV market digital video recorders as a competing service, principally by building the capability into the satellite receiver. EchoStar introduced this dual use set- top box under the name “Dish Video On Demand.” 327 EchoStar states that it has sold approximately one million DVR equipped satellite receivers. 328 EchoStar plans to introduce a high definition DVR, capable of recording high definition programming. 329 DirecTV also 322 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, 2003, at 19 (“ EchoStar 2 nd Quarter 2003 SEC Report”). SES Americom expects to launch this satellite during the second half of 2004. SES Americom, SES Americom to Provide Satellite Capacity to EchoStar (press release), Mar. 26, 2003. See also Peter Brown, EchoStar Eases Back Into Broadband, TV TECHNOLOGY, Sept. 3, 2003, at 24. 323 EchoStar 2 nd Quarter 2003 SEC Report at 19. 324 Id. at 31. 325 Digital video recorder (“ DVR”) and personal video recorder (“ PVR”) generally refer to consumer electronics devices which allow the user to record video and audio programming on a hard drive and to control that programming using VCR- like controls such as rewind, fast forward and pause. DVRs offer a range of additional features and recording functionality is usually managed through an electronic program guide, which allows the viewer to choose programming to record, up to 14 days in advance. DVRs have hard drives ranging in size from 20 GB to 80 GB of storage capacity, allowing users to record up to 80 hours of programming. See also paras. 111, 192 infra. 326 See Seth Shiesel, Cable or Satellite? Pleased Stay Tuned, THE NEW YORK TIMES, July 31, 2003. 327 EchoStar to Offer New Dish Customers New 100- Hour DVR Free of Charge, INTERACTIVE TV TODAY, Sept. 1, 2003. The set- top box is free of charge to new customers who commit to a one- year service contract with Dish Network and pay a $50 activation fee. Id. See also EchoStar Communications Corp., Dish Network Introduces Dish Player (press release), Aug. 25, 2003. 328 EchoStar Communications Corp., Dish Network First to Reach TV Industry Milestone: 1 Million Digital Video Recorders (press release), Sept 24, 2003. DISH customers may receive the unit free or by paying up to $199 depending on the level of service and length of the subscriber’s service contract. See EchoStar Launches “Free” Digital VCR Offer, SATELLITE BUSINESS NEWS, Aug. 27, 2003, at 2. 329 Mike Snider, Satellite TV Builds a Better Set- top Box, With High Definition, USA TODAY, Sept. 30, 2003. The high definition DVR is expected to retail for $999. DirecTV is expected to introduce a similar HD DVR set- top box in early 2004. Id. 53 Federal Communications Commission FCC 04- 5 54 offers an integrated satellite receiver and DVR. 330 DirecTV expects higher revenues from DVR customers, expecting them to generate $10 to $20 in additional revenue per unit and lower churn rates. 331 DirecTV has approximately 500,000 digital video recorder subscribers. 332 Similar to EchoStar, DirecTV markets a DVR service as VOD with its premium subscription service “Starz on Demand,” which allows subscribers to download up to five movies per week onto their DVR hard drive. 333 77. With respect to HDTV, DirecTV and EchoStar continue to provide high definition television services and packages. 334 DirecTV offers seven national channels of HDTV programming and some HDTV special events and pay- per- view offerings. 335 EchoStar offers a similar package of HD channels. 336 EchoStar also introduced a new satellite dish capable of receiving signals from three EchoStar satellites at once, and providing EchoStar with the ability to offer subscribers using this dish up to 50 HD channels. 337 C. Broadband Service Providers 78. In our first Report, we identified municipal and independent overbuilders. At that time, video distribution was the sole focus of overbuilding activity. In our 1998 Report, we noted that municipal and independent overbuilders were beginning to offer local and long distance telephone service and Internet 330 DirecTV Comments at 18. DirecTV DVR equipment ranges in price from $99 to $399. Id. DirecTV charges $4.95 per month for its DirecTV DVR service, except for subscribers to DirecTV’s Total Choice Premier package, which receive the service free of charge. See also DirecTV, at http:// www. directv. com/ DTVAPP/ imagine/ TIVO. dsp. 331 DVRs: The Key to Customer Satisfaction, SKY RESEARCH, June 2003, at 4. 332 Despite Loss, DirecTV, Hughes Play Up Third Quarter Results, SATELLITE BUSINESS NEWS, Oct. 15, 2003, at 2. 333 DirecTV Comments at 18. 334 See, e. g., Leichtman Research Group, HDTV Attracting A Growing Audience (press release), June 6, 2003; Barry Willis, DBS Delivering More HDTV, STEREOPHILE, Sept. 29, 2003. 335 DirecTV Comments at 18. DirecTV offers a package of HD programming that includes ESPN HD, Discovery HD Theater, HD Net, HD Net Movies, HBO HDTV, Showtime HDTV, and High Definition Pay- Per- View. See DirecTV, at http:// www. directv. com/ DTVAPP/ imagine/ HDTV_ pricing. dsp. See also Naina Chernoff, DirecTV Kicks Off With HD, Interactive NFL, TV TECHNOLOGY, Sept. 3, 2003. 336 EchoStar offers ESPN HD, Discovery HD Theater, HD Net, HD Net Movies, HBO HDTV, Showtime HDTV, and Dish On Demand Pay- Per- View movies. EchoStar Communications Corp., Dish Network Expands High Def Offerings; HD Leader Packages Four Channels, Prepares Rollout of Receivers (press release), Sept. 5, 2003. See also EchoStar Communications Corp., at http:// www. dishnetwork. com/ content/ programming/ hdtv/ index. asp. 337 See EchoStar Communications Corp., DISH Network to Add HDNet, HDNet Movies; DISH Network Unveils New SuperDish Technology Capable of Providing Consumers Up to 50 HDTV Channels (press release), May 1, 2003. Dubbed the “SuperDish” by EchoStar, it is an elliptical 66- centimeter dish. Beginning in late 2003, EchoStar plans to offer a “SuperDish HD Bundle” for approximately $1,500, which includes either a 34- inch-screen HDTV monitor or a 40- inch rear- projection HDTV monitor, plus a digital receiver and a satellite dish. HD monitors alone retail for between $1000-$ 2000. See Mark Koebrich, EchoStar to Offer High Definition TVs in Satellite Package, DENVERPOST. COM, Oct. 15, 2003, at http:// www. denverpost. com/ Stories/ 0,1413,36% 2 57E3 3% 257E1698702,00. html. 54 Federal Communications Commission FCC 04- 5 55 access services in order to compete with incumbent cable operators. At that time, CLEC overbuilders, which were already providing local telephone service as their core business, were beginning to provide Internet access services as well. In our 2001 Report we addressed a new class of providers called BSPs. 338 Today, we recognize overbuilders (municipal, independent, and CLEC overbuilders alike) as BSPs because most, if not all, operate state- of- the- art networks capable of providing bundles of services (i. e., voice, advanced video, and data services). As we reported last year, some BSPs are now offering subscribers VOD and ITV services in addition to telephone and Internet access services. 339 In a recent study, GAO found that competition from wire- based technologies, such as BSPs, was the most effective means of reducing cable rates. 340 Even with the multi- service strategy, however, BSPs continue to face considerable challenges, many of which are discussed below. 341 As a result, competition from a wire- based competitor such as a BSP is limited to a very few markets. 342 79. At the time of the 1994 Report, overbuilders were still a limited phenomenon, distributing only multichannel video programming. 343 Overbuilders at that time were either cable systems or LECs providing multichannel video services under the “video dialtone” framework. 344 By 1998 there were many more overbuilders, most offering a bundle of voice, video, and data services, which allowed them to compete more effectively with incumbent cable operators. As of June 1998, competing franchises had been awarded covering as many as 149 communities in 21 states with the potential to pass 7.2 million homes, though not all the franchises awarded as this time were in operation at the time of the 1998 Report. 345 Today, Broadband Service Providers Association (“ BSPA”) members serve over one million video subscribers, and they have franchises that authorize them to serve over 17.7 million homes with voice, video, and data. 346 BSPA members have deployed over 32,000 miles of fiber in order to provide a multitude of state- of- the- art services to subscribers, including VOD and interactive television. 347 80. OVS. In 1996, Congress abolished the VDT framework, and established the open video system (“ OVS”) framework, one of four statutorily- recognized options for provision of video programming services 338 We define “broadband service providers” (“ BSPs”) here as, “newer firms that are building state- of- the- art facilities- based networks to provide video, voice and data services over a single network.” The term BSP is not intended to imply anything with respect to Commission policy or proceedings that might involve broadband services. Usually, the services of a BSP can be purchased separately as well as in a bundle. 2001 Report, 17 FCC Rcd at 1296- 7 ¶ 3. See also 2002 Report, 17 FCC Rcd at 26948- 52 ¶¶ 102- 111. 339 2002 Report, 17 FCC Rcd at 26950 ¶ 106. See also BSPA Comments at 27- 30. 340 2003 GAO Report, fn. 7 supra, at 3- 4. 341 BSPA Comments at iii- iv 342 2003 GAO Report at 3- 4. 343 See BSPA Comments at 2. 344 See 1994 Report, 9 FCC Rcd at 7495- 7505 ¶¶ 103- 120. See para. 112 infra. 345 1998 Report, 13 FCC Rcd at 24308- 9 ¶ 43. 346 BSPA Comments at iii and 6. Not all overbuilders are members of BSPA. 347 Id. at iii, 2, 8 and 10. 55 Federal Communications Commission FCC 04- 5 56 by LECs. 348 Most firms currently receiving certification from the Commission as OVS operators, however, are not LECs. 349 BSPs, primarily RCN, are 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 the OVS framework for a relatively few systems, and others may explore doing so in the future.” 350 BSPA indicates that competitors and consumers have not been able to realize the full potential of OVS as a competitive alternative to the incumbent cable operators due in part to the City of Dallas, Tex. v. FCC decision of the 5th Circuit Court of Appeals, in which the court held that municipalities can require OVS operators to obtain a local franchise. 351 81. BSP Overbuilders. RCN Corporation is the nation’s first and largest broadband overbuilder supplying voice, video and high- speed Internet access services to residential subscribers over its own network. 352 RCN also offers such advanced offerings as VOD and HDTV. 353 Currently, RCN is the 11th largest MVPD. 354 RCN provides competitive cable, telephone, and high- speed Internet services in eight 348 47 U. S. C. § 571( a)( 3)-( 4); 1996 Report, 12 FCC Rcd at 4395- 8 ¶ 68- 71. Open video systems are subject to reduced regulation under Title VI. An open video system’s carriage rates are entitled to a presumption that they are just and reasonable where one or more unaffiliated video programming providers occupy channel capacity on the system at least equal to that of the open video system operator and its affiliates. Open video systems are subject to the Commission’s rules governing must carry, retransmission consent, program access, sports exclusivity, network nonduplication, syndicated exclusivity, and public, educational and governmental (“ PEG”) access channels. In addition, while open video systems are exempt from local cable franchise requirements, localities are permitted to assess a fee on an open video system’s gross revenues at a rate not exceeding the franchise fee imposed by that locality on the local cable operator. Id. Although OVS is one of four means for LEC entry into video, the OVS rules do not preclude other types of entities from using the OVS rules. BSPs continue to be the only significant holders of OVS certifications or local OVS franchises. See 1998 Report, 13 FCC Rcd at 24357- 8 ¶ 117; 2001 Report, 17 FCC Rcd at 1296 ¶ 113; See also para. 113 infra. 349 Bell Atlantic- New Jersey, Inc. (Certification to Operate an Open Video System), 11 FCC Rcd 13249 (CSB 1996). 350 BSPA Comments at 47. In those markets where local franchising authorities embrace the OVS concept as a means to facilitate market entry for competitors and introduce competition and its benefits to consumers, entities continue to consider OVS as a regulatory alternative to the traditional cable franchise and have employed the OVS model with some success. Id at 48. For a complete list of OVS certifications, see http:// www. fcc. gov/ mb/ ovs/ csovscer. html. 351 BSPA Comments at 48. In City of Dallas v. FCC, 165 F. 3d 341 (5 th Cir. 1999), the court decided that cities may require local franchises for OVS operators. 352 RCN Comments at i. See para. 120 infra. 353 RCN Comments at 1. In September, RCN announced the launch of its HDTV service to subscribers in Philadelphia, Pennsylvania. RCN already offered HDTV service in Boston, Massachusetts; parts of New York City; Washington, D. C.; and Lehigh Valley, Pennsylvania. Mass Media Notes, COMMUNICATIONS DAILY, Sept. 19, 2003, at 7. RCN alleges that Comcast has entered into an exclusive arrangement with New England Sports Network (“ NESN”) to provide sports programming broadcasting using HDTV, but NESN has not provided this critical HDTV programming to RCN because of the exclusive agreement. RCN Reply Comments at 2- 5. 354 Kagan World Media, Cable TV Investor, Oct. 31, 2003, at 12. 56 Federal Communications Commission FCC 04- 5 57 states to approximately half a million subscribers. 355 At the end of June 30, 2003, RCN reported a total of 1.4 million homes passed and 462,953 video subscribers .356 WideOpenWest (“ WOW”) is the second largest overbuilder. WOW is the 15th largest MVPD and, as of June 2003, served 290,000 subscribers. 357 WOW offers voice, video and high- speed Internet access services in over 100 communities in four states. 358 In 2003, the chairman and CEO of WOW resigned and formed another BSP, Champion Broadband. 359 Champion began its operations by purchasing WOW’s Denver, Colorado, overbuild system which serves approximately 2,000 subscribers. 360 The third largest BSP is Knoxville, Tennessee- based Knology, which operates in the Southeast. As of June 2003, Knology was the 26th largest MVPD, and had 132,163 video subscribers. 361 Seren Innovations provides voice, video, and high- speed Internet access services through its subsidiary Astound in St. Cloud, Minnesota, and Concord, California. 362 As of September 2003, Astound had 40,000 customers. 363 Other overbuilders include Everest, which provides service in Kansas City, Kansas; Altrio, which provides service in the Los Angeles, California metropolitan area; Surewest, which provides service in Sacramento, California; and Grande, which provides service in seven locales in Texas. 364 82. Last year we reported that many overbuilders were experiencing financial difficulties. This year we note that after restructuring in 2002, Knology once again continues to expand its operations, most notably through its purchase of broadband assets from Verizon Media Ventures, Inc., adding approximately 355 RCN Corp., RCN Announces Second Quarter 2003 Results (press release), Aug. 11, 2003 356 Id. 357 Kagan World Media, Cable TV Investor, Oct. 31, 2003, at 12. 358 For a full list of communities served, see http:// www. wideopenwest. com/ whatwedo_ avail. html. 359 WOW CEO Forms New Cable Firm, MULTICHANNELDAY NEWS, Apr. 11, 2003. Champion Broadband, WideOpenWest to Sell Denver/ Lakewood Cable System to Company Founders (press release), Apr. 4, 2003. 360 Id. 361 Kagan World Media, Cable TV Investor, Oct. 31, 2003, at 12. Knology Inc., Knology Reports Strong Revenue and EBITDA in Second Quarter (press release), Aug 11, 2003. For a full list of communities served, see http:// www. knology. com/ services/ cities. cfm. 362 Seren Innovations, Seren Innovations Reaches Another Milestone (press release), Sept 5, 2003. Seren Innovations is a wholly owned subsidiary of Xcel Energy Inc. Id. 363 Id. 364 BSPA Comments at 15- 16, 50. Altrio Communications provides high- speed Internet access, local and long-distance telephone service, and video services (including VOD) via a fiber optic communications network in the Los Angeles metropolitan area. Altrio offers 80 channels of basic television programming, nearly 150 channels of premium programming, 600 hours of video- on- demand programming, 75 channels of pay- per- view programming, and 45 CD- quality channels of digital music. Altrio Communications, Altrio Communications Rated Best Television Provider (press release), July 10, 2003. Like RCN and Seren Innovations, Everest is affiliated with an electric utility company. Steve Everly, Utilicorp United Forms Partnership to Offer Telephone, High- Speed Internet and Cable TV Services, THE KANSAS CITY STAR, Apr. 18, 2000. See para. 120 infra. 57 Federal Communications Commission FCC 04- 5 58 290,000 homes passed and 64,000 subscribers to its coverage area. 365 In addition, Knology experienced a 23% increase in revenues in the second quarter of 2003 over the second quarter of 2002. 366 Similarly, RCN experienced a 17% percent increase in average residential revenues per customer in the second quarter of 2003, over the second quarter of 2002. 367 Grande Communications secured an additional $45 million in financing, which will be used for expansion into additional markets. 368 Other overbuilders, such as McLeod USA, continue to face financial challenges. 369 83. Competitive Responses. In the 1994 Report, the Commission stated that cable service rates in markets that were overbuilt were an average of 16% lower than the rates in markets that were not overbuilt. 370 In the 1998 Report, we noted that where incumbent cable operators faced head- to- head competition from overbuilders, lower prices were often the result, as were additional channels at the same monthly rate, and improved service. 371 Today, BSPA states that BSPs bring new competition to all incumbent providers of video, telephone and high- speed data Internet access services, including satellite competitors. 372 BSPA believes that the impact of BSP competition includes the moderation of cable rate increases, increased total penetration of high- speed Internet access, increased penetration of enhanced digital television, acceleration of next generation service deployment, incumbent upgrade investments, improved customer satisfaction rates, expanded PEG and other public service capabilities, and rural market entry. 373 84. Barriers to Competition. In addition to difficulties with the OVS regime, 374 BSPs continue to report other barriers to competition in the MVPD market. BSPA alleges, among other things, that incumbent cable operators continue to leverage their vertical relationships to restrict competitive access to programming, and use their buying power to enforce exclusive agreements with unaffiliated programmers, 365 Knology, Inc., Knology Announces Agreement To Purchase Broadband Assets (press release), July 18, 2003. Knology also took certain steps to reduce its debt, which according to Knology officials “significantly improves our balance sheet and liquidity position.” Knology Inc., Knology Completes $39 Million Private Placement Transaction (press release), Nov. 7, 2002. 366 Knology, Inc., Knology Reports Strong Revenue And EBITDA In Second Quarter 2003 (press release), Aug 11, 2003. 367 RCN Corp., RCN Announces Second Quarter 2003 Results (press release), Aug. 11, 2003. 368 Westward Expansion, CABLEFAX DAILY, Oct. 9, 2003 at 2. 369 Mc Leod USA Board Shuffled, COMMUNICATIONS DAILY, June 6, 2002 370 1994 Report, 9 FCC Rcd at 7470 ¶ 57. 371 1998 Report, 13 FCC Rcd at 24311 ¶ 47. 372 BSPA Comments at 9. 373 BSPA Comments at 9- 11. See also RCN Comments at 5- 6. 374 See para. 80 supra. 58 Federal Communications Commission FCC 04- 5 59 especially sports programming. 375 BSPA and RCN also claim that cable operators are engaging in discriminatory pricing strategies, which have increased in frequency and aggressiveness; pricing video services in some cases below any estimate of variable cost. 376 Some cases of price discrimination, BSPA alleges, are only targeted at BSP existing and potential customers, allegedly violating various federal and local regulatory regulations. 377 BSPA also asserts its continued concern over the inapplicability of the Commission’s program access rules to terrestrially delivered programming, which prevents it access to vital local and regional content, including sports programming. 378 BSPA contends that long- term exclusive MDU contracts not only block competitive entry by deterring BSP investment, but also serve to lock tenants and building owners into outdated networks and services. 379 BSPA also charges that BSPs (as well as incumbent cable operators) are denied access to utility poles and public rights of way necessary to build out their networks, and claims that the adjudication process for gaining such access is onerous. 380 D. Wireless Cable Systems 85. 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 using line- of- sight technology. 381 This delivery technology also is known as multichannel multipoint distribution service (“ MMDS”). 375 BSPA Comments at iv, 12, and 14- 19; RCN Comments at 2 and 6- 11. See paras. 151, 160 infra. Comcast notes that it was Congress’ decision to permit programmers to offer volume discounts to their largest customers, and that volume discounts are common throughout the country. Comcast Reply at 19. 376 BSPA Comments at iv and 34; RCN Comments at 2- 3 and 11- 14; See para. 124 infra. 377 BSPA Comments at iv, 34, and 36- 38. See also RCN Comments at 11- 14. We have reported on similar complaints in several prior Reports. See 2001 Report, 17 FCC Rcd at 1297 ¶ 115; 2002 Report 17 FCC Rcd at 26951 ¶ 110. 378 BSPA Comments at 2, 13, and 16- 18; see para. 149 infra. Comcast notes that Congress deliberately chose not to extend the prohibition on exclusive contracts for vertically integrated programming to programming that is terrestrially delivered, and that there is no evidence that programming has been migrated for purposes of evading the program access rules. Comcast Reply Comments at 12- 14. NCTA notes that Congress has rejected the policy of extending the program access rules to terrestrially delivered programming. NCTA Reply Comments at 8. 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. See BSPA Comments at 27. 379 BSPA Comments at 39- 41; RCN Comments at 2 and 16- 17; see para. 129 infra. Comcast argues that if MDU exclusive agreements obtained by cable operators are objectionable, then they should be equally objectionable when obtained by BSPs. Comcast Reply Comments at 21. 380 BSPA Comments at 44- 47; RCN Comments at 2- 3 and 15- 16. According to BSPA, these difficulties result from lengthy proceedings, excessive fees, and slow action on the part of pole owners and local governments. BSPA Comments at 44- 47. 381 MMDS must have a “line- of- sight” path between transmitter and receiver. Technical limitations include signal strength and blockage by terrain. 59 Federal Communications Commission FCC 04- 5 60 86. In June 1994, the wireless industry served about 550,000 subscribers up from 300,000 subscribers in 1990. 382 The number of MMDS subscribers peaked at approximately 1.2 million subscribers in 1996 and has steadily decreased since then. As of June 2003, wireless cable systems served about 200,000 subscribers. 383 Thus, MMDS provides competition to incumbent cable operators only in limited areas. 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. 384 As a result, licensees of MDS and ITFS spectrum are turning to data delivery rather than video service. 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. 385 87. Last year, we reported on the top four companies holding MMDS/ ITFS licenses, which hold more than half of the licenses - Worldcom, Nucentrix, Sprint and BellSouth. 386 WorldCom’s MDS and MMDS licenses have tentatively been acquired by Nextel. 387 A U. S bankruptcy court approved the sale to Nextel for $144 million for the fixed wireless assets that WorldCom holds including an agreement that covers certain protection measures for ITFS licenses. 388 The Commission is currently considering the proposed transfer. The Commission is also considering a transfer of NextWave PCS licenses in 34 markets to Cingular Wireless for $1.4 billion, also a result of a bankruptcy court action. 389 In another bankruptcy action, Leap Wireless has sold 15 MHz blocks of spectrum in Idaho to Edge Communications for $3.25 million. 390 McLeodUSA, a company based in Cedar Rapids, Iowa, has signed a multi- year wholesale agreement with AT& T Wireless to offer wireless service along with its local and long distance 382 1994 Report, 9 FCC Rcd at 7482 ¶ 79, 383 NCTA Comments at 8. 384 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 at 19112 (1998), recon., 14 FCC Rcd at 12764 (1999), further recon., 15 FCC Rcd at 14566 (2000). 385 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 at 17222 ¶ 2 (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 ¶ 5. 386 2002 Report, 17 FCC Rcd at 26938 ¶ 74. 387 See Commission Seeks Comment on Applications to Assign Wireless License from WorldCom Inc. to Nextel Spectrum Acquisition Corp., 18 FCC Rcd 19313 (2003). 388 Wireless, COMM DAILY, Sept. 26, 2003, at 9. 389 Id. 390 Wireless, COMMUNICATIONS DAILY, Sept. 16, 2003, at 7. 60 Federal Communications Commission FCC 04- 5 61 services to its customers. 391 BellSouth continues to provide video programming in the areas where it holds MMDS and ITFS licenses. 392 88. On April 2, 2003, the Commission released a Notice of Proposed Rule Making (“ MDS NPRM”) initiating a comprehensive examination of the rules and policies governing the licensing of the ITFS, MDS, and MMDS services. 393 The proposed rule changes would facilitate the provision of high-speed data and voice services accessible to mobile as well as fixed users in channels that today are used primarily for one- way video delivery to fixed locations. 394 Specifically, the Commission: (1) sought comment on whether and how to reconfigure the 2500- 2690 MHz band; (2) sought comment on the best means of ensuring the efficient utilization of unassigned ITFS spectrum, including geographic area licensing and unlicensed operation; (3) proposed to convert site- by- site licenses of MDS and ITFS incumbents to geographic service areas; (4) sought comment on how best to promote increased access to and efficient utilization of ITFS spectrum; (5) proposed technical rules to increase licensee flexibility and protect incumbent operations in the 2500- 2690 MHz band; (6) proposed to simplify and streamline the licensing process for the services; (7) proposed application filing and processing procedures to facilitate implementation of the three services into the Universal Licensing System (ULS) administered by the Wireless Telecommunications Bureau; and (8) proposed to consolidate all service- specific rules for the ITFS, MDS, and MMDS services under Parts 27 and 101 but sought comment on alternatives. Pending resolution of the rulemaking proceeding, the Commission temporarily suspended acceptance of applications for new ITFS licenses and applications to amend or modify either ITFS or MDS stations in the 2500- 2690 MHz band, subject to certain exceptions; 395 and similarly temporarily suspended the current construction deadline for MDS and ITFS authorization holders. 396 In this regard, W. A. T. C. H. TV, 397 one of the first commercial MDS/ ITFS systems in the country to deploy digital wireless cable 391 Telecommunications, THE NEW YORK TIMES, Sept. 4, 2003, at C- 4. 392 BellSouth Comments at 2. 393 See Amendment of Parts 1, 21, 73, 74, and 101 of the Commission’s Rules to Facilitate Provision of Fixed and Mobile Broadband Access, Educational and Other Advanced Services in the 2150- 2162 and 2500- 2690 MHz Bands, 18 FCC Rcd 6722 (2003). The Commission incorporated the two ongoing dockets into this proceeding because they pertain to these services. See Amendment of Parts 21 and 74 of the Commission’s Rules With Regard to Licensing in the Multipoint Distribution Service and in the Instructional Television Fixed Service for the Gulf of Mexico, 17 FCC Rcd at 8446 (2002) (proposing to establish a Gulf of Mexico service area); see also Amendment of Parts 1, 21 and 74 to Enable Multipoint Distribution Service and Instructional Television Fixed Service Licensees to Engage in Fixed Two- Way Transmissions, 15 FCC Rcd at 14566 (2000). 394 See Amendment of Parts 1, 21, 73, 74, and 101 of the Commission’s Rules to Facilitate Provision of Fixed and Mobile Broadband Access, Educational and Other Advanced Services in the 2150- 2162 and 2500- 2690 MHz Bands, 18 FCC Rcd at 6725 ¶ 2. 395 The Commission modified this temporary suspension in the Amendment of Parts 1, 21, 73 ,74, and 101 of the Commission’s Rules to Facilitate Provision of Fixed and Mobile Broadband Access, Educational and Other Advanced Services in the 2150- 2162 and 2500- 2690 MHz Bands, 18 FCC Rcd 16848 (2003). 396 The Commission clarified its action in the Amendment of Parts 1, 21, 73, 74, and 101 of the Commission’s Rules to Facilitate Provision of Fixed and Mobile Broadband Access, Educational and Other Advanced Services in the 2150- 2162 and 2500- 2690 MHz Bands, 18 FCC Rcd 15087 (2003). 397 W. A. T. C. H. TV serves more than 12,500 households in the Lima, Ohio, television market. W. A. T. C. H. TV Comments at 2. 61 Federal Communications Commission FCC 04- 5 62 service and high- speed Internet access service, states that the Commission should allow digital service providers like W. A. T. C. H. TV to continue to operate high- power, high- site facilities in the 2500- 2690 MHz band. W. A. T. C. H. TV is concerned that a mandatory transition to a cellular architecture, as suggested in the MDS NPRM, will force W. A. T. C. H. TV to terminate its provision of video and audio programming to subscribers. W. A. T. C. H. TV claims that such services cannot be distributed economically over cellularized facilities. 398 E. Private Cable Systems 89. 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. 399 PCOs acquire video programming and distribute it via terrestrial wiring in urban and suburban multiple dwelling units (“ MDUs”), such as apartments and condominiums, and commercial multiple tenant units (“ MTUs”), including hotels and office buildings. Traditionally, PCOs received non- broadcast programming from resellers called aggregators using satellite master antenna systems atop the buildings they serve. Today, some PCOs obtain programming from DBS operators. PCOs usually combine this non- broadcast video programming with local broadcast television signals that they receive using analog master antennas. Thus, the packages PCOs provide their subscribers are comparable to those of cable systems, and they directly compete with franchised cable operators. In 1994, PCOs provided the same types of video programming that were offered by cable systems. 400 By 1998, some PCOs were offering telephone service, closed- circuit security monitoring, interactive TV, Internet access services, voice mail, paging, and other services. 401 Some PCOs now offer broadband access, through DSL technology, to consumers in addition to video services. 402 90. Currently there are approximately 250 PCOs operating in the United States. 403 PCOs often serve approximately 3,000- 4,000 subscribers, but the larger operations serve as many as 15,000- 55,000 subscribers. 404 The number of subscribers to private cable systems appears to have fluctuated over the past ten years. In August 1994, PCOs served one million subscribers. 405 In June 1998, PCO 398 Id. at 3- 5. 399 47 U. S. C. § 522( 7). 400 1994 Report, 9 FCC Rcd at 7488 ¶ 91. 401 1998 Report, 13 FCC Rcd at 24342 ¶ 92. 402 Amy Cravens, Is The MTU Dead?, BROADBAND PROPERTIES, March 2003, at 17. 403 In 1994, we reported that there were 3,000 to 4,000 SMATV systems operating nationwide, and in 1998 we reported that there were hundreds of firms operating throughout the United States. See 1994 Report, 9 FCC Rcd at 7488 ¶ 92. See also 1998 Report, 13 FCC Rcd at 24341 ¶ 90. For a list of private communications operators, see Independent Multi- Family Communications Council’s, at http:// www. imcc- online. org/ membership (visited Oct. 6, 2003). 404 See 1999 Report, 15 FCC Rcd at 1023 ¶ 94. See also Ten Largest Private Cable Operators/ Multiple System Operators, PRIVATE CABLE & WIRELESS CABLE, Dec. 1999, at 4. 405 1994 Report, 9 FCC Rcd at 7540 ¶ 201, Table 5.1. 62 Federal Communications Commission FCC 04- 5 63 subscribership dropped to 940,000, a decrease of six percent from 1994. 406 As of June 2003, PCO subscribership reached 1.2 million, an increase of 260,000, or 27.7%, over 1998. This represents a decrease in PCO subscribership of 400,000 subscribers, or 25%, from the 1.6 million subscribers reported in 2002. 407 To some extent, these fluctuations result from the lack of a standardized data source, and not necessarily from changes in the actual number of subscribers. 406 1998 Report, 13 FCC Rcd at Appendix C, Table C- 1. 407 NCTA Comments at 8. See also 2002 Report, 17 FCC Rcd at 26940 ¶ 77. 63 Federal Communications Commission FCC 04- 5 64 91. PCOs are not regulated in the same way as traditional cable operators. 408 Some PCO systems use microwave transmissions and wires to serve multiple buildings that are not commonly owned. 409 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. 410 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 PCOs. 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. 411 In that proceeding, several commenters contended that use of the lower CARS band of 12.70- 13.20 will help PCOs compete with cable MSOs. 412 92. In January 2003, the Commission issued the Second Report and Order on inside wiring, which declined to restrict certain exclusive contracts for the provision of video services in MDUs because the record did not demonstrate a need for government intervention in the marketplace with privately negotiated contracts. 413 In that Order, the Commission also made four changes, or clarifications, to its cable inside wiring rules which could benefit property owners and PCOs in the long run. The changes 408 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 n. 296. 409 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 ¶ 10 (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 13450 (2000). Subsequently, the Commission allowed PCOs to use CARS for programming services delivery, and gave the 18 GHZ frequencies to Hughes Electronics Corporation. See Second Order on Reconsideration, 17 FCC Rcd 24248 (2002). 410 Entertainment Connections, Inc., Motion for Declaratory Ruling, 13 FCC Rcd 14277 (1998). 411 Amendment of Eligibility Requirements in Part 78 Regarding 12 GHz Cable Television Relay Service, 17 FCC Rcd 9930 (2002). 412 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. 413 Telecommunications Services Inside Wiring, Customer Premises Equipment, Implementation of the Cable Television Consumer Protection and Competition Act of 1992; Cable Home Wiring, 18 FCC Rcd 1342 (2003). On May 20, 2003, NCTA filed a Petition for Review in the U. S. Court of Appeals for the D. C. Circuit. National Cable & Telecommunications Association v. FCC and USA, No. 03- 1140. See also Matthew C. Ames and Larry D. Kessler, The FCC’s New Cable Inside Wiring Rules: Property Owners and Private Operators Benefit, BROADBAND PROPERTIES, March 2003, at 24. 64 Federal Communications Commission FCC 04- 5 65 are: (1) wiring located behind sheet rock is “physically inaccessible” for purposes of the home run wiring rules; (2) incumbent providers must allow access to their wiring before the termination of services; (3) incumbent operators must share space in molding with competitors; and (4) the rules apply to all programming providers, including both franchised cable operators and PCOs. F. Broadcast Television Service 93. Broadcast networks and stations supply video programming directly over the air to consumers. Some consumers, who do not subscribe to an MVPD service, rely solely on over- the- air transmission of broadcast television signals. Other households receive broadcast television programming over- the- air on those television receivers that they have chosen not to connect to an MVPD service. In addition, many consumers receive broadcast signals via their cable, DBS, or other MVPD service. The number of commercial and noncommercial television stations increased from 1,518 as of November 30, 1993, to 1,726 as of June 30, 2003. 414 Total television broadcast advertising revenue averaged an annual six percent increase 415 after the 1991 recession but fell dramatically during the 2001 recession with a decline in revenue of about 12% from 2000. 416 Total television broadcast advertising revenues rebounded in 2002, with a 9.4% increase from the $37.8 billion garnered in 2001 to $41.4 billion in 2002. 417 Advertising revenues for the four networks (ABC, CBS, Fox, and NBC) was $10.2 billion in 1993. 418 By 1998, the four networks’ total advertising revenue had increased to $13.7 billion. 419 In 2002, the four networks had $15.3 billion in advertising revenue. 420 In contrast, cable programming networks collected $2.8 billion in advertising revenue in 1993. By 1998, cable programming networks’ advertising revenue more than doubled to $7.2 billion, and by 2002, these networks earned $10.9 billion in advertising revenue. 421 Three new broadcast television networks have emerged since our 1994 Report: UPN and WB in 1995; and PAXTV in 1997. 422 Advertising revenue for the seven most widely distributed broadcast networks (ABC, CBS, Fox, NBC, PAX, UPN, and WB) in 2002 was estimated at $22 billion, an 8.8% increase over the $20.3 billion earned in 2001. 423 Broadcast stations, traditionally viewed as having only 414 Compare Federal Communications Commission, Broadcast Station Totals as of June 30, 2003, FCC News Release (July 22, 2003) with Federal Communications Commission, Broadcast Station Totals as of November 30, 1993, FCC News Release (Dec. 10, 1993). 415 Mark Fratrick, State of the Television Industry: Television Revenues 2003: Is There Hope? BIA Financial Network, Feb. 2003, at 9. 416 2002 Report, 17 Rcd at 26940 ¶ 79. 417 Television Bureau of Advertising, 2002 TV Ad Revenue Figures, at http:// www. tvb. org/ rcentral/ adrevenuetrack/ revenue/ 2002/ ad_ figures (visited Sept. 24,2003). 418 Robert J. Coen, Universal McCann, U. S. Advertising Volume 1990- 2001, Jan. 1, 2001. 419 Id. 420 Robert J. Coen, Universal McCann, U. S. Advertising Volume 2000- 2003, Mar. 11, 2003. 421 NCTA, Cable Advertising Revenue: 1984- 2002 (In Millions), Cable Television Developments 2003, at 15. 422 The Rise of Mega- Media, BROADCASTING & CABLE, Nov. 12, 2001, at 30. 423 Television Bureau of Advertising, 2002 TV Ad Revenue Figures, at http:// www. tvb. org/ rcentral/ adrevenuetrack/ revenue/ 2002/ ad_ figures (visited Sept. 24, 2003). 65 Federal Communications Commission FCC 04- 5 66 advertising and not direct viewers payments as a revenue source, were given the opportunity through the retransmission consent provisions of the 1992 Cable Act, to obtain direct compensation or other economic benefits from MVPDs making use of their signals. Although the value of the retransmission consent rights have not be reported, some broadcasters, including in particular those with more significant audience ratings, now have two potential sources of revenue. 94. Broadcast television stations’ audience shares have continued to fall as cable penetration, the number of cable channels, and the number of non- broadcast networks continue to grow. During the 1993- 1994 television season, broadcast stations 424 collectively attained a 74 share of primetime viewing. 425 By the 1997- 1998 television season, their share dropped to 60 and by the 2002- 2003 television season, broadcast television stations accounted for a combined average 49 share of prime time viewing among all television households, compared to a 50 share in the previous season. Similarly, in the 1993- 1994 television season, broadcast television stations accounted for a 71 share of all- day viewing. By the 1997- 1998 season, the broadcast stations’ share dropped to 58. This trend continues, with broadcast stations achieving a 45 share of all- day viewing during the 2002- 2003 season, down from a 47 share the previous season. In contrast, non- broadcast channels’ collective audience share has continued to grow. In the 1993- 1994 television season, non- broadcast channels had a 26 share of primetime; by 1997- 1998, that share had grown to 40. In the 2002- 2003 television season, non- broadcast channels, 426 accounted for a combined average 51 share of prime time viewing among all television households, up from the 50 share in the previous season. For all- day (24- hour) viewing, non- broadcast channels accounted for a combined 29 share in the 1993- 1994 television season; by 1997- 1998, that share had grown to 42. By the recent 2002- 2003 television season, non- broadcast channels had a 55 share of all-day viewing, also up from a 53 share in the previous season. 95. We previously reported on consolidation in the broadcast industry and on “repurposing,” which continues to become more common. Programming is sometimes repurposed on commonly owned networks, although that is not always the case. For example, NBC has repurposed programming on its co- owned cable network Bravo, and vice versa; Fox has rerun its broadcast programming on its FX network; and ABC has repurposed its broadcast programming on commonly- owned Lifetime. Alternatively, NBC, ABC and Fox have repurposed programming on Viacom’s networks, such as Comedy Central and VH- 1. Repurposing deals between NBC and PaxTV, NBC with USA Network and Comedy Central, ABC with Lifetime, USA and VH- 1, Fox with FX, and Fox and Warner Bros. with VH-1, were reported in last year’s report. 427 This season, the Bravo cable network has replayed NBC’s Kingpin, The Restaurant and Fame. 428 UPN’s sitcoms The Parkers and Girlfriends will appear on Black 424 Includes network affiliates, independent stations, and public broadcast stations. 425 Nielsen Media Research, Broadcast Calendar (TV Season) Share of Audience Report, Primetime and Total Day, 1984- 85 to 2002- 03, September 2003. Nielsen reports audience shares that exceed 100% when totaled due to simultaneous multiple set viewing. We have normalized audience shares to equal 100%. 426 Includes basic (BST and CPST) networks, as well as premium and PPV networks, distributed by MVPDs. 427 2002 Report, 17 FCC Rcd at 26941 ¶ 81. “Repurposing” (virtually non- existent before 1999, See 1999 Report 15 FCC Rcd at 1027 ¶ 105) generally involves a re- run of broadcast content on a different network (cable or broadcast) shortly after it airs originally on network affiliate stations. 428 Coupling on Bravo, BROADCASTING & CABLE, Sept. 29, 2003, at 8. 66 Federal Communications Commission FCC 04- 5 67 Entertainment Television. 429 Examples of reverse repurposing (i. e., programming first distributed on non-broadcast networks and then shown on broadcast networks) include USA’s Monk on ABC last season and Bravo’s Queer Eye for the Straight Guy, a 2003 summer hit for NBC. 430 96. 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. 431 Since the first DTV stations began operation in March 1998, the number has continued to grow. As of September 2003, all but two of the 40 stations that make up the top- four network affiliates in the top ten television markets were broadcasting DTV service. 432 In television markets ranked 11- 30, 77 of 79 stations were broadcasting DTV service. Virtually all of the more than 1,300 commercial television stations have been granted a DTV construction permit or license, and 1,038 are on the air with DTV operation. 433 97. Current use of DTV spectrum involves HDTV transmissions of programs that are also broadcast in standard NTSC analog format over paired analog facilities. For instance, ABC is broadcasting all of its prime time scripted comedies and dramas, theatrical movies, Monday Night Football, plus the NBA finals and NHL Stanley Cup finals in HDTV during the 2003- 2004 TV season. 434 CBS states that all scripted prime time dramas, comedies, many Sunday night movies, the daytime drama The Young and Restless and several sporting events including the February 2004 Super Bowl will be broadcast in HDTV this television season. 435 NBC will provide a high- definition digital version for nearly two- thirds of its prime time schedule as well as The Tonight Show with Jay Leno and Late Night with Conan O’Brien. 436 PBS occasionally offers programs in HD but is planning to create and begin making available to stations a 24- hour- per- day digital television service comprised of high- definition and 429 David Kronke, LOS ANGELES DAILY NEWS, Sharing the Shows, SOUTH FLORIDA SUN- SENTINEL, Sept. 21, 2003, at 41. 430 Id. 431 2002 Report, 17 FCC Rcd at 26941 ¶ 82. 432 WABC- DT and WNBC- DT (New York) were on the air prior to September 11, 2001 but are now off the air due to the destruction of the World Trade Center. 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. 433 Id. While over 1,000 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. 434 Letter from Alex Wallau, President, ABC Television Network, to W. Kenneth Ferree, Chief, Media Bureau, FCC (June 25, 2003) at 2. 435 Letter from Martin D. Franks, Executive Vice President, CBS, to W. Kenneth Ferree, Chief, Media Bureau, FCC (June 27, 2003) at 2- 3. 436 Letter from F. William LeBeau, Senior Regulatory Counsel, National Broadcasting Co., to W. Kenneth Ferree, Chief, Media Bureau, FCC (June 27, 2003) at 1. 67 Federal Communications Commission FCC 04- 5 68 digital widescreen programming drawn from PBS’s growing library of digital programming. 437 The WB network is increasing its HDTV schedule from 5˝ to 11˝ hours of HDTV per week. 438 Fox currently provides an all- digital, 480P feed to affiliates which includes 15 hours of prime time, one hour of late night, one hour of Fox News Sunday and all sports. 439 Fox plans to transmit at least 50% of its prime time schedule in 720P by the 2004- 2005 television season. 440 UPN hopes to begin HD broadcasts in prime time during the 2003- 2004 season. 441 98. On January 27, 2003, the Commission began the Second Periodic Review of the Commission’s rules and policies affecting the conversion to Digital Television. 442 The Second Periodic Review seeks comment on issues essential to ensuring continued progress on the DTV transition. Among other things, the Commission is seeking comment on new channel election, replication, and maximization deadlines for broadcast television service. Questions regarding Section 309( j)( 14) of the Communications Act are also raised. 443 This section states that the broadcast licenses for analog television service expire on December 31, 2006, and requires the Commission to reclaim the spectrum unless one of three conditions set forth in section 309( j)( 14)( B) is met. As part of this review, the Commission asked questions regarding how we should interpret the extension criteria. 99. In August 2003, the Commission initiated a rulemaking to establish rules for digital low power television (“ LPTV”) and television translator stations. 444 LPTV stations bring television service, including local service, to viewers otherwise unserved or underserved by existing service providers. TV translator stations are intended to provide service to areas where direct reception of full- service broadcast stations is unsatisfactory because of distance or intervening terrain obstructions. 100. In Digital Broadcast Copy Protection, the Commission adopted rules to assure that DTV broadcast content will not be indiscriminately redistributed while protecting consumers' use and enjoyment of broadcast content. 445 Specifically, content protection will be signaled via the Redistribution 437 Letter from Wayne Godwin, Executive Vice President & CEO, PBS, to W. Kenneth Ferree, Chief, Media Bureau, FCC (June 23, 2003) at 2- 3. 438 The WB Sees the Big Picture, BROADCASTING & CABLE, Sept. 8, 2003, at 14. 439 Letter from Peter Chernin, President & COO, News Corporation, to W. Kenneth Ferree, Chief, Media Bureau, FCC (June 24, 2003) at 1. 440 Id. 441 Letter from Martin D. Franks, Executive Vice President, CBS, to W. Kenneth Ferree, Chief, Media Bureau, FCC (June 27, 2003) at 2. 442 See Second Periodic Review of the Commission’s Rules and Policies Affecting the Conversion to Digital Television, 18 FCC Rcd 1279 (2003). 443 47 U. S. C. § 309( j)( 14). 444 Amendment of Parts 73 and 74 of the Commission’s Rules to Establish Rules for Digital Low Power Television, Television Translator, and Television Booster Stations and to Amend Rules for Digital Class A Television Stations, 18 FCC Rcd 18365 (2003). 445 Digital Broadcast Copy Protection, 18 FCC Rcd 23550 (2003). 68 Federal Communications Commission FCC 04- 5 69 Control Descriptor, as set forth in ATSC Standard A/ 65B, Program and System Information Protocol for Terrestrial Broadcast and Cable. Content marked by the descriptor may only be output or recorded through analog outputs, protected digital outputs, and a small class of unprotected digital analog connectors, protected digital connectors, and a small class of unprotected digital connectors at a lower resolution. Implementing protection technology is intended to increase the availability of high- value content on digital broadcast television. 101. The Commission also adopted rules for digital “plug and play” cable compatibility. 446 In a “plug and play” world, consumers can plug their cable directly into their digital television set without the need of a set- top box. This will ease the transition to digital television by promoting competition, convenience and simplicity for consumers. The new rules will permit television sets to be built with “plug and play” functionality for one- way digital cable services, which include typical cable programming services and premium channels such as HBO and Showtime. Consumers will have to obtain a security card from their local cable operator, to be inserted into the television set. Consumers will still need a set- top box to receive two- way services such as video on demand, impulse pay- per- view and cable operator- enhanced electronic program guides. 447 102. 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. 448 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, 449 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. 450 Petitions to reconsider this decision are currently before the Commission. 103. CEA reports the sale of DTV products is gaining momentum. From their introduction in August 1998 451 through the second quarter of 2003, over six million HDTV- capable sets have been sold, but only about 700,000 of these have been purchased with a built- in tuner or add- on decoder box required for receiving an HDTV broadcast. 452 CEA predicts that DTV sales will continue to increase, with sales of 4.3 million units in 2003, 5.8 million in 2004, 8.3 million in 2005, 11.9 million in 2006 and over 16 million in 2007. 453 Manufacturers currently offer more than 500 models of digital monitors and 446 FCC Eases Digital TV Transition for Consumers (press release), Sept. 10, 2003. 447 See para. 184 infra. 448 Carriage of Digital Television Broadcast Signals, 16 FCC Rcd 2598 (2001) (“ DTV Must Carry Order”). 449 Id.; see also 47 U. S. C. § 534. 450 See DTV Must Carry Order. 451 1998 Report, 13 FCC Rcd at 24346 ¶ 99. 452 CEA Comments at 4. 453 Id. 69 Federal Communications Commission FCC 04- 5 70 integrated sets, up from about 100 models offered in 2000. 454 As a result, broadcasters continue to engage in tests of various DTV products, such as HDTV, multiple SDTV services, ancillary services, or some combination. 455 It is difficult to assess the competitive impact of DTV service on the MVPD market at this time, other than to continue to observe that the potential for a positive competitive impact remains. G. Other Entrants 1. Internet Video 104. In 1994, Internet video was not yet in use. The World Wide Web was a nascent technology. By year- end 1994, there were only about 3,000 Web sites, and home- use modems were running at maximum data exchange speeds of 28.8 Kbps. 456 Five years later, the Web had expanded significantly to include more than two and a half million Web sites, and access to the Internet was available via broadband, with approximately 300,000 cable modem subscribers and approximately 25, 000 DSL subscribers achieving access speeds between one and ten Mbps. 457 In our 1998 Report, we noted the availability of software technologies that made real- time and downloadable audio and video from the Internet accessible through a personal computer. 458 We also noted that there were technologies available for the provision of Internet video over a television using a set- top box and the WebTV and Worldgate Internet access service packages. 459 Despite increasing interest in the medium, however, Internet video was still very poor quality in 1998, and the necessary hardware and software to enable Internet video was relatively hard to obtain. As a result, Internet video was still far from being a direct competitor to traditional video services. 105. For the last several years, streaming video has been marketed as an important new technology for the delivery of video, but near broadcast- quality streaming video requires a high- speed broadband connection. 460 As of June 2003, there were about 20 million broadband subscribers out of a total 454 Id. at 5. 455 2002 Report, 17 FCC Rcd at 26943 ¶ 87. 456 See Introduction and History of Modems, at http:// www. ianxxi. com. ar/ computers/ history_ modem. htm (visited Sept. 26, 2003). 457 The Web Contains 7 Million Sites in 2000, Pandia Search, Oct. 2000, at http:// www. pandia. com/ searchworld/ 2000- 39- oclc- size. html (visited Nov. 19, 2003). See 1998 Report, 13 FCC Rcd at 24313, 24316 ¶¶ 52; 55; see also Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, 14 FCC Rcd at 2398 (1999). 458 1998 Report, 13 FCC Rcd at 24348- 50 ¶¶ 102- 105. 459 Id. 460 Broadcast quality requires a broadband connection of about 300 Kbps or higher. Streaming Video: If It’s Pictures You Want, Then It’s Bandwidth You’ll Need!, Realtor. org, July 2000, at http:// www. realtor. org/ webintell. nsf/ 0/ 3 6a eb06df63f6c0186256aa9006c1896? OpenDocument (visited Sept 23, 2003); see also 2000 Report, 16 FCC Rcd at 6054- 5, n. 382. See also Sports Score Big Online, BUSINESS WEEK ONLINE, Apr. 15, 2003; Walter S. Mossberg, RealNetworks Builds Fans for Video Service with Host of Programs, THE WALL STREET JOURNAL, Mar. 20, 2003, at B1. 70 Federal Communications Commission FCC 04- 5 71 59 million Internet subscribers. 461 Internet video, however, is not yet viewed in the same manner as is broadcast video, despite increased quality with high- speed connections. Nevertheless, the overall number of homes with access to the Internet continues to grow, as does the number of Americans who access video content via the Internet. As of June 2003, an estimated 59 million Americans subscribed to either a dial- up or a broadband Internet access service, compared with 55 million as of June 2002. 462 In addition, as of July 2003, an average of 12% of all Americans watched some form of Internet video in the past month, up from an average 8% as of July 2002. 463 As of July 2003, approximately 45% of all Americans and 57% of those with Internet access had accessed streaming audio or video at least once before, up from the approximately 51% who had accessed streaming audio or video at least once before as of July 2002. 464 106. Today there is a significant amount of video available for downloading and for viewing in “real- time” (also known as “streaming video”), 465 and an increasing amount of video content is available over the Internet each year. For example, Movielink, a joint venture of five movie studios, Metro- Goldwyn- Mayer Inc., Paramount Pictures, Warner Bros, Sony Pictures Entertainment, and Universal Pictures, provides an online movie download service. 466 The service allows customers to download a movie for single- use viewing, though a new product allows a movie to be viewed multiple times without having to download it over again each time. Users are able to stop and restart a downloaded movie. In addition, as we have reported in the past, many traditional television programmers continue to offer Internet video versions of their programming as well as supplemental content. 467 As of March 2003, approximately 22% of the affiliates of ABC, CBS, and NBC operated websites offering streaming media. 468 ABC Network’s ABCNews. com, for example, recently added a subscription- only Internet broadcast news network called “PoliticsLIVE” to its online video service. 469 Also, independent content producers (e. g., sports leagues, independent film producers) provide their content to viewers on a per- program basis or through subscription streaming video provider services, such as the kind of service 461 Richard Bilotti, Benjamin Swinburne, Megan Lynch, Broadband Update, Morgan Stanley, July 7, 2003, at 16. 462 Id. 463 Arbitron, Inc., Internet and Multimedia 11: New Media Enters the Mainstream, Sept. 3, 2003, at http:// www. arbitron. com (visited Sept. 23, 2003). 464 Id. 465 Just as radio and television broadcasts are not downloaded and stored on radios and TVs, a streaming file is not actually stored on the local computer used to view it. Instead, the video player software on the viewer’s computer continually requests video data from the host server computer, so the viewer does not have to wait for the entire file to download before viewing. Streaming Video: If It’s Pictures You Want, Then It’s Bandwidth You’ll Need!, Realtor. org, July 2000, at http:// www. realtor. org/ webintell. nsf/ 0/ 36aeb06df63f6c0186256aa9006c1896? Open Document (visited Sept 23, 2003). 466 Movielink Updates Service, Plans New Ad Campaign, Yahoo News, Sept 3, 2003, at http:// news. yahoo. com/ news? tmpl+ story2& cid= 581& u=/ nm/ 20030903/ tc_ nm/ media_ movielink_ dc& printe… (visited Sept. 3, 2003). 467 2002 Report, 18 FCC Rcd at 26944 ¶ 90. 468 Kagan World Media, Streaming Media, Media Trends, Dec. 2002, at 251- 253. 469 ABCNEWS. com’s 24- Hour Web Newscasts Concern Affiliates, COMMUNICATIONS DAILY, Sept. 8, 2003, at 6. 71 Federal Communications Commission FCC 04- 5 72 offered by Real Networks or Microsoft Media Player. 470 For example, Fox Sports Interactive Media and Real Networks are in partnership to provide out- of- market sporting events to Real Networks’ SuperPass subscribers, Major League Baseball is in partnership with RealNetworks to provide Webcasts of Major League baseball games on a per- game basis, and AOL for Broadband has an alliance with the NFL, giving its subscribers access to NFL video content including game highlights, and clips from HBO’s Inside the NFL. Sports and news programming remain the most common categories of streaming video programming currently available over the Internet, but other genres of video programming are also available. In April, 2003, steaming media provider RealNetworks surpassed one million subscribers. 471 Analysts expect that over the next several years, video streaming subscription services will increase significantly, reaching an estimated $4.7 billion in revenues by 2007. 472 107. In our Cable Modem NPRM, we invited comment on several questions concerning Internet content, including whether the threat that subscriber access to Internet content or services could be blocked or impaired is sufficient to justify some form of regulatory intervention at this time, 473 and whether a finding of such blocking or impairment in the future should trigger regulatory intervention. 474 We are presently reviewing comments on these and other issues as part of that proceeding. 475 2. Home Video Sales and Rentals 108. 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. 476 As such, they offer some level of competition to broadcast television, cable television and DBS for the consumer’s time and money. Cable video- on- demand also has emerged as a competitive service to home video. 477 109. In 1994, VCR penetration was 84% of TV households. 478 By 1998, that figure had increased to 88%. 479 In 2003, Nielsen Media Research estimates VCR penetration at 91% of TV 470 College Football Fanatics Can Pay to Watch Over the Internet, COMMUNICATIONS DAILY, Sept. 19, 2003 at 3; Major League Drops the Price of Webcasts, THE WALL STREET JOURNAL, Sept. 18, 2003. Deals, CABLEFAX DAILY, Aug. 27, 2003, at 2; America Online Inks NFL Internet Deal, REUTERS, Aug. 26, 2003. 471 Real Networks, RealNetworks Reports First Quarter Results and Announces One Million Subscribers to Real Networks’ Subscription Services (press release), Apr. 29, 2003. 472 Stefanie Olsen, Net Video Subscriptions To Go Prime Time, CNET NEWS. COM, Sept. 23, 2003. 473 Cable Modem NPRM, fn. 15 supra, 17 FCC Rcd at 4845 ¶ 87. 474 Id. at 4846 ¶ 92. 475 See AT& T- Comcast Merger Order, fn. 94 supra, 17 FCC Rcd 23246 ¶ 145. 476 See, 2002 Report, 17 FCC Rcd at 26944 ¶ 91. 477 See paras. 44- 45 supra. 478 See 1994 Report, 9 FCC Rcd at 7510 ¶ 135. 479 See 1998 Report, 13 FCC Rcd at 24351 ¶ 106. 72 Federal Communications Commission FCC 04- 5 73 households. 480 In our 1998 Report we addressed laser discs as another means to view video programming, and stated that DVD technology introduced in 1997 would likely replace laser disc technology. 481 DVDs have since made significant impact on the home video market. For the first six months of 2003, DVD sales were 57% higher than during the same period a year earlier. 482 Moreover, equipment manufacturers have sold 10.3 million DVD players so far this year, outpacing the 7.3 million sold in the first half of 2002. DVD players sell for less than $100 and can be found in close to 50% of all U. S. homes. 483 Rental spending on DVDs in 2002 doubled over the previous year to $2.9 billion. 484 Consumer spending on home video programming is expected to reach $23.3 billion in 2003, an increase of 11% over 2002. Of this amount, $14 billion will be spent on DVD and video cassettes, most coming from DVD sales. For the first time in 2003, DVDs will pass VHS cassettes in rentals. 485 110. The influence of DVDs is growing. For example, Netflix, the leading online movie rental service with over 15,000 DVD titles, experienced a 71% increase in its subscriber base from 670,000 in June 2002 to 1,147,000 in June 2003. 486 Other companies have entered the online movie business, such as Wal- Mart; MovieLink, a joint Internet venture by five major studios; and CinemaNow. 487 Disney is now using the broadcast spectrum of ABC- owned stations and National Datacast’s network of PBS stations to deliver movie rentals over the air and on demand. The service requires a MovieBeam receiver and a small antenna that is rented for $6.99 a month. 488 111. Another home video technology gaining popularity is the personal video recorder (“ PVR”). 489 Introduced in 1999, this device is capable of pausing, recording and rewinding live TV in digital form on an internal hard drive instead of videotape. 490 PVRs allow users watching recorded programs to fast forward through commercials. PVR penetration is currently at about 2% of television 480 Nielsen Media Research, Television Audience 2002, 2003, at 4. 481 See 1998 Report, 13 FCC Rcd at 24351 ¶¶ 107- 108. 482 NCTA Comments at 27. 483 Id. 484 Id. at 28. 485 Id. 486 Id. at 29. 487 Leslie Walker, Web Watch, THE WASHINGTON POST, Sept. 7, 2003, at F7. 488 Disney Is On The Beam, BROADCASTING & CABLE TV FAX, Sept. 30, 2003, at 1. 489 These devices also are referred to as digital video recorders (“ DVRs”). 490 See 1999 Report, 15 FCC Rcd at 1035 ¶ 119. 73 Federal Communications Commission FCC 04- 5 74 households. 491 By 2007, about 20% of households are predicted to have PVRs. 492 Cable and DBS operators are beginning to incorporate PVR functionality into their set- top boxes. 493 PVR maker TiVo claims that users “skip over” between 70% and 80% of the commercials in the recorded programming last year. 494 Television and advertising executives are concerned about the long- term effects of this trend on the traditional 30- second commercials, and have started to consider alternative ways to promote products, such as product placement within programs. 495 H. Local Exchange Carriers 112. Ten years ago, LEC entry into the MVPD industry was uncertain, but appeared promising. LECs were pursuing authorizations under a new regulatory regime that allowed them to enter as video dialtone (“ VDT”) operators, a commission regulatory framework that did not contravene the statutory prohibition on LEC entry into the MVPD market. 496 LECs were operating numerous market and technical trials, and had filed 24 applications for permanent VDT authority to offer service to as many as 8.5 million homes. 497 The VDT regime was abandoned, however, as were all pending and approved authorizations, with passage of the 1996 Act, which provided other means for LECs to enter the MVPD market. 113. 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. The statute permitted common carriers to: (1) provide video programming to subscribers through radio communications under Title III of the Communications Act; 498 (2) provide transmission of video programming on a common carrier basis under Title II of the Communications Act; 499 (3) provide video programming as a cable 491 Steve McClellan, And Another Thing About Those PVRs, BROADCASTING & CABLE, Apr. 21, 2003, at 20. EchoStar Communications claims to have sold one million digital VCRs and TiVo claims 800,000 units sold. See EchoStar Crosses 1 Million Digital VCR Mark, SATELLITE BUSINESS NEWS, Sept. 26, 2003, at 2. 492 Mass Media Notes, COMMUNICATIONS DAILY, Sept. 23, 2003, at 10. 493 See paras. 60, 76 supra. 494 Steve McClellan, And Another Thing About Those PVRs, BROADCASTING & CABLE, Apr. 21, 2003, at 20. 495 Id. See Paul J. Gough, Yet Another Study Deems PVRs A Death Knell For TV Ads, MEDIA POST’S MEDIADAILY NEWS, Oct. 3, 2003, at http:// mediapost. com/ PrintFriend. cfm? articleld= 221102 (visited Oct. 7, 2003); Ad Experts Downplay Impact of Rapid PVR Rollout on Ads, COMMUNICATIONS DAILY, Sept. 30, 2003, at 5; Anthony Crupi, Will DVR Really Kill the 30- Second Ad?, CABLE WORLD, Sept. 29, 2003, at http:// cableworld. com /microsites/ magazinearticle. asp? mode= print& magazinearticleid= 183520& releaseid (visited Oct. 7, 2003). 496 Under the VDT regulatory framework adopted by the Commission in 1992, a LEC was allowed to make available, on a nondiscriminatory common carrier basis, a platform capable of providing access to multiple video programmers and of delivering video programming and other services to consumers in its local telephone service area. See 1994 Report, 9 FCC Rcd at 7493- 96 ¶¶ 106- 108. 497 1994 Report, 9 FCC Rcd at 7493 ¶ 104. 498 47 U. S. C. § 571( a)( 1). 499 47 U. S. C. § 571( a)( 2). 74 Federal Communications Commission FCC 04- 5 75 system under Title VI of the Communications Act; 500 or (4) provide video programming by means of an open video system (" OVS"). 501 114. As a result, the presence of LECs in the MVPD market grew. By 1998 the Commission indicated that “LECs are already or are becoming significant regional competitors.” 502 Ameritech (later acquired by SBC) was a significant overbuilder in the midwest, BellSouth was an overbuilder and MMDS operator in the southeast, RCN was an expanding OVS and cable overbuild operator, and Bell Atlantic (now Verizon) and SBC were selling, marketing and installing DirecTV DBS video service. 503 Additionally, LECs briefly owned and operated two joint programming and packaging ventures, but by 1998 both of these efforts were ended or scaled back, and today no longer exist. 504 115. Today, facilities- based cable franchise services provided by the large, former “baby bells” are much less prominent, continuing a trend from last year’s Report, with only BellSouth and Qwest offering such services. 505 Some LECs have come full circle, however, and are marketing DBS service as they did in 1998. As with last year, Qwest and a number of smaller incumbent LECs, however, are offering, or preparing to offer, MVPD service over existing telephone lines using very high- speed digital subscriber line (“ VDSL”) or asymmetric digital subscriber line (“ ADSL”) technologies. 506 116. In- Region Cable Franchises. BellSouth holds 20 cable franchises with the potential to pass 1.4 million homes and provides cable service in 14 of its franchise areas. It is the only remaining large LEC to offer video service over franchised cable systems using traditional cable architecture. 507 This is unchanged from last year. 508 500 47 U. S. C. § 571( a)( 3). 501 47 U. S. C. § 571( a)( 3)-( 4). See also para. 80 supra. 502 1998 Report, 13 FCC Rcd at 24353- 4 ¶ 111. 503 Id. 504 Id. at 24359- 60 ¶ 119. 505 2002 Report, 17 FCC Rcd at 26946 ¶ 96. 506 Id. at 26947 ¶ 98. 507 BellSouth Comments at 1- 2. 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. BellSouth also states that it is restructuring its wireless video service, but that it continues to provide analog multichannel video service in areas where it holds licenses. 508 We reported last year that Verizon, which inherited franchised cable systems in California and Florida when it purchased GTE, 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 subject to litigation. 2002 Report, 17 FCC Rcd at 26946 ¶ 96 n. 338. Subsequently, Verizon sold these systems to Knology, Inc., a broadband service provider. See Knology, Inc., Knology Announces Agreement To Purchase Broadband Assets (press release), July 18, 2003. 75 Federal Communications Commission FCC 04- 5 76 117. VDSL. Qwest offers video, high- speed Internet access and telephone service over existing copper telephone lines using VDSL in the Phoenix, Arizona, metropolitan area and in Denver and Boulder, Colorado, and over a hybrid fiber- coaxial system in Omaha, Nebraska. 509 Qwest serves 40,000 subscribers in Phoenix; 2,000 in Denver and Boulder; and 14,000 in Omaha. 510 Although Qwest indicates that its broadband services have been “well received,” it states that regulatory uncertainty regarding which type of regulation will apply to its VDSL high- speed Internet access and asymmetric regulation vis- ŕ- vis cable broadband services raises its costs of deployment and threatens facilities- based competition in these markets. 511 Small LECs continue to deploy VDSL for the purpose of video service delivery, but indicate that discriminatory practices, such as exclusive programming contracts, higher prices for programming, and discriminatory pricing, by incumbent cable operators and programmers impede competition in small, rural markets. 512 118. Joint Ventures with DBS. BellSouth, SBC, and Qwest have all recently announced agreements to sell DBS service as part of a telecommunications bundle. BellSouth announced an agreement with DirecTV that will allow its customers to receive a bundle of high- speed Internet, local and long distance telephone, wireless telephone, and DirecTV video service on one bill with one order early next year, 513 and that will allow BellSouth to continue restructuring its MMDS video services. 514 SBC Communications, Inc. announced a similar service that will be co- branded with EchoStar as "SBC DISH Network," and includes a $500 million investment by SBC in EchoStar convertible debt. 515 Finally, Qwest announced agreements with both DirecTV, 516 and with EchoStar, 517 to offer bundled services in separate markets. While these agreements do not represent new, facilities- based competition, they may allow both LECs and DBS operators to become more competitive with cable operators’ bundled offerings. 509 Qwest Comments at 3- 4. 510 Id. at 4. 511 Id. at 1- 2 and 5- 8. Qwest also states that it pays higher prices for programming than incumbent cable operators due to its comparably small scale of video operations. Id. at 8- 10. 512 See, generally, RICA Comments. See also OPASTCO Reply Comments at 2- 4. 513 BellSouth Corp. and DirecTV, Inc., BellSouth and DirecTV Announce Agreement To Sell Digital Satellite Television Service as Part of BellSouth Answers Bundle (press release), Aug. 27, 2003. 514 BellSouth Comments at 1. 515 SBC Communications Inc. and EchoStar Communications Corporation, SBC Communications, EchoStar Forge Strategic Partnership, Will Offer "SBC Dish Network" Television Service (press release), July 21, 2003. 516 The agreement with DirecTV covers single- family homes in Phoenix and Tucson, Arizona, and Seattle, Washington. Qwest expects to rollout these services to more markets throughout the remainder of 2003 and into 2004. See Qwest Communications International, Inc., Qwest Forges Agreement with DirecTV to Offer Satellite Services as Part of Communications Bundle (press release), July 21, 2003. 517 The agreement with EchoStar covers single- family homes in Colorado and Nebraska. The company expects to rollout these services to more markets throughout the remainder of 2003 and into 2004. See Qwest Communications International, Inc., Qwest Forges Agreement with EchoStar to Offer Satellite Services as Part of Communications Bundle (press release), July 21, 2003. 76 Federal Communications Commission FCC 04- 5 77 I. Electric and Gas Utilities 119. Electric and gas utilities possess certain assets that have long made them good candidates as entrants into the MVPD market. Such assets include their access to public rights of way, ownership and operation of various infrastructures amenable to the provision of network services, and well-established relationships with customers. In 1994, some utilities were actively engaged in the provision of video services through overbuilding incumbent cable systems with fiber- optic infrastructure, though such activity was very limited. 518 Section 103 of the Communications Act, enacted as part of the 1996 Act, removed a significant regulatory barrier that had deterred registered public utility holding companies’ entry into video markets. 519 By our 1998 Report, many of these utility companies remained involved in the provision of video services, joined by a few additional entrants, though still, they were not considered significant or nation- wide competitors in the market for video distribution. Today, many utilities continue to move forward with ventures involving multichannel video programming distribution, though their services are still not widespread in either the telecommunications or video distribution markets. Utilities do, however, continue to provide competition in scattered localities, most beneficially in rural areas where cable operators and telephone companies may not be willing or able to provide the full range of advanced telecommunications services. 520 120. As previously reported, utilities provide voice, video, and data services by overbuilding incumbent cable systems with fiber optic networks. Some utilities have built systems on their own, but the most prominent utilities involved in the video distribution market are engaged in joint ventures with other companies. 521 Starpower, for example, is a joint venture between RCN and Potomac Electric and Power Company (“ PEPCO”) operating in the Washington, D. C., area. 522 Municipalities, in many cases, provide broadband services on their own when others are unwilling to provide such services. Kurtztown, Pennsylvania, for example, built a fiber loop in 1999, hoping the private sector would step in and provide voice, video and data services, but when no providers expressed interest, the utility department established service for its residents. 523 518 See 1994 Report, 9 FCC Rcd at 7508- 09 ¶ 131- 133. 519 See 1996 Report, 12 FCC Rcd at 4410- 11 ¶ 95- 96. Specifically, prior to enactment of the 1996 Act, the Public Utility Holding Company Act of 1935 (“ PUHCA”) imposed strict “line of business” restrictions on registered public utility holding companies which sought to diversify into telecommunications or information services markets. Section 103 of the 1996 Act, which added a new Section 34 to PUHCA, now permits registered public utility holding companies to enter telecommunications industries without prior SEC permission through the acquisition or maintenance of an interest in an “exempt telecommunications company” or “ETC.” Congress essentially eliminated disparate regulatory treatment among different types of utility companies by this action. Id. 520 See para. 81 supra. 521 See 2002 Report, 17 FCC Rcd at 26947- 8 ¶ 100. 522 See para. 81 supra. 523 Officials: Broadband Investments Pay Off For Localities, TR DAILY, Sept. 26, 2003. 77 Federal Communications Commission FCC 04- 5 78 121. The American Public Power Association (“ APPA”) surveyed its members at the end of 2002, finding that 511 public power entities offer some kind of broadband services. Of those, 105 offered video service, 71 offered cable modem service, and 37 offered local telephone service. 524 122. Several utility companies have been experimenting with a technology called broadband-over- power line (“ BPL”) service which uses power lines to carry high- speed data signals the “last mile” to the home. 525 BPL must use fiber optic lines or another traditional medium to deliver data to the power line. While the primary objective of this technology is to provide high- speed Internet access services, some companies have expressed plans to offer video streaming services, but not traditional video services. 526 In September 2003, a few utility companies announced their timelines for the commercial rollout of BPL services, including video streaming. 527 III. MARKET STRUCTURE AND CONDITIONS AFFECTING COMPETITION A. Horizontal Issues 123. 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 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 June 2002 and June 2003, and over the past five and ten years. 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, five years, and ten years. 1. Competitive Issues in the Market for the Distribution of Video Programming 124. The market for the delivery of video programming to households continues to be highly concentrated in many local markets, with the majority of households in most franchise areas subscribing to cable. While this is still true, most consumers today have at least two additional MVPD service choices (EchoStar and DirecTV) than they did ten years ago, and others have even more MVPD choice from overbuilders and MMDS service. Additionally, the percentage of MVPD subscribers served by 524 APPA, Public Power: Powering the 21 st Century with Community Broadband Services (fact sheet), May 2003, at 2. 525 John Markoff and Matt Richtel, Internet via the Power Grid: New Interest in Obvious Idea, THE NEW YORK TIMES, Apr. 10, 2003. On April 23, 2003, the Commission initiated a Notice of Inquiry to obtain information on a variety of issues related to BPL. Use of BPL for video services was not anticipated or discussed. Inquiry Regarding Carrier Current Systems, Including Broadband Over Power Line Systems, 18 FCC Rcd at 8498 (2003). 526 In September 2003, Ambient Corp. and IDACOMM announced that they jointly would conduct a test of BPL to include such offerings as video streaming. New Technologies, COMMUNICATIONS DAILY, Sept. 5, 2003, at 13. See also paras. 104- 106 supra. 527 Utilities Unveil Time Lines For Commercial Broadband Deployment, COMMUNICATIONS DAILY, Sept. 23, 2003, at 4- 5. The City of Manassas Virginia, plans to commercially deploy BPL, as do Cinergy in Cincinnati, Ohio, and PEPCO in Potomac, Maryland. 78 Federal Communications Commission FCC 04- 5 79 cable operators has dropped steadily, both in national percentages, as well as in most local markets. 528 For most consumers the choices are over- the- air broadcast, one cable provider, two DBS providers, and, in limited cases, an overbuilder or other delivery technology. 529 According to commenters, certain barriers to full competition exist, including: (a) cable operator exclusive access to programming, especially sports programming; (b) anti- competitive conduct including “predatory pricing”; (c) cable operator technicians cutting the connections of competitors; and (d) manipulation of local and state regulations, resulting in delay for entrants in gaining access to local public rights- of- way and in getting cable franchises. 530 In response to the allegations concerning access to programming, Comcast responds that Congress deliberately chose not to extend program access regulations to non- vertically integrated programming or terrestrially- delivered programming and that there is no evidence that any video programming network has been migrated to terrestrial delivery to evade the program access regulations. 531 125. During the past year, DBS has continued to make inroads in the MVPD market, as it has over the past ten years. DBS, the major wireless MVPD technology that is available to subscribers nationwide, saw its share of MVPD subscribers increase by nearly 1.5% between June 2002 and June 2003, to 21.6% of the market. 532 DirecTV reports that DBS has higher than 15% penetration in 35 states. 533 DBS’s 2003 share of the market compares to 9.4% in 1998, and less than one percent in 1993, when the service had just launched. 534 528 See Appendix B, Table B- 1. As of June 2003, approximately 75% of MVPD subscribers were served by cable operators. In June 2002, approximately 77% of MVPD subscribers were served by cable operators. Five years ago, in June 1998, roughly 85% of MVPD subscribers were served by cable operators, and at the end of 1993, almost 95% of MVPD subscribers were served by cable operators. 529 Some sources indicate, however, that some percentage of households cannot receive one or both DBS providers due to line of sight issues. See 2002 Report, 17 FCC Rcd at 26952 ¶ 113 n. 385. 530 BSPA Comments at 14- 47; RCN Comments at 6- 18 and Reply Comments, generally; and DirecTV Comments at 9- 11. 531 Comcast Reply Comments at 14. See also para. 150 infra, and NCTA Reply Comments at 8- 12. Comcast also states that the Commission has determined that the cases of terrestrially- delivered networks referenced by the commenters were not evasions of the program access rules, and were allowed under Commission rules. Comcast Reply Comments at 14. Comcast also states that some of RCN’s statements concerning the availability to RCN of Comcast SportsNet are inaccurate, and that Comcast SportsNet has always been available for carriage by RCN. Id. at 15. 532 See Appendix B, Table B- 1. See also NCTA Comments at 8. 533 DirecTV Comments at 11. 534 See Appendix B, Table B- 1. 79 Federal Communications Commission FCC 04- 5 80 Table 7: Summary of Competing Technologies, Percentage of MVPD Households Served 1993 1998 2003 Cable 94.89.% 85.34% 74.87% DBS 0.12% 9.40% 21.63% Other MVPDs 4.99% 5.26% 3.5% 126. Relatively few consumers have a second wireline alternative, such as an overbuild cable system, BSP or OVS, and this has been true for the entire history of this report. Of the 33,485 cable community units nationwide, 878, or approximately 2.6%, have been certified by the Commission as having effective competition 535 as a result of consumers having a choice of more than one wireline MVPD, or because DBS penetration was above 15%. 536 This compares to 57 cases of effective competition covering 60 community units based on overbuilds in 1998. 537 127. In cases where incumbent cable operators faced competition from a new wireline entrant, BSPA reports benefits to consumers, such as restraint in cable price increases and increased access to advanced services. 538 Several other MVPD technologies, such as private cable systems or SMATV systems and MMDS offer consumers alternatives to incumbent cable services, but only in limited areas. 128. Competitive Developments in the MDU Market. A significant segment of many local MVPD markets is multiple dwelling units (“ MDUs”). Nationally, the Census Bureau reports that 24.6 million households, or 23% of the total, are in buildings with more than one unit. The Census Bureau further reports that 32% of U. S. households are renter occupied. 539 MDUs are comprised of a wide variety 535 Under Section 76.907, a cable operator (or other interested party) may petition the Commission for a determination of effective competition pursuant to Commission’s procedural rules in Section 76. 7. See 47 C. F. R. §§ 76.7, 76.907. In its petition, a cable operator must provide evidence that it meets one of the statutory tests for the existence of effective competition. See 47 U. S. C. § 543 (1)( l)( A)-( D). See also 47 C. F. R. § 76.905( b). Based on the evidence provided in the petition and any opposition received, the Commission determines whether to grant effective competition status within a franchise area. Where effective competition exists, an LFA may not regulate basic service rates. See 47 C. F. R. § 76.905 (a). If a local franchising authority (“ LFA”) believes that a Commission finding of effective competition is no longer valid, it may file a petition for recertification pursuant to Section 76.916 of the Commission’s rules. 47 C. F. R. § 76.916. If the Commission grants the petition, the LFA’s certification to regulate basic service tier rates will be reinstated. 536 Of the 878 communities where effective competition status was granted, 579 were based on DBS competition. 537 1998 Report, 13 FCC Rcd at 1060 ¶ 46. Numbers for 1994 are not available because the effective competition certification process had just been implemented at the time of the 1994 Report, and data about overbuilds were sketchy. See 1994 Report, 9 FCC Rcd at 7463- 70 ¶¶ 48- 60. 538 BSPA Comments at 9- 12. 539 U. S. Census Bureau, 2001 American Housing Survey, Table 2- 1, at http:// www. census. gov/ hhes/ www/ housing/ ahs/ ahs01/ tab21. html. 80 Federal Communications Commission FCC 04- 5 81 of high- density residential complexes, including high and low- rise rental buildings, condominiums, and cooperatives. Historically, cable and private cable operators were the primary providers of MVPD services to MDU residents. Non- incumbent MVPD commenters raise a number of issues that they contend adversely affect their ability to serve the MDU market. 129. Exclusive contracts are those that specify that video service in an MDU will be provided only by a particular MVPD. Perpetual contracts are those which grant an MVPD the right to provide service for indefinite or very long period of time, or which have automatic renewal provisions (sometimes referred to as “evergreen”). Competitive entrants into the MVPD market have raised concerns with these kinds of contracts for the past five years. This year, BSPA states that these kinds of contracts block potential entry into MDUs, and lock tenants and building owners into outdated networks and services. 540 BSPA further argues that BSPs may be deterred from entering markets where MDUs comprise a significant portion of the franchise due to the exclusionary contracts in place, and that this was a factor in the demise of Carolina Broadband. 541 BSPA notes, however, that the existing home wiring rules have allowed a BSP access to MDUs in at least one instance. 542 While DirecTV states that the Commission’s over- the- air- reception devices (“ OTARD”) rules have encouraged some MDU landlords and owners to use a single dish for reception to prevent “dish clutter,” it reiterates its previous comment that the rule should be extended to renters and owners who do not have exclusive use of areas suitable for satellite reception. 543 In addition, DirecTV reports that “cable incumbents continue to control the market for provision of video programming services to MDUs” and that DirecTV’s penetration has been adversely affected. 544 2. Competitive Issues in the Market for the Purchase of Video Programming 130. 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. 545 This market tends to be regional or national since programmers seek to reach 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). 540 BSPA Comments at 39. 541 Id. at 40. 542 Id. at 40- 41. BSPA cites a case in which the U. S. District Court held for Everest Communications in an inside wiring dispute with Time Warner. See also Time Warner Entm’t Co., L. P. v. Atriums Partners, L. P., 232 F. Supp. 2d 1257 (D. Kan. 2002), appeal docketed, No. 03- 3005 (10 th Cir. Jan. 7, 2003). 543 DirecTV Comments at 22. See also SBCA Comments at 14- 15. See also 2002 Report, 17 FCC Rcd at 26955 ¶ 123. The OTARD rules are at 47 C. F. R. § 1.4000. 544 DirecTV Comments at 21- 22. 545 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. 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. 81 Federal Communications Commission FCC 04- 5 82 a. The Regional Programming Market 131. For the entire history of this report, 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. 132. Competitive Issues Related to Clustering. In past years, we have noted both potential benefits and potential harms from clustering. 546 Cox contends that clustering of cable systems can create greater economies of scale and scope, and thus justify the investment necessary to transform its cable systems into “advanced broadband platforms.” 547 Clustering creates efficiencies through scale and scope, and allows cable operators to serve geographically contiguous areas. This, in turn, may make provision of advanced services, creation of regional programming, and competition in the regional advertising market more economical. As competitive MVPDs have done for the past five years, several commenters assert harmful effects of clustering and regional concentration on program distribution with regard to vertically- integrated incumbent cable operators, and provide examples in which programming was denied to entrants. 548 Specifically, these commenters contend that cable operators have “migrated” programming from satellite delivery to terrestrial (fiber optic) delivery, and will do so to a greater extent in the future, because only satellite- delivered programming is subject to the program access rules. 549 NCTA and Comcast dispute the allegations that programming has been migrated to avoid program access requirements, and maintain that the Commission is correct in maintaining the exception for terrestrially 546 Potential benefits listed in the following sources include economies of scale and scope, potentially allowing a wider array of broadband services, and cost savings. See 2000 Report, 16 FCC Rcd at 6071 ¶ 153, citing AT& T Comments at 6- 10, Comcast Comments at 21- 29, and United States General Accounting Office Report to the Subcommittee on Antitrust, Business Rights, and Competition, Committee on the Judiciary, U. S. Senate; Telecommunications: The Changing Status of Competition to Cable Television; GAO/ RCED- 99- 158, July 1999. A potential harm is the possibility that cost savings from clustering are not passed along to consumers. See Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, Statistical Report on Average Rates for Basic Service, Cable Programming Services, and Equipment, Report on Cable Industry Prices, 16 FCC Rcd 4346, 4362 ¶ 39 (2001), and Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, Statistical Report on Average Rates for Basic Service, Cable Programming Services, and Equipment, Report on Cable Industry Prices, 15 FCC Rcd 10927, 10943 ¶ 39 (2000). AT& T disputes this result, citing limitations in the methods and data of the Price Survey Reports in question. See 2001 Report, 17 FCC Rcd at 1305 ¶ 141, citing AT& T Comments at 19- 20, and 2000 Report, 16 FCC Rcd at 6071- 73 ¶¶ 154- 55, citing AT& T Comments at 13- 16 and Appendices B and D; AT& T Reply Comments at 2. Another potential harm is the possible incentive and ability to foreclose unaffiliated regional programming. See AT& T- Comcast Merger Order, fn. 94 supra, 17 FCC Rcd at 23266- 69 ¶¶ 57- 65. In the case of the AT& T-Comcast merger, the Commission examined the possibility of foreclosure of unaffiliated regional programming, but concluded that such foreclosure was not likely in the case of the AT& T- Comcast merger. The merger order does, however, enumerate the conditions under which foreclosure is possible. Id. at 23266 ¶ 58. 547 Cox Comments at 2- 6. 548 BSPA Comments at 14- 19; DirecTV Comments at 9- 11; RCN Comments at 6- 11 and Reply Comments, generally. 549 Id. 82 Federal Communications Commission FCC 04- 5 83 delivered content. 550 Comcast points out that DirecTV has its own exclusive arrangement for programming. 551 133. System Mergers and Acquisitions, and Clusters. In November 2002, Comcast and AT& T completed their merger. 552 No other large cable mergers occurred or were proposed over the past year. Between July 2002 and June 2003, a total of 29 small (by industry standards) transactions were announced having an aggregate value of approximately $996.2 million and involving 361,774 subscribers. 553 At the end of 2002, there were 109 clusters with approximately 51 million subscribers compared to 107 clusters and approximately 52 million subscribers at the end of 2001. 554 This compares to 106 clusters with 40. 4 million subscribers at the end of 1998, 555 and 97 clusters with 20.1 million subscribers at the end of 1994, the first year we compiled clustering information. 556 In the largest cluster size category (over 500,000 subscribers), the number of clusters decreased between 2001 and 2002, from 32 to 29. 557 Over the past decade, both the number of clusters and the number of subscribers served by clusters has increased, with the number of subscribers served by clusters increasing by more than two- and- one- half times. 134. System Trades. Little system trading, or swapping, occurred in the year since the last report. Between July 2002 and the end of 2002, three swaps occurred, between Mediacom and U. S. Cable Corp., between Insight and AT& T, and between CableOne and Time Warner. 558 Between the beginning of 2003 and the end of June 2003, no swaps occurred. 550 NCTA Reply Comments at 8- 12; Comcast Reply Comments at 12- 17. 551 Comcast Reply Comments at 13. 552 Comcast Corp., Comcast Completes AT& T Broadband Transaction (press release), Nov. 18, 2002. When announced in December 2001, the AT& T- Comcast deal involved 13.8 million subscribers at a value of more than $71 billion. 553 Kagan World Media, Cable System Sales Summary, Cable TV Investor, Aug. 28, 2003, at 13; Jan. 31, 2003, at 9; and Aug. 29, 2002, at 8. The value of the AT& T- Comcast merger is not included in these totals because these are totals of announced deals and AT& T- Comcast was announced in December 2001. 554 See Appendix B, Table B- 2. We note that merging clusters can cause the total number of clusters to drop. Additionally, an analysis of these numbers indicates that the criteria for including subscribers in a particular cluster may have changed, giving a false impression of a shrinking number of clusters or subscribers within those clusters. 555 See 2002 Report, 17 FCC Rcd at 26977, Table B- 2. 556 See 1997 Report, 13 FCC Rcd at 1202, Table E- 2. 557 See Appendix B, Table B- 2. An analysis of these numbers indicates, however, that the criteria for including subscribers in a particular cluster may have changed, giving a false impression of a shrinking number of clusters or subscribers within those clusters. This compares to 21 clusters with over 500,000 subscribers in 1998 (2002 Report, 17 FCC Rcd at 26977, Table B- 2) and 4 in 1994 (1997 Report, 13 FCC Rcd at 1202, Table E- 2). 558 Kagan World Media, Cable System Exchanges, Broadband Cable Financial Databook 2003, Aug. 2003, at 178. 83 Federal Communications Commission FCC 04- 5 84 b. The National Programming Market 135. Concentration Among Buyers of National Video Programming. Cable operators still are the primary purchasers of multichannel video programming targeted to a national audience. As of June 2003, cable operators served approximately 74.9% of MVPD subscribers. 559 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 12.0% in 2002 to 12.3% in 2003. Similarly, EchoStar’s share increased from 8.3% in 2002 to 9.4% in 2003. 560 Reversing a recent trend, the share of subscribers of the top four MVPDs has increased over the past year, mainly due to the AT& T- Comcast merger. 561 In 2003, the four MVPDs with the largest subscribership served 56% of all MVPD subscribers. 562 In 2002, the top four MVPDs served 50.5% of all MVPD subscribers nationwide. 563 This compares to 47.2% of subscribers served by the largest four in 1993, and 54.6 in 1998, indicating that recent merger activity has reversed a downward trend in this statistic that has held since 1998. The share of subscribers served by the top ten MVPDs, however, decreased from 84.4% in 2002 to 82% in 2003. This compares to 63.2 % in 1993 and 71% in 1998. 136. We note in this context that Congress adopted Section 613( f) of the Communications Act as part of the 1992 Cable Act to address the consequences of horizontal concentration and vertical integration in the cable television industry. 564 This provision directs the Commission to establish limits on the number of cable subscribers that may be reached through commonly owned or attributed cable systems and to prescribe rules limiting the number of channels that can be occupied by the cable system’s owned or affiliated video programming. The Commission’s horizontal limit barred a cable operator from having an attributable interest in more than 30% of nationwide subscribership of multichannel video programming, and the vertical limit barred a cable operator from carrying attributable programming on more than 40% of its channels up to 75 channels of capacity. In Time Warner Entertainment Co. v. FCC (“ Time Warner”), 565 the United States Court of Appeals for the D. C. Circuit reviewed the Commission’s 559 See Appendix B, Table B- 1. 560 DirecTV is the second largest MVPD with 11.6 million subscribers; EchoStar is the fourth largest MVPD with 8. 8 million subscribers. See para. 67 supra. 561 The top four MVPD purchasers of video programming for distribution to the households or the MDU market are Comcast (with a share of 23.7% of all MVPD subscribers), DirecTV (with a share of 12.3%), Time Warner (with a share of 11.6%), and EchoStar (with a share of 8.8%). These percentages are derived from publicly-available data and are not the result of application of the Commission’s attribution rules. 562 See Appendix B, Table B- 4. 563 Id. 564 Section 613( f) was adopted as Section 11( c) of the Cable Television Consumer Protection and Competition Act of 1992, Pub. L. No. 102- 385, 106 Stat. 1460, codified at 47 U. S. C. § 533( f). 565 240 F. 3d 1126 (D. C. Cir. 2001). 84 Federal Communications Commission FCC 04- 5 85 cable television horizontal and vertical ownership limits, 566 and attribution benchmarks, 567 and reversed and remanded the rules. The Commission has an ongoing proceeding to respond to the ruling of the Court. 568 137. NCTA submitted comments on the use of market share and price increases as indicators of market power, including a statement and an empirical study. The statement, prepared by Dr. Debra J. Aron, concerns cable pricing, market share, and their relationship to market power. Dr. Aron argues that high rates of growth in prices do not in general create an economic inference of market power, that market share is not determinative of market power, and it is not even the primary determinant. Rather, the availability of competitive alternatives is relevant to assessing competition. 569 138. NCTA also submitted a study of cable pricing by Dr. Steven S. Wildman. Dr. Wildman studied cable prices and chose a method for adjusting for quality changes. Dr. Wildman examined a price per viewing hour (“ PPVH”), defined as price paid for cable service divided by the number of hours spent watching basic cable networks. 570 The cable price is the subscription fee paid for the lowest tier of service (BST) plus additional tiers (CPSTs) above that containing satellite- delivered national cable networks. 571 The number of viewing hours is based on Nielsen estimates of average viewing hours for cable subscribers in its national audience sample, and is not divided into smaller geographic units such as county. 572 Dr. Wildman found that PPVH has dropped three percent between 1997 and 2003 because the ratings for basic cable networks have increased faster than the nominal increase in cable prices. Adjusted for inflation, PPVH has dropped 15%. 573 139. We appreciate the NCTA’s effort to examine the question of quality adjusted cable rates, although we reserve judgment as to whether PPVH is the appropriate measure. While cable rates have increased faster than the rate of inflation, the number of channels and advanced services available to consumers also have increased over the same time. Additionally, consumers now spend a higher proportion of their viewing hours watching cable networks partially at the expense of broadcast networks, indicating a substitution toward cable networks. Several studies have attempted to adjust for changes in cable quality over time and thus examine whether cable price increases can be explained by increases in quality. The 566 The ownership rules in question were adopted in Implementation of Section 11( c) of the Cable Television Consumer Protection and Competition Act of 1992 Horizontal Ownership Limits, 14 FCC Rcd 19098 (1999). 567 The attribution rules in question were adopted in Implementation of the Cable Television Consumer Protection and Competition Act of 1992 Implementation of Cable Act Reform Provisions of the Telecommunications Act of 1996 Review of the Cable Attribution Rules, 14 FCC Rcd 19014 (1999). The Commission’s attribution rules serve to define the level of ownership interest implicated by the horizontal and vertical limits. 568 See Implementation of Section 11 of the Cable Television Consumer Protection and Competition Act of 1992, 16 FCC Rcd 17312 (2001). 569 NCTA Comments, Aron Statement, generally. 570 The Nielsen measure for basic cable networks excludes over- the- air broadcast networks. 571 E- mail from Dr. Steven S. Wildman, Michigan State University, Dec. 17, 2003. 572 Id. 573 NCTA Comments, Wildman Statement, generally. 85 Federal Communications Commission FCC 04- 5 86 Commission has in its past Price Surveys examined per channel rates to adjust for quality, which has shown considerably slower growth than the general rate of inflation. 574 Per channel rates, however, value all additional channels the same even if consumers do not want new channels that are added to cable systems. On the other hand, GAO found in a recent report that the price of system upgrades for the purpose of adding non- video services was a factor in cable price increases, meaning that the increasing cost of new and improved video services is not the only factor in rising cable prices. 575 PPVH, however, may adjust for consumer demand for the new channels they are receiving since it measures the amount they are watching them. The main weakness of PPVH, as identified by Dr. Wildman, 576 is that it measures total viewing of all basic cable networks, new and old, without distinguishing between the value added by the addition of new networks and the value added through quality increases in established networks. While PPVH lacks the precision to distinguish between quality additions (new channels) and quality increases (established channels), it has the potential to measure consumer perceptions of overall quality changes in cable service. We will continue to examine this issue, and will consider PPVH, as well as other measures of quality- adjusted price, in examining the effect of competition on rates. 140. 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”), using national MVPD subscriber shares. 577 We use the reported MVPD subscriber shares to calculate HHI figures. The HHI for the national market for purchase of programming is 1031 – considered “moderately concentrated” under the Merger Guidelines. 578 Due to the AT& T- Comcast merger, the larger firms in the calculation are now less equal in size, so that the HHI for 2003 is 147 points higher than the HHI of 884 reported last year. This increase marks a change in the gradual trend downward since 1998 (when the HHI was higher at 1096), and is also higher than the HHI of 880 in 1993. While this increase pushes the market into the moderately concentrated range, it is unclear whether this is a potential competitive problem, because the delivery market is local, not national, and because the main competitors to cable in both the upstream and 574 See, e. g, 2002 Price Survey Report, 18 FCC Rcd at 13293, Table 2. 575 2003 GAO Report, fn. 7 supra, at 3- 5. The report notes, however, that the availability these new services benefit only those subscribers who choose them, but that all subscribers may be subsidizing new services through higher rates. 576 NCTA Comments, Wildman Statement at 18- 19. 577 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. 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. 578 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 HHI above 1800 as “highly concentrated.” See 1998 Report, 13 FCC Rcd at 24363 n. 562. 86 Federal Communications Commission FCC 04- 5 87 downstream markets continue to grow in size. Nonetheless, this change is an important one, and we will continue to monitor it. B. Vertical Integration and Other Programming Issues 1. Status of Vertical Integration 141. Vertical integration occurs when a video programming distributor has an ownership interest in a video programming supplier or vice versa. These vertical relationships may have beneficial effects, 579 or they may deter competitive entry in the video marketplace and/ or limit the diversity of programming. 580 Since our last Report, the total number of national networks has increased, and cable operators continue to consolidate and develop new ownership interests. In 2003, we identified 339 satellite- delivered national programming networks, an increase of 31 networks over the 2002 total of 308 networks. Of the 339, 110 networks, representing approximately 33%, were vertically integrated with at least one cable MSO in 2003. 581 Last year, 92 networks were vertically integrated, or 30% of the 308 total. 142. The following table shows the number of national satellite- delivered networks, the number of vertically- integrated networks and the percent of vertically integrated networks since 1990. 582 As the table indicates, the number of national networks increased each year, with a slight decline from 283 in 1999 to 281 in 2000. In 1998, there were 245 national satellite- delivered networks, or a 131% increase over 1994, when there were 106 networks. In 2003, the 339 national satellite- delivered networks represent a 38% increase over 1998 and a 220% increase over the last ten years. The number of vertically- integrated networks increased steadily from 1990 to 1999. Since then the number of vertically-integrated networks has fluctuated from year to year. In 1998, there were 95 vertically- integrated national networks. This represents a 70% increase over 56 vertically integrated networks in 1994. In 2003, the 110 vertically integrated networks represent a 16% increase over 1998, and a 96% increase over the last ten years. As the number of vertically- integrated networks has increased, the total number of networks 579 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). 580 See 1995 Report, 11 FCC Rcd at 2135 ¶158; Implementation of Section 11( c) of the Cable Television Consumer Protection and Competition Act of 1992 Vertical Ownership Limits, 10 FCC Rcd 7364, 7365 ¶ 4 (1995). 581 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. See also Appendix C, Table C- 1. 582 Competition, Rate Deregulation and the Commission’s Policies Relating to the Provision of Cable Television Service, 5 FCC Rcd at 5109- 5110 Appendix G, Tables IV and V (1990); 1994 Report, 9 FCC Rcd at 7589 Appendix G, Tables 3 and 4; 1995 Report, 11 FCC Rcd at 2132 ¶ 150; 1996 Report, 12 FCC Rcd at 4430 ¶ 142; 1997 Report, 13 FCC Rcd at 1122 ¶ 158; 1998 Report, 13 FCC Rcd at 24376 ¶ 159; 1999 Report, 15 FCC Rcd at 1057 ¶ 179; 2000 Report, 16 FCC Rcd at 6078 ¶ 173; 2001 Report, 17 FCC Rcd at 1309 ¶ 157; 2002 Report, 17 FCC Rcd at 26959 ¶ 134. 87 Federal Communications Commission FCC 04- 5 88 also has increased such that the percent of vertically- integrated networks has steadily declined (from over 50% in 1994 to 30% in 2002) until this year when the percent rose to 33%. 583 Table 8: National Network Growth Year Total Number of Networks Number of Vertically Integrated Networks Percent of Vertically Integrated Networks 1990 70 35 50 1994 106 56 53 1995 129 66 51 1996 145 64 45 1997 172 68 40 1998 245 95 39 1999 283 104 37 2000 281 99 35 2001 294 104 35 2002 308 92 30 2003 339 110 33 143. Four of the top six cable MSOs (i. e., Comcast, Time Warner, Cox, and Cablevision) hold ownership interests in satellite- delivered national programming networks. 584 One or more of these companies has an interest in 50 of the 110 vertically- integrated national satellite- delivered programming networks. 585 Using the same methodology as in past Reports, 586 Time Warner has an ownership interest 583 A significant decline in the percent of vertically- integrated networks occurred between 1995 and 1996 (from 51% to 45%) due to Viacom’s sale of its cable systems. See 1996 Report, 12 FCC Rcd at 4429- 30 ¶ 142. 584 We derive our information concerning vertically- integrated networks from various sources, such as NCTA’s 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 complex. For example, our tables do not reflect that Vulcan Programming, Inc., an entity controlled by Paul Allen, owns a majority interest in Charter Communications and approximately 31% of Oxygen Network. We also note, as an example, that Liberty holds approximately 19% interest in News Corporation, which is the owner of cable networks operated by the Fox Cable Networks Group. See Letter from William M. Wiltshire, Counsel for News Corp., to Marlene H. Dortch, Secretary, FCC, MB Docket No. 03- 124 (Oct. 6, 2003). In addition, Charter Holding Company will receive unregistered shares of Oxygen Media common stock on, or prior to, February 2, 2005. William Savoy, a director of Charter and Charter Holding Company sits on Oxygen Network’s board of directors. Mr. Savoy is also an officer and director of Vulcan Programming and Vulcan Cable III. 585 The top six MSOs are Comcast, Time Warner, Charter Communications, Cox Communications, Adelphia Communications, and Cablevision Systems. See NCTA, Cable Operators, Cable Developments 2003, at 28. 586 Traditionally, the Commission has counted each channel of several multiplexed networks separately (i. e., six channels for Canales ń, 35 channels for iN DEMAND, and 33 channels TVN Entertainment Corporation) for the (continued….) 88 Federal Communications Commission FCC 04- 5 89 in 62, or 18% of all national programming networks (counting each of iN Demand’s 35 multiplexed channels separately); Cox, holds an ownership interest in 48, or 14% of all national programming networks (counting each of iN Demand’s 35 multiplexed channels separately); Comcast has an ownership interest in 41 programming networks, or 12% of all national programming networks (counting each of iN Demand’s 35 multiplexed channels separately); and Cablevision, through its programming subsidiary, Rainbow Media, has an ownership interest in five national programming networks, or two percent of all national programming networks. Liberty Media is the only other cable operator that owns national programming networks. 587 It has interests in 41 national networks, or 12% of all national programming networks (counting each of Canales ń’s six multiplexed channels separately). 588 In 1994, Time Warner had ownership interests in 16, or 15% of the 106 national programming networks; TCI had ownership interests in 23, or 22% of all national programming networks; Comcast had ownership interests in four national networks, or four percent; Cox also had ownership interests in four national networks, or four percent; and Cablevision had ownership interests in 13, or 12% of all national programming networks. 589 In 1998, Time Warner had ownership interests in 20, or eight percent of the 245 national programming networks; TCI had ownership interests in 50, or 20% of all national networks; Comcast had ownership interests in seven, or three percent of all national networks; Cox had ownership interests in 18, or seven percent of all national networks; and Cablevision had ownership interest in six, or three percent of all national networks. 590 (Continued from previous page) total number of national networks and these calculations. See Appendix C, Tables C- 1 and C- 2. We use this methodology again this year for consistent comparisons over the last decade. We recognize, however, that an alternative methodology, which counts each multiplexed network once, may be more consistent with industry practice. Under this alternative method, the total number of national networks is 268. On this basis, Time Warner has an ownership interest in 28 networks, or 10% of all national networks; Cox holds an ownership interest in 14 networks or 5%; Comcast has an ownership interest in seven networks or 3%; and Cablevision holds an ownership interest in five networks or 2%. 587 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. 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. If we did not count Liberty Media as being vertically integrated, the ratio of vertically- integrated networks would increase from 20.6% in 2002 to 24.8% in 2003. See Appendix C, Table C- 5. 588 If we only count multiplexed networks once, Liberty Media holds an ownership interest in 36 networks or 13% of all national networks. 589 1994 Report, 9 FCC Rcd at 7256 Appendix G, Table 6. 590 1998 Report, 13 FCC Rcd at 24445 Appendix D, Table D- 5. We include TCI’s ownership interests for 1994 and 1998 because on February 17, 1999, the Commission approved the transfer of control of TCI’s licenses to AT& T in Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from Tele- Communications, Inc., Transferor to AT& T Corp., Transferee, 14 FCC Rcd at 3160 (1999) and on November 13, 2002, the Commission approved the transfer of control of Licenses from Comcast and AT& T to AT& T- Comcast in AT& T- Comcast Merger Order, fn 94 supra. Subsequently, AT& T- Comcast dropped the AT& T from its name. 89 Federal Communications Commission FCC 04- 5 90 144. Vertical integration is not only associated with the largest cable system operators, but also the programming networks with the largest number of subscribers. Currently, nine of the top 20 non-broadcast video programming networks (ranked by subscribership) are vertically integrated with a cable MSO. 591 This figure represents a slight increase from 2002 when eight of the top 20 networks were vertically integrated. 592 In 1994, 14 of the top 20 companies were vertically integrated and, in 1998, nine of the top 20 networks were vertically integrated. Additionally, it appears that a significant amount of video programming is currently controlled by 13 companies, including cable MSOs, broadcasters, and other media entities. 593 Almost all (i. e., 18) of the top 20 programming networks in terms of subscribership are owned by one or more of these 13 companies. 594 145. Vertical integration is also associated with the largest cable system operators in terms of prime time ratings. Seven of the top 15 prime time non- broadcast video networks are vertically integrated with a cable MSO, with the other eight owned at least in part by one of the major broadcast networks. 595 This figure represents a slight increase since 2002, when six of the top 15 networks were vertically integrated. 596 In 1994, 12 of the top 15 companies were vertically integrated and, in 1998, nine of the top 15 companies were vertically integrated. 597 146. This year, we found 61 programming services that have been planned but are not yet operational, an increase of one over the 2002 Report’s count of 60 planned services. 598 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. Moreover, we 591 See Appendix C, Table C- 6. 592 See 2002 Report, 17 FCC Rcd at 26998 Appendix C, Table C- 6. 593 The 13 companies are: Time Warner, Cablevision, Comcast, Cox, Disney, E. W. Scripps Co., General Electric, Hearst, Liberty Media, Advance Newhouse, News Corp., Viacom, and Vivendi. See http:// www. cjr. org/ tools/ owners (visited at Oct. 17, 2003). We note that Liberty Media owns approximately 19% of News Corp. and that General Electric and Vivendi have announced plans to merge. See Letter from William M. Wiltshire, Counsel for The News Corporation Limited, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 03- 124 (Oct. 6, 2003); Vivendi Universal, General Electric and Vivendi Universal Sign Agreement To Merge NBC and Vivendi Entertainment (press release), Oct. 8, 2003, at http:// www. vivendiuniversal. com/ vu/ en/ press_ 2003/ 20031008_ General_ Electric_ and_ Vivendi_ Sign_ Agreement_ To_ Merge_ NBC_ and Vive. cfm. 594 C- SPAN and the Weather Channel are the two programming networks among the top 20 not affiliated with one of the 13 companies. C- SPAN was created by the cable industry and currently derives 97% of its revenues from affiliate fees (i. e., per subscriber fees from MVPDs). The remaining three percent is provided by various investments. Affiliates have no ownership or program control interests in C- SPAN. Landmark Communications, the licensee of two broadcast television stations, owns The Weather Channel. See http:// cjr. org/ tools/ owners. 595 See Appendix C, Table C- 7. 596 2002 Report, 17 FCC Rcd at 26999 Appendix C, Table C- 7. 597 1994 Report, 9 FCC Rcd at 7595 Appendix G, Table 7; 1998 Report, 13 FCC Rcd at 24453 Appendix D, Table D- 7. 598 See Appendix C, Table C- 4. See also 2002 Report, 17 FCC Rcd at 26992 ¶137. 90 Federal Communications Commission FCC 04- 5 91 include in this list programming that has been announced but is in various stages of development, which can lead to variations in the count from year- to- year. During 2003, several of the planned services listed in the 2002 report, such as College Sports Television and the Tennis Channel, launched. We first reported on planned programming services in 1995. At that time, there were 80 planned services. 599 Some of the 1995 planned services launched by the following year were Animal Planet and BET on Jazz. 600 In 1998, we reported that there were 65 planned programming services, a drop from 1995. 601 2. Other Programming Issues 147. 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. 602 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. 603 In addition, the Notice asked if these issues that are present in programming access also affect other, emerging services, like VOD. In this section, we also address issues raised in the comments relating to the carriage of local broadcast stations pursuant to must carry and retransmission consent. We also requested information on: programming issues, including local and regional channels, public education and governmental (“ PEG”) channels; compliance with the DBS public interest programming obligations; locally- originated programming, children’s, news and community affairs programming, programming in languages other than English, packaging of programming; and programming costs. 604 a. Regulatory Issues 148. 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. 605 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 599 1995 Report, 11 FCC Rcd at 2203- 2205 Appendix H, Tables 3 and 4. 600 1996 Report, 13 FCC Rcd at 4509 Appendix G, Table 1. 601 1998 Report, 13 FCC Rcd at 24380 ¶168. 602 Notice, 18 FCC Rcd at 16045 ¶ 13. 603 Id. at 16047 ¶ 18. 604 Id. at 16046- 47 ¶¶ 17- 18. 605 47 U. S. C. § 548. 91 Federal Communications Commission FCC 04- 5 92 with vertically- integrated programming vendors. The Commission has concluded that the statutory access requirements apply only to satellite- delivered programming and not to terrestrially- delivered programming. 606 149. MVPDs that compete with incumbent cable operators, and small cable operators, describe difficulties they have had gaining access to programming, which they consider “must- have,” such as regional sports and news networks, as they have in previous years. These commenters state that without access to regional sports and news programming networks many of which are affiliated with incumbent cable operators, it is difficult to compete. 607 They claim that incumbents’ ability to foreclose programming is due, in part, to the terrestrial- delivery exemption in the existing program access rules, alleging that some cable companies intentionally “migrate” programming to terrestrial distribution in order to avoid their programming access obligations. 608 They contend that consolidation and the clustering of cable systems within certain regions have exacerbated this problem 609 and are concerned that an increasing amount of programming will be denied them on the basis of the terrestrial- delivery exemption. 610 As evidence, BSPA cites the CEO of a fiberoptic network who stated that his network could be used to deliver programming terrestrially. 611 Commenters cite examples of terrestrially-delivered regional news and sports networks that they are unable to provide their subscribers, including Comcast Sports Net, the New England News Channel (“ NECN”), and overflow sports programming distributed by Cablevision- owned networks. 612 In addition, they observe that an increasing amount of regional sports programming has been moved from broadcast television to non- broadcast networks and, as a result of being denied this programming due to the terrestrial- delivery exemption, they cannot provide this “critical” programming to their subscribers. 613 150. Cable operators respond that Congress explicitly exempted terrestrial delivered programming from the program access rules. 614 In this regard, NCTA notes that the Commission 606 See 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 ¶¶ 70- 71 (1998) (“ Program Access Order”). 607 RCN Comments at 7; RCN Reply Comments at 2- 3; BSPA Comments at 17- 18; ACA Comments at 3- 4. 608 BSPA Comments at 17- 18; DirecTV Comments at 9- 10; RCN Comments at 8- 9. 609 BSPA Comments at 18; RCN Comments at 10; Direct TV Comments at 10- 11. 610 Id. at 18. 611 Id. (quoting Jerald L. Kent, CEO, Cequel III, a co- owner of Broadwave Communications Services). 612 RCN Comments at 7- 9. See also BSPA Comments at 17; DirecTV Comments at Exhibit D. 613 BSPA Comments at 17- 18. 614 Comcast Reply Comments at 14; NCTA Reply Comments at 8- 9. 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. In the same proceeding, the Commission concluded that (continued….) 92 Federal Communications Commission FCC 04- 5 93 previously found that a cable operator may choose terrestrial over satellite distribution as a legitimate business practice. 615 It explains that, since regional sports and news networks are intended to serve a limited geographic area, programmers choose terrestrial delivery designed to serve a small area, rather than satellite delivery designed to serve the entire U. S. Moreover, Comcast and NCTA state that no commenter has provided evidence showing that any programming network has ever been migrated from satellite to terrestrial delivery for the purpose of “evading” the program access rules. 616 Rather, they note that the three terrestrially- delivered networks which RCN and DirecTV have claimed in proceedings before the Commission were evasions have been determined not to be so by the Commission. 617 151. In addition, a number of MVPDs that compete with incumbent cable operators and small cable operators are concerned about exclusive carriage agreements between incumbent cable operators, especially the large vertically- integrated MSOs, and unaffiliated programmers. 618 They assert that incumbent cable operators seek exclusive contracts with unaffiliated programmers, often leveraging their own vertical relationships with programmers to maintain barriers to entry by denying “must- have” programming to competitors. For example, RICA states that a number of its member small cable systems serving rural areas have been unable to obtain access to programming owned by Disney, Fox and others, including ESPN, TV Land, MSNBC, and Fox Sports Midwest. 619 According to BSPA, Everest Connections’ Kansas City system has been denied access to University of Missouri basketball games because Mizzou Sports Properties, the rights holder, has an exclusive agreement with the incumbent cable operator, a Time Warner affiliate. 620 It also mentions an August 2003 meeting between Comcast, Cox, Time Warner, Adelphia, and Charter and Los Angeles County representatives in which the cable MSOs sought to have local county government programming made exclusive to their systems. 621 152. In response, Comcast states that exclusive arrangements with unaffiliated programmers, such as Mizzou Sports Properties, are not covered by the program access rules. 622 Comcast and NCTA point out that cable operators face the same challenges in receiving access to programming carried exclusively by other MVPDs, such as DirecTV’s carriage of the NFL Sunday Ticket which provides (Continued from previous page) the language of section 628( c) expressly applies to satellite programming, and that terrestrially- delivered programming is not covered. Program Access Order, 13 FCC Rcd at 15856- 57 ¶¶ 70- 71. 615 NCTA Reply Comments at 10- 11. 616 Comcast Reply Comments at 14- 16; NCTA Reply Comments at 9. 617 Comcast Reply Comments at 14; NCTA Reply Comments at 9- 10. 618 BSPA Comments at 14- 17; RICA Comments at 3; ACA Comments 3- 4; RCN Comments at 11; DirecTV Comments at 17, Exhibit D (listing over 30 regional networks that are unavailable to non- cable operators, either due to terrestrial distribution or exclusive carriage agreements). 619 RICA Comments at 4. 620 BSPA Comments at 16. A complaint on this matter is pending, CSR- 6094- P. 621 BSPA Comments at 14- 15. 622 Comcast Reply Comments at 16- 17. See also NCTA Reply Comments at 8. 93 Federal Communications Commission FCC 04- 5 94 valuable football programming. 623 Further, Comcast observes that BSPs could invest in developing their own exclusive programming now that they serve hundreds of thousands of subscribers. 624 153. In the Notice, we asked if program access issues have arisen with respect to new services, such as VOD. 625 BSPA recommends that the Commission adopt a “technology neutral view of content access” so that no consumer is denied access to digital content. 626 BSPA and RCN urge the Commission to extend program access- types rules to all digitally distributed content stored at the cable headend. 627 BSPA and RCN seek regulation of VOD hardware, software, and content as well as HDTV content to ensure access. 628 To support its position, BSPA states that iN DEMAND, a company owned by Comcast, Time Warner, Cox, which is a dominant provider of VOD programming, has denied non-member/ owners’ access to its service. 629 In its reply, iN DEMAND notes that initially it had limited deployments, but that it currently has a VOD agreement with Knology and is negotiating with other non-member/ owner companies. 630 154. Must Carry and Retransmission Consent. Under Sections 614 and 615 of the Communications Act, cable operators must set aside up to one third of their channel capacity for the carriage of commercial television stations and additional channels for noncommercial stations depending on the system’s channel capacity. 631 Pursuant to the Satellite Home Viewer Improvement Act of 1999 (“ SHVIA”), DBS operators may provide local- into- local broadcast television service. 632 Unlike cable operators that are required to carry local television stations in every market they serve, a DBS operator must carry all stations in any market where it chooses to carry one local television station (“ carry- one, carry- all”). 633 In both the cable and DBS contexts, commercial broadcasters may elect to be carried pursuant to must- carry status or retransmission consent. 634 Where a station elects must- carry it is 623 NCTA Comments at 13; Comcast Reply Comments at 13. 624 Comcast Reply Comments at 16. 625 Notice, 18 FCC Rcd at 16047 ¶ 18. 626 BSPA Comments at 18- 22, 31- 33. 627 Id. at 27- 31; RCN Comments at 10- 11. 628 RCN Comments at 10- 11. 629 BSPA Comments at 28- 29. 630 iN DEMAND Reply Comments at 1- 2. See also Comcast Reply Comments at 19- 20. 631 47 U. S. C. §§ 534( b), 535( b). See also 47 C. F. R. § 76.56. 632 SHVIA was enacted as Title I of the Intellectual Property and Communications Reform Act of 1999 (relating to copyright licensing and carriage of broadcast signals by satellite carriers, codified in scattered sections of 17 and 47 U. S. C.), Pub. L. No. 106- 113, 113 Stat. 1501, 1501A- 526 to 1501A- 545 (Nov. 29, 1999). 633 47 C. F. R. § 76.66. 634 47 C. F. R. § 76.64. 94 Federal Communications Commission FCC 04- 5 95 generally guaranteed carriage, but it is prohibited from receiving compensation for this carriage. 635 Under retransmission consent, the broadcaster and cable or DBS operator negotiate an agreement that may involve compensation in return for permission to retransmit the broadcast signal. The current rules apply to the carriage of analog television stations. In the pending DTV Must- Carry Proceeding, the Commission is considering issues relating to the carriage of digital television signals and whether to require dual carriage of analog and digital signals during the DTV transition. 636 155. Some cable commenters claim that the retransmission negotiation process for broadcast carriage is being abused. They assert that, in return for retransmission consent for the carriage of network O& Os, they must agree to carry network- affiliated cable programming networks not only in the markets where the O& Os are located, but on all their cable systems. 637 In this regard, Cox observes that, since cable operators must pay for carriage of these affiliated programming networks, these agreements result in increased cable rates for consumers. 638 The Broadcast Networks respond that the retransmission process is working well with very few bargaining impasses and that they bargain in good faith. They indicate that they may legally seek carriage of additional channels or cash in return for retransmission consent and dismiss the cable companies’ comments as efforts to secure better terms.. 639 The Broadcast Networks further state that they offer cable operators multiple options, including cash payment per subscriber, in exchange for retransmission consent. 640 Cox, however, contends that broadcasters exercise market power that harms the public interest by requiring carriage of less- desired programming. 641 While Cox initially indicated that it was never formally offered a cash payment option by any of the Broadcast Network commenters, it subsequently provided a clarification indicating that it received a cash payment option for KCAL, the Los Angeles CBS affiliate. 642 635 47 C. F. R. § 76.60. 636 See DTV Must Carry Order, fn. 448 supra. 637 Cox Comments at 16- 18; ACA Comments at 5- 7; Coalition Comments at 1- 2; OPASTCO Comments at 3. 638 Cox Comments at 17- 19. 639 Broadcast Networks Reply Comments at 3- 6. 640 Id. at 2. 641 Letter from To- Quyen Troung, Counsel to Cox Communications, to Marlene H. Dortch, Secretary, FCC (Oct. 14, 2003) at 2. 642 Letter from To- Quyen Troung, Counsel to Cox Communications, to Marlene H. Dortch, Secretary, FCC (Nov. 24, 2003) at 1 (Cox refused to accept CBS’ offer to pay $0.75 per subscriber per month for carriage of KCAL because it was concerned that the other seven retransmission consent stations it carried would make similar demands and Cox would have to raise its basic service rates by $5.25). See also Letter from John C. Quale, Counsel to the Broadcast Networks, to Marlene H. Dortch, Secretary, FCC (Dec. 23, 2003) (detailing options offered to Cox by the networks for retransmission consent); Letter from Susan L. Fox, Vice President, Government Relations, The Walt Disney Company (Dec. 23, 2003) (regarding Disney’s willingness to offer a cash payment option to Cox). 95 Federal Communications Commission FCC 04- 5 96 156. NAB and NRTC argue that DBS operators should be required to carry local broadcast signals in all 210 DMAs. 643 NAB further suggests that DBS operators be required to carry broadcasters’ HDTV signals and both their analog and digital signals during the digital transition. 644 DirecTV and SBCA state that there is no statutory basis for these requirements, the Commission has declined to require DBS operators to carry television broadcast stations’ digital or HDTV signals, and such requirements would limit DBS operators’ ability to use their spectrum capacity for diverse programming. 645 NAB counters that the satellite industry has historically claimed limited capacity, while continuing to increase the number of markets where local- into- local television service is provided. 646 In this regard, NAB and NRTC note that DirecTV recently committed to offer local- into- local service in all television markets by 2008, and perhaps as early as 2006. 647 157. With respect to the carriage of digital television signals, Paxson argues that cable and satellite companies’ must- carry obligations should be expanded to include multicast offerings. 648 Paxson states that it can only compete against cable and other MVPDs if cable must- carry obligations are expanded to include multiple streams of content (analog and digital) and HD signals. 649 NAB also argues that dual carriage of analog and digital signals is necessary for the digital transition. 650 Comcast responds that digital signal carriage issues should be addressed in the on- going DTV Must- Carry Proceeding. 651 b. Sports Programming 158. Sports programming continues to be an important segment of programming for all MVPDs. 652 According to many commenters, local and regional programming holds high value for 643 NRTC Comments at 5- 7 (this requirement should be met by January 1, 2006); NAB Reply Comments at 1; NRTC Reply Comments at 1- 4. 644 NAB Reply Comments 1- 2, 11. 645 SBCA Comments at 13; DirecTV Comments at 9. 646 NAB Reply Comments at 3- 9. 647 NAB Reply Comments at 4- 5; NRTC Reply Comments at 2- 3. See also DirecTV Reply Comments at 3- 4 (citing Letter from William M. Wiltshire, Counsel for The News Corporation Limited, Garry M. Epstein and Richard E. Wiley, Counsel for General Motors Corporation and Hughes Electronics Corporation, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 03- 124, Sept. 22, 2003). 648 Paxson Comments at 4- 6. 649 Id. at 5- 8. 650 NAB Reply Comments at 11. 651 Comcast Reply Comments at 17- 19 (noting that the Commission has tentatively concluded that multicast must carry should not be required). See also DTV Must- Carry Order, fn. 448 supra. 652 See, e. g., Comcast Comments at 27; RCN Reply Comments at 3. 96 Federal Communications Commission FCC 04- 5 97 subscribers. 653 Of the 84 regional cable channels identified this year, 27, or 33%, are sports channels. 654 In 1998, 29 of the 61 regional cable channels were regional sports networks. 655 The most widely distributed sports programming network, ESPN, which is owned by Disney, reaches almost 87 million television households through a variety of MVPD technologies. While ESPN dominates national sports programming, regional sports distribution is dominated by Fox, which owns or holds an ownership interest in 70% (19 of 27) of all regional sports networks. 656 These regional sports networks serve approximately 79 million subscribers. 657 159. MVPDs that compete with incumbent cable operators, such as DBS operators and BSPs, assert that cable operators deny competitors access to vertically- integrated regional sports programming that is delivered terrestrially. 658 For example, RCN contends that it was initially denied access to Comcast’s SportsNet in Philadelphia, and subsequently it obtained only a short- term agreement for carriage. 659 Comcast disputes this claim and states that Comcast SportsNet has been available to, and carried by, RCN since it was created, without interruption. 660 Moreover, BSPA notes that Congress recognized the importance of sports programming and alleges that cable operator exploitation of the terrestrial- delivery exemption exacerbates the problem of making certain sports programming available only over certain distribution platforms. 661 Cable interests respond that these allegations amount to a request for government mandated access to programming that Congress deliberately chose to exempt from the program access rules. 662 160. In addition, BSPA states that incumbent cable operators enter into exclusive programming arrangements that deprive its members of access to regional sports networks. 663 For 653 Comcast Comments at 27- 28. 654 See Appendix C, Table C- 3. 655 See 1998 Report, 13 FCC Rcd at 24380- 81, 24439- 41 ¶ 171, Appendix D, Table D- 3. 656 See Appendix C, Table C- 3. 657 Application of General Motors Corporation and Hughes Electronics Corporation, Transferor, and the News Corporation Limited, Transferee, for Authority to Transfer Control, MB Docket No. 03- 124 (May 2, 2003), at 26. 658 RCN Comments at 7- 10; BSPA Comments at 17- 18. 659 RCN Comments at 7- 8. RCN states that it hopes to finalize a long- term contract for this programming soon. Id. 660 Comcast Reply Comments at 15 (citing Comcast Corporation and AT& T Corp., Reply to Comments and Petitions to Deny Applications for Consent To Transfer Control, MB Docket No. 02- 70, May 21, 2002, at 101- 102; Letter from James L. Casserly, Counsel to Comcast, to Marlene H. Dortch, Secretary, FCC, Sept. 10, 2002, at 1- 2). 661 BSPA Comments at 17- 18. See also RCN Comments at 8- 9. 662 NCTA Reply Comment at 8; Comcast Reply Comment at 14- 15. 663 BSPA Comments at 14, 16 (citing Mizzou Sports Properties exclusive arrangement in Kansas City, see para. 151 supra). 97 Federal Communications Commission FCC 04- 5 98 example, RCN alleges that Comcast has entered into an exclusive arrangement with New England Sports Network (“ NESN”) to provide its HDTV sports programming, which RCN considers critical programming for it subscribers. 664 Comcast disputes this charge, stating that it was simply the first MVPD to negotiate a carriage agreement for NESN’s HDTV programming in return for support for launch of this coverage. 665 In response, RCN claims that it was rebuffed when it first approached NESN to negotiate a carriage agreement, an expected response given previous arrangements that prevented RCN from acquiring programming, 666 although it acknowledges that it may now be able to negotiate an agreement for this programming. 667 c. News Programming 161. Local news channels have been on cable since at least 1986, when Cablevision launched News 12 Long Island. This year, of the 84 regional programming networks identified, 37 or 44% are regional news networks. 668 In 1998, 25 of the 61 regional cable channels were regional news networks. 669 Unlike sports programming, regional and local news networks have a more diverse ownership. Some regional news networks are vertically integrated with cable MSOs, such as Time Warner’s New York 1 News and Rhode Island News Channel, owned in part by Cox Communications. 670 Others are affiliated with local broadcasters or newspapers, including Allbritton’s Newschannel 8 in the Washington, D. C., area, A. H. Belo Corporation’s Texas Cable News serving Dallas, and Six News Now, owned by the Sarasota Herald- Tribune. 162. RCN and DirecTV comment that they have had difficulty obtaining access to some regional news programming. 671 For example, RCN states that Comcast refused to waive its exclusive rights to carry terrestrially- delivered New England News Channel (“ NECN”), thereby denying RCN access to this important local programming. 672 Comcast counters that NECN was exempted from the 664 RCN Reply Comments at 2. 665 See Letter from James L. Casserly, Counsel to Comcast, to Marlene H. Dortch, Secretary, FCC (Oct. 8, 2003), at 1- 2. 666 See Letter from L. Elise Dieterich, Counsel to RCN, to Marlene H. Dortch, Secretary, FCC (Oct. 16, 2003). 667 Id. See also Letter from Ryan G. Wallach, Counsel to Comcast, to Marlene H. Dortch, Secretary, FCC (Nov. 18, 2003) at 2 (citing attached declaration of Peter Plaehn, Vice President of Marketing, NESN, clarifying that Comcast does not have any exclusive rights that would prevent NESN from entering into an agreement with RCN). 668 See Appendix C, Table C- 3. 669 See 1998 Report, 13 FCC Rcd at 24383, 24439- 41 ¶ 176, Appendix D Table D- 3. 670 Radio and Television News Directors Association, at http:// www. rtnda. or/ resources/ nonstopnews/ directory. html (visited Oct. 6, 2003). 671 RCN Comments at 8; DirecTV Comments at 17, Exhibit D. 672 RCN Comments at 8. See also BSPA Comments at 17. 98 Federal Communications Commission FCC 04- 5 99 prohibition on exclusive contracts by the Commission based on a finding that its regional programming served the public interest. 673 d. Other Programming 163. In the Notice, we sought information regarding public, educational and government (“ PEG”) channels and programming provided by DBS operators in compliance with the public interest programming obligations. 674 In addition, this year, we specifically requested comment on locally-originated programming, children’s programming, local news, community affairs programming, and non- English language programming. 675 164. PEG Programming. 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. 676 PEG channels are intended to provide community- specific information, such as bulletin boards for local activities for local activities, local civic meetings, and local governmental activities. In addition to PEG channels, some cable operators also are providing local and regional sports, weather, and news programming. There are over 5,000 PEG channels carried nationwide, 677 with Comcast reporting that it carries more than 2,400 PEG channels across the country and spends $100 million in direct support for PEG channels. 678 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. 165. DBS Public Interest Programming. DBS operators are required to reserve four percent of their channel capacity for “noncommercial programming of an educational or informational nature.” 679 DirecTV states that it currently carries 11 channels pursuant to this requirement as well as 673 Comcast Reply Comments at 15- 16 (citing New England Cable News, 9 FCC Rcd 3231 (1994)). 674 Notice, 18 FCC Rcd at 16046- 7 ¶ 17. 675 Id. at 16046 ¶ 14. 676 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). 677 Telephone conversation with Bunnie Riedel, Executive Director, Alliance for Community Media (Oct. 27, 2003). 678 Comcast Comments at 24. See also Cox Comments at 7. 679 See Implementation of Section 25 of the Cable Television and Consumer Protection Act of 1992, Direct Broadcast Satellite Public Interest Obligations, 13 FCC Rcd 23254 (1998). On August 19, 2003, Word of God Fellowship, Inc. dba Daystar Television Network filed a Request for Section 403 Inquiry and for Declaratory Ruling regarding exclusive contracts for programming carried on DBS channels reserved pursuant to the DBS public interest obligations. See Request For Comment On Petition Regarding DBS Public Interest Obligations And Private Contractual Arrangements, 18 FCC Rcd 18689 (2003). 99 Federal Communications Commission FCC 04- 5 100 additional educational channels that it does not include as part of its compliance with the rules. 680 We previously reported that EchoStar carried 21 channels in compliance with this requirement and other educational channels. 681 DBS providers are charging some noncommercial programmers for carriage on their systems to the extent allowed by the Commission’s rules. 682 166. Locally- originated, Community- oriented, Children’s and Non- English Programming. A number of commenters provide information regarding locally- produced, community- oriented, children’s and non- English programming they offer consumers. This information is illustrative of the variety of programming offered to consumers. 167. In addition to the regional/ local news and sports programming previously mentioned, cable operators provide a source of community- oriented programming through local origination channels that cover news, sports, weather, local politics, education, and cultural and ethnic activities since their earliest days. 683 A few examples are: Cox4, Baton Rouge, which highlights area schools; Insight’s 24- hour educational access channel in Covington, Kentucky; Armstrong’s Orrville, Ohio, system’s coverage of local school events; and Comcast’s CN8, which provides local news, discussions of public issues, and family entertainment in several states. 684 Comcast states that it produces local public affairs programming such as “Local Edition” and “Newsmakers,” five- minute programs shown every half hour on the channel carrying CNN Headline News. 685 In addition, Time Warner reports that one of its cable systems is developing an on- demand local channel. 686 168. Numerous cable and satellite operators report carrying programming specifically aimed at children. Among the programming networks with children’s programming listed are: ABC Family Channel; Boomerang; Cartoon Network; Discovery Kids; Disney Channel (East & West); Hallmark Channel; Nickelodeon/ Nick at Nite; Noggin/ The “N”; PBS Kids; Toon Disney; and TV Land. 687 169. Cable and DBS operators also offer a range of non- English and international programming. For example, DirecTV carries numerous Spanish and Chinese- language programming 680 This programming includes C- SPAN, Trinity Broadcast Network (TBN), PBS You, Link TV, Eternal Word Television Network, Mari+ Vaision, I Life, NASA- TV, RFD- TV, The Word, Daystar, and BYU- TV. DirecTV Comments at 16. 681 2002 Report, 17 FCC Rcd at 26964 ¶ 151. 682 Under the Commission’s 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). 683 NCTA Comments at 65- 67, Appendix C. 684 Id. See also Comcast Comments at 24 -25. 685 Comcast Comments at 38. 686 Time Warner Comments at 10. 687 DirecTV Comments at 16; Cox Comments at 7- 8; Comcast Comments at 24. 100 Federal Communications Commission FCC 04- 5 101 networks. 688 The Dish Network offers Arabic, South Asian, Polish, Greek Chinese, Russian and Korean-language packages in addition to several Spanish packages. 689 Comcast produces two specialty Spanish-language programming tiers in markets with large Spanish- speaking populations. 690 Cablevision has launched a 30- channel Hispanic digital tier (iO en Espanol) and Time Warner offers a tier of 15 Spanish-language networks (DTV en Espanol). 691 In New York City, Time Warner offers two local news channels, one of which is a Spanish- language service. 692 Cox offers a TeleLatina tier and international premium services, such as TV Asia and Washington Korean TV, to its digital customers. 693 e. Programming Costs 170. The Commission’s most recent report on cable industry prices (“ 2002 Price Survey Report”) asked cable operators to describe factors that led to changes in their rates. Competitive and noncompetitive cable operators attributed 61.2% and 66.1%, respectively, of their rate increases to increases in programming costs. 694 GAO recently found that programming costs have risen on average by as much as 34% in the last three years. During the same time period, GAO states that sports programming costs have increased on average by 59%. 695 171. Cable operators state that increases in programming costs reflect their investments in higher quality programming. 696 In particular, a major source of increased programming costs is sports programming attributable to competition among sports networks and rising players’ salaries that lead to increased television rights fees. 697 For example, Cox reports that its programming costs increased an average of 12% last year, but some sports networks are seeking up to 35% annual price increases. 698 Cox further claims that sports programming is responsible for the price of cable service increasing more 688 DirecTV Comments at 16; Cox Comments at 8, n. 8. See generally SkyReport, Niche Programming, 2 THE BRIDGE (Sept. 2003) (describing non- English and other niche programming services). 689 Dish Network, at http:// www. dishnetwork. com/ content/ programming/ international/ index. shtml (visited Oct. 27, 2003). 690 Comcast Comments at 23- 24. 691 NCTA Comments at 52. 692 Time Warner Comments at 10. 693 Cox Comments at 8. 694 Inflation, channel additions, and system upgrades, were also said to account for a large portion of rate increases. See 2002 Price Survey Report, fn. 10 supra, 18 FCC Rcd at 13296 ¶ 34, Table 8. 695 See 2003 GAO Report, fn 7 supra, at 4, 21- 22. 696 NCTA Comments at 35- 36; Cox Comments at 20- 21. 697 NCTA Comments at 35- 37, Appendix A (Wildman Study, Assessing Quality- Adjusted Changes in the Real Price of Basic Cable Service); Cox Comments at 20- 22. See also SkyReport, Sports Programming, THE BRIDGE (Aug. 2003) at 3. 698 Cox Comments at 20- 21. 101 Federal Communications Commission FCC 04- 5 102 than three times the rate of inflation. 699 As a result, Cox is refusing to pay the 20% increase ESPN is demanding when their current contract expires in March 2004. 700 Currently Cox asserts that it pays $2.61 per subscriber per month for carriage of ESPN on its expanded basic tier, compared to an average of $2.55 per subscriber per month for the seven top- rated programming networks combined carried on that tier. Moreover, Cox seeks the right to place ESPN and other high priced programming on optional tiers. 701 ESPN counters that cable’s rising rates are caused more by the industry’s digital upgrades than by higher programming costs. 702 172. Moreover, several commenters state that they face difficulties obtaining access to necessary content at reasonable rates, noting that the largest cable operators pay less, and can negotiate more favorable terms, than other MVPDs for programming. 703 In this regard, Qwest estimates that it pays approximately 20% more for programming than the incumbent cable operators with which it competes. 704 ACA similarly states that small cable operators pay more for satellite- delivered programming than the large MSO and are subject to costly terms and conditions for retransmission of local broadcast stations controlled by the networks and large affiliate groups. 705 f. Packaging of Programming Services 173. In the Notice, we sought information regarding the packaging and marketing of programming and whether, and to what extent, distributors offer discrete programming choices, such as mini- tiers or a la carte services. 706 Generally, MVPDs continue to offer packages or tiers of service that include a large number of programming networks. 707 Bundling programming channels into packages allows greater penetration of individual channels which lowers the per subscriber price MVPDs pay to programmers and benefits new or niche channels through subscriber awareness that is necessary for the 699 Jim Lovel, Cox Takes on ESPN, Fox, ATLANTA BUSINESS CHRONICLE, at http:// atlanta. bizjournals. com/ atlanta/ stories/ 2003/ 11/ 03/ story1. html (visited Nov. 7, 2003). 700 Under its current contract ESPN has increased its price 20% each of the last four years, the maximum allowable rate. 701 John M. Higgins, War of Words Between Cox, ESPN Escalates, BROADCASTING & CABLE, Oct. 27, 2003, at 50. 702 Frank Ahrens, ESPN to Cox: Back to You, THE WASHINGTON POST, Oct. 23, 2003, at E1. 703 Qwest Comments at 8- 9; RICA Comments at 5; OPASTCO Comments at 2- 3. 704 Quest Comments at 9. Quest recognizes that programmers may charge new entrants and overbuilders higher prices on the basis of economies of scale, differences in delivery technologies and transmission costs, expected viewership and advertising revenues, and the small size of the new entrant’s subscribership under section 628( c)( 2)( B). See also Comcast Reply Comments at 17 (citing 47 C. F. R. § 76.1002( b), which permits programmers to offer volume discounts to their largest customers). 705 ACA Comments at 2. 706 Notice, 18 FCC Rcd at 16046 ¶ 15. 707 1998 Report, 13 FCC Rcd at 24387 ¶ 187. See also 2003 GAO Report at 30- 31. 102 Federal Communications Commission FCC 04- 5 103 survival of such new programming, especially when it is not associated with a “brand name” entity. 708 Commenters assert that an a la carte requirement would result in reduced choices and higher prices for consumers due to increased transaction costs and the synergies associated with selling advertising and promoting services. 709 For these reasons, cable operators and other MVPDs have chosen to market their services primarily as programming packages and several programming networks (e. g., Bravo and Disney) have migrated from a la carte offerings to traditional programming packages. 710 174. GAO recently analyzed the costs and benefits of a la carte offerings. It found that, while an a la carte system might provide greater consumer choice, it would impose additional costs on subscribers and alter the current economic structure of the cable industry. 711 Initially, many consumers would have to obtain additional equipment to unscramble the networks they are authorized to receive. Cable operators would lose advertising revenues because they are based on the number of potential viewers (i. e., the number of subscribers to the tier of service the network is carried on). If advertising revenues decline, then licensing fees may rise to compensate. These increased fees could be passed on to consumers and result in higher cable rates. Factors, including the pricing of a la carte service, consumers’ purchasing patterns, and whether certain niche services would cease to exist with a la carte service, make it difficult to ascertain whether consumers would be better or worse off with such an approach. GAO comments that perhaps a separate tier for sports programming would be viable because of its loyal customer base, but also observes that sports programmers are reluctant to agree to such tiers because they seek wide availability of their programming. 175. Some have suggested a la carte or mini- tier offerings could lower cable rates generally by allowing consumers to pay for sports and certain other expensive programming only if they choose to do so. 712 In this regard, ACA states that small cable operators would like to offer high- priced programming on an a la carte basis, but that network owners, such as Disney and Fox, currently require that their networks be carried on the expanded basic tier. 713 Recently, however, a number of larger cable operators announced plans to offer a few channels of sports programming on a separate tier. For example, Time Warner now offers a digital sports tier in New York and New Jersey that includes NBA TV, Tennis Channel, NBA TV, three Fox Sports Digital networks and Fuel for $3.95 a month. Similarly, Comcast has announced plans to begin a comparable sports tier in 2004. 714 176. The most notable example of the development of a separate sports tier resulted from a dispute between Cablevision and the Yankee Entertainment and Sports Network (“ YES”), a New York area sports network with rights to carry the New York Yankee baseball games and other sports 708 DirecTV Comments at 13- 14; A& E Comments at 8- 9. These commenters note that premium, pay- per- view and some sports programming has historically been offered separately on a per- channel or per- program basis. Id. 709 A& E Comments at 8, 10. See also DirecTV Comments at 13. 710 A& E Comments at 10- 11. 711 See 2003 GAO Report at 5- 6, 32- 33. 712 See SkyReport, Sports Programming, THE BRIDG, at 3. 713 ACA Comments at 4- 5. According to GAO this is a common practice. See 2003 GAO Report at 33- 34. 714 CABLEFAX DAILY, Oct. 28, 2003, at 1. 103 Federal Communications Commission FCC 04- 5 104 programming. Initially, YES sought carriage on the Cablevision’s expanded basic tier at a cost of $2 per subscriber per month. 715 Cablevision declined to accept these terms and did not carry YES during the 2002 baseball season. Prior to the start of the 2003 baseball season, Cablevision and YES agreed to a one year agreement which allowed Cablevision to offer YES on a new regional sports tier that also included MSG Network and Fox Sports Net New York at $4.95 per month. Cablevision also offers subscribers each channel separately for $1.95 a month. 716 C. Technical Issues 177. In 1994, most technical efforts were focused on the development and use of digital compression and modulation technologies. On June 17, 1994, high- power DBS service, DirecTV, began its operation as an all- digital technology, capable of providing hundreds of channels of services, whereas cable was still providing an average of less than 47 channels via the analog standard. 717 Also at that time, telephone companies were contemplating the use of digital compression technologies to provide ADSL data transport services over their wired networks. 718 The cable industry accelerated the upgrade of its wired networks so that it could continue to experiment with, and deploy such advanced and competitive services as voice, data transport (later known as Internet access services), and advanced video services such as video- on- demand (“ VOD”). Cable operators began to launch trials and commercial deployments of advanced service offerings as systems increased their capacity to handle such services. For example, at the end of 1994, Time Warner launched a commercial trial of VOD service in its Orlando, Florida, system, the first such service. Time Warner’s early entry into the VOD market, however, was short- lived and the operation was closed by mid- 1997. 719 By the time of our 1998 Report, VOD deployment was more or less abandoned by cable operators, and instead cable operators were beginning to offer digital video services, facilities- based high- speed Internet access, and facilities- based cable telephony, with plans for widespread deployment of these services as networks continued to be upgraded. Today, advanced services are still evolving. With digital compression technology now in widespread use, as well as many of the services operating on cable platforms such as cable telephony and high- speed Internet access services, cable operators and other MVPDs are once again implementing VOD and other emerging services such as interactive television. 715 Peter Grant, Cable Firms Cheer Yankee Network’s Pact, THE WALL STREET JOURNAL, Mar. 21, 2003, at B2. See also Ken Kerschbaumer, Cablevision Finally Says YES, BROADCASTING & CABLE, Mar. 17, 2003, at 2. 716 Id. Cablevision offers some alternative pricing for subscribers already receiving MSG and Fox Sports and some premium packages. 717 Kagan World Media, Channel Capacity Projections by Technology, Marketing New Media, Sept. 16, 1996, at 1. Originally launched in 1991 as an analog service, medium- power DBS provider, Primestar, a DBS service owned and operated by a collective of cable operators, did not begin to use digital technology until July 31, 1994. Primestar service was acquired by DirecTV in 1998. 718 1994 Report, 9 FCC Rcd at 7500- 2 ¶ 112- 115. 719 Michael Grebb, Time Warner Capitulates on VOD, WIRED NEWS, May 1, 1997. 104 Federal Communications Commission FCC 04- 5 105 1. Cable Modems 178. Cable modems allow cable subscribers to access high- speed data services, over hybrid fiber- coaxial (HFC) cable plants. 720 At the time of our first Report in 1994, the Internet was still a nascent technology. Only five years later, the Internet was available via broadband, with approximately 300,000 cable modem subscribers achieving average data access speeds of between one and ten Mbps, with reported top speeds of 52 Mbps. 721 Cable modem deployment continues to increase, with manufacturers shipping nearly 1.9 million cable modems in North America during the second quarter of 2003. 722 By June 2003, there were approximately 13.4 million cable modem subscribers in the U. S. 723 At the time of our 1998 Report, most subscribers to cable modem service leased the modem from an MSO. Today, approximately 70% of video subscribers taking high- speed Internet access services purchase their own modems. 724 179. 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). Although cable modems were not available for residential use at the time of our 1994 Report, a group of cable operators, joined together in December 1996 to issue a Request for Proposal (“ RPF”) that resulted in the development of the DOCSIS standard. 725 DOCSIS defines interface requirements for cable modems and cable modem termination systems (“ CMTS”) used for high- speed data distribution. Originally only one among many proposed standards, DOCSIS emerged as the leading option for the cable modem standard in late 1997. 726 In March 1998, the International Telecommunications Union approved DOCSIS. 727 In June 1998, CableLabs hosted a series of Interoperability and Certification conclaves to initiate the certification of the DOCSIS 720 As described above, cable modem service is primarily residential service, but may also include some small business service. See fn. 135 supra. See also para. 53 supra. 721 The Web Contains 7 Million Sites, Pandia Search, at http:// www. pandia. com/ searchworld/ 2000- 39- oclc-size. html (visited Nov. 17, 2003); 1998 Report, 13 FCC Rcd at 24313 ¶ 52. These speeds represent download speeds. In the first several years of residential broadband Internet access use, return path (or upload) data transfer was often conducted over a telephone line at significantly lower data transfer speeds than the broadband downloads. See 1998 Report, 13 FCC Rcd at 24316 ¶ 55; see also Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, 14 FCC Rcd at 2398 (1999). 722 Kinetic Strategies, Cable Modem Market Stats & Projections, CABLE DATACOM NEWS, June 5, 2003, at http:// cabledatacomnews. com (visited Sept. 23, 2003). 723 Richard Bilotti, Benjamin Swinburne, Megan Lynch, Broadband Update, Morgan Stanley, July 7, 2003 at 16. See also NCTA Comments at 57. 724 According to a Morgan Stanley report, an average of 68.4% of video subscribers to the top five MSOs purchased their modems as opposed to leasing them from the cable operator. Time Warner is not included in this average, since data was not available. Richard Bilotti, Benjamin Swinburne, Megan Lynch, The Copernicus Theorem, Morgan Stanley, July 2, 2003, at 37. 725 1998 Report, 13 FCC Rcd at 24318- 9 ¶ 57. 726 Id. 727 Id. 105 Federal Communications Commission FCC 04- 5 107 response to customer demands for more speed. 736 Several operators are adding voice services over the Internet access platform using Voice Over Internet Protocol (VoIP), such as Cablevision’s Optimum Voice service. 737 Bright House, Cox, and Time Warner are conducting limited trials of this type of voice service and are expected to increase their deployments in the next year. 738 182. PacketCable. PacketCable, another CableLabs project, is the standard developed for delivering advanced, real- time multimedia services over two- way cable plant. 739 The PacketCable effort began in 1997 when a team comprised of CableLabs members identified the need for a multimedia architecture to support the delivery of advanced services over DOCSIS 1.1. cable modem architecture. 740 PacketCable enables a wide range of services, including IP telephony, multimedia conferencing, interactive gaming, and general multimedia applications. 741 In late 2001, CableLabs established the PacketCable test program to begin qualifying vendor equipment over the course of four certification waves in 2002. 742 As of April 2003, a total of nine PacketCable devices were certified or qualified in the CableLabs certification test. 743 Currently, PacketCable’s IP telephony is the service being focused on by the cable community. 2. Navigation Devices 183. 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 and other equipment, from commercial sources other than their cable providers. 744 In 1998, the Commission adopted rules that require MVPDs to unbundle security from other functions of the navigation device and, to make available 736 RCN Corp., RCN Raises the Bar By Increasing Cable Modem Download Speeds to Up to 5 Mbps (press release), Oct. 2, 2003. 737 CSC Holdings, Inc., Phone Services- Optimum Voice, at http:// www. optimumvoice. com/ (visited Oct. 28, 2003). 738 Eric Hellweg, An Investor’s Guide to VOIP, CNN MONEY, Oct. 20, 2003, at http:// money. cnn. com/ 2003/ 10/ 20/ technology/ techinvestor/ hellweg/ (visited Oct. 28, 2003); Kinetic Strategies, Inc., Volo Starts Cable VoIP Trial in Florida, CABLEDATACOMNEWS. COM, Oct. 1, 2003, at http:// www. cabledatacomnews. com/ oct03/ oct03- 7. html (visited Oct. 28, 2003). 739 Cable Labs, PacketCable Home, at http:// www. packetcable. com (visited Oct. 3, 2003). 740 Cable Labs, Two CMS and Additional PaketCable Devices Get Certified/ Qualified in Wave 25 (press release), Apr. 11, 2003. 741 Cable Labs, PacketCable Home, at http:// www. packetcable. com (visited Oct. 3, 2003). 742 CableLabs, PacketCable Qualification Process Ready for 2002 (press release), Nov. 6, 2002. CableLabs established the specifications in late 2000. See CableLabs, Cablelabs Releases New Interim PacketCable Specifications (press release), Nov. 28, 2000. 743 Cable Labs, Two CMS and Additional PaketCable Devices Get Certified/ Qualified in Wave 25 (press release), Apr. 11, 2003. 744 47 U. S. C. § 549. 107 Federal Communications Commission FCC 04- 5 108 point- of- deployment modules (“ PODs”), to separately perform the conditional access function. 745 Thus, an MVPD subscriber would be able to obtain a set- top box without the security features (“ host device”) from a retailer, and the MVPD would provide a card- sized POD module for security functions (also called a “CableCARD”). 746 184. In the Second Report and Order in the navigation devices proceeding, the Commission adopted technical, labeling and encoding rules to permit TV sets to be built with “plug- and- play” functionality for one- way digital cable services, which include typical cable programming services and premium channels. 747 "Plug and play" means consumers can plug their cable directly into their digital TV set without the need for a set- top box. At this time, consumers will still need a set- top box to receive two-way services, such as video on demand, pay- per- view, and cable operator- enhanced electronic programming guides. However, cable and consumer electronics industries continue to work on the development of an agreement for two- way “plug- and- play” receivers. 748 The Commission also initiated a Second Further Notice of Proposed Rulemaking to examine potential processes for approving new digital output and content protection technologies, including potential use of objective criteria. 749 185. Prior to adoption of the Second Report and Order, through the OpenCable project, CableLabs developed hardware specifications for the POD module (“ Cable- CARD”), as well as specifications for the software interface that a host device needs to accommodate the POD (known as the OpenCable Application Platform or “OCAP”). 750 To begin development under the OpenCable project, manufacturers had to sign the POD- Host Licensing Agreement (“ PHILA”) in order to get access to the necessary technology to make PODs function in host devices. 751 Currently, there are 14 companies that signed the PHILA. 752 The companies that have signed include manufacturers of digital televisions and set- 745 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 13 FCC Rcd 14775 (1998) (“ First Navigation Report and Order”). 746 The POD, or CableCARD requirement is intended to permit portability among set- top boxes, which will increase the market base and facilitate volume production. First Navigation Report and Order, 13 FCC Rcd at 14793- 4 ¶ 49. See also Cable Labs, Open Cable- OCAP, at http:// www. opencable. com/ ocap. html. 747 Implementation of Section 304 of the Telecommunications Act of 1996, Commercial Availability of Navigation Devices, 18 FCC Rcd 20885 (2003) (“ Second Report and Order and FNPRM”). 748 Id. 749 Id. 750 See CableLabs, Open Cable Project Primer, at http:// www. opencable. com. primer/ (visited Oct. 3, 2003). CableLabs, CableLabs Publishes OCAP Middleware Specifications (press release), Jan. 3, 2002; see also 2002 Report, 17 FCC Rcd at 26970- 1 ¶ 169. Specifications for OCAP 1.0, completed on December 21, 2001, provides 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. In May 2002, CableLabs released OCAP 2.0, which is designed to support additional interactive applications in consumer devices. Id.; CableLabs, CableLabs Publishes OCAP 2. 0 Middleware Specifications (press release), May 6, 2002 751 CableLabs, Broadcom Corporation Signs CableLabs PHILA (press release), Mar 31, 2003. 752 Id. 108 Federal Communications Commission FCC 04- 5 109 top boxes, as well as other companies in the digital video industry. 753 Three suppliers of interoperable CableCARDS have been qualified by CableLabs. 754 Seven companies have submitted a total of 45 patents for assessment under the OCAP intellectual property rights agreement (“ IPR”). 755 In August 2003, following the completion of a wave of certification testing, CableLabs granted OpenCable certified status to Panasonic for four models of integrated DTV sets that connect directly to cable systems. 756 Now, both host devices and PODs are CableLabs certified. 186. Following the Second Report and Order, CableLabs released the DFAST Technology License Agreement for Unidirectional Digital Cable Products (“ the DFAST License”). 757 For manufacturers implementing “plug- and- play” products, the DFAST License replaces the PHILA. Initial devices must still be tested by a qualified test facility; however, subsequent models may be self- certified by the manufacturer. 758 The Consumer Electronics Association (“ CEA”) supports the Commission’s Second Report and Order and FNPRM, and notes that “plug- and- play” will accelerate the sale of DTV- related consumer products.. 759 In addition, CEA assets that timely implementation of a “Phase II” agreement for bi-directional services is necessary for the competitive supply of interactive digital cable- ready products that are fully interoperable with cable systems around the country. 760 The Consumer Electronics Retailers Coalition contends that beyond the Phase I issues covered in the Second Report and Order with regard to “plug and play,” there must be a Phase II to provide for a truly competitive market for navigation devices in which all interactive features are made compatible or set- top boxes use specifications that are made public. 761 The Consumer Electronic Retailers Coalition also notes that despite the development of some retail products, no “PHILA” device is yet available at retail. 762 3. Emerging Services 187. Interactive Television (“ ITV”). We continue to monitor development of ITV technologies and services. In broad terms, ITV services are services that support subscriber- initiated 753 Id. 754 CableLabs, CableLabs Awards CableCARD Qualification to NDS (press release), Aug. 5, 2003. 755 CableLabs, CableLabs Joins Call for IPR Related to OCAP; Promotes Formation of Patent Pool (press release), May 7, 2003. 756 Panasonic Notches Digital Milestone: Four Models of Integrated Digital Television Sets Achieve CableLabs OpenCable Certified Status (press release), Aug. 14, 2003. 757 CableLabs, CableLabs Releases the DFAST Technology License Agreement for Plug and Play Devices (press release), Oct. 20, 2003. 758 Report and Order and Second Further Notice of Proposed Rulemaking, FCC 03- 255, Sept. 10, 2003, at 38. 759 CEA Comments at 9- 10; CEA Reply Comments at 2. 760 CEA Reply Comments at 2. 761 CERC Comments at 3- 4. 762 Id. at 4. 109 Federal Communications Commission FCC 04- 5 110 choices or actions that are related to one or more video programming streams. 763 The Commission has noted that ITV was rapidly developing, thus making it difficult to define with specificity the precise universe of services that might be encompassed within the term. For purposes of discussion, the Commission instead attempted to identify the major technical resources or “building blocks” necessary for the provision of what it understood to be likely ITV services. 764 The identified components were: (1) a video transmission capacity associated with interactive content (e. g., the digital video stream); (2) a two- way connection (e. g., via the Internet); and (3) specialized customer premises equipment (e. g., the interactive television set- top box). 765 For example, an interactive television service might be a “t-commerce” service, permitting consumers to electronically purchase merchandise related to the displayed video. 766 Although not requiring a return path, service offerings such as electronic program guides (“ EPGs”), might also fit within the category. 767 A wide variety of services from data enhancements to interactive gaming may also be described as ITV services. 768 188. At the time of our 1994 Report, ITV services as described above were not in use. By the time of our 1998 Report, cable, DBS and other MVPDs were offering such ITV services as advanced electronic program guides, but t- commerce, and many of the other anticipated interactive services remained under development. Today, cable MSOs and DBS operators continue to develop a variety of ITV services in order to increase subscribership, develop new streams of revenue, and reduce churn. The assortment of interactive and enhanced interactive television products currently being developed makes following ITV trends challenging. 769 One industry observer notes that while many have been focused on the growth of enhanced interactive television (t- commerce and play- along interactivity), video subscribers have been “interacting” with their televisions daily through such ITV services as program guides and such emerging services as VOD and PVRs, described later in this section. 770 Other industry observers note that Websites offering interactivity synchronized to broadcast content remains the leading approach to enhanced ITV 763 See Nondiscrimination in the Distribution of Interactive Television Services Over Cable, 16 FCC Rcd 1321 (2001) (“ ITV NOI”). The Commission sought comment on whether rules are necessary to prevent anticompetitive behavior and to promote diversity and capital investments in the ITV market. 764 Id. at 1323- 28 ¶¶ 6- 20. 765 Id. at 1324- 5 ¶¶ 10- 13. See also AOL Time Warner Order, fn. 94 supra, 16 FCC Rcd at 6637- 9 ¶¶ 218- 226. 766 ITV NOI, 16 FCC Rcd at 1323 ¶ 6. 767 An EPG is an on- screen directory of programming. An interactive EPG (also known as an “IPG”) allows users to sort and search programming, gives program descriptions, provides reminders of upcoming programming, and takes users to programming they select. 768 Enhanced television services generally allow the viewer to obtain more information on certain programming, purchase products, permit the manipulation of the video image, or provide input on questions posed by the program distributor. With this type of technology, the subscriber accesses a graphic interface, overlay, or a screen that wraps around the displayed video signal( s), providing supplementary information related to the video display or a t- commerce opportunity. 769 Study Reveals Growth for iTV Advertising, IMEDIA, Sept. 11, 2003. 770 Ed Forman, ITV Its Already A Part of Life in the US, and Only Cable Can Make the Most of It, CABLE WORLD, Sept. 29, 2003. 110 Federal Communications Commission FCC 04- 5 111 services. 771 One study found that more than 30 networks, including all major broadcast and most major cable networks, now offer some form of enhanced programming. 772 189. Interactive television standards remain under development. 773 Last year we reported that 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. 774 In July 2002, CableLabs hosted an interoperability event demonstrating support and incipient adoption of the OCAP middleware specification including the MHP standard. 775 In February 2003, the ITV Production Standards Initiative, led by GoldPocket, released version 1.1 of its “XML” specification for writing interactive television programs. 776 190. On October 2, 2003, the Advanced Television Systems Committee (“ ATSC”) announced that it successfully harmonized its DTV Application Software Environment (“ DASE”) specification with CableLabs’ OCAP specification creating the Advanced Common Application Platform (“ ACAP”). ACAP is currently a candidate standard awaiting implementation and technical feedback. This new standard will provide content creators, broadcasters, cable operators and consumer electronics manufacturers with the technical details required to develop interoperable services and products across all platforms. 777 191. Video- on- Demand (“ VOD”). VOD permits subscribers to instantly access video programming content on a program by program basis. VOD subscribers are able to pause, fast- forward, or rewind programming in the same manner as permitted by a traditional video recorder. VOD is an evolved form of pay- per- view where subscribers do not have to wait to view desired programming. VOD requires the cable operator to install high- capacity video servers in its head- end (central office), and requires a digital set top box in the subscriber’s home. 778 At the time of our 1994 Report, VOD was limited to a single trial of VOD service by Time Warner. This deployment was unsuccessful and service ended three years later. One industry observer estimates that over 50 million digital cable and DBS subscribers interact with their televisions daily through the use of VOD and PVRs, at an average of 100 771 Study Reveals Growth for iTV Advertising, IMEDIA, Sept. 11, 2003. 772 Id. 773 Tim Halle, Standards for Interactive Television: A Brief State of the Union, ETV Cookbook, Mar. 27, 2003, at http:// etvcookbook. org/ reference/ standards. html. 774 See 2002 Report, 17 FCC Rcd at 26972 ¶ 171. 775 CableLabs, CableLabs Demonstrates Interoperability of ITV Applications (press release), Aug 1, 2002. 776 ITV Standards, ITVProduction Standards Initiative Publishes Version 1.1 of Open XML Specification for Interactive Television (press release), Feb. 10, 2003. Improvements to the specification include the delineation of timing as its own element instead of as an attribute of each of the content types. Other improvements include the addition of genre, sequence, and status as new attributes to extend the richness of the content types; changes to data types to increase flexibility; and clearer definition of hierarchy and grouping. Id. See also ITV Standards, at http:// www. itvstandards. org/ iTVPublic/ overview. aspx. 777 ATSC, ATSC Published New Interactive “ACAP” Candidate Standard (press release), Oct. 2, 2003. 778 See paras. 44- 45, 76 supra for discussions of VOD deployments. 111 Federal Communications Commission FCC 04- 5 112 interactions per subscriber household per day. 779 According to one analyst, there were about 6.5 million VOD- enabled digital households at year- end 2002 and, by year- end 2003, there will be as many as 12.8 million. 780 In addition, the same analyst notes that, as of year- end 2002, there were 700,000 subscription-VOD households, and that, by year- end 2003, there will be three million. 192. Personal Video Recorders (“ PVRs”). A PVR is a device connected to a television set, either embedded in a set- top box or as a stand- alone device, which uses a hard disk drive, software, and other technology to digitally process and record programming. PVR technology allows a consumer to pause, replay, rewind, and fast- forward television programs as well as skip past commercials. PVRs cannot play prerecorded videocassettes or DVDs, but can record pay- per- view signals or other content from digital platforms. 781 As many as 700,000 DBS homes were PVR enabled as of year- end 2002, and it is estimated that by year- end 2003, there will be 1.6 million DBS homes and almost one million cable homes that are PVR enabled. 782 As many as 500,000 “stand- alone” PVR have been deployed as of year- end 2002, and as many as 1.1 million will be deployed as of year- end 2003. 783 IV. FOREIGN MARKETS 193. In the Notice, the Commission invited comment on developments in countries outside of the United States that might help to inform our understanding of video competition in the U. S. market. 784 Although none of the commenting parties responded to this invitation, we continue to believe that insights may be derived from such developments. 194. For example, the process whereby the television broadcasting system transitions from analog to digital transmissions is an important competitive issue both domestically and in Europe and has recently been successfully accomplished in the Berlin- Brandenburg television market in Germany. On August 4, 2003, analog transmission of terrestrial broadcast television service ceased in that market and was replaced with digital transmissions. It would appear that there may be potential lessons to be learned from this experience, although there are significant differences from the technical, economic, and regulatory situation in the United States as well. 195. On the transition date, terrestrial broadcasters in Berlin switched off their analog transmissions and commenced broadcasting solely in a digital form. Each of the stations involved, which had been broadcasting a single programming service, started transmitting a “bouquet” or multiplex of digital services. Both before and after the transition, all of the services involved were in standard 779 Ed Forman, ITV Its Already A Part of Life in the US, and Only Cable Can make the Most of It, CABLE WORLD, Sept. 29, 2003 780 Richard Bilotti, Benjamin Swinburne, Megan Lynch, and Jeremy Falk, PVR and VOD: Video Real Estate- Buy vs. Lease, Morgan Stanley, Aug. 10, 2003, at 3 and 6. 781 See paras. 60, 76, 111 supra for additional discussions of PVRs. 782 Richard Bilotti, Benjamin Swinburne, Megan Lynch, and Jeremy Falk, PVR and VOD: Video Real Estate- Buy vs. Lease, Morgan Stanley, Aug. 10, 2003, at 6. 783 Id. at 9. “Standalone” PVRs are purchased directly by the consumer, and subscriptions are managed by independent companies such as TiVo or ReplayTV. Id. 784 Notice, 18 FCC Rcd at 16056 ¶ 48. 112 Federal Communications Commission FCC 04- 5 113 definition format. Unlike the situation in the United States, no transmission or reception of high definition content was involved. After the transition, all off- air viewers required either a new integrated digital television receiver or a digital set- top box in order to receive service. Of the 1.8 million television households in the market, some 160,000 receive terrestrial off- air reception only, with the rest receiving cable or satellite service. Ninety thousand homes were estimated to receive off- air reception on a second or third receiver. In terms of viewers’ perceptions, it appears that neither satellite nor cable television subscribers were significantly affected by the change because of the signals in question being reconverted to analog format prior to consumer reception. 196. Among the reasons attributed for the success of the conversion were the following: (1) a relatively small percentage of viewers obtaining service through direct off- air reception; (2) significant improvements in the quality and amount of service available to these viewers after the transition; (3) a robust digital transmission system facilitating indoor reception; (4) the availability of relatively low cost analog to digital set- top box converters; (5) set- top box subsidy mechanisms for disadvantaged portions of the population; (6) careful coordination between all of the commercial and governmental entities involved; and (7) an aggressive communications program to prepare and keep the public informed of the changes taking place. A portion of the population also appears to have welcomed the change as providing an alternative to becoming dependent solely on cable reception. 785 V. ADMINISTRATIVE MATTERS 197. This 2003 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). 198. It is ORDERED that the Office of Legislative Affairs shall send copies of this 2003 Report to the appropriate committees and subcommittees of the United States House of Representatives and the United States Senate. 199. It is FURTHER ORDERED that the proceeding in MB Docket No. 03- 172 IS TERMINATED. FEDERAL COMMUNICATIONS COMMISSION Marlene H. Dortch Secretary 785 See Berlin Goes Digital; The Switchover of Terrestrial Television From Analogue to Digital Transmission in Berlin- Brandenburg. Project Report of the Medienanstalt- Berlin- Brandenburg, at http:// www. MABB. de. 113 Federal Communications Commission FCC 04- 5 114 APPENDIX A LIST OF COMMENTERS Initial Comments A& E Television Networks, Inc. and the Courtroom Television Network LLC (“ A& E”) American Cable Association (“ ACA”) BellSouth Corporation (“ BellSouth”) Broadband Service Providers Association (“ BSP”) Coalition of Small Video Operators (“ Coalition”) Comcast Corporation (“ Comcast”) Consumer Electronics Association (“ CEA”) Consumer Electronics Retailers Coalition (“ CERC”) Cox Communications, Inc. (“ Cox”) DIRECTV, Inc. (“ DirecTV”) National Cable Television Association (“ NCTA”) National Rural Telecommunications Cooperative (“ NRTC”) Paxson Communications Corporation (“ Paxson”) Quest Communications International Inc. (“ Qwest”) RCN Corporation (“ RCN”) Rural Independent Competitive Alliance (“ RICA”) Satellite Broadcasting and Communications Association (“ SBCA”) Time Warner Cable (“ Time Warner”) W. A. T. C. H. TV Company (“ W. A. T. C. H. TV”). Reply Comments Comcast Corporation (“ Comcast”) Consumer Electronics Association (“ CEA”) Consumer Federation of America Consumers Union, Center For Digital Democracy Common Cause, Center For The Creative Community, United Church of Christ, Office of Communications, INC., U. S. Prig, The Association of Independent Video and Filmmakers, The National Alliance For Media Arts and Culture, and The Media Access Project (“ CFA”) DIRECTV, Inc. (“ DirecTV”) Fox Entertainment Group, Inc. and Fox Television Stations, Inc.; National Broadcasting Company, Inc. and Telemundo Communications Group, Inc; Viacom; and the Walt Disney Company and The ABC Television Network (“ Broadcast Networks”) iN DEMAND L. L. C. (“ iN DEMAND”) National Association of Broadcasters (“ NAB”) National Cable & Telecommunications Association (“ NCTA”) National Rural Telecommunications Cooperative (“ NRTC”) Organization for the Promotion and Advancement of Small Telecommunications Companies (“ OPASTCO”) Paxson Communications Corporation (“ Paxson”) RCN Corporation (“ RCN”) SES Americom, Inc. (“ SES”) 114 Federal Communications Commission FCC 04- 5 115 APPENDIX B TABLE B- 1 Assessment of Competing Technologies (i) Technology Used Dec. 93 June 98 June 01 June 02 June 03 (1) TV Households Percent Change 94,200,000 1.18% 98,000,000 1.03% 102,184,810 1.37% 105,444,330 3.19% 106,641,910 1.14% (2) MVPD Households (ii) Percent Change Percent of TV Households 60,283,000 4.79% 63.99% 76,634,200 4.06% 78.20% 87,830,074 4.60% 86.42% 89,890,641 2.35% 85.25% 94,150,000 4.74% 88.29% (3) Cable Subscribers Percent Change Percent of MVPD Total 57,200,000 3.62% 94.89.% 65,400,000 1.95% 85.34% 68,500,000 1.18% 77.99% 68,800,000 0.04% 76.54% 70,490,000 2.46% 74.87% (4) MMDS Subscribers Percent Change Percent of MVPD Total 397,000 22.91% 0.66% 1,000,000 -9.09% 1.30% 700,000 0.0% 0.80% 490,000 -30.00% 0.55% 200,000 -59.18% 0.21% (5) SMATV Subscribers Percent Change Percent of MVPD Total 1,004,000 2.03% 1.67% 940,000 -19.14% 1.23% 1,500,000 0.0% 1.71% 1,600,000 6.67% 1.78% 1,200,000 -25.00% 1.27% (6) HSD Subscribers Percent Change Percent of MVPD Total 1,612,000 57.58% 2.67% 2,028,200 -7.15% 2.65% 1,000,074 -32.28% 1.14% 700,641 -29.94% 0.78% 502,191 -28.32% 0.53% (7) DBS Subscribers Percent Change Percent of MVPD Total <70,000 0.12% 7,200,000 42.66% 9.40% 16,070,000 23.74% 18.30% 18,240,000 13.66% 20.29% 20,360,000 11.62% 21.63% (8) OVS Subscribers (iii) Percent Change Percent of MVPD Total 0 66,000 2100.00% 0.09% 60,000 0.0% 0.07% 60,000 0.0% 0.07% 60,000 0.0% 0.01% (9) BSP Subscribers (iv) Percent of MVPD Total 1,400,000 1.49% 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. (iv) Beginning this year, we will report broadband service provider (“ BSP”) Subscribers, but we are unable to provide a growth rate from previous years due to lack of data. This number includes some, if not all, OVS subscribers, and may double count some cable subscribers from newer cable overbuild systems. Beginning 115 Federal Communications Commission FCC 04- 5 116 next year, this figure will replace the OVS subscriber number. 116 Federal Communications Commission FCC 04- 5 117 Sources: (1) Television households: 1994 from A. C. Nielsen Co. cited by Veronis, Suhler & Associates, Homes Passed by Cable and Incidence of Subscription, The Veronis, Suhler & Associates Communications Industry Forecast, July 1995, at 145; 1998 from Nielsen Media Research as cited in Broadcasting & Cable, June 29, 1998, at 70; and 2001 - 2003 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: 1993 from Paul Kagan Associates, Inc., History of Cable and Pay- TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5; 1998 from Paul Kagan Associates, Inc., Paul Kagan’s 10- Year Cable TV Industry Projections, Cable TV Investor, August 10, 1998, at 4; 2001 from Kagan World Media, Kagan’s 10- Year Cable TV Industry Projections, Broadband Cable Financial Databook 2001, July 2001, at 10; 2002 from Kagan World Media, Kagan’s 10- Year Cable TV Industry Projections, Broadband Cable Financial Databook 2002, July 2002, at 10; and 2003 from NCTA Comments at 8. (4) MMDS subscribers: 1993 from Paul Kagan Associates, Inc., Wireless Cable Industry Projections, 1992- 2002, The 1995 Wireless Cable Databook, Jan. 1995, at 23; 1998 estimated by the FCC; 2001 from NCTA Comments for the 2001 Report at 7; 2002 from NCTA Comments for the 2002 Report at 12; and 2003 from NCTA Comments at 8. (5) SMATV subscribers: 1993 from Cable & Pay TV Census – December, Marketing New Media, Dec. 19, 1994, at 4; 1998 from NCTA Comments for the 1998 Report at 6; 2001 from NCTA Comments for the 2001 Report at 9; 2002 from NCTA Comments for the 2002 Report at 12; and 2003 from NCTA Comments at 8. (6) HSD subscribers: 1993 from Subscription Data from General Instrument (Chart), SkyReport, Oct. 1994, at 21; 1998 from SkyReport. com, at http:// www. skyreport. com/ dth_ us. htm; 2001 from SBCA Comments for the 2001 Report Table 1 at 4; 2002 from SkyReport. com, at http:// www. skyreport. com/ dth_ us. htm; and 2003 from SBCA Comments at 4. (7) DBS subscribers: 1993 from Let the Games Begin, SkyReport, May 1994, at 2; 1998 from Minal Damani and Jennifer E. Sharpe, U. S. DBS Marketplace: 1998, The Strategis Group, July, 1998 at 6; 2001 from SBCA Comments for the 2001 Report, Table 1 at 4; 2002 from SkyReport. com, at http:// www. skyreport. com/ dth_ us. htm; and 2003 from SBCA Comments at 4. (8) OVS subscribers: Estimated by the FCC. (9) BSP subscribers: NCTA Comments at 8. 117 Federal Communications Commission FCC 04- 5 118 TABLE B- 2 Number and Subscriber Size of Major Cable System Clusters (Cumulative Figures) 1994* 1998 2001 2002 Range of Clustered Subscribers (thousands) Clusters Subscribers (millions) Clusters Subscribers (millions) Clusters Subscribers (millions) Clusters Subscribers (millions) 100- 199 58 8.0 33 4.6 30 4.3 31 4.5 200- 299 26 6.0 25 6.3 17 4.2 18 4.4 300- 399 6 2.0 20 6.7 18 6.1 21 7.1 400- 499 3 1.3 7 3.2 10 4.4 10 4.4 >500 4 2.8 21 19.6 32 33.3 29 31.0 Total 97 20.1 106 40.4 107 52.3 109 51.3 Sources: Paul Kagan Associates, Inc., Major Cable TV Systems/ Clusters, The Cable TV Financial Databook, 1995, at 38- 39; 1999, at 46- 48; 2001 from Kagan World Media, Major Cable TV Systems/ Clusters, Broadband Cable Financial Databook 2002 at 38; and 2002 from Kagan World Media, Major Cable TV Systems/ Clusters, Broadband Cable Financial Databook 2003, at 39. * We did not report this information for 1993. 1994 is the first year we tracked these numbers. 118 Federal Communications Commission FCC 04- 5 119 TABLE B- 3 2003 Concentration in the National Market for Purchase of Video Programming (1) Rank Company Percent of Subscribers (2) 1 Comcast 22.69 2 DirecTV 12.32 3 Time Warner 11.62 4 EchoStar 9.35 Top 4 55.98 5 Charter 6.87 6 Cox 6.67 7 Adelphia 5.43 8 Cablevision 3.15 Top 8 78.10 9 Bright House 2.19 10 Mediacom 1.66 Top 10 81.95 Top 25 87.45 Top 50 89.29 HHI 1031 (3) Notes: (1) MSO subscriber totals as of June 2003, and reported in Top Cable System Operators as of June 2003, Kagan World Media, Cable TV Investor, Oct. 31, 2003, at 12- 13. 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. For DirecTV and EchoStar subscribers, see Hughes Electronics Corp., SEC Quarterly Report Form 10- Q Pursuant to Section 13 of 15( d) of the Securities Act of 1934 for the Quarterly Period Ended June 30, 2003 (“ Hughes 2 nd Quarter 2003 10- Q”), at 37; EchoStar Communications Corp., SEC Quarterly Report Form 10- Q Pursuant to Section 13 of 15( d) of the Securities Act of 1934 for the Quarterly Period Ended June 30, 2003, at 20. (2) The total number of MVPD subscribers used to calculate the HHI is 94,150,000 from Table B- 1. (3) The HHI is calculated on the basis of market shares for the top 62 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. 119 Federal Communications Commission FCC 04- 5 120 TABLE B- 4 Concentration in the National Market for the Purchase of Video Programming Percent of MVPD Subscribers Market Share 1993 1998 2001 2002 2003 Top Share 24.30 26.48 16.44 14.75 22.69 Top 2 36.90 42.62 30.79 29.04 35.01 Top 3 42.30 48.94 42.11 41.03 46.63 Top 4 47.20 54.63 51.64 50.48 55.98 Top 10 63.20 71.04 84.29 84.44 81.95 Top 25 83.10 80.99 89.70 90.26 87.45 Top 50 93.10 86.08 91.38 92.05 89.29 HHI 880 1096 905 884 1031 Sources: Data for 1993 through 2002 were taken from Reports, 1995- 2002. Data for 2003 are from Table B- 3. 120 Federal Communications Commission FCC 04- 5 121 APPENDIX C TABLE C- 1 MSO Ownership in National Video Programming Services Programming Service Launch Date MSO Ownership (%) Action Max Jun- 98 Time Warner (100) American Movie Classics (AMC) Oct- 84 Cablevision (60) Animal Planet Oct- 96 Liberty Media (39.2), Cox (25) @Max May- 01 Time Warner (100) Black STARZ! Feb- 97 Liberty Media (100) Canales ń (6 digital channels) * Aug- 98 Liberty Media (90) Cartoon Network Oct- 92 Time Warner (100) Cinemax Jun- 98 Time Warner (100) CNN Jun- 80 Time Warner (100) CNN En Espańol Mar- 97 Time Warner (100) CNN Headline News Jan- 82 Time Warner (100) CNN International Jan- 95 Time Warner (100) CNNfn Dec- 95 Time Warner (100) Comedy Central Apr- 91 Time Warner (50) Court TV Jul- 91 Liberty Media (50) Time Warner 50) Discovery Channel Jun- 85 Liberty Media (50), Cox (25) Discovery En Espańol Oct- 98 Liberty Media (50), Cox (25) Discovery Health Jul- 98 Liberty Media (44.1), Cox (25) Discovery HD Theatre Jun- 02 Liberty Media (50), Cox (25). Comcast (20) Discovery Home & Leisure Oct- 96 Liberty Media (50), Cox (25) Discovery Kids Oct- 96 Liberty Media (50), Cox (25) Discovery Times (formerly Discovery Civilization) Oct- 96 Liberty Media (50), Cox (25) Discovery Wings: The Aviation and Adventure Network Jul- 98 Liberty Media (50), Cox (25) E! Entertainment Jun- 90 Comcast (50) Encore Apr- 91 Liberty Media (100) * Canales ń, Liberty Media’s digital package of Spanish- language channels, consists of 121 Federal Communications Commission FCC 04- 5 122 FoxSportsAmericas, CBS Telenoticias, CineLatino, BoxTejano, BoxExitos, and Canal 9. 122 Federal Communications Commission FCC 04- 5 123 Programming Service Launch Date MSO Ownership (%) Encore Action Sep- 94 Liberty Media (100) Encore Love Stories Jul- 94 Liberty Media (100) Encore Mystery Jul- 94 Liberty Media (100) Encore True Stories Sep- 94 Liberty Media (100) Encore WAM! America’s Youth Network Sep- 94 Liberty Media (100) Encore Westerns Jul- 94 Liberty Media (100) 5StarMax May- 02 Time Warner (100) Fox Sports World en Espanol Feb- 99 Liberty Media (10.6) Fuse (formerly Much Music USA) Jul- 94 Cablevision (60) Fuse On Demand Jun- 03 Cablevision (60) G4 Video Gaming Network Jun- 02 Comcast (94) Game Show Network Dec- 94 Liberty Media (50) Golf Channel Jan- 95 Comcast (99) Hallmark Channel Sep- 98 Liberty Media (32.5) HBO (Home Box Office) Nov- 72 Time Warner (100) HBO Latino Nov- 00 Time Warner (100) HBO 2 Oct- 98 Time Warner (100) HBO Signature Oct- 98 Time Warner (100) HBO Comedy May- 99 Time Warner (100) HBO Family Oct- 98 Time Warner (100) HBO Zone May- 99 Time Warner (100) Health Network Dec- 93 Liberty Media (49), Cox (25) Home Shopping Network Jul- 85 Liberty Media (20) iN DEMAND (formerly Viewer’s Choice) 35 multiplexed channels Nov- 85 Comcast (50), Time Warner (33), Cox (15) Independent Film Channel Sep- 94 Cablevision (60) International Channel Jul- 90 Liberty Media (90) MoreMAX Jun- 98 Time Warner (100) MoviePlex Oct- 94 Liberty Media (100) Outdoor Life Network Jul- 95 Comcast (100) 123 Federal Communications Commission FCC 04- 5 124 Programming Service Launch Date MSO Ownership (%) OuterMax May- 01 Time Warner (100) Ovation: The Arts Network Apr- 96 Time Warner (4.2) QVC Nov- 86 Liberty Media (98) Science Channel (formerly Discovery Science Channel) Oct- 96 Liberty Media (50), Cox (25) Sci- Fi Channel Sept- 92 Liberty Media (20) Starz! Mar- 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 Oct- 98 Comcast (60) TBS Dec- 76 Time Warner (100) TLC (The Learning Channel) Nov- 80 Liberty Media (50), Cox (25) Thriller Max Jun- 98 Time Warner (100) TNT (Turner Network Television) Oct- 88 Time Warner (100) Travel Channel Feb- 87 Liberty Media (50), Cox (25) Turner Classic Movies Apr- 94 Time Warner (100) USA Network Apr- 80 Liberty Media (20) WE Jan- 97 Cablevision (60) WMAX May- 01 Time Warner (100) Sources: NCTA, Directory of Program Services, Cable Developments 2003, at 43- 174. Liberty Media Corp., at http:// www. libertymedia. com/ our_ affliliates/ video_ programming. htm. iN DEMAND, at http:// indemand. com/ about/ who. jsp. CABLEFAX DAILY, April 9, 2003, at 1. Kagan World Media, Cable Networks, Media Mergers & Acquisitions 2003, at 73- 77. 124 Federal Communications Commission FCC 04- 5 125 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 America's Store Sep- 86 ANA Television Network Dec- 91 ART (Arab Radio & Television) 1999 BBC America Mar- 98 BET Jan- 80 BET Gospel Jul- 02 BET Hip Hop Jul- 02 BET Jazz: The Jazz Channel Jan- 96 Biography Channel Nov- 98 Black Belt TV: The Martial Arts Network Jun- 02 Bloomberg Television Jan- 95 B Mania Nov- 00 Bravo Dec- 80 Buzztime Entertainment 1984 Canal Sur Aug- 91 CCTV- 4 (China Central Television) 1995 Celtic Vision 1995 Church Channel Jan- 02 Classic Arts Showcase May- 94 CMT (Country Music Television) Mar- 83 CNBC Jul- 89 CNBC World Apr- 89 College Entertainment Network Jan- 97 Crime Channel Jul- 96 C- SPAN* Mar- 79 C- SPAN2* Jun- 86 C- SPAN3* Sep- 97 CSTV (College Sports Television) Apr- 03 Deep Dish TV Jan- 86 125 Federal Communications Commission FCC 04- 5 126 Programming Service Launch Date Destiny Channel Dec- 98 Disney Channel Apr- 83 Do- It- Yourself Channel Dec- 94 Dream TV Network Dec- 94 Ecology Communications Nov- 94 ESPN Sep- 79 ESPN Classic Sports May- 95 ESPN2 Oct- 93 ESPN EXTRA (formerly ESPN Now) Jun- 01 ESPN HD Mar- 03 ESPNEWS Nov- 96 EWTN: Global Catholic Network Aug- 81 Family Net May- 00 Filipino Channel (ABS- CBN) Feb- 98 Fine Living Mar- 02 Flix Aug- 92 Food Network Nov- 93 Fox Movie Channel Nov- 94 Fox News Channel Oct- 96 Fox Sports Digital Networks Jun- 01 Fox Sports World Nov- 97 FX Jun- 94 Fuel Jul- 03 Free Speech TV (FSTV) Jun- 95 Galavision Oct- 79 Gol TV Unknown Golden Eagle Broadcasting Nov- 98 Goodlife Television Network (formerly Nostalgia Channel) Feb- 85 Great American Country Dec- 95 HDNET Sep- 01 HDNET Movies Jan- 03 History Channel Jan- 95 History Channel International Nov- 98 Home & Garden Television Dec- 94 Horse Racing TV Dec- 02 126 Federal Communications Commission FCC 04- 5 127 Programming Service Launch Date Hot Choice Jun- 86 Hot Net Mar- 99 Hot Zone Mar- 99 HTV Aug- 95 Inspirational Life Television (I- LIFETV) Jun- 98 Inspirational Network (INSP) Apr- 90 Interactive Channel Nov- 93 JCTV Nov- 02 La Familia Network May- 02 Liberty Channel Sep- 01 Lifetime Movie Network Jul- 98 Lifetime Real Women Aug- 01 Lifetime Television Feb- 84 Locomotion Channel Nov- 96 MBC Network Nov- 99 MBC America (MUNHWA Broadcasting Corporation) Unknown Meadow Racing Network Nov- 84 MSNBC Jul- 96 MTV Espańol Aug- 98 MTV Hits May- 02 MTV Jams May- 02 MTV Latin America Oct- 93 MTV: Music Television Aug- 81 MTV 2 Dec- 98 Mun2 Oct- 01 My Pet TV Sep- 96 NASA Television Jul- 91 National Geographic Channel Jan- 01 National Jewish Television May- 81 N. B. A. TV Nov- 99 Newsworld International Sep- 94 NFL Network Nov- 03 Nickelodeon’s TV Land Apr- 96 Nick 2 May- 98 127 Federal Communications Commission FCC 04- 5 128 Programming Service Launch Date Nickelodeon Gas- Games & Sports Network Mar- 99 Nickelodeon/ Nick at Nite Apr- 79 Nicktoons Jan- 99 Noah’s World International May- 03 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 Praise Television Dec- 96 Proto X 1997 Puma TV 1997 RAI International 1999 Russian Television Network of America Aug- 00 Rx Channel May -03 Saigon Broadcasting Network Feb- 02 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 S / Networks May- 03 Sorpressa Mar- 03 128 Federal Communications Commission FCC 04- 5 129 Programming Service Launch Date SoapNet Jan- 00 Speed Channel Jan- 96 Spice 1 May- 89 Spice 2 Unknown Spike TV (formerly the National Network) Mar- 83 Sportsman Channel Apr- 03 Sun TV Aug- 96 Sundance Channel Feb- 96 Sur Aug- 91 TBN (Trinity Broadcasting Network) May- 73 Tech TV May- 98 Telefutura Jan- 02 Telemundo Jan- 87 Telemundo Internacional Mar- 00 The Erotic Network (TeN) Sep- 98 TeN on Demand Mar- 99 TeN BLOX Jan- 03 TeN Blue Jan- 03 TeN Blue Plus Jan- 03 TeN Clips May- 00 TeN Max Oct- 02 Tennis Channel May- 03 Tenxsty Feb- 98 TFN (The Football Network) Sep- 03 TMC (The Movie Channel) Dec- 79 True Blue Feb- 98 Toon Disney Apr- 98 Totally Broadway TV Jun- 02 Totally Hollywood TV Jun- 02 TRIO Sep- 94 TV 5 – USA Inc. Jan- 98 TV Asia Jul- 91 TV Games Network Jul- 94 TV Japan Jul- 91 129 Federal Communications Commission FCC 04- 5 130 TVN Entertainment Corporation (33 digital pay- per- view channels) Feb- 98 130 Federal Communications Commission FCC 04- 5 131 Programming Service Launch Date TVN Direct Jan- 96 TV Guide Channel Jan- 88 TV Guide Interactive Oct- 96 UBC (Urban Broadcasting Company) Apr- 03 Univision Sep- 96 UVTV/ KTLA Mar- 98 UVTV/ WPIX May- 84 USA Network Apr- 80 VH1 (Music First) Jan- 85 VH1 (Classic) May- 00 VH1 Soul Aug- 98 VHI Country Aug- 98 VH1 Megahits May- 02 VH UNO Nov- 99 Video Rola Jan- 01 Vivid TV Mar- 99 Weather Channel May- 82 Weatherscan Oct- 99 WGN Nov- 78 Wisdom Television Jul- 97 Word Network Feb- 00 Worship Network Sep- 92 ZEE TV 1999 Zhon Tian Channel (formerly Power TV Zhon Tian Channel) 1995 * C- SPAN derives 97% of its revenues from affiliate fees (i. e., subscriber fees from MVPDs). The remaining three percent is provided by various investments. Affiliates have no ownership or program control interests in C- SPAN. Sources: NCTA, Directory of Cable Networks, Cable Developments 2003, at 43- 174. SkyReports, Sports Programming, THE BRIDGE, Aug. 2003, at 11- 12. Richard Sandomir, 3 Cable Systems Will Add N. B. A TV, THE NEW YORK TIMES, Sept. 29, 2003. Kagan World Media, Up- And- Comers 2003, Cable Program Investor, March 14, 2003, at 5. 131 Federal Communications Commission FCC 04- 5 132 TABLE C- 3 Regional Video Programming Services Programming Services Launch Date MSO Ownership (%) Arabic Channel Apr- 91 Arizona News Channel Nov- 96 Cox (50) Bay News 9 Sep- 97 Time Warner (100) California Channel Feb- 91 Casa Club TV Jul- 97 Central Florida News 13 (CFN 13) Oct- 97 Time Warner (50) ChicagoLand Television News (CLTV) Jan- 93 CN8 – The Comcast Network Oct- 97 Comcast (100) Comcast SportsNet Oct- 97 Comcast (78) Comcast SportsNet Mid Atlantic 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 Detroit Sep- 97 Cablevision (45) Fox Sports Net Florida 1989 Cablevision (45) Fox Sports Net Midwest Sep- 97 Fox Sports Net New England Jan- 88 Cablevision (30), Comcast (50) Fox Sports Net New York 1989 Cablevision (45) Fox Sports Net North Mar- 89 Fox Sports Net Northwest Nov- 88 Fox Sports Net Ohio Feb- 89 Cablevision (45) Fox Sports Net Pittsburgh Apr- 86 Fox Sports Net Rocky Mountain Nov- 88 Fox Sports Net South Aug- 90 Fox Sports Net Southwest Jan- 83 Fox Sports West Oct- 85 132 Federal Communications Commission FCC 04- 5 133 Programming Services Launch Date MSO Ownership (%) Fox Sports West 2 Jan- 97 Game Bank Nov- 95 Gwinnet News & Entertainment Television May- 97 Hip Hop Network Jan- 97 International Television Broadcasting (ITV) Apr- 86 Las Vegas One News Apr- 98 Local News on Cable Feb- 97 Cox (50) Madison Square Garden Network (MSG) Oct- 69 Cablevision (41.5) MediaOne News Dec- 95 Liberty Media (100) Michigan Government Television Jul- 96 MSG Metro Guide Aug- 98 Cablevision (80) MSG Metro Learning Channel Aug- 98 Cablevision (80) MSG Metro Traffic and Weather Aug- 98 Neighborhood News Unknown Cablevision (75) New England Cable News Mar- 92 Comcast (50) New England Sports Network (NESN) Mar- 84 New York 1 News (NY1 News) Sep- 92 Time Warner NY 1 Noticias Jun- 03 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- 97 Cablevision (75) News 12 Westchester Nov- 95 Cablevision (75) News 8 Austin Sep- 99 Time Warner News Channel 5+ Sept- 96 News 14 Carolina Jun- 02 Time Warner News Now 53 Jun- 97 Cox (50) News on One Oct- 97 Cox (50) News Watch 15 Oct- 99 Cox (50) Newschannel 8 Oct- 91 NGTV (National Greek Television) Dec- 87 Nippon Golden Network Jan- 82 North West Cable News (NWCN) Dec- 95 Ohio News Network May- 97 133 Federal Communications Commission FCC 04- 5 134 Programming Services Launch Date MSO Ownership (%) Orange County Newschannel (OCN) Sep- 90 PASS Sports (Pro- Am Sports System) Apr- 84 Pennsylvania Cable Network (PCN) Sep- 79 Pittsburgh Cable News Channel (PCNC) Jan- 94 Rarities Exchange Dec- 98 Regional News Network (RNN) Dec- 95 Rhode Island News Channel Sep- 98 Cox (50) R News Rochester Jul- 95 Time Warner (?) San Diego’s News Channel 15 Jan- 97 Six News Now Jul- 95 Sunshine Network Mar- 88 Liberty Media (34.5), Cox (6.3) Texas Cable News Jan- 99 Tri- State Media News (TSM News) Apr- 99 Comcast (100) Turner South (STC) Oct- 99 Time Warner (100) TV33 Dec- 95 Victory Sports One Oct- 03 WSBK Feb- 88 Yankee Entertainment Sports Network (YES) Mar- 02 Sources: NCTA, Regional Cable Networks, Cable Developments 2003, at 175- 201. Radio- Television News Directors Association & Foundation, at http:// www. rtnda. org/ resources/ nonstopnews/ directory. html (visited Sept. 11, 2003). Cablevision, at http:// www. cablevision. com/ index. jhtml (visited Oct. 21, 2003). 134 Federal Communications Commission FCC 04- 5 135 TABLE C- 4 Planned Programming Services Programming Service Planned Launch Date, If Announced Africast Television Network 4Q03 America National Network Oct- 03 AMC’s American Pop TBA Anti- Aging Network 4Q03 Applause TBA Auto Channel Jul- 04 Beauty Channel TBA BET World Music Beat TBA Bingo TV Sep- 04 Black Education Network Sep- 04 Black Entertainment Network TBA Black Women’s Television TBA Boating Channel TBA BOB: Brief Original Broadcasts Feb- 04 Booknet 2003 Boxing Channel 2Q04 Caribbean Visions Television Sep- 04 Chop TV TBA Collectors Channel TBA Comcast SportsNet Chicago Oct- 04 CSN (Cable Science Network) TBA Diversity Network 4Q02 Documentary Channel Dec- 03 Election Channel TBA Employment Channel Jul- 04 ESPN Deportes Jan- 04 Fad TV (Fashion & Design Television) 4Q03 Fifth Avenue Channel TBA Fox Enhanced TV TBA Florida Channel Jul- 04 Gambling Channel 2004 135 Federal Communications Commission FCC 04- 5 136 Programming Service Planned Launch Date, If Announced GETV Program Network $Q03 Global Village Network TBA Government Channel TBA Home Improvement Channel TBA Honey Vision TBA Ice Channel 1Q04 Investment TV TBA Local News Network TBA Martial Arts Action Network 4Q03 MEN (Maverick Entertainment Network) 1Q04 Moore TV Network Sep- 03 Moviewatch 2004 Native American Nations Program Network Sep- 03 Orb TV TBA Performance Showcase TBA Premiere Horse Network TBA Puppy Channel 4Q03 RadioTV Network Mar- 04 Real Estate Channel Dec- 03 Real Estate Network (TREN) TBA Reality Central 1Q04 Seminar TV Network (Seminar TV) 4Q03 Senior Citizens Television Network 4Q04 Si TV Feb- 04 Sundance Documentary Channel TBA The World Cinema Channel TBA Theater Channel TBA U. S. Military Television Network Aug- 03 World Cinema TBA Youth Sports Broadcasting Channel TBA 136 Federal Communications Commission FCC 04- 5 137 Sources: NCTA, Planned Services, Cable Developments 2003, at 207- 225. MultiChannel Ventures, at http:// www. multichannelventures. com/ about/ html . Email from Michael Gerrity, Chairman and CEO, MultiChannel Ventures, LLC, Sept. 24, 2003. The Moviewatch Network, at http:// www. moviewatch. com. Si Tv, at http:// www. sitv. com/ Cox_ and_ Time_ Warner_ Warner_ Say_ Si_ TV. htm Press Release (visited Sept. 23, 2003). Senior Citizens Network ,at http:// www. scntv/ org (visited Oct. 28, 2003). 137 Federal Communications Commission FCC 04- 5 138 TABLE C- 5 MSO Ownership in National Programming Services 1 Subs. (mil) Liberty Media Time Warner Comcast Cox Cablevision Systems Action Max * 2 100.0% AMC 83.9 60% Animal Planet 81.4 39.2% 25.0% @Max * 100.0% Black Starz! * 100.0% Canales ń (6 channels) * 90.0% Cartoon Network 82.6 100.0% Cinemax 37.0 100.0% CNN 86.2 100.0% CNN Espańol 13.8 100.0% CNN Headline News 82.0 100.0% CNN International 3 28.0 100.0% CNN fn 24.0 100.0% Court TV 75.3 50.0% 50.0% Discovery 86.5 50.0% 25.0% Discovery En Espańol * 50.0% 25.0% Discovery Health 42.5 44.1% 25.0% Discovery HD Theatre * 50.0% 20.0% 25.0% Discovery Home& Leisure 28.5 50.0% 25.0% Discovery Kids 30.0 50.0% 25.0% Discovery Times 28.5 50.0% 25.0% Discovery Wings 28.5 50.0% 25.0% E! Entertainment 80.4 50.0% Encore 20.0 100.0% Encore Action * 100.0% Encore Love Stories * 100.0% Encore Mystery * 100.0% Encore True Stories * 100.0% Encore WAM! * 100.0% 138 Federal Communications Commission FCC 04- 5 139 Services 1 Subs. (mil) Liberty Media AOL Time Warner Comcast Cox Cablevision Systems Encore Westerns * 100.0% 5Star Max * 100.0% Fox Sports en Espanol 5.0 10.6% Fuse 30.3 60.0% Fuse On Demand * 60.0% G4 Video Gaming Ntwk * 94.0% Game Show Network 50.5 50.0% Golf Channel 53.2 91.0% Hallmark Channel 51.3 32.5% HBO 38.0 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% Health Network 29.3 49.0% 25.0% HSN 80.0 20.0% iN DEMAND 28 33.0% 50.0% 15.0% Independent Film 26.2 60.0% International Channel 12.5 90.0% More Max 37.0 100.0% Movie Plex 8.0 100.0% Outdoor Life 50.7 100.0% Outer Max * 100.0% Ovation 6.2 4.2% QVC 83.4 98.0% Science Channel 30.0 50.0% 25.0% Sci- Fi 79.9 20.0% Starz! 13.5 100.0% 139 Federal Communications Commission FCC 04- 5 140 Services 1 Subs. (mil) Liberty Media AOL Time Warner Comcast Cox Cablevision Systems Starz! Cinema * 100.0% Starz! Family * 100.0% Starz! Theater * 100.0% Style 29.0 60.0% TBS 87.7 100.0% TLC 84.8 50.0% 25.0% Thriller Max 37.0 100.0% TNT 86.2 100.0% Travel Channel 70.5 50.0% 25.0% TCM 63.9 100.0% USA 86.3 20.0% WE (formerly Romance) 51.2 60.0% Wmax * 100.0% Notes: 1 In addition to cable, other MVPD services, such as wireless cable (MMDS), private cable (SMATV), satellite, including DBS and HSD or large dish service, 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 28 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 2003, at 43- 174. Kagan World Media, Cable Networks, Media Mergers and Acquisitions 2003, at 73- 80. 140 Federal Communications Commission FCC 04- 5 141 TABLE C- 6 Top 20 Programming Services by Subscribership Rank Programming Network Number of Subscribers (Millions) MSO Ownership Interest in Network (%) 1 TBS 87.7 AOL Time Warner (100) 2 ESPN 86.7 3 C –SPAN 86.6 4 Discovery Channel 86.5 Liberty Media (49), Cox (24.6) 5 USA Network 86.3 Liberty Media (20) 6. CNN 86.2 AOL Time Warner (100) 6 TNT 86.2 AOL Time Warner (100) 8 Lifetime Television 86.0 8 Nickelodeon 86.0 10 A& E 85.9 11 Spike TV (formerly TNN) 85.8 12 The Weather Channel 85.3 13 MTV 84.9 13 QVC 84.9 Liberty Media (43) Comcast (57) 15 ABC Family Channel 84.8 16 TLC 84.7 Liberty Media (50), Cox (24.6) 17 ESPN2 84.5 18 CNBC 84.2 19 AMC 83.9 Cablevision (60) 20 VH1 83.7 AOL Time Warner (100) Note: In addition to cable, other MVPD services, such as wireless cable (MMDS), private cable (SMATV), satellite, including DBS and HSD or large dish service, broadcast television, and LPTV (low power television) may distribute these signals. Subscriber figures may include these non- cable services. C- SPAN derives 97% of its revenues from affiliate fees (i. e., subscriber fees from MVPDs). The remaining three percent is provided by various investments. Source: NCTA, Top 20 Cable Networks, Cable Developments 2003, at 39- 40. 141 Federal Communications Commission FCC 04- 5 142 TABLE C- 7 Top 15 Programming Services by Prime Time Rating Rank Programming Service MSO with Ownership Interest (%) 1 TNT AOL Time Warner (100) 2 Lifetime Television 3 Disney Channel 4 Nickelodeon 5 TBS AOL Time Warner (100) 6 Cartoon Network AOL Time Warner (100) 7 USA Network Liberty Media (20) 8 A& E 9 Fox News Channel 10 Discovery Channel Liberty Media (50), Cox (24.6) 11 MTV 12 TLC Liberty Media (50), Cox (24.6) 13 Spike (TNN) 14 ESPN 15 Sci- Fi Channel Liberty Media (20) Source: Kagan World Media, Day Part Ratings Averages, Prime Time (July), Cable Program Investor, Sept. 12, 2003, at 16. 142 Federal Communications Commission FCC 04- 5 143 SEPARATE STATEMENT OF MICHAEL K. POWELL Re: Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming What a difference a decade makes. At the close of 1993, the cable industry, holding a monopoly in nearly every local market, dominated the pay television landscape— serving nearly 95% of the market with mostly one- way analog cable systems capable of delivering thirty or so television channels. In hindsight, however, 1993 would prove to be a watershed year that marked the beginning of dramatic shifts in the communications industry that would unleash a decade of benefits to the American public arising from increased competition, investment, innovation, and diversity in the video delivery and programming markets. The transformation started in earnest that year, as we oversaw the launch of the first high- power DBS service in the United States and over the course of the decade have seen DBS services compete to whittle away cable’s former near monopoly status. Today, DBS has over 21% of the pay- television market and cable’s 95% share in 1993 now stands at 75 percent. Much like in the wireless and long- distance industries, the American public has been the primary beneficiary of the advancement of facilities- based competition in the television industry. Increased DBS competition to cable, the steady loss of market share, and Congress’ broad deregulation of the cable industry allowed cable operators across the country to invest some $75 billion to upgrade their infrastructure into a two- way digital broadband platform. As a result, at the dawn of 2004, broadband Internet services, cable telephony services, including Internet telephony, high- definition television, personal video recorders and video on demand services are increasingly available to the public. This investment has, in turn, spurred further investment by other segments of the communications industry, most notably in the broadband Internet space as traditional telephone companies and traditional and emerging wireless providers throughout the country continue to invest in upgrading their infrastructure to compete in today’s converging communications marketplace. Competition in the pay television market has had a domino effect of enhancing competition and innovation across the communications industry. In addition to these new services, competition is constraining and, at times, lowering prices (most notably in equipment costs) and forcing operators in the pay- television market to improve the quality of their service. These benefits have been significant, but it may be that the greatest benefits stemming from the investments of DBS and cable operators over the last ten years has been the expanding diversity of programming, ideas and opinions that come across our television screens on a daily basis. Increased infrastructure investment has meant increased channel capacity and with it more diversity. The thirty channel systems of a decade ago are today cable and satellite systems offering literally hundreds of channels. It is unquestioned that this increased channel capacity has allowed the biggest of our nation’s media companies to get bigger, but it is equally undeniable that it has also provided opportunities for new, independent cable networks and programmers— sparking intense competition in the video programming market as well. Big and small media companies are bringing more program diversity to more Americans, serving our individual and diverse interests in abundance. Whether your interests lie in sports, history, homemaking, Hollywood, culture, technology, politics, minority programming, religion, the outdoors or countless other 143 Federal Communications Commission FCC 04- 5 144 categories, I believe that there is more on television today, from a greater variety of sources than at any time in history. In addition, news, political and public discourse continues to expand on television. The last ten years has seen the rise of news networks such as BBC America, Bloomberg TV, the Fox News Channel and MSNBC as well as many others, serving, along with more established players, as outlets for opinions from across the political, social and economic spectrum. We live in a world where every debate amongst presidential candidates is now on television and where opposing viewpoints can be found making their case on the topics of the day -- from segment to segment on political program to program. And as our ability to find diverse programming and viewpoints on our television screens increases, so too does the amount of local and regional programming. Local cable news and sports programming continues to proliferate on cable and satellite television systems. Over this past decade Americans have responded and taken advantage of the increased competition, investment, innovation and diversity in the pay- television and programming markets. More Americans pay for television today than they did a decade ago. Today, 85% of television households (94.1 million households) pay for television, as compared to 63% of TV households (60.3 million households) in 1993. As more diverse and higher quality programming has emerged on cable and satellite systems, more people are watching. For the second year in a row (and only the second time in history), cable programming networks collectively brought more viewers to their channels throughout the day than did the seven broadcast networks and in primetime, cable networks brought in a viewing share of over 50% of all television viewers (vs. 44.7% of the seven networks). The shift in viewing should come as no surprise as the quality of cable programming has also been recognized as award nominations and wins continue to reach new heights for cable programming. The emergence of DBS as a competitive alternative to cable, however, was not the only innovation of 1993 to forever change the video marketplace. That year also produced the commercialization of the Internet that has not only fundamentally changed the life and course of many Americans, but that will have a tremendous impact on the video delivery and programming markets in the next decade. Largely non- existent a decade ago, today, we are beginning to see the possibilities that Internet video streaming can offer and as this Commission continues its push to bring universal, affordable and competitive broadband Internet access to every American, the use of the Internet to deliver even more competitive and diverse video offerings can and should be realized in the future. This past year, for instance, sports had a banner year in Internet video streaming as Major League Baseball made over 1,500 games available over the Internet. The WNBA, and several college programs including Texas Tech and the University of Connecticut’s women’s basketball team have begun webcasting their games over the last year. Video streaming of news, movies and other programming have also made great strides over the past year. The Internet and broadband platforms of tomorrow should continue to provide producers of programming with increasing opportunities to serve the individual and diverse interests of the American people. Although the past decade in the markets for pay- television and programming have produced an explosion of benefits for the American public and the decade ahead looks even brighter, our work is far from done. Despite the highly competitive nature of this industry, we must continue to provide investment opportunities for new providers of video distribution and producers of new networks and programming. We must continue to allow the Internet’s innovators to bring broadband and video streaming to the masses. And, I, along with my colleagues will continue to reach out to interested stakeholders to ensure that the Commission improves and updates it data collection mechanisms to better understand this changing, competitive and dynamic marketplace. The fact remains that the United States has the most competitive and diverse media marketplace the world has ever seen and we must continue to bring the 144 Federal Communications Commission FCC 04- 5 145 benefits of that competition and diversity to our citizenry. 145 Federal Communications Commission FCC 04- 5 146 Joint Statement of Commissioners Michael J. Copps and Jonathan S. Adelstein, Concurring Re: Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming Congress charged the Commission in Section 628( g) with reporting annually on “the status of competition in the market for the delivery of video programming.” As we release this Tenth Report, we are concerned that these Reports are becoming mere recitations of the record we receive in response to our Notice of Inquiry, rather than an in- depth analysis of the status of competition. Congress directed the FCC to focus on competition because it recognized the power of competition to give consumers more choices, lower prices, better services, and access to more sources of content. Yet, this Report fails to examine adequately the circumstances that distinguish those places where competition is occurring and those where it is not. It fails to evaluate barriers to greater competition. And it fails to consider sufficiently such important issues raised in the Notice as the availability of independently- produced programming, children’s programming, locally- produced programming, and non- English programming. In sum, it simply fails to delve beneath the surface. We took issue with our other Report on cable rates issued last July because the Commission conducted little analysis other than pointing out that cable rates are increasing, something most consumers already know all too well. We are concerned that we may be heading down the same road with this Report. At a time of significant increases in cable rates year after year – 8.2 percent last year and 40 percent over the last five years, all significantly in excess of the rate of inflation -- Congress and American consumers deserve a better effort from the FCC. In part, the fault lies with the limited data we received in response to our Notice. We urge the Commission to undertake a more pro- active and comprehensive information gathering effort for our next Report. This Report serves as the factual foundation for many Commission decisions as well as providing Congress with statutorily- mandated information that can inform the national policy debate. None of our comments on this Report should take away from the investments that have been made by those that deliver video programming. Nor do they diminish the benefits American consumers receive as new services are deployed. But, as the government’s expert agency, the Commission must do more to gather accurate and complete data as well as provide the information and analysis that Congress required. 146