FOR IMMEDIATE RELEASE NEWS MEDIA CONTACT January 14, 2002 Michelle Russo (202) 418-2358 FCC ADOPTS EIGHTH ANNUAL REPORT ON COMPETITION IN VIDEO MARKETS Washington, DC – The Federal Communications Commission (FCC) released its eighth annual report on competition in the market for the delivery of video programming. This report will be submitted to Congress in accordance with Section 628(g) of the Communications Act. The report provides updated information on the status of competition in the market for the delivery of video programming, discusses changes that have occurred in the competitive environment over the last year, and describes barriers to competition that continue to exist. The report finds that competitive alternatives and consumer choices continue to develop. Cable television still is the dominant technology for the delivery of video programming to consumers, although its market share continues to decline. As of June 2001, 78 percent of all subscribers to multichannel video program distributor (MVPD) services received their programming from a franchised cable operator, compared to 80 percent a year earlier. Since last year’s report, the total number of subscribers to both cable and non-cable MVPDs increased to 88.3 million households as of June 2001, up 4.6 percent over the 84.4 million households subscribing to MPVDs in June 2000. Specifically, the number of cable subscribers reached nearly 69 million as of June 2001, up about 1.9 percent from the 67.7 million cable subscribers in June 2000. The total number of noncable MVPD subscribers grew from 16.7 million as of June 2000 to 19.3 million as of June 2001, an increase of more than 15 percent. The growth of noncable MVPD subscribers continues to be primarily attributable to the growth of direct broadcast satellite (DBS) service. Between June 2000 and June 2001, the number of DBS subscribers grew from almost 13 million households to about 16 million households, which is nearly two and a half times the cable subscriber growth rate. DBS subscribers now represent 18.2 percent of all MVPD subscribers. During the period under review, cable rates rose faster than inflation. According to the Bureau of Labor Statistics, between June 2000 and June 2001, cable prices rose 4.24 percent compared to a 3.25 percent increase in the Consumer Price Index (CPI). However, capital expenditures for upgrading cable facilities increased to $15.5 billion during 2000, representing a 45.9 percent increase over the $10.6 billion spent in 1999. The number of video and non-video services offered has also increased. For example, the number of digital tier channels increased from zero reported in 1999 to 39 reported in 2000. In addition, cable modem service was estimated to be available to 81 million homes by December 2001. -more- The eighth annual report details the status of competitors in markets for the delivery of video programming including: cable systems, direct-to-home satellite service (DBS and home satellite dishes), wireless cable systems, SMATV systems, broadcast television, local exchange carrier (LEC) entry, open video systems, Internet video, home video sales and rentals, and electric utilities. In addition, for the first time this year, the FCC addresses broadband service providers (BSPs), a new category of entrant into the video marketplace. The report also examines market structure and competition by evaluating horizontal concentration in the MVPD marketplace and vertical integration between cable television systems and programming services; discussing competitors serving multiple dwelling unit (MDU) buildings; and addressing programming issues and technical advances. Finally, the report outlines the competitive effects in communities where consumers have a choice between an incumbent cable operator and at least one other MVPD, and provides several examples of the incumbent cable operator’s response to such competition. A list of the key findings of the report is attached. Action by the Commission, December 27, 2001, by Report (FCC 01-389). Chairman Powell, Commissioners Abernathy, Copps and Martin, with Commissioner Martin issuing a statement. -- FCC-- CS Docket No. 01-129 Cable Services Bureau contacts: Marcia Glauberman, Anne Levine at (202) 418-7200. TTY: (202) 418-7172 KEY FINDINGS OF THE FCC’S EIGHTH ANNUAL REPORT ON VIDEO COMPETITION Industry Growth: In the 2001 Report, the FCC examines the status of competition in the market for the delivery of video programming, discusses changes that have occurred in the competitive environment over the last year, and describes barriers to competition that continue to exist. Overall, the Commission finds that competitive alternatives continue to develop. Cable television still is the dominant technology for the delivery of video programming to consumers in the MVPD marketplace, although its market share continues to decline. As of June 2001, 78 percent of MVPD subscribers received their video programming from a franchised cable operator, compared to 80 percent a year earlier. The total number of subscribers to both cable and non-cable MVPDs continues to increase. A total of 88.3 million households subscribe to multichannel video programming services as of June 2001, up 4.6 percent over the 84.4 million households subscribing to MVPDs in June 2000. This subscriber growth accompanied a 2.7 percentage point increase in MVPDs’ penetration of television households to 86.4 percent as of June 2001. Since the 2000 Report, the number of cable subscribers continued to grow, reaching almost 69 million as of June 2001, up about 1.9 percent from the 67.7 million cable subscribers in June 2000. The total number of non-cable MVPD subscribers grew from 16.7 million as of June 2000 to 19.3 million as of June 2001, an increase of more than 15 percent. The growth of non-cable MVPD subscribers continues to be primarily due to the growth of DBS. DBS appears to attract former cable subscribers and consumers not previously subscribing to an MVPD. The continued growth of DBS is, 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”). Between June 2000 and June 2001, the number of DBS subscribers grew from almost 13 million households to about 16 million households, which is nearly two and a half times the cable subscriber growth rate. DBS subscribers now represent 18.2 percent of all MVPD subscribers. Over the last year, the number of subscribers to, and market shares of, MMDS, SMATV, and OVS have remained relatively stable. However, the number of home satellite dish (“HSD”) subscribers continues to decline. Cable Rates: During the period under review, cable rates rose faster than inflation. According to the Bureau of Labor Statistics, between June 2000 and June 2001, cable prices rose 4.24 percent compared to a 3.25 percent increase in the Consumer Price Index (“CPI”), which measures general price changes. Concurrently with these rate increases, capital expenditures for the upgrading of cable facilities increased, the number of video and non-video services offered increased, and programming costs increased. The report also notes that cable operators’ pricing decisions may be affected by direct competition. Available evidence indicates that when an incumbent cable operator faces “effective competition,” as defined by the Communications Act, it responds in a variety of ways, including lowering prices or adding channels without changing the monthly rate, as well as improving customer service and adding new services such as interactive programming. Convergence of Cable and Telephone Service: The Telecommunications Act of 1996 (“1996 Act”) removed barriers to local exchange carrier (“LEC”) entry into the video marketplace to facilitate competition between incumbent cable operators and telephone companies. At the time of the 1996 Act, it was expected that LECs would compete in the video delivery market and that cable operators would provide local telephone exchange service. The FCC previously reported that there had been an increase in the amount of video programming provided to consumers by telephone companies, although the expected technological convergence that would permit use of telephone facilities for video service had not yet occurred. This year, the report finds that incumbent local exchange carriers (“ILECs”) have largely exited the video business, instead mainly reselling DBS service. A few smaller LECs offer, or are preparing to offer, MVPD service over existing telephone lines. Some competitive local exchange carriers (“CLECs”) continue to pursue MVPD entry and competition. Alternatively, several cable multi-system operators (“MSOs”) offer telephone service. Circuit-switched telephony is still the only type of commercially deployed cable telephony, but trials continue for cable-delivered IP telephony. MSOs, such as Cox and AT&T, continue to deploy circuit-switched cable telephony. Others, like Cablevision and Comcast, continue to offer cable telephony where it has already been deployed, but generally are waiting for Internet Protocol (“IP”) technology to become widely available before accelerating their rollout of telephone service. AT&T, AOL Time Warner, Comcast, and Charter currently are testing IP telephony, while Cox has plans for IP telephony trials in 2002. High-Speed Internet Service: The most significant convergence of service offerings continues to be the pairing of Internet service with other service offerings. There is evidence that a wide variety of companies throughout the communications sector are providing multiple services, including data access. Cable operators continue to expand the broadband infrastructure that permits them to offer high-speed Internet access. The most popular way to access the Internet over cable is still through the use of a cable modem and personal computer, though a small number of users continue to access the Internet through their television and a specially designed set-top box, rather than the personal computer. Virtually all of the major MSOs offer Internet access via cable modems in portions of their service areas. Like cable, the DBS industry is developing ways to bring advanced services to their customers. For example, DirecTV currently offers a satellite-delivered high-speed Internet access service with a telephone return path called DirecPC. EchoStar now offers its subscribers a similar service, called Starband, in cooperation with a subsidiary of Gilat. Many SMATV operators offer local and long distance telephone service, and Internet access along with video service. In addition, digital technology makes it possible for MMDS operators, who provide video service in limited areas, to offer two-way services, such as high-speed Internet service and telephony. Broadband service providers are building advanced systems specifically to offer a bundle of services, including video, voice, and high-speed Internet access. Promotion of Entry and Competition: Non-cable MVPDs continue to report that regulatory and other barriers to entry limit their ability to compete with incumbent cable operators. Non-cable MVPDs continue to experience some difficulties in obtaining programming from vertically integrated cable programmers and from unaffiliated programmers that continue to make exclusive agreements with cable operators. In MDUs, potential entry may be discouraged or limited because an incumbent video programming distributor has a long-term and/or exclusive contract. In addition, non-cable MVPDs report problems obtaining franchises from local governments and difficulties in gaining access to utility poles needed to build out their systems. Distribution Mechanism Findings: FCC findings as to particular distribution mechanisms operating in markets for the delivery of video programming include the following: * Cable Systems: Since the 2000 Report, the cable television industry has continued to grow in terms of subscribership (a 1.9 percent increase from June 2000), revenues (an approximate 3.7 percent increase between 1999 and 2000), audience ratings (non-premium cable viewership rose from an approximate 46 share in June 2000 to slightly over a 48 share in 2001), and expenditures on programming. The number of national satellite-delivered video programming services, which declined slightly last year, increased from 281 to 294, between June 2000 and June 2001. * The cable industry has continued to invest in improved facilities. As a result, there have been increases in channel capacity, the deployment of digital transmissions, and non-video services such as Internet access. Cable operators also offer telephony, although the use of integrated facilities remains primarily experimental. * Direct-to-Home (“DTH”) Satellite Service (DBS and HSD): Video service is available from high power DBS satellites that transmit signals to small DBS dish antennas installed at subscribers’ premises, and from low power satellites requiring larger antennas. DBS has over 16 million subscribers, an increase of approximately 24 percent since the 2000 Report. Between June 2000 and June 2001, the number of HSD subscribers, measured as the number of HSD users that actually purchase programming packages, declined from 1.5 million to one million, a decrease of 32 percent. DirecTV and EchoStar are each among the ten largest providers of multichannel video programming service. In June 2001, DBS represented an 18.2 percent share of the national MVPD market and HSD represented another 1.1 percent of that market. * Wireless Cable Systems: Currently, the wireless cable industry (“MMDS”) provides competition to the cable industry in limited areas. MMDS subscribership remained at approximately 700,000 subscribers between June 2000 and June 2001. With the advent of digital MMDS and the Commission’s authorization of two-way MMDS service, it appears that most MMDS spectrum eventually will be used to provide high-speed data services. Wireless cable represented a 0.8 percent share of the national MVPD market in June 2001. * SMATV Systems: SMATV systems, also know as private cable operators, use some of the same technology as cable systems, but do not use public rights-of-way, and focus principally on serving subscribers living in MDUs. As of June 2001, SMATV subscribership remained unchanged from last year at 1.5 million subscribers, representing approximately 1.7 percent of national MVPD subscribership. * Broadcast Television: Broadcast networks and stations are competitors to MVPDs in the advertising and program acquisition markets. Broadcast networks and stations also are suppliers of content for distribution by MVPDs. In addition, they supply video programming directly to those television households that are not MVPD subscribers and to television sets in MVPD households that are not connected to such service. In this regard, one study estimates that 81 million, or approximately 30 percent of the nation’s 267 million television sets, receive broadcast signals over-the-air. Since the 2000 Report, the broadcast industry has continued to grow in the number of operating stations (from 1,663 in 2000 to 1,678 in 2001) and in advertising revenues ($41 billion in 2000, a 12.2 percent increase over 1999). Audience levels, however, continue to decline. During the 2000-2001 television season, the seven television networks accounted for a 57 percent share of prime time viewing for all television households, compared to a 59 share a year earlier. Broadcast television stations continue to deploy digital television (“DTV”) service. Eighty-three percent of the more than 1,300 commercial television stations have been granted a DTV construction permit or license and 229 are on the air with DTV operations. * LEC Entry: The 1996 Act expanded opportunities for LECs to enter the market for the delivery of video programming. The 2000 Report notes that even the most aggressive LECs were reducing or terminating their efforts in the video marketplace. This year, the report finds that ILECs have largely exited the video business, instead mainly reselling DBS service. The exceptions to this trend are BellSouth, which, in addition to reselling DBS service, continues to operate some overbuild cable systems, and a number of smaller LECs that are offering, or preparing to offer, MVPD service over telephone lines. Some CLECs, most notably RCN, continue to pursue MVPD entry. Previously, Ameritech, now owned by SBC, was the most significant LEC provider of in-region cable service. In the past year, SBC sold these systems to WideOpenWest. Qwest Communications International (formerly US West) continues to offer video, high-speed Internet access, and telephone service over existing copper telephone lines using very high-speed digital subscriber line (“VDSL”) in Omaha and Phoenix. Reports indicate that 40 to 50 LECs, mostly small, also are using VDSL to offer a bundle of services, including video, over telephone lines. * Open Video Systems: In the 1996 Act, Congress established a new framework for the delivery of video programming -- the open video system (“OVS”). Under these rules, a LEC or other entrant may provide video programming to subscribers, although the OVS operator must provide non-discriminatory access to unaffiliated programmers on a portion of its channel capacity. Several BSPs, including some that are CLECs, operate open video systems, hold OVS certifications, or hold local OVS franchises. RCN is the largest OVS operator in the country. * Broadband Service Providers: This year’s report adds a new section to recognize the growing importance of providers that are overbuilding existing cable systems with state-of-the-art systems that offer a bundle of telecommunications services, including video, voice, and high-speed Internet access. BSPs are carefully selecting which communities to serve, based on factors such as favorable demographics and high population density. Their strategy is to increase per subscriber revenue and decrease churn. Yet, BSPs face considerable challenges inherent in entering markets with entrenched competitors. RCN is the largest BSP, serving approximately 443,000 subscribers in New York City, Washington, D.C., and surrounding suburbs, south San Francisco, Boston and its suburbs, northern New Jersey, and suburbs of Philadelphia. WideOpenWest (“WOW”) recently became the second largest BSP with its acquisition of the former Ameritech cable systems, which serve about 300,000 subscribers. In addition, WOW is constructing systems in selected metropolitan Denver communities. The third largest BSP is Knology, which operates or is building systems in the Southeast, and currently serves 110,000 subscribers. * Internet Video: As of July 2001, 58 percent of the U.S. population had Internet access at home. Real- time and downloadable video accessible over the Internet continues to become more widely available and the amount of content also is increasing. Despite the evidence of increased interest in Internet video deployment and use, the medium is still not seen as a direct competitor to traditional video service. Broadcast quality Internet video requires a high-speed broadband connection at speeds which most current broadband providers cannot guarantee. * Home Video Sales and Rentals: The report considers the sale and rental of home video, including videocassettes, DVDs, and laser discs, part of the video marketplace because they provide services similar to the premium and pay-per-view offering of MVPDs. About 90 percent of all U.S. households have at least one VCR. The number of homes with DVD players has grown rapidly since their introduction, with the number of homes with DVD players expected to reach 25 million by the end of 2001. The newest home video is the personal video recorder (“PVR”). One source reports that 500,000 PVRs have been sold since they were introduced two years ago. * Electric and Gas Utilities: Several electric and gas utilities continue to move forward with ventures involving multichannel video programming distribution. Some of their characteristics, such as ownership of fiber optic networks and access to public rights-of-way, make them competitively significant. Some utilities offer telecommunications services on their own, while others partner with broadband service providers, such as Starpower, RCN’s joint venture with PEPCO. It also appears that utilities, particularly municipal utilities in rural areas, are willing to build advanced telecommunications networks to offer a full range of services where incumbent cable operators and telephone companies are not. Reports indicate that 357 public power systems offer communications services. Additional Findings Consolidations and Clustering: Consolidations within the cable industry continue as cable operators acquire and trade systems. The ten largest operators now serve close to 87 percent of all U.S. cable subscribers. In terms of one traditional economic measure, national concentration among the top MVPDs has decreased since last year as the largest MSOs have become more equal in size, and it remains below the levels reported in earlier years. DBS operators DirecTV and EchoStar rank among the ten largest MVPDs in terms of nationwide subscribership along with eight cable multiple system operators (“MSOs”). As a result of acquisitions and trades, cable MSOs have continued to increase the extent to which their systems form regional clusters whereby the largest MSOs concentrate their operations in specific geographic areas. Currently, close to 55 million of the nation’s cable subscribers are served by systems that are included in regional clusters. By clustering their systems, cable operators may be able to achieve efficiencies that facilitate the provision of cable and other services, such as telephony. Programming Networks: The number of satellite-delivered programming networks has increased by 13, from 281 in 2000 to 294 in 2001. Vertical integration of national programming services between cable operators and programmers remained at 35 percent after several years of decline. Although AT&T spun off its Liberty Media programming interests, Liberty Media is still included in this percentage since it owns several cable systems in Puerto Rico. In 2001, four of the top seven cable MSOs held ownership interests in satellite-delivered programming services. Sports programming warrants special attention because of its widespread appeal and strategic significance for MVPDs. The 2001 Report identifies 80 regional networks, 29 of which are sports channels, many owned at least in part by MSOs. There are also 29 regional and local news networks that compete with local broadcast stations and national cable networks. The program access rules adopted pursuant to the 1992 Cable Act were designed to ensure that other MVPDs can access vertically-integrated satellite delivered programming on non-discriminatory terms. The report recognizes that the terrestrial distribution of programming, including in particular regional sports programming, could have an impact on the ability of alternative MVPDs to compete in the video marketplace. Advanced Technologies: Cable operators and other MVPDs continue to develop and deploy advanced technologies, especially digital compression techniques, to increase capacity and enhance the capabilities of their transmission platforms. These technologies allow MVPDs to deliver additional video options and other services (e.g., data access, telephony, and interactive services) to subscribers. As reported last year, MVPDs are beginning to develop and deploy interactive television (“ITV”) services. In particular, this year, cable operators and other MVPDs have devoted most of their attention to the development of video-on-demand services. In the last year, there have been a number of developments regarding navigation devices and cable modems used to access a wide range of services offered by MVPDs. Most notably, cable operators are favoring less powerful and less expensive set-top boxes. It is unclear how these modified plans will affect advance service offerings. CableLabs is continuing its efforts to develop next generation navigation devices with its initiative for the OpenCable Application Platform (“OCAP”) or “middleware” specification. The Consumer Electronics Association maintains that until this software standard is complete, manufacturers will not be able to build advanced set-top boxes for a retail market. In another effort intended to facilitate retail availability of set-top boxes, cable operators announced an initiative to encourage their set-top box suppliers to make their digital set-top boxes with embedded security available at retail. ### 2 6 News media Information 202 / 418-0500 Fax-On-Demand 202 / 418-2830 T TY 202/418-2555 Internet: http://www.fcc.gov ftp.fcc.gov Federal Communications Commission 445 12th Street, S.W. Washington, D. C. 20554 This is an unofficial announcement of Commission action. Release of the full text of a Commission order constitutes official action. See MCI v. FCC. 515 F 2d 385 (D.C. Circ 1974).