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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Implementation of Section 3 ) Of the Cable Television ) Consumer Protection and ) Competition Act of 1992 ) MM Docket No. 92-266 ) Statistical Report on ) Average Rates for Basic ) Service, Cable Programming ) Services, and Equipment ) REPORT ON CABLE INDUSTRY PRICES Adopted: May 5, 1999 Released: May 7, 1999 By the Commission: I. Introduction 1. Section 623(k) of the Communications Act of 1934 ("Communications Act"), as amended by the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"), requires the Commission to publish annually a statistical report that compares the prices charged by cable systems facing effective competition with the prices charged by those systems not facing effective competition for the delivery of basic cable service, other cable programming services, and equipment. This information is used to monitor cable prices and determine if the rates charged for equipment and services by cable systems not subject to effective competition are not unreasonable when compared with rates charged by cable systems subject to effective competition. The report also shows the changes in rates for programming services and equipment over time and on a per channel basis. This report is issued in compliance with that statutory obligation and represents the sixth study of cable rates conducted by the Commission since 1992. 1. The information and analysis provided in this report is based upon the results of the Commission's 1998 survey of cable industry prices (the "Survey"). On July 21, 1998, the Commission released an Order directing cable operators selected for the sample to respond to Commission data requests, pursuant to Section 623(k) of the Communications Act, no later than September 1, 1998. The Survey requested data from selected cable operators as of July 1, 1997 and July 1, 1998. A limited amount of data were requested as of July 1, 1996. The Survey collected information about each operator's regulatory status, monthly charge for the basic service tier ("BST") and cable programming service tiers ("CPSTs"), monthly charge for equipment, installation fees, disconnect and reconnect fees, fees for tier changes, and charges for additional outlets. The Survey also sought information to explain the changes in rates and subscriber charges. After the Survey data were collected, the Commission supplemented those data with information about each respondent's regulatory status from Commission files. The Survey permits the Commission to compare the prices charged by two groups of cable operators: (1) cable operators that face effective competition as defined by the Communications Act -- referred to as the "competitive group"-- and (2) cable operators that do not face effective competition -- referred to as the "noncompetitive group." Within the noncompetitive group, information was collected from both regulated and unregulated operators. 2. In this Survey, we sought, for the first time, to gather additional information about the price and availability of new services such as digital tiers, Internet access, and telephony offered by cable operators. The major findings of the Survey are summarized below. II. Summary of Findings 3. The gap in average monthly rates between competitive and noncompetitive operators has widened. The average monthly rate (for the BST, CPST, and equipment) charged by cable operators facing effective competition was $27.15 and $28.71 as of July 1, 1997 and 1998, respectively, ($0.55 and $0.57 on a per channel basis). For those not facing effective competition, the average monthly rate was $28.56 and $30.53, respectively, during the same time period ($0.64 and $0.65 on a per channel basis). This represents a differential of 5.2% and 6.3%, respectively, in average monthly rates between the competitive and the noncompetitive. Further, the average monthly rates charged by systems facing head- to-head competition (i.e., systems within the competitive group that meet the overbuild test or the LEC test) was 14% less than the average monthly rate charged by noncompetitive systems. 4. Average monthly rates have continued to rise within each group as well. Specifically, average monthly rates charged by competitive operators rose by 6.8% during the 12 months ending July 1, 1997 and 5.8% during the 12 months ending July 1, 1998. Per channel rates decreased by 5.2% in 1997 and increased by 3.6% as of July 1, 1998. During the same time periods, the average monthly rates charged by noncompetitive operators rose by 8.9% and 6.9%, respectively. Per channel rates of noncompetitive operators rose by 3.2% and 1.6%, respectively. As a result, average monthly rates and per channel rates as well as the rate of increase in rates is greater for the noncompetitive group than for the competitive group. However, the pace of those increases slowed in 1998. 5. Another source of information on cable industry prices is the Consumer Price Index ("CPI") published by the Bureau of Labor Statistics ("BLS"). For the same time periods, the cable services segment of the CPI ("Cable CPI") grew by 7.5% and by 6.7% respectively. The Cable CPI, however, includes the prices charged for premium services such as a la carte and pay-per-view channels as well as installation charges, which are not included in our calculation of average monthly rates. This may explain differences between the rates reported by the BLS for the Cable CPI and the average monthly rates reported in the Survey. The overall CPI, which is also published by the BLS, grew by 2.2% and 1.7%, respectively, during the years ending July 1, 1997 and 1998. 6. Both competitive and noncompetitive operators attribute most of their rate increases to increases in programming costs, inflation, channel additions and system upgrades. Both groups also attribute significant portions of their rate increases to increases in non-defined "other" expenses. 7. Ideally, when calculating price changes, we would like to be able to take into account changes in the quantity and quality of service provided. In the case of cable rates, however, this is difficult to do because both the quantity and quality of services provided has changed significantly in recent years as cable operators have continued to upgrade their systems' capacity. Both competitive and noncompetitive operators have continued to increase the number of channels provided to their subscribers which means that the quantity of service received by subscribers has changed over time. Survey results show that almost 50% of operators surveyed have increased their systems' capacity to 550 MHz or more. This typically has resulted in additional channels of service and may result in improved signal reliability. The competitive group reported a 1.5% increase and the noncompetitive group a 4.6% increase, in the average number of channels provided for the 12 months ending July 1, 1998. This brought the competitive group to an average of 54 channels and the noncompetitive group to an average of 50.1 channels as of July 1, 1998. Looking at average monthly rates on a per channel basis provides one approach that can serve as a proxy for quality adjusted price changes, although not a perfect proxy. Per channel rates increased for both groups, but by a rate of increase that was lower than the increase in unadjusted average monthly rates. For the competitive group, per channel rates increased by 3.6% (from $0.55 to $0.57) and for the noncompetitive group by 1.6% (from $0.64 to $0.65) during the year ending July 1, 1998. 8. Operators in the competitive and noncompetitive groups report that they offered 41 and 38 satellite channels, respectively, as of July 1, 1998, and that about 75% of those channels for both groups are devoted to general entertainment programming with the remaining 25% distributed among children's, news, and sports programming. Rates per satellite channel increased by 0.1% for the competitive group and declined by 2.2% for the noncompetitive group for the year ending July 1, 1998. 9. The Survey requested information on the provision of digital services and found that of 444 responses to a question on the availability of digital tiers, 128 operators (or 29%) offered that service. Of 709 responses to a question about Internet access, 137 operators (or 19%) reported that they offered Internet access service, and of the 678 responses to a question about telephony service, 25 operators (or 4%) report that they offered telephony service as of July 1, 1998. III. Survey Methodology A. Sample 10. Because only a small number of cable operators face effective competition, we chose not to sample that group and requested data from all cable operators serving areas where effective competition was believed to exist. This group was drawn from two lists: (1) a list of operators serving competitive CUIDs which was compiled for the 1993 cable rate survey, and (2) a list of operators serving CUIDs that the Commission has subsequently found to be subject to effective competition (as well as the new competitive entrants where applicable). The resulting competitive group consisted of 286 CUIDs. Because the noncompetitive group is so large, consisting of approximately 30,000 CUIDs, we chose to sample that group. Using a standard formula for deriving sample size, we drew 560 sampling units to make up the sample for the noncompetitive group. We further chose to stratify the noncompetitive group to achieve a closer representation of the industry's subscribers, which is our ultimate interest. The noncompetitive group was divided into three size strata. The size of each stratum was determined according to the proportion of subscribers receiving service from systems in each size group across the entire industry. The resulting sample for the noncompetitive group consisted of 560 CUIDs. A total of 846 survey questionnaires were mailed to cable operators serving the selected CUIDs from both groups, and 783 completed questionnaires were returned to the Commission in time to be included in the analysis. 11. Of the 783 questionnaires returned to the Commission, 767 met minimum necessary data requirements. The remaining 16 lacked sufficient information to be included in the Survey. Thus, completed and usable surveys were received from 90% of the 846 CUIDs surveyed. Operators serving the 767 CUIDs included in the Survey served 14.1 million subscribers, or approximately 21.7% of all cable subscribers (assuming an industry total of approximately 65 million subscribers), as of July 1, 1998. 12. Approximately 32%, or 246, of the usable questionnaires belong to the competitive group. As of July 1, 1998, operators serving these CUIDs provided service to approximately 1.1 million subscribers, or 1.7% of all cable subscribers. As of July 1, 1998, 88 of these 246 respondents reported that they faced competition in the geographic area they serve, with 29 of these meeting the overbuild test and 59 meeting the LEC test. The remaining 158 respondents met the effective competition test either because they served fewer than 30% of the households in their respective franchise areas or because they faced competition from a municipal provider (153 operators met the low penetration test and 5 operators met the municipal test). 13. Approximately 68%, or 521, of the usable responses were from cable operators that are in the noncompetitive group. Of these 521 responses, 356, or 68.3%, were subject to rate regulation ("regulated group"). These respondents provided cable services to 11.7 million subscribers. The remaining responses in the noncompetitive group are from cable operators not subject to rate regulation ("unregulated group"). These operators provided cable services to 1.3 million subscribers. Thus, as of July 1, 1998, the cable operators making up the sample for the noncompetitive group (both regulated and unregulated operators) provided service to 13 million subscribers, or approximately 20% of all cable subscribers. See Attachment A for further information about the sample. B. Variables 14. For purposes of this report, six variables were selected to serve as the focus of the analysis. These variables are: average monthly rate for programming services (BST and CPST), average monthly charge for equipment, average monthly rate for programming services and equipment combined, average number of channels provided, average monthly rate per channel, and average monthly rate per satellite channel. Each variable is described below. 15. Average Monthly Rate for Programming Services (BST and CPST). This variable is the monthly rate paid by subscribers for the BST and the most highly subscribed CPST. This excludes premium, a la carte, and pay-per-view services, digital tiers, and CPSTs that are New Product Tiers ("NPTs") because their rates are not subject to rate regulation. This variable is made up of the sum of each respondent's BST and CPST rate. The average monthly rate is then calculated by averaging this variable for each group. 16. Equipment. This variable is the average monthly charge paid by subscribers for a converter and remote control unit. A converter may be addressable or non-addressable. The equipment variable was constructed for each respondent by adding the price charged for a remote control unit and for the type of converter purchased by the largest number of subscribers. 17. Average Monthly Rate (for BST and CPST Service and Equipment). This variable is the sum of the programming services and equipment charges and represents the amount charged a typical subscriber for BST and CPST service and equipment. 18. Average Number of Channels Offered (on BST and CPST). This variable is the average number of channels received by a typical subscriber on the BST and the most highly subscribed CPST (other than NPTs) as reported by the Survey respondents. As with the monthly rate, channels devoted to premium, a la carte, pay-per-view services, and digital tiers, are not included. 19. Average Monthly Rate Per BST and CPST Channel. This variable is calculated by dividing the average monthly rate by the average number of BST and CPST channels reported by each respondent, and then averaging the result. 20. Average Monthly Rate Per BST and CPST Satellite Channel. This variable is calculated by dividing the average monthly rate by the average number of BST and CPST satellite channels reported by each respondent, and then averaging the result. 21. In addition to these variables, we sought information on the availability of digital tiers and other non-video services such as Internet access and telephony. We also sought information on charges for installation, disconnection, reconnection, and tier changes, and on the distribution of channels among the major categories of programming. C. Calculation of Averages 22. To increase the precision of the Survey results, we stratified both the competitive and noncompetitive groups. The reported averages for both groups were calculated according to the following three steps. First, as explained above, each noncompetitive CUID was categorized into one of three size strata according to the number of subscribers served by the respondent's system. The competitive group was also divided into three size strata using the same subscriber size criteria as used for the noncompetitive group. Operators serving 50,000 or more subscribers were placed in the large category, operators serving between 10,000 and 49,999 subscribers were placed in the medium-sized category, and operators serving fewer than 10,000 subscribers were placed in the small category. Second, an unweighted average for each of the six primary variables was calculated for each size stratum for both groups. Third, an overall average for each primary variable was calculated for each group by weighting the averages of each stratum by the proportion of subscribers in that stratum. The relative weights for each stratum of the noncompetitive group are given in footnote 15. For the competitive group, relative weights were determined by the proportion of subscribers served by operators in each of the size categories. We found that 48.9% of the total number of subscribers in the competitive universe were served by operators in the large category, 44.5% of subscribers were served by operators in the medium- sized category, and 6.6% of subscribers were served by operators in the small category. These percentages became the weights used to calculate the averages for the competitive group IV. Survey Results A. Comparison of Competitive and Noncompetitive Groups 23. The average monthly rates for the competitive and noncompetitive groups as of July 1, 1996, 1997, and 1998, are shown in Table 1, below. As shown in the table, the differential in monthly rates between competitive and noncompetitive operators has increased from 3.1% on July 1, 1996, to 5.2% on July 1, 1997, and to 6.3% on July 1, 1998. Table 1: Average Monthly Rates of Competitive and Noncompetitive Groups Date Competitive Noncompetitive $ Difference % Difference 7/1/96 $25.42 $26.21 $0.79 3.1%* 7/1/97 $27.15 $28.56 $1.41 5.2%* 7/1/98 $28.71 $30.53 $1.82 6.3%* Source: 1998 Price Survey. Average rate is for BST, the most highly subscribed CPST, a remote, and a converter. An asterisk signifies a statistically significant difference between competitive and noncompetitive groups at 95.5% level of confidence. To determine whether a change over time, or the difference between the estimated means for two groups, is statistically significant, we apply the "z test." See Kmenta at pages 136-137 for a more complete explanation of the "z test." See Attachment C-1 for standard errors for the reported averages. 24. We recognize that the rates charged by individual operators may be affected by factors other than competitive status. In our 1997 Price Survey Report, we identified size as another factor that influences average monthly rates. In order to determine the extent to which size influences rates, we have calculated the average monthly rate for each size stratum in the competitive and noncompetitive groups and present the results of these calculations in Tables 2 and 3, below. The tables show that, for both groups of operators, smaller systems typically charge less, and their rates have increased less rapidly, than larger systems. It should be noted, however, that smaller systems typically offer fewer channels than larger systems. Thus, larger systems typically charge less on a per channel basis than smaller systems. See Attachment C-8 for information on number of channels and per channel rates by size category. 25. The tables also show that the competitive group had lower average monthly rates than the noncompetitive group across all size categories. See Attachment C-1 for additional information on the comparison between the competitive and noncompetitive groups by size category. As shown in the attachment, between 1997 and 1998, the gap between competitive and noncompetitive operators changed only slightly for small operators, from 3.9% in 1997 to 4.1% in 1998, and increased for large operators, from 7.3% in 1997 to 10.8% in 1998. The gap between medium-sized operators decreased from 5.2% to 4.1%. Table 2: Comparison of Average Monthly Rates by Size Strata Competitive Group 7/1/96 (a) 7/1/97 (b) % Change (b-a) 7/1/98 (c) % Change (c-b) Large Systems $25.77 $27.54 6.9%* $28.73 4.3%* Medium Systems $25.16 $26.87 6.8%* $28.95 7.7%* Small Systems $24.40 $25.87 6.0%* $27.02 4.4%* Source: 1998 Price Survey. Large systems are those with 50,000 or more subscribers, medium-sized systems are those between 10,000 and 49,999 subscribers, and small systems are those with fewer than 10,000 subscribers. Note: this is not the legal definition for small systems. Average rate is for BST, CPST, a remote and a converter. An asterisk signifies a statistically significant change over time. Table 3: Comparison of Average Monthly Rates by Size Strata Noncompetitive Group 7/1/96 (a) 7/1/97 (b) % Change (b-a) 7/1/98 (c) % Change (c-b) Large Systems $27.21 $29.54 8.6%* $31.82 7.7%* Medium Systems $25.82 $28.28 9.5%* $30.14 6.6%* Small Systems $24.49 $26.89 9.8%* $28.12 4.6%* Source: 1998 Price Survey. Large systems are those with 50,000 or more subscribers, medium-sized systems are those between 10,000 and 49,999 subscribers, and small systems are those with fewer than 10,000 subscribers. Note: this is not the legal definition for small systems. Average rate is for BST, CPST, a remote and a converter. An asterisk signifies a statistically significant change over time. 26. As previously noted, within the competitive group there are four subcategories according to the four criteria or tests under which a finding of effective competition can be made. Generally, effective competition is found where more than one operator serves a community (the "overbuild" test), where there is low subscribership (the "low penetration" test), where the system is owned by a municipality (the "municipal" test), or where the competing service provider is owned by, or affiliated with, a local telephone company (the "LEC" test). In the following table, we report the average monthly rate for each of these four subcategories of the competitive group, along with the average rates for the noncompetitive group. The table shows that the average monthly rate charged by competitive operators varies significantly according to which test was used to determine effective competition but for all subcategories was lower than the average monthly rate charged by the noncompetitive group. The differentials between the noncompetitive group and each subcategory of the competitive group also vary widely. As of July 1, 1998, these differentials ranged from a low of 5.5% for the low penetration subcategory to a high of 30.2% for the municipal subcategory. The two subcategories that face head-to- head competition -- the overbuild and LEC test subcategories -- charged similar rates, on average, and had a differential of about 14% on July 1, 1998. (The percentage differentials for each subcategory can be found in Attachment C-5.) Table 4: Average Monthly Rate for Each Subcategory of the Competitive Group According to the Test by Which Effective Competition was Determined Compared With the Noncompetitive Group Overbuild Low Penetration Municipal LEC Noncompetitive Group 7/1/96 $22.01 $25.36 $20.42 $24.45 $26.21 7/1/97 $24.47 $27.08 $22.52 $26.21 $28.56 7/1/98 $26.79 $28.94 $23.46 $26.78 $30.53 Source: 1998 Price Survey. Average rate is for BST, CPST, a remote and a converter. See Attachment C-5 for standard errors for the reported averages, the percentage differentials, and the test for statistical significance. 27. Table 5, below, reports additional information for the competitive group. The table provides a breakdown of the programming services portion of average monthly rates by BST and CPST along with information on equipment charges, average monthly rates per channel, and average monthly rates per satellite channel. Between July 1, 1997 and July 1, 1998, the average monthly rate for programming services and equipment for the competitive group rose by 5.8%. The charge for basic service increased by 4.0% while the charge for CPST service increased by 7.1%. The average monthly charge for equipment rose by 10.2% over the same time period. The number of channels offered increased by 1.5% from 53.2 channels on July 1, 1997 to 54 channels on July 1, 1998. The average rate per channel increased by 3.6%, while the average rate per satellite channel remained flat during the year ending July 1, 1998. Table 5: Competitive Group Average Monthly Charge For: 7/1/97 7/1/98 $ Change % Change BST $10.69 $11.12 $0.44 4.0% CPST $14.11 $15.00 $0.89 7.1%* Programming Services (BST+CPST) $24.80 $26.12 $1.32 5.3%* Equipment $2.35 $2.59 $0.24 10.2% Average Monthly Rate (Programming+Equip.) $27.15 $28.71 $1.56 5.8%* Avg. Number of Channels Offered 53.2 54 NA 1.5%* Avg. Monthly Rate Per Channel $0.55 $0.57 $0.02 3.6% Avg. Number of Satellite Channels Offered 39.3 41.0 NA 4.3% Avg. Monthly Rate Per Satellite Channel $0.77 $0.77 $0.00 0% Source: 1998 Price Survey. An asterisk signifies a statistically significant change over time. See Attachment C-2 for standard errors for the reported averages. 28. Table 6 reports a similar breakdown for the noncompetitive group. The average monthly rate for programming services and equipment increased by 6.9% between 1997 and 1998. The average monthly charge for the BST and CPST rose by 3.7% and 9.0%, respectively, in the same time period. The average monthly charge for equipment was up by 9.9%. Because many cable operators increased the number of channels they offered during this period, increases in cable rates are lower on a per channel basis. Subscribers received about 48 channels, on average, in July 1997, and about 50 channels as of July 1998, an increase of 4.6%. The average rate per channel was $0.64 as of July 1997, and $0.65 as of July 1998, an increase of 1.6%. The average monthly rate per satellite channel declined by 2.2% for the year ending July 1, 1998, from $0.89 to $0.87. In addition, the per channel rates (both average monthly rate per channel and average monthly rate per satellite channel) are lower for the competitive group than for the noncompetitive group, and the competitive group offers more channels, on average, than the noncompetitive group. 29. The per channel rates and the number of channels offered are interpreted by some observers as a measure of value or quality. As previously noted, in note 27, the value of cable service is difficult to measure and per channel rates or the addition of new channels is not always considered a measure of increased value by subscribers or by industry observers. The BLS, for example, when compiling the Cable CPI makes a qualitative assessment when new channels are added and in some cases makes a quality adjustment for the new channel and in some cases does not. In compiling the Cable Producer Price Index ("Cable PPI"), however, the BLS makes a quality adjustment each time a new channel is added. For the years ending July 1996 and 1997, the Cable PPI rose by 4.2% and 4.1%, respectively. This compares with an increase of 7.5% and 6.7%, respectively, for the Cable CPI for the same time periods. In this report we have not adjusted rates, including per channel rates, in an attempt to measure value or quality. Table 6: Noncompetitive Group Average Monthly Charge For: 7/1/97 7/1/98 $ Change % Change BST $11.63 $12.06 $0.43 3.7% CPST $14.51 $15.82 $1.31 9.0%* Programming Services (BST+CPST) $26.14 $27.88 $1.74 6.7%* Equipment $2.42 $2.65 $0.24 9.9%* Average Monthly Rate (Programming+Equip.) $28.56 $30.53 $1.97 6.9%* Avg. Number of Channels Offered 47.9 50.1 NA 4.6%* Avg. Monthly Rate Per Channel $0.64 $0.65 $0.01 1.6% Avg. Number of Satellite Channels Offered 35.4 38 NA 7.6% Avg. Monthly Rate Per Satellite Channel $0.89 $0.87 -$0.02 -2.2% Source: 1998 Price Survey. An asterisk signifies a statistically significant change over time. See Attachment C-2 for standard errors for the reported averages. B. Regulated and Unregulated Subcategories of the Noncompetitive Group 30. As previously noted, the Survey included questions intended to identify each respondent's regulatory status, and this information was further verified against Commission records. Tables 7 and 8, below, report results for noncompetitive operators by their regulatory status. Average monthly rates for programming services and equipment for the regulated sub-group increased by 7.5% and for the unregulated sub-group by 6.1% during the year ending July 1, 1998. The regulated group, however, offers subscribers more channels and charges less on a per channel basis than the unregulated group. The regulated group showed a marked increase in charges for equipment compared with the unregulated group for the year ending July 1, 1998. This change may be due to the application of rules for averaging equipment costs as well as the higher cost of digital equipment that is being put into service by large, and for the most part regulated, systems. As of July 1, 1997 and 1998, the regulated group charged $2.43 and $2.71, respectively, per month for equipment, an increase of 11.5% between those two dates. For the same time period, the unregulated portion of the noncompetitive group charged $2.49 and $2.57, respectively, an increase of 3.2%. Table 7: Regulated Subcategory of the Noncompetitive Group Average Monthly Charge For: 7/1/97 7/1/98 % Change BST $10.81 $11.05 2.2% CPST $15.18 $16.79 10.6%* Programming Services (BST+CPST) $25.99 $27.84 7.1%* Equipment $2.43 $2.71 11.5%* Average Monthly Rate (Programming+Equip.) $28.42 $30.55 7.5%* Avg. Number of Channels Offered 48.4 50.8 5.0%* Avg. Monthly Rate Per Channel $0.62 $0.63 1.6%* Avg. Monthly Rate Per Satellite Channel $0.86 $0.84 -2.3% Source: 1998 Price Survey. An asterisk signifies a statistically significant change over time. See Attachment C-2 for standard errors for the reported averages. Table 8: Unregulated Subcategory of the Noncompetitive Group Average Monthly Charge For: 7/1/97 7/1/98 % Change BST $12.37 $12.89 4.2%* CPST $13.92 $15.07 8.3%* Programming Services (BST+CPST) $26.29 $27.96 6.4%* Equipment $2.49 $2.57 3.2% Average Monthly Rate (Programming+Equip.) $28.78 $30.53 6.1% Avg. Number of Channels Offered 46.8 49.1 4.7% Avg. Monthly Rate Per Channel $0.67 $0.67 0% Avg. Monthly Rate Per Satellite Channel $0.90 $0.89 -1.1* Source: 1998 Price Survey. An asterisk signifies a statistically significant change over time. See Attachment C-3 for standard errors. C. Other Charges 31. Table 9, below, provides a comparison of the charges for installation, disconnection, reconnection and tier changes for the competitive and noncompetitive groups. These charges are difficult to interpret because they are subject to frequent promotions that may provide deep discounts. See Attachment D-1 for further information about these charges. Table 9: Other Charges Competitive Group Noncompetitive Group 1997 1998 1997 1998 Installation $24.26 $26.15 $28.21 $29.74 Disconnection $8.60 $11.89 $3.16 $3.31 Reconnection $19.04 $18.84 $21.70 $22.74 Tier Change $9.28 $9.28 $6.76 $6.89 Source: 1998 Price Survey. D. Operators' Explanation for Changes in Rates 32. The survey asked respondents to attribute changes in rates between July 1, 1996 and July 1, 1997, and between July 1, 1997 and July 1, 1998 to several factors. Both competitive and noncompetitive respondents attribute most of their rate increases to increases in programming costs, inflation, channel additions, and system upgrades. Miscellaneous or "other" cost increases also account for a large portion of rate increases. Table 10, below, summarizes the results for both the competitive and noncompetitive groups. Additional information on the explanation for rate changes is provided in Attachment C-6. Table 10: Explanation for Changes In Rates Competitive Group Noncompetitive Group 1997 1998 1997 1998 Increases in Existing Programming Costs* 24% 29% 24% 33% Inflation 21% 30% 20% 16% Channel Addition** 20% 11% 18% 13% System Upgrades*** 17% 10% 15% 14% Equipment Cost Increases 3% 8% 12% 10% "Other" Cost Increases 15% 12% 11% 15% Source: 1998 Price Survey. *Programming costs include copyright fees. For a breakdown of programming by type, see Attachment C-6. ** Includes the cost of programming for newly added channels. ***Includes upgrades pursuant to a social contract or local franchise agreement. E. Distribution of Programming by Major Categories 33. Table 10, above, shows that competitive and noncompetitive operators attribute a relatively large portion of their rate increases to increases in existing programming costs. The Survey questionnaire asked operators to provide the number of satellite channels they offered as well as a breakdown of their programming cost increases according to the major categories of programming, i.e., children's, news, sports, and general entertainment. In their explanation for changes in rates, operators attribute a large percentage of their programming cost increases to general entertainment programming. This follows from the fact that the bulk of satellite channels are devoted to general entertainment programming as shown in Table 11, below. The competitive group attributed 63% of their programming cost increases to general entertainment programming, 4% to children's programming, 9% to news programming, and 24% to sports for the year ending July 1, 1998. For the same time period, the noncompetitive group attributed 69% of their programming cost increases to general entertainment programming, 3% to children's programming, 6% to news, and 22% to sports. Table 11 also shows the average number of satellite channels devoted to each of these major categories of programming for both the competitive and noncompetitive groups. Table 11: Average Number of Satellite Channels Devoted to Each Category of Programming Competitive Group Noncompetitive Group 1997 1998 % Change 1997 1998 % Change Children's 1.7 1.9 11.8% 1.5 1.6 6.7% News 5.1 5.4 5.9% 5.0 5.4 8.0% Sports 3.3 3.6 9.1% 2.6 2.9 11.5% General Entertainment 29.2 30.1 3.1% 26.3 28.2 6.8% Total Satellite Channels 39.3 41.0 4.3% 35.4 38 7.6% Source: 1998 Price Survey. F. Digital Services 34. This is the first year that operators were asked questions about digital services. Of the operators responding to a question about the availability of a digital tier of service, 128 reported that they offer that service. Of those 128 respondents, 107 provided additional information on the number of channels offered, the monthly rate charged, and the average number of subscribers. On average, operators offered a single digital tier made up of approximately 40 video channels (which, through compression, occupied approximately five analog channels) for an average monthly charge of $10.70, as shown in Table 12, below. The operators offering this service had a total of approximately 160,000 subscribers, or an average of about 1,500 each, to the service as of July 1, 1998. Table 12: Digital Services As of July 1, 1998 Average Number of Digital Tiers 1 Average Monthly Charge for Digital Tier $10.70 Average Number of Digital Tier Subscribers 1,481 Average Number of Digital Channels 39.7 Average Number of Analog Channels Devoted to Digital Tier 5 Source: 1998 Price Survey. 35. Of the 764 operators responding to a question about system capacity, about 10% had capacities of more than 330 MHz but less than 450 MHz, about 25% had capacities between 450 MHz and 549 MHz, and almost 50% had a capacity of 550 MHz or more which could allow the provision of roughly 90 uncompressed analog video channels and/or services such as telephony or Internet access. A total of 261 operators, or nearly 35% of the 751 operators responding to a question about two-way interactive capacity, reported that they have such capacity. Of the 709 operators who responded to a question about Internet access, 137, or approximately 20% of those responding, reported that they offer that service, and that they provide Internet access to more than 115,000 subscribers. Twenty-five operators reported that they offer telephony service, and that they provide that service to about 22,000 subscribers. Table 13: Capacity/Service Information Number of Valid Responses to These Questions Number of Respondents Offering Particular Capacities/Services Respondents Offering Particular Capacities/Services as a Percent of Valid Responses Operators Reporting Capacity of: Up to 330 MHz 755 123 16.3% Between 331 MHz and 450 MHz 755 73 9.7% Between 451 MHz and 549 MHz 755 185 24.5% 550 MHz and above 755 374 49.5% Operators That Offer: Two-way interactive service 751 261 34.8% Internet access 709 137 19.3% Cable telephony 678 25 3.7% Source: 1998 Price Survey. V. Conclusion 36. The results of this year's survey of cable prices indicate that prices rose both for the competitive and noncompetitive groups. As of July 1, 1997, the noncompetitive group, on average, charged $28.56 per month compared with $27.15 for the competitive group, a differential of $1.41 or 5.2%. As of July 1, 1998, the average monthly rate for the noncompetitive group, rose by 6.9% to $30.53, and for the competitive group, rose by 5.8% to $28.71, a differential between competitive and noncompetitive of $1.82, or 6.3%, as of that date. 37. Both the competitive and noncompetitive groups offered subscribers more channels. Regulated operators, on average, offer more channels than unregulated operators, and subscribers of regulated operators pay significantly less on a per channel basis than subscribers purchasing services from noncompetitive unregulated operators. 36. The competitive group has lower per channel rates than the noncompetitive group for both years studied. For the year ending July 1, 1998, the competitive group reports an average monthly rate per channel of $0.57 compared with $0.65 for the noncompetitive group. For the same time period, the average monthly rate per satellite channel remained the same for the competitive group and fell by 2.2% for the noncompetitive group, respectively, resulting in an average monthly rate per satellite channel of $0.77 for the competitive group compared with $0.87 for the noncompetitive group. 37. Finally, we found that a growing number of operators are offering new services such as digital tiers, Internet access, and telephony. Approximately one-half of the operators surveyed report that they have upgraded their systems to a capacity of 550 MHz or higher. VI. ADMINISTRATIVE MATTERS 38. It is ORDERED that this Report is issued pursuant to authority contained in Section 623(k) of the Communications Act of 1934, as amended 47 U.S.C. 534(k). FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary Attachment A: Survey Sample By Group and Size Stratum Number of CUIDs in Universe* Number of CUIDs in Sample Number of CUIDs Responding Number of CUIDs Providing Usable Responses Competitive Group 286 286 253 246 Large NA NA 44 44 Medium NA NA 94 93 Small NA NA 115 109 Noncompetitive Group 29,595 560 530 521 Large 3,145 289 265 265 Medium 7,046 190 186 181 Small 19,404 81 79 75 Grand Total 29,881 846 783 767 *From FCC Form 325 filings. Note: The number of competitive CUIDs sampled by size stratum are not available because the competitive group was not stratified until after the survey results were collected and because subscriber counts for CUIDs recently found to be competitive were not in the FCC Form 325 database. Attachment B: Operators That Changed the Number of Active Channels Between 1997 and 1998 Responses Competitive Group Noncompetitive Group Regulated Group Unregulated Group No change 259 90 169 102 67 Increased capacity between 1 and 5 channels 312 92 220 160 60 Increased capacity between 6 and 10 channels 69 32 37 28 9 Increased capacity between 11 and 15 channels 32 8 24 19 5 Increased capacity between 16 and 20 channels 12 2 10 5 5 Increased capacity between 21 and 30 channels 17 4 13 11 2 Increased capacity between 31 and 50 channels 10 2 8 6 2 Source: 1998 Price Survey. Attachment C-1 Comparison of Competitive and Noncompetitive Groups By Size Strata Average Monthly Rates Size Competitive Group Noncompetitive Group $ Difference between Means % Difference between Means 1998 Large $28.73 $31.82 $3.09 10.8%* Standard error (0) (0.18) Number of Responses 44 265 Medium $28.95 $30.14 $1.19 4.1%* Standard error (0) (0.33) Number of Responses 93 181 Small $27.02 $28.12 $1.10 4.1%* Standard error (0) (0.58) Number of Responses 109 75 1997 Large $27.54 $29.54 $2.00 7.3%* Standard error (0) (0.17) Number of Responses 29 256 Medium $26.87 $28.28 $1.41 5.2%* Standard error (0) (0.29) Number of Responses 93 184 Small $25.87 $26.89 $1.02 3.9%* Standard error (0) (0.58) Number of Responses 108 70 1996 Large $25.77 $27.21 $1.46 5.67%* Standard error (0) (0.17) Number of Responses 17 258 Medium $25.16 $25.82 $0.66 2.6%* Standard error (0) (0.3) Number of Responses 49 201 Small $24.40 $24.49 $0.09 0.4% Standard error (0) (0.54) Number of Responses 95 76 Source: 1998 Price Survey. Average rate is for BST, CPST, a remote and a converter. Standard error of the estimate is reported in parenthesis. An asterisk signifies a statistically significant difference between competitive and noncompetitive groups at 95% level of confidence. Attachment C-2 Comparison of Competitive and Noncompetitive Groups 1998 1997 1996 Competitive Group Noncompetitive Group %Difference between Means Competitive Group Noncompetitive Group %Difference between Means Competitive Group Noncompetitive Group %Difference between Means Average Monthly Rates $28.71 $30.53 6.3%* $27.15 $28.56 5.2%* $25.42 $26.21 3.1%* (0) (0.18) (0.) (0.17) (0) (0.17) Average Number of Channels 54.0 50.1 -7.2%* 53.2 47.9 -10.0%* 48.8 46.1 -5.5%* (0) (0.5) (0) (0.5) (0) (0.52) Avg. Monthly Charge Per Channel $0.57 $0.65 14.01%* $0.55 $0.64 16.4%* $0.58 $0.62 6.9%* (0) (0.01) (0) (0.01) (0) (0.01) Avg. Monthly Charge Per Satellite Channel $0.77 $0.87 13.0%* $0.77 $0.89 15.6%* (0) (0.01) (0) (0.01) Monthly Charge for BST $11.12 $12.06 8.5%* $10.69 $11.63 8.8%* (0) (0.24) (0) (0.23) Monthly Charge for CPST $15.00 $15.82 5.5%* $14.11 $14.51 3.6%* (0) (0.27) (0) (0.25) Equipment Charges $2.59 $2.65 2.3%* $2.35 $2.42 3.0%* (0) (0.05) (0) (0.05) Number of Responses 246 521 230 510 161 535 Source: 1998 Price Survey. Average rate is for BST CPST, a remote and a converter. Standard error of the estimate is reported in parenthesis. An asterisk signifies a statistically significant difference between competitive and noncompetitive groups at 95% level of confidence. Attachment C-3 Within the Noncompetitive Group, Comparison of Regulated and Unregulated Subgroups By Size Strata Average Monthly Rates Size Regulated Subgroup Unregulated Subgroup $ Difference between Means % Difference between Means 1998 Large $31.87 $31.58 -$0.29 -0.9% Standard Error (0.19) (0.55) Number of Responses 221 44 Medium $29.90 $30.55 $0.65 2.2% Standard Error (0.43) (0.51) Number of Responses 115 66 Small $28.52 $27.98 -$0.54 -1.9% Standard Error (0.92) (0.73) Number of Responses 20 55 1997 Large $29.54 $29.51 -$0.03 -1.1% Standard Error (0.19) (0.47) Number of Responses 216 40 Medium $27.91 $28.97 $1.06 3.8% Standard Error (0.37) (0.48) Number of Responses 119 65 Small $26.63 $26.71 $0.08 0.3% Standard Error (0.94) (0.72) Number of Responses 19 51 1996 Large $27.19 $27.34 $0.15 .6% Standard Error (0.18) (0.44) Number of Responses 216 42 Medium $25.72 $25.88 $0.16 0.6% Standard Error (0.34) (0.57) Number of Responses 128 73 Small $25.00 $24.22 -$0.78 -3.1% Standard Error (0.60) (0.75) Number of Responses 26 50 Source: 1998 Price Survey. Average rate is for BST CPST, a remote and a converter. Standard error of the estimate is reported in parenthesis. Note: In this attachment, differences between the means are not statistically significant. Attachment C-4: Regression Results Showing Coefficients for Competitive Status, MSO Affiliation, System Size, Number of Channels, and Per-capita Income Year Variable Coefficient 1997 Low Penetration Dummy -0.004 (0.015) LEC Dummy -0.124 (.022) Municipal Dummy -0.321 (.064) Overbuild Dummy -0.139 (.029) MSO Affiliation Dummy 0.041 (.022) Reciprocal of System Subscribers 5.21 (1.08) Reciprocal of Average Number of Channels -7.67 (.689) Log of Per Capita Income 0.049 (.026) Intercept 2.98 (.273) Adjusted R Square 0.252 Number of Observations 740 1998 Low Penetration Dummy -0.003 (0.014) LEC Dummy -0.168 (0.021) Municipal Dummy -0.307 (0.070) Overbuild Dummy -0.117 (0.028) MSO Affiliation Dummy 0.033 (0.021) Reciprocal of System Subscribers 5.32 (1.07) Reciprocal of Average Number of Channels -8.68 (0.70) Log of Per Capita Income 0.049 (0.026) Intercept 3.084 (0.27) Adjusted R Square 0.276 Number of Observations 767 Source: 1998 Price Survey. Dependent variable is log of average monthly rate. Standard error of coefficient is in parenthesis. Attachment C-5: Comparison of Competitive Group by Test for Effective Competition With Noncompetitive Group Average Monthly Rates Low Penetration Test LEC Test Municipal Test Overbuild Test Noncompetitive Group % Difference Low Penetration vs. Noncompetitiv e Group % Difference LEC vs. Noncompetitiv e Group % Difference Municipal vs. Noncompetitiv e Group % Difference Overbuild vs. Noncompetitiv e Group 1998 Rate Standard Error $28.94 (0) $26.78 (0) $23.46 (0) $26.79 (0) $30.53 (0.18) 5.5%* 14.0%* 30.2% 14.0%* Responses 153 59 5 29 521 1997 Rate Standard Error $27.08 (0) $26.21 (0) $22.52 (0) $24.47 (0) $28.56 (0.17) 5.5%* 9.0%* 26.8% 16.7%* Responses 148 50 5 27 510 1996 Rate Standard Error $25.36 (0) $24.45 (0) $20.42 (0) $22.01 (0) $26.21 (0.17) 3.4%* 7.2%* 28.4% 19.1%* Responses 132 5 6 18 535 Source: 1998 Price Survey. Average rate is for BST, CPST, converter and a remote. Standard error is reported in parenthesis. An asterisk signifies a statistically significant difference between averages for various subcategories of the competitive group and the noncompetitive group. Attachment C-6 Operators' Explanation for Changes in Rates for Competitive and Noncompetitive Groups 1997 -1998 1996 -1997 Respondents Attribute Changes in Rates to the Following Factors: Competitive Group % of Change in Average Monthly Rate Noncompetitive Group % of Change in Average Monthly Rate Competitive Group % of Change in Average Monthly Rate Noncompetitive Group % of Change in Average Monthly Rate Sports Programming $0.10 (0) 6.8% $0.15 (.01) 7.5% $0.13 (0) 8.7% $0.10 (.01) 4.8% News Programming 0.04 (0) 2.7% 0.04 (.01) 2.0% $0.02 (0) 1.3% $0.03 (.0) 1.4% Children's Programming $0.02 (0) 1.4% $0.02 (.01) 1.0% $0.01 (0) 1.7% $0.02 (.01) 1.0% All Other Programming $0.27 (0) 18.5% $0.46 (.03) 23.1% $0.19 (0) 12.8% $0.34 (.02) 16.2% Copyright Fees $0.00 (.03) 0.0% $0.00 (.01) 0.0% $0.01 (0) 0.7% $0.02 (.01) 1.0% New Channels $0.13 (0) 8.9% $0.15 (.02) 7.5% $0.22 (0) 14.8% $0.19 (.02) 9.0% Channel Additions $0.03 (0) 2.1% $0.10 (.02) 5.0% $0.08 (0) 5.4% $0.18 (.02) 8.6% Headend Upgrades $0.04 (0) 2.7% $0.06 (0.02) 3.0% $0.10 (0) 6.7% $0.08 (.03) 3.8% Upgrade Under Social Contract $0.09 (0) 6.2% $0.21 (.02) 10.6% $0.11 (0) 7.4% $0.23 (.02) 11.0% Upgrade Pursuant to LFA $0.02 (0) 1.4% $0.00 (.0) 0.0% $0.04 (0) 2.7% $0.01 (0.0) 0.5% Inflation Adjustment $0.43 (0) 29.5% $0.32 (.02) 16.1% $0.31 (0) 20.8% $0.42 (.02) 20.0% Equipment $0.12 (0) 8.2% $0.19 (.02) 9.5% $0.05 (0) 3.4% $0.26 (.03) 12.4% Other $0.17 (0) 11.6% $0.29 14.6% $0.22 (0) 14.8% $0.22 (.04) 10.5% Change in Avg. Monthly Rate* $1.46 100% $1.99 100% $1.49 100% $2.10 100% Number of Responses 205 452 178 445 Source: 1998 Price Survey. *Change in average monthly rate shown above may not be the same as that shown in Tables 5 and 6 because the average monthly rates shown there are based on a larger set of responses (i.e., responses may contain rate information but lack information on factors that explain changes in rates). Standard error is in parenthesis. Attachment C-7: Average Number of Channels Devoted to Each Category of Programming Competitive Group Noncompetitive Group 1997 1998 % Change 1997 1998 %Change Children's Programming 1.7 (0) 1.9 (0) 11.8% 1.5 (.03) 1.6 (.03) 6.7% News Programming 5.1 (0) 5.4 (0) 5.9% 5 (.07) 5.4 (.07) 8.0% Sports Programming 3.3 (0) 3.6 (0) 9.1% 2.6 (.06) 2.9 (.06) 11.5% General Entertainment Programming 29.1 (0) 30 (0) 3.1% 26.3 (.33) 28.1 (.33) 6.8% Broadcast and PEG 14.9 (0) 15 (0) .7% 14.5 (.21) 14.6 (.21) 0.7% Total Number of Channels* 54.1 (0) 55.9 (0) 3.3% 49.9 (.48) 52.6 (.49) 5.4% Number of Usable Responses 231 250 509 519 Source: 1998 Price Survey. *Includes BST and all CPST (other than NPT) channels. Standard error of the estimate is reported in parenthesis. Attachment C-8 Comparison of Competitive and Noncompetitive Groups By Size Strata Channels Offered and Per Channel Rates Size Competitive Group Noncompetitive Group 1998 Large Number of Channels 60.3 56.62 Standard error (0) (0.67) Per Channel Rate $0.49 $0.58 Standard error (0) (0.01) Number of Responses 44 265 Medium Number of Channels 48.94 49.29 Standard error (0) (0.84) Per Channel Rate $0.63 $0.64 Standard error (0) (0.1) Number of Responses 93 181 Small Number of Channels 38.35 36.13 Standard error (0) (1.38) Per Channel Rate $0.82 $0.85 Standard error (0) (0.54) Number of Responses 93 75 Large 1997 Number of Channels 59.07 53.97 Standard error (0) (0.68) Per Channel Rate $0.49 $0.57 Standard error (0) (0.01) Number of Responses 29 256 Medium Number of Channels 48.69 46.86 Standard error (0) (0.8) Per Channel Rate $0.59 $0.63 Standard error (0) (0.01) Number of Responses 93 184 Small Number of Channels 36.33 35.27 Standard error (0) (1.39) Per Channel Rate $0.82 $0.84 Standard error (0) (0.04) Number of Responses 108 70 Large 1996 Number of Channels 54.29 51.66 Standard error (0) (0.71) Per Channel Rate $0.51 $0.55 Standard error (0) (0.01) Number of Responses 17 258 Medium Number of Channels 44.78 44.86 Standard error (0) (0.76) Per Channel Rate $0.62 $0.60 Standard error (0) (0.01) Number of Responses 49 201 Small Number of Channels 32.54 34.86 Standard error (0) (1.53) Per Channel Rate $0.87 $0.80 Standard error (0) (0.04) Number of Responses 95 76 Source: 1998 Price Survey. Average rate is for BST, CPST, a remote and a converter. Standard error is reported in parenthesis. Attachment D-1: Average Monthly Charges for Other Services Competitive Group Noncompetitive Group 1997 1998 1997 1998 Installation $24.26 (0) $26.15 (0) $28.21 (.16) $29.74 (.92) Number of Responses 173 215 502 506 Disconnection $8.60 (0) $11.89 (0) $3.16 (.21) $3.31 (.23) Number of Responses 50 50 155 158 Reconnection $19.04 (0) $18.84 (0) $21.70 (.16) $22.74 (.15) Number of Responses 174 180 151 359 Tier Change $9.28 (0) $9.28 (0) $6.76 (.14) $6.89 (.14) Number of Responses 126 129 363 371 Source: 1998 Price Survey. Standard error is reported in parenthesis.