******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect or Word to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. 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 Statistical Report on Average Rates for Basic Service, Cable Programming Services, and Equipment ) ) ) ) ) ) ) ) ) MM Docket No. 92-266 Report on Cable Industry Prices Adopted: June 9, 2000 Released: June 15, 2000 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 prices charged by cable operators facing effective competition with those of operators not facing effective competition for the delivery of basic service, other cable programming services, and equipment. This 1999 Report is issued in compliance with that statutory obligation. 2. The information and analysis provided in this 1999 Report is based upon the Commission's 1999 survey of cable industry prices ("Survey"). On August 20, 1999, the Commission released an Order directing cable operators selected as part of a random sample representative of the industry to respond to Commission data requests, pursuant to Section 623(k) of the Communications Act, no later than October 1, 1999. The Survey requested data from selected cable operators as of July 1, 1998 and July 1, 1999. Limited amounts of data were requested as of July 1, 1997. The Survey collected information about each operator's regulatory status, monthly charges for the basic service tier ("BST") and cable programming service tiers ("CPSTs"), monthly charges for equipment, installation fees, disconnect and reconnect fees, fees for tier changes, and charges to install additional outlets. The Survey also sought information needed to determine average rates per channel and to explain changes in rates between the survey dates. After the Survey data were collected, the Commission supplemented those data with information about each respondent's regulatory status from Commission files. The Survey enables 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 operators that were both regulated and unregulated as of July 1, 1998. 3. Beginning with the 1998 Report and continuing with this year's Survey, we also sought to gather information about the price and availability of services such as digital tiers, interactive capability, Internet access, and telephony offered by cable operators. In addition, we sought, for the first time this year, to gather information and analyze the effect of clustering (the practice of operating commonly owned cable systems in close proximity on an integrated basis through the use of shared personnel and/or facilities). Finally, we sought information on the number of Direct Broadcast Satellite ("DBS") subscribers in each cable operator's franchise area in order to determine if DBS penetration has had an effect on the demand for cable as well as on the monthly charges for cable service. The major findings of the Survey are summarized below. IV. Summary of findings 5. Competitive operators increased average monthly cable rates for BST, CPST, and equipment by 4.6% during the 12-month period ending July 1, 1999; noncompetitive operators increased rates by 5.8% over the same period. These increases were smaller than the increases of 6.7% and 6.9% for competitive and noncompetitive groups, respectively, for the year ending in July 1998 and reflect a slowing in the pace of rate increases a trend we first noted in the 1998 Report. 6. For the 12 months ending July 1, 1999, both competitive and noncompetitive operators attributed about half of their rate increases to higher programming costs. Inflation, equipment cost increases, increased costs for channel additions, and facilities upgrades are the other factors to which rate increases are attributed. Operators also explain that small portions of their rate increases are not attributable to changes in costs. 7. The difference in average monthly rates for BST, CPST, and equipment (typically a converter and remote) between competitive and noncompetitive operators (the "competitive differential") widened between July 1, 1998 and July 1, 1999 from 4.6% to 5.7%. On July 1, 1998, competitive and noncompetitive cable operators charged $28.66 and $29.97, respectively. The rates for the noncompetitive group were 4.6% higher than the rates charged by the competitive group. By July 1, 1999, cable operators facing competition were charging, on average, $29.99 while operators not facing competition were charging $31.70, which is 5.7% higher than the competitive group. 8. Within the overall average monthly rate, the rates of increase for BST and CPST services were not similar for both competitive and noncompetitive groups. For both groups, CPST rates rose faster than BST rates. For the competitive group, the average rate for BST service increased by 3.2% between July 1, 1998 and July 1, 1999, while the average rate for CPST service increased by 5.8%. For the noncompetitive group, the average monthly rate for BST service rose by 2.1%, while the increase for CPST service was 8.9%. 9. Both competitive and noncompetitive groups increased the average number of channels offered on BST and CPST service during the 12 months ending July 1, 1999. The competitive group averaged 52.3 channels and the noncompetitive group averaged 51.1 channels as of July 1, 1999, increases in channel offerings of 5.2% and 4.7%, respectively. Despite an increased average number of channels, the per channel rates for both the competitive and the noncompetitive group remained unchanged, at $0.62 and $0.65, respectively, over the 12 months ending July 1, 1999. 10. In addition, many more cable operators offered digital and non-video services in 1999 than in 1998. As of July 1, 1999, 29% of the surveyed cable operators offered a digital programming tier and 27% offered Internet services. Forty-five percent of operators offered two-way interactive services and 4% offered telephone service in 1999. The practice of operating commonly owned cable systems in close proximity on an integrated basis (clustering) did not increase the availability of Internet or telephony services or reduce the average monthly rate for cable services. 11. Operators reported increased revenue from non-video subscriber sources (i.e. Internet and telephony), but reported no change in the percentage of their revenues received from advertising and other fees, which remained at 7.9% of total revenues from 1998 to 1999. 12. Operators also reported that DBS service has captured, on average, an estimated 10.5% share of television households in their service areas. In addition, we found that the demand for cable service is somewhat sensitive to changes in monthly cable rates. XIII. Survey methodology A. Sample 14. Because relatively few cable operators face effective competition, we chose, as in previous years, not to use a random sample for this group and instead requested data from all cable operators serving areas where we believe effective competition exists. This group included the list of cable competitors compiled for the 1993 cable rate survey and operators subsequently found to face effective competition by the Commission and their competitors. The resulting competitive group consisted of 309 CUIDs. Because the noncompetitive group contains approximately 30,000 CUIDs, we chose to sample that group, using a standard formula to derive the sample size. To obtain a sample that was representative of subscribers across the entire industry, we divided all CUIDs in the industry (excluding competitive CUIDs) into three strata by size. The strata size thresholds are: 50,000 or more subscribers, between 10,000 and 49,999 subscribers, and less than 10,000 subscribers. Because there are many more small operators, a nonstratified sample would place a disproportionately greater emphasis on smaller operators relative to the number of subscribers they serve. We selected CUIDs for our sample from each stratum according to the proportion of subscribers nationwide receiving service from operators in that stratum. The resulting sample for the noncompetitive group consisted of 506 CUIDs. 15. Of the 815 survey questionnaires mailed to cable operators from both groups, respondents returned 769 completed questionnaires to the Commission in time to be included in the analysis. Of these, 725 met minimum necessary data requirements. The remaining 44 lacked sufficient information to be included in the Survey. As of July 1, 1999, operators serving the 725 CUIDs included in the analysis served 13.1 million subscribers, or approximately 20% of the 66.7 million cable subscribers nationwide. 16. Two hundred seventy-nine of the usable questionnaires were submitted by competitive cable operators. These 279 respondents served approximately 2.1 million subscribers, or 3% of all cable subscribers. Of these, 129 respondents report facing direct competition in their geographic area, with 42 meeting the overbuild test and 87 meeting the LEC test. Of the remaining respondents in the competitive group, 145 served fewer than 30% of the households in their service area (thereby meeting the low penetration test) and 5 operators are owned by the municipality in their service area (thereby meeting the municipal test). 17. The remaining 446 usable responses were submitted by noncompetitive cable operators. Of these, slightly more than half, 224, were subject to rate regulation as of July 1, 1998 ("regulated group"). These respondents serve 9.3 million subscribers. The remaining 222 responses in the noncompetitive group are from cable operators who were not subject to rate regulation on July 1, 1998 ("unregulated group"). These operators provided cable services to 1.9 million subscribers. Thus, the cable operators that comprise the sample for the noncompetitive group (both regulated and unregulated operators) provide service to 11.2 million subscribers, or approximately 17% of all cable subscribers. See Attachment A for further statistical information about the sample. A. Variables 18. We focus our analysis on six variables, and calculate an average for each variable by competitive and regulatory status as well as size. The variables are: (1) average monthly rate for BST and CPST programming services; (2) average monthly charge for equipment; (3) average monthly rate for programming services and equipment; (4) average number of channels; (5) average monthly rate per channel; and (6) average monthly rate per satellite channel. We describe each variable below. 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. It excludes premium, a la carte, and pay-per-view services, digital tiers, and CPSTs that are new product tiers ("NPT"s) because these services were not rate regulated as of July 1, 1998. Average Monthly Charge for Equipment. This variable is the average monthly charge paid by subscribers for a converter (either addressable or non-addressable) and remote control unit. It equals the monthly charge for a remote plus the monthly rate for the type of converter purchased by the largest number of subscribers. Average Monthly Rate (for BST, CPST, and Equipment). This variable equals the sum of the monthly programming service and equipment charges. It represents the rate that a typical subscriber pays for BST, CPST service, and equipment. Average Number of Channels (BST and CPST). This variable is the average number of channels a typical subscriber receives on the BST and most highly subscribed CPST. As with the monthly rate, this variable excludes channels devoted to premium, a la carte, and pay-per-view services, digital tiers, and NPTs. We also report the average number of satellite channels, which is a subset of all channels and does not include local broadcast, PEG, or other local origination channels or services. Average Monthly Rate Per Channel (BST and CPST). This variable is the programming services rate divided by the average number of channels offered. Average Monthly Rate Per Satellite Channel (BST and CPST). This variable is the programming services rate divided by the average number of BST and CPST satellite channels. 19. In addition to these variables, we sought information on the availability of digital tiers and non- video services such as Internet access and telephony. We also sought information on charges for installation, disconnection, reconnection, tier changes and additional outlets, as well as on the distribution of channels among the major categories of programming (e.g. news, sports). A. Calculation of Price Averages 20. As mentioned above, a stratified sampling methodology was used to calculate price averages. Within each group, we assigned each CUID to one of three strata: large, medium or small. We assigned CUIDs to strata according to the number of subscribers in the system to which the CUID belonged, even though a system might include more than one CUID. 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. Systems serving 50,000 or more subscribers were placed in the large category; those serving between 10,000 and 49,999 subscribers were placed in the medium-sized category, and those 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. We found that 50.5% of the total number of subscribers in the cable universe were served by operators in the large category, 31.7% of subscribers were served by operators in the medium-sized category, and 17.8% of subscribers were served by operators in the small category. These percentages became the weights used to calculate the averages for the competitive and the noncompetitive groups. XXI. survey results A. Comparison of Competitive and Noncompetitive Groups 22. Table 1 shows the average monthly rates for the competitive and noncompetitive groups, and the differential between these two groups, as of July 1, 1997, 1998, and 1999. Over the three years shown, average monthly rates (the rate charged for BST, the most highly-subscribed CPST, a remote, and a converter) have increased for both groups and the differential between them has widened. The difference in monthly rates between competitive and noncompetitive operators was 4.4% in July 1997, 4.6% in July 1998, and 5.7% in July 1999. These differentials are statistically significant, as denoted by the asterisks in Table 1. See Attachments B-1, B-2 and B-3 for more detailed information on the differentials between the competitive and noncompetitive groups. Table 1. Comparison of Average Monthly Rates, Competitive and Noncompetitive Groups Date Competitive Noncompetitive Difference % Difference 7/1/97 $26.85 $28.04 $1.19 4.4%* 7/1/98 $28.66 $29.97 $1.31 4.6%* 7/1/99 $29.99 $31.70 $1.71 5.7%* *An asterisk denotes a statistically significant difference between the competitive and noncompetitive groups at a 95.5% level of confidence for this and all subsequent tables. 23. We recognize that rates charged by individual cable operators are affected by a number of factors in addition to competitive status. Size is one such factor. In order to determine the extent to which size influences rates, we calculated the average monthly rate for each size stratum in both the competitive and noncompetitive groups. Tables 2 and 3, below, present the results of these calculations. 24. The tables show that rates increased across the strata from small to large for both the competitive and noncompetitive groups. When compared with the noncompetitive group, the competitive group has consistently lower rates in the large and medium strata but not in the small stratum where rates tend to be higher. Attachment B-2 contains additional information on competitive and noncompetitive differentials by size. Attachment B-3 also provides detailed information on the number of channels and per channel rates by siz e category. Table 2. Average Monthly Rates, Competitive Group by Size Strata Size Strata 7/1/97 7/1/98 %Chg. 7/l/99 %Chg. (a) (b) (a to b) (c) (b to c) Large $27.40 $29.37 7.2%* $30.88 5.1%* Medium $26.32 $28.19 7.1%* $29.43 4.4%* Small $26.26 $27.51 4.8%* $28.47 3.5%* Total (All Size Strata) $26.85 $28.66 6.7%* $29.99 4.6%* The strata size thresholds are: 50,000 or more subscribers (large); between 10,000 and 49,999 subscribers (medium); and below 10,000 subscribers (small). Table 3. Average Monthly Rates, Noncompetitive Group by Size Strata Size Strata 7/1/97 7/1/98 % Chg. 7/1/99 % Chg. (a) (b) (a to b) (c) (b to c) Large $28.54 $30.68 7.5%* $32.39 5.6%* Medium $28.30 $30.31 7.1%* $32.22 6.3%* Small $26.17 $27.34 4.5%* $28.80 5.3%* Total (All Size Strata) $28.04 $29.97 6.9%* $31.70 5.8%* 25. Operators in the competitive group belong to one of four subcategories, overbuild, low penetration, municipal or LEC, under the Commission's effective competition standard. Table 4 reports the average rate for each competitive subcategory, compared with the average for the noncompetitive group. Attachment B-5 provides a more detailed comparison of these competitive subcategories as well as the differentials in average monthly rates between each competitive subcategory and the noncompetitive group along with number of channels and per channel rates over time. 26. Table 4 shows that average monthly rates vary significantly among the competitive subcategories, from $22.39 to $30.82 as of July 1, 1999. However, the average monthly rates for each of the four subcategories of the competitive group were lower than the average monthly rate of $31.70 for the non competitive group. Table 4. Average Monthly Rates, Comparison of Competitive Subcategories to Noncompetitive Date Overbuild LEC Low Penetration Municipal Noncompetitive 7/1/98 $29.46 $26.97 $28.93 $21.11 $29.97 7/1/99 $30.82 $28.01 $30.51 $22.39 $31.70 See Attachment B-5 for standard errors for the reported averages, the percentage differentials, and the test for statistical significance. 27. We further analyzed average monthly rates using a regression equation, and found that, for 1999, the categories that face head-to-head competition (the overbuild and LEC subcategories combined) had rates that were, on average, 19% lower than the noncompetitive group. In addition, our regression analysis revealed that competitive operators that meet the LEC test had rates that were 16% lower than the noncompetitive group while operators belonging to the overbuild subcategory had rates that were 2.8% lower than the noncompetitive group. For the same year, the low penetration subcategory had rates 3.9% higher than the noncompetitive group and systems owned by a municipality had rates 29.3% lower than rates charged by the noncompetitive group. 28. Table 5 disaggregates the average monthly rate into three components -- BST, CPST, and equipment. It also shows the average monthly rate per channel and per satellite channel, both separately and combined. Between July 1, 1998 and July 1, 1999, the average rates for programming services and equipment rose by 4.6%. The charge for basic service increased by 3.2% while the charge for CPST service increased by 5.8%. The monthly charge for equipment, which represents a relatively small portion of the overall monthly rate, rose by 4.7%. The number of BST and CPST channels offered by the competitive group increased overall by 5.2% from 49.7 channels on July 1, 1998 to 52.3 channels on July 1, 1999. The average rate per channel, however, remained at $0.62 over this time period. The average rate per satellite channel declined by a small amount, 1.1%, during the year ending July 1, 1999. Table 5. Averages for Competitive Group Monthly Charge 7/1/98 7/1/99 $ Change % Change Basic Service Tier (BST) $11.66 $12.03 $0.37 3.2%* Cable Programming Service Tier (CPST) $14.43 $15.27 $0.84 5.8%* Programming Services (BST & CPST) $26.09 $27.30 $1.21 4.6%* Equipment (Converter & Remote) $ 2.57 $ 2.69 $0.12 4.7%* Total: Program & Equipment Charge $28.66 $29.99 $1.33 4.6%* Number of Channels 7/1/98 7/1/99 $ Change % Change Channels (Broadcast & Satellite) 49.7 52.3 NA 5.2%* Charge per Channel $0.62 $0.62 $0.0 0% Channels (Satellite Only) 35.5 37.5 NA 5.6%* Charge per Satellite Channel $0.90 $0.89 -$0.01 -1.1% An asterisk denotes a statistically significant change over time. See Attachment B-1 for standard errors for the reported averages. 29. Table 6 reports similar information for the noncompetitive group. The average monthly rate for programming services and equipment increased by 5.8% from July 1, 1998 to July 1, 1999. The BST charge rose 2.1%, while the CPST rate rose by 8.9%. The average monthly charge for equipment rose by 4.9%. Subscribers received 48.8 channels, on average, on July 1, 1998, and 51.1 channels, on average, as of July 1, 1999, which represents an increase of 4.7%. The per channel rate was unchanged between 1998 and 1999 at $0.65 cents per channel. The average monthly rate per satellite channel was also unchanged at $0.95 for the yea r ending July 1, 1999. Table 6. Averages for Noncompetitive Group Monthly Charge 7/1/98 7/1/99 $ Change % Change Basic Service Tier (BST) $12.32 $12.58 $0.26 2.1% Cable Programming Service Tier (CPST) $15.02 $16.36 $1.34 8.9%* Programming Services (BST & CPST) $27.34 $28.94 $1.60 5.9%* Equipment (Converter & Remote) $2.63 $2.76 $0.13 4.9%* Total: Program & Equipment Charge $29.97 $31.70 $1.73 5.8%* Number of Channels 7/1/98 7/1/99 $ Change % Change Channels: (Broadcast & Satellite) 48.8 51.1 NA 4.7%* Charge per Channel $0.65 $0.65 $0.00 0.0% Channels: (Satellite Only) 34.1 36.1 NA 5.9%* Charge per Satellite Channel $0.95 $0.95 $0.00 0.0% An asterisk denotes a statistically significant change over time. See Attachment B-1 for standard errors for the reported averages. 30. Tables 5 and 6 show increased rates of 4.6% and 5.8%, respectively, for the competitive and noncompetitive groups during the 12-month period ending July 1, 1999. These increases were smaller than the increases found for the year ending on July 1, 1998, and reflect a slowing in the pace of rate increases for both competitive and noncompetitive operators during 1998 and 1999. The Bureau of Labor Statistics ("BLS") reports a similar slowing in the pace of increases in cable rates. The Consumer Price Index for cable services (the "cable CPI"), which is published by the BLS, grew by 6.7% and by 3.6%, respectively, over the twelve month periods ending July 1, 1998 and July 1, 1999. The cable CPI, however, measures the prices charged for a slightly different mix of services than the Survey, and also does not seek to compare prices cha rged by competitive and noncompetitive operators. A. Regulated and Unregulated Subcategories of the Noncompetitive Group 31. As with the competitive group, there are subcategories within the noncompetitive group. Tables 7 and 8, below, report results for noncompetitive operators by their regulatory status as of July 1, 1998 and 1999. The Survey included questions to identify regulatory status, and this information was further verified against Commission records. The regulated subcategory discussed here is defined as that segment of the noncompetitive group whose BST and/or CPST were regulated as of July 1, 1998. Recognizing the March 31, 1999 sunset of CPST rate regulation, the 1999 regulated subcategory consisted of those operators whose BSTs were regulated by a local regulatory authority as of July 1, 1999. The unregulated subcategory consisted of the remaining noncompetitive group operators. Although competitive operators are also unregulated, for purposes of this analysis, they were not included in the unregulated subcategory. 32. Monthly rates for programming services and equipment for the unregulated group increased by 5.8% for the year ending July 1, 1999. The average monthly rate charged by the regulated group increased by 6.4% during the same time period. Unregulated operators charged $30.95, on average, per month for programming services and equipment as of July 1, 1999, while regulated operators charged $32.46. The reason that unregulated operators charged less than regulated operators is likely due to the substantially higher number of small cable operators in the unregulated group (40%) than in the regulated group (8%). The smaller cable operators in the noncompetitive group typically offer fewer channels and have lower monthly rates than larger operators. On a per channel basis, therefore, the rate charged as of July 1, 1999 by the regulated group, is lower than that of the unregulated group at $0.65 versus $0.66, respectively. Table 7. Averages, Unregulated, Noncompetitive Group Monthly Charge 7/1/98 7/1/99 $ Change % Change Basic Service Tier (BST) $12.59 $12.81 $0.22 1.7% Cable Programming Service Tier (CPST) $14.11 $15.43 $1.32 9.4%* Programming Services (BST & CPST) $26.70 $28.24 $1.54 5.8%* Equipment (Converter & Remote) $2.55 $ 2.71 $0.16 6.3%* Total: Program & Equipment Charge $29.25 $30.95 $1.70 5.8%* Number of Channels 7/1/98 7/1/99 $ Change % Change Channels: (Broadcast & Satellite) 46.5 49.4 NA 6.2%* Charge per Channel $0.66 $0.66 $0.00 0.0% Channels: (Satellite Only) 32.9 35.5 NA 7.9%* Charge per Satellite Channel $0.97 $0.95 -$0.02 -2.1% An asterisk denotes a statistically significant change over time. See Attachment B-6 for standard errors for the reported averages. Table 8. Averages, Regulated, Noncompetitive Group Monthly Charge 7/1/98 7/1/99 $ Change % Change Basic Service Tier (BST) $12.03 $12.18 $0.15 1.2% Cable Programming Service Tier (CPST) $15.80 $17.53 $1.73 10.9%* Programming Services (BST & CPST) $27.83 $29.71 $1.88 6.8%* Equipment (Converter & Remote) $2.67 $2.75 $0.08 3.0%* Total: Program & Equipment Charge $30.50 $32.46 $1.96 6.4%* Number of Channels 7/1/98 7/1/99 $ Change % Change Channels: (Broadcast & Satellite) 51.1 52.7 NA 3.1% Charge per Channel $0.63 $0.65 $0.02 3.2% Channels: (Satellite Only) 35.4 36.6 NA 3.4% Charge per Satellite Channel $0.93 $0.96 $0.03 3.2% An asterisk denotes a statistically significant change over time. See Attachment B-6 for standard errors for the reported averages. A. Charges for Other Regulated Services 33. Table 9, below, provides a comparison of average charges for other regulated cable services that are not included in the average monthly rate for the competitive and noncompetitive groups. These services include installation, disconnection, reconnection, tier changes, and the installation of additional outlets. The charges for these services are one-time charges rather than monthly fees and are calculated based on cable operators' average yearly receipts from these activities, divided by the number of occurrences reported for each activity. For the most part, we found only small year-to-year changes in these fees. The charges are difficult to interpret, however, since they are subject to frequent promotions, which may results in deep discounts at certain times and steep increases at other times. Table 9. Charges for Other Regulated Services Competitive Group Noncompetitive Group 7/1/98 7/1/99 %Chg. 7/1/98 7/1/99 %Chg. Installation $29.41 $28.18 -4.2% $35.20 $34.94 -0.7% Disconnection $0.28 $0.31 10.7% $0.42 $0.48 14.3% Reconnection $21.20 $21.53 1.6% $21.88 $21.89 0.0% Tier Change $8.98 $8.42 -6.2% $8.39 $8.55 1.9% Additional Outlet $9.21 $10.49 13.9% $12.73 $12.55 -1.4% See Attachment B-7 for standard errors for the reported averages. A. Operators' Explanation for Changes in Rates 34. The Survey asked respondents to explain any changes in their rates between July 1, 1998, and July 1, 1999, by attributing those changes to increased costs or other factors. For those respondents who raised rates, Table 10 shows the percentage by which each factor contributed to the overall price increase. Significantly, both the competitive and the noncompetitive groups attributed more than half of their rate increases to higher programming costs. For the 12 months ending July 1, 1999, the competitive group attributed 53.3% and the noncompetitive group attributed 51.0% of their higher rates to programming cost inc reases. 35. For the competitive group, inflation was the next cost factor cited as contributing most to rate increases at 15.1%, followed by increased equipment costs (11.5%), system upgrades (10.1%), and channel addition costs (7.9%). In addition, the competitive group attributed 3.6% of its rate increases to unspecified costs and reported that a reduction in costs of 5.8% also contributed to changes in rates. After programming costs, the noncompetitive group attributed its 1999 rate increases to system upgrade costs (11.8%), equipment costs (10.6%), inflation (10.0%), and increased channel addition costs (6.5%), in that order. The noncompetitive group also attributed 5.9% of rate increases to unspecified costs, mitigated by a 2.9% reduction in costs during the 12 months ending July 1, 1999. Finally, respondents reported that 4.3% of the rate changes made by the competitive group, and 7.1% of the rate changes made by the noncompetitive group, wer e not cost related. Table 10. Explanation for Changes in Rates Competitive Group Noncompetitive Group 7/1/98 7/1/99 7/1/98 7/1/99 Programming Costs 42.2% 53.3% 50.5% 51.0% Inflation 17.1% 15.1% 14.0% 10.0% Channel Additions 9.9% 7.9% 8.5% 6.5% System Upgrades 9.2% 10.1% 9.0% 11.8% Equipment Costs 13.8% 11.5% 10.0% 10.6% Unspecified Costs 3.9% 3.6% 5.0% 5.9% Reduction in Costs -0.7% -5.8% -0.5% -2.9% Changes Not Based on Costs 4.6% 4.3% 3.5% 7.1% Increases in costs on existing programming, including copyright fees. For a breakdown of programming by type, see Attachment B-8. Includes the cost of programming for newly added channels. Includes upgrades pursuant to a social contract or local franchise agreement. XXXVI. other findings A. Distribution of Programming by Major Categories 37. Table 11 shows a breakdown of the average number of satellite channels by major category -- children, news, sports, and general entertainment -- for the competitive and noncompetitive groups. This table shows that increases were relatively uniform across all programming categories. Attachment C-1 provides additional information on the number of channels offered in each category. Table 11. Average Number of Satellite Channels, by Type of Programming Competitive Group Noncompetitive Group 7/1/98 7/1/99 7/1/98 7/1/99 Children 3.0 3.5 2.7 3.0 News 5.8 6.0 5.9 6.1 Sports 3.9 4.3 3.4 3.4 General Entertainment 29.5 30.3 26.7 27.8 Total Satellite Channels 42.2 44.1 38.7 40.3 Satellite channel totals reported here include all CPST channels, not just those carried on the most highly- subscribed CPST, as well as any satellite channels carried on BST. A. Annual System Revenues 38. The Survey sought information on annual system-wide revenues from three major sources: (a) programming (BST, CPST, premium and pay-per-view), (b) non-cable services (Internet and cable telephony) and (c) advertising, customer equipment, fees from leased access and other programmers, and commissions. Table 12 shows that between 1998 and 1999, revenues from non-video sources increased from 1.9% to 3.4%. This may be attributed to the growing importance of these services and the increasing number of operators offering interactive and Internet services. Revenue from advertising, equipment, and fees, however, remained con stant at 7.9% between July 1, 1998 and July 1, 1999. Table 12: Percent of Annual System Revenues from Various Sources Revenue Sources 7/1/98 7/1/99 Programming Services 90.2% 88.7% Non-Video Services 1.9% 3.4% Advertising, Equipment, and Fees 7.9% 7.9% Number of Operators reporting 657 694 39. All operators report receiving the bulk of their revenues from subscription services, and approximately 30% of those operators responding to this question report receiving revenues from all three sources. For the 198 operators reporting revenue from all three sources in 1999, 11.4% of revenue was received from non-video subscriber services, 8.6% was from advertising, equipment, and fees, and 80% was from programming services. For 1998, 146 of the 657 operators reporting revenue data received revenues from all three sources. For those operators, 8.6% of total revenue was received from non-video subscriber services; 9.2% was from advertising, equipment, and fees; and 82.2% was from subscription services. A. System Capacity and Non-Video Services 40. As of July 1, 1999, 410 of the 725 operators in the sample (57%) reported a capacity of 550 MHz or more. A total of 325 operators (45%) reported offering two-way interactive service; 193 operators (27%) offered Internet access service; and 27 operators (4%) offered telephony service, representing growth in all categories from 1998. Table 13: 1999 Capacity and Non-Video Services Operators Reporting a Capacity of: 7/1/99 Up to 330 MHz 100 Between 331 MHz and 450 MHz 199 Between 451 MHz and 549 MHz 16 550 MHz and above 410 Operators Offering: Two-way interactive service 325 Internet access 193 Cable Telephony 27 A. Clustering 41. This year, for the first time, we sought to gather information on and analyze the effects of clustering (i.e. the practice of operating commonly-owned cable systems in close proximity on an integrated basis through the use of shared personnel and/or facilities). For the past several years, cable operators have engaged in a strategy of buying and/or swapping cable systems with the objective of creating regional clusters of contiguous, commonly-owned and operated, cable systems. It is believed that clustering can create greater economies of scale and scope and that it may enable operators to offer a wider variety of services, including broadband services, at lower prices to consumers. Analysts report that in 1999, MSOs sought to create larger clusters to better enable cable operators to provide local telephone and Internet services. 42. The Survey found that, of the 725 operators in the sample, 459, or 63%, are part of clusters. Of those 459, only 8 operators, less than 2%, offer cable telephony, 211, or 46%, offer two-way interactive service, and 114, or 25%, offer Internet access service to their subscribers. 43. We also sought to determine whether clustering had a measurable effect on monthly rates. Using a regression equation similar to the Benchmark equation, we found that operators that were part of a cluster had, on average, higher monthly rates than operators that were not part of a cluster. A. Digital Services 44. As of July 1, 1999, 213 (29%) operators report that they offer a digital tier of service. The Survey shows that 49 (18%) competitive operators provide digital service, while 135 (30%) noncompetitive operators offer such service. Competitive cable operators offered an average of 1.8 digital tiers and noncompetitive operators offered 1.5 digital tiers, on average. Competitive operators charged $8.80 monthly, at $0.31 per channel, for digital service while noncompetitive operators charged $9.49 monthly at $0.33 per channel. These averages represent enormous growth in the number of operators offering digital services as well as the number of subscribers to digital tiers between July 1, 1998 and July 1, 1999. Table 14: Digital Tiers, Competitive and Noncompetitive Groups, Competitive Noncompetitive 7/1/98 7/1/99 7/1/98 7/1/99 Number of Operators Offering Digital Service 24 49 78 135 Average Number of Digital Tiers 1.0 1.8 1.2 1.5 Number of Channels Offered 44.6 46.5 43.9 46.8 Average Monthly Charge $6.67 $8.80 $9.80 $9.49 Average Price Per Channel $0.17 $0.31 $0.29 $0.33 Average Number of Subscribers 737 1,272 1,311 4,235 Results are reported for the most highly subscribed digital tier. A. Commercial Leased Access 45. Of the 725 cable operators surveyed, 558 responded to our request for information on the number of commercial leased access channels provided by operators and the price charged for use of those channels. On average, less than one channel per system was leased. In addition, of the 558 operators responding, only 137 reported price information. Because the price information reported was inconsistent, it was not suitable dat a for the purpose of calculating averages. A. Lifeline Basic Tier 46. The Survey asked operators if they offered a tier of service that excluded satellite channels and carried only signals from local television broadcast stations and PEG channels. This tier is frequently called "lifeline" or "limited basic." In response to our 1998 Survey, we received no valid responses to this question. This year, 23 operators reported that they offered lifeline basic service at an average monthly rate of $12.26 for an average of 8.7 channels. A. Elasticity of Demand for Cable Services 47. We also analyzed demand for cable services by creating a demand equation model. A detailed discussion of the econometrics used in the equation analysis can be found in Appendix D-2. The equation presupposes that changes in demand for cable services are a function of: (a) average monthly rate for programming services and equipment; (b) median household income; (c) number of households passed; (d) ratio of non-urban population to total population; (e) average number of satellite channels offered; and (f) competitive status. Based on this analysis, we found that demand for cable services was sensitive in varying degrees to changes in all of the variables listed above. Competitive status, non-urban population, and average monthly rate variables are inversely related to the demand for cable services; as these variables increase, the demand for cable services decreases. Conversely, median household income, number of households passed, and number of satellite channels offered have a direct relationship to demand, i.e. as these variables increase, the demand for cable services increases. 48. The demand equation also produced price and income elasticities of demand for cable. The estimated price elasticity of cable according to this equation is 1.31, which indicates that the demand for cable services is somewhat price elastic. This means that a one percent increase in the price of cable services, for example, would result in a slightly more than one percent decrease in the demand for those services. Since our measure of cable price elasticity is greater than one, the equation also suggests that cable service has substitutes. The effects of one such substitute, DBS, is discussed below. With regard to income elasticity, we found that the estimated income elasticity of cable services was 0.24. This suggests that the demand for cable services is not very sensitive to changes in household income. Results from the estimated demand equation are sho wn in Attachment D-2. A. Effects of DBS on the Demand for and Price of Cable Services 49. In this year's Survey, we sought to investigate the extent to which DBS penetration may have had an effect on the demand for cable services. In the 1999 Competition Report, the Commission notes that DBS is cable's largest competitor with over ten million subscribers as of June 1999. In response to Survey questions, a number of cable operators provided estimates of the number of DBS subscribers in their service are as. 50. Table 15, shows the number of cable and DBS subscribers in the cable operators' service areas expressed as a percentage of TV households in the same areas, as of July 1, 1999. The data are shown by size strata and for both competitive and noncompetitive groups. On average, cable operators responding to our Survey reported that DBS has a 10.5% share of television households in their franchise areas. Noncompetitive operators report that their share of TV households is slightly over 63%, on average, whereas the competitive operators report their share at approximately 43%, as of July 1, 1999. Competitive operators report a significantly lower level of penetration than noncompetitive operators because the competitive group includes a large number of operators with relatively low penetration, i.e., those meeting the low penetration tes t. 51. The Survey results also indicate that DBS made relatively more progress in acquiring new subscribers in rural areas than in urban areas. For those operators who provided DBS subscribership information, we found that those serving areas having less than 25% urban population had an average DBS penetration (DBS subscribers as a percent of TV households) of approximately 18%. In areas with more than 75% urban population, the average DBS penetration was approximately 8%. TABLE 15: Average Share of TV Households by Size Strata, Cable and DBS, as of July 1, 1999 Size Strata Competitive Noncompetitive DBS Large 41.8% 60.4% 8.8% Medium 47.1% 67.9% 9.8% Small 36.4% 64.3% 13.3% Overall (all size) Share 42.9% 63.5% 10.5% The DBS penetration data was reported by cable operators responding to the Survey. Therefore, the size stratification for the DBS data was based on the size strata of the reporting cable operators and does not represent stratification of DBS operators. 52. The 1999 Competition Report noted that cost differences, notably installation and equipment costs, between cable and DBS continue to diminish. As a result, some observers assert that many consumers now perceive DBS and cable to be substitutable services. In economic terms, the better the substitute for a particular good or service the greater its price elasticity will tend to be. 53. In order to measure the effects of DBS on the demand for cable services, we estimated a demand equation. We hypothesized a negative coefficient for this variable suggesting that as the number of DBS subscribers increases, the demand for cable services decreases. As hypothesized, the sign for the DBS coefficient is negative. Compared with the other coefficients, however, the coefficient for DBS subscribers is extremely small and also is not statistically significant (the standard error is far larger than the coefficient). While the result is consistent with DBS being a substitute for cable service, the small magnitude of the coefficient and lack of statistical significance support the conclusion that DBS exerts only a modest influence on the demand for cable service. The results and a fuller discussion of the analysis are shown in Attachment D-2 . LIV. Conclusion 55. We found that both competitive and noncompetitive operators increased their average monthly rates for BST, CPST and equipment during the time period surveyed. We also found that the competitive differential between competitive and noncompetitive operators widened over the period studied. However, we also observed a slowing in the pace of price increases on an annual basis, in the average monthly rates charged by both competitive and noncompetitive cable operators. 56. Both competitive and noncompetitive operators point to increased programming costs to explain a significant portion of their rate increases. System upgrades and channel additions are also cited as factors to explain higher rates. Competitive and noncompetitive operators have increased system capacity and, as a result, are now able to offer their subscribers more channels on BST and CPST along with new services such as digital programming tiers, Internet access, and telephony. Finally, cable operators estimate that DBS service continues to capture market share in their service areas with the greatest inroads being felt by small and rural cable systems. Finally, we found that demand for cable service is somewhat sensitive to changes in cab le rates. 57. This report fulfills the Commission's annual statutory obligation to compare prices charged by competitive cable operators with those of cable operators not facing effective competition for the delivery of basic service, other cable programming services, and equipment. LVIII. administrative matters 59. It is ORDERED that this Report be 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 STRATA CUIDs IN UNIVERSE CUIDs IN SAMPLE CUIDs RESPONDING USABLE RESPONSES COMPETITIVE GROUP Large NA NA 104 98 Medium NA NA 95 91 Small NA NA 91 90 Total 309 309 290 279 NONCOMPETITIVE GROUP Large 3,145 263 261 253 Medium 7,046 138 119 110 Small 19,404 105 99 83 Total 29,595 506 479 446 Grand Total 29,904 815 769 725 From FCC Form 325 filings. Systems serving 50,000 or more subscribers were placed in the large category; those serving between 10,000 and 49,999 subscribers were placed in the medium-sized category; and those serving fewer than 10,000 subscribers were placed in the small category. The number of competitive CUIDs sampled by size strata is not available because the competitive group was not stratified until after the survey responses were received. ATTACHMENT B-1 COMPARISON OF COMPETITIVE AND NONCOMPETITIVE GROUPS COMPETITIVE NON-COMPETITIVE DIFFERENCE IN MEANS 1999 BST $12.03 $12.58 4.6%* Standard. Error 0 0.27 --- CPST $15.27 $16.36 7.1%* Standard. Error 0 0.31 --- Equipment $2.69 $2.76 2.6%* Standard. Error 0 0.05 --- BST,CPST& Equipment $29.99 $31.70 5.7%* Standard. Error 0 0.19 --- Per Channel $0.62 $0.65 5.2%* Standard. Error 0 0.01 --- Per Satellite Channel $0.89 $0.95 6.4%* Standard. Error 0 0.01 --- Channels 52.3 51.1 -2.3% Standard. Error 0 0.50 --- Satellite Channels 37.5 36.1 -3.7%* Standard. Error 0 0.44 --- Total Responses 279 446 --- 1998 BST $11.66 $12.32 5.7%* Standard. Error 0 0.28 --- CPST $14.43 $15.02 4.1%* Standard. Error 0 0.29 --- Equipment $2.57 $2.63 2.3%* Standard. Error 0 0.05 --- BST,CPST& Equipment $28.66 $29.97 4.6%* Standard. Error 0 0.19 --- Per Channel $0.62 $0.65 4.6%* Standard. Error 0 0.01 --- Per Satellite Channel $0.90 $0.95 5.9%* Standard. Error 0 0.01 --- Channels 49.7 48.8 -1.8% Standard. Error 0 0.53 --- Satellite Channels 35.5 34.1 -3.8%* Standard. Error 0 0.43 --- Total Responses 263 447 --- 1997 BST --- --- --- Standard. Error --- --- --- CPST --- --- --- Standard. Error --- --- --- Equipment --- --- --- Standard. Error --- --- --- BST,CPST& Equipment $26.85 $28.04 4.4%* Standard. Error 0 0.19 --- Per Channel $0.60 $0.63 5.8%* Standard. Error 0 0.01 --- Per Sat Chan --- --- --- Standard. Error --- --- --- Channels 48.3 46.7 -3.3%* Standard. Error 0 0.54 --- Satellite Channels --- --- --- Standard. Error --- --- --- Total Responses 224 445 --- Total charge is for the BST, CPST, and equipment (i.e. a converter and remote control). An asterisk denotes a statistically significant difference between competitive and noncompetitive groups at a 95% level of confidence ATTACHMENT B-2 COMPARISON OF COMPETITIVE AND NONCOMPETITIVE GROUPS, BY SIZE STRATA AVERAGE MONTHLY RATES SIZE COMPETITIVE NONCOMPETITIVE $ DIFFERENCE BETWEEN MEANS % DIFFERENCE BETWEEN MEANS 1999 Large $30.88 $32.39 $1.51 4.9%* Standard Error 0 0.24 Number of Responses 98 253 Medium $29.43 $32.22 $2.78 9.5%* Standard Error 0 0.30 Number of Responses 91 110 Small $28.47 $28.80 $0.33 1.2% Standard Error 0 0.59 Number of Responses 90 83 1998 Large $29.37 $30.68 $1.31 4.5%* Standard Error 0 0.22 Number of Responses 86 255 Medium $28.19 $30.31 $2.12 7.5%* Standard Error 0 0.31 Number of Responses 87 106 Small $27.51 $27.34 -$0.17 -0.6% Standard Error 0 0.51 Number of Responses 90 86 1997 Large $27.40 $28.54 $1.14 4.2%* Standard Error 0 0.21 Number of Responses 64 263 Medium $26.32 $28.30 $1.98 7.5%* Standard Error 0 0.26 Number of Responses 80 102 Small $26.26 $26.17 -$0.09 -0.3% Standard Error 0 0.52 Number of Responses 80 80 Average monthly rates include BST, CPST, and equipment (i.e. converter and remote control). An asterisk denotes a statistically significant difference between competitive and noncompetitive groups at a 95% level of confidence. ATTACHMENT B-3 COMPARISON OF COMPETITIVE AND NONCOMPETITIVE GROUPS, BY SIZE STRATA NUMBER OF CHANNELS OFFERED AND PER CHANNEL RATES Number Of Channels Per Channel Rates SIZE COMPETITIVE NONCOMPETITIVE COMPETITIVE NONCOMPETITIVE 1999 Large 59.5 55.9 $0.54 $0.60 Standard Error 0 0.66 0 0.01 Responses 98 253 98 253 Medium 48.3 50.6 $0.64 $0.67 Standard Error 0 1.01 0 0.02 Responses 91 110 91 110 Small 39.0 38.7 $0.80 $0.77 Standard Error 0 1.15 0 0.02 Responses 90 83 90 83 1998 Large 56.2 53.7 $0.54 $0.59 Standard Error 0 0.70 0 0.01 Responses 86 255 86 255 Medium 45.9 47.1 $0.64 $0.67 Standard Error 0 0.97 0 0.02 Responses 87 106 87 106 Small 38.1 38.2 $0.80 $0.76 Standard Error 0 1.28 0 0.02 Responses 90 86 90 86 1997 Large 55.0 51.2 $0.52 $0.58 Standard Error 0 0.69 0 0.01 Responses 64 263 64 263 Medium 44.3 45.1 $0.62 $0.66 Standard Error 0 0.97 0 0.02 Responses 80 102 80 102 Small 36.6 37.0 $0.79 $0.75 Standard Error 0 1.24 0 0.02 Responses 80 80 80 80 ATTACHMENT B-4 REGRESSION RESULTS SHOWING THE EFFECTS OF COMPETITIVE STATUS, MSO AFFILIATION, SYSTEM SIZE, NUMBER OF CHANNELS, AND HOUSEHOLD INCOME ON AVERAGE MONTHLY RATES VARIABLE COEFFICIENT 1999 Low Penetration Dummy 0.032 (0.013) LEC Dummy -0.175 (0.016) Municipal Dummy -0.347 (0.061) Overbuild Dummy -0.029 (0.021) MSO Dummy 0.036 (0.024) Log of Reciprocal of Avg. Total Channels -13.01 (0.707) Log of Median Household Income 0.02 (.021) Intercept 3.476 (0.221) Adjusted R Square 0.407 Number of Observations 725 Impact of LEC &Overbuild Systems -0.189 1998 Low Penetration Dummy 0.033 (0.022) LEC Dummy -0.154 (.017) Municipal Dummy -0.379 (.069) Overbuild Dummy -0.023 (.022) MSO Dummy 0.035 (.025) Log of Reciprocal of Avg. Total Channels -11.843 (.722) Log of Median Household Income 0.022 (.022) Intercept 3.386 (.231) Adjusted R Square 0.366 Number of Observations 709 Impact of LEC &Overbuild Systems -0.165 Dependent variable is log of average monthly rate. Standard error of coefficient is in parenthesis. ATTACHMENT B-5 COMPARISON OF COMPETITIVE GROUP BY TEST FOR EFFECTIVE COMPETITION WITH NONCOMPETITIVE GROUP OVERBUILD LEC LOW PENETRATION MUNICIPAL NON COMPETITIVE GROUP 1999 Monthly Rate $30.82 $28.01 $30.51 $22.39 $31.70 Standard Error 0 0 0 0 0.19 % Difference (Between Competitive Subcategories and Noncompetitive Group) 2.9%* 13.2%* 3.9%* 41.6%* -- Number of Channels 50.6 59.3 42.6 54.9 51.1 Standard Error 0 0 0 0 0.50 % Difference (Between Competitive Subcategories and Noncompetitive Group) 1.0% -13.8%* 20.0%* -6.9%* -- Rate per Channel 0.64 0.49 0.77 0.42 0.65 Standard Error 0 0 0 0 0.01 % Difference (Between Competitive Subcategories and Noncompetitive Group) 1.6% 32.7%* -15.9%* 54.8%* -- Responses 42 87 145 5 446 1998 Monthly Rate $29.46 $26.97 $28.93 $21.11 $29.97 Standard Error 0 0 0 0 0.19 % Difference (Between Competitive Subcategories and Noncompetitive Group) 1.7%* 11.1%* 3.6%* 42.0%* -- Number of Channels 49.9 56.2 40.4 59.1 48.8 Standard Error 0 0 0 0 0.53 % Difference (Between Competitive Subcategories and Noncompetitive Group) -2.2%* -13.2%* 20.8%* -17.4%* -- Rate per Channel 0.62 0.49 0.77 0.36 0.65 Standard Error 0 0 0 0 0.01 % Difference (Between Competitive Subcategories and Noncompetitive Group) 4.8%* 32.7%* -16.0* 80.6%* -- Responses 41 74 144 4 447 Average monthly rates are for BST, CPST, and equipment (i.e. a converter and remote control). ATTACHMENT B-6 COMPARISON OF AVERAGE MONTHLY RATES (BY SIZE) OF REGULATED AND UNREGULATED SUBGROUPS WITHIN THE NONCOMPETITIVE GROUP SIZE REGULATED UNREGULATED $ DIFFERENCE BETWEEN MEANS % DIFFERENCE BETWEEN MEANS 1999 Large $33.06 $31.15 -$1.91 -5.8%* Standard Error 0.23 0.52 Number of Responses 165 88 Medium $32.31 $32.15 -$0.16 -0.5% Standard Error 0.41 0.41 Number of Responses 43 67 Small $31.05 $28.22 -$2.83 -9.1% Standard Error 0.95 0.69 Number of Responses 17 66 Total $32.46 $30.95 -$1.51 -4.7%* Standard Error 0.24 0.32 Number of Responses 225 221 1998 Large $31.28 $29.41 -$1.87 -6.0%* Standard Error 0.21 0.52 Number of Responses 174 81 Medium $30.30 $30.32 $0.02 0.1% Standard Error 0.52 0.38 Number of Responses 42 64 Small $28.64 $26.91 -$1.73 -6.0% Standard Error 0.77 0.62 Number of Responses 21 65 Total $30.50 $29.25 -$1.25 -4.1%* Standard Error 0.24 0.31 Number of Responses 237 210 Average monthly rates are for BST, CPST, and equipment (i.e. a converter and remote control). ATTACHMENT B-7 AVERAGE MONTHLY CHARGES FOR OTHER SERVICES COMPETITIVE GROUP NONCOMPETITIVE GROUP 1998 1999 1998 1999 Installation $29.41 $28.18 $35.20 $34.94 Standard Error 0 0 0.55 0.59 Disconnection $0.28 $0.31 $0.42 $0.48 Standard Error 0 0 0.12 0.13 Reconnection $21.20 $21.53 $21.88 $21.89 Standard Error 0 0 0.37 0.37 Tier Change $8.98 $8.42 $8.39 $8.55 Standard Error 0 0 0.41 0.39 Additional Outlet $9.21 $10.49 $12.73 $12.55 Standard Error 0 0 0.51 0.60 ATTACHMENT B-8 OPERATORS' EXPLANATION FOR CHANGES IN MONTHLY RATES FOR COMPETITIVE AND NONCOMPETITIVE GROUPS 1999 1998 RATE CHANGES ATTRIBUTED TO: Competitive % of Total NonComp % of Total Competitive % of Total NonComp % of Total Programming: Sports $0.23 16.5% $0.30 17.6% $0.18 11.8% $0.27 13.5% Standard Error 0 0.03 0 0.02 News $0.05 3.6% $0.07 4.1% $0.04 2.6% $0.07 3.5% Standard Error 0 0.03 0 0.01 Children's $0.06 4.3% $0.07 4.1% $0.03 2.0% $0.12 6.0% Standard Error 0 0.03 0 0.02 All Other $0.40 28.8% $0.41 24.1% $0.39 25.7% $0.56 28.0% Standard Error 0 0.03 0 0.05 Copyright Fees $0.00 0.0% $0.02 1.2% $0.00 0.0% -$0.01 -0.5% Standard Error 0 0.00 0 0.01 Channel Additions $0.11 7.9% $0.11 6.5% $0.15 9.9% $0.17 8.5% Standard Error 0 0.00 0 0.01 Upgrades $0.13 9.4% $0.20 11.8% $0.14 9.2% $0.19 9.5% Standard Error 0 0.04 0 0.02 Equipment $0.16 11.5% $0.18 10.6% $0.21 13.8% $0.20 10.0% Standard Error 0 0.04 0 0.02 Franchise $0.01 0.7% $0.00 0.0% $0.00 0.0% -$0.01 -0.5% Standard Error 0 0.00 0 0.00 Inflation $0.21 15.1% $0.17 10.0% $0.26 17.1% $0.28 14.0% Standard Error 0 0.02 0 0.04 Unspecified Costs $0.05 3.6% $0.10 5.9% $0.06 3.9% $0.10 5.0% Standard Error 0 0.02 0 0.02 Non-Cost Increases $0.06 4.3% $0.12 7.1% $0.07 4.6% $0.07 3.5% Standard Error 0 0.00 0 0.03 Reduction in Costs -$0.08 -5.8% -$0.05 -2.9% -$0.01 -0.7% -$0.01 -0.5% Standard Error 0 0.00 0 0.00 $ Change in Rate $1.39 100% $1.70 100% $1.52 100% $2.00 100% Responses 251 436 224 426 Change in average monthly rates shown above may not equal that shown in Tables 5 and 6 because rates shown there are based on a larger set of responses. ATTACHMENT C-1 AVERAGE NUMBER OF CHANNELS DEVOTED TO EACH CATEGORY OF PROGRAMMING COMPETITIVE GROUP NONCOMPETITIVE GROUP Category of Programming 1998 1999 %Change 1998 1999 %Change Total Number of Channels 53.3 55.6 4.3% 51.1 53.7 5.1% Standard Error 0 0 0.91 0.84 Public Access 2.7 3.1 14.8% 3.3 3.5 6.1% Standard Error 0 0 0.13 0.11 Broadcast 11.0 10.8 -1.8% 10.7 10.9 1.9% Standard Error 0 0 0.21 0.23 Children's Programming 2.7 3.3 22.2% 2.7 3.1 14.8% Standard Error 0 0 0.09 0.08 News Programming 5.6 5.8 3.6% 5.5 5.8 5.5% Standard Error 0 0 0.14 0.13 Sports Programming 3.7 4.0 8.1% 3.3 3.4 3.0% Standard Error 0 0 0.10 0.08 General Entertainment 27.6 28.7 4.0% 25.6 27.0 5.5% Standard Error 0 0 0.52 0.49 Responses 257 272 --- 430 430 --- These numbers may differ from numbers reported elsewhere because these numbers contain all CPST tiers, rather than the most highly subscribed CPST, as well as BST. ATTACHMENT C-2 OPERATORS THAT CHANGED THE NUMBER OF ACTIVE CHANNELS BETWEEN 1998 AND 1999 Responses Competitive Group Noncompetitive Group Regulated Group Unregulated Group No Change or Reduction 350 126 224 119 105 Increased Channels: Between 1 and 5 274 123 151 78 73 Between 6 and 10 45 14 31 12 19 Between 11 and 15 12 3 9 3 6 Between 16 and 20 12 4 8 4 4 Between 21 and 30 20 4 16 4 12 Between 31 and 50 12 5 7 5 2 ATTACHMENT D-1 Regression Results Showing The Effects of Clustering, Competitive Status, Median Household Income, and Number of Channels on Average Monthly Rates VARIABLE COEFFICIENT STANDARD ERROR Low Penetration Dummy .034 .013 LEC Dummy -.170 .016 Municipal Dummy -.339 .061 Overbuild Dummy -.025 .021 MSO Dummy .020 .025 Log of Reciprocal of Avg. Total Channels -13.42 .720 Log of Median Household Income .017 .021 Cluster Dummy .026 .011 Constant 3.516 .220 Adjusted R Square .417 Number of Observations 724 Notes on Attachment D-1: This equation is intended to measure the effects of clustering on average monthly rates. The form of the equation is analgous to that of the Benchmark equation shown in Attachment B-4 except that a cluster dummy variable was added to measure the effects of clustering. We assigned a value of one for each operator that was part of a cluster and a value of zero for those operators that were not part of a cluster. The dependent variable (log of average monthly rates) is the same in both equations. We expected the clustering variable to have a negative coefficient, i.e., an inverse relationship between clustering and average monthly rates. As clustering increases, we expected to find lower average monthly rates due to increasing economies of scale. When we estimated the equation, we found the opposite effect, the coefficient for the clustering variable was positive. This means that as clustering increased, average monthly rates also increased. This may be due to a variety of reasons not captured by the equation. ATTACHMENT D-2 TWO-STAGE LEAST SQUARES REGRESSION COEFFICIENTS FOR DEMAND EQUATION Dependent Variable Independent Variables Log of Franchise Subscribers Constant Competitive Status Log of ratio of Non-urban Population Log of Average Monthly Rate Log of Median Household Income Log of Number of Households Passed Log of Number of Satellite Channels Coefficient -45 -.49 -.17 -1.31 .24 .96 .59 Standard error (1.58) (.094) (.08) (.66) (.16) (.02) (.32) Adjusted R2 = .93 Number of Observations = 331. The number of observations are based on the number of valid responses that provided complete information for the variables included in the model. TWO-STAGE LEAST SQUARES REGRESSION COEFFICIENTS FOR DEMAND EQUATION SHOWING THE EFFECT OF DBS ON DEMAND FOR CABLE SERVICES Dependent Variable: Independent Variables*: Log of Franchise Subscribers Constant Competitive Status Log of Ratio of Non- urban Population Log of Average Monthly Rate Log of Median Household Income Log of Number of Households Passed Log of Number of Satellite Channels Log of Number of DBS Subscribers Coefficient -.10 -0.48 -0.17 -1.15 0.24 0.98 0.59 -0.032 Standard error (2.63) (0.11) (0.08) (..97) (0.16) (0.094) (0.32) (0.11) Adjusted R2 = .93 Number of Observations = 331 The number of observations are based on the number of valid responses that provided complete information for the variables included in the model Notes on Attachment D2: Attachments D2 shows our econometric estimates of the demand for cable services. Estimating a demand equation provides information about the sensitivity of cable subscriptions to the price of service and also permits examination of substitutability between cable and other services. The first table in Attachment D-2 contains our basic demand equation, and the second table augments it with a DBS variable. Our residual demand equation for cable services uses a set of variables similar to those used in previous academic studies. In our demand equation, the number of cable subscribers is the dependent variable (i.e., the variable determined by the other variables in the equation). This variable is a function of several independent variables (i.e., those that determine the dependent variable). The independent variables selected for this model are: (a) average monthly rate for programming services and equipment; (b) median household income; (c) number of households passed; (d) ratio of non-urban population to total population; (e) average number of satellite channels offered; and (f) competitive status. We selected these independent variables for the following reasons. Economic theory shows that price and consumer income should be selected as independent variables when constructing a demand equation. The number of satellite channels was selected as a quality factor since it represents a proxy for the quality of cable services received by consumers. The remaining variables capture demographic and other factors that influence the demand for cable services. These variables also serve as a proxy to capture the effects of the prices of competing services as well as the prices of all other goods and services which were not included in our study. In general, the coefficients in our estimated demand function were expected to have a positive or negative influence on the demand for cable service (i.e., signs), as follows. The average monthly rate for programming services and equipment was expected to have a negative sign that would indicate a decreasing demand for cable as the price of cable service rises. The sign for the coefficient of median household income was expected to be positive because we would expect the demand for cable services to increase as consumers' income rises. The number of households passed was expected to have a positive sign: as the number of households passed increases the potential market increases and, as a result, we would expect a larger number of subscribers. The ratio of non-urban population to total population was expected to have a negative sign because there is generally a lower penetration of cable service in rural areas and there may be a greater presence of non-cable video providers (mainly Direct-to-Home satellite providers) in those areas. The average number of satellite channels offered was expected to have a positive sign because we believe that, as more channels are offered, consumers will associate this with a higher quality of service and, as a result, demand more cable service. The competitive status of the cable operator was expected to have a negative sign. We believe that the presence of competitors in the market will take subscribers away from the incumbent operator and thus lead to lower cable demand for the incumbent. All of the estimated coefficients produced by this model have the signs that were expected. Some of these variables produce simultaneous (or two-way) relationships. For example, as mentioned above, we believe that the demand for cable service is sensitive to changes in average monthly cable rates and to the number of satellite channels offered. At the same time, as demand increases, this may enable cable operators to offer more channels and charge higher rates for their service. To handle this simultaneity problem, we chose a two-stage least squares ("TSLS") procedure, which addresses this problem in estimating the demand equation. The TSLS procedure uses a two-step method to purge the simultaneous relationship among the variables. In the first stage, we derive predicted values for certain variables and then we use those predicted values as independent variables in the second stage. Specifically, in the first stage, we estimated predicted values for average monthly rates and number of satellite channels. Next, in the second stage, we regress our dependent variable (number of cable subscribers) on the predicted values for these variables and on the actual values of the remaining variables (average household income, non-urban population, competitive status, and number of households passed in the service area) to estimate our demand equation for cable service. The estimated coefficients shown in the first table of Attachment D-2 were derived using this TSLS procedure. The predicted values used in the second stage were estimated in separate "first stage" regressions of the monthly rate and satellite channel variables on a set of instrument variables which served as independent variables in the equations. The set of instrument variables included log of median household income, and a number of demographic and regional variables that affect demand for cable. The demographic variables include log of county population density, log of ratio of non-urban population to total population, log of percent of county families in poverty, log of ratio of county population with a bachelor's degree, and log of county population living in owner occupied housing, log of percent of population under the age of 16, and log of percent of population living in condominiums. These demographic variables have been found to be important determinants of cable demand by other researchers in their studies of the cable industry. The regional instrument variables included in the model include the south, northeast, New England, and the west. These variables were used to account for regional differences in taste and consumer preferences for cable as well as other services. We also used MSO affiliation and whether or not the cable system was part of a cluster as additional instrument variables. Since the data used in our model are taken from a stratified sample, econometric theory indicates that the estimates will most likely be heteroskedastic. Hetroskedasticity is a common problem in econometric estimation of models that use data similar to our data. Econometric theory assumes that the differences between the estimated value and the actual value at each data point are independent of one another. With heteroskedastic estimates, by contrast, the differences between the estimated values and actual values vary systematically, e.g., grow larger as one of the variables grows larger. This problem, if it is not corrected, will cause some of the statistical characteristics of the model, such as the standard errors, to be unreliable. To deal with this influence, we used a procedure suggested by Halbert White that corrects for the problems introduced by hetroskedasticity. The estimated standard errors shown below are hetroskedasticity consistent . As shown in the first table of Attachment D-2, the coefficient for average monthly rates is minus 1.31. This suggests that the demand for cable service is somewhat price elastic (i.e., has a price elasticity of minus 1.31) and suggests that there are substitutes for cable services. In order to investigate the extent to which DBS may be one of those substitutes, we added a DBS variable to our demand model. The coefficients shown in the table are based on a demand equation identical to the one discussed above with the single exception that a DBS variable was added. Since the price for DBS service does not vary geographically, we used the number of DBS subscribers as the additional independent variable in this model. We hypothesized a negative coefficient for this variable suggesting that as the number of DBS subscribers increases, the demand for cable service decreases. Since there may be simultaneity between the number of DBS subscribers and the demand for cable services, we used a two-stage least squares procedure for this model similar to that explained above. Also, since the data used in our model are taken from a stratified sample, which tends to introduce heteroskedasticity, we used the procedure suggested by White to deal with this influence. The coefficients estimated from this model are shown in the second table of Attachment D-2. As hypothesized, the sign for the DBS coefficient is negative. Compared with the other coefficients, however, the coefficient for DBS subscribers is extremely small and also is not statistically significant (the standard error is far larger than the coefficient). While the result is consistent with DBS being a substitute for cable service, the small magnitude of the coeffient and lack of statistical significance support the conclusion that DBS exerts only a modest influence on the demand for cable service.