FCC REPORT SHOWS SOME TECHNOLOGIES THRIVE AS OTHERS FLAIL

However, Comrs. Copps and Adelstein, who concurred on the report, issued a joint statement in which they said they feared the annual competition report had turned into nothing more than a recitation of the record and not a real analysis of the competitive situation. “This report fails to examine adequately the circumstances that distinguish those places where competition is occurring and those where it is not,” they wrote: “It fails to evaluate barriers to greater competition. And it fails to consider sufficiently such important issued raised… as the availability of independently produced programming, children’s programming, locally produced programming, and non-English programming.” They said the report only scratched the surface and wondered why cable rates continually rose at a rate greater than inflation.

The 141-page report said that overall, due in part to congressional efforts in the last decade, technological advances and investment in new platforms for delivering video programming, the vast majority of Americans had more choices, but cable TV remained the dominant technology for the delivery of video programming. However, the report said that 10 years ago, cable operators served almost 100% of the nation’s multichannel subscribers, and today that had fallen to 75%. Meanwhile, DBS, which first became commercially available in 1993, has become the most significant national competitor to cable today, with almost 22% of the multichannel video provider (MVPD) marketplace through 2 companies, the report said. It found other delivery technologies, such as overbuilders, wireless cable systems, and private cable systems, still served only small numbers of subscribers in limited areas.

The total of subscribers to both cable and noncable MVPDs increased significantly over the last 10 years, the report said. A total of 60.3 million households subscribed to MVPD services at the end of 1993, increasing more than 56% by June 2003 to 94.1 million households. The number of cable subscribers continues to grow, reaching almost 70.5 million as of June 2003, up from 57.2 million at the end of 1993. However, in the last several years, cable subscribership has declined, the report said. As of June 2003, there were about the same number of cable subscribers as there were at the end of 1999. The total of noncable MVPD subscribers grew from 3.1 million at the end of 1993 to 11.23 million June 1998 and to 23.7 million June 2003.

The Bureau of Labor Statistics said that between the end of 1993 and June 2003, the Consumer Price Index (CPI), which measures general price changes, increased 25.5% while cable prices, also measured as a subcategory of the CPI, climbed 53%. Between June 2002 and June 2003, cable prices rose 5.1% and the overall CPI 2.1%. At the same time, the FCC report said that the number of video and nonvideo services offered by cable companies increased, including a substantial surge in the number of video channels, increased use of cable in terms of viewership and the addition of advanced service offerings such as the Internet and telephony, which customers paid for separately. Cable operators attributed rising rates to increased programming costs and higher labor expenditures.

The FCC said that in certain locations, cable operators’ pricing decisions might be affected by direct competition. Available evidence indicated that when an incumbent cable operator faced “effective competition,” as defined by the Communications Act, it responded by such things as cutting prices or adding channels without changing the monthly rate, as well as improving customer service and adding new services such as interactive programming. A recent General Accounting Office study found that in the rare place where there was wireline-based competition, cable rates were 15% lower.

The report said the continued growth of DBS still was attributable in part to the authority granted to DBS operators to distribute local broadcast TV stations in their local markets by the Satellite Home Viewer Improvement Act of 1999 (SHVIA), and an increase in the number of markets where such service was offered. Since its introduction, DBS has attracted former cable subscribers as well as consumers not previously subscribing to an MVPD, the FCC said.

Over the last year, the number of subscribers to MMDS and large dish satellite service (HSD) continued to decline, as did the participation of incumbent local exchange carriers in the distribution of video programming, while the number of subscribers to open video systems (OVS) and private cable remained relatively stable, although their market share remained small, the report said. Although subscribership to those services and their relative market share have been declining steadily over the last several years, their deployment and use has contributed significantly to the early acceptance of nonwireline alternatives to traditional MVPD service and has inspired current iterations of all-digital, wireless DBS services, the FCC said.

The report said that 10 years ago Congress and the FCC expected local exchange carrier (LEC) video systems to become the primary competitors to cable systems. In 1992, the Commission established the video dial tone framework that permitted LEC entry into the video marketplace consistent with statutory prohibitions. Then Congress amended the Communications Act to permit LECs’ entry in their telephone service areas under one of 4 statutory frameworks, including the open video system (OVS) framework. However, significant LEC entry has “failed to materialize.” Meanwhile, today some cable MSOs are offering circuit switched telephony, but most are waiting for IP technology to become widely available before accelerating their rollout of telephone service. Some of those cable operators are offering, or continuing to test, IP telephony products, the report said.

The FCC said the “most significant convergence of service offerings” was the pairing of Internet with video programming services. Today, virtually all of the major MSOs offer Internet access services via cable modems in large portions of their service areas and about half of all midsized and small cable operators provide that service. As of last June, there were more than 13.8 million cable modem high-speed Internet access subscribers, the FCC said.

The agency said noncable MVPDs continued to report barriers to entry, such as difficulties in obtaining programming from vertically integrated cable programmers and from unaffiliated programmers that made exclusive agreements with cable operators. Some have trouble accessing vital sports and regional news programming as a result of exemptions to the program access rules -- most notably, the terrestrial delivery of programming to distributors. The report said entry into providing service for multiple dwelling units (MDUs) was difficult because incumbent video programming distributors often had long-term and/or exclusive contracts. Some providers also found it difficult to obtain franchises from local govts. and in gaining access to utility poles needed to build out their systems.

The report said that since the FCC’s 1994 report, the broadcast industry had continued to grow in the number of operating TV stations (1,726 as of June 2003 from 1,518 in Nov. 1993), adding 1.3% more stations on average each year over the last 10 years. Ad revenue averaged an annual 6% increase since the 1994 Report, but audience levels continued to decline as they have for many years. In the 2002-2003 TV season, broadcast TV stations collectively (network affiliates, independent stations and public broadcast stations) accounted for an average 49 share of prime-time viewing for all TV households, down from an average 74 share 10 years earlier, the FCC said.

Although cable operators continued to acquire and trade systems, the report said consolidation of the top cable operators appeared to have declined slightly over the last year, after many years of rapid consolidation and concentration. For example, the 4 largest operators had 51.7% of all U.S. cable subscribers in June 2002, and a year later that number had dipped to 50.5%. In terms of one traditional economic measure, national concentration among the top MVPDs increased in the last year as the largest MSOs grew larger, and current levels were above those reported since the 1994 report, the FCC said. DBS operators DirecTV and EchoStar rank among the 5 largest MVPDs in terms of nationwide subscribership, along with 3 cable MSOs.