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Federal Communications Commission FCC 01-389

Before the

Federal Communications Commission

Washington, D.C. 20554

In the Matter of

Annual Assessment of the Status of

Competition in the Market for the

Delivery of Video Programming

)

CS Docket No. 01-129

EIGHTH ANNUAL REPORT

Adopted: December 27, 2001 Released: January 14, 2002

By the Commission: Commissioner Martin issuing a statement.

Table of Contents

Paragraph

I. Introduction ............ ................................................................................................... 1

A. Scope of this Report ............................................................................................. 2

B. Summary of Findings............................................................................................ 5

II. Competitors in the Market for the Delivery of Video Programming..................................... 15

A. Cable Industry.. ................................................................................................... 15

1. General Performance................................................................................ 16

2. Financial Performance.............................................................................. 23

3. Capital Acquisition and Disposition.......................................................... 30

4. Provision of Advanced Broadband Services .............................................. 34

B. Direct-to-Home Satellite Services ......................................................................... 55

1. Direct Broadcast Satellite Service............................................................. 55

2. Home Satellite Dishes .............................................................................. 67

C. Multichannel Multipoint Distribution Service........................................................ 68

D. Satellite Master Antenna Television Systems......................................................... 73

E. Broadcast Television Service ................................................................................ 78

F. Other Entrants.. ................................................................................................... 89

1. Internet Video.......................................................................................... 89

2. Home Video Sales and Rentals................................................................. 95

Federal Communications Commission FCC 01-389

G. Local Exchange Carriers....................................................................................... 99

H. Electric and Gas Utilities....................................................................................... 104

I. Broadband Service Providers, Open Video System Operators, and Overbuilders..... 107

III. Market Structure and Conditions Affecting Competition..................................................... 116

A. Horizontal Issues in the Market for the Delivery of Video Programming................. 116

1. Competitive Issues in the Market for the Delivery of Video Programming.. 118

2. Competitive Issues in the Market for the Purchase of Video Programming . 137

B. Vertical Integration and Other Programming Issues ............................................... 156

1. Status of Vertical Integration .................................................................... 156

2. Other Programming Issues ....................................................................... 161

C. Technical Issues ................................................................................................... 186

1. Interactive Television............................................................................... 187

2. Navigation Devices.................................................................................. 191

3. Cable Modems......................................................................................... 194

IV. Competitive Responses . ................................................................................................... 196

V. Administrative Matters.. ................................................................................................... 210

Appendices

A. List of Commenters

B Cable Industry Tables

C. Horizontal Issues

D. Vertical Integration Tables

Federal Communications Commission FCC 01-389

I. INTRODUCTION

This is the Commission’s eighth annual report (“

2001 Report

”) to Congress on the status of

competition in the market for the delivery of video programming.

Section 628(g) of the

Communications Act of 1934, as amended (“Communications Act”), requires the Commission to report

annually to Congress on the status of competition in the market for the delivery of video programming.

Congress imposed this annual reporting requirement in the Cable Television Consumer Protection and

Competition Act of 1992 (“1992 Cable Act”)

as a means of obtaining information on the competitive

status of markets for the delivery of video programming.

A. Scope of this Report

The

2001 Report

updates the information in our previous reports and provides data and

information that summarize the status of competition in the market for the delivery of video

programming. The information and analysis provided in this report are based on publicly available data,

filings in various Commission proceedings, and information submitted by commenters in response to a

Notice of Inquiry

(

“Notice”

) in this docket.

To the extent that information provided in previous annual

reports is still relevant, we do not repeat that information in this report other than in an abbreviated

fashion, and provide references to the discussions in prior reports.

In Section II, we examine the cable television industry, existing multichannel video

programming distributors (“MVPDs”) and other program distribution technologies and potential

competitors to cable television. Among the MVPD systems or techniques discussed are direct broadcast

satellite (“DBS”) services and home satellite dishes (“HSDs”), wireless cable systems using frequencies

in the multichannel multipoint distribution service (“MMDS”), private cable or satellite master antenna

The Commission’s previous reports appear at:

Implementation of Section 19 of the 1992 Cable Act (Annual

Assessment of the Status of Competition in the Market for the Delivery of Video Programming)

, CS Docket No. 94-

48, First Report (“

1994 Report

”), 9 FCC Rcd 7442 (1994);

Annual Assessment of the Status of Competition in the

Market for the Delivery of Video Programming

, CS Docket No. 95-61, Second Annual Report (“

1995 Report

”),

11 FCC Rcd 2060 (1996);

Annual Assessment of the Status of Competition in the Market for the Delivery of Video

Programming

, CS Docket No. 96-133, Third Annual Report (“

1996 Report

”), 12 FCC Rcd 4358 (1997);

Annual

Assessment of the Status of Competition in Markets for the Delivery of Video Programming

, CS Docket No. 97-141,

Fourth Annual Report (“

1997 Report

”), 13 FCC Rcd 1034 (1998);

Annual Assessment of the Status of Competition

in Markets for the Delivery of Video Programming

, CS Docket No. 98-102, Fifth Annual Report (“

1998 Report

”),

13 FCC Rcd 24284 (1998);

Annual Assessment of the Status of Competition in Markets for the Delivery of Video

Programming

, CS Docket No. 99-230, Sixth Annual Report (“

1999 Report

”), 15 FCC Rcd 978 (2000); and

Annual

Assessment of the Status of Competition in the Market for the Delivery of Video Programming

, CS Docket No. 00-

132, Seventh Annual Report (“

2000 Report

”), 16 FCC Rcd 6005 (2001).

Communications Act of 1934, as amended, § 628(g), 47 U.S.C. § 548(g).

Pub. L. No. 102-385, 106 Stat. 1460 (1992).

One of the purposes of Title VI of the Communications Act is to “promote competition in cable communications

and minimize unnecessary regulation that would impose an undue economic burden on cable systems.” 47 U.S.C.

§ 521(6).

Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming

, CS Docket

No. 00-129, Notice of Inquiry (

“Notice”

), 16 FCC Rcd 13330 (2001). Appendix A provides a list of commenters

and the abbreviations by which they are identified herein.

Federal Communications Commission FCC 01-389

television (“SMATV”) systems as well as broadcast television service. We also consider other existing

and potential distribution technologies for video programming, including the Internet, home video sales

and rentals, local exchange carriers (“LECs”), and electric and gas utilities. In addition, for the first time

this year, we address broadband service providers (“BSPs”), a new category of entrant into the video

marketplace.

In Section III of this report, we examine market structure and competition. We evaluate

horizontal concentration in the multichannel video marketplace and vertical integration between cable

television systems and programming services. We also discuss competitors serving multiple dwelling

unit (“MDU”) buildings. We further address programming issues and technical advances. In Section IV,

we report on the competitive effects in communities where consumers have a choice between an

incumbent cable operator and at least one other MVPD and provide several examples of the incumbent

cable operator’s response to such competition.

B. Summary of Findings

In the

2001 Report

, we examine the status of competition in the market for the delivery of

video programming, discuss changes that have occurred in the competitive environment over the last year,

and describe barriers to competition that continue to exist. Overall, the Commission finds that

competitive alternatives continue to develop. Cable television still is the dominant technology for the

delivery of video programming to consumers in the MVPD marketplace, although its market share

continues to decline. As of June 2001, 78 percent of MVPD subscribers received their video

programming from a franchised cable operator, compared to 80 percent a year earlier.

The total number of subscribers to both cable and non-cable MVPDs continues to increase.

A total of 88.3 million households subscribe to multichannel video programming services as of June

2001, up 4.6 percent over the 84.4 million households subscribing to MVPDs in June 2000. This

subscriber growth accompanied a 2.7 percentage point increase in MVPDs’ penetration of television

households to 86.4 percent as of June 2001.

Since the

2000 Report

, the number of cable subscribers continued to grow, reaching almost

69 million as of June 2001, up about 1.9 percent from the 67.7 million cable subscribers in June 2000.

The total number of non-cable MVPD subscribers grew from 16.7 million as of June 2000 to 19.3 million

as of June 2001, an increase of more than 15 percent.

The growth of non-cable MVPD subscribers continues to be primarily due to the growth of

DBS. DBS appears to attract former cable subscribers and consumers not previously subscribing to an

MVPD. The continued growth of DBS is, in part, attributable to the authority granted to DBS operators

to distribute local broadcast television stations in their local markets by the Satellite Home Viewer

Improvement Act of 1999 (“SHVIA”). Between June 2000 and June 2001, the number of DBS

subscribers grew from almost 13 million households to about 16 million households, which is nearly two

and a half times the cable subscriber growth rate. DBS subscribers now represent 18.2 percent of all

MVPD subscribers. Over the last year, the number of subscribers to, and market shares of, MMDS,

The number of MVPD households reported here, and the associated percentages, may be as much as two million

households too high because a household that subscribes to more than one MVPD (e.g., cable and DBS) is included

as a subscriber to both services.

See

Centris,

Digital Cable Subscriber Order 4x as Many PPV Movies and 2x as

Many PPV Events as Analog Households; 50% More Events than DBS Households

(press release), Mar. 20, 2001, at

http://www.centris.com/announcements/re1032001.htm.

Federal Communications Commission FCC 01-389

SMATV, and OVS have remained relatively stable. However, the number of HSD subscribers continues

to decline.

During the period under review, cable rates rose faster than inflation. According to the

Bureau of Labor Statistics, between June 2000 and June 2001, cable prices rose 4.24 percent compared to

a 3.25 percent increase in the Consumer Price Index (“CPI”), which measures general price changes.

Concurrently with these rate increases, capital expenditures for the upgrading of cable facilities increased,

the number of video and non-video services offered increased, and programming costs increased. We

also note that cable operators’ pricing decisions may be affected by direct competition. Available

evidence indicates that when an incumbent cable operator faces “effective competition,” as defined by the

Communications Act, it responds in a variety of ways, including lowering prices or adding channels

without changing the monthly rate, as well as improving customer service and adding new services such

as interactive programming.

10.

The Telecommunications Act of 1996 (“1996 Act”)

removed barriers to LEC entry into the

video marketplace to facilitate competition between incumbent cable operators and telephone companies.

At the time of the 1996 Act, it was expected that LECs would compete in the video delivery market and

that cable operators would provide local telephone exchange service. We previously reported that there

had been an increase in the amount of video programming provided to consumers by telephone

companies, although the expected technological convergence that would permit use of telephone facilities

for video service had not yet occurred.

This year, we find that incumbent local exchange carriers

(“ILECs”) have largely exited the video business, instead mainly reselling DBS service. A few smaller

LECs offer, or are preparing to offer, MVPD service over existing telephone lines. Some competitive

local exchange carriers (“CLECs”) continue to pursue MVPD entry and competition. Alternatively,

several cable MSOs offer telephone service. Circuit-switched telephony is still the only type of

commercially deployed cable telephony, but trials continue for cable-delivered IP telephony. MSOs, such

as Cox and AT&T, continue to deploy circuit-switched cable telephony. Others, like Cablevision and

Comcast, continue to offer cable telephony where it has already been deployed, but generally are waiting

for Internet Protocol (“IP”) technology to become widely available before accelerating their rollout of

telephone service. AT&T, AOL Time Warner, Comcast, and Charter currently are testing IP telephony,

while Cox has plans for IP telephony trials in 2002.

11.

The most significant convergence of service offerings continues to be the pairing of Internet

service with other service offerings. There is evidence that a wide variety of companies throughout the

communications sector are providing multiple services, including data access. Cable operators continue

to expand the broadband infrastructure that permits them to offer high-speed Internet access. The most

popular way to access the Internet over cable is still through the use of a cable modem and personal

computer, though a small number of users continue to access the Internet through their television and a

specially designed set-top box, rather than the personal computer. Virtually all of the major MSOs offer

Internet access via cable modems in portions of their service areas. Like cable, the DBS industry is

developing ways to bring advanced services to their customers. For example, DirecTV currently offers a

satellite-delivered high-speed Internet access service with a telephone return path called DirecPC.

EchoStar now offers its subscribers a similar service, called Starband, in cooperation with a subsidiary of

Gilat. Many SMATV operators offer local and long distance telephone service, and Internet access along

with video service. In addition, digital technology makes it possible for MMDS operators, who provide

Pub. L. No. 104-104, 110 Stat. 56 (1996).

2000 Report, 16 FCC Rcd at 6009.

Federal Communications Commission FCC 01-389

video service in limited areas, to offer two-way services, such as high-speed Internet service and

telephony. Broadband service providers are building advanced systems specifically to offer a bundle of

services, including video, voice, and high-speed Internet access.

12.

Non-cable MVPDs continue to report that regulatory and other barriers to entry limit their

ability to compete with incumbent cable operators. Non-cable MVPDs continue to experience some

difficulties in obtaining programming from vertically integrated cable programmers and from unaffiliated

programmers which continue to make exclusive agreements with cable operators. In MDUs, potential

entry may be discouraged or limited because an incumbent video programming distributor has a long-

term and/or exclusive contract. In addition, non-cable MVPDs report problems obtaining franchises from

local governments and difficulties in gaining access to utility poles needed to build out their systems.

13.

Our findings as to particular distribution mechanisms operating in markets for the delivery of

video programming including the following:

Cable Systems: Since the 2000 Report, the cable television industry has

continued to grow in terms of subscribership (a 1.9 percent increase from June

2000), revenues (an approximate 3.7 percent increase between 1999 and 2000),

audience ratings (non-premium cable viewership rose from an approximate 46

share in June 2000 to slightly over a 48 share in 2001), and expenditures on

programming. The number of national satellite-delivered video programming

services, which declined slightly last year, increased from 281 to 294, between

June 2000 and June 2001.

The cable industry has continued to invest in improved facilities. As a result,

there have been increases in channel capacity, the deployment of digital

transmissions, and non-video services such as Internet access. Cable operators

also offer telephony, although the use of integrated facilities remains primarily

experimental.

Direct-to-Home (“DTH”) Satellite Service (DBS and HSD): Video service is

available from high power DBS satellites that transmit signals to small DBS dish

antennas installed at subscribers’ premises, and from low power satellites

requiring larger antennas. DBS has over 16 million subscribers, an increase of

approximately 24 percent since the 2000 Report. Between June 2000 and June

2001, the number of HSD subscribers, measured as the number of HSD users that

actually purchase programming packages, declined from 1.5 million to one

million, a decrease of 32 percent. DirecTV and EchoStar are each among the ten

largest providers of multichannel video programming service. In June 2001,

DBS represented a 18.2 percent share of the national MVPD market and HSD

represented another 1.1 percent of that market.

Wireless Cable Systems: Currently, the wireless cable industry (“MMDS”)

provides competition to the cable industry in limited areas. MMDS

subscribership remained at approximately 700,000 subscribers between June

2000 and June 2001. With the advent of digital MMDS and the Commission’s

authorization of two-way MMDS service, it appears that most MMDS spectrum

eventually will be used to provide high-speed data services. Wireless cable

represented a 0.8 percent share of the national MVPD market in June 2001.

Federal Communications Commission FCC 01-389

SMATV Systems: SMATV systems, also know as private cable operators, use

some of the same technology as cable systems, but do not use public rights-of-

way, and focus principally on serving subscribers living in MDUs. As of June

2001, SMATV subscribership remained unchanged from last year at 1.5 million

subscribers, representing approximately 1.7 percent of national MVPD

subscribership.

Broadcast Television: Broadcast networks and stations are competitors to

MVPDs in the advertising and program acquisition markets. Broadcast networks

and stations also are suppliers of content for distribution by MVPDs. In addition,

they supply video programming directly to those television households that are

not MVPD subscribers and to television sets in MVPD households that are not

connected to such service. In this regard, one study estimates that 81 million, or

approximately 30 percent of the nation’s 267 million television sets, receive

broadcast signals over-the-air. Since the

2000 Report

, the broadcast industry has

continued to grow in the number of operating stations (from 1,663 in 2000 to

1,678 in 2001) and in advertising revenues ($41 billion in 2000, a 12.2 percent

increase over 1999). Audience levels, however, continue to decline. During the

2000-2001 television season, the seven television networks accounted for a 57

percent share of prime time viewing for all television households, compared to a

59 share a year earlier. Broadcast television stations continue to deploy digital

television (“DTV”) service. Eighty-three percent of the more than 1,300

commercial television stations have been granted a DTV construction permit or

license and 229 are on the air with DTV operation.

LEC Entry: The 1996 Act expanded opportunities for LECs to enter the market

for the delivery of video programming. In the

2000 Report

, we noted that even

the most aggressive LECs were reducing or terminating their efforts in the video

marketplace. This year, we find that ILECs have largely exited the video

business, instead mainly reselling DBS service. The exceptions to this trend are

BellSouth, which, in addition to reselling DBS service, continues to operate some

overbuild cable systems, and a number of smaller LECs that are offering, or

preparing to offer, MVPD service over telephone lines. Some CLECs, most

notably RCN, continue to pursue MVPD entry. Previously, Ameritech, now

owned by SBC, was the most significant LEC provider of in-region cable service.

In the past year, SBC sold these systems to WideOpenWest, which we consider a

BSP and discuss below. Qwest Communications International (formerly US

West) continues to offer video, high-speed Internet access, and telephone service

over existing copper telephone lines using very high-speed digital subscriber line

(“VDSL”) in Omaha and Phoenix. Reports indicate that 40 to 50 LECs, mostly

small, also are using VDSL to offer a bundle of services, including video, over

telephone lines.

Open Video Systems: In the 1996 Act, Congress established a new framework

for the delivery of video programming -- the open video system (“OVS”). Under

these rules, a LEC or other entrant may provide video programming to

subscribers, although the OVS operator must provide non-discriminatory access

to unaffiliated programmers on a portion of its channel capacity. Several BSPs,

including some that are CLECs, operate open video systems, hold OVS

Federal Communications Commission FCC 01-389

certifications, or hold local OVS franchises. RCN is by far the largest OVS

operator in the country.

Broadband Service Providers: In this year’s

Report

, we add a new section to

recognize the growing importance of providers that are overbuilding existing

cable systems with state-of-the-art systems that offer a bundle of

telecommunications services, including video, voice, and high-speed Internet

access. BSPs are carefully selecting which communities to serve, based on

factors such as favorable demographics and high population density. Their

strategy is to increase per subscriber revenue and decrease churn. Yet, BSPs face

considerable challenges inherent in entering markets with entrenched

competitors. RCN is the largest BSP, serving approximately 443,000 subscribers

in New York City, Washington, D.C., and surrounding suburbs, South San

Francisco, Boston and its suburbs, Northern New Jersey, and suburbs of

Philadelphia. WideOpenWest (“WOW”) recently became the second largest

BSP with its acquisition of the former Ameritech cable systems, which serve

about 300,000 subscribers. In addition, WOW is constructing systems in selected

metropolitan Denver communities. The third largest BSP is Knology, which

operates or is building systems in the Southeast, and currently serves 110,000

subscribers.

Internet Video: As of July 2001, 58 percent of the U.S. population has Internet

access at home. Real-time and downloadable video accessible over the Internet

continues to become more widely available and the amount of content also is

increasing. Despite the evidence of increased interest in Internet video

deployment and use, the medium is still not seen as a direct competitor to

traditional video service. Broadcast quality Internet video requires a high-speed

broadband connection at speeds which most current broadband providers cannot

guarantee.

Home Video Sales and Rentals: We consider the sale and rental of home video,

including videocassettes, DVDs, and laser discs, part of the video marketplace

because they provide services similar to the premium and pay-per-view offering

of MVPDs. About 90 percent of all U.S. households have at least one VCR. The

number of homes with DVD players has grown rapidly since their introduction,

with the number of homes with DVD players expected to reach 25 million by the

end of 2001. The newest home video is the personal video recorder (“PVR”).

One source reports that 500,000 PVRs have been sold since they were introduced

two years ago.

Electric and Gas Utilities: Several electric and gas utilities continue to move

forward with ventures involving multichannel video programming distribution.

Some of their characteristics, such as ownership of fiber optic networks and

access to public rights-of-way, make them competitively significant. Some

utilities offer telecommunications services on their own, while others partner

with broadband service providers, such as Starpower, RCN’s joint venture with

PEPCO. It also appears that utilities, particularly municipal utilities in rural

areas, are willing to build advanced telecommunications networks to offer a full

range of services where incumbent cable operators and telephone companies are

Federal Communications Commission FCC 01-389

not. Reports indicate that 357 public power systems offer communications

services.

14.

We also find that:

Consolidations within the cable industry continue as cable operators acquire and

trade systems. The ten largest operators now serve close to 87

percent of all U.S.

cable subscribers. In terms of one traditional economic measure, national

concentration among the top MVPDs has decreased since last year as the largest

MSOs have become more equal in size, and it remains below the levels reported

in earlier years.

DBS operators DirecTV and EchoStar rank among the ten

largest MVPDs in terms of nationwide subscribership along with eight cable

multiple system operators (“MSOs”). As a result of acquisitions and trades,

cable MSOs have continued to increase the extent to which their systems form

regional clusters whereby the largest MSOs concentrate their operations in

specific geographic areas. Currently, close to 55 million of the nation’s cable

subscribers are served by systems that are included in regional clusters. By

clustering their systems, cable operators may be able to achieve efficiencies that

facilitate the provision of cable and other services, such as telephony.

The number of satellite-delivered programming networks has increased by 13,

from 281 in 2000 to 294 in 2001. Vertical integration of national programming

services between cable operators and programmers remained at 35 percent after

several years of decline. Although AT&T spun off its Liberty Media

programming interests, Liberty Media is still included in this percentage since it

owns several cable systems in Puerto Rico. In 2001, four of the top seven cable

MSOs held ownership interests in satellite-delivered programming services.

Sports programming warrants special attention because of its widespread appeal

and strategic significance for MVPDs. The

2001 Report

identifies 80 regional

networks, 29 of which are sports channels, many owned at least in part by MSOs.

There are also 29 regional and local news networks that compete with local

broadcast stations and national cable networks.

The program access rules adopted pursuant to the 1992 Cable Act were designed

to ensure that other MVPDs can access vertically-integrated satellite delivered

programming on non-discriminatory terms. We recognize that the terrestrial

distribution of programming, including in particular regional sports

programming, could have an impact on the ability of alternative MVPDs to

compete in the video marketplace.

Cable operators and other MVPDs continue to develop and deploy advanced

technologies, especially digital compression techniques, to increase capacity and

enhance the capabilities of their transmission platforms. These technologies

Traditional economic measures (e.g., the Herfindahl-Hirschman Index or HHI) are based on market shares or the

squaring of market shares such that large companies are weighed more heavily than small companies. The HHI (and

apparent levels of concentration) decline with rising equality among any given number of companies in terms of

market shares even if these firms individually have larger shares of the markets.

Federal Communications Commission FCC 01-389

allow MVPDs to deliver additional video options and other services (e.g., data

access, telephony, and interactive services) to subscribers. As reported last year,

MVPDs are beginning to develop and deploy interactive television (“ITV”)

services. In particular, this year, cable operators and other MVPDs have devoted

most of their attention to the development of video-on-demand services.

In the last year, there have been a number of developments regarding navigation

devices and cable modems used to access a wide range of services offered by

MVPDs. Most notably, cable operators are favoring less powerful and less

expensive set-top boxes. It is unclear how these modified plans will affect

advance service offerings. CableLabs is continuing its efforts to develop next

generation navigation devices with its initiative for the OpenCable Application

Platform (“OCAP”) or “middleware” specification. The Consumer Electronics

Association maintains that until this software standard is complete,

manufacturers will not be able to build advanced set-top boxes for a retail

market. In another effort intended to facilitate retail availability of set-top boxes,

cable operators announced an initiative to encourage their set-top box suppliers

to make their digital set-top boxes with embedded security available at retail.

II. COMPETITORS IN THE MARKET FOR THE DELIVERY OF VIDEO

PROGRAMMING

A. Cable Industry

15.

This section addresses the performance of franchised cable system operators during the past

year.

We address four different areas of performance. First, we report figures of general performance

including subscriber levels, availability of basic services, and viewership. Second, we discuss the cable

industry’s financial performance, including its revenue, cash flow status, stock valuations, and system

transactions. Third, we examine the cable industry’s acquisition and disposition of capital, including the

amount of funds raised, and how these funds are being used to upgrade physical plant and to acquire new

systems. Lastly, we address the growth of advanced broadband services, including cable modem service,

digital video services, and broadband telephony.

1. General Performance

16.

Since our last

Report

, the cable industry has continued to grow in terms of homes passed,

basic cable subscribership,

premium service subscriptions,

basic cable viewership, and channel

A franchise is an authorization supplied by a federal, state, or local government entity to own or construct a cable

system in a specific area. 47 U.S.C. §§ 522(9), 522(10). A cable system operator is "any person or group of persons

(A) who provides cable service over a cable system, and directly or through one or more affiliates owns a significant

interest in such cable system; or (B) who otherwise controls or is responsible for, through any arrangement, the

management and operation of such a cable system." 47 U.S.C. § 522(5).

Homes passed is the total number of households capable of receiving cable television service.

We refer to all cable programming networks offered as a part of program packages or tiers as "basic cable

networks." The primary level of cable television service is commonly referred to as "basic service" and must be

taken by all subscribers. The content of basic service varies widely among cable systems but, pursuant to the

Communications Act, must include all local television signals and public, educational, and governmental access

channels and, at the discretion of the cable operator, may include satellite delivered cable programming channels

(continued.…)

Federal Communications Commission FCC 01-389

capacity.

Basic cable penetration, the ratio of the number of cable subscribers to the total number of

households passed by the system, has declined slightly since our last report. Deployment of advanced

broadband service offerings, however, continued during 2000 and the first half of 2001. These services

include offerings of digital video, Internet access through cable, interactive cable,

and facilities-based

broadband telephony.

17.

Cable’s Capacity to Serve Television Households

. The number of U.S. homes with at least

one television ("TV households") was reported as 100.8 million during the 1999-2000 television season.

During the 2000-2001 television season the number of TV households was reported as 102.2 million, an

increase of 1.4 percent.

The number of homes passed by cable was approximately 96.6 million at the

end of 1999, 103.2 million at the end of 2000, and by the end of June 2001 was estimated to be 104

million.

The most widely used industry measurement of cable availability, however, is the

number of

homes passed expressed as a percentage of TV households. Based on data from Paul Kagan Associates,

homes passed as a percentage of TV households was estimated to be 97.1 percent as of June 2001.

In its

comments, NRTC once again proposes that this figure is flawed.

This statistic, it notes, varies

depending on the estimate of homes passed and whether the comparison is based on TV households, all

households, all occupied housing units, or all housing units in the United States, as some have

(…continued from previous page)

carried on the system. One or more expanded tiers of service, known as cable programming service (“CPS”) tiers

for purposes of rate regulation, and often known as expanded basic, also may be offered to subscribers. These

expanded tiers of service usually include additional satellite delivered cable programming channels. 47 U.S.C.

§§ 543(b)(7), 543(l)(2).

Premium services are cable networks provided by a cable operator on a per channel basis for an extra monthly fee.

Pay-per-view (“PPV”) services are cable networks provided on a per program basis. PPV service is a separate

category from premium service. 47 U.S.C. §§ 543(b)(7), 543(l)(2).

Channel capacity is defined as the maximum number of 6 MHz video channels that a system can carry

simultaneously. Video channel capacity can be decreased on any given system simply by using bandwidth for other

services such as connectivity to the Internet.

The interactive cable services discussed here include video-on-demand (“VOD”), interactive guides, and

interactive programming.

Nielsen Media Research, U.S. Television Household Estimates September 2000, DMA Rankings. Nielsen Media

Research estimates the number of television households annually, and industry practice is to use this figure

throughout the television broadcast season, which begins in September and ends in August of the following calendar

year. Thus, the figure for TV households in June 2001 is the same as the figure for December 2000. In App. B, Tbl.

B-1, we report the number of television households as of year-end 2000 and June 2001. These figures are from Paul

Kagan Associates, and we use these estimates of television households for consistency with the remainder of

reported figures in this section.

Nielsen Media Research, U.S. Television Household Estimates September 2001, DMA Rankings. See also App.

C, Tbl. C-1.

See App. B, Tbl. B-1.

Id.

See 2000 Report, 16 FCC Rcd at 6016-7.

Federal Communications Commission FCC 01-389

suggested.

NRTC suggests again this year that the number of homes passed as a percentage of TV

households could be as low as 81 percent.

18.

Subscribership

. Cable television subscribership grew from 67.3 million subscribers at the

end of 1999 to 68.5 million subscribers at the end of 2000, an increase of 1.8 percent.

It continued to

grow to an estimated 69 million subscribers by June 2001, a six month increase of approximately 0.7

percent.

Cable penetration declined between 1999 and 2000, decreasing from 69.7 percent at the end of

1999 to 66.4 percent at the end of 2000, and 66.3 percent by June 2001.

The percentage of TV

households subscribing to cable also decreased over the last year, declining from 67.3 percent in 1999 to

64.4 percent of all TV households by the end of 2000 and June 2001.

The number of homes subscribing

to one or more premium cable services increased from 35.5 million homes at the end of 1999 to 36.8

million homes at the end of 2000, an increase of 3.7 percent.

For the first half of 2001, premium cable

subscribers increased again, reaching 37.2 estimated subscribers, a six-month increase of about one

percent.

The number of premium services to which homes are subscribing (known as "premium units")

increased 4.9 percent by the end of 2000 to 55.6 units and by June 2001, to 56.4 units.

19.

Channel Capacity

. As part of its consideration of issues relating to the carriage of DTV

stations by cable operators, the Commission conducted a survey of, among other things, cable system

channel capacity.

Preliminary results from the survey revealed that 48.8 million subscribers, or

approximately 87 percent of all subscribers served by cable MSOs included in the survey are served by

systems that provided bandwidth of 550 MHz or higher, and more than 76 percent are served by systems

that provided bandwidth of 750 MHz or higher.

Cable operators have allocated this bandwidth in a

Id. See also National Telecommunications and Information Administration, United States Department of

Commerce and Rural Utilities Service, United States Department of Agriculture, Advanced Telecommunications in

Rural America, The Challenge of Bringing Broadband Service to All Americans (“NTIA/RUS Report”), April 2000.

NRTC Comments at 6-11; see also 2000 Report, 16 FCC Rcd at 6016-7.

See App. B, Tbl. B-1.

Id.

Id. The percentage of TV households subscribing to cable is the ratio of the number of cable subscribers to the

total number of households with at least one television.

See App. B, Tbl. B-2.

Id.

See Carriage of Digital Television Broadcast Signals, Amendment to Part 76 of the Commission’s Rules,

Implementation of the Satellite Home Viewer Improvement Act of 1999: Local Broadcast Signal Carriage Issues,

Application of Network Non-Duplication, Syndicated Exclusivity and Sports Blackout Rules to Satellite

Retransmission of Broadcast Signals, CS Docket Nos. 98-120, 00-96, 00-2, First Report and Order and Further

Notice of Proposed Rulemaking (“DTV Signal Carriage Proceeding”), 16 FCC Rcd 2598 (2001).

MSOs surveyed included the top twelve cable operators, and four other relatively large operators, comprising

approximately 90 percent of all cable subscribers (AT&T Broadband, Time Warner, Comcast, Charter, Cox,

Adelphia, Cablevision, Insight, Mediacom, CableOne, RCN, Armstrong Cable, Classic Communications, Service

Electric Cable TV, BellSouth, and Northland). Results are based on responses provided by twelve MSOs. Not all

MSOs were included in the results due to lack of response or quality of data submitted.

Federal Communications Commission FCC 01-389

variety of ways, using a portion of this bandwidth for the provision of analog video, and a portion for the

provision of digital video, with the remainder allocated for services such as Internet access and telephony.

For example, systems with 750 MHz system capacity on average allocated 478 MHz or approximately 80

channels to analog video. Also, on average, 750 MHz systems allocated 140 MHz for downstream digital

video, which may yield a range of channels, depending on the modulation technique and compression

ratio employed.

20.

Viewership

. As reported last year, viewership shares of non-premium cable networks have

continued to grow over the past decade, while viewership shares of broadcast television stations have

steadily declined. This trend continues. Audience share statistics for Monday through Sunday, 24 hours

a day, show that non-premium cable audience shares rose 5.7 percent from an average 45.5 share

between July 1999 through June 2000, to an average 48.1 share between July 2000 and June 2001.

Broadcast television audience shares decreased 4.7

percent from an average 59.6 share from July 1999

through June 2000, to an average 56.8 share between July 2000 and June 2001.

21.

Cable Networks

. Although the number of cable networks, on average, increased in 2000,

several categories of networks decreased. For example, in 2000, the number of non-premium cable

networks decreased from 147 to 130, an 11.6 percent decline.

The number of premium networks also

decreased during 2000, from 43 at year-end 1999 to 40 at year-end 2000.

These decreases were

coordinated to make room for the addition of digital tier channels for which there were, on average, none

recorded in 1999, but 39 reported for 2000.

The number of pay-per-view (“PPV”) services increased

4.8 percent in 2000 from 9 to 11 networks.

22.

Programming Costs

. Cable operators incurred expenses of approximately $8.9 billion for

producing and acquiring programming in 2000.

Approximately $6.4 billion of these expenses were

license fees paid by the basic cable networks to obtain programming, and approximately $2.2 billion were

license fees paid by premium cable services.

Approximately $148 million of these expenses were for

the production of original programming.

Programming expenses incurred by cable operators for

A share is the percent of all households using television during the time period that are viewing the specified

station(s) or network(s). The sum of reported audience shares exceeds 100 percent due to multiple set viewing.

Nielsen Media Research, Total Day 24 Hours 6 am - 6 am: Total US Ratings By Viewing Source July 2000-June

2001, Oct. 2001. Nielsen reports non-premium, basic cable viewership as "Ad Supported Cable" and “All Other

Cable.” Premium services are classified as “Premium Pay.”

Id. “Broadcast” shares include network affiliates, independent, and public television stations.

These statistics regarding types of cable networks are from NCTA, National Cable Video Networks By Type of

Service: 1980-1999, Cable Television Developments 2001, at 8. These totals differ from those reported in the

Vertical Integration Section of this report. In that section, the information on cable networks is from NCTA

Developments and additional sources. See App. B, Tbl. B-3.

See App. B, Tbl. B-3.

Id.

NCTA Comments at 20.

Telephone interview with Gregory Klein, Senior Director of Economic and Policy Analysis, NCTA (Oct. 31,

2001).

Id.

Federal Communications Commission FCC 01-389

approximately $112 million in 2000.

As of November 7, 2001,

operators or broadcast signal carriage for the period January 1, 2000, to June 30, 2000, were $53.2

million.

For the period July 1, 2000, through December 31, 2000, fees collected were $59.6 million.

Reported estimates indicate that these programming network expenses will total $9 billion by year-end

2001.

Thus far, for the period January 1, 2001, to June 30, 2001, copyright fees collected were $53.9

million.

2. Financial Performance

23.

Data concerning cable industry revenue, cash flow, and stock prices indicate that the cable

industry growth slowed significantly in the past year. Relative to major market indices, cable stocks, as

represented by the Kagan MSO Index, performed below average in 2000 and in the first half of 2001.

24.

Cable Industry Revenue

. Annual cable industry revenue grew 3.7 percent in 2000 over

1999, reaching $38.1 billion.

By the end of 2000, revenue per subscriber grew almost two percent to

$561.38 per subscriber per year, or $46.78 per subscriber per month.

Analysts estimate that 2001 year-

end total revenue will reach nearly $44 billion, an estimated 15.4 percent increase over 2000,

and that

revenue per subscriber per year will reach approximately $637.33, or $53.11 per subscriber per month.

25.

When cable system revenue is classified by source, home shopping revenue demonstrated the

greatest percent increase in 2000.

Commissions from home shopping increased nearly 30 percent in

2000, from $185 million in revenue in 1999 to $239 million in 2000.

Advanced video services

current figures available.

indicates the date the Copyright Office has deposited payments made by cable operators.

Id.

Cable industry stocks underperformed the NASDAQ in 2000, but performed slightly better in the first quarter of

2001. See Paul Kagan Assocs., Inc., Kagan Cable MSO Average vs. NASDAQ, The Broadband Cable Financial

Databook 2001 (“2001 Cable Databook”), July 2001, at 83; Jessica Reif Cohen and Nathalie Brochu, Q2/Q3

Preview (“Merrill Lynch – Q2/Q3 Preview”), Merrill Lynch, July 30, 2001, at 9.

See App. B, Tbl. B-4.

Id.

Id. The “advanced video services” category includes both analog video services and digital video services.

Advanced analog services provide users with certain two-way capabilities such as PPV and VOD. Digital video

services can provide superior video picture quality and increased channel capacity. Both digital and advanced

analog services require the use of a set-top box.

See App. B, Tbl. B-4.

Federal Communications Commission FCC 01-389

increased 3.7 percent in 2000 after having experienced 338 percent growth in 1999.

Analysts expect

advanced video services to grow nearly 175 percent in 2001 to reach just over $5.5 billion in revenues for

the year.

The PPV sector, typically volatile, demonstrated a 20 percent decline in revenues in 2000, but

analysts expect PPV revenue to increase in 2001, growing an estimated 44 percent, to over $1 billion in

annual revenue.

Equipment and installation revenue declined over 13 percent in 2000, from $2.8 billion

in annual revenue in 1999 to a little more than $2.4 billion in 2000.

Industry analysts predict this

revenue sector will increase slightly in 2001 to an estimated $2.5 billion.

Annual revenue from local

advertising increased from $2.7 billion in 1999 to $3.2 billion in 2000, a 20.7 percent increase, and

analysts expect local advertising revenue to increase 13 percent over the next year to reach $3.7 billion in

revenues by year-end 2001.

Revenue from the basic service tier (“BST”) and from the cable

programming service tier (“CPST”) combined grew from $23.1 billion in 1999 to $24.7 billion in 2000, a

6.9 percent increase, and analysts expect these revenues to increase to $26.1 billion by year-end 2001.

26.

Cable Industry Cash Flow

. Cash flow is often used to assess the financial position of cable

firms. Cash flow is generally expressed as “EBITDA” (earnings before interest, taxes, depreciation, and

amortization). Financial analysts reported that industry-wide cash flow increased 6.5 percent between the

end of 1999 and the end of 2000, from $15.6 billion to $16.6 billion.

Cash flow will increase an

estimated 10 percent, reaching $18.3 billion by year-end 2001.

In 2000, the cable industry generated

$244.64 in annual cash flow per subscriber, $10.76 higher per subscriber than the $233.88 per subscriber

generated in 1999.

Analysts estimate that in 2001, cash flow per subscriber per year will increase by

$20.17, reaching $264.81.

The ratio of cash flow to revenue (“cash flow margin”) increased from 42.4

percent in 1999 to 43.6 percent in 2000, and is expected to decrease to 41.5 percent by year-end 2001.

27.

Stock Prices

After reaching its all-time high in January 2000, cable stock values, as

represented by the Kagan MSO Stock Index, declined throughout 2000 and the first half of 2001.

Unlike past years, when there were many precipitating events causing the sell-off of cable stocks, cable’s

Id.

Basic cable rates are regulated at the local level. CPST rate regulation ended in March 1999.

See

47 U.S.C.

§ 543 (c)(3), (c)(4).

See

App. B, Tbl. B-4.

Id.

Cash flow margin is a commonly-used financial analysis tool for determining a cable operator’s operating

efficiency, profitability, and liquidity.

See The Public Market

, 2001 Cable Databook, at 82;

Kagan Cable MSO Average vs. NASDAQ

, 2001 Cable

Databook, at 83.

Federal Communications Commission FCC 01-389

current downturn seems to be more in step with the overall trends of the economy.

But despite currently

depressed stock prices, analysts are optimistic about cable’s future as the cable companies have proven

that they can successfully roll out new services with the synergistic effects of bundling.

Even in the face

of competition from DBS, analysts are encouraged by continued advanced service revenue growth.

28.

Cable System Transactions.

Over the last several years, the number of acquisitions and

exchanges between MSOs has declined, though there have been a number of mergers among large

operators. The number of systems sold decreased between 1998 and 1999 from 119 to 92 systems.

Between 1999 and 2000, the number of systems sold decreased from 92 to 47 systems, and between

January and June 2001, there were 23 transactions.

The total number of subscribers affected by system

transactions and the average size of systems sold (measured by the number of subscribers per system)

continues to vary greatly from year to year. Smaller cable operators, however, are often unable to take

advantage of the efficiencies that come from clustering, and thus are more susceptible to financial

difficulties. In the past year, small operators Galaxy Telecom, Inc., and Classic Communications faced

such difficulties often seen among small MSOs.

The assets of these operators were sold to larger

MSOs, further consolidating the industry.

29.

While the number of subscribers affected by system transactions decreased between 1999 and

2000, from 18.3 million to 10.5 million, the average size of traded systems increased from approximately

199,000 subscribers per system sold in 1999 to approximately 223,000 subscribers per system sold in

2000.

Between January and June 2001, the number of subscribers affected by system transactions

reached approximately four million, with an average number of subscribers per system transaction at

approximately 176,000.

The total dollar value of transactions decreased between 1999 and 2000 from

$73 billion at year-end 1999 to $62.1 billion at the end of 2000.

The total dollar value of transactions

between January 2001 and June 2001 was approximately $15 billion.

3. Capital Acquisition and Disposition

30.

Industry Financing

. The cable industry typically has relied on combinations of private and

public financing, with the distribution of these combinations varying greatly from year to year. These

Id.

at 82;

Kagan Cable MSO Average vs. NASDAQ

, 2001 Cable Databook, at 83;

Analysts Bullish on Cable Stocks

Despite Slumping Prices

, Comm. Daily, Dec. 7, 2000, at 4. Bundling in this context merely means the co-marketing

and co-billing of these products.

Analysts Bullish on Cable Stocks Despite Slumping Prices

, Comm. Daily, Dec. 7, 2000, at 4.

This includes all systems bought and sold.

See

App. B, Tbl. B-5.

Id.

Mike Farrell,

Bondholders OK Galaxy Plan

, Multichannel News, Oct. 1, 2001; Classic Communications, Inc.,

Classic Communications to Restructure Operations Under Chapter 11; Company to Continue to Conduct Business

as Usual

(press release), Nov. 13, 2001, at http://www.classic-cable.com/pages/Framesets/InvestorFrameset.html.

See

App. B, Tbl. B-5

Id.

Federal Communications Commission FCC 01-389

year-to-year fluctuations in financing sources appear to be based on the availability of acceptable

financing rates through private investors or capital lending institutions, and the attractiveness of debt and

equity offerings.

31.

During 2000, the cable industry acquired approximately $380 million in public equity

offerings (i.e., sale of stock), $101 million in private equity (i.e., financing from individuals, private

corporations, venture capital firms and investment banks), $2.8 billion in private debt (i.e., banks and

other borrowings), and $4.2 billion in public debt (i.e., sale of public bonds).

Between January and June

2001, the cable industry acquired approximately $2.5 billion in public equity offerings, $94 million in

private equity, $8.6 billion in private debt, and $8.1 billion in public debt.

32.

Capital Expenditures/Capital Investment

. In 2000, the cable industry spent a total of $15.5

billion on the construction of new plant, upgrades, rebuilds, new equipment, and maintenance of new and

existing equipment.

This represents a 45.9 percent increase over the $10.6 billion spent in 1999.

Analysts expect that operators will spend an estimated $14.7 billion in 2001, a decrease of 5.2 percent

over 2000.

Of the $14.7 billion to be spent industry-wide, approximately $850 million will be spent on

new builds, $2.4 billion on rebuilds, $4.4 billion on upgrades, $4.4 billion on equipment and $2.6 billion

on maintenance.

33.

MSOs continue to spend substantially on maintenance, upgrades, rebuilds, and new services.

In the case of Time Warner, AT&T, Comcast, and Cox, some or all of the expenditures in 2000 and the

first half of 2001 were associated with commitments made by those MSOs pursuant to social contracts

with the Commission.

As of June 2001, AOL Time Warner had spent $1.1 billion and is expected to

See App. B, Tbl. B-6.

Id.

Estimated Capital Flows in Cable TV, 2001 Cable Databook, at 138. "New builds" are the construction of new

cable plant where none existed before, primarily newly built homes. "Rebuilds" are improvements to existing

systems that do not retain much of the old system plant and equipment. Instead, they consist of mostly new plant

and equipment. "Upgrades" are improvements to existing cable systems that do not require the replacement of the

entire existing plant and equipment.

Id.

Paul Kagan Assocs., Inc., Estimated Capital Flows in CableTV: Total Raised and Spent 1996-2001, Cable TV

Finance, June 28, 2001, at 2.

The social contract with Time Warner committed that MSO to spend $4 billion on upgrades over a five-year

period and to provide 100 percent of its subscribers with 550 MHz service and 50 percent of its subscribers with 750

MHz service. Social Contract for Time Warner, 11 FCC Rcd 2788 (1995). Time Warner’s final annual social

contract implementation report indicates that the MSO has met its commitment under the Social Contract.

Letter

from Arthur Harding to Royce Sherlock, Cable Services Bureau, May 3, 2001, attaching Time Warner Cable Social

Contract Progress Report 2000

The social contract originally agreed upon with Continental Cablevision, now

administered by AT&T and Cox, commits that MSO to spend $1.7 billion on upgrades over a four-year period

ending December 31, 2000, and also to provide 100 percent of its subscribers with 550 MHz service and 50 percent

of its subscribers with 750

MHz service. Social Contract for Continental Cablevision, Inc. (subsequently

MediaOne), 13 FCC Rcd 11118 (1996). In its final report, AT&T indicates that it met its commitment under the

Social Contract. Letter from Richard D. Treich, Senior Vice President, AT&T Broadband, LLC. to Magalie Roman

Salas, Secretary, FCC, May 4, 2001, attaching Annual Report for In re Social Contract for Continental Cablevision.

Cox submits that it has met its commitment under the Social Contract. Letter from Peter H. Feinberg, Attorney,

(continued.…)

Federal Communications Commission FCC 01-389

spend $2.2 billion by year-end.

Comcast reported cable-related capital expenditures of $1.2 billion in

2000, and is expected to spend approximately $1.8 billion by the end of 2001.

AT&T’s broadband unit

reported capital expenditures of $4.2 billion in 2000, of which approximately $1.6 billion were related to

the launch of new services and $1.3 billion for plant upgrades.

AT&T Broadband plans to spend $3.6

billion in capital in 2001, with the majority focused on providing advanced services and plant upgrades.

Adelphia reported capital expenditures of approximately $1.5 billion in 2000.

As of June 2001,

Adelphia had spent $1.1 billion and expects that by year-end 2001, it will have spent a total of $2

billion.

Cox reported total capital spending of $2.2 billion in 2000.

As of June 2001, Cox had spent

approximately $1.1 billion, and expects that by year-end it will have spent a total of $2 billion.

Cablevision reported capital expenditures of about $912 million in 2000 and is expected to spend $1.1

(…continued from previous page)

Dow, Lohnes & Albertson, PLLC, to Magalie Roman Salas, Secretary, FCC, April 2, 2001, attaching Annual Report

for Social Contract for Continental Cablevision. The Social Contract agreed to by Comcast commits the MSO to

provide free cable connections, Internet, and modems to schools and libraries for certain systems covered under the

contract. The Fifth Annual Progress Report for the Social Contract with Comcast reports that as of Apr. 2, 2001,

Comcast continues to provide services and materials in accordance with the terms of the Social Contract and that it

has completed its upgrade obligations under the contract. Social Contract for Comcast Cable Communications, Inc.,

13 FCC Rcd 3612 (1997); Letter from Peter H. Feinberg, Attorney, Dow, Lohnes & Albertson, PLLC, to Magalie

Roman Salas, Secretary, FCC, April 2, 2001, attaching Fifth Annual Progress Report pursuant to the Comcast Social

Contract.

AOL Time Warner, Inc., SEC Form 10-Q for the Quarter Ended June 30, 2001, at 15.

Comcast Reply Comments at 13. As a result of these capital expenditures, Comcast reports that as of June 30,

2001, 86 percent of its customers were served by systems of 550 MHz or greater, and 70 percent of its systems were

served by 750 MHz or greater. It expects that by year-end, 94 percent of customers will be served by 550 MHz or

greater and 85 percent with 750 MHz or greater. Comcast Reply Comments at 13.

AT&T Corp., AT&T Fourth Quarter Pro Forma Revenue Increases 2.5 Percent (press release), Jan. 29, 2001.

AT&T’s investments have resulted in the upgrade of over 71 percent of its cable plant to at least 550MHz, with 56

percent of the network upgraded to 750 MHz. AT&T Comments at 14-15

AT&T Corp., AT&T Details Results and Outlines Growth Plans for Broadband Business (press release), July 24,

2001.

Adelphia Communications Corp., SEC Form10-K for the Year Ended December 31, 2000, at 31.

Adelphia Communications Corp., SEC Form10-Q for the Quarter Ended June 30, 2001, at 20.

Cox Communications, Inc., SEC Form 10-K for the Year Ended December 31, 2000, at 35 and 44. These

expenditures were primarily directed at upgrading and rebuilding its network. Id. at 35. At the end of 2000, Cox

had upgraded 70 percent of its networks to a bandwidth capacity of 750 MHz or greater and anticipates that

approximately 83 percent of its networks will have bandwidth capacity of 750 MHz or greater by the end of 2001.

Id. at 1.

Cox Communications, Inc., SEC Form 10-Q for the Quarter Ended June 30, 2001, at 20. By the end of 2000,

Cox had upgraded 70 percent of its networks to a bandwidth capacity of 750 MHz or greater. Cox expects by year-

end 2001, 83 percent of its networks will have bandwidth capacity of 750 MHz or greater. Cox Communications,

Inc., SEC Form 10-K for the Year Ended December 31, 2001, at 1.

Federal Communications Commission FCC 01-389

billion in 2001.

Charter reported cable-related capital expenditures of almost $2.83 billion in 2000, and

is expected to spend approximately $2.9 billion during 2001.

4. Provision of Advanced Broadband Services

34.

Advanced services continue to be deployed at a rapid pace. With most systems able to

deliver digital video, and many systems able to deliver cable modem and/or cable telephone service,

MSOs are beginning to experiment with the deployment of other advanced service offerings such as

video-on-demand (“VOD”) and Internet protocol (“IP”) telephony over cable systems.

35.

Digital Video Services.

Most major cable operators currently offer a selection of digital

video packages offered on the expanded capacity of cable systems that have converted to digital. The

basic digital tier typically includes about 40 additional channels of audio and video. In addition, some

MSOs have chosen to offer digital tiers of different genres, such as family, sports, or movie channels.

36.

As we have discussed in past

Reports

, subscriber reception of digital video requires a set-top

device to decompress and decode incoming digital signals and to translate the signals into the signals used

by current television sets. While its primary purpose is to convert digital signals to analog form, these

digital set-top boxes can allow cable operators to offer such additional services as PVRs, games, home

networking, and e-commerce.

The next generation set-top box was scheduled to be deployed in 2001,

but its release has been delayed and analysts expect it will be deployed in 2002.

37.

Cable operators are still providing set-top boxes to the consumer for a monthly fee; though

the Commission has undertaken a proceeding to facilitate retail availability of these devices to

consumers.

The Commission continues to evaluate its rules to determine whether changes are required

to meet the statutory objective of creating a retail market for navigation devices.

Cablevision Systems Corp.,

Cablevision Systems Corporation Reports Second Quarter 2001 Financial Results for

Cablevision NY Group and Rainbow Media Group

(press release), Aug. 9, 2001.

Charter Communications, Inc.,

SEC Form 10-K for the Year Ended December 31, 2001

, at 39. As a result of

these expenditures, more than 54 percent of Charter subscribers were served by systems with broadband capacity of

750 MHz or greater. Charter expects by year-end 2001, nearly 68 percent of its subscribers will be served by

systems with broadband capacity of 750 MHz or greater.

. at 15.

Merrill Lynch - Q2/Q3 Preview, at 16.

Richard Bilotti, Benjamin Swinburne, and Megan Lynch,

Industry Review: An Early Look at 2005

(“Morgan

Stanley – Industry Review”),

Morgan Stanley Dean Witter, Jan. 2, 2001, at 16; Michael Lafferty,

Taking a Look at

the Thick and the Thin of It,

CED, Sept. 2001, at 29.

See 2000 Report,

16 FCC Rcd at 6026-7. Section 629 of the Communications Act requires that the Commission

adopt regulations to assure the commercial availability of navigation devices. In 1998, the Commission adopted

rules to implement Section 629.

See

47 U.S.C. § 549;

see also Implementation of Section 304 of the

Telecommunications Act of 1996, Commercial Availability of Navigation Devices

, CS Docket No. 97-80, Report and

Order (“

Navigation Report and Order

”), 13 FCC Rcd 14775 (1998)

; Implementation of Section 304 of the

Telecommunications Act of 1996, Commercial Availability of Navigation Devices

, CS Docket 97-80, Order on

Reconsideration (“

Navigation Reconsideration

”), 14 FCC Rcd 7596 (1999).

Implementation of Section 304 of the Telecommunications Act of 1996 - Commercial Availability of Navigation

Devices

, CS Docket No. 97-80,

Further Notice of Proposed Rule Making and Declaratory Ruling, 15 FCC Rcd

(continued.…)

Federal Communications Commission FCC 01-389

38.

As of year-end 2000, it was estimated that there were more than 8.7 million digital video

subscribers.

As of June 2001, there were an estimated 12 million digital cable subscribers industry-

wide.

Some predict that digital video subscriptions will reach 15.1 million by the end of 2001.

100

39.

As of year-end 2000, Cox reported approximately 840,000 digital video subscribers.

101

As of

June 2001, Cox reported approximately one million digital video subscribers.

102

Analysts estimate that by

year-end 2001, Cox will have as many as 1.3 million subscribers.

103

As of June 2001, Comcast reported

1.8 million digital video subscribers and expects to end the year with as many as 2.2 million digital video

subscribers.

104

As of June 2001, Adelphia had approximately 1.5 million digital video subscribers with a

target of 1.8 million digital video subscribers by year-end.

105

As of year-end 2000, AOL Time Warner

had more than 1.7 million digital video subscribers.

106

By June 2001, AOL Time Warner had as many as

2.5 million subscribers and analysts expect that by year-end 2001, AOL Time Warner will have more than

three million digital video subscribers.

107

As of June 2001, AT&T reported 3.1 million digital video

subscribers.

108

Analysts expect AT&T will have as many as 3.5 million digital video subscribers as of

year-end 2001.

109

Charter Communications provided digital video service to approximately 1.6 million

subscribers as of June 2001, and analysts expect that by year-end it will serve as many as two million

subscribers.

110

As of June 2001, Cablevision was only conducting technical trials of digital video service,

(…continued from previous page)

18199 (2000); Compatibility Between Cable Systems And Consumer Electronics Equipment, PP Docket No. 00-67,

Report and Order, 15 FCC Rcd 17568 (2000).

Richard Bilotti, Benjamin Swinburne, and Megan Lynch, Industry Review: The Marquis de Broadbandbury:

Parte Deux, (“Morgan Stanley – Broadband Parte Deux”), Morgan Stanley Dean Witter, July 3, 2001, at 22.

NCTA Comments at 26.

100

Megan Larson, Digital Dollar Downward, MediaWeek Online, June 18, 2001; Morgan Stanley – Industry

Review, at 14.

101

Cox Communications, Inc., SEC Form 10-K for the Year Ended December 31, 2000, at 4.

102

Cox Communications, Inc., Cox Communications Announces Third Quarter Financial for 2001 (press release),

Oct. 25, 2001.

103

Merrill Lynch – Q2/Q3 Preview, at 53; Raymond Lee Katz, Gloria Radeff, Bryan Goldberg, Cable TV &

Broadband, Bear Stearns, May 2001, at 145.

104

Comcast Comments at 9; Comcast Reply Comments at 7.

105

Adelphia Communications Corp., Adelphia Communications Announces Second Quarter 2001 Results (press

release), Aug. 14, 2001.

106

AOL Time Warner, Inc., SEC Form 10-K For the Transition Period from July 1, 2000 to December 31, 2000, at

I-10.

107

AOL Time Warner, Inc., SEC Form 10-Q for the Quarter Ended June 30, 2001, at 15.

108

AT&T Comments at 15.

109

Morgan Stanley – Broadband Parte Deux, at 22.

110

Charter Communications, Inc., Charter Communications Exceeds Revenue, Operating Cash Flow Guidance

(press release), July 30, 2001.

Federal Communications Commission FCC 01-389

but it expects to offer the service commercially by October 2001.

111

Analysts expect that by year-end

2001, Cablevision will have as many as 50,000 digital video subscribers.

112

40.

Video-on-Demand.

113

VOD services allow subscribers to view movies at any time or on a

time-staggered basis from a library of options. Many of the top MSOs are conducting trials of VOD or

have moved to commercial offerings in some markets. According to one analysis, VOD will generate

revenues of more than $65 million by year-end 2001 and $420 million in 2002.

114

41.

Cox continues to test VOD in its Hampton Roads Market, and has begun a market rollout in

its San Diego markets.

115

Comcast is currently conducting trials of VOD service in four markets and

expects to offer VOD to as many as two million customers by year-end 2001.

116

Adelphia has also been

testing VOD in its Cleveland Heights, Ohio, market, covering an initial 1000 suburban Cleveland homes,

with a planned commercial roll out to all its Cleveland area systems encompassing 284,000 cable

subscribers.

117

Charter has deployed VOD service in several of its major markets and expects that, by

year-end 2001, it should have VOD available to almost 40 percent of its customer base.

118

Charter

expects to complete VOD rollout in all its markets by year-end 2002.

119

Time Warner Cable is continuing

the trials it started last year in Tampa Bay/St. Petersburg, Florida, Honolulu, Hawaii; and Austin,

Texas.

120

The company is also conducting a subscription VOD trial in its Columbia, South Carolina,

111

Cablevision Reply Comments at 4.

112

Morgan Stanley – Broadband Parte Deux, at 22.

113

See

¶¶ 187, 188

infra

114

Yankee Group,

Video-on-Demand Will Generate Revenues of Nearly $2 Billion in 2005

(press release), June 25,

2001.

115

Cox Communications, Inc.,

Cox Communications Launches Entertainment-On-Demand in Hampton Roads,

Virginia

(press release),Nov. 29, 2001; Cox Communications, Inc.,

Cox Communications Launches Movies--On-

Demand Service in San Diego

(press release), Sept. 25, 2000; Merrill Lynch – Q2/Q3 Preview,

at 53; Michael

Grotticelli and Ken Kerschbaumer,

Slow and Steady

, Broadcasting & Cable, July 9, 2001, at 38-40 (“

Grotticelli

”).

116

Comcast Reply Comments, at 15; NCTA Comments at 28; Andrew Grossman,

Comcast’s VOD System First to

Link With Gemstar

, Hollywood Reporter, Oct. 5, 2001, at http://www.hollywoodre…display.jsp?vnu_content_id=1

070446; Craig Leddy,

Sneaking a Peek at Comcast’s ITV Plans

, Multichannel News, Aug. 27, 2001.

117

Morgan Stanley – Broadband Parte Deux, at 82;

Rigas and Sie Mark Inaugural S-VOD Launch for Adelphia and

Starz Encore

, C-Net Investor, Oct. 9, 2001.

118

Charter Communications, Inc.,

SEC Form 10-K for the Year Ended December 31, 2001

, at 12;

Cable Insiders

Weigh in on ITV’s Promise

, Multichannel News, July 23, 2001. Charter credits the introduction of VOD and high

speed data in its top markets to keeping customer churn low.

See

Charter Shows Strong Growth but Trims Outlook

Broadband-Daily.com, Nov. 2, 2001. As of November 1, 2001, Charter reported rolling out VOD to the following

markets: Glendale, California; Birmingham, Alabama; Atlanta, Georgia; Pasadena and Long Beach, California; St.

Louis, Missouri; Fort Worth, Texas; Greenville-Spartanburg, South Carolina; Hickory, North Carolina; and Slidell,

Louisiana. It expects to bring VOD to two million homes by the end of 2001.

119

Charter Communications, Inc.,

SEC Form 10-K for the Year Ended December 31, 2000

, at 12;

Cable Insiders

Weigh in on ITV’s Promise

, Multichannel News, July 23, 2001.

120

AOL Time Warner, Inc.,

SEC Form 10-K For the Transition Period from July 1, 2000 to December 31, 2000

, at

I-10; NCTA Comments at 28;

Grotticelli

at 38-40.

Federal Communications Commission FCC 01-389

market featuring on-demand access to a library of HBO programming for an additional monthly fee of

$3.95.

121

AT&T is test marketing VOD is certain markets.

122

42.

High-Definition Television (“HDTV”).

In October 2001, Comcast announced the launch of

an HDTV service to more than 1.3 million customers.

123

The service will provide access to high-

definition broadcasts of ABC, NBC, CBS, HBO, and Showtime. Since most commercial television sets

do not have built-in HDTV tuners, Comcast will make set-top tuners available to customers. Comcast

digital cable customers who have HDTV-ready sets will now be able to rent or purchase a set-top box

similar to their current digital tuner, which will allow them to view all channels broadcast in high-

definition. Time Warner has agreed to carry HDTV signals that will be broadcast by television stations

owned and operated by the ABC, CBS, NBC, and Fox networks, and also by nearly all public television

stations, in Time Warner Cable’s operating areas. Time Warner Cable is also carrying the HDTV versions

of HBO and Showtime in certain areas.

124

43.

Internet and High-Speed Data Services

. Dial-up Internet access is the most popular way to

access the Internet. As of year-end 2000, 84.6 percent of all Internet households were accessing the

Internet using dial-up modems.

125

It is projected that telephone dial-up will remain the principal means of

accessing the Internet until about 2004, when it is expected that only 44.4 percent of Internet households

will use dial-up access, with the remaining 55.7 percent accessing the Internet through broadband

facilities.

126

44.

While cable modem access is the primary means of accessing the Internet over broadband

networks, cable’s share of the broadband Internet access market continues to decrease. DSL is the most

significant broadband competitor to cable modem service. As of year-end 2000, cable modem service

was available to 58.5 million homes and there were approximately 3.9 million cable subscribers, whereas

DSL was available to 37.6 million homes and had approximately 1.9 million subscribers.

127

As of June

2001, cable modem service was available to approximately 67.3 million homes and there were

approximately 5.6 million cable modem subscribers, while DSL was available to an estimated 45 million

121

This service proved to be popular with an 11.5 percent take rate among 328,000 basic subscribers, which at times

created too high a concurrent demand for programming, forcing TWC to scale back the trial in order to improve

network traffic engineering. See David Iler, VOD Shining Brightly in Cable Universe, Broadband Week, Aug. 6,

2001. TWC also is extending the trial to its systems in Summerville and Myrtle Beach, South Carolina. Mass Media,

Comm. Daily, Nov. 6, 2001.

122

AT&T Comments at 15.

123

Comcast Corp., Comcast Launches HDTV (press release), Oct. 29, 2001.

124

AOL Time Warner, Inc., SEC Form 10-K for the Transition Period from July 1, 2000 to December 31, 2000, at

I -10.

125

Morgan Stanley – Broadband Parte Deux, at 46.

126

Id. Broadband technologies include cable broadband, telephone company digital subscriber line (“DSL”),

broadband wireless, and broadband satellite. By 2004, analysts expect 28.9 percent of households will access the

Internet through cable broadband, 21.1 percent through DSL and 5.7 percent through wireless and satellite

broadband technologies. Id. Broadband technologies allow users to access the Internet at much greater speeds than

is available over traditional dial-up connections. See 1999 Report, 15 FCC Rcd at 1003-04.

127

See Morgan Stanley – Broadband Parte Deux, at 46.

Federal Communications Commission FCC 01-389

homes with approximately three million subscribers.

128

It is estimated that as of year-end 2001, cable will

be available to more than 81 million homes with more than 7.2 million subscribers, whereas DSL is

expected to be available to as many as 51.5 million homes with approximately 4.3 million subscribers.

129

Satellite and wireless technologies currently have eight percent of the market and are not expected to

increase market share over the next several years.

130

45.

CableLabs created the cable modem standard, DOCSIS (Data Over Cable Service Interface

Specification) in an effort to ensure the interoperability and retail sale of cable modem technologies.

131

Equipment conforming to the DOCSIS standard is eligible to be CableLabs Certified.

132

There are now

193 cable modems and 26 cable modem termination systems that have been certified by CableLabs on the

DOCSIS 1.0 standard.

133

As of June 2001, certification for DOCSIS 1.1 had begun, and as of December

2001, seven companies had achieved certification for nine modems that comply with the DOCSIS 1.1

specification, and two more companies had gained qualification status for their DOCSIS 1.1 cable modem

termination systems.

134

In August 2001, CableLabs announced the establishment of DOCSIS 2.0, which

incorporates standards to increase cable bandwidth for data transmissions without requiring any physical

rebuilding of cable networks.

135

Certification testing for DOCSIS 2.0 equipment is expected sometime

next year.

46.

Virtually all the major MSOs offer cable modem service in portions of their nationwide

service areas.

As we reported last year, unlike high-speed access offered over the telephone network

where the customer can select the Internet Service Provider (“ISP”) of his own choice, the cable ISP is

selected by the cable provider and offered to customers in that cable operator’s individual regions.

136

128

Id. June data for DSL homes passed are based on year-end estimate by Morgan Stanley. Id. TeleChoice Inc.,

TeleChoice2Q00 DSL Deployment Summary, at http://www.xdsl.com; Kinetic Strategies, Inc., Cable Modem Market

Stats & Projections, Cable Datacom News, at http://www.cabledatacomnews.com/cmic/cmic16.html. Of the

approximately 3.3 million DSL subscribers, only 2.5 million residential subscribers, or 74 percent, as compared with

nearly 100 percent of cable modem subscribers. See TeleChoice Inc., TeleChoice2Q00 DSL Deployment Summary,

at http://www.xdsl.com.

129

NCTA Comments at 27 (citing Morgan Stanley); see Morgan Stanley – Broadband Parte Deux, at 46.

130

Id.

131

See 2000 Report, 16 FCC Rcd at 6030.

132

CableLabs Certified means that a modem complies with CableLab’s cable modem specifications which ensures

that it will interoperate with qualified cable systems worldwide. CableLabs, CableLabs

Certifies More Modems

(press release), Oct. 20, 2000.

133

CableLabs, CableLabs Certifies 7 More DOCSIS 1.1 Modems, Continuing Cable Data Advances (press release),

Dec. 20, 2001, at http://cablelabs.com/news_room/PR/01_pr_cw20_122001.html.

134

Id. See also ¶ 194 infra.

135

CableLabs, CableLabs Creating Advanced Modem Spec to Enable 30 Mbps in Upstream (press release), Aug 31,

2001.

136

Most cable providers hold interest in the chosen ISP and also provide proprietary content to that ISP. See Inquiry

Concerning High-Speed Access to the Internet Over Cable and Other Facilities, GN Docket No. 00-185, Notice of

Inquiry (“High-Speed Access Inquiry”), 15 FCC Rcd 19287 (2000).

Federal Communications Commission FCC 01-389

Most cable operators offer only one ISP to customers in a given system,

137

although there has been a

move recently within the industry to offer multiple ISPs to customers in a given cable system.

138

For

example, pursuant to its merger obligations with the Federal Trade Commission, AOL Time Warner has

announced that, in addition to Road Runner, it will carry the AOL Internet service as well as unaffiliated

ISPs Earthlink and Juno.

139

In September 2001, AOL Time Warner started selling Earthlink high-speed

access over its cable lines in Columbus, Ohio, and Syracuse, New York.

140

AOL Time Warner plans to

sell Earthlink high-speed service in numerous additional Time Warner markets by year-end.

141

addition, AT&T voluntarily conducted a technical and operational multiple-ISP trial in Boulder,

Colorado, with plans for the commercial rollout of multiple-ISP service in several major cable markets by

mid-2002.

142

47.

Many MSOs have offered high-speed Internet access through Excite@Home, which filed for

bankruptcy in September 2001.

143

As a result, in December 2001, AT&T terminated its @Home service

and switched its subscribers to its own network, while other MSOs will continue to provide @Home

service until February 28, 2002, when they will have transitioned their subscribers to other services.

144

Cox has traditionally offered high-speed Internet access service either under the brand Cox@Home, Road

Runner, or Cox Express.

145

However, following the bankruptcy of Excite@Home, Cox announced that it

plans to migrate all of its current high-speed cable modem subscribers to Cox’s proprietary high speed

137

For example, Adelphia offers high-speed Internet access service under the brands Adelphia Power Link,

PowerLink@Home, the ISP Channel and Convergence.com. Each system, however, offers only one ISP to its

subscribers, and in some cases, third-party brands are re-branded under the Adelphia brand name.

138

In this regard, the Commission released a the High-Speed Access Inquiry on September 28, 2000, to determine

what regulatory treatment, if any, should be accorded to cable modem service and the cable modem platform used in

providing this service. See 2000 Report, 16 FCC Rcd 6030; see also High-Speed Access Inquiry, n. 136 supra.

139

Letter from Steven N. Teplitz, Vice President, Communications Policy and Regulatory Affairs, to Magalie

Roman Salas, Secretary, FCC, Oct. 3, 2001. AOL Time Warner’s deal with Juno outlines that Time Warner will be

responsible for billing and Juno will be responsible for customer service, except for customer service that relates to

the cable infrastructure. Both companies will be free to market the service independently. Juno, AOL Time Warner

Strike Open Access Pact, Reuters, Apr. 26 2001; Thor Olavsrud, Juno Seals Open Access Pact with AOL Time

Warner, InternetNews, Apr. 26, 2001.

140

Letter from Steven N. Teplitz, Vice President, Communications Policy and Regulatory Affairs, to Magalie

Roman Salas, Secretary, FCC, Oct. 3, 2001; AOL Time Warner, Inc., Time Warner Communications Columbus

Offers Choice of ISPs With High-Speed Cable Modem Service (press release), Sept. 26, 2001; AOL Time Warner,

Inc., Time Warner Communications Syracuse Offers Choice of ISPs With High-Speed Cable Modem Service (press

release), Sept. 26, 2001.

141

Time Warner Cable, EarthLink Will Launch in Time Warner Cable’s Columbus and Syracuse Operations in

September and Plans Broad Deployment by Year End (press release), July 16, 2001.

142

AT&T Comments in High-Speed Access Inquiry at 61-66; Letter from Joan Marsh, Director Federal Government

Affairs, AT&T, to Magalie Roman Salas, Secretary, FCC, Feb. 28, 2001; AT&T Comments in High-Speed Access

Inquiry at 61.

143

Excite@Home, Excite@Home’s Broadband Service to Be Acquired by AT&T (press release), Sept. 28, 2001.

144

Excite@Home, Excite@Home Announces AT&T Termination of Pending Asset Purchasing Agreement and

Transition Agreements with Several Cable Companies (press release), Dec. 4, 2000. See also Christopher Stern, At

Home Won’t Try to Stay in Business, Washington Post, Dec. 5, 2001, at E1.

145

Cox Communications, Inc., Cox Communications Announces Fourth Quarter Financial Results for 2000 (press

release), Feb. 6, 2001.

Federal Communications Commission FCC 01-389

network.

146

In addition, Cox has begun a technical trial with AOL and EarthLink in its El Dorado,

Arkansas, system.

147

Comcast also announced that it plans to migrate its current Comcast@Home

subscribers to its own high-speed network.

148

Additionally, in November 2000, Comcast announced that

it will offer Juno Express in a trial to take place in its Philadelphia area system.

149

In March 2001,

Earthlink announced that it also would participate in that trial.

150

48.

As of year-end 2000, Cox had approximately 480,000 high-speed data subscribers, and, as of

June 2001, Cox had approximately 668,000 high-speed data subscribers.

151

Analysts forecast that Cox

could end 2001 with as many as 880,000 high-speed data subscribers.

152

As of June 2001, Comcast had

approximately 675,000 high-speed data subscribers and it expects to have as many as 950,000 high-speed

data subscribers by year-end 2001.

153

As of June, 2001, AT&T had approximately 1.3 million broadband

data subscribers.

154

As of June 2001, Cablevision had 367,800 cable modem subscribers and expects to

have more than 475,000 subscribers by year-end 2001.

155

As of June 2001, Charter had 419,000 high-

speed data subscribers and it expects that by year-end 2001 it will have as many as 575,000 high-speed

data subscribers.

156

As of June 2001, AOL Time Warner had 1.4 million subscribers to its own cable

146

Cox Communications reached an agreement with Excite@Home that will allow the company’s 555,000

Cox@Home customers to maintain Internet access until the company transitions to its own high-speed network.

Cox Communications, Inc., Cox Communications Announces Agreement to Avoid Disruption of Cox@Home

Internet Service (press release), Dec. 3, 2001.

147

Cox Communications, Inc., Cox Communications and Earthlink Agree to High-Speed Cable-Based Internet

Service Trial (press release), Apr. 24, 2001.

148

Comcast also reached an agreement with Excite@Home that will allow the company’s Comcast@Home

customers to maintain Internet access until the company transitions them to its own high-speed network. Comcast

Corp., Comcast Unveils High-Speed Internet Network Plans; Gains Final Approval For Excite@Home Agreement

(press release), Dec. 11, 2001.

149

Comcast Corp., Comcast and Juno Announce Multiple ISP Trial (press release), Nov. 29, 2000. See also

Comcast Comments in High-Speed Access Inquiry at 37-38. Comcast has indicated that it was considering adding

multiple ISPs to this trial early in 2002. Comcast Reply Comments in High-Speed Access Inquiry at 16-17.

150

EarthLink, Comcast and EarthLink Announce Technical Trial of High-Speed Cable-Based Internet Service

(press release), Mar. 27, 2001.

151

Cox Communications, Inc., Cox Communications Announces Third Quarter Financial for 2001 (press release),

Oct. 25, 2001.

152

Richard Bilotti, Benjamin Swinburne, and Megan Lynch, Broadband/CATV Industry Review: An Early Look at

2005, Morgan Stanley Dean Witter, Jan. 2, 2001, at 112-113.

153

Comcast Comments at 9.

154

AT&T Comments at 15.

155

Cablevision Systems Corp., Cablevision Systems Corporation Reports Second Quarter 2001 Financial Results

for Cablevision NY Group and Rainbow Media (press release), Aug. 9, 2001.

156

Charter Communications, Inc., Charter Communications Exceeds Revenue, Operating Cash Flow Guidance

(press release), July 30, 2001.

Federal Communications Commission FCC 01-389

modem service.

157

As of June 2001, Adelphia had more than 250,000 cable modem subscribers and

expects to have as many as 375,000 by year-end.

158

49.

As we have reported in the past, a small portion of cable Internet access continues to be

delivered through a television receiver rather than a personal computer.

159

These services typically do not

provide complete access to the Internet, but provide such basic applications as e-mail, Web browsing, and

“hyperlinking” technology.

160

Many of these services are now considered by industry analysts to be

interactive television (“ITV”) services, instead of Internet access services.

161

Nationwide providers of

such service include WebTV, Worldgate, and America Online which provides AOLTV.

162

Wink

Communications offers a similar product marketed primarily as an interactive tool for the enhancement of

multichannel video programming. Charter is planning to roll out an interactive television service called

Digeo Broadband which will provide interactive television and limited Internet functionality including e-

mail, chat, and news and travel information.

163

50.

Telephone Services Offered by Cable Operators.

Circuit-switched telephony still is the only

type of commercially-deployed cable telephony available, but trials continue for cable-delivered IP

telephony.

164

MSOs, such as Cox and AT&T, continue to deploy circuit-switched cable telephony, and

others, such as Cablevision and Comcast, offer cable telephony where it has already been deployed.

Several MSOs, including AT&T, AOLTW, Comcast, and Charter, are currently testing IP telephony,

while Cox has plans for IP telephony trials in 2002.

51.

As we reported last year, CableLabs

is managing a project, called PacketCable, aimed at

identifying, qualifying, and supporting products that support Internet over cable-based multimedia

services such as IP telephony.

165

In May 2000, CableLabs announced the release of the final feature set

for PacketCable residential IP voice service.

166

Following that, CableLabs released draft compliance test

157

AOL Time Warner, Inc., SEC Form 10-Q for the Quarter Ended June 30, 2001, at 15.

158

Adelphia Communications Corp., Adelphia Communications Announces Second Quarter 2001 Results (press

release), Aug. 14, 2001.

159

1998 Report, 13 FCC Rcd at 24315; 1999 Report, 15 FCC Rcd at 1008; 2000 Report, 16 FCC Rcd 6033-4.

160

2000 Report, 16 FCC Rcd at 6033-4. Hyperlinking, in this context, is the technology that combines broadcast or

cable television and telephone Internet connections to offer consumers access to supplemental information to

television shows, one-button ordering, and the ability to play along with television shows when applicable.

161

See Spencer Wang, Interactive Television, ING Barrings Furman Selz, Dec. 2000.

162

For an explanation of how the WebTV and Worldgate services operate, see 1998 Report, 13 FCC Rcd at 24315-

163

Charter Communications, Inc., SEC Form 10-K for the Year Ended December 31, 2000, at 11.

164

As we have reported in past Reports, a circuit-switched cable telephony voice call and an IP telephony voice call

both begin with special equipment that connects a household's twisted pair infrastructure with its cable

infrastructure.

Cable circuit-switched telephony, however, eventually turns the call over to traditional "circuit

switched" processing, while IP telephony eventually turns the call over to the network of the Internet for IP

processing. IP telephony processes voice telephone calls much like data are processed on the Internet; that is,

digitized pieces of data are divided into discrete packets and are transported over the Internet following the path that

does not resist transfer.

165

See 2000 Report, 16 FCC Rcd at 6034-5.

166

Id.

Federal Communications Commission FCC 01-389

plans for PacketCable interface specifications.

167

In May 2001, the Society for Cable

Telecommunications Engineers (“SCTE”) and the European Telecom Standards Institute (“ETSI”)

announced a set of new technical standards for offering IP telephony based on PacketCable technical

standards established by CableLabs.

168

In March 2001, leaders in the IP telephony market congregated

for the World Telecom Policy Forum in Geneva, Switzerland to discuss the future regulatory environment

in IP telephony.

169

52.

As one of the first cable operators to offer a telephony product, Cox Communications has

long been regarded as the leader in cable telephony deployment. As of June 2001, Cox provided

facilities-based cable telephony services to approximately 344,000 subscribers nationwide.

170

Cox reports

an average 14.5 percent penetration in areas where its local telephone service is available.

171

Cox expects

to start testing IP telephone service in 2002.

172

AT&T provided telephone services to more than 848,000

customers, as of June 30, 2001.

173

In addition to circuit-switched technology, AT&T has also been

pursuing Internet voice applications for cable telephony. In March 2000, AT&T purchased a 32 percent

equity investment in Net2Phone giving it a 39 percent voting stake.

174

In January 2001, it announced that

it would expand its trial of local Internet telephone service to the Rochester, New York, area from its

initial test site in Portland, Maine.

175

The service, called Line Runner, is being marketed to Road Runner

customers as a second line service only.

176

167

Id.

168

CableLabs, International Standardization Achieved for Cable Internet Protocol Architecture (press release), May

23, 2001.

169

International Telecommunication Union, The Telecom Revolution Brought About by IP Telephony to be at the

Top of the International Agenda as Government and Industry Converge on Geneva (press release), Feb. 21, 2001;

International Telecommunication Union, ITU World Policy Forum Closes With Consensus on a Way Forward for

Internet Protocol Telephony (press release), Mar. 9, 2001.

170

Cox Communications, Inc., Cox Digital Telephone Scores High in Customer Satisfaction (press release), Aug.

14, 2001.

171

Cable Telephony Helps Drive Revenue at Cox, TR Daily, July 23, 2001, at 4-5. As of August 2001, Cox reports

24 percent total market penetration in Orange County, California, and 40 percent penetration to telephone-ready

homes in areas of the Omaha market. See Cox Communications, Inc., Cox Digital Telephone Scores High in

Customer Satisfaction (press release), Aug. 14, 2001.

172

Cox Communications, Inc., Written Testimony of James O. Robbins CEO, Cox Communications, Inc. Before the

Senate Judiciary Subcommittee on Antitrust, Business Rights and Competition Hearing on the Status of Competition

in the Telephone Local Exchange Market (transcript), May 2, 2001, at 5.

173

AT&T Comments at 15; AT&T Corp., AT&T Details Results and Outlines Growth Plans for Broadband

Business (press release), July 24, 2001.

174

AT&T Corp., AT&T-Led Consortium to Acquire 39 Percent Voting Stake in Net2Phone (press release), Mar. 31,

2001.

175

AOL Time Warner, Inc., Time Warner Cable Expands Internet Telephone Test to Rochester Road Runner

Customers (press release), Jan. 31, 2001.

176

Id.

Federal Communications Commission FCC 01-389

53.

As a result of its acquisition of Jones Intercable in March 2000, Comcast now has 15,000

cable telephony customers in the Washington, D.C., metropolitan area.

177

Comcast also offers telephony

service in Florida and Michigan.

178

Although Comcast is not interested in deploying circuit-switched

service of its own, it has chosen to maintain the service where it has already been deployed. Cablevision

offers limited facilities-based residential circuit-switched telephony in New York through its commercial

telephone business, Lightpath.

179

As of June 2001, Lightpath reported almost 12,500 cable telephony

customers, representing 8.2 percent penetration of the 153,000 homes marketed.

180

Charter

Communications is not presently pursuing commercial deployment of circuit-switched cable telephony.

However, since December 1999, Charter has been testing IP telephony in several field trials.

181

54.

Multi-Service Offerings

Over the last several years, cable operators have been upgrading

their systems so that they can offer digital video, access to the Internet, and telephone services. Over the

past year, the MSOs have proven that they can successfully deploy multiple services, although some

services, such as telephony, have not been as profitable as once expected. However, MSOs have found

value in all their advanced services as a way to reduce basic cable video churn. For example, Adelphia is

proposing to offer video-on-demand as an adjunct service to premium service subscribers, perhaps as a

means of retaining premium subscriptions. In addition, several analysts note that cable telephony is

valuable as a tool to increase video penetration and lower customer loss, especially to DBS.

182

While

individually some advanced services are not considered particularly lucrative to the MSOs, these services

appear to be valuable as a package.

B. Direct-To-Home Satellite Services

1. Direct Broadcast Satellite Services

55.

DBS service is a nationally distributed subscription video service that delivers programming

via satellite to a small parabolic "dish" antenna located at the viewer’s home. There are currently four

companies licensed by the Commission to provide DBS service: DirecTV, EchoStar (marketed as the

DISH Network), Dominion Video Satellite, Inc. (marketed as Sky Angel) and R/L DBS Company.

183

177

Comcast Reply Comments at 8; Most MSOs Still Waiting to Enter Residential Phone Market, Comm. Daily,

Sept. 20, 2000, at 5-6.

178

Comcast Reply Comments at 9.

179

Cablevision Systems Corp., Cablevision Systems Corporation Reports Second Quarter 2001 Financial Results

for Cablevision NY Group and Rainbow Media Group (press release), Aug. 9, 2001.

180

Id.

181

Charter Communications, Inc., Charter Communications and High Speed Access Corp. Announce Trial of True

IP Switched Local Voice Service Over Cable (press release), Dec. 14, 1999.

182

Bruce Roberts and Stephen DeLucia, Cable Telephony, Dresdner, Kleinwort, and Wasserstein, May 21, 2001, at

1; Dennis Leibowitz, Reed Kenyon, and Ryan Pappas, MediaWeek, Credit Suisse First Boston, Aug. 6, 2001, at 3

and 5.

183

R/L DBS Company, L.L.C. is a joint venture of Rainbow Media Holdings, Inc., the programming subsidiary of

Cablevision Systems Corporation, and Loral SpaceCom DBS Holdings Inc. R/L DBS holds a permit to construct a

DBS system but has not launched a satellite or begun service. In August 1999, R/L DBS filed a petition requesting

an extension of its build-out requirements in order to construct and launch a satellite for DBS service, 130 SAT-

EXT-95. On December 28, 2000, the Commission granted a 36-month extension of time to R/L DBS. See Petition

(continued.…)

Federal Communications Commission FCC 01-389

these, DirecTV, EchoStar and Dominion currently provide service.

184

General Motors, which owns

DirecTV through its Hughes Electronics subsidiary, agreed to spin-off Hughes from General Motors and

to merge Hughes with EchoStar.

185

This transaction is pending before the Commission and the United

States Department of Justice.

186

56.

At present, DBS is the largest competitor to cable in the MVPD market, and analysts predict

continued growth. Paul Kagan Associates predicts that total DBS subscribership will increase to almost

26 million in 2005 and to over 28 million in 2010, a compound annual growth rate of 7.1 percent.

187

Kagan also predicts that total DBS industry revenue will triple from $8.8 billion in 2000 to nearly $26

billion in 2010.

188

57.

Subscribership.

DBS is the principal subscription competitor to cable television service with

16,070,000 subscribers as of June 30, 2001, a gain of over three million subscribers, and an increase of

over 19 percent since June 2000.

189

DBS’s share of MVPD households has grown to over 18 percent

nationally.

190

It is estimated that total DBS industry revenue for 2001 will total $12.1 billion, a 37.5

percent increase over 2000.

191

DirecTV, which reported revenues of $2.7 billion for the first six months of

2001,

192

is the nation’s leading DBS service and the third largest distributor of multichannel video

(…continued from previous page)

of R/L DBS Company, L.L.C. For Extension of its Direct Broadcast Satellite Construction Permit

, Memorandum

Opinion and Order, 16 FCC Rcd 9, 10-11 (2001).

184

Dominion was originally issued its DBS construction permit in 1982. On May 17, 1999, the Commission granted

Dominion Video Satellite, Inc. authority to commence operation of a DBS service using an EchoStar satellite

currently in orbit.

See

Dominion Video Satellite, Inc. Application for Minor Modification of Authority to Construct

and Launch and to Continue Construction and Launch of Planned Satellite at 61.5

W.L. File No. 12-SAT-ML-97,

IBFS File No. SAT-MOD-19961108-00132; Application for Additional Time to Construct and Launch Direct

Broadcast Satellites, File No. 13-SAT-MP/ML-97, IBFS File No. SAT-MOD-19961108-00133; Application for

Launch Authority, File No. 108-SAT-LA-97, IBFS File No. SAT- L/A-19970814-00074, Order and Authorization,

14 FCC Rcd 8182 (1999). See also http://www.skyangel.com. Dominion does not operate its own satellite, and

offers only 19 video channels, as opposed to hundreds for DirecTV and EchoStar. Dominion expects to launch its

own satellite sometime in 2003.

185

General Motors, GM’s Hughes Electronics To Merge With EchoStar Communications (press release), Oct. 29,

2001.

186

See EchoStar Communications Corporation, General Motors Corporation, Hughes Electronics Corporation,

Transferors, and EchoStar Communications Corporation, Transferee, Consolidated Application for Authority to

Transfer Control, Dec. 3, 2001. See also EchoStar Communications Corporation, General Motors Corporation, and

Hughes Electronics Corporation Seek FCC Consent for a Proposed Transfer of Control, CS Docket No. 01-348,

Public Notice, DA 01-3005 (rel. Dec. 21, 2001).

187

Paul Kagan Assocs., Inc., The State of DBS 2001 (“DBS Databook”), Dec. 2000, at 5.

188

Id. at 6. Kagan predicts that interactive television services and advertising will be a major factor in this growth.

189

App. C, Tbl. C-1. See also SBCA Comments at 4, Table 1. Current subscriber numbers from SkyREPORT at

http://www.skyreport.com/skyreport.com/dth_us.htm.

190

NCTA Comments at 7. One study estimates that two million households subscribe to both DBS and cable. See

Centris, Digital Cable Subscribers Order 4x as Many PPV Movies and 2x as Many PPV Events as Analog

Households; 50% More Events than DBS Households (press release), Mar. 20, 2001.

191

DBS Databook at 6.

192

DirecTV Comments at 11.

Federal Communications Commission FCC 01-389

programming.

193

DirecTV had over 10 million subscribers as of June 2001, an increase of almost 15

percent from the 8.7 million customers reported as of June 2000.

194

As of June 2001, EchoStar reported a

40 percent increase in subscribers, from 4.3 million in June 2000 to more than 6 million subscribers as of

June 2001.

195

EchoStar is now the sixth largest MVPD in the United States.

196

Dominion, under the

brand name Sky Angel, is a self-described Christian and family oriented DBS service. Sky Angel offers

19 video and 16 radio channels for $9 a month.

197

Although Dominion’s transponders are currently

located on an EchoStar satellite, Sky Angel subscribers must use a separate antenna to receive DISH

Network programming.

198

58.

SBCA, the national trade organization of the satellite television industry, states that DBS is

gaining over 8,500 subscribers per day.

199

Penetration by state varies from a low of less than two

percent

200

to a high of more than 40 percent.

201

Forty-five states now have penetration of more than 10

percent, as compared to the 44 states reported in 2000; 30 states have more than 20 percent penetration,

compared to 24 states in 2000; and five states have more than 30 percent DTH penetration.

202

According

to DirecTV, its subscribers are distributed across the continental United States with approximately 50

percent residing in urban counties and 50 percent living in smaller, rural counties.

203

As compared to

cable subscribers, DirecTV subscribers are more likely to live in rural areas and are more likely to live in

single-family homes.

204

59.

Availability of Local Broadcast Stations

. DirecTV states that the ability to offer local

broadcast stations continues to be a significant factor in DBS subscriber growth. DirecTV reports that its

overall subscriber levels have increased by 20 percent due to local broadcast channel service, and that 47

percent of its customers to whom it is available take a local channel package.

205

As of August 2001,

DirecTV offers for $5.99 the local affiliates of ABC, CBS, NBC, and FOX in 41 markets, and a national

193

NCTA Comments at 7-8.

194

DirecTV Comments at 11.

195

EchoStar Comments at 1.

196

NCTA Comments at 8.

197

http://www.skyangel.com/HTML%20Site/Body%20Pages/FAQ/faq.htm.

198

Id.

199

SBCA Comments at 5, Table 3.

200

Penetration is less than two percent in Hawaii. The State of Hawaii states that DirecTV service began in

September 2000, but that this service is limited and is not comparable to those offered on the mainland. EchoStar

service is closer to mainland service, but subscription to its popular “Top 150” service requires two dishes, raising

equipment costs. Hawaii Comments at 4-8.

201

SBCA Comments at 3-4 and App. A.

202

Id. at 4 and App. A.

203

DirecTV Comments at 13.

204

Id. at 11-12. DirecTV attributes the higher single-family home statistic to “…anti-competitive ‘evergreen’ and

exclusive service contracts between cable operators and multiple dwelling unit (‘MDU’) owners and other barriers

to MDU entry.”

205

Id. at 12-13.

Federal Communications Commission FCC 01-389

PBS feed with every local station package.

206

DirecTV indicates that it will offer all required local

broadcast stations in these markets on January 1, 2002.

207

Similarly, EchoStar transmits a local network

package to its subscribers in 35

markets for $4.99 and offers the national PBS feed as an option for one

dollar extra.

208

Another company, Local TV on Satellite (“LTVS”), proposes to offer all 1,600 full-power

local broadcast stations to DBS subscribers, first via leased transponders with low bit rates, but eventually

with spot beams at high bit rates.

209

60.

This year, in its implementation of the Satellite Home Viewer Improvement Act (“SHVIA”),

the Commission reaffirmed and clarified its prior rulemakings in two

Orders on Reconsideration

, dealing

with issues in relation to mandatory carriage of broadcast signals (“must carry”) and retransmission

consent.

210

The satellite industry challenged the SHVIA must-carry provisions.

211

On December 7, 2001,

the United States Court of Appeals for the Fourth Circuit denied the petitions for review and affirmed the

United States District Court for the Eastern District of Virginia’s opinion.

212

In addition, the Commission

has resolved 20 must-carry complaints filed against DBS operators, with an addition 21 cases currently

pending.

61.

Program Access

. The Commission has undertaken a proceeding to determine whether the

exclusivity provisions of the program access regulations should be allowed to sunset on October 5,

2002.

213

SBCA believes that the exclusivity provisions should be extended. SBCA states that, if the

prohibition of exclusive contracts is not extended, it will harm DBS operators’ ability to continue to

compete effectively with cable operators.

214

SBCA further states that the program access rules should be

206

Id.

See also

http://www.skyreport.com/skyreport/local.htm.

207

DirecTV Comments at 12-13.

See also

Implementation of the Satellite Home Viewer Improvement Act 1999:

Broadcast Signal Carriage Issues, Retransmission Consent Issues,

CS Docket Nos. 00-96 and 00-363, Report and

Order, 16 FCC Rcd 1918 (2000).

208

See

http://www.skyreport.com/skyreport/local.htm.

209

LTVS Plans To Fill Void Left By DBS Operators

, Comm. Daily, Aug. 29, 2001, at 3.

210

Implementation of the Satellite Home Viewer Improvement Act 1999: Broadcast Signal Carriage Issues,

Docket No. 00-96, Order on Reconsideration, 16 FCC Rcd 16544 (2001);

Implementation of the Satellite Home

Viewer Improvement Act of 1999: Retransmission Consent Issues: Good Faith Negotiation and Exclusivity

, CS

Docket No. 99-363, Order on Reconsideration, 16 FCC Rcd 15599 (2001).

211

DirecTV, Echostar, SBCA v. FCC & USA, No. 01-1151 (Fourth Circuit). SHVIA provides DBS carriers with

the opportunity to carry local stations in a Designated Market Area (“DMA”) pursuant to a statutory copyright

license similar to the one provided cable operators. If DBS carriers elect this option in a DMA, however, they must

carry all the local stations in the DMA, effective January 1, 2002. In this consolidated case, the satellite carriers

sought review of the Commission's Order implementing the statute. They also appealed a June 19, 2001, judgment

of the United States District Court for the Eastern District of Virginia, which granted the government's motion to

dismiss their complaint challenging the SHVIA.

212

See Satellite Broadcasting and Communications Association v. FCC

, No. 01-1151

et al.

Cir. 2001).

213

See

Implementation of the Cable Television Consumer Protection and Competition Act of 1992, Development of

Competition and Diversity in Video Programming Distribution: Section 628(c)(5) of the Communications Act

, CS

Docket No. 01-290, Notice of Proposed Rulemaking (“

Program Access NPRM

”), 16 FCC Rcd 19074 (2001).

See

also

¶¶ 162-170

infra

214

SBCA Comments at 8-9.

See also

DirecTV Comments at 9-10; EchoStar Comments at 13; NRTC Comments at

18-21, and Reply Comments at 3.

Federal Communications Commission FCC 01-389

extended to cover all vertically integrated programming, regardless of how it is delivered.

215

NCTA, in its

comments, on the other hand, states that DBS is firmly entrenched as a competitor to cable,

216

and that

DBS is constraining cable prices.

217

Given the changes in the MVPD marketplace, NCTA believes that

the program access limitations on exclusivity should sunset.

218

62.

Broadband Satellite Services.

Both DirecTV and EchoStar now offer two-way Internet

access services to their subscribers.

219

DirecTV offers the service under the brand name DirecPC, and

consumers can receive video and high-speed Internet access through one satellite dish, the DirecDUO.

220

EchoStar offers a similar service, called Starband, in cooperation with a subsidiary of Gilat.

221

These

services are available in areas where other high-speed options are not, but analysts question whether

higher monthly fees and equipment costs will limit satellite high-speed data’s competitiveness with cable

and DSL.

222

63.

High-Definition Television.

DirecTV and EchoStar provide subscribers with high-definition

television (“HDTV”) programming. This year, DirecTV premiered HDNet, an HDTV channel that will

show Major League Baseball games, National Hockey League games, qualifying events for the 2002

Winter Olympic games, and other non-sports entertainment programming.

223

DirecTV also carries Home

Box Office (“HBO”) and select pay-per-view movies in HDTV format.

224

EchoStar carries HBO,

Showtime, CBS, and select pay-per-view movies in HDTV format.

225

215

SBCA Comments at 9.

See also

DirecTV Comments at 8-10; EchoStar Comments at 1-4 and 9-14. EchoStar

also indicates that the Commission has not enforced its existing program access regulations with sufficient vigor. In

opposition to EchoStar’s position,

see

NCTA Reply Comments at 8-11.

216

NCTA Comments at 6-13.

217

Id.

at 13-17.

218

Id.

at 36-39.

219

SBCA Comments at 5-6.

220

See

http://www.direcpc.com. DirecTV also continues to offer its one-way high-speed access service, with a

telephone line return path.

221

KaganBroadband,

EchoStar Adds HSD, Promotes New Boxes

, Jan. 8, 2001, at 1. EchoStar has increased its

ownership interest in Starband, and will take a majority interest next year.

EchoStar Begins Takeover of Starband

Comm. Daily, July 12, 2001, at 3.

222

See, e.g.,

Satellite Internet Challenges Include Improving Business Models

, Comm. Daily, May 15, 2001, at 3,

and Yuki Noguchi,

Slow to Take Off: Internet Service Via Satellite Remains an Expensive Choice

, Washington Post,

Aug. 8, 2001, at E1.

223

Monica Hogan,

DirecTV Readies HDTV Sports Net

, Multichannel News, Sept. 4, 2001.

224

Id.

To receive DirecTV’s HDTV service, subscribers must purchase either an HDTV set with a built-in DirecTV

receiver, or a separate decoder box, and a second satellite dish that is capable of receiving the signals.

See

http://www.directv.com:80/yourservice/yourservicepages/0,1125,384,00.html.

225

Monica Hogan,

DirecTV Readies HDTV Sports Net

, Multichannel News, Sept. 4, 2001. To receive EchoStar’s

HDTV service, subscribers must purchase a second dish, use a certain kind of decoder box, and pay an extra fee of

$5.99 per month.

See

http://www.dishnetwork.com/content/programming/locals/cbshd/index.shtml and

http://www.dishnetwork.com/ppv/features/hdtv/hdtv.html.

Federal Communications Commission FCC 01-389

64.

Terrestrial Reuse of DBS Spectrum.

We previously reported on Northpoint Technologies,

Inc.’s proposal to reuse DBS spectrum for a terrestrial service that the Commission has termed

Multichannel Video Distribution & Data Services (“MVDDS”).

226

The Commission determined that it is

technically feasible for MVDDS and DBS to share spectrum and that such sharing can be accomplished

under an already existing fixed allocation in the 12.2-12.7 GHz band.

227

This allocation requires that

MVDDS not cause harmful interference to incumbent DBS services.

228

The Commission also adopted a

Further Notice of Proposed Rulemaking

seeking comment on technical and service rules for licensing the

new services.

229

On April 18, 2001, Mitre Corporation delivered to the Commission a Report titled,

“Analysis of Potential MVDDS Interference to DBS in the 12.2-12.7 GHz Band.”

230

The Mitre Report

indicates that sharing of the 12 GHz band is feasible and provides suggested mechanisms to mitigate

potential interference to DBS operations.

231

A separate company, MDS America, has also proposed

reusing these frequencies, and has conducted tests it claims show no interference.

232

A third company,

PDC Broadband Corporation has also filed for permission to reuse this band for terrestrial services.

233

65.

Northpoint states that the Mitre Report indicates that sharing of the DBS spectrum is feasible,

and that the report only points to the threat of interference under certain circumstances.

234

Northpoint

states that it will provide more effective competition to cable than DBS by offering local broadcast

stations in every market, and by quickly achieving economies of scale and scope.

235

Northpoint believes

226

See 2000 Report

, 16 FCC Rcd at 6043.

227

Amendment of Parts 2 and 25 of the Commission’s Rules to Permit Operation of NGSO FSS Systems Co-

Frequency With GSO and Terrestrial Systems in the Ku-Band Frequency Band; Amendment of the Commission’s

Rules to Authorize Subsidiary Terrestrial Use of the 12.2-12.7 GHz Band by Direct Broadcast Licensees and Their

Affiliates; and Applications of Broadwave USA, PDC Broadband Corporation, and Satellite Receivers, Ltd., to

Provide A Fixed Service in the 12.2-12.7 GHz Band

, ET Docket No. 98-206, RM-9147, RM-92-45, First Report and

Order and Further Notice of Proposed Rulemaking (“

New Fixed Satellite Services Order

”), 16 FCC Rcd 4096

(2001).

228

See

47 C.F.R. § 2.106, fn. S5.490.

229

See New Fixed Satellite Services Order

, n. 227

supra

230

The Mitre Corporation report was conducted pursuant to Section 1012, Prevention of Interference to Direct

Broadcast Satellite Services, of the Commerce, Justice, State and Judiciary Appropriations Act, (CJSJA Act), H.R.

5548 (enacted on December 21, 2000, as part of Pub. L. 106-553). FCC,

Comments Requested on The Mitre

Corporation Report on Technical Analysis of Potential Harmful Interference to DBS from Proposed Terrestrial

Services in the 12.2 – 12.7 GHz Band (ET Docket 98-206)

, Press Release (Apr. 23, 2001). In this Press Release, the

Commission requested, and subsequently received, comments on the report.

231

Mitre Corporation,

Analysis of Potential MVDDS Interference to DBS in the 12.2-12.7 GHz Band

, Apr. 18, 2001,

at 6.1-6.2.

232

MDS America Says Test Show It Can Share Ku-Band Without DBS Interference

, TR Daily, Oct. 12, 2001.

233

New Fixed Satellite Services Order

, 16 FCC Rcd at 4196-7. Satellite Receivers, Ltd. also filed an application for

authority to provide terrestrial services in this band in Illinois, Indiana, Iowa, Michigan, Minnesota and Wisconsin.

234

Northpoint Comments at 3-6.

235

Id.

at 6-8. Northpoint states that DBS industry suggestions to move MVDDS service to other spectrum bands

would reduce its effectiveness as a competitor.

Federal Communications Commission FCC 01-389

that the Commission should grant its license application to provide this service without competitive

bidding.

236

66.

SBCA counters that interference harmful to DBS services is inherent to MVDDS design, and

that the mitigation techniques suggested in the Mitre Report are “untested, expensive, and burdensome,

and will not be able to eliminate all interference.”

237

SBCA proposes a solution, allowing MVDDS

services in higher frequency bands already allocated for point-to-multipoint video and data services.

238

EchoStar and DirecTV also oppose MVDDS reuse of DBS spectrum, stating that this reuse would

degrade and decrease reliability of DBS services and thus adversely affect DBS subscribership.

239

NRTC

also raises concerns about MVDDS interference with DBS service.

240

2. Home Satellite Dishes

67.

The home satellite dish (“HSD”) or C-band segment of the satellite industry continues to

experience a decline in subscribership. Between June 2000 and June 2001, C-band subscribers fell from

1,476,717 to 1,000,074, an average loss of 1,306 subscribers per day.

241

SBCA states, however, that “C-

band remains the delivery vehicle for a core contingent of satellite subscribers,”

242

and “that satellite

programmers remain committed to offering programming to this sector of the industry.”

243

There are now

four remaining C-Band programming distributors, Gemstar-TV Guide Superstar/Netlink Group, DSI

Distributing, Satellite Receivers, Ltd., and the NRTC.

244

C. Multichannel Multipoint Distribution Service

68.

Multipoint and multichannel multipoint distribution service (“MDS” and “MMDS”) and

instructional television fixed service (“ITFS”) share spectrum in the 2.5-2.69 GHz band. In addition,

MDS entities license spectrum in the 2.15-2.162 GHz band, primarily for upstream communications to

hub receiving facilities in two-way data communications systems. Traditionally, MDS spectrum has been

used to deliver multichannel video programming (known as wireless cable service) to residential

customers.

245

236

Id. at 8-9.

237

SBCA Comments at 10-13.

238

Id. at 14.

239

EchoStar Comments at 14-15; DirecTV Comments at 5-6.

240

NRTC Comments at 17-18; Reply Comments at 5. NRTC requests that the Commission accept competing

applications and conduct an auction to provide the service.

241

SBCA Comments at 4-5, Tables 1 and 3.

242

For instance, Gregory C. Jones and John Dowie, C-Band subscribers, filed comments in this proceeding, urging

the Commission to enact policies to aid C-Band’s continued presence as a competitor to cable and a provider of

technology to rural America. See Dowie Comments and Jones Reply Comments.

243

SBCA Comments at 3.

244

Satellite Business News, Inc., Satellite Receivers Buys Disney’s C-Band Subscribers, Satellite Business News

FAXUpdate, June 15, 2001.

245

See 2000 Report, 16 FCC Rcd at 6045.

Federal Communications Commission FCC 01-389

69.

In 1998, the Commission released the

Two-Way Order

permitting MDS/ITFS licensees to

construct digital two-way systems that could provide high-speed, high-capacity broadband service,

including two-way Internet service via cellularized communication systems.

246

In the wake of the

Two-Way Order

, WorldCom and Sprint each invested over $2 billion in acquiring MDS licensees and at

least another $1 billion each in system construction. An initial filing window for two-way service was

held in August 2000. Following this initial filing window, on April 16, 2001, the Mass Media Bureau

commenced a rolling one-day filing window process, which permits licensees to apply for authorizations

on a first-come first-served basis.

247

To date, approximately 1,600 of those applications have been

granted.

70.

On January 5, 2000, the Commission issued a

Notice of Proposed Rulemaking

that examined

spectrum options for third-generation wireless service (“3G”) and other advanced wireless services.

Although many different spectrum bands were discussed in that proceeding, the Commission sought

comment on whether to provide mobile services in the 2.5-2.69 GHz, which is occupied by MDS and

ITFS licenses.

248

On September 6, 2001, the Commission adopted a

First Report and Order and

Memorandum Opinion and Order

(“

First R&O/MO&O

”) in the New Advanced Wireless Services

proceeding.

249

The First R&O

adds a mobile allocation to the 2.5-2.69 GHz band to provide additional

near-term and long-term flexibility for use of this spectrum, thereby making this band potentially

available for advanced mobile and fixed terrestrial wireless services, including 3G and future generations

of wireless systems. The Commission decided not to relocate the existing licensees or otherwise modify

their licenses. In addition, the Commission recognized that it will have to explore the service rules that

would apply to permit mobile operations in the 2.5-2.69 GHz band in a separate future proceeding.

71.

MDS Households and Subscribership

. As reported last year, the potential number of homes

with a serviceable line-of-sight to an MMDS operator's transmission facilities was about 62 million and

the number of homes actually capable of receiving an MMDS signal (“homes seen”) was about 36

million.

250

The number of MMDS subscribers, however, continues to hover around 700,000.

251

MMDS

246

Amendment of Parts 21 and 74 to Enable Multipoint Distribution Service and Instructional Television Fixed

Service Licensees to Engage in Fixed Two-Way Transmissions

, MM Docket No. 97-217, Report and Order, 13 FCC

Rcd. 19112 (1998),

recon.,

14 FCC Rcd 12764 (1999),

further recon

., 15 FCC Rcd 14566 (2000).

247

Mass Media Bureau Provides Further Information Regarding Grants Of ITFS And MDS Two-Way Applications;

Certain ITFS Major Modification Applications; And The Rolling One-Day Filing Window Procedure

, Public Notice,

DA 01-751 (rel. Mar. 26, 2001).

248

See Amendment of Part 2 of the Commission’s Rules to Allocate Spectrum Below 3GHz for Mobile and Fixed

Services to Support the Introduction of New Advanced Wireless Services, Including Third Generation Wireless

Systems

, ET Docket No. 00-258, Notice of Proposed Rule Making and Order, 16 FCC Rcd 596 (2000).

249

See Amendment of Part 2 of the Commission’s Rules to Allocate Spectrum Below 3GHz for Mobile and Fixed

Services to Support the Introduction of New Advanced Wireless Services, Including Third Generation Wireless

Systems

, ET Docket No. 00-258, First Report and Order and Memorandum Opinion and Order, 16 FCC Rcd 17222

(2001).

250

See

2000 Report

, 16 FCC Rcd at 6046. The number of homes with a "serviceable line of sight" counts all homes

which an MMDS operator is licensed to serve within a particular license area, regardless of technical limitations

such as signal strength or blockage by terrain. The number of "homes seen," on the other hand, is the number of

homes that MMDS operators have the technical ability to serve.

See 1997 Report

, 13 FCC Rcd at 1081.

251

NCTA,

Cable & Telecommunications Industry Overview 2001

, Cable Television Developments 2001, at 11

Federal Communications Commission FCC 01-389

providers, such as WorldCom and Nucentrix,

252

have continued to roll out high-speed Internet access in

new markets, many of them rural. However, Sprint, which introduced its video, voice, and data service to

consumers and businesses in 1998, recently announced that it will terminate this service.

253

Pursuant to its

independent spectrum management responsibilities, the Commission recently undertook a study of the

2500-2690 MHz band. An Interim Report regarding this band was issued in November 2000,

254

and a

Final Report was issued in March 2001.

255

The following information regarding the rollout of two-way

services by MDS providers was set forth in the studies: Sprint has acquired interests in more than 90

markets covering about 30 million households. WorldCom holds MDS licenses covering over 31 million

households in 78 markets. Nucentrix Broadband Services, Inc. currently offers two-way high-speed

Internet access service in Austin and Sherman-Denison, Texas, and is conducting a trial of the service in

Amarillo, Texas. At least 24 other companies offer fixed wireless services in approximately 33 different

counties. Generally, MDS providers are focusing on data transmission rather than video service.

72.

Barriers to Competition

. Section 628(c)(2)(D) of the Communications Act generally

prohibits exclusive contracts between,

inter alia

, vertically integrated satellite cable programming

vendors and cable operators. WCA states that preservation of this statutory prohibition is of critical

importance to fixed wireless providers of multichannel video programming.

256

WCA further contends

that the conditions that prompted the adoption of program access rules are worse than they were in 1992.

Where cable programmers once had opportunities to sell their programming to multiple cable operators in

a local market, in many cases there is now a single cable operator that has consolidated previously

independent systems. According to WCA, this exposes MDS/ITFS providers and other terrestrial

competitors to a risk that vertically integrated programmers will refuse to sell their programming to

alternative MVPDs that do not serve a “critical mass” of subscribers.

257

WCA also claims that cable

programmers have already withheld programming from competitors due in part to the Commission’s

liberal interpretation of the terrestrial distribution requirement.

258

D. Satellite Master Antenna Television Systems

73.

SMATV systems, also known as private cable operators or private communication operators,

are video distribution facilities that use closed transmission paths without using any public right-of-

252

Nucentrix reports that it operates the largest wireless cable company, Heartland Cable Television, Inc., which

provides 33 channels of video programming to subscribers in 57 markets.

See

Nucentrix Broadband Networks at

http://www.nucentrix.com.

253

Sprint,

Sprint to Terminate ION Efforts; Announces Additional Actions to Improve Competitive Positioning and

Reduce Operating Costs in FON Group

(press release), Oct. 17, 2001, at

http://www3.sprint.com/PR/CDA/PR_CDA_Press_Releases_Detail/1,1579,3921,00.html; Sprint,

Sprint History

http://www.sprint.com/sprint/ir/sd/sh.html.

254

See

FCC Staff Report,

Spectrum Study of the 2500-2690 MHz Band: The Potential for Accommodating Third

Generation Mobile Systems

, ET Docket No. 00-232, Interim Report, 15 FCC Rcd 22310 (2000).

255

See

FCC Staff Report,

Spectrum Study of the 2500-2690 MHz Band: The Potential for Accommodating Third

Generation Mobile Systems

, ET Docket No. 00-258, Final Report, 16 FCC Rcd 10272 (2001).

256

WCA Comments at 1-2.

See Program Access NPRM,

n. 213

supra

257

WCA Comments at 3-4.

258

Id.

at 4-5.

Federal Communications Commission FCC 01-389

way.

259

SMATV systems usually are satellite-based and distribute television signals to urban and

suburban multiple dwelling units (“MDUs”) as well as commercial multiple tenant units (“MTUs”).

260

SMATV providers receive and process satellite signals directly at an MDU or other private property with

an on-site headend facility consisting of receivers, processors and modulators. Programming is

distributed to individual units through an internal hard-wire system in the building.

74.

SMATV operators are subject to less regulatory oversight than traditional cable systems. For

example, they are not required to obtain cable television franchises, nor do they face regulatory

constraints on the geographic areas in which they may offer video services.

261

Some SMATV systems use

microwave transmissions and wires to serve multiple buildings that are not commonly owned.

262

On July

13, 1999, the Commission adopted a

Notice of Proposed Rulemaking

seeking comment on a proposal to

allow SMATV operators to use Cable Television Relay Service (“CARS”) 12 GHz band channels to

deliver video programming.

263

Because SMATV systems do not use public rights-of-way, and are

technically not cable operators, they have been ineligible for CARS licenses.

264

In addition, the

Commission sought comment on whether the CARS band should be expanded to include the frequency

band segment from 13.20-13.25 GHz, currently designated for television broadcast auxiliary service.

This proceeding is pending.

75.

SMATV operators consist of hundreds of small and medium size firms throughout the

nation.

265

Most SMATV operators serve approximately 3,000-4,000 customers, but the larger ones serve

259

47 U.S.C. § 522(7).

260

The MDU market is comprised of an estimated 20-25 million units. Mor Allon,

Who Should be in the Driver’s

Seat in Delivering Broadband Services: Business or Technology?

, Private & Wireless Broadband,

August/September 2001, at 32.

261

1996 Act, sec. 301(a)(2), 47 U.S.C. § 522(7). In addition, private cable and SMATV operators (a) do not pay

franchise and Federal Communications Commission subscriber fees; (b) are not obligated to pass every resident in a

given area; (c) are not subject to rate regulation; and (d) are not subject to must carry and local government access

obligations.

1997 Report

, 13 FCC Rcd at 1085.

262

. at 1085. The Commission held in 1991 that microwave transmissions do not "use" public rights-of-way and

made 18 GHz technology available for the point-to-point delivery of video programming services, allowing

operators to free themselves from large networks of coaxial or fiber optic cable and amplifiers.

Amendment of Part

94 of the Commission’s Rules to Permit Private Video Distribution Systems of Video Entertainment Access to the 18

GHz Band

, PR Docket No. 90-5, Report and Order, 6 FCC Rcd 1270, 1271 (1991). In addition, on June 22, 2000,

the Commission adopted a

Report and Order

affirming the allocation of the 18 GHz band for SMATV providers,

concluding that “private cable operators using the 18 GHz band, for both current and future operations, will not be

able to compete effectively against franchised cable operators if we redesignate the 18.3-18.55 GHz band….”

See

Redesignation of the 17.7-19.7 GHZ Frequency Band, Blanket Licensing of Satellite Earth Stations in the 17.7-20.2

GHz and 27.5-30.0 GHz Frequency Bands, and the Allocation of Additional Spectrum in the 17.3-17.8 GHz and

24.75-25.25 GHz Frequency Bands for Broadcast Satellite-Service Use

, IB Docket No. 98-172, Report and Order

(“

18 GHz Report and Order

”), 15 FCC Rcd 13430, 13450 (2000).

263

1999 Report,

15 FCC Rcd at 1023;

Petition for Rulemaking To Amend Eligibility Requirements in Part 78

Regarding 12 GHz Cable Television Relay Service

, CS Docket No. 99-250, Notice of Proposed Rulemaking,

14 FCC Rcd 11967 (1999).

264

47 C.F.R. § 78.13.

265

For a list of self-described private communications operators,

see

the Web site of the Independent Multi-Family

Communications Council (IMCC), Private Communication Operator (PCO) Members at http://www.imcc-

online.org/membership.

Federal Communications Commission FCC 01-389

15,000-55,000 subscribers each.

266

As of July 2001, SMATV subscribership remained unchanged from

last year at 1.5 million subscribers.

267

76.

In terms of service offerings, private cable operators generally offer the same basic service

tiers that are offered by franchised cable operators.

268

We have previously reported that SMATV

operators are joining with satellite providers to combine analog antenna and DBS systems in order to

increase service offerings and this trend continues.

269

Some private cable operators are upgrading their

systems with digital technology that allows the operator to provide service packages of up to 200 channels

over their analog infrastructure, plus pay per view and digital music channels.

270

Private cable operators

also are developing suites of service offerings to satisfy the increasing demand among MDU owners for

broadband services beyond digital video service or DBS programming services.

271

For example, they are

seeking service suites that include one or more of the following: high-speed Internet access, community

portals, interactive programming guides and localized video information.

272

77.

Barriers to Competition

: Private cable operators’ ability to compete with other MVPDs is

based, in part, on the degree of access they have to the MDU marketplace. Ongoing issues confronting

private cable operators include exclusive and/or perpetual contracts between MDUs and other MVPDs.

The Commission has issued a

Second Further Notice of Proposed Rulemaking

seeking comments, among

other things, on the advantages or disadvantages of exclusive contracts in promoting a competitive

environment, and whether there are circumstances in which the Commission should adopt restrictions on

266

1999 Report,

15 FCC Rcd at 1023.

See also

Ten Largest Private Cable Operators/Multiple System Operators

Private Cable & Wireless Cable, Dec. 1999, at 4.

267

NCTA Comments at 7.

268

One source indicates that the average private cable operator offering SMATV video service usually delivers

about 30-45 channels.

See

Mor Allon,

How the PCO Can Improve the Bottom Line Providing Bundled Services to

MDUs

, Private & Wireless Broadband, June 2000, at 16. In 1999, we reported that the number of channels being

offered by SMATV operators responding to an industry poll was approximately 89 channels, with a low of 50

channels and a high of 200 channels offered.

1999 Report,

15 FCC Rcd at 1024. This figure is derived from the

reports of 18 operators, and likely includes SMATV operators that offer video over a combined SMATV/DBS

system.

269

1999 Report,

15 FCC Rcd at 1024-25;

2000 Report

, 16 FCC Rcd at 6048-9.

See, e.g., MDTV to Provide

DIRECTV and High-Speed Internet Access to Ginsburg Development Companies’ Property

, Private & Wireless

Broadband, June/July 2001, at 52.

270

Doug Trukenmiller,

QAM: Your Secret Weapon for a Competitive Television Solution

, Private & Wireless

Broadband, August/September 2001, at 52.

271

According to one analysis, sales of broadband equipment and services tailored to the MDU market will increase

from $370 million in 2000 to $4.8 billion by 2004. Cahners In-Stat Group,

Broadband to the MTU Becoming More

Mature: Market to Reach $4.8 Billion by 2004

(press release), Jan. 10, 2001.

See also

What Went Wrong:

Broadband Delivery to the MDU

, Cahners In-Stat Group Information Alert Newsletter, Aug. 9, 2001.

272

See, e.g.

, Amy Helland,

Bringing Broadband to Your Tenants: What Property Owners are Thinking and Doing

Private & Wireless Broadband, August/September 2001, at 38-40; Mark Sherman,

Increase Your Cash Flow by

Delivering Digital Service

, Private & Wireless Broadband, June/July 2001, at 26; Larry Kessler,

Experiencing A

Revolution

, Private & Wireless Broadband, April/May 2001, at 10.

See also

USOL Executes Agreement to Provide

Cable and High-Speed Internet Services to Concord at McGallion Complex

, Private & Wireless Broadband,

April/May 2001, at 48;

OnePath Networks and NWS Communications Collaborate on Delivery of Broadband

Services to MDUs

(press release), July 16, 2001, at http://www.onepathnet.com/newsevents/index.html.

Federal Communications Commission FCC 01-389

exclusive contracts in order to further promote competition in the MDU marketplace.

273

This proceeding

is pending.

E. Broadcast Television Service

78.

Broadcast networks and stations are competitors to MVPDs particularly in the advertising

and program acquisition markets. Broadcast networks also compete with MVPDs by supplying video

programming over the air to those who do not subscribe to an MVPD service. Additionally, broadcast

networks and stations are suppliers of content for distribution directly to consumers and to consumers

through MVPDs. Since the

2000 Report

, the number of commercial and noncommercial television

stations increased to 1,678 as of June 30, 2001, from 1,663 as of September 30, 2000.

274

Total television

broadcast advertising revenues reached $41 billion in 2000, a 12.2 percent increase over 1999.

275

Advertising revenues for the seven most widely circulated broadcast networks (ABC, CBS, Fox, NBC,

PAX, UPN, and WB) alone reached $20.2 billion in 2000.

276

In comparison, cable programming

networks earned $10.3 billion in advertising revenue in 2000, an increase of 24 percent over 1999.

277

79.

A Spring 2001 Home Technology Monitor Ownership Report prepared by Statistical

Research, Inc. (“SRI”), indicated that there are approximately 46.5 million television sets in broadcast-

only homes. An additional 34.5 million television sets in homes subscribing to an MVPD service remain

unconnected to such service. Thus, 81 million, or approximately 30.3 percent of the 267 million sets in

the U.S. receive broadcast signals over-the-air. This study estimates that 20.9 percent of all households

are broadcast-only homes and over 41 percent of all homes have at least one broadcast-only set.

Similarly, Nielsen estimates that 20.7 million, or 29.2 percent of all households are broadcast-only

homes.

278

Moreover, the SRI study reports that approximately 33 percent of homes with incomes under

$30,000 are broadcast-only, compared to 10 percent of the households with incomes exceeding

$75,000.

279

80.

During the 2000-2001 television season, ABC, CBS, Fox, NBC, PAX, UPN and WB

affiliates accounted for a combined average 57 percent share of prime time viewing among all television

households, compared to 59 percent in the previous year.

280

For all-day (24-hour) viewing, programming

273

Telecommunications Services Inside Wiring, Customer Premises Equipment, Implementation of the Consumer

Protection and Competition Act of 1992: Cable Home Wiring

, CS Docket No. 95-184 and MM Docket No. 92-260,

Report and Order and Second Further Notice of Proposed Rulemaking (“

Inside Wiring Order

”), 13 FCC Rcd 3659

(1998).

274

Compare

Federal Communications Commission,

Broadcast Station Totals as of September 30, 2000

, FCC News

Release (Nov. 29, 2000)

with

Federal Communications Commission,

Broadcast Station Totals as of June 30, 2001

FCC News Release (July 13, 2001).

275

Television Bureau of Advertising,

Local Broadcast TV Posts 12.2% Gain in 2000 Over 1999

(press release),

Mar. 22, 2001.

276

Id.

277

NCTA,

Cable Advertising Revenue: 1984-2000 (In Millions)

, Cable Television Developments 2001, at 11.

278

In addition, broadcast-only homes include a higher proportion of racial and ethnic minorities – 18 percent of

white households, 24 percent of African-American households and 32 percent of Hispanic households. NAB

Comments at 2-3.

279

Id.

at 3.

280

Nielsen Media Research

, Viewing Sources – Primetime, 1984-85 to 2000-01.

Federal Communications Commission FCC 01-389

broadcast on all television stations (affiliates, independents and non-commercial stations) accounted for a

combined 57 percent share of viewing in all TV households, also down from 59 percent last year. Non-

premium cable networks and pay cable services achieved a combined 55 percent share of 24-hour

viewing, up from 52 percent last year. Reported audience shares exceed 100 percent due to simultaneous

multiple set viewing.

281

81.

We previously reported on consolidation in the broadcast industry and on “repurposing” of

content. Repurposing of programming is becoming more common. We reported “repurposing” deals

between NBC and PaxTV, and ABC with Lifetime and VH-1 in last year’s report.

282

This season, FX and

Fox have also agreed to rebroadcast, on FX, two Fox series (

and

Nathan’s Choice

) in the same week

as the initial showing on Fox.

283

82.

As we stated in previous reports, DTV could potentially enhance the ability of broadcasters to

compete in the video marketplace. DTV allows broadcasters to transmit a very high quality signal (High

Definition Television or HDTV), several standard definition signals (“multicasting”), or ancillary services

in addition to broadcast signals. As of August 1, 2001, all but one of the network affiliates in the top ten

television markets were broadcasting DTV service.

284

In television markets 11-30, 70 of 79 stations were

broadcasting DTV service. Eighty-three percent of the more than 1,300 commercial television stations

have been granted a DTV construction permit or license and 229 are on the air with DTV operation.

285

All commercial broadcasters are required to be on the air with DTV signals by May 2002.

83.

Current use of DTV spectrum involves simultaneous broadcast of standard definition signals.

For instance, ABC will be broadcasting its prime time dramas and comedies in HDTV this season. All of

ABC’s scripted prime time shows will be available to viewers in HDTV, representing about 60 percent of

the network’s weekly schedule. Reality programs, news shows and

Monday Night Football

(“

MNF

”) will

not be aired in HDTV, although ABC intends to add

MNF

to the HDTV lineup as soon as next season.

CBS is delivering its entire prime time lineup in HDTV in partnership with digital television set

manufacturers Panasonic and Zenith. This is the third consecutive year that CBS has broadcast the

majority of its prime time schedule in HD digital format.

286

NBC airs

Crossing Jordan

in prime time and

The Tonight Show With Jay Leno

in HDTV.

287

PBS will also broadcast two or three documentaries per

month in HDTV.

288

84.

Since the

2000 Report

, there has been limited progress on broadcast-cable compatibility

issues. A February 22, 2000, agreement between the NCTA and the CEA addressed two issues -

281

Nielsen Media Research,

NTI Total Viewing Sources Reports, 1999-2001.

282

2000 Report

, 16 FCC Rcd at 6051. “Repurposing” generally involves a re-run of broadcast content on a different

network (cable or broadcast) shortly after it airs originally on network affiliate stations.

283

Cahners,

FX, Fox Reach Repurposing Deal

, Multichannel News, July 30, 2001, at http://www.tvinsite.com.

284

See

Summary of DTV Applications Filed and DTV Build Out Status

http://www.fcc.gov/mmb/vsd/files/dtvsum.html for an updated list on the status of DTV broadcasts.

285

286

Cahners,

CBS Putting all of Prime in HD

, Broadcasting & Cable, Sept. 7, 2001, at http://www.tvinsite.com.

287

See

Top of the Week, Digital Dossier

, Broadcasting & Cable

Oct. 8, 2001, at 20; Michael Grotticelli,

Nets

Increase HDTV Output

, Broadcasting & Cable, Oct. 8, 2001, at 36-37.

288

. at 36.

Federal Communications Commission FCC 01-389

technical requirements for direct connection of digital television receivers to digital cable systems and

provision of tuning and program schedule information to support the navigation function of DTV

receivers, including on-screen program guides. This information is generally referred to as "PSIP"

(“Program and System Information Protocol”) information. With regard to the technical requirements for

direct connection, the Society of Cable Telecommunications Engineers (“SCTE”) completed adoption of

the standard Digital Video Subcomittee (DVS)-313 on April 4, 2001. CEA has a parallel standard,

Electronic Industry Association (EIA)/CEA-818-B, which is being revised to reflect the latest version of

DVS-313. However, DVS-313 alone is not sufficient for building a device that will permit access to

encrypted digital cable programming (and cable operators plan to encrypt most of their digital

programming). To access encrypted programming requires a point of deployment (“POD”) device. The

February 22 agreement also set out a seven-step PSIP "Implementation Plan” designed to ensure that

DTV receivers would be able to access certain PSIP information provided by program networks. The

cable and consumer electronics industries differ on the amount of progress made on the implementation

plan, with the CEA suggesting that there has been very little.

289

85.

The lack of a comprehensive copy protection regime has also slowed the DTV transition.

There has been some progress on this front since last year, with two studios, Sony and Warner, signing

copy protection technology licensing agreements with the "5C" companies.

290

However, various copy

protection issues remain unresolved, including the degree of protection for broadcast programming and

how to realize it. The

2000 Report

noted that the Commission had adopted DTV receiver labeling

requirements in order to ensure that consumers will be fully informed about the capabilities of DTV

receivers to operate with cable television systems.

291

Two reconsideration petitions are pending in that

proceeding.

86.

In addition, the Commission continues to consider mandatory carriage requirements of DTV

broadcast signals by cable systems. On January 18, 2001, the Commission adopted a

First Report and

Order and Further Notice of Proposed Rule Making

that tentatively rejected a dual carriage requirement

for both a station’s analog and digital signals. It also provided a framework for the private resolution of

such signal carriage issues through retransmission consent agreements for commercial stations and

through voluntary agreements in the case of noncommercial stations.

292

In the

First Report and Order

among other things, the Commission clarified that a digital-only television station could assert carriage

rights on local cable systems, afforded carriage rights to any station that returns its analog spectrum and

converts to digital operations and resolved a number of other related issues. In the

Further Notice

, the

Commission seeks additional comment on its tentative conclusion regarding a dual carriage requirement.

Additionally, the

Further Notice

requests comment on the proper scope of the requirement to carry

“program related” content in this context and the applicability of the rules adopted in the

First Report and

Order

to satellite carriers under the SHVIA signal carriage provisions.

289

Id.

290

The “5C” companies are Intel, Toshiba, Sony, Hitachi, and Matsushita.

See 1998 Report

, 13 FCC Rcd at 24347:

1999 Report

, 15 FCC Rcd at 1029.

291

See

Compatibility Between Cable Systems And Consumer Electronic Equipment

, PP Docket No. 00-67, Report

and Order, 15 FCC Rcd 17568 (2000).

292

See DTV Signal Carriage Proceeding

, n. 30

supra

Federal Communications Commission FCC 01-389

87.

Although initial consumer acceptance of, and transition to, DTV has been slow, some assert

that progress is being made.

293

As a result, broadcasters continue to engage in tests of various possible

DTV products, such as HDTV, ancillary services, or some combination. It is, however, impossible to

assess the competitive impact of DTV service on the MVPD market at this time, other than to observe

that the potential for a positive competitive impact remains.

88.

Comments on Low-Power Competition.

In addition to the 1,304 commercial television

stations the Commission licenses, the Commission also licenses lower-power television (“LPTV”)

stations. There are currently over 2,300 licensed LPTV stations.

294

Several low power television stations

claim that LPTV stations need must-carry status to survive.

295

WBGT-LP argues that the Commission

should consider special must-carry provisions for competitors that can show reasonable evidence as to

their desirability or consumer demand, similar to the significant viewing methodology.

296

F. Other Entrants

1. Internet Video

89.

Since our last

Report

, the availability of real-time and downloadable video over the Internet

(“Internet video”) has increased greatly.

297

The number of homes with access to the Internet and the

number of home users accessing Internet video have also increased over the last year, as has the amount

of available content. As of July 2001, an estimated 58 percent of all Americans had Internet access at

home, compared with 52 percent as of July 2000.

298

Additionally, as of July 2001, 41 million residential

Web users had accessed streaming video.

299

However, despite the evidence of continued interest in

Internet video deployment and use, the medium still is not generally seen as a direct competitor to

traditional video services.

300

As we reported last year, broadcast-quality Internet video service requires a

293

The Consumer Electronics Association reports the sale of DTV products is gaining momentum. Factory to dealer

sales of DTV units were almost 650,000 units in 2000, and are projected to over 1.2 million units for 2001.

See

http://www.ce.org/vision_magazine/editions/2001/mayjun/p04b.asp.

294

See

Federal Communications Commission,

Broadcast Station Totals as of June 30, 2001

FCC News Release

(July 13, 2001).

295

Pursuant to 47 U.S.C. § 534(h), low power television stations qualify for must-carry status only in limited

circumstances.

296

WBGT-LP Comments at 2.

See

47 C.F.R. § 76.54.

See also

WJAN-CA and WQBC-CA Comments.

297

Internet video provided in real-time is also known as “streaming video.”

298

Amanda Cantrell,

Growth of Internet Access Slows Dramatically in U.S.

, The Industry Standard, Aug. 14, 2001.

299

Arbitron, Inc.,

Arbitron/Edison Media Research Study Reveals Most “Streamies” First Accessed Webcasting

within the Last Year

(press release), Sept. 5, 2001 (citing Nielsen// Net Ratings data).

300

The Commission recently suggested that, given the nascent stage of the Internet video industry, it is premature to

consider Internet video to be a full competitive alternative.

Amendment of Section 73.658(g) of The Commission’s

Rules – The Dual Network Rule

, MM Docket No. 00-108, Report and Order, 16 FCC Rcd 11114, 11120 (2001). In

addition, industry sources believe that Internet video still is substandard to broadcast quality and that hurdles remain

to watching video on a computer screen. Robert La Franco,

The Serious Game: Digital Video is Still Off-track

, Red

Herring Online, Aug. 22, 2001, at http://www.redherring.com/ind…01&doc_id=170020017&rh_special_report_id=;

Alan Goldstein,

Test Pattern: Yahoo Still Trying to Tune in Potential of Broadcast.com

, The Dallas Morning News

Online, July 3, 2001, at http://www.dallas news.com/cgi-bin/…hnology/409092_yahoo_03bus.AR.html;

Dot.Bomb

Won’t Slow Streaming Media Growth, CERF Predicts

, Comm. Daily, Apr. 27, 2001, at 5-6; Chris Wallace,

(continued.…)

Federal Communications Commission FCC 01-389

high-speed broadband connection of about 300 kbps or higher, which most current broadband providers

cannot yet guarantee.

301

In addition, high-speed Internet subscribership still is limited, with only a few

more than ten million subscribers.

302

Nevertheless, there have been a number of significant legal,

business, and technological developments over the past year to report.

90.

Last year we reported that some providers of Internet video were facing difficulties with U.S.

303

We reported that among others, Canadian-based JumpTV was seeking to stream U.S.

television signals to Internet users in Canada.

304

Since our last

Report

, JumpTV applied for and then

recently dropped its bid for copyright clearance to retransmit TV stations over the Internet.

305

JumpTV

was seeking the right to pay copyright license fees, similar to cable, satellite or wireless firms, to stream

Canadian and U.S. television signals over the Internet.

306

91.

This year, the most prominent webcasting conflict has been the contract dispute between

Disney and Charter. In June 2001, the Walt Disney Company and Charter Communications engaged in a

dispute over whether Disney had the right to stream its own ESPNews over the Internet at the same time

that Charter held distribution rights through license fees.

307

In June, Disney briefly revoked permission

for Charter to carry ESPNews.

308

In turn, Charter replaced ESPNews in 250,000 homes with other

programming.

309

92.

Despite these obstacles, Internet users continue to download and use software for accessing

Internet video, and Web sites dedicated to streaming video continue to proliferate. For example, Nielsen//

Net Ratings estimates that Microsoft’s Windows Media Player, which recently overtook RealNetworks as

the dominant software program for accessing Internet video, has over 24.7 million users.

310

It also

(…continued from previous page)

Streaming Video Dead?

, ZDNet, Mar. 19, 2001, at http://www.zdnet.com/filters/printerfriendly/0,6061,2697806-

2,00.html;

Streaming Media Poised for Big Growth, Speakers Say

, Comm. Daily, June 21, 2001, at 5-6.

301

See 2000 Report,

16 FCC Rcd at 6054.

302

See ¶

supra. See also Second Inquiry Concerning the Deployment of Advanced Telecommunications

Capability Pursuant to Section 706 of the Telecommunications Act of 1996

, CC Docket No. 98-146, Second Report,

15 FCC Rcd 20913, 21053-7 (2000).

303

See 2000 Report

, 16 FCC Rcd at 6055-6.

304

Id.

at 6056.

305

JumpTV.com Pullout Doesn’t End Debate on Streaming TV Copyright

, Comm. Daily, Oct. 15, 2001, at 3-4.

306

Id.

307

Mass Media

, Comm. Daily, Aug. 28, 2001, at 6; Sally Beatty,

Cable Operator Drops ESPNews, Escalating

Dispute Over Video Streaming

, Wall Street Journal, July 2, 2001, at B22; John Higgins,

ESPNews Going Dark on

Charter

, Broadcasting Cable Online, July 2, 2001, at http://www.tvinsite.com/broadcasti…print_page&doc_id=3

4049&articleID=; Laura Rich,

Kicking and Streaming

, The Industry Standard Online, June 11, 2001, at

http://www.thestandard…02,26836,00.html?printer_friendly=;

ESPN-Charter Dispute Shows Cable Fears of Video

Streaming

, Comm. Daily, July 5, 2001, at 2.

308

Id.

309

310

RealNetworks Fuses Programs into Service

, Reuters, Sept. 23, 2001, at http://news.cnet.com/news/0-1005-200-

7277594.html;

RealNetworks Melds Audio, Video Platforms

, InternetNews.com, Sept. 24, 2001, at http://www.

internetnews.com/streaming-news/article /0,,861_889 881,00.html.

Federal Communications Commission FCC 01-389

estimates that RealNetworks’ RealPlayer has more than 24.4 million users.

311

The amount of video

programming content on the Internet also continues to grow.

312

In addition, traditional television

programmers are offering Internet video versions of their broadcast or cablecast programming or

supplemental webcast programming. For example, RealNetworks and the NBA teamed up in April 2001

to offer a webcast of the Dallas Mavericks versus the Sacramento Kings basketball game in what they say

was the first live video webcast of a professional sports league game.

313

Video-on-demand provider

Intertainer and DSL provider ZoomTown.com say they will stream Hollywood movies and other

entertainment content to ZoomTown’s DSL subscribers through a video-on-demand service system.

314

MTV plans to launch a channel designed specifically for access via the Internet.

315

The channel will be

called MTV Live, and will draw heavily from its library of live performances by various acts.

316

Partnerships and marketing agreements between Web sites and traditional programming providers also

continue. In August 2001, five movie studios announced a joint venture to distribute movies on-demand

over the Internet.

317

93.

Technological firms and services also continue to facilitate streaming video and address its

weaknesses. Aerocast, Inc., is creating methods to deliver high-speed streaming video content at more

than 500 kbps with its long term goal to stream video directly to a television set or receiver via a

broadband cable provider.

318

Arbitron and Lariat continue to measure and report the viewership of

streaming video.

319

In addition, The Media Channel continues to catalogue and list available Internet

video programming.

320

94.

Finally, many in the industry have been pushing for Internet video standards. In December

2000, Apple, Cisco, Kasenna, Inc., Philips, Sun Microsystems, and other companies launched the Internet

311

Id.

312

http://www.breaktv.com; http://www.feedroom.com; http://www.intv.net; http://www.television.com; http://

www.broadcast.com; http://www.tvtaxi.com; http://www.tvworldwide.com.

313

Gwendolyn Mariano, RealNetworks to Play NBA Live, CNET News.com, Apr. 9, 2001, at http://news.cnet.com/

news/0-1005-202-5550801.html; Richard Alm, Mavericks to Get First Shot at Web Broadcast, Dallas News.com,

Apr. 20, 2001, at http://www.dallasnews.com/technology/334785_MavsKings_10bu.html.

314

Gwendolyn Mariano, Intertainer Turns on Streaming in Cincinnati, CNET News.com, Mar. 29, 2001, at

http://news.cnet.com/news/0-1005-202-5381234.html.

315

Steve Gold, MTV Europe to Launch its First Broadband Channel, NewsBytes, Aug. 15, 2001, at

http://www.newsbytes.com/cgi-bin/u…lient.id=newsbytes&story.id=169-61.

316

Steve Gold, MTV Europe to Launch its First Broadband Channel, NewsBytes, Aug. 15, 2001, at

http://www.newsbytes.com/cgi-bin/u…lient.id=newsbytes&story.id=169-61.

317

The five movie studios are MGM, Paramount, Sony Pictures, Universal, and Warner. Disney is independently

pursuing its own video-on-demand service. Bruce Orwall, Five Studios Join Venture for Video on Demand, Wall

Street Journal, Aug. 17, 2001, at A3; Rick Lyman, Hollywood Moves to Rent Movies Online, New York Times,

Aug. 17, 2001; Alec Klein, Five Studios to Offer Films Online, Washington Post, Aug. 17, 2001, at E01; Clearband

Says Movie Studio Project Threatens Cable, Comm. Daily, Aug. 21, 2001, at 3.

318

Ann Donahue, Aerocast Goes Full Speed Ahead, Video Business Online, Aug. 14, 2001, at http://www.

videobusiness.com/news/081401_aerocast_streaming_video.asp.

319

See http://www.lariat.com; http://internet.arbitron.com/webcast_index.htm.

320

See http://www.mediachannel.com/info.htm.

Federal Communications Commission FCC 01-389

Streaming Media Alliance (“ISMA”) to accelerate the market adoption of open standards for streaming

media over IP.

321

2. Home Video Sales and Rentals

95.

We consider the sale and rental of home video, including videocassettes, DVDs, and laser

discs, part of the video marketplace because they provide services similar to the premium and pay-per-

view offerings of MVPDs.

322

The home video industry views cable television, direct broadcast satellite

services, and broadcast television as its competition.

323

It also expects that near video on demand and

video on demand services offered by MVPDs, now principally offered on a test basis, and streaming

video over the Internet will provide additional competition in the near future.

324

Moreover, digital

compression technologies, which enable cable operators, DBS providers, and others to transmit a greater

number of movies to consumers at more frequent intervals, could provide additional competition to home

video retailers.

325

96.

Approximately 93 million U.S. households, or about 90 percent of all households, have at

least one VCR, with nearly 46 million households owning at least two VCRs.

326

By the end of 2000, the

number of homes with DVD players reached approximately 14.5 million, and it is estimated that 25

million homes will have DVDs by the end of 2001.

327

In addition, about two million homes have laser

disc players.

328

U.S. consumers spent approximately $19.04 billion renting and buying prerecorded video

321

John Townley, Streaming Media Alliance to Accelerate Open Standards, InternetNews.com, Dec. 12, 2000, at

http://www.internetnews.com/streaming-news/article/0,,8161_532681,00.html; Paul Festa, New Streaming

Standards Effort Missing Market Leaders, CNET News.com, Dec. 15, 2000, at http://news.cnet.com/news/0-1005-2

02-4157183.html.

322

See, e.g., Competition, Rate Deregulation and the Commission’s Policies Relating to the Provision of Cable

Television Service, MM Docket No. 89-600, Report, 5 FCC Rcd 4962, 5019-20 (1990); 1995 Report, 11 FCC Rcd at

2118-9; 1998 Report, 13 FCC Rcd at 24350.

323

See Viacom Inc., SEC Form 10-K for the Year Ended December 31, 2000 (“Viacom 10-K”); Hollywood

Entertainment Corp., SEC Form 10-K for the Year Ended December 31, 2000 (“Hollywood Entertainment 10-K”);

Blockbuster Inc., SEC Form 10-K for the Year Ended December 31, 2000 (“Blockbuster 10-K”). In September

2000, Blockbuster began selling DirecTV equipment and programming packages and, in 2001, it introduced a co-

branded pay-per-view service with DirecTV, Blockbuster Ticket, that can be ordered over the telephone or Internet.

See DirecTV and Blockbuster at http://www.directv.com and http://www.blockbuster.com, respectively.

324

Annual Report on the Home Entertainment Industry 2001, Video Software Dealers Association (“VSDA

Report”), at 25-26; Hollywood Entertainment 10-K; Viacom 10-K; Blockbuster 10-K.

325

Hollywood Entertainment 10-K, Viacom 10-K; VSDA Report at 26.

326

VSDA Report at 6, 26. Other sources provide alternative estimates of VCR penetration ranging between

approximately 87 percent to over 93 percent of all television households. See, e.g., Hollywood Entertainment 10-K

citing Adams Media Research statistics; Veronis Suhler, Communications Industry Forecast, July 2001, at 191.

327

VSDA Report at 6, 18. Hollywood Entertainment citing the DVD Entertainment Group estimates a 27 percent

penetration for DVDs by the end of 2001. The number of DVD households is expected to grow significantly as

DVD player prices continue to decline. VSDA at 6. The average DVD player now sells for $193, down from an

average price of $298 in 1999, and compared to the average VCR price of $73. Christopher Stern, Blockbuster

Switching Focus to DVDs, Washington Post, Sept. 11, 2001, at E1, 12.

328

Tom Shales, Shall We Dance? With DVD, Indeed, Washington Post, June 2, 1999, at C1.

Federal Communications Commission FCC 01-389

in 2000, almost a 10 percent increase over the $17.36 billion we reported last year.

329

Total rental revenue

was $8.25

billion in 2000, compared to $8.07 billion in 1999, an increase of 2.2 percent.

330

Total revenue

from video sales increased to $10.79 billion in 2000, up from $9.24 billion in 1999, an increase of 17

percent.

331

In the last year, DVDs have doubled their share of both the rental and sales markets,

accounting for 6.9 percent of all rental revenue and 16 percent of sales revenues.

332

The video retail

industry is the largest source of revenue for movie studios, generating approximately half of their

revenues in 2000.

333

In this regard, we note that, since 1997, the largest video chains and several movie

studios have shared rental revenues.

334

97.

The video retail industry is considered competitive, with about 19,800 video specialty stores

selling or renting home video programming.

335

There also are more than 8,000 retail outlets, primarily

supermarkets and drug stores, that rent videos.

336

Mass merchandise stores (e.g., Wal-Mart and Target)

and electronics chain stores (e.g., Best Buy and Circuit City) compete with specialty video stores in the

sale of videos.

337

In recent years, the home video industry has undergone a period of consolidation, with

many independent operators selling to larger concerns or closing their businesses.

338

The Internet also has

become a source for video rentals

339

and sales.

340

329

VSDA Report at 12, 16; 2000 Report, 16 FCC Rcd at 6057-8.

330

VSDA Report at 12.

331

Id. at 16.

332

Id. at 12, 16. Retailers, both video specialty stores and others, are allotting increasing amounts of shelf space to

DVDs. VSDA Report at 16-18; Christopher Stern, Blockbuster Switching Focus to DVDs, Washington Post, Sept.

11, 2001, at E1, 12.

333

See, e.g., Hollywood Entertainment 10-K citing Adams Media Research statistics (the movie studios’ 2000 home

video revenues of $9.5 billion represented 54.8 percent of their $17.4 billion domestic revenue), Blockbuster 10-K

citing Paul Kagan Associates statistics (the movie studios’ 2000 home video revenues of $7.9 billion represents 44.3

percent of their $17.8 billion domestic revenue).

334

VSDA Report at 13-14; 2000 Report, 16 FCC Rcd at 6058.

335

See, e.g., VSDA Report at 8; Viacom 10-K.

336

Id.

337

VSDA Report at 8-10. Videos also can be borrowed from public libraries. Blockbuster 10-K; Hollywood

Entertainment 10-K; Viacom 10-K.

338

For example, video superstores (e.g., Blockbuster, Hollywood) have a 58.9 percent share of the video rental

business. VSDA Report at 10. Etna comments that it is difficult for small independent video businesses to compete

against the large video chain stores because of their revenue sharing agreements with the movie studios. Etna

Comment at 1-2.

339

For example, for a monthly fee of $19.95, Netflix allows consumers to rent DVDs from its Internet site with the

movies sent to the consumer and returned to the company through the mail. See http://www.netflix.com. In

addition, consumers in several markets can search Blockbusters’ inventory over the Internet and reserve videos

online before going to the store to pick them up. See http://www.blockbuster.com.

340

For example, Best Buy and Amazon.com sell video programming through their Internet sites. See

http://www.bestbuy.com and http://www.amazon.com. Express.com is limited to the sales of DVDs. See

http://www.express.com. Previously, Blockbuster and Hollywood Entertainment, using its reel.com web site, sold

video programming over the Internet. However, both companies now are withdrawing from e-commerce and

(continued.…)

Federal Communications Commission FCC 01-389

98.

Another home video technology is the personal video recorder (“PVR”).

341

One source

reports that 500,000 PVRs have been sold since this technology was introduced two years ago.

342

Currently, there are three companies offering PVRs, Replay TV Inc., TiVo, Inc., and Microsoft. Last

year, we reported that ReplayTV would no longer sell PVRs directly to consumers, but would focus on

licensing its technology to cable and other television-oriented companies.

343

In August 2001, Sonicblue

acquired ReplayTV, and announced that it again would sell PVRs over the Internet and at select retail

outlets.

344

TiVo is offered on a subscription basis for approximately $10 a month.

345

About 20 percent of

its reported 200,000 subscribers receive the service through DirecTV using a set-top box that combines

DBS and PVR functions.

346

Recently introduced, Microsoft’s UltimateTV is only offered by DirecTV,

also for a monthly fee of approximately $10. Its combined DBS/PVR receiver features dual tuners that

allow viewers to watch and record two live programs at the same time, or to surf the Internet while

watching television.

347

In addition, EchoStar offers set-top boxes, the DISHPlayer and the DishPVR, with

PVR capabilities.

348

G. Local Exchange Carriers

99.

The 1996 Act amended Section 651 of the Communications Act in order to permit telephone

companies to provide video services in their telephone service areas. According to the statute, common

carriers may: (1) provide video programming to subscribers through radio communications under Title

III of the Communications Act;

349

(2) provide transmission of video programming on a common carrier

basis under Title II of the Communications Act;

350

(3) provide video programming as a cable system

(…continued from previous page)

focusing on providing entertainment news and information on their sites. See http://www.blockbuster.com and

http://www.reel.com. See also 2000 Report, 16 FCC Rcd at 6058-9.

341

See 2000 Report, 16 FCC Rcd at 6059-69. See also 1999 Report, 15 FCC Rcd at 1035.

342

See Michael Grotticelli, Reviving ReplayTV, Broadcasting & Cable, Sept. 10, 2001, at 32.

343

2000 Report, 16 FCC Rcd at 6059-60.

344

Natalie Weinstein, Sonicblue Completes ReplayTV Acquisition, CNET News.com, Aug. 2, 2001, at

http://news.cnet.com/newx/0-1006-200-6762533.html; Khanh T.L. Tran, TiVo, Sonicblue Still See the Bright Side,

Wall Street Journal, Aug. 31, 2001, at B3. Sonicblue also plans to provide Ethernet capabilities in order to offer a

subscription service for niche programming. Michael Grotticelli, Reviving ReplayTV, Broadcasting & Cable, Sept.

10, 2001, at 32.

345

http://www.tivo.com; Walter S. Mossberg, Personal Technology, SuperSet-Top Boxes Put Viewers in Charge,

Change TV Habits, Wall Street Journal, Feb. 22, 2001, at B1. See also 1999 Report, 15 FCC Rcd at 1035.

346

TiVo Reports Subscriber Increases, Lower Losses, Satellite Business News Fax Update, May 30, 2001, at 2;

http://www.directv.com.

347

See http://www.directv.com; http://www.utimatetv.com.

348

http://www.dishnetwork.com/content/products/receivers/index.shtml.

349

47 U.S.C. § 571(a)(1).

350

47 U.S.C. § 571(a)(2).

Federal Communications Commission FCC 01-389

under Title VI of the Communications Act;

351

or (4) provide video programming by means of an open

video system ("OVS").

352

100.

ILECs have largely exited the video business.

353

The exceptions to this trend are

BellSouth, which, in addition to reselling DBS service, continues to operate some overbuild cable

systems, and a number of smaller LECs that are offering, or preparing to offer, MVPD service over

existing telephone lines.

101.

MMDS.

As previously reported, GTE (now Verizon) operated a digital MMDS system

in Oahu, Hawaii,

354

but has since sold it to Craig Wireless Honolulu, Inc.

355

BellSouth completed its

restructuring of its MMDS business by transitioning its MMDS customers to EchoStar or other video

providers.

356

102.

In-Region Cable Franchises.

At one point, Ameritech, now owned by SBC, was the

most significant LEC provider of in-region cable service.

357

SBC sold the systems to WideOpenWest in

May of this year.

358

BellSouth currently holds 20 cable franchises with the potential to pass 1.4 million

homes, and provides cable service in 14 of its franchise areas.

359

We previously reported that GTE

operated competitive cable franchises in Ventura County, California, and St. Petersburg and Clearwater,

Florida, and non-competitive franchise in Cerritos, California.

360

Verizon, however, reportedly is seeking

to sell these assets.

361

SNET, now also owned by SBC Communications, at one point held a statewide

cable franchise in Connecticut and offered service to 30,000 subscribers in 29 localities.

362

Subsequently,

SNET filed with the State of Connecticut’s Department of Public Utility Control (“DPUC”) for

permission to discontinue cable television service in Connecticut and to transition its subscribers to

351

47 U.S.C. § 571(a)(3).

352

47 U.S.C. § 571(a)(3)-(4).

353

1998 Report

, 13 FCC Rcd at 24331-2;

2000 Report

, 16 FCC Rcd at 6061.

354

1998 Report

, 13 FCC Rcd at 24534.

355

Federal Communications Commission,

Mass Media Bureau, Instructional Television Fixed Wireless Service,

Multipoint Distribution Service Accepted for Filing

, Public Notice (Sept. 25, 2001).

See also

Kristin Sawada,

Craig

to Buy Americast

, PacificBusinessNews, June 15, 2001.

356

See

BellSouth Corp.,

BellSouth Updates Plans for Restructuring its Video Entertainment Service

(press release),

Dec. 19, 2000.

See

also Michael E. Kanell,

BellSouth Pulls the Plug on Wireless TV

, Atlanta Constitution, May 16,

2001, at D1.

357

1999 Report

, 15 FCC Rcd at 1036-37.

358

SBC Sells Americast Cable Overbuild Systems To Wide Open West

, Comm. Daily, May 25, 2001, at 2-3. We

discuss WideOpenWest in the Broadband Service Providers section.

359

Telephone interview with Karen B. Possner, Vice President-Strategic Policy, BellSouth Corporation (Nov. 13,

2001). The active franchises are located in: Vestavia Hills, Alabama; St. John’s County, Dade County, Davie, and

Pembroke Pines, Florida; Counties of Cherokee, Cobb, Dekalb, and Gwinnett and Cities of Chamblee, Duluth,

Lawrenceville, Roswell, and Woodstock, Georgia.

360

1998 Report

, 13 FCC Rcd at 24355.

361

Verizon Trying to Unload GTE Cable TV Assets

, TR Daily, July 3, 2000.

362

2000 Report

, 16 FCC Rcd at 6062.

Federal Communications Commission FCC 01-389

DirecTV DBS Service.

363

The DPUC granted this permission, with conditions to ease the transition of

SNET’s cable subscribers.

364

103.

VDSL.

Qwest Communications International (formerly U S West) offers video, high-

speed Internet access, and telephone service over existing copper telephone lines using very high speed

digital subscriber line ("VDSL") in Omaha, Nebraska, and Phoenix, Arizona.

365

An increasing number of

small LECs are using VDSL to offer a bundle of services, including multichannel video, over phone lines.

Reports indicate that 40 to 50 LECs, mostly small, are using VDSL technology for this purpose, that they

have 100,000 video subscribers, and that more than 280,000 lines to households are capable of delivering

VDSL services.

366

Companies are also deploying, or investigating deploying, video over the lower

bandwidth asymmetric digital subscriber line service (“ADSL”). Because of the lower capacity, video

over ADSL involves an IP-based video-on-demand service, rather than full-fledged multichannel video.

Qwest has contracted with Intertainer, Inc., to provide this service in Seattle, Washington, Portland,

Oregon, Salt Lake City, Utah, Denver, Colorado, Minneapolis, Minnesota, and Phoenix, Arizona,

367

and

Verizon is investigating whether to offer the service to MDUs in its territory.

368

Between 5,000 and

10,000 households currently subscribe to ADSL video-on-demand service.

369

363

State of Connecticut, Department of Public Utility Control, Application of Southern New England

Telecommunications Corporation and SNET Personal Vision, Inc., To Relinquish SNET Personal Vision, Inc.’s

Certificate of Public Convenience and Necessity (“SNET Application”), Docket No. 00-08-14, Mar. 14, 2001. See

also SNET, SNET Cable Unit Seeks to Exit Cable TV Business (press release), Aug. 11, 2000.

364

See SNET Application.

365

2000 Report, 16 FCC Rcd at 6062. See also Matt Stump, In Omaha, Cox and Qwest Wage Three-Way Contest,

Broadband Week, Oct. 1, 2001.

366

Roger Bindl, Next Level Communications, Video In Telephony, Nov. 9, 2001. According to Next Level

Communications, the companies offering VDSL include Qwest Communications, Wood County Telephone,

Horizon Exop, Tri County, All West, Hutchinson, New Ulm, XIT Telecommunications & Technology, Inc., Pine

Island Telephone, Washington County, Halstad, NEP, HTC, PBT Communications & Paul Bunyan Rural Telephone

Cooperative, Craw-Kan Telephone Cooperative, Clear Lake Independent Telephone, Yadkin Valley Telephone

Membership Cooperative, Outreach, Hickory Tech, Chequamegon Telephone, Horry Telephone Cooperative,

Mankato, North Star, Sleepy Eye, CTC Communication & Chibardun Telephone Cooperative, Brandenburg LLP,

Delhi, Hansol, Manti Telephone Company, WH-Link, Skyline Telephone, Membership, Sherburne Tele Systems,

Inc., Piedmont Telephone Membership Corporation, Iowa Network Services, Century Telephone, En-Tel

Communications, LLC, and North-Eastern Pennsylvania Telephone Co.

E-mail from Roger Bindl, Director,

Engineering & Consulting Companies, Next Level Communications, Oct. 18, 2001. Some of the other small LECs

deploying VDSL are Wood County Telephone in Wood County, Wisconsin, Paul Bunyan Telephone in Bemidji,

Minnesota, Hutchinson Telephone Company in Hutchinson, Minnesota, Hart Telephone Company in Hartwell,

Georgia, and Horizon Chillicothe Telephone in Chillicothe, Ohio. Karen Brown, Getting the Picture? Telcos

Struggle With Unfocused Video Market, Broadband Week, June 4, 2001.

367

Karen Brown, Getting the Picture? Telcos Struggle With Unfocused Video Market, Broadband Week, June 4,

2001.

368

Richard Williamson and Bill Scanlon, DSL Video Service Goes Condo, Interactive Week, Apr. 15, 2001.

369

Roger Bindl, Next Level Communications, Video In Telephony, Nov. 9, 2001.

Federal Communications Commission FCC 01-389

H. Electric and Gas Utilities

104.

Electric and gas utilities continue to move forward with ventures involving multichannel

video programming distribution, but are not yet major competitors in the telecommunications or cable

markets. Some of their characteristics, however, such as ownership of fiber optic networks and access to

public rights-of-way, could make them competitively significant.

370

Some utilities seek to offer

telecommunications services on their own, while others partner with broadband service providers, such as

RCN, to offer service. It also appears that some utilities, particularly some municipal utilities in rural

areas, are willing to build advanced telecommunications networks offering a full range of services where

incumbent cable operators and telephone companies are not.

371

105.

One of the oldest municipal utility overbuilders, Glasgow Electric Plant Board, in

Glasgow, Kentucky, bought the competing incumbent cable system from Comcast and plans to upgrade

the system to provide high-speed Internet service to its customers.

372

Starpower, a joint venture between

RCN and Potomac Electric and Power Company (“PEPCO”) in the Washington, D.C., area continues to

build out its network and “…increase penetration in its chosen markets.”

373

We previously reported on

the activities of Seren, a wholly owned subsidiary of Minneapolis-based Northern States Power,

374

and

Sigecom, funded by Blackstone Capital and a joint venture of Southern Indiana Gas and Electric and

Utilicom.

375

RCN, Seren, and Sigecom offer voice, video, and high-speed Internet access services over

integrated networks. In addition to the communities they were serving, or had applied for franchises to

serve last year, Sigecom received a franchise to serve Louisville, Kentucky,

376

and Seren began service in

St. Joseph, Minnesota.

377

Finally, Braintree, Massachusetts, granted a franchise to the municipal electric

utility, Braintree Electric Light Department, which began offering cable service in February 2001.

378

106.

Newer reports of entry into the market include Grande Communications, a Texas-based

BSP, which is involved in a strategic partnership with Reliant Energy and plans to provide bundled

services to Houston beginning in 2002.

379

In Scottsboro, Alabama, the Electric Power Board began

offering cable television service over a municipal system in 1999 and, at one point, captured 90 percent of

370

See, e.g., 1999 Report, 15 FCC Rcd at 1042.

371

See, e.g., Gerry Blackwell, Wireless in the Wild, ISP Planet, Aug. 16, 2001 and Dennis K. Berman, Isolated

County Gambles With Broadband Network, Wall Street Journal, Aug. 17, 2001, at B1.

372

Mass Media, Comm. Daily, Apr. 12, 2001, at 8.

373

RCN Comments at 5.

374

1999 Report, 15 FCC Rcd at 1042.

375

2000 Report, 16 FCC Rcd at 6065.

376

Sigecom, TOTALink Granted Competitive Cable Television Franchise by Louisville Board of Alderman (press

release), Nov. 14, 2000.

377

Seren, Astound Broadband to Begin Offering Service Today in the City of St. Joseph (press release), Aug. 7,

2001.

378

Mass Media, Comm. Daily, Feb. 23, 2001, at 10.

379

Joe Estrella and Linda Haugsted, Despite Some Losses, Overbuilds Persist, Multichannel News, June 11, 2001,

at 56.

Federal Communications Commission FCC 01-389

the market.

380

Utilicorp Communications Services, which is owned by a natural gas and electricity

distributor, has invested in two BSPs offering bundled services, Everest Connections Corporation

(“Everest”) and ExOp of Missouri, Inc. (“ExOp”).

381

Everest offers service in Lenexa, Kansas, a suburb

of Kansas City,

382

ExOp entered Kearney, Missouri, as a CLEC, but Utilicorp acquired it and added

digital cable television services using VDSL technology.

383

Utilicorp reports problems as an entrant in

these markets, including difficulties in negotiating franchises, negotiating pole attachment agreements,

entering MDUs, and gaining access to equipment and programming.

384

See also

Andy Grossman,

High Stakes in Vegas, Court TV’s Royal Analog

Flush,

Cablevision, July 9, 2001, at 8.

Federal Communications Commission FCC 01-389

previous years because it can often take several years from the announcement of a new programming

network to its launch and initiation of service. For example, several of the 66 planned services counted in

Reports

have been launched during the past year and are now operating, while others have been

aborted for various reasons.

518

2. Other Programming Issues

161.

As in previous years, this year’s

Notice

requested comment on a number of programming

issues apart from vertical integration and the status of existing and planned programming services.

Among these issues, we asked about the effectiveness of our program access, program carriage, and

channel occupancy rules that govern the relationships between cable operators and programming

providers. We also requested information about local and regional channels, including sports and news

services, public, educational and governmental (“PEG”) access channels, packaging of programming

services, and electronic programming guides (“EPGs”). In this section we address these issues.

162.

Regulatory Issues Relating to Program Access and Carriage Rules.

The Commission’s

rules on competitive access to cable programming prohibit unfair and discriminatory practices by

vertically integrated cable operators.

519

The rules seek to promote competition and diversity in the

multichannel video programming market by preventing vertically integrated programming suppliers from

favoring affiliated video distributors over unaffiliated MVPDs in the sale of satellite-delivered

programming.

520

The program access rules apply to cable operators and to programming vendors that are

affiliated with cable operators and deliver video programming via satellite to an MVPD. The rules

prohibit any cable operator that has an attributable interest in a satellite cable programming vendor from

improperly influencing the decisions of the vendor with respect to the sale or delivery, including prices,

terms, and conditions of sale or delivery, of satellite-delivered programming to any competing MVPD.

The rules also prohibit vertically integrated satellite programming distributors from discriminating in the

prices or terms and conditions of sale of satellite-delivered programming to cable operators and other

MVPDs. In addition, cable operators generally are prohibited from entering into exclusive distribution

arrangements with vertically integrated programming vendors. The Commission has declined to apply

the program access requirements to terrestrially-delivered programming.

521

163.

The prohibition on exclusive contracts in the program access law ceases to be effective

on October 5, 2002, unless the Commission finds that the prohibition continues to be necessary to

preserve and protect competition and diversity in the distribution of video programming.

522

On October

518

Compare, for example, App. D, Tbl. D-4

infra,

with

2000 Report,

16 FCC Rcd at 6131,

1999 Report

, 15 FCC

Rcd at 1112

and

1998 Report,

13 FCC Rcd at 24442.

519

47 C.F.R. §§ 76.1000-76.1003.

See also

47 U.S.C. § 536(a)(2); 47 U.S.C. § 548(a)(2). The program access rules

apply to OVS operators and common carriers in the same manner as they apply to cable operators. 47 C.F.R.

§§ 76.1004, 76.1507.

520

47 U.S.C. § 548.

521

Implementation of the Cable Television Consumer Protection and Competition Act of 1992, Petition for

Rulemaking of Ameritech New Media, Inc. Regarding Development of Competition and Diversity in Video

Programming Distribution and Carriage

, CS Docket No. 97-248, RM No. 9097, Report and Order ("

Program

Access Order

''), 13 FCC Rcd 15822, 15856-7 (1998).

522

47 U.S.C. § 548(c)(5).

Federal Communications Commission FCC 01-389

11, 2001, the Commission adopted a

Notice of Proposed Rule Making

to begin its review of the rule.

523

the

Notice

in this proceeding, we

sought comment on the methods we should use to evaluate whether this

provision still is needed, and on other issues related to the availability of vertically integrated

programming.

524

164.

Cable’s competitors, including SBCA, Utilicorp, and WCA, are opposed to the sunset of

the prohibition on exclusivity and some suggest that the program access rules should be broadened to

include terrestrially-delivered programming.

525

Several commenters maintain that, despite the presence of

the program access rules, lack of access to programming, especially sports programming, remains a

significant barrier to entry and an impediment to the successful development of a competitive MVPD

business.

526

In particular, WCA maintains that the cable industry’s conduct suggests that the

programming most in demand will become unavailable if the ban on exclusivity is relaxed.

527

165.

DirecTV asserts that the program access rules are more important now than ever and that

the Commission should make them even more stringent.

528

It urges the Commission to examine the

October 5, 2002, sunset on the prohibition on exclusive contracts in the program access rules in light of

technical advances that have diminished the costs of terrestrial delivery and in light of continued cable

clustering which facilitates terrestrial delivery.

529

166.

Cable television operators oppose the extension of the program access rules. NCTA

disputes WCA’s assertions and points to the success and continued growth of DBS and the increase in

competition over the past five years to demonstrate that the program access rules exclusivity provisions

have served their purpose and should be allowed to sunset.

530

NCTA asserts that the current MVPD

landscape is competitive and surpasses anything that Congress or the Commission could have imagined in

1992. NCTA also opposes any expansion to the scope of the current rules and dismisses concerns related

to the “terrestrial migration” of channels from satellite delivery to terrestrial delivery.

531

NCTA points out

that DBS has had exclusive rights to some major league sports packages, concerts, and other

programming. It likens these contracts to the development of cable exclusive terrestrially-delivered

programming.

532

167.

Cablevision states that there is a wide variety of programming available and that the

program access rules are no longer necessary.

533

Comcast asserts that the program exclusivity rules

523

See Program Access NPRM

, n. 213

supra.

524

Notice

, 16 FCC Rcd at 13333, 13346.

525

SBCA Comments at 9; Utilicorp Comments at 8; WCA Comments at 4-8.

526

Carolina Comments at 12; EchoStar Comments at 11-12; RCN Comments at 9-13; SBCA Comments at 9.

527

WCA Comments at 5.

528

Id.

at 9-10.

529

DirecTV Comments at 10

530

NCTA Comments at 39.

531

532

NCTA Comments at 38-39.

533

Cablevision Reply Comments at 7.

Federal Communications Commission FCC 01-389

pertain to marketplace conditions that no longer exist. It argues that exclusive contracts are commonplace

in the communications industry, and that such arrangements spur investment, creativity, and

responsiveness to consumer demand.

534

168.

Comcast also suggests criteria for the Commission to apply in its proceeding to evaluate

the program access rules. These criteria are: (a) the marketplace benefits of permitting program

exclusivity for satellite-delivered programming in which a cable operator has a financial interest; (b) the

evolution of the MVPD marketplace since 1992; (c) the extent to which exclusive agreements have been

used successfully by large non-cable MVPDs; (d) the lack of any basis for constraining exclusivity in

cable contracts for satellite-delivered cable programming while not constraining exclusivity in DBS

contracts; (e) whether sufficient alternative programming networks exist to provide competition if certain

satellite-delivered networks enter into exclusivity agreements; and (f) whether the Commission would

have the tools to prevent discrimination, unfair methods of competition, or other unfair acts by vertically

integrated satellite programming networks against competing MVPDs.

535

RCN suggests that the

Commission form an industry forum among MVPDs, programming providers, and other interested parties

to create an interactive dialogue to evaluate program access issues.

536

169.

In 1998, in the

Program Access Order

, the Commission found “no indications at this time

that terrestrial delivery of programming formerly delivered by satellite is a significant competitive

problem.”

537

Several commenters now assert that access to popular programming, including terrestrially-

delivered programming, is vital and more important than ever.

538

Carolina recommends that the

Commission expand the program access rules to encompass any method of delivery. Moreover, it

suggests that the rules should cover content delivered from all platforms, such as the Internet, interactive

program guides, VOD, and ITV.

539

170.

Pursuant to section 613(f) of the Communications Act,

540

the Commission also adopted

channel occupancy rules that restricted the number of channels on a cable system that may be occupied by

programmers affiliated with the owner of the system.

541

On March 3, 2001, the United States Court of

Appeals for the D.C. Circuit reversed and remanded Commission’s channel occupancy limits.

542

Currently, the Commission is seeking comment on, among other things, how changes in the MVPD

market and in the level of vertical integration for cable MVPDs may have affected MSOs’ ability to favor

affiliated over unaffiliated programming.

543

Given the changes in the marketplace, in the

Ownership

Further Notice

, the Commission requests comment on how to fashion meaningful and relevant channel

occupancy limits.

534

Comcast Reply Comments at 17-18.

535

Id.

at 21.

536

RCN Comments at 14-15.

537

Program Access Order

, 13 FCC Rcd at 15856-7.

538

Carolina Comments at 11; DirecTV Comments at 9; RCN Comments at 14.

539

Carolina Comments

at 11.

540

Section 613(f) was added to the Communications Act as part of the 1992 Cable Act. 47 U.S.C. § 533(f).

541

47 C.F.R § 76.504.

See 1994 Report,

9 FCC Rcd at 7521.

542

Time Warner Entertainment Co. v. FCC

, 240 F.3d 1126 (D.C. Cir.2001).

543

See Ownership Further Notice

, n. 468

supra.

Federal Communications Commission FCC 01-389

171.

Sports Programming

Regional sports programming continues to be an important

segment of programming for all MVPDs. According to RCN, sports programming is critical to the

success of any cable television system.

544

Of the 80 regional cable channels counted in this year’s report,

29, or 36 percent, are sports channels.

545

172.

The most widely distributed sports programming network, ESPN, which is owned by

Disney, reaches 81 million television households through a variety of delivery technologies. While ESPN

dominates national sports programming, regional sports distribution is dominated by Fox Sports Net,

which owns 69 percent (20 of 29) of all regional sports networks. Fox Sports Net, jointly owned by News

Corp. and Cablevision, reaches 77 million television households.

546

Both News Corp. and Disney also

have interests in sports teams and sports venues.

173.

Commenters assert that such vertical integration, especially with important sports

programming, gives these programmers incentives to act as gatekeepers and engage in unfair methods of

controlling access to sports programming.

547

Commenters note that vertically integrated entities may have

an incentive to shift regional sports networks from satellite to terrestrial distribution and thereby avoid the

ambit of program access rules.

548

In addition, commenters allege that where a regional sports network is

non-vertically integrated, a video programming distributor may enter into an exclusive contract with the

program provider which deprives rivals of the programming.

549

RCN also alleges that clustering has an

impact on access to sports programming.

550

In the

1999 Report

, we noted that because most sports

programming affiliate fees are based on subscriber volume, only well clustered, large MSOs can take full

advantage of programming discounts.

551

174.

DirecTV lists 23 regional sports networks (including 17 Fox Sports Networks) that are

carried on its system.

552

DirecTV carries regional sports networks in every regional sports market except

Philadelphia where it was refused access to Comcast’s SportsNet.

553

EchoStar states that exclusivity deals

544

RCN Comments at 13.

545

See

App. D, Tbl. D-3.

546

NCTA,

Regional Cable Networks,

Cable Television Developments 2001, at 174 - 200.

547

RCN Comments at 9-16.

548

See

¶ 162

supra

for a more detailed description of program access.

549

Carolina Comments at 10-11; RCN Reply Comments at 4.

550

RCN Comments at 22-23.

551

1999 Report

, 15 FCC Rcd at 1060

See also

R. Thomas Umstead,

Consolidation Blues

, Cablevision, June 28,

1999, at 39.

552

DirecTV Comments at Exhibit A.

553

See also

Application for Review of Orders of the Cable Services Bureau Denying Program Access

Complaints

, CSR 5122-P and CSR 5244-P, Memorandum Opinion and Order, 15 FCC Rcd at 22802 (2000). This

Order consolidates several proceedings involving Comcast, DirecTV, and EchoStar. In separate proceedings,

DirecTV and EchoStar filed program access complaints alleging that Comcast violated sections 628(b) and (c) of the

Communications Act and the Commission's regulations by engaging in discrimination and unfair practices in the

distribution of satellite cable programming. The Cable Services Bureau denied the complaints. Subsequently,

DirecTV and EchoStar each requested Commission review; the Commission consolidated the proceedings and

denied the applications for review.

Federal Communications Commission FCC 01-389

between video programming distributors and sports leagues are “detrimental to subscribers” who cannot

get such sports programming from a DBS company.

554

Where a regional sports channel is non-vertically

integrated, a cable MSO may enter into an exclusive contract with the program provider. Alternatively,

Comcast notes that DirecTV is not required to make its

NFL Sunday Ticket

package available to any other

MVPD provider, and that it indeed does not make it available to any Comcast cable system.

555

175.

News Programming

. Cable systems have carried local news services since at least 1986,

when Cablevision launched News 12 Long Island. This year, of the 80 regional programming networks

counted, 36 percent (29 networks) are regional news networks. Unlike sports programming, regional and

local news networks have a more diverse ownership. Some regional news networks are vertically

integrated with cable MSOs, but many are not.

556

176.

Most regional news networks cover a single city or other limited geographic market, or

subsections of that market. There are at least seven local news networks in separate sections of the New

York City area.

557

A handful of regional news networks, however, have elected to broaden their coverage.

Statewide news channels are operating in Florida, Massachusetts, Texas, and Ohio. New England Cable

News (“NECN”) is the oldest statewide network and the most widely distributed regional news network.

NECN reaches more than 2.5 million households, approximately 64 percent of cable homes in the

six-state region it serves. In the Boston market, the network can be seen in 92 percent of cable homes.

558

However, not all regional news networks are success stories. BayTV News Network in San Francisco,

California, reached 1.4 million homes with programming that featured local news, high-school sports, and

public affairs. However, viewership remained low and it ceased operating on July 31, 2001.

559

Another

California news network, Orange County Newschannel, which served 177,000 homes with local news,

sports, traffic, and weather, ceased its operations on September 7, 2001, due to declining advertising sales

and continued operating losses over the past 22 months.

560

177.

PEG Programming

. Public, educational, and government (“PEG”) channel set-asides

often are required on cable systems by local franchising authorities.

561

Approximately 15 percent of all

cable systems carry PEG programming.

562

Cable operators do not have ownership interests in PEG access

programming, although some franchise agreements require that they provide services, production

554

EchoStar Comments at 11.

555

Comcast Reply Comments at 18.

556

Cablevision, the seventh largest MSO, owns news networks, including MSG Metro Traffic and Weather in New

York and the News 12 group of regional news services in Connecticut, New Jersey, and Westchester County and

Long Island, New York.

See also

App. D, Table D-3.

557

App. D. Tbl. D-3.

558

Steve Sullivan,

NECN Comes Into Its Own

, Broadcasting & Cable, May 8, 2000, at 52.

559

Linda Haugsted,

AT&T Pulls the Plug on BayTV News Network,

Multichannel News, July 9, 2001, at 15.

560

Linda Haugsted,

Adelphia to Shut Down OCN,

Multichannel News, July 31, 2001, at

http://www.tvinsite.com/index.asp…print_page&doc _id=3931&articleID=.

561

47 U.S.C. § 531. Local franchise authorities are allowed to establish procedures under which the cable operator

may utilize unused PEG channel capacity for other services. 47 U.S.C. § 531(d)(1).

562

http://www.alliancecm.org/about/info.htm.

Federal Communications Commission FCC 01-389

facilities, and equipment for the production of local programming. PEG programming is not, therefore,

considered vertically integrated.

178.

PEG channels are intended to provide community specific information. Since the

September 11, 2001, terrorist attacks in New York City and Washington, D.C., many PEG channels are

taking part in keeping the public informed about recent events and recovery efforts. Across the country,

PEG channels are providing bulletin boards on blood drives, church services, counseling sessions, Web

sites, local school activities, call-in programs, civil liberties studies, local civic meetings, and local

governmental activities.

563

In addition to PEG channels, some cable operators are also providing local

and regional sports, weather, and news programming.

564

179.

In March 1999, Cablevision declined to air a program on its PEG channels in Oyster Bay,

New York, when the program

American Defense Monitor

offered transcripts of the program for $5.00 or

tapes for $19.95. Cablevision required the programmer to delete the 25-second closing segment which

made the offer. The producer complied, but later filed suit in district court claiming that Cablevision was

trying to control programming content, thus violating the 1984 Cable Act.

565

The district court found that

Cablevision was within its rights to refuse to air a program that included solicitation for its tapes of the

show.

566

On August 16, 2001, the U.S. Court of Appeals for the Second Circuit vacated and remanded the

lower court’s decision.

567

Members and representatives of the industry are concerned that the Appeals

Court decision will undermine the social purposes of PEG channels.

568

180.

Packaging of Cable Programming Services

. In the

Notice

, we sought information on the

extent to which MVPDs offer or plan to offer consumers programming choices on an “a la carte” or

individual channel basis rather than in tiers of channels. Currently, the majority of programming is

offered in tiers. Although some programming is still being offered a la carte, MVPDs are not vigorously

marketing such services.

181.

In the

2000 Report

, we reported that the sunset of cable rate regulation, digital upgrades,

and the resulting ability to deliver more channels of programming that could enable greater flexibility for

cable operators in packaging programming channels did not result in a trend to do so.

569

Although digital

services are offering various options for channel packages and a la carte tiers, a trend toward more

flexible packaging appears to be in the packaging of services, rather than the packaging of channels. For

example, in the Boston market, AT&T offers various purchasing plans. A customer can save up to

$20.90 per month by subscribing to standard video, digital video, cable Internet service, and local

563

E-mail from Bunnie Riedel, Executive Director, Alliance for Community Media, Oct. 15, 2001. In Sacramento,

California, volunteers created messages of sympathy and messages in honor of search and rescue personnel; in

Multnomah, Oregon, members of the local Muslim Community Center hosted a call-in program; and in Summit,

New Jersey, PEG channels covered local prayer services and ran an emergency bulletin board.

564

NCTA Comments at 30.

565

47 U.S.C. § 531.

566

Goldberg v Cablevision Systems Corp.

, 69 F.Supp.2

398, 399 (E.D.N.Y. 1999).

567

Goldberg v. Cablevision Systems Corp.

, No. 99-9411, 2001 WL913555 (2

Cir. Aug. 14, 2001).

568

Joe Estrella,

Court Overrules Cablevision’s PEG Editing,

Multichannel News, Aug. 27, 2001, at 22.

569

2000 Report,

16 FCC Rcd at 6085.

Federal Communications Commission FCC 01-389

telephone service; up to $10.95 per month by subscribing to standard video, digital video, and local

telephone service; or, up to $4.00 per month by subscribing to two of the four service offerings.

570

182.

In Lexena, Kansas, Everest Connections Corporation offers four service packages to its

4,100 plus subscribers in addition to its a la carte offerings. Basic cable, the digital tier, and one local

telephone line is available for $49.95 per month. The monthly rate for basic cable, the digital tier, a

premium channel, a local telephone line, and 256 kbps Internet downstream is $76.95. Basic cable, the

digital tier, two premium channels, a local exchange line, ten custom calling features, voice mail, and 1.5

Mbps Internet downstream is priced at $99.95 per month. The fourth package consists of basic cable, the

digital tier, HBO, Cinemax, Showtime, Starz, Encore, ten custom calling features, high-speed Internet,

voice mail with increased greeting, message and storage capabilities, plus home/guest mail box features

for $129.95 per month.

571

183.

Comcast credits digitization for its ability to provide a wide variety of packages and

services to its subscribers.

572

It states that today it routinely offers packages of digital video channels,

PPV channels, and VOD as well as the analog packages that it has historically provided. It states that

service providers are able to provide their customers with many packaged services such as multichannel

video services, telephone services, and high-speed Internet services as a single offering, or with prices for

any one group of services discounted for those who buy two or more services. All sizes and types of

MVPDs are continuing to provide subscribers with bundles of services.

184.

Programming Costs

. The Commission’s most recent report on cable industry prices

(“

2000 Price Survey Report

”) asked cable operators to describe factors that led to changes in their rates.

Competitive and noncompetitive cable operators attributed 44 percent and 41 percent, respectively, of

their rate increases to increases in programming costs.

573

185.

According to Comcast, the costs of acquiring video programming over the past two years

has continued to escalate. Comcast states that its programming costs have increased by 13 percent to 15

percent over the past two years. It states that some services have increased by as much as 33 percent. It

notes that ESPN’s rates have increased at the rate of 20 percent per year for the last four years. Comcast

also points out that increases in sports licensing fees continue be a cause of price increases for sports

channels, even though the ratings for some sports channels are declining.

574

C. Technical Issues

186.

Cable operators and other MVPDs continue to develop and deploy advanced

technologies, to increase capacities and enhance the capabilities of their transmission systems.

575

These

technologies allow MVPDs to deliver additional video options and other services to their subscribers.

576

570

AT&T Comments at 25.

571

Utilicorp Comments at 3.

572

Comcast Comments at 7-8.

573

Inflation, channel additions, system upgrades, and equipment costs were also said to account for a large portion

of rate increases.

See 2000 Price Survey Report

, 16 FCC Rcd at 4346.

574

Comcast Comments at 14.

575

See 2000 Report

, 16 FCC Rcd at 6087-8.

576

See

e.g

., NCTA Comments at 31-32; DirecTV Comments at 16-17.

Federal Communications Commission FCC 01-389

In addition, cable operators continue to rebuild their cable plants and to upgrade their facilities for

bandwidth expansion through other technical means, such as the electronic component upgrading of

existing amplifiers, in order to offer more video programming and other services.

577

In the last year, there

have been a number of developments concerning navigation devices and cable modems that are used to

access the range of services offered by MVPDs. Most notably, cable operators are favoring less powerful

and less expensive set-top boxes, such as Motorola’s DCT 2000 and Scientific Atlanta’s Explorer

boxes.

578

These so-called “thin” boxes would likely require more processing power at the headend or

nodal sites to accomplish the same functionalities of the more powerful boxes, such as Motorola’s DCT

5000 or the Scientific Atlanta’s Explorer 5000 boxes (“thick boxes”). It remains unclear, however,

whether the industries have modified their plans for advanced services around these thin boxes. In this

section, we address interactive television technologies and update the information provided in the

2000

Report

regarding navigation devices and cable modems.

579

1. Interactive Television

187.

Interactive television (“ITV”) services provide, or have the potential to provide, a wide

range of services, including VOD, e-mail, TV-based commerce (“e-commerce”), Internet access, PVR

functionality, programming-related content, and electronic couponing.

580

In the last year, cable operators

have not initiated large-scale ITV service rollouts, focusing instead on upgrading their systems to digital

service and rolling out cable modem service.

581

One ITV service to which MSOs have devoted more

attention this year is VOD, which qualifies as interactive because the consumer chooses when to buy the

programming and has “VCR-like” control over the viewing experience.

582

A variation of this service is

subscription VOD, which enables the impulse viewing of a library of programming with full "VCR-like"

functionality, but for a subscription fee. This model is in contrast to the more traditional pay-per-view

requirement of ordering and paying for programming a la carte with the PPV purchase.

583

According to

one analysis, VOD will generate revenues of more than $65 million by year-end 2001; $420 million in

2002; $970 million in 2003; $1.43 billion in 2004; and will reach $1.98 billion by year-end 2005.

584

188.

As we discuss in detail above,

585

many of the top MSOs are conducting trials of VOD or

have moved to commercial offerings in some markets. Several MSOs also have launched other

577

1999 Report

, 15 FCC Rcd at 1067.

578

See

Michael Lafferety,

Taking a Look at the Thick and the Thin of It

, CED, Sept. 2001, at 29-44.

579

See 2000 Report

, 16 FCC Rcd at 6088-6092.

580

2000 Report

, 16 FCC Rcd at 6088.

See also

Michael Grotticelli and Ken Kerschbaumer,

Slow and Steady

Broadcasting & Cable, July 9, 2001, at 34-38 (“

Grotticelli

”).

581

Grotticelli

at 34-38

. See also

Andy Grossman,

GMs on Hot Seat to Add Cash Flow; Cable Executives Say

Digital Cable and Highspeed Data are Keys to Growth

, Multichannel News, June 4, 2001.

582

Cable operators use VOD servers located at the cable headend to manage VOD streams. The principal VOD

server vendors are Concurrent Computer, Diva, SeaChange, and nCube.

583

George Mannes,

Video on Demand Tests Begin as Cable Firms Seek Growth Channels

, TheStreet.com, June 8,

2001.

584

Yankee Group,

Video-on-Demand Will Generate Revenues of Nearly $2 Billion in 2005

(press release), June 25,

2001.

585

See

¶¶ 40, 41

supra

Federal Communications Commission FCC 01-389

interactive services in addition to VOD. In September 2001, Cablevision launched its “iO: Interactive

Optimum” service in select areas of western Long Island, New York, providing VOD, an interactive

programming guide, expanded digital programming, digital music, niche video content, two-way

interactive programming, and e-mail.

586

Insight Communications has launched VOD and an information

service called Local Source throughout its Indiana, Kentucky, and Ohio markets.

587

In September 2001,

the company launched its “Insight Digital Mall,” an electronic mall of 40 national and local stores, which,

once an electronic wallet account has been established, allows Insight subscribers to purchase select

goods and services directly through their televisions.

588

Charter is incorporating Microsoft’s Advanced

TV software on Motorola DCT-5000 set-tops in order to offer customers Internet-based streaming audio

and video, e-mail, VOD, interactive local and national news, and high-speed Internet access.

589

189.

As we reported last year, DBS operators and broadcasters also have entered the ITV

market.

590

In addition to rolling out interactive programming guides, DBS operators are integrating PVR

technology into their subscriber equipment. DirecTV continues to add features to its “DirecTV

Interactive” service launched in October 2000, including on-demand stock quotes, sports information, and

interactive e-commerce.

591

In addition, DirecTV has integrated TiVo and UltimateTV PVR platforms into

certain of its set-top boxes. EchoStar has introduced an upgraded digital receiver, which enables it to

offer enhanced programming as well as digital video recording capabilities.

592

The four major television

586

Cablevision Systems Corp., Cablevision Introduces iO: Interactive Optimum, Its Suite of New Digital Services in

Western Long Island (press release), Sept. 27, 2001. Among the two-way offerings, the service includes MSG

Game Director, which allows subscribers to control their view of live sporting events taking place at Madison

Square Garden; PhotoNeTV, which allows customers to create slide shows of personal photos directly on the

television screen for viewing, retrieval and storage; and Playjam interactive trivia and games. Niche video content is

offered through a service called Mag Rack, which offers on-demand video magazines on a wide range of topics and

VCR-like viewing control.

587

Insight’s interactive digital TV service was available to 809,000 customers or 63.4% of the company’s total

footprint at the end of Q3 2001. New Services Drive Insight’s Revenue Growth, Broadband-Daily.com, Nov. 7,

2001. Insight claims that digital cable penetration is 30 percent where it has launched interactive services as

compared to 17-18 percent digital penetration in markets where interactive services are not available. Id.

588

Insight has partnered with Liberate for set-top box software, CommerceTV for the electronic mall and with

SourceMedia for LocalSource local information services. See Insight Communications, Insight Communications

Launches Commerce.TV in Lexington (press release), Sept. 17, 2001.

589

Rebecca Buckman, Microsoft Lands TV Software Agreement with Cable Firm Charter Communications, Wall

Street Journal, Nov. 8, 2001 at A4. Charter expects to launch Microsoft TV-based services in early 2002. Id.

590

2000 Report, 16 FCC Rcd at 6088-89.

591

See DirecTV, Personalized On-Demand Stock Quotes on TV – Now a Reality with Bloomberg Television,

DirecTV and Wink Communications (press release), Apr. 2, 2001; DirecTV, DirecTV, ESPN and Wink

Communications Announce Availability of “ESPN Today” on DirecTV Interactive Service (press release), July 17,

2001; DirecTV, Wink Communications and Barnes & Noble.com Launch the First National 24/7 Interactive E-

Commerce Channel on Television (press release), Sept. 18, 2001; DirecTV, DirecTV, Music Choice and Wink

Communications Announce New Interactive Television Commerce Service (press release), Nov. 5, 2001. With

respect to the e-commerce offerings, by employing their remote control, DirecTV customers can buy the top 100

best selling books on Barnes and Noble.com and can buy CDs containing the song they are listening to on music

channels. DirecTV also includes in its programming lineup ShopNBC which offers “click and buy” interactivity via

Wink technology.

592

EchoStar, EchoStar Introduces DISH Network PRO 501 – Premium Satellite Television Receiver Featuring

Digital Video Recording, Interactive TV (press release), Jan. 8, 2001.

Federal Communications Commission FCC 01-389

networks continue to offer enhanced programming synchronized with online content. For example, ABC

synchronizes web-based content with ESPN’s

Sunday Night Football

games and ABC’s

Monday Night

Football

games.

593

During the 2002 Winter Olympics in Salt Lake City, WOW Digital TV and NBC

affiliate KSL-TV will conduct a trial of a digital broadcast and interactive service, which will allow

customers to call up data and make purchases over their televisions.

594

190.

On January 18, 2001, the Commission released a

Notice of Inquiry

seeking comment on

whether rules are necessary to prevent anticompetitive behavior and to promote diversity and capital

investments in the ITV market.

595

In this proceeding, some commenters reiterate their concerns regarding

the advent of technical advances and the ability to distribute ITV and related advanced services. NAB

asserts that new technologies, such as ITV and EPGs, will expand opportunities for cable operators to

disfavor competing content and service providers.

596

NCTA disputes this, noting that cable companies

and many other providers are in only the early stages of developing a variety of services that might be

described as ITV services.

597

It further notes that video content providers are exploring all avenues for

distribution, including DBS, wireless transport, DSL, digital broadcasting, and telephone lines for both

the downstream and upstream components of ITV services.

598

2. Navigation Devices

191.

Section 629 of the Communications Act directed the Commission to adopt rules that

would allow consumers to obtain “navigation devices,” such as cable set-top boxes, remote control units,

and other equipment, from commercial sources other than their cable providers.

599

In 1998, the

Commission adopted rules that require MVPDs to unbundle security from other functions of the

navigation device, and by July 1, 2000, to make available point-of-deployment modules (“PODs”) to

perform this function.

600

On reconsideration, the Commission deferred application of the rules requiring a

593

For a description of ABC Enhanced TV,

see

http://heavy.etv.go.com/etvHome/tour.shtml.

594

In this trial, viewers will be able to receive digital broadcasts of Olympics coverage on their analog sets by using

a WOW Digital TV proprietary set top box, which will be connected to a telephone line to allow interaction with the

programming. OpenTV is providing the interactive-enabling software. Michael Grotticielli,

Putting Some Wow in

DTV

, Broadcasting & Cable, Nov. 5, 2001; WOW Digital TV,

WOW Digital TV Formed to Deploy First Enhanced

Digital Broadcast Platform for U.S. Broadcasters and Viewers

(press release), Nov. 5, 2001.

595

Nondiscrimination in the Distribution of Interactive Television Services Over Cable

, CS Docket No. 01-7, Notice

of Inquiry, 16 FCC Rcd 1321 (2001).

596

NAB Comments at 4. NAB also states that the delivery of digital ITV services will, unlike analog, require a

mechanism for associating all of the video, audio and data elements comprising any interactive service, and cable

operators will control this mechanism in the form of EPGs, thus expanding the opportunity for cable operators to

discriminate against the offerings of unaffiliated entities and other disfavored competitors such as broadcasters.

at 5.

597

NCTA at 13.

598

. at 14.

599

47 U.S.C. § 549.

600

Navigation Report and Order

, n. 96

supra

. On August 14, 2000, the Commission adopted a

Memorandum

Opinion and Order

, which granted waivers of the July 1, 2000, compliance date for a limited number of cable

operators that use hybrid navigation devices. The Commission established a revised compliance date for each of the

individual systems involved, with no waiver granted beyond December 31, 2001.

Charter Communications, Inc.,

AT&T Broadband, L.L.C., Insight Communications Company, L.P., Cox Communications, Inc., GCI Cable Inc.,

(continued.…)

Federal Communications Commission FCC 01-389

separate security module for analog-only devices.

601

Thus, an MVPD subscriber will be able to obtain a

set-top box without the security features (“host device”) from retailers and only remain reliant on the

MVPD to provide a POD for security functions.

602

Despite the availability of PODs, CEA maintains that

retailers have not been carrying cable set-top boxes.

603

192.

Through the OpenCable project, CableLabs has developed specifications for the POD

module as well as the interface that a host device needs to accommodate the POD. CableLabs also

developed the POD-Host Licensing Agreement (“PHILA”) to provide manufacturers with the necessary

technology to make PODs work in host devices.

604

Consumer electronics manufacturers contend that the

standards developed by CableLabs are not sufficiently settled to allow the manufacture of set-top boxes

that are competitive with the equipment supplied to subscribers by cable operators.

605

193.

CableLabs is continuing its efforts to develop next generation navigation devices with its

initiative for the OpenCable Application Platform (“OCAP”) or “middleware” specification. This

specification includes a set of Application Programming Interfaces (“APIs”) designed to enhance the

portability of OpenCable products across brands and operating systems. CableLab plans to release the

OCAP specification by February 1, 2002.

606

CEA maintains that until this software standard is complete,

manufacturers will not be able to build advanced set-top boxes for a retail market.

607

In another effort

intended to facilitate the retail availability of set-top boxes, cable operators announced an initiative to

encourage their set-top box suppliers to make their digital set-top boxes with embedded security available

at retail.

608

3. Cable Modems

194.

A cable modem allows cable subscribers to access high-speed data services and

interactive television, including the Internet, Internet Protocol (“IP”) telephony, video conferencing, and

(…continued from previous page)

Cablevision Systems Corp., Adelphia Communications Corp., MediaCom Communications Corp., CableAmerica

Corp., Time Warner Cable, Petition for Waiver of the Requirement To Provide Point of Deployment Modules

Contained in Section 76.1204 of the Commissions Rules, CSR Nos. 5545-Z, 5548-Z, 5558-Z, 5561-Z, 5564-Z, 5566-

Z, 5567-Z, 5569-Z, 5570-Z, 5572-Z, Memorandum Opinion and Order, 15 FCC Rcd 15075 (2000).

601

47 C.F.R. § 76.1204. See also Navigation Reconsideration supra n. 96.

602

The POD requirement is intended to permit portability among set-top boxes, which will increase the market base

and facilitate volume production. Navigation Report and Order, 13 FCC Rcd at 14793-4.

603

CEA Comments at 2.

604

Motorola and Scientific Atlanta have signed the PHILA and CableLabs is engaged in negotiations over the

PHILA with other manufacturers. Letter from William A. Check, Ph.D., Vice President, Science and Technology,

NCTA, to Magalie R. Salas, Secretary, FCC, Oct. 31, 2001.

605

Letter from Michael Petricone, Vice President, Technology Policy, CEA, to Magalie R. Salas, Secretary, FCC,

Nov. 6, 2001.

606

Letter from William A. Check, Ph.D., Vice President, Science and Technology, NCTA, to Magalie R. Salas,

Secretary, FCC, Oct. 31, 2001.

607

Letter from Michael Petricone, Vice President, Technology Policy, CEA, to Magalie R. Salas, Secretary, FCC,

Nov. 6, 2001.

608

Letter from Robert Sachs, CEO, NCTA, to Michael Powell, Chairman, FCC, Oct. 10, 2001.

Federal Communications Commission FCC 01-389

telecommuting. Cable modem deployment continues to increase.

609

As we previously reported, the

CableLabs Certified Cable Modem Project (formerly known as Data Over Cable Service Interface

Specification or DOCSIS) defines interface requirements for high-speed cable modems and provides a

method for certifying that cable modems available for retail sale are in compliance with the DOCSIS

specifications.

610

As of December 2001, CableLabs had certified 193 DOCSIS 1.0 modems and 26 cable

modem termination systems (“CMTS”).

611

CableLabs also has developed an enhanced specification,

DOCSIS 1.1, which provides for high-speed Internet service tiers, using techniques known as data

fragmentation and quality of service. Under this specification, which is compatible with the existing

DOCSIS 1.0 specification, cable operators can deliver high-speed Internet services simultaneously over

the same plant and in a path parallel to core video services. To date, CableLabs has certified nine high-

speed cable modems that comply with the DOCSIS 1.1 specification, and two companies have received

qualification status for their DOCSIS 1.1 cable modem termination systems.

612

Recently, CableLabs

announced the next version of the specification, to be called DOCSIS 2.0, which will significantly

increase cable bandwidth for data transmissions without requiring any physical rebuilding of cable

networks.

613

DOCSIS certified cable modems are now being sold at retail in some markets, although

widespread retail availability has not yet occurred.

614

195.

PacketCable, another CableLabs project, is intended to develop interoperable interface

specifications for delivering advanced, real-time multimedia services over two-way cable plant.

PacketCable will use IP technology to enable a wide range of services, including IP telephony,

multimedia conferencing, interactive gaming, and general multimedia applications.

615

In November 2000,

CableLabs announced that it had completed the second phase of the PacketCable project and had released

several new interim specifications and technical reports.

616

These specifications, which build upon the

capabilities defined by the PacketCable 1.0 suite of specifications, describe call signaling, quality-of-

service, and event messaging extensions that will enable cable operators to directly exchange multimedia

traffic over managed-IP backbone networks. Future extensions to the PacketCable specifications will

define protocols for enhanced capabilities, such as multimedia conferencing and interactive gaming.

CableLabs observes that several vendors participating in this project are developing products based on the

PacketCable specification.

609

See ¶¶ 44-8 supra.

610

2000 Report, 16 FCC Rcd at 6092. See also CableLabs at http://cablemodem.com.

611

CableLabs, CableLabs Certifies 7 More DOCSIS 1.1 Modems, Continuing Cable Data Advances (press release),

Dec. 20, 2001, at http://cablelabs.com/news_room/PR/01_pr_cw20_122001.html.

612

Id. See also CableLabs, Certifies Two DOCSIS 1.1 Modems and Qualifies Two CMTS, Achieving Breakthrough

on Advanced Devices (press release), Sept. 27, 2001, at http://www.cablelabs.com/news_room/

PR/00_pr_cw19_092701.html. Companies receiving certification are Ambit, Arris, Ericsson, Scientific-Atlanta,

Tellabs, and, for two modems apiece, Toshiba and Texas Instruments. Arris and Cadant gained qualification status

for their cable modem termination systems.

613

CableLabs, CableLabs Creating Advanced Modem Spec to Enable 30 Mbps in Upstream (press release), Aug. 31,

2001, at http://www.cablelabs.com/news_room/PR/01_pr_adv_phy_083101.html.

614

Kinetic Strategies, Inc., Cable Modem FAQ, at http://www.cabledatacomnews.com/cmic/cmic2.html.

615

See CableLabs at http://www.packetcable.com. See also 2000 Report, 16 FCC Rcd at 6092.

616

CableLabs, Cablelabs Releases New Interim PacketCable Specifications (press release), Nov. 28, 2000, at

http://www.cablelabs.com/news_room/PR/00_pr_pc_specs_112800.html.

Federal Communications Commission FCC 01-389

IV. COMPETITIVE RESPONSES

196.

In this section, we describe a number of cases where the incumbent cable operator faces

competition from a new entrant. We report information gathered through comments filed in this

proceeding, petitions filled with the Commission for a determination of effective competition, trade press

reports, articles, and other publicly available sources.

197.

Between July 2000 and June 2001, the Bureau granted 16 petitions for effective

competition, representing 240 communities, based on competitive entry from LECs or their affiliates,

DBS, and municipal operators. These communities represent approximately two percent of all cable

subscribers. The differences between competition and general market responses based on technological

advances, improved marketing, and new service opportunities are not always easy to distinguish.

However, in communities where head-to-head competition is present, the incumbent cable operator has

generally responded to competitive entry in a variety of ways, such as by lowering prices, providing

additional channels at the same monthly rate, improving customer service, adding new services, or by

challenging the legality of the entrant’s activities.

198.

For example, in Boston, Massachusetts, in response to RCN’s entry, the incumbent cable

operator in Boston, Cablevision of Boston (“Cablevision”), “moderated” its regional rate increase in the

Boston area and agreed to improve its commitment to public and educational channels.

617

RCN, a wholly

owned subsidiary of RCN Telecom Services Inc., initially entered the Boston area market in 1996 as an

OVS operator.

618

It was granted a 15-year cable franchise by the City of Boston on July 27, 1999. By

September 1999, RCN served a total of 11,000 subscribers in the Boston metropolitan area, including

5,000 subscribers in the City of Boston.

619

By comparison Cablevision serves about 140,000 subscribers

in Boston.

620

199.

RCN contends that, because of its entry to the Boston area, the City of Boston was able to

negotiate a franchise renewal with Cablevision that imposed obligations on the incumbent more favorable

to the public than would otherwise have been possible.

621

The franchise agreement requires Cablevision

to upgrade its system capacity within three years to offer more channels, as well as local telephone and

high-speed Internet access.

622

Initially Cablevision took steps to prevent RCN from going forward by

filing a lawsuit against RCN and the city.

623

Furthermore, RCN contends that Cablevision created a

barrier to entry by refusing RCN access to inside wiring in MDUs in the Boston area.

624

617

RCN Comments at App. A.

618

Cablevision Petition for Special Relief, CSR 5048-E, Aug. 3, 1999, at 2.

619

RCN Comments at 5.

620

On Jan. 5, 2001, AT&T acquired the Cablevision system that serves the Boston franchise area.

621

RCN Comments at App. A.

622

Bruce Mohl, City Hopes Cable Pact Means Rate War, Boston Globe, July 29, 1999, at 32.

623

City of Boston Application for Review of Determination of Effective Competition In Re Cablevision of Boston,

Inc., CSR 5048-E, Aug. 20, 2001, at 2. See also Cablevision of Boston, Inc., Petition for Determination of Effective

Competition, DSR 5048-E, Memorandum Opinion and Order, 16 FCC Rcd 14056 (2001).

624

See ¶ 133 supra.

Federal Communications Commission FCC 01-389

200.

Lower monthly rates and added or improved services were also found in a number of

other communities where the incumbent cable operator faced new entrants. For example, in Duluth,

Georgia, the incumbent Rifkin & Associates, Inc./Cable Equities of Colorado, Ltd. (“Rifkin”) faced

aggressive advertising aimed at its subscribers, accompanied by extensive press coverage in the local

media, from new entrant BellSouth Interactive Media Services, Inc. (“BIMS”).

625

In response to

aggressive competition from BIMS, Rifkin upgraded its system and added 19 new channels -- nine new

expanded basic channels, a low priced, three-channel new product tier, and seven PPV channels.

626

201.

Similarly, RCN contends that in Somerville, Massachusetts, upon its entry, Time Warner,

the incumbent, announced a rate freeze for only that area where it faced competition.

627

In suburban

Philadelphia, as a result of RCN’s entry, Comcast, the incumbent, began to offer “rate locks” and service

improvements in the towns where it faced competition.

628

In the Washington, D.C., area, as a result of

entry by Starpower, an RCN affiliate, Comcast, the incumbent cable operator, reduced a previously

proposed rate increase. RCN also contends that in anticipation of its entry in Fairfax County, a suburb of

Washington, D.C., the incumbent Cox announced an upgrade of its plant.

629

202.

In some situations questions have been raised regarding the techniques used by

incumbent service providers to forestall competition. In Scottsboro, Alabama, the Scottsboro Electric

Power Board (“Scottsboro”) began construction of a new, municipally owned cable television system in

Scottsboro because of widespread dissatisfaction with Falcon Cablevision (“Falcon”), the incumbent

cable operator.

630

In late 1999, Charter Communications (“Charter”) acquired Falcon’s operation in

Scottsboro. After acquiring the system, Charter began to engage in a course of conduct that, according to

Scottsboro, is designed to terminate Scottsboro’s efforts to compete in the market and, moreover, to

signal other would-be competitors that attempts to enter other Charter markets would lead to similar

predatory practices.

631

203.

Since beginning in April 2000, Charter offered a special rate of $19.95 per month for one

year. It then allowed some customers to continue subscribing at that rate for a second year. In May 2000,

Charter added one month of free service to the $19.95 rate.

632

Scottsboro contends that Charter’s special

rates are available only to Scottsboro’s customers and are not available to all potential subscribers in

Scottsboro.

633

204.

According to Scottsboro, Charter normally charges $24.95 per month for its expanded

basic service, which includes 200 channels comprised of 16 premium movie channels, 45 digital music

625

Rifkin & Associates, Inc./Cable Equities of Colorado, Ltd., Petition for Determination of Effective Competition at

Exhibits D - F.

626

Id. at 10.

627

See 1999 Report, 15 FCC Rcd at 1073.

628

RCN Comments at App. A.

629

Id.

630

Scottsboro Comments at 5.

631

Id. at 1.

632

Id. at 5.

633

Id. at 7.

Federal Communications Commission FCC 01-389

channels, 16 educational channels, and 14 PPV channels. A digital receiver with remote and Charter’s

on-screen guide are also included. Furthermore, Charter offers a $200 “bounty” to switch from

Scottsboro to Charter, and an additional $200 if subscribers take its Internet service. In addition, Charter

established a system under which it retired subscribers’ old debts. Scottsboro states that Charter’s special

offerings have induced about 36 percent of Scottsboro’s customers to switch to Charter.

205.

Charter counters that Scottsboro has easy access to every citizen because of its

advantageous position as a municipally owned-cable system; it also has wide public support, low capital

costs, and the incumbent system against which it formerly competed was in dire need of an upgrade.

According to Charter, it upgraded the system after purchasing it from Falcon, and the system is now able

to provide cable modem service and digital programming at competitive rates.

634

Charter admits that it

has conducted “win back” campaigns, but claims that such campaigns are widespread among cable

television operators. It also denies that it has set its prices at predatory rates and maintains that its actions

and pricing policies have benefited subscribers in the community because they now enjoy lower monthly

charges for improved services.

635

206.

Knology submits that Charter has engaged in similar behavior against its systems in West

Point, Georgia, and Montgomery, Alabama.

636

Knology has provided cable service in West Point since

1998.

637

In 1999, Charter purchased the incumbent cable system from Marcus Cable. After Knology

entered the market, several rounds of lowering prices occurred until both providers were charging about

$20 for expanded basic service. Knology contends that Charter did not offer the same discounted rates in

nearby communities. According to Knology, in nearby communities, Charter’s prices ranged to more

than $35 per month for expanded basic, more than the national average of $32.25.

638

In addition, earlier

this year, Charter began offering a “bounty” of $200 and free installation to any consumers that switched

from Knology to Charter. Knology states that, for customers taking advantage of this offer, the effective

cost of cable service was reduced to less than $4 per month.

639

In Montgomery, Knology purchased an

existing competitive system in 1997.

640

When Charter acquired the incumbent cable system in 2001 from

AT&T Broadband, it immediately lowered the price of its digital tier and offered consumers $300 to

switch from Knology to Charter. According to Knology, Charter recently began to offer a “digital

complete basic” service for less than $23 per month, which includes all analog expanded basic services,

50 channels available only on the digital tier, and 50 channels of digital music. In addition, Charter will

forgive old debts to Charter or the system’s previous owner. Knology alleges that Charter’s discounts and

giveaways have reduced its prices below costs, even if only programming costs are considered. Knology

contends that Charter is taking a significant loss on each new customer it takes from its competitors, but it

will be able to recoup its losses once it has driven its competitors out of the market.

641

634

Charter Reply Comments at 1.

635

Id. at 2- 3.

636

Knology Comments at 1.

637

Id. at 3-4.

638

Id. at 4.

639

Id.

640

Id. at 5-6.

641

Id. at 6. See also Scottsboro Comments at 6-7.

Federal Communications Commission FCC 01-389

207.

In previous

Reports

, we have examined responses to head-to-head competition. In

communities where cable operators have faced competition for a substantial period of time, the initial

competitive response generally gives way to a more mature form of competition that benefits both

subscribers and operators. In Omaha, Nebraska, where Cox and Qwest have been competing for the past

six years, both offer a bundle of video, telephony, and high-speed Internet access services to entice new

customers and retain old ones.

642

For example, Qwest’s phone customers pay $28.95 per month for 59

channels of basic cable service and $39.95 per month for cable modem service. For its part, Cox charges

$33.95 per month for its 70 channel basic cable service and its cable modem service is $5.00 lower than

Qwest’s charge for cable modem service. As result of this competition, cable penetration in the area has

increased and “churn” has stabilized.

643

208.

As the cases presented above suggest, subscribers usually benefit from “head-to-head”

competition. In communities where “head-to-head” competition has been sustained for a long period of

time, customers generally receive lower monthly rates and better service, while operators generally enjoy

higher penetration rates and lower churn rates. Commenters report that, however, in some cases,

particularly where a new entrant may appear vulnerable for financial or other reasons, the initial response

of a large incumbent MSO to competition may be motivated by anticompetitive animus rather than

legitimate business concerns.

644

Further, commenters informed us that, because of the difficulty and cost

of pursuing antitrust remedies, it may be that the target of anticompetitive conduct is without practical

remedy.

645

209.

The allegations made in the comments of Scottsboro and Knology highlight the

difficulties of new entrants that, for whatever reason, are capable of competing only within a confined

geographic region. The vast resources of a large MSO may simply prove too much if brought to bear in a

targeted fashion against a single system entrant. Moreover, we are concerned about the signal such

targeting may send to others who would compete in the MVPD market, and particularly to the financial

markets to which a new entrant may well be dependent for resources. However, it is not clear that we

have specific statutory authority to address these kinds of problems directly. There has been some

suggestion that our authority to prohibit anticompetitive acts or unfair practices under section 628 of the

Act would reach targeted and predatory competitive responses.

646

Alternatively, it may be that we would

have to seek additional authority from Congress in order to combat such practices, which tend to limit

competition and discourage new entry.

V. ADMINISTRATIVE MATTERS

210.

This

2001 Report

is issued pursuant to authority contained in sections 4(i), 4(j), 403, and

628(g) of the Communications Act of 1934, as amended, 47 U.S.C. §§ 154(i), 154(j), 403, and 548(g).

211.

It is ORDERED that the Office of Legislative and Intergovernmental Affairs shall send

copies of this

2001 Report

to the appropriate committees and subcommittees of the United States House

of Representatives and the United States Senate.

642

Matt Stump,

In Omaha, Cox and Qwest Wage Three-Way Contest,

Broadband Week, Oct. 1, 2001.

643

Id.

644

Knology Comment at 6-8; Scottsboro Reply Comment at 2-3.

645

Cable Services Bureau staff meeting with Scottsboro, Oct. 17, 2001.

646

Scottsboro Comment at 7-9; Knology Comments at 6-7.

Federal Communications Commission FCC 01-389

212.

It is FURTHER ORDERED that the proceeding in CS Docket No. 01-129 IS

TERMINATED.

FEDERAL COMMUNICATIONS COMMISSION

Magalie Roman Salas

Secretary

Federal Communications Commission FCC 01-389

APPENDIX A

List of Commenters

Initial Comments

AT&T Corp. (“AT&T”)

Carolina Broadband, Inc. (“Carolina”)

Comcast Corporation (“Comcast”)

Consumer Electronics Association (“CEA”)

DirecTV, Inc. (“DirecTV”)

John Dowie (“Dowie”)

EchoStar Satellite Corporation (“EchoStar”)

Etna Video (“Etna”)

Motorola, Inc. (“Motorola”)

National Association of Broadcasters (“NAB”)

National Cable & Telecommunications Association (“NCTA”)

National Rural Telecommunications Cooperative (“NRTC”)

RCN Corporation (“RCN”)

Satellite Broadcasting and Communications Association (“SBCA”)

Scottsboro (Alabama) Electric Power Board (“Scottsboro”)

State of Hawaii (“Hawaii”)

Utilicorp Communications Services, Everest Connections Corporation, and ExOp of Missouri, Inc.

(“Utilicorp”)

WBGT-LP, David Grant and Molly Grant (“WBGT-LP”)

WBQC-CA, Elliott B. Block (“WBQC-CA”)

WJAN-CA, Sherjan Broadcasting Co., Inc. (WJAN-CA”)

WLOT-LP, R. Anthony Dimarcantonio (“WLOT-LP”)

Wireless Communications Association International, Inc. (“WCA”)

Reply Comments

AT&T Corp. (“AT&T”)

Cablevision Systems Corporation (“Cablevision”)

Charter Communications, Inc. (August 20, 2001, Letter) (“Charter Letter”)

Charter Communication, Inc. (Reply Comment) (“Charter”)

Comcast Corporation (“Comcast”)

DirecTV, Inc. (“DirecTV”)

EchoStar Satellite Corporation (“EchoStar”)

Gregory C. Jones, M.D. (“Jones”)

National Association of Broadcasters (“NAB”)

National Cable & Telecommunications Association (“NCTA”)

National Rural Telecommunications Cooperative (“NRTC”)

Northpoint Technology, Ltd. and Broadwave USA, Inc. (“Northpoint”)

RCN Corporation (“RCN”)

Federal Communications Commission FCC 01-389

Late-filed Comments

EARN (Equal Airwaves Right Now) (“EARN”)

Knology, Inc. (“Knology”)

Scottsboro (Alabama) Electric Power Board (“Scottsboro”)

WideOpenWest Holdings, LLC (“WOW”)

Federal Communications Commission FCC 01-389

APPENDIX B

TABLE B-1

Cable Television Industry Growth: 1993 - June 2001

(in millions)

Television

Households

("TH")

Homes Passed

("HP")

Basic Cable

Subscribers

("Subs")

Year End

Total

Change Total

Change

HHs

Passed by

Cable

(HP/TH)

HHs

Subscribin

(Subs/TH)

U.S.

Penetration

(Subs/HP)

1993 94.0 1.0% 90.6 1.0% 57.2 3.6% 96.4% 60.9% 63.1%

1994 94.9 1.0% 91.6 1.1% 59.7 4.4% 96.5% 62.9% 65.2%

1995 95.9 1.1% 92.7 1.2% 62.1 4.0% 96.7% 64.8% 67.0%

1996 97.0 1.1% 93.7 1.1% 63.5 2.3% 96.6% 65.5% 67.8%

1997 98.0 1.0% 94.6 1.0% 64.9 2.2% 96.5% 66.2% 68.6%

1998 99.0 1.0% 95.6 1.1% 66.1 1.8% 96.6% 66.8% 69.1%

1999 100.0 1.0% 96.6 1.0% 67.3 1.8% 96.6% 67.3% 69.7%

2000 106.4 6.4% 103.2 6.8% 68.5 1.8% 97.0% 64.4% 66.4%

June 01

(e)

107.1 0.7% 104.0 0.8% 69.0 0.7% 97.1% 64.4% 66.3%

(e)

June data is based on year-end estimate by Paul Kagan Associates.

Sources:

1993 to 1997:

U.S. Television Households: Paul Kagan Assocs., Inc.,

Basic Cable Network Economics

(1983-2007)

, Cable Program Investor, Mar. 13, 1998, at 2; Homes Passed and Basic Cable Subscribers

Paul Kagan Assocs., Inc.,

History of Cable and Pay-TV Subscribers and Revenues

, Cable TV Investor,

Apr. 14, 1998, at 3.

1998 and 1999:

U.S. Television Households, Homes Passed

, and Basic Cable Subscribers: Paul Kagan

Assocs., Inc.,

Paul Kagan’s 10-Year Cable TV Industry Projections (1998-2009

), The Cable TV

Financial Databook 1999, Aug. 1999, at 10.

2000 and 2001:

U.S. Television Households, Homes Passed

, and Basic Cable Subscribers: Paul Kagan

Assocs., Inc.,

Paul Kagan’s 10-Year Cable TV Industry Projections (2000-2011

), The Broadband Cable

Financial Databook 2001, July 2001, at 10.

Federal Communications Commission FCC 01-389

TABLE B-2

Premium Cable Services: 1993 - June 2001

(in millions)

Premium Cable

Service Subscribers

Premium Units

Year End Year End Total % Change Year End Total % Change

1993 26.4 6.9% 47.0 1.1%

1994 28.1 6.4% 47.4 0.9%

1995 29.8 6.0% 51.6 8.9%

1996 31.0 4.0% 54.6 5.8%

1997 31.5 1.6% 56.0 2.6%

1998 35.3 12.1% 57.9 3.4%

1999 35.5 0.6% 53.0 -8.5%

2000 36.8 3.7% 55.6 4.9%

June 2001

(e)

37.2 1.0% 56.4 1.4%

(e)

June data are based on year-end estimate by Paul Kagan Associates.

Premium Cable Services Subscribers refers to the total number of homes subscribing to one or more

premium services. Each home is counted once, regardless of the number of premium services to which it

subscribes.

Premium Units refers to the total number of premium subscriptions. Each subscription is counted

separately, thus may exceed the number of premium subscribers.

The decrease in the number of premium units is due to the migration of certain pay services to other tier

categories. As such, the number of units sold by those services are no longer counted here.

Sources:

1993 to 1997:

Paul Kagan Assocs., Inc.,

History of Cable and Pay-TV Subscribers and Revenues

, Cable

TV Investor, Apr. 14, 1998, at 3.

1998 to 1999:

Paul Kagan Assocs., Inc.,

Paul Kagan’s 10-Year Cable TV Industry Projections (1998-

2009

), The Cable TV Financial Databook 1999, Aug. 1999, at 10.

2000 to 2001:

Paul Kagan Assocs., Inc.,

Paul Kagan’s 10-Year Cable TV Industry Projections (2000-

2011

), The Broadband Cable Financial Databook 2001, July 2001, at 10.

Federal Communications Commission FCC 01-389

TABLE B-3

Growth By Network Type: 1999 - June 2001

1999 98-99 2000 99-00

Network Type Number of

Networks

Percent of

Networks

Percent

Change

Number of

Networks

Percent of

Networks

Percent

Change

Basic/No-Chg 147 68.7% 5.8% 130 56.2% -11.6%

Premium 43 20.1% 138.9% 40 17.3% -7.0%

Pay Per View 9 4.2% -10.0% 11 4.8% 22.2%

Digital - - - 39 16.9% -

Other* 15 7.0% 114.3% 11 4.8% -26.7%

Total 214 100% 23.0% 231 100% 7.9%

* “Other” includes cable networks that fall under more than one service category. For example, the

Disney Channel is part of the basic tier in some systems, but is sold as a premium service on other

systems.

Sources:

1999:

NCTA,

National Cable Video Networks By Type of Service: 1980 - 1999

, Cable Television

Developments 1999/2000, at 6.

2000:

NCTA,

National Cable Video Networks By Type of Service: 1980 - 2000

, Cable Television

Developments 2001, at 8.

Federal Communications Commission FCC 01-389

TABLE B-4

Cable Industry Revenue and Cash Flow: 1997 – 2001

1997 1998 1999 2000 2001

Total Total

Change Total

Change

Estimated

Year End

Total

Change

Avg Basic Subscribers (mil) 64.2 65.4 1.9% 66.7 2.0% 67.9 1.8% 69.0 1.6%

Revenue Segments (mil.)

Basic Service and CPST Tiers $20,008 $21,830 9.1% $23,135 6.0% $24,729 6.9% $26,142 5.7%

Pay Tiers $4,952 $5,084 2.7% $4,989 -1.9% $4,648 -6.8% $4,777 2.8%

Local Advertising $1,925 $1,850 -3.9% $2,685 45.1% $3,240 20.7% $3,661 13.0%

Pay-Per-View $823 $627 -23.8% $954 52.2% $760 -20.3% $1,096 44.2%

Home Shopping $152 $187 23.0% $185 -1.1% $239 29.2% $260 8.8%

Advanced Services (Ana./Dig.)

$208 $452 117.3% $1,978 337.6% $2,051 3.7% $5,562 171.2%

Equipment and Install $2,320 $2,631 13.4% $2,824 7.3% $2,451 -13.2% $2,478 1.1%

Total Revenue (mil.) $30,388 $32,661 7.5% $36,750 12.5% $38,118 3.7% $43,976 15.4%

Revenue Per Subscriber $473.33 $499.40 5.5% $550.97 10.3% $561.38 1.9% $637.33 13.5%

Operating Cash Flow (mil.)

$13,369 $14,602 9.2% $15,600 6.8% $16,611 6.5% $18,272 10.0%

Cash Flow per Subscriber $208.24 $225.87 8.5% $233.88 3.5% $244.64 4.6% $264.81 8.2%

Cash Flow/Total Revenue 44.0% 45.2% 2.7% 42.4% -6.2% 43.6% 2.8% 41.5% -4.8%

Includes advanced analog, digital video, high-speed data, cable telephony, interactive services, and games.

Cash flow and its proxies (e.g., EBITDA) are often used to value the operations of a communications

firm without regard to the firm's capital structure. Cash flow from operations is the net result of cash

inflows from operations (revenue) and cash outflows from operations (expenses), thus ignoring non-cash

charges to net income such as depreciation and amortization. Cash flow from operations indicates a

firm's ability to meet its net finance and investment obligations.

Sources:

1997:

Average Number of Basic Subscribers: Paul Kagan Assocs., Inc.,

History of Cable and Pay-TV

Subscribers and Revenues

, Cable TV Investor, Apr. 14, 1998, at 3; Revenue Segments: Paul Kagan

Assocs., Inc.,

Paul Kagan's 10-YearProjections,

Cable TV Investor, May 20, 1997, at 9; Paul Kagan

Assocs., Inc.,

Total Cable TV Advertising Revenue (1980-2007),

Cable TV Financial Databook, Aug.

1998, at 15; Operating Cash Flow: Paul Kagan Assocs., Inc.,

Estimated Capital Flows In Cable TV

Cable TV Finance, May 31, 1998, at 1.

1998:

Average Number of Basic Subscribers and Revenue Segments

: Paul Kagan Assocs., Inc.,

Paul

Kagan’s 10-Year Cable TV Industry Projections (1998-2009

), The Cable TV Financial Databook 1999,

Aug. 1999, at 10-11; Operating Cash Flow: Paul Kagan Assocs., Inc.,

Estimated Capital Flows in Cable

, The Cable TV Financial Databook 1999, Aug. 1999, at 149.

1999:

Average Number of Basic Subscribers and Revenue Segments

: Paul Kagan Assocs., Inc.,

Paul

Kagan’s 10-Year Cable TV Industry Projections (1999-2010

), The Cable TV Financial Databook 2000,

Aug. 2000, at 10; Operating Cash Flow: Paul Kagan Assocs., Inc.,

Estimated Capital Flows in Cable

, The Cable TV Financial Databook 2000, Aug. 2000, at 150.

Federal Communications Commission FCC 01-389

2000 and 2001:

Average Number of Basic Subscribers and Revenue Segments

: Paul Kagan Assocs.,

Inc.,

Paul Kagan’s 10-Year Cable TV Industry Projections (2000-2011

), The Broadband Cable Financial

Databook 2001, July 2001, at 10; Operating Cash Flow: Paul Kagan Assocs., Inc.,

Estimated Capital

Flows in Cable TV

, The Broadband Cable Financial Databook 2001, July 2001, at 138.

Federal Communications Commission FCC 01-389

TABLE B-5

System Transactions: 1998 - June 2001

1998 1999 98-99

% Change

2000 99-00

% Change

Jan-June

2001

Number of Systems Sold 119 92 -22.7% 47 48.9% 23

Total Number of Subscribers 22,466,200 18,288,706 -18.6% 10,494,290 -42.6% 4,040,046

System Size Average 188,792 198,790 5.3% 223,283 12.3% 175,654

Number of Homes Passed 36,397,730 28,345,972 -22.1% 17,393,388 -38.6% 6,789,548

No. of Homes Passed Avg 305,863 308,108 0.73% 370,072 20.1% 295,197

Total Dollar Value (mil.) $64,601 $73,070 13.1% $62,154 -14.9% $14,772

Dollar Value (mil.) Average $542.9 $794.2 46.3% $1,322.4 66.5% $64.0

Dollar Val. Per Subscriber $2,875 $3,995 39.0% $5,923 48.3% $3,656

Dollar Val. Per Home Passed $1,775 $2,578 45.2% $3,573 38.6% $2,176

Cash Flow Multiple 13.1x 16.7x 27.5% 19.6x 17.4% 14.4x

Sources:

1998:

Paul Kagan Assocs., Inc.,

Cable System Sale Summary (through December annually)

, Cable TV

Investor, Jan. 29, 2000, at 7.

1999 to 2000:

Paul Kagan Assocs., Inc.,

Cable System Sale Summary (Annually through December)

Cable TV Investor, Feb. 5, 2001, at 12.

2001:

Paul Kagan Assocs., Inc.,

Cable System Sale Summary (Annually through June)

, Cable TV

Investor, Aug. 29, 2001, at 9.

Federal Communications Commission FCC 01-389

TABLE B-6

Acquisition of Capital: 1993 - June 2001

($ in million)

Private Debt Public Debt

Private Equity Public EquityYear

Sum

Raised

% of

Total

Sum

Raised

% of

Total

Sum

Raised

% of

Total

Sum

Raised

% of

Total

Capital

Raised

1993 $(3,584) -186.4% $5,280 274.6% $62 3.2% $165 8.6% $1,923

1994 $ 4,803 87.0% $155 2.8% $100 1.8% $461 8.4% $5,519

1995 $(714) -8.5% $4,495 53.6% $1,191 14.2% $3,419 40.7% $8,391

1996 $1,287 23.4% $2,355 42.7% $49 0.9% $1,818 33.0% $5,509

1997 $103 1.2% $6,252 73.3% $1,942 22.8% $230 2.7% $8,527

1998 $194 2.3% $6,174 72.7% $200 2.4% $1,927 22.7% $8,495

1999 $(320) -1.1% $16,115 55.9% $5,385 18.7% $7,648 26.5% $28,828

2000 $2,766 36.7% $4,288 56.9% $101 1.3% $380 5.0% $7,535

June 2001 $8,585 44.3% $8,156 42.1% $94 0.5% $2,540 13.1% $19,375

Total: 1993-

June 2001

$13,120 $53,270 $9,124 $18,588 $94,102

Avg Raised

Per Year

$1,544 $6,267 $1073 $2,187 $11,071

Column entitled "% of Total" represents the percent of total capital raised from financing sources for

that given year.

Public Debt is expressed in terms of net new public debt.

Total Capital Raised equals private debt plus public debt plus private equity plus public equity.

Sources:

1993:

Paul Kagan Assocs., Inc.,

Estimated Capital Flows in Cable TV

, Cable TV Finance, May 31, 1998,

at 1.

1994:

Paul Kagan Assocs., Inc.,

Estimated Capital Flows in Cable TV

, The Cable TV Financial

Databook 1999, Aug. 1999, at 149.

1995 to 1999:

Paul Kagan Assocs., Inc.,

Estimated Capital Flows in Cable TV

, The Cable TV Financial

Databook 2000, Aug. 2000, at 150.

Federal Communications Commission FCC 01-389

2000:

Paul Kagan Assocs., Inc.,

Estimated Capital Flows in Cable TV

, The Broadband Cable Financial

Databook 2001, July 2001, at 138.

2001:

Paul Kagan Assocs., Inc.,

June Cable Financing Snapshot

, Cable TV Finance, July 31, 2001, at

10.

Federal Communications Commission FCC 01-389

APPENDIX C

TABLE C-1

Assessment of Competing Technologies

(i)

Technology Used June 97 June 98 June 99 June 00 June 01

(1) TV Households

Percent Change

97,000,000

0.00%

98,000,000

1.03%

99,400,000

1.43%

100,801,720

1.41%

102,184,810

1.37%

(2) MVPD Households

(ii)

Percent Change

Percent of TV Households

73,646,970

1.76%

75.92%

76,634,200

4.06%

78.20%

80,882,411

5.54%

81.37%

84,423,717

4.38%

83.75%

88,310,074

4.60%

86.42%

(3) Cable Subscribers

Percent Change

Percent of MVPD Total

64,150,000

1.02%

87.10%

65,400,000

1.95%

85.34%

66,690,000

1.97%

82.45%

67,700,000

1.51%

80.19%

68,980,000

1.89%

78.11%

(4) MMDS Subscribers

Percent Change

Percent of MVPD Total

1,100,000

-6.78%

1.49%

1,000,000

-9.09%

1.30%

821,000

-17.90%

1.02%

700,000

-14.74%

0.83%

700,000

0.0%

0.79%

(5) SMATV Subscribers

Percent Change

Percent of MVPD Total

1,162,500

3.24%

1.58%

940,000

-19.14%

1.23%

1,450,000

54.26%

1.79%

1,500,000

3.45%

1.78%

1,500,000

0.0%

1.70%

(6) HSD Subscribers

Percent Change

Percent of MVPD Total

2,184,470

-4.10%

2.97%

2,028,200

-7.15%

2.65%

1,783,411

-12.07%

2.20%

1,476,717

-17.20%

1.75%

1,000,074

-32.28%

1.13%

(7) DBS Subscribers

Percent Change

Percent of MVPD Total

5,047,000

17.78%

6.85%

7,200,000

42.66%

9.40%

10,078,000

39.97%

12.46%

12,987,000

28.86%

15.38%

16,070,000

23.74%

18.20%

(8) OVS Subscribers

(iii)

Percent Change

Percent of MVPD Total

3,000

36.99%

0.00%

66,000

2100.00%

0.09%

60,000

-9.09%

0.07%

60,000

0.0%

0.07%

60,000

0.0%

0.07%

Notes:

(i) Some numbers have been rounded.

(ii) The total number of MVPD households is likely to be somewhat less than the given figure since

some households subscribe to the services of more than one MVPD.

See

1994 Report,

9 FCC

Rcd at 7480. However, the number of households subscribing to more than one MVPD is

expected to be low. Hence the given total can be seen as a reasonable estimate of the number of

MVPD households.

(iii)

The decline in OVS subscribers since 1998 reflects the conversion of portions of some OVS

systems to franchised cable systems over the last three years

Federal Communications Commission FCC 01-389

Sources:

(1)

Television households: 1997 from Nielsen Media Research as cited in

TV Column

, Washington Post,

Aug. 26, 1997, at E4; 1998 from Nielsen Media Research as cited in Broadcasting & Cable, June 29,

1998, at 70; 1999 from Nielsen Media Research as cited in Broadcasting & Cable, June 28, 1999, at

26; and 2000 and 2001 from

Nielsen Media Research.

(2)

Total MVPD households: The sum of the total number of subscribers listed under each of the

categories of the various technologies. See note (ii) above.

(3)

Cable subscribers: 1997 from Paul Kagan Assocs., Inc.,

Paul Kagan’s 10-Year Cable TV Industry

Projections,

Cable TV Investor, May 20, 1997, at 9; 1998 from Paul Kagan Assocs., Inc.,

Paul

Kagan’s 10-Year Cable TV Industry Projections,

Cable TV Investor, Aug. 10, 1998, at 4; 1999 from

Paul Kagan Assocs., Inc.,

Cable Industry 10-YearProjections,

Cable TV Investor, June 25, 1999, at 6;

2000 from Paul Kagan Assocs., Inc.,

Cable Industry 10-YearProjections,

Cable TV Investor, June 19,

2000, at 6; and 2001 from Paul Kagan Assocs.,

Kagan’s 10-Year Cable TV Industry Projections,

Broadband Cable Financial Databook 2001, July 2001, at 10.

(4)

MMDS subscribers: 1997 from WCA Comments for the

1997 Report

at 8. The 1998 and 1999

subscribers estimated by the FCC; 2000 subscribers from NCTA Comments for the

2000 Report

at 9;

and 2001 subscribers from NCTA comments at 7.

(5)

SMATV subscribers: 1997 subscribers were estimated by the FCC based on data from Paul Kagan

Assocs., Inc.,

Private Cable Growth,

Private Cable Investor, July 1997, at 3; 1998 subscribers from

NCTA 1998 Comments at 6; 1999 subscribers from NCTA Comments for the

2000 Report

at 5; and

2001 subscribers from NCTA Comments at 9.

(6)

HSD subscribers: 1997 from

DTH Subscribers,

SkyREPORT, Nov. 1999, at 10; 1998-2000 from

SkyReport.com at http://www.skyreport.com/dth_us.htm; and 2001 from SBCA Comments, Table 1

at 4.

(7)

DBS subscribers: 1997 from

DTH Subscribers,

SkyREPORT, November 1997, at 10; 1998 from

Minal Damani and Jennifer E. Sharpe,

U.S. DBS Marketplace: 1998,

The Strategis Group, July, 1998

at 6; 1999-2000 from SkyReport.com at http://www.skyreport.com/dth_us.htm; and 2001 from SBCA

Comments, Table 1 at 4.

(8)

OVS subscribers: OVS subscriber count for 1997 through 2001 estimated by the FCC.

Federal Communications Commission FCC 01-389

TABLE C-2

Number and Subscriber Size of Major Cable System Clusters

(Cumulative Figures)

1997 1998 1999 2000Range of Clustered

Subscribers

(thousands)

Clusters Subscribers

(millions)

Clusters Subscribers

(millions)

Clusters Subscribers

(millions)

Clusters Subscribers

(millions)

100-199 49 6.7 33 4.6 41 5.4 26 3.6

200-299 33 8.2 25 6.3 16 4 13 3.2

300-399 11 3.8 20 6.7 20 6.8 22 7.4

400-499 8 3.7 7 3.2 9 3.9 13 5.9

>500 16 11.9 21 19.6 28 23.8 34 34.3

Total

117 34.3 106 40.4 114 43.9 108 54.4

Sources:

1997 to 1999:

Paul Kagan Assocs., Inc.,

Major Cable TV Systems/Clusters

, The Cable TV Financial

Databook 1997, July 1997, at 39-41; Paul Kagan Assocs., Inc.,

Major Cable TV Systems/Clusters

The Cable TV Financial Databook 1998, July 1998, at 42-44; Paul Kagan Assocs., Inc.,

Major Cable

TV Systems/Clusters

, The Cable TV Financial Databook 1999, July 1999, at 46-48.

2000:

Paul Kagan Assocs.,

Major Cable TV Systems/Clusters

, Broadband Cable Financial Databook

2001, July 2001, at 36.

Federal Communications Commission FCC 01-389

TABLE C-3

2001 Concentration in the National Market for Purchase of Video Programming

(1)

Rank Company

Percent of Subscribers

(2)

1 AT&T 16.44

2 Time Warner 14.35

3 DirecTV 11.32

4 Comcast 9.53

Top 4

51.64

5 Charter 7.35

6 Cox 6.98

7EchoStar6.87

8 Adelphia 6.51

Top 8

79.35

9 Cablevision 3.40

10 Insight 1.54

Top 10

84.29

Top 25

89.70

Top 50

91.38

HHI

905

(3)

Notes:

(1)

MSO subscriber totals as of June 2001, and reported in Top Cable System Operators as of June 2001,

Kagan World Media,

Cable TV Investor,

August 29, 2001, at 12-13. There is no double counting of

subscribers. If a cable operator is partially owned by more than one MSO, its subscribers are

assigned to the largest MSO. Subscribers for DirecTV and EchoStar are based on SkyReport.com at

http://www.skyreport.com/dth_us.htm.

Federal Communications Commission FCC 01-389

(2)

The total number of MVPD subscribers used to calculate the HHI is 88,310,074 from Table C-1.

(3)

The HHI is calculated on the basis of market shares for the top 60 companies. Because all of the

remaining MVPDs have very small shares of the market, an HHI calculation that included all cable

system operators could only be slightly higher (no more than 2-3 points) than the given HHI.

Federal Communications Commission FCC 01-389

100

TABLE C-4

Concentration in the National Market for the Purchase of Video Programming

1998-2001

Percent of MVPD SubscribersMarket Share

1998 1999 2000 2001

Top Share 26.48 20.50 19.07 16.44

Top 2 42.62 36.45 33.99 30.79

Top 3 48.94 45.68 44.27 42.11

Top 4 54.63 53.94 52.70 51.64

Top 10 71.04 74.95 83.90 84.29

Top 25 80.99 84.92 89.75 89.70

Top 50 86.08 89.58 92.14 91.38

HHI 1096 923 954 905

Source:

Data for 1998 through 2000 were taken from

Reports, 1997-2000

. Data for 2001 are from Table C-2.

Federal Communications Commission FCC 01-389

101

APPENDIX D

TABLE D-1

MSO Ownership in National Video Programming Services

Programming Service Launch Date MSO Ownership (%)

Action Max Jun-98 AOL Time Warner (100)

American Movie Classics (AMC) Oct-84 Cablevision (75)

Animal Planet Oct-96 Liberty Media (49), Cox (19.7)

@Max May-01 AOL Time Warner (100)

BET Movies Feb-97 Liberty Media (100)

Black STARZ! Feb-97 Liberty Media (100)

Bravo Feb-80 Cablevision (75), Liberty Media

(25)

Canales ñ (6 digital channels)

Oct-98 Liberty Media (100)

Cartoon Network Oct-92 AOL Time Warner (100)

Cinemax Aug-80 AOL Time Warner (100)

CNN Jun-80 AOL Time Warner (100)

CNN Español Mar-97 AOL Time Warner (100)

CNN Headline News Jan-82 AOL Time Warner (100)

CNN International Jan-95 AOL Time Warner (100)

CNN/Sports Illustrated Dec-96 AOL Time Warner (100)

CNN Money Dec-95 AOL Time Warner (100)

Comedy Central Apr-91 AOL Time Warner (50)

Court TV Jul-91 Liberty Media (50), AOL Time

Warner (50)

Discovery Channel Jun-85 Liberty Media (49), Cox (24.6)

Discovery Civilization Oct-96 Liberty Media (49), Cox (24.6)

Discovery En Español Aug-98 Liberty Media (49), Cox (24.6)

Discovery Health Jul-98 Liberty Media (49), Cox (24.6)

Discovery Home & Leisure Oct-96 Liberty Media (49), Cox (24.6)

Discovery Kids Oct-96 Liberty Media (49), Cox (24.6)

Discovery Science Oct-96 Liberty Media (49), Cox (24.6)

Federal Communications Commission FCC 01-389

102

Programming Service Launch Date MSO Ownership (%)

Discovery Wings Jul-98 Liberty Media (49), Cox (24.6)

E! Entertainment Jun-90 Comcast (40), Liberty Media (10)

Encore Apr-91 Liberty Media (100)

Encore Action Sept-94 Liberty Media (100)

Encore Love Stories Jul-94 Liberty Media (100)

Encore Mysteries Jul-94 Liberty Media (100)

Encore True Stories and Drama Sept-94 Liberty Media (100)

Encore WAM! America's Youth

Network

Sept-94 Liberty Media (100)

Encore Westerns Jul-94 Liberty Media (100)

5StarMax May-01 AOL Time Warner (100)

FOX Sports Net (5 channels) Various Cablevision (50)

GEMS International Television Apr-93 Liberty Media (50)

Golf Channel Jan-95 Liberty Media (10), Comcast (90)

Great American Country Dec-95 Comcast (100)

Hallmark Channel (formerly Odyssey) Oct-93 Liberty Media (32.5)

HBO (Home Box Office) Nov-72 AOL Time Warner (100)

HBO Latino Nov-00 AOL Time Warner (100)

HBO Plus Dec-75 AOL Time Warner (100)

HBO Signature Oct-93 AOL Time Warner (100)

HBO Comedy May-99 AOL Time Warner (100)

HBO Family Dec-96 AOL Time Warner (100)

HBO Zone May-99 AOL Time Warner (100)

Home Shopping Network Jul-85 Liberty Media (19.7)

Independent Film Channel Sep-94 Cablevision (75)

International Channel Jul-90 Liberty Media (90)

MoreMAX Aug-91 AOL Time Warner (100)

MoviePlex Dec-79 Liberty Media (100)

MuchMusic USA Jul-94 Cablevision (75)

Federal Communications Commission FCC 01-389

103

Programming Service Launch Date MSO Ownership (%)

Outdoor Life Network Jul-95 Cox (33.3), Comcast (17), Liberty

Media (15.4)

OuterMax May-01 AOL Time Warner (100)

Ovation: The Arts Network Apr-96 AOL Time Warner (4.2)

PIN (Product Information Network) Apr-94 Cox (45)

Prevue Channel Jan-88 Liberty Media (51)

QVC Nov-86 Comcast (57), Liberty Media (43)

Sci-Fi Channel Sept-92 Liberty Media (19.7)

Sneak Prevue May-91 Liberty Media (12)

Starz! Feb-94 Liberty Media (100)

Starz! Action May-99 Liberty Media (100)

Starz! Cinema May-99 Liberty Media (100)

Starz! Family May-99 Liberty Media (100)

Starz! Love Stories Feb-94 Liberty Media (100)

Starz! MoviePlex Jan-95 Liberty Media (100)

Starz! Mystery Feb-94 Liberty Media (100)

Starz! Theater Mar-96 Liberty Media (100)

Starz! True Stories Feb-94 Liberty Media (100)

Starz! Wam Feb-94 Liberty Media (100)

Starz! Westerns Feb-94 Liberty Media (100)

Style May-99 Comcast (40), Liberty Media (10)

TBS Dec-76 AOL Time Warner (100)

Telemundo

Jan-87 Liberty Media (40)

TLC (The Learning Channel) Nov-80 Liberty Media (49), Cox (24.6)

Thematic Multiplex SM Jul-94 Liberty Media (100)

Thriller Max Jun-98 AOL Time Warner (100)

TNT (Turner Network Television) Oct-88 AOL Time Warner (100)

Travel Channel Feb-87 Liberty Media (49), Cox (24.6)

Turner Classic Movies Apr-94 AOL Time Warner (100)

Federal Communications Commission FCC 01-389

104

Programming Service Launch Date MSO Ownership (%)

USA Network Apr-80 Liberty Media (21)

Viewers Choice 1-10 and Hot Choice (11

multiplexed channels)

Nov-85 Cox (20), Time Warner (17), Liberty

Media (11.7), Comcast (11)

WE Jan-97 Cablevision (75)

WMAX May-01 AOL Time Warner (100)

Notes:

Canales ñ, Liberty Media’s digital package of Spanish-language channels, consists of FoxSportsAmericas,

CBS Telenoticias, CineLatino, BoxTejano, BoxExitos, and Canal 9.

On October, 11, 2001, NBC announced that it would acquire the Telemundo Network Group.

Since this sale is subject to regulatory approval by the Federal Communications Commission and

the Federal Trade Commission, we list it as vertically integrated with Liberty Media.

See

Steve

McClellan,

Lo Mas Grande Deal De NBC,

Broadcasting & Cable, Oct. 15, 2001, at 6.

Sources:

NCTA,

Directory of Cable Networks

, Cable Television Developments 2001, at 28-146.

Joe Schlosser,

Fox Puts on Some Speed,

Broadcasting and Cable, Aug. 6, 2001, at 4.

BET.com, at http://www.bet.com/atBET/0.,C-6-73-137584,00.html.

Viacom.com, at http://www.viacom.com/unitbyseg.tin?sBusSegmentNickname=ctv.

Liberty Media Corp., at http://www.libertymedia.com/our_affiliates/video_programming.htm

Federal Communications Commission FCC 01-389

105

TABLE D-2

National Video Programming Services

Not Affiliated With a Cable Operator

Programming Service Launch Date

A&E (Arts & Entertainment) Feb-84

ABC Family (formerly Fox Family Channel) Apr-77

All News Channel Nov-89

America's Store Sep-86

ANA Television Network Dec-91

ART (Arab Radio & Television) 1999

Asian American Satellite TV Jan-92

BBC America Mar-98

BET Jan-80

BET Action Pay Per View Sep-90

BET Gospel Nov-98

BET on Jazz Jan-96

Biography Channel Dec-98

Bloomberg Information Television Jan-95

Boating Channel Nov-98

Box Music Network Dec-85

Canal Sur Aug-91

CCTV-4 (China Central Television) Jan-98

CelticVision Mar-95

Classic Arts Showcase May-94

CMT (Country Music Television) Mar-83

CNBC Apr-89

CNET: The Computer Network Jan-95

College Entertainment Network Jan-97

Crime Channel Jul-93

C-SPAN* Mar-79

C-SPAN2* Jun-86

C-SPAN3* Sep-97

CTN (Chinese Television Network) 1995

Deep Dish TV Jan-86

Federal Communications Commission FCC 01-389

106

Programming Service Launch Date

Disney Channel Apr-83

Do-It-Yourself Channel Sep-99

Dream TV Network Nov-96

Ecology Communications Nov-94

ESPN Sep-79

ESPN Classic Sports (formerly Classic Sports Network) May-95

ESPN2 Oct-93

ESPNEWS Nov-96

ESPN EXTRA Sep-99

ESPN NOW Sep-99

ETC (The Erotic Network) Jul-00

EWTN: Global Catholic Network Aug-81

Extasy Feb-98

Filipino Channel Apr-94

Flix Aug-92

Food Network Nov-93

Fox Movie Channel Nov-94

Fox News Channel Oct-96

Fox Sports World Español Feb-99

Fox Sports World 1997

FoxNet Jul-91

FX Jun-94

Free Speech TV (FSTV) Jun-95

Galavision Oct-79

Game Show Network Dec-94

Golden Eagle Broadcasting Nov-98

Goodlife Television Network (formerly Nostalgia Channel) Jun-98

History Channel Jan-95

History Channel International Dec-98

Home & Garden Television Dec-94

Hot Choice Jun-86

Federal Communications Commission FCC 01-389

107

Programming Service Launch Date

Hot Networks Mar-99

HTV Aug-95

Idea Channel Jan-92

iN DEMAND (Pay Per View) Nov-85

Inspirational Network Apr-78

Interactive Channel Nov-93

International Channel Jul-90

Ladbroke Racing Channel Nov-84

Lifetime Movie Network Jun-98

Lifetime Television Feb-84

Lightspan Partnership, Inc. Feb-95

Locomotion Channel Nov-96

MBC Movie Network Nov-98

Melli TV 1995

MSNBC Jul-96

MTV “S” Aug-98

MTV “X” Aug-98

MTV Networks Latin America (formerly MTV Latino) Oct-93

MTV: Music Television Aug-81

MTV 2 Aug-98

My Pet TV Sep-96

NASA Television Jul-91

National Geographic Channel Jan-01

National Jewish Television May-81

Newsworld International Sep-94

Nick At Nite’s TV Land Apr-96

Nickelodeon Gas-Games & Sports Network Mar-99

Nick Too Jan-99

Nickelodeon/Nick at Nite Apr-79

Noggin Feb-99

NUE-TV Jul-00

Oasis TV Sep-97

Federal Communications Commission FCC 01-389

108

Programming Service Launch Date

Outdoor Channel Apr-93

Oxygen Feb-00

Pax TV Aug-98

Playboy TV Nov-82

Pleasure Channel Jun-99

Praise Television Dec-96

Proto X 1997

Puma TV 1997

RAI International 1999

Recovery Network Feb-97

Scandinavian Channel Oct-99

SCOLA Aug-87

Shop at Home Jun-86

Short TV Jan-99

Showtime Jul-76

Showtime Beyond Sep-99

Showtime Event Television (SET) 1979

Showtime Extreme 1998

Showtime Family Zone Mar-01

Showtime Next Mar-01

Showtime Women Mar-01

Skyview World Media 1992

SoapNet Jan-00

Speedvision Jan-96

Spice 1 May-89

Spice 2 Unknown

Sun TV Aug-96

Starnet Jan-89

Sundance Channel Feb-96

The Erotic Network (TEN) Aug-98

TMC (The Movie Channel) Dec-79

True Blue Feb-98

TNN (The National Network) Mar-83

Federal Communications Commission FCC 01-389

109

Programming Service Launch Date

Toon Disney Apr-98

Trinity Broadcasting Network Mar-83

TRIO Sep-94

TV 5 – USA Inc. Jan-98

TV Asia Apr-93

TV Games Network Unknown

TV Japan Jul-91

TVN Entertainment Corporation (33 digital pay-per-view channels) Feb-98

TVR (TV Russia Network) 1995

TV Guide Channel Jan-88

TV Guide Interactive Oct-96

TV Guide Sneak Preview 1991

TVN Direct Jan-96

Universal Torah Broadcasting Network Dec-98

Univision Sep-76

UVTV/KTLA Mar-88

UVTV/WGN Nov-98

UVTV\WPIX May-84

ValueVision Oct-91

VH1 (Music First) Jan-85

VH1 (Classic Rock) Aug-98

VH1 Soul Aug-98

VHI Country Aug-98

Weather Channel May-82

Weather Channel/Latin America Nov-96

Weatherscan April-98

Weatherscan Local May-99

Wisdom Television Jul-97

Worship Network Sep-92

X Cubed Unknown

Z Music Mar-93

ZEE TV 1999

Federal Communications Commission FCC 01-389

110

Note:

* Cable affiliates provide 95 percent of funding for C-SPAN, C-SPAN2, and C-SPAN3, but have no

ownership or program control interests. DBS licensees provide the other 5 percent of funding and also

have no ownership or program control interests.

Source:

NCTA,

Directory of Cable Networks

, Cable Television Developments 2001, at 28-154.

Federal Communications Commission FCC 01-389

111

TABLE D-3

Regional Video Programming Services

Programming Services Launch Date MSO Ownership (%)

Arabic Channel Apr-91

Arizona News Channel Nov-96

Automotive Television Network (ATN) Sep-95

Bonjour USA Sep-94

Cable TV Network of New Jersey Jul-93

California Channel Feb-91

Casa Club TV Jul-97

Central Florida News 13 Oct-97 AOL Time Warner (50)

ChicagoLand Television News (CLTV) Jan-93

CN8 – The Comcast Network 1996 Comcast (100)

Comcast SportsNet Oct-97 Comcast (45)

Comcast SportsNet Mid Atlantic Apr-84 Comcast (45)

County Television Network San Diego Jul-96

Ecumenical Television Channel 1983

Empire Sports Network Dec-90

Florida's News Channel Sep-98

Fox Sports Net West Oct-85 Cablevision (45)

Fox Sports Net 2 Jan-97 Cablevision (45)

Fox Sports Net Arizona Sep-96 Cablevision (45)

Fox Sports Net Bay Area Apr-90 Cablevision (45)

Fox Sports Net Chicago Jan-84 Cablevision (45)

Fox Sports Cincinnati 1989 Cablevision (45)

Fox Sports Net Detroit Sep-97 Cablevision (45)

Fox Sports Intermountain West 1990 Cablevision (45)

Fox Sports Midwest 1989 Cablevision (45)

Fox Sports Net New England Nov-81 Cablevision (22.5), Liberty Media

(50)

Fox Sports New York 1982 Cablevision (41.5)

Fox Sports Net North Mar-89 Cablevision (45)

Fox Sports Net Northwest Nov-88 Cablevision (45)

Fox Sports Net Ohio Feb-89 Cablevision (45)

Federal Communications Commission FCC 01-389

112

Programming Services Launch Date MSO Ownership (%)

Fox Sports Net Pittsburgh Apr-86 Cablevision (45)

Fox Sports Net Rocky Mountain Nov-88 Cablevision (45)

Fox Sports Net South Aug-90 Cablevision (45)

Fox Sports Net Southwest Jan-83 Cablevision (45)

Fox Sports West 2 Jan-97 Cablevision (45)

Hip Hop Network Jan-97

Home Team Sports (HTS) Apr-84 Liberty Media (17)

International Television Broadcasting (ITV) Apr-86

Las Vegas One News Apr-98

Local News on Cable Feb-97

Lottery Channel Nov-95

Madison Square Garden Network (MSG) Oct-69 Liberty Media (18), Cablevision (41.5)

MediaOne News Dec-95 Liberty Media (100)

MGM Jul-97

Michigan Government Television Jul-96

Midwest Sports Channel Mar-89

MSG Metro Guide Aug-98 Cablevision (100)

MSG Metro Learning Channel Aug-98 Cablevision (100)

MSG Traffic and Weather Aug-98 Cablevision (100)

Neighborhood News L.I. Unknown Cablevision (75)

New England Cable News Mar-92 Liberty Media

(50)

New England Sports Network (NESN) Mar-84

New York 1 News Sep-92

News 12 Connecticut Jun-95 Cablevision (75)

News 12 Long Island Dec-86 Cablevision (75)

News 12 New Jersey Mar-96 Cablevision (75)

News 12 The Bronx Jun-98 Cablevision

News 12 Westchester Nov-95 Cablevision (75)

News 8 Austin Sep-99

News Channel 5+ Sept-96

News Now 53 Jun-97 Cox (50)

News on One Oct-97

Federal Communications Commission FCC 01-389

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Programming Services Launch Date MSO Ownership (%)

News Watch 15 Oct-99

Newschannel 8 Oct-91

NGTV Dec-87

Nippon Golden Network Jan-82

NorthWest Cable News Dec-95

Ohio News Network May-97

PASS Sports (Pro-Am Sports System) Apr-84

Pennsylvania Cable Network (PCN) Sep-79

Pittsburgh Cable News Channel (PCNC) Jan-94

Rarities Exchange Dec-98

San Diego’s News Channel 15 Jan-97

Six News Now Jul-95

South Florida News Channel 1998

SportsChannel Florida Dec-87 Liberty Media (6), Cablevision (13.5)

Sunshine Network Mar-88 Liberty Media (34.5), Comcast (16),

Cox (5.3)

Texas Cable News Jan-99

TV33 Dec-95

WSBK Feb-88

Sources:

NCTA,

Regional Cable Networks

, Cable Television Developments 2001, at 174-200.

Cablevision Systems Corp., at http://www.cablevision.com/cvhome/cvrainb/rainbow.htm.

FoxSports, at http://foxsports.com/direct/index.sml.

New Frontier Media, at http://www.noof.com/business/broadcast.html.

Federal Communications Commission FCC 01-389

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TABLE D-4

Planned Programming Services

Programming Service Planned Launch Date, If Announced

AACN 2Q02

American Legal Network TBA

AMC’s American Pop TBA

American West Network TBA

Anthropology Programming and Entertainment TBA

Anti-Aging Network TBA

Applause TBA

Auto Channel 2Q02

Baby TV TBA

Beauty Channel 4Q02

BET Rap/Hip Hop TBA

BET World Music Beat TBA

Black Women’s Television 4Q01

Boating Channel TBA

Bravo World Cinema TBA

Children’s Fashion Network 4Q01

Collectors Channel TBA

Documentary Channel 4Q01

Eurocinema TBA

Fad TV (Fashion & Design Television) 2Q02

Fashion Network TBA

Fine Living 1Q02

G4 April 2002

GETV Network March 2002

Global Village Network TBA

Hobby Craft Interactive TBA

Honey Vision TBA

Investment TV 4Q01

Local News Network TBA

Love Network TBA

Moviewatch 2002

Federal Communications Commission FCC 01-389

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Programming Service Planned Launch Date, If Announced

Native American Nations Program Network 2002

Noah’s World International April 2002

Orb TV TBA

Performance Showcase TBA

Premiere Horse Network TBA

Puppy Channel February 2002

RadioTV Network 4Q02

Real Estate Network (TREN) TBA

Romanceland TBA

Seminar TV Network (Seminar TV) 1Q02

Senior Citizens Television Network 1Q01

Si TV 2002

Skywatcher Channel TBA

The Football Channel (TFN) TBA

The Gospel Network TBA

The Military Channel TBA

The World Cinema Channel TBA

Theater Channel TBA

The Tennis Channel July 2002

Youth Sports Broadcasting Channel TBA

Sources:

NCTA,

Planned Services

, Cable Television Developments 2001, at 155-173.

John M. Higgins,

Tennis Anyone,

Broadcasting & Cable, Sept. 3, 2001, at 12.

Scripps Secures Time Warner Carriage,

Multichannel News, Oct. 15, 2001, at 2.

Federal Communications Commission FCC 01-389

116

TABLE D-5

MSO Ownership in National Programming

Services

Subs.

(mil)

Liberty

Media

AOL

Time Warner

Comcast Cox Cablevision

Systems

Action Max 37.0 100.0%

AMC 75.0 75.0%

Animal

Planet 54.0 49.0% 19.7%

@Max *

100.0%

BET Movies 10.0 100.0%

Black Starz! * 100.0%

Bravo 49.4 25.0% 75.0%

Canales ñ (6 channels) * 100.0%

Cartoon Network 60.0 100.0%

Cinemax 100.0%

CNN 79.7 100.0%

CNN Español 10.5 100.0%

CNN Headline News 76.2 100.0%

CNN International

10.0 100.0%

CNN/SI 15.4 100.0%

CNN Money 13.0 100.0%

Comedy Central 69.0 50.0%

Court TV 40.0 50.0% 50.0%

Discovery 81.7 49.0% 24.6%

Discovery Civilization 7.0 49.0% 24.6%

Discovery En Español * 49.0% 24.6%

Discovery Health 25.0 49.0% 24.6%

Discovery

Home&Leisure

7.0 49.0% 24.6%

Discovery Kids 10.0 49.0% 24.6%

Discovery Science 10.0 49.0% 24.6%

Discovery Wings 7.0 49.0% 24.6%

E! Entertainment 65.0 10.0% 40.0%

Encore 16.0 100.0%

Encore Action * 100.0%

Federal Communications Commission FCC 01-389

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Services

Subs.

(mil)

Liberty

Media

AOL

Time Warner

Comcast Cox Cablevision

Systems

Encore Love Stories * 100.0%

Encore Mysteries * 100.0%

Encore True

Stories/Drama

* 100.0%

Encore WAM! * 100.0%

Encore Westerns * 100.0%

Fox Sports (5 channels) 100.0%

5Star Max * 100.0%

GEMS International TV 6.4 50.0%

Golf Channel 29.5 10.0% 90.0%

Great American Country 15.0 100.0%

Hallmark Channel * 32.5%

HBO 37.0

100.0%

HBO Latino * 100.0%

HBO Plus * 100.0%

HBO Signature * 100.0%

HBO Comedy * 100.0%

HBO Family * 100.0%

HBO Zone * 100.0%

HSN 50.0 19.7%

Independent Film

Channel

30.0 75.0%

International Channel 8.3 90.0%

More Max * 100.0%

Movie Plex 8 100.0%

Much Music USA 19.1 75.0%

Outdoor Life 26.0 15.4% 17.0% 33.3%

Outer Max * 100.0%

Ovation 15.0 4.2%

PIN 35.0 45.0%

Prevue Channel * 51.0%

Federal Communications Commission FCC 01-389

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Services

Subs.

(mil)

Liberty

Media

AOL

Time Warner

Comcast Cox Cablevision

Systems

QVC 74.8 43.0% 57.0%

Sci-Fi 66.0 19.7%

Sneak Prevue * 12.0%

Starz! 13.0 100.0%

Starz! Action * 100.0%

Starz! Cinema * 100.0%

Starz! Family * 100.0%

Starz! Love St. * 100.0%

Starz! MoviePlex * 100.0%

Starz! Mystery * 100.0%

Starz! Theater * 100.0%

Starz! True Stories * 100.0%

Starz! WAM * 100.0%

Starz! Westerns * 100.0%

Style 8.0 10.0% 40.0%

TBS 82.0 100.0%

Telemundo 22.2 40.0%

TLC 78.0 49.0% 24.6%

Thematic Multiplex SM 24.5

100.0%

Thriller Max * 100.0%

TNT 81.6 100.0%

Travel Channel 52.3 49.0% 24.6%

TCM 45.0 100.0%

USA 81.0 21.0%

Viewers Choice 1-10 * 11.7% 17.0% 11.0% 20.0%

WE (formerly Romance) 25.0 75.0%

Wmax * 100.0%

Federal Communications Commission FCC 01-389

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Notes:

In addition to cable, other services such as MMDS (wireless cable), SMATV (satellite master

antenna television), satellite, including DBS (direct broadcast satellite) and HSD (home satellite

dish), broadcast television, and LPTV (low power television) may distribute these signals.

Subscriber figures may include these non-cable services.

Indicates that subscribership count is unknown or not available.

CNN International subscribership of 10 million includes domestic US subscribers only. CNN

International has 129 million subscribers outside the U.S.

HBO subscriber numbers include HBO Latino, HBO Plus, HBO Signature, HBO Comedy, HBO

Family, HBO Zone, and Cinemax, 5 Star Max, @ Max, MoreMax, ActionMax, Outer Max,

Thriller Max and W Max.

Encore’s Thematic Multiplex subscriber numbers include Encore Love Stories, Encore

Westerns, Encore Mystery, Encore Action, Encore True Stories and Encore WAM.

Sources:

NCTA,

Directory of Cable Networks

, Cable Television Developments 2001, at 25-146.

GemstarTV Guide International, at http://www.gemstartvguide.com/investors/shareholders.asp.

ATT Broadband, at http://www.attbroadband.com/services/other/Partners.html.

Federal Communications Commission FCC 01-389

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TABLE D-6

Top 20 Programming Services by Subscribership

Rank Programming

Network

Number of

Subscribers (Millions)

MSO Ownership Interest in

Network (%)

1 TBS 82.0 AOL Time Warner (100)

2 Discovery Channel 81.7 Liberty Media (49), Cox (24.6)

3 TNT 81.6 AOL Time Warner (100)

4 ESPN 81.0

5 USA Network 81.0 Liberty Media (21)

6 Fox Family Channel 80.5

7 A&E 80.4

8 TNN 80.1

9 Lifetime Television 79.9

10 Nickelodeon/Nick at Nite 79.8

11 CNN 79.7 AOL Time Warner (100)

12 C-SPAN 79.4

13 The Weather Channel 78.9

14 TLC 78.0 Liberty Media (49), Cox (24.6)

15 MTV 77.3

16 QVC 77.0 Comcast (57), Liberty Media

(43)

17 CNN Headline News 76.2 AOL Time Warner (100)

18 CNBC 76.0

19 AMC 75.9 Cablevision (75)

20 VH1 74.2

Notes:

In addition to cable, other services such as MMDS (wireless cable), SMATV (satellite master

antenna television), satellite, including HSD (home satellite dish) and DBS (direct broadcast

satellite), broadcast television and LPTV (low power television) may distribute these signals.

Subscriber figures may include these non-cable services. Cable affiliates provide 95 percent of

funding for C-SPAN, but have no ownership or program control interests. DBS licenses provide

the other five percent of funding and also have no ownership or program control interests.

Source:

NCTA,

Top 20 Cable Networks

, Cable Television Developments 2001, at 22-23.

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TABLE D-7

Top 20 Programming Services by Prime Time Rating

Rank Programming Service MSO with Ownership Interest (%)

1 Lifetime Television

2 USA Network Liberty Media (21)

3 TNT AOL Time Warner (100)

4 Cartoon Network AOL Time Warner (100)

5 TBS AOL Time Warner (100)

6 Nick at Night

7A&E

8 Discovery Channel Liberty Media (49), Cox (24.6)

9 WGN-C

10 TNN

11 History Channel

12 ESPN

13 TLC Liberty Media (49), Cox (24.6)

14 MTV

15 FX

16 Sci-Fi Liberty Media (19.7)

17 Fox News

18 TV Land

19 BET

20 HGTV

Source:

Paul Kagan Assocs., Inc.,

Day Part Ratings Averages, Prime Time (3

Quarter)

, Cable Program Investor,

Sept. 11, 2001, at 6.

Federal Communications Commission FCC 01-389

122

SEPARATE STATEMENT OF

COMMISSIONER KEVIN J. MARTIN

Re: Annual Assessment of the Status of Competition in the Market for the Delivery of Video

Programming, CS Docket No. 01-129

In 1992, Congress instructed the FCC to “annually report to Congress on the status of competition

in the market for the delivery of video programming.”

647

I support the report we adopt today, but I write

separately to express my concern with some aspects of the approach the report takes in analyzing market

structure and the extent of concentration. Specifically, I question whether the relevant product market is

properly defined.

The report refers repeatedly to “the market for the delivery of video programming,”

acknowledging that this is the relevant market for our analysis. The Communications Act defines “video

programming” as “programming provided by, or generally considered comparable to programming

provided by, a

television broadcast station

.”

648

Accordingly, the report describes as “competitors” in the

market for the delivery of video programming entities such as broadcasters, cable operators, and DBS

operators. With no explanation, however, the section addressing “Horizontal Issues in the Market for

Delivery of Video Programming” limits the competitive analysis to only a subset of that market—the

market for the delivery of

multichannel

video programming.

649

In so doing, the report eliminates

broadcasters from the analysis, despite the fact that several commenters argued for their inclusion.

650

It may be true that broadcast is not a statistically significant competitor to satellite or cable as a

distribution platform, or that broadcasters and MVPDs do not compete in the same economic market, and

thus the relevant market analysis

should

be limited to multichannel video programming. Nevertheless,

given the plain language of the statute and the specific requests of commenters to consider broadcasters’

role in the marketplace, I would have preferred either to analyze the market for

all

video programming

(and therefore include broadcasters as competitors), or to explain in a direct fashion why an analysis of

only the

multichannel

video programming marketplace is more appropriate.

647

47 U.S.C. § 628(g).

648

Id.

at § 522(20).

649

The Report states, “The video programming market is comprised of two separate but related markets: (a) the

market for the distribution of

multichannel

video programming to households, and (b) the market for the purchase of

video programming by

MVPDs

.”

Annual Assessment of the Status of Competition in the Market for the Delivery of

Video Programming

, CS Docket No. 01-129, Eighth Annual Report, at ¶ 116 (adopted Dec. 27, 2001) (emphasis

added).

650

See, e.g.

, AT&T Comments at 22.