ALTERNATIVES TO CABLE STILL DEVELOPING, FCC REPORT FINDS

Consumers Union spokesman said report underscored group’s argument that both FCC and Congress needed to do more to encourage competition to cable. Many consumers don’t have option of antenna that provides poor reception or expensive satellite alternative, spokesman said. “It was Congress that deregulated the cable industry. Lawmakers need to go back to the drawing board and tinker with the [Telecom] Act,” spokesman David Butler said. FCC Comr. Martin, while saying he supported report, wrote in separate opinion that he questions whether “the relevant product market is properly defined.” He complained that analysis in one section on horizontal issues in marketplace didn’t include broadcasters as competitors.

Report said total number of subscribers to both cable and noncable services increased to 88.3 million households as of June 2001, up 4.6% over June 2000. Number of cable subscribers reached nearly 69 million as of June 2001, up 1.9% in year and total of noncable multichannel video subscribers grew to 19.3 million from 16.7 million, increase of more than 15%. Growth of noncable subscribers continues to be attributable to gains of DBS, 122-page report said. Between June 2000 and June 2001, number of DBS subscribers grew to 16 million households from almost 13 million, nearly 2-1/2 times rate of cable subscriber gains. DBS subscribers now represent 18.2% of all subscribers of multichannel video program distributors (MVPDs).

Report said rates for cable service grew faster than inflation (see separate story) but said cable had invested billions of dollars in upgrades and number of channels had increased. For example: (1) There was no digital tier in 1999 but 39 digital channels were reported in 2000. (2) Cable modem service was estimated to be available to 81 million homes by Dec. 2001, report said. Study found evidence indicates that, when incumbent cable operator faced “effective competition,” as defined by Communications Act, it lowered prices or added channels without changing monthly rate or improved customer service and added new services, such as interactive programming.

Consolidations within cable continued, with 10 largest operators serving close to 87% of all U.S. subscribers, report said. National concentration among top MVPDs decreased in year as largest MSOs became more equal in size, study said, with concentration below levels reported in earlier years. DBS operators DirecTV and EchoStar ranked among 10 largest MVPDs in terms of nationwide subscribership, along with 8 MSOs. As result of acquisitions and trades, cable MSOs continued to increase regional clustering. Vertical integration of national programming services between cable operators and programmers remained at 35% after several years of decline. Program access rules designed to ensure that other MVPDs could access vertically integrated satellite delivered programming, in particular sports programming, could affect ability of alternative MVPDs to compete, report said.

Report examined entire field of competitors, including cable, DBS and home satellite dishes, MMDS, SMATV, broadcast, local exchange carrier, open video systems, Internet video, home video sales and rentals, electric utilities. For first time, FCC addressed broadband service providers (BSPs) -- new category of entrant.

DBS appeared to attract former cable subscribers and consumers not previously subscribing to MVPD, report said. Continued growth of DBS was attributable in part to authority granted to DBS operators by Satellite Home Viewer Improvement Act (SHVIA) to distribute local broadcast TV in local markets. Over last year, number of subscribers to, and market shares of, MMDS, SMATV, and open video system remained relatively stable, while number of C-band home satellite dish (HSD) subscribers continued to decline, report said.

Incumbent local exchange carriers (ILECs) largely left video business, instead mainly reselling DBS service, study said. So while 1996 Telecom Act envisioned LECs’ getting into video business, Cable Bureau found that “convergence that would permit use of telephone facilities for video service” had not yet occurred. Few small LECs offered or were preparing to offer MVPD service over existing telephone lines. Some competitive local exchange carriers (CLECs) continued to pursue MVPD entry and competition, report said, while several cable MSOs offered telephone service. Circuit- switched telephony still was only type of commercially deployed cable telephony, but trials continued for cable- delivered Internet Protocol (IP) telephony, report said. MSOs such as Cox and AT&T continued to deploy circuit- switched cable telephony. Others, such as Cablevision Systems and Comcast, offered cable telephony where it already had been deployed, but generally were waiting for IP technology to become widely available before accelerating rollout of telephone service. AT&T, AOL Time Warner (AOL- TW), Comcast and Charter currently were testing IP telephony, while Cox had plans for IP telephony trials in 2002.

Report found that “most significant” convergence of service offerings was pairing Internet service with other offerings, in large part because cable operators expanded their broadband infrastructure. Virtually all of major MSOs offered Internet access via cable modems in portions of their service areas.

Study found DBS also was developing Internet capabilities, with DirecTV offering satellite-delivered high- speed Internet access service with telephone return path through DirecPC. EchoStar offered similar service, called Starband. Many SMATV operators provided local and long distance telephone service and Internet access along with video service. In addition, digital technology allows MMDS operators, which provide video service in limited areas, to offer 2-way services such as high-speed Internet service and telephony. Broadband service providers were building advanced systems to offer bundled services of video, voice and high-speed Internet access.

Noncable MVPDs continued to report that regulatory and other barriers limited their ability to compete with cable incumbents. They also complained they had difficulty getting programming from vertically integrated cable programmers and from unaffiliated programmers that made exclusive agreements with cable operators. They reported problems getting franchises from local govts. and difficulties gaining access to utility poles.

Bureau reported findings on various technologies for delivery. Wireless cable systems, for example, provided competition in limited service areas and had stagnant subscribership of 700,000 -- 0.8% share of marketplace. With advent of digital MMDS and Commission’s authorization of 2- way MMDS service, it appeared that most MMDS spectrum eventually would be used to provide high-speed data services, report said. SMATV remained unchanged from previous year at 1.5 million subscribers, representing 1.7% of market. Bureau cited another study that found that over-air broadcast was provider for 30% of nation’s 267 million TV sets. Since 2000 report, broadcast audience continued to decline. In 2000- 2001 TV season, 7 TV networks accounted for 57% share of prime-time viewing for all TV households, down from 59% share year earlier. Although 58% of U.S. population had Internet access at home as of July 2001, it was “still not seen as a direct competitor to traditional video service,” report said.