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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Annual Assessment of the Status of ) CS Docket No. 96-133 Competition in the Market for the ) Delivery of Video Programming ) THIRD ANNUAL REPORT Adopted: December 26, 1996 Released: January 2, 1997 By the Commission: Table of Contents Paragraph I. Introduction. . . . . . . . . . . . . . . . . . . . . . . 1 A Scope of this Report . . . . . . . . . . . . . . . . 2 B. Summary of Findings. . . . . . . . . . . . . . . . . 4 II. The Telecommunications Act of 1996. . . . . . . . . . . . 5 III. Competitors in Markets for the Delivery of Video Programming 11 A. Cable Industry . . . . . . . . . . . . . . . . . . 11 B. Direct Broadcast Satellite Service . . . . . . . . 36 C. Home Satellite Dishes. . . . . . . . . . . . . . . 49 D. Wireless Cable Systems . . . . . . . . . . . . . . 51 E. Local Exchange Carriers . . . . . . . . . . . . . 67 F. Satellite Master Antenna Television Systems. . . . 80 G. Broadcast Television Service . . . . . . . . . . . 86 H. Other Entrants . . . . . . . . . . . . . . . . . . 95 IV. Market Structure Conditions Affecting Competition . . . 114 A. Horizontal Issues in Markets for the Delivery of Video Programming 114 B. Vertical Integration in the Cable Industry . . . . 140 C. Technical Advances . . . . . . . . . . . . . . . . 170 V. Issues. . . . . . . . . . . . . . . . . . . . . . . . . 185 A. Legal and Regulatory Obstacles . . . . . . . . . . 185 B. Competitive Responses. . . . . . . . . . . . . . . 201 VI. Administrative Matters. . . . . . . . . . . . . . . . . 234 Appendices A. List of Commenters B. Cable Industry Tables C. DBS and HSD Tables D. FCC MDS Auction Information E. Top Ten SMATV Operators F. Horizontal Issues Tables G. Vertical Integration Tables H. Program Access Matters Resolved I. INTRODUCTION 1. 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 one means of obtaining information on the competitive status of markets for the delivery of multichannel video programming delivery that would aid both Congress and the Commission in determining when there was competition sufficient to reduce or eliminate many of the regulatory restraints imposed on the cable industry by that legislation. This is the Commission's third annual report ("1996 Report") to Congress submitted in compliance with this statutory requirement. In this 1996 Report, we update our two prior reports and provide data and information that summarizes the status of competition in the market for the delivery of video programming. In the two prior reports we described the methodology and theory underlying our competitive analysis. We do not repeat that information in this report other than in an abbreviated fashion, and provide reference to the relevant discussion in prior reports. The information and analysis provided in this third report are based on publicly available data, filings in various Commission rulemaking proceedings, and information submitted by commenters in response to a Notice of Inquiry ("Notice") in this docket. A. Scope of this Report 2. Section II of this report contains a brief review of the Telecommunications Act of 1996 ("1996 Act"). In Section III we examine the cable television industry, existing multichannel video programming distributors ("MVPDs") and distribution technologies, and potential competitors to cable television. Among the alternative distribution technologies and providers discussed are direct broadcast satellite ("DBS") services and home satellite dishes ("HSDs"), wireless cable systems using frequencies in the multichannel multipoint distribution service ("MMDS") or local multipoint distribution service ("LMDS"), local exchange telephone carriers ("LECs"), satellite master antenna television ("SMATV") systems, and broadcast television service. We also consider several other existing and potential distributors of and distribution technologies for video programming, including electric utilities, the Internet, and interactive video and data services ("IVDS"). 3. In Section IV of this 1996 Report, we examine market structure and competition. We evaluate horizontal concentration and vertical integration between cable television systems and programming services. We also discuss in this section program access and technological advances. In Section V we discuss some evidence of potential obstacles to the emergence of a freely competitive multichannel video programming distribution ("MVPD") marketplace, and evidence of competitive responses by industry players that are beginning to face competition from other MVPDs. B. Summary of Findings 4. In this 1996 Report, the Commission makes the following findings: þ The 1996 Act embodies Congress' intent to promote a "pro-competitive national policy framework" and eventual deregulation of markets for the delivery of video programming. Several of the 1996 Act's provisions are intended to build on prior efforts, particularly the 1992 Cable Act, by removing additional barriers to competitive entry in these markets and establishing market conditions that promote the process of competitive rivalry. Many provisions of the 1996 Act, and the Commission's actions to implement them, have the potential for fostering increased competition. The Commission has adopted rules to implement the open video system provisions of the 1996 Act and has adopted rules to implement the 1996 Act provision which preempts certain local government and non-government restrictions on reception devices, including antennas and dishes for reception of over-the-air broadcast, wireless cable and DBS signals. The Commission has adopted similar rules with respect to certain home satellite dish services. A change in the definition of a cable system made by the 1996 Act now permits SMATV operators to serve buildings regardless of ownership without being subject to regulation as cable operators, provided that public rights-of-way are not used in the process. þ We find that incumbent franchised cable systems continue to be the primary distributors of multichannel video programming, although other MVPDs, particularly those using alternative technologies (e.g., DBS, wireless cable and SMATV systems), continue to increase their share of subscribers in many markets. Subscribership for distributors using technological alternatives to traditional cable service now accounts for 11% of total MVPD subscribership. Non-cable MVPD subscribership has been increasing an average of 22% per year since 1990, with cable subscribership currently down to 89% of all MVPD subscribers. Notwithstanding this decrease in cable systems' share of total MVPD subscribers, the actual number of cable subscribers continues to increase. In fact, since the 1995 Report, the number of cable subscribers increased by two million compared to the increase in combined subscribership for all other MVPDs of 2.3 million. þ Local markets for the delivery of video programming generally remain highly concentrated, and structural conditions remain in place that could permit the exercise of market power by incumbent cable systems. Overall, our conclusion concerning competition in markets for the delivery of multichannel video programming remains unchanged from last year -- it remains difficult to determine to what extent these markets will be characterized over the long term by vigorous rivalry among multiple MVPDs offering closely substitutable services or, conversely, the extent to which many of these markets will remain dominated by one or two providers facing less vigorous rivalry from MVPDs offering highly-differentiated or niche programming services. þ We find a growing but still very limited number of instances where incumbent cable system operators face competition from MVPDs offering services with very similar attributes (i.e., overbuilds/wired delivery). Where such competition exists, such as in Dover Township, New Jersey, the effects of competition are readily apparent. We also find a substantially increased presence of MVPDs deploying somewhat differentiated services, particularly DBS service providers. Increased competition among DBS service providers has led to lower equipment prices and, possibly, increases in the number of cable subscribers choosing to drop or reduce cable services in favor of DBS services. Moreover, some cable system operators appear to be taking steps to improve their service offerings in response to the availablity of DBS service. MVPDs using other distribution technologies, such as MMDS, have not posted comparable increases in subscribership, but are in the process of testing digital technology that has the potential to significantly improve the competitiveness of their services. Consequently, it remains difficult to predict the extent to which competition from MVPDs using non-cable delivery technologies will constrain cable systems' ability to exercise market power in the future. þ As a result of acquisitions and trades, cable multiple system operators ("MSOs") have continued to increase the extent to which their systems form regional clusters. The number of clusters of systems serving at least 100,000 subscribers increased from 97 to 137, and these clustered systems now account for service to approximately 50% of the nation's cable subscribers. þ Nationally, concentration among the top cable MSOs has continued to increase, but still remains within the moderately concentrated range at 1326 (an Herfindahl- Hirschman Index ("HHI") between 1000 and 1800). If all MVPDs are included in the calculation, national concentration falls just above the threshold of the moderately concentrated range with an HHI of 1013. DBS providers DIRECTV and PRIMESTAR rank among the ten largest MVPDs in terms of nationwide subscribership with over 2.0 and 1.5 million subscribers, respectively. þ Vertical integration of national programming services between cable operators and programmers declined from last year's total of 51% to just 44% this year. We find, however, insufficient evidence to make any determination of the effect to date of these developments. The decline is due largely to the sale of Viacom's cable system assets. In addition, of the 16 programming services that were launched since the 1995 Report, 10 are not vertically integrated. Access to programming remains one of the most critical factors for the successful development of competitive MVPDs. Competing MVPDs have complained about the potential unavailability of programming distributed by means other than satellite or produced by programmers that are not vertically integrated with cable systems. To the extent that it appears that the denial of access to programming serves to deter entry of competitors in markets for the delivery of video programming, we will be concerned about these developments. þ Technological advances are occurring that will permit MVPDs to increase both quantity of service (i.e., an increased number of channels using the same amount of bandwidth or spectrum space) and types of offerings (e.g., interactive services). MVPDs continue to pursue new system architectures, upgraded facilities, use of increased bandwidth and deployment of digital technology. þ Our findings as to particular distribution mechanisms operating in markets for the delivery of video programming include the following: Cable Systems: The cable industry has continued to grow in terms of subscriber penetration, average system channel capacity, the number of programming services available, revenues, audience ratings and expenditures on programming since the 1995 Report. DBS Service Providers: Subscribership to DBS services increased from 1.7 million homes last year to nearly 4 million homes at the end of October 1996. This increase is attributable in part to the development of competition from two new DBS services in the last year -- AlphaStar and EchoStar -- and price competition among providers that has significantly lowered the cost of receiving equipment. Wireless Cable Systems: Although wireless cable systems showed some growth in subscribership, the most significant development in 1996 was MMDS systems' preparation for the deployment of digital systems in 1997. This will increase the number of channels that MMDS systems can offer and permit them to be more competitive with incumbent cable systems. Throughout most of the year, LECs continued to expand their investment in the wireless industry, but some have recently cut back on that investment. We also observe a continuation of the trend toward increased consolidation among wireless companies. SMATV Systems: SMATV subscribership increased 10.5% over the past year in systems that serve MDUs. Industry analysts attribute the growth, among other things, to technical improvements that increased operating efficiencies and to expanded product offerings, i.e., security features and diverse programming. Broadcast TV: Broadcast service continues to serve as both a transmission medium for many households, and a primary source of programming for most viewers regardless of distribution media. Regulatory changes and technological advances may, at some point in the future, permit the use of broadcast television and other existing and potential video technologies, such as low power television, for distribution of multichannel video programming. LEC Entry: The 1996 Act expands opportunities for LECs to enter markets for the delivery of multichannel video programming. Since adopting rules implementing the 1996 Act's open video system ("OVS") provision, we have certified the conversion of Bell Atlantic's Dover, New Jersey, video dialtone system to an OVS and authorized two additional OVS operators. In the last year, some LECs have continued to expand franchised cable operations, both within and outside their telephone service areas. Utilities: Section 103 of the 1996 Act removes regulatory barriers to entry in telecommunications and video markets for "registered" public utility holding companies. On September 12, 1996, the Commission adopted final rules to implement Section 103, and, to date, has granted all 18 applications filed thus far under the 1996 Act. II. THE TELECOMMUNICATIONS ACT OF 1996 5. The Telecommunications Act of 1996, enacted February 8, 1996, marks a fundamental shift toward competition throughout the entire telecommunications marketplace. Congress specifically stated its intent to establish a "pro-competitive de-regulatory national policy framework" for the telecommunications industry. Consistent with this philosophy, the 1996 Act contains several provisions that focus on removing barriers to competitive entry and on establishing market conditions that promote competitive firm rivalry. In addition to encouraging competition in the local telephone exchange market, the 1996 Act also encourages competition in the market for the delivery of multichannel video programming. 6. Eliminating a significant statutory barrier to entry, the 1996 Act removes the statutory provision that prevented local telephone companies from providing video programming services directly to subscribers in their telephone service areas. The 1996 Act also directs the Commission to eliminate all of its video dialtone rules and attendant policies, and to eliminate the requirement that a common carrier obtain authorization pursuant to Section 214 of the Communications Act for the provision of video programming. In place of these provisions, the 1996 Act provides for a new "open video system" or "OVS" framework for the provision by telephone companies and others of multichannel video programming. The Commission has promulgated rules pursuant to this new statutory provision, including extending the program access requirements to common carriers providing video programming pursuant to Section 302(b)(1)(A) of the 1996 Act. 7. Several other provisions of the 1996 Act focus on eliminating regulatory barriers to entry into markets for the delivery of video programming. For example, pursuant to Section 207 of the 1996 Act, the Commission has implemented rules preempting certain local government and non- government restrictions on reception devices, including antennas for reception of over-the-air broadcast, wireless cable, and DBS. Section 301(a)(2) of the 1996 Act redefined the statutory exceptions to a cable system so as to permit more efficient operation by SMATV operators. Pursuant to Section 202(f)(1) of the 1996 Act, the Commission has revised Section 76.501 of the rules to permit the common ownership of a cable system and a broadcast television network. 8. In addition to removing statutory and regulatory barriers to competition among actual and potential MVPDs, the 1996 Act also contains a number of provisions that directly affect competition in the cable industry. For example, Section 304 of the 1996 Act contains provisions affecting cable system operators, such as multiple dwelling unit ("MDU") bulk discounts and uniform rate structure rules. Section 301(c) of the 1996 Act contains immediately effective deregulatory provisions for small cable system operators and Section 301(b) of the 1996 Act contains deregulatory provisions for large cable system operators that take effect within three years of enactment of the 1996 Act. In addition, Section 301(b)(3) of the 1996 Act broadens the definition of effective competition so as to increase the ability of cable operators to assert the existence of effective competition and avoid rate regulation. Section 301(f) of the 1996 Act, addressing cable equipment compatibility, provides for narrowly drawn compatibility requirements that do not adversely affect the features, functions, protocols or other products and services options of such equipment other than those specifically specified in the equipment compatibility requirement. 9. The 1996 Act also contains provisions to encourage open competition in MVPD equipment markets. Section 304 of the 1996 Act tasks the Commission with adopting regulations to assure the commercial availability of converter boxes, interactive communications equipment and other equipment used by consumers to access multichannel video programming services. The 1996 Act also provides for the sunset of these provisions when the Commission determines: (1) the market for MVPDs is fully competitive; (2) the market for converter boxes and interactive communications equipment is fully competitive; and (3) elimination of the regulations would promote competition and the public interest. 10. Finally, we note there are additional provisions aimed at encouraging market entry. Pursuant to Section 101 of the 1996 Act, the Commission has instituted a proceeding to identify and eliminate market entry barriers for entrepreneurs and other small businesses in the provision and ownership of telecommunications services. Pursuant to Section 103 of the 1996 Act, the Commission established rules that enable public utility holding companies to enter into telecommunications markets and has approved exempt telecommunications company status for 18 companies. III. COMPETITORS IN MARKETS FOR THE DELIVERY OF VIDEO PROGRAMMING A. Cable Industry 11. This section addressing the performance of franchised cable system operators is divided into three categories: (1) general performance -- both quantitative measures of the current amount of cable industry services that are being produced and qualitative measures of the nature of the service; (2) financial performance -- the revenues and cash flow that are generated by the industry's general performance; and (3) capital acquisition and disposition -- the amount of funds that companies have been able to raise and use to improve their existing physical plant and acquire new systems, and how they have chosen to allocate those funds. In addition, this section reports on the status of overbuilding, one of the first forms of competition to the cable industry. The term "overbuild" refers to a situation in which two or more wireline cable television systems directly compete for subscribers in a local video programming delivery market. 1. General Performance 12. During 1996, the cable industry's total basic subscribership, total homes passed, basic penetration, and premium channel subscriptions have reached all-time highs. The industry is also offering more channels, a greater number of individual program services than at any time in the past, and higher audience levels. 13. Cable Industry Capacity and Subscribership. Since release of the 1995 Report, the cable industry has continued to expand. The number of homes capable of receiving service from a cable system (commonly referred to as homes passed) grew from approximately 91.6 million at the end of 1994 to approximately 92.7 million at the end of 1995, a 1.2% increase. Thus, at year end 1995, cable service was available to 96.7% of all television households in the United States. 14. Subscribership grew from a total of 59.7 million at the end of 1994 to 62.1 million at the end of 1995, a 4.0% increase. This increase is reflected in the industry's basic cable penetration level, which rose by 2.8% -- from 65.2% to 67.0% of homes passed. This increase in penetration is the second largest annual increase since 1977. According to at least one analyst, industry subscribership appears to be growing at approximately a 3% growth rate during 1996. 15. The total number of subscriptions to premium channels grew by 6.1% from approximately 51.1 million at the end of 1994 to approximately 54.2 million at the end of 1995. The number of homes subscribing to at least one premium channel was approximately 28.1 million in 1994. No estimates of this statistic are available for 1995 at this time. 16. Cable Industry Services. During 1995, both the number of systems with large channel capacity and the number of subscribers served by such systems continued to increase. In 1994, cable systems with the capacity to offer 30 or more channels accounted for over 78% of all cable systems. The equivalent figure for 1995 was 79.4%. As a result of upgrades over the last year, 123 more systems, or 14% of all systems, now offer 54 or more channels. The percentage of all systems which offered 12 or fewer channels declined from 6.7% in 1994 to 5.4% in 1995. 17. During 1995, the number of subscribers served by high capacity systems (54 or more channels) grew to 27.7 million (47.9% of all subscribers). This represents growth of 20.3% over the 23 million subscribers recorded in 1994. Moreover, the number of subscribers receiving service from systems with at least 30 channels rose 4.6% to 56.3 million at the end of 1995, which accounted for 97.3% of all subscribers. 18. Over the past decade, the number of television viewing hours of non-premium cable programming networks has grown. Comparing the 1984-85 and 1994-95 seasons, the combined, full-day audience of cable networks increased from an 11% share to a 30% share of television viewing hours. Comparing the same two periods, the combined audience of the network-affiliated, independent, and public broadcast television stations has decreased from an 87% share to a 72% share of television viewing hours. This growth in the viewership of the cable networks has continued into the 1996/1997 season. The total prime time share of the cable networks for the first week of the 1996/1997 television season increased 11.1% over the first week of the 1995/1996 season to 30% of television viewing hours. A comparison of the same two periods shows that the four largest broadcast networks had their total prime time share decrease by 5.8% to 65% of viewing households. 19. License fees paid by cable system operators to non-premium cable network programmers increased by 19% from approximately $2.233 billion in 1994 to approximately $2.658 billion in 1995. License fees paid by cable system operators to premium cable network programmers increased by 2.1% from $1.9 billion in 1994 to $1.94 billion in 1995. Copyright fees paid by cable system operators for broadcast signal carriage under Section 111 of the Copyright Act increased 2.2% from $161 million in 1994 to $164 million in 1995. 20. Consumer Satisfaction. In March 1995, the cable industry, through the National Cable Television Association ("NCTA"), launched a new on-time guarantee program to improve consumer satisfaction. Under this program, operators promise that: (1) if an installation appointment is not performed on time, the installation will be done for free, and (2) if a service appointment is not performed on time, the customer will receive a $20 refund. According to NCTA, this program has been adopted by cable systems serving 25 million subscribers. This year, NCTA reports that the on-time performance of individual MSOs participating in the program has ranged between 76% and 99%. 2. Financial Performance 21. The supply and demand statistics described above provide an important indicator of the state of the cable industry. However, these statistics alone do not reveal how the subscribership changes have influenced the industry's financial health. This section examines revenue and cash flow for the cable industry and shows that in 1995 these two key financial indicators performed well. 22. Cable Industry Revenue. Financial analysts who follow the cable industry report that after showing slight growth in 1994, the industry's revenue increased by 10.8% in 1995, growing from $22.79 billion to $25.1 billion. Using these figures, it is estimated that the cable industry generated $411.90 in annual revenue per subscriber served in 1995. This figure is $22 higher than the $389.50 annual revenue per subscriber generated in 1994. When total cable system revenue is broken down by source, between 1994 and 1995, it is estimated that: MSO revenue from regulated tiers (referred to by the Commission as the basic service and cable programming service tiers) increased by 11.1%; MSO revenue from premium services increased by 12%; and MSO revenue from advertising, pay-per-view, and home shopping grew 18.9%, 68.0%, and 13.4% respectively. 23. For purposes of this report, the Commission calculated its own estimates of the annual, industry-wide total revenues from 1992 to 1995. Based on these estimates, it appears that the industry generated revenue of over $21.07 billion in 1992, $22.59 billion in 1993, $23.09 billion in 1994, and $24.46 billion in 1995. Based on the Commission's estimates, the industry's annual revenue increased 6.0% from 1994 to 1995. 24. In Table 8A of Appendix B, we present detailed, quarterly revenue results for 14 publicly held MSOs, including the eight largest. For each quarter of 1994, 1995, and the first two quarters of 1996, total revenue growth over the same quarters of the previous year is calculated for these MSOs based on their filings with the Securities and Exchange Commission ("SEC"). As of December 31, 1995, these 14 MSOs served over 66.9% of the industry's 62.1 million subscribers. Based on their combined revenues, an estimate of the total industry revenue was made for each quarter and is also presented in Table 8A. 25. Revenue increased in each quarter of 1995 and showed increases over the equivalent quarters in 1994. The industry generated 2.9% more revenue in the first quarter of 1995 than in the first quarter of 1994; 4.5% more in the second quarter; 8.1% more in the third quarter; and 10.6% more in the fourth quarter. While this trend continued into the first quarter of 1996 (when revenue growth was 11.4% over the first quarter of 1995), the pace slowed slightly in the second quarter, with industry revenues 9.9% higher than in the second quarter of 1995. 26. Cable Industry Expenditures and Earnings Before Interest, Taxes, Depreciation, and Amortization. Measurements of earnings before interest, taxes, depreciation, and amortization ("EBITDA"), commonly referred to as "cash flow" by the industry, are often used to value the financial position of cable firms. Financial analysts who follow the cable industry report that after declining by 1.6% to $9.94 billion in 1994, industry wide cash flow increased 13.1% in 1995 to $11.2 billion. Using these figures, the cable industry generated approximately $184.53 in annual cash flow per subscriber served in 1995, about $15 higher than the $169.85 generated in 1994. Based on these estimates, the ratio of cash flow to revenue ("cash flow margin") increased from 43.6% in 1994 to 44.8% in 1995. 27. For purposes of this report, the Commission has also calculated an estimate of annual, industry-wide cash flows from 1992 to 1995. Based on Commission estimates, the industry generated cash flow of $9.72 billion in 1992, $10.31 billion in 1993, $10.05 billion in 1994, and $10.63 billion in 1995. The Commission's 1995 estimate represents a cash flow increase of 5.7% from 1994. 28. An analysis of the industry's cash flow for any one year may not provide a complete picture of the trend in the industry's performance. A more informed analysis may be provided by comparing each quarter of 1994, 1995, and the first two quarters of 1996, with the same quarters of the previous year. These quarterly growth rates are shown in Appendix B, Table 8B. As in Appendix B, Table 8A, we present detailed quarterly cash flow for the same 14 publicly held MSOs. After exhibiting slow year-over-year cash flow growth in the first two quarters of 1995 (2.1% and 1.5% respectively), year-over-year cash flow growth was much stronger in the third and fourth quarters of 1995 (10.1% and 9.4% respectively). In the first two quarters of 1996, year-over-year cash flow growth slowed to 5.6% and 8.0% respectively. 3. Capital Acquisition and Disposition 29. In 1995, the cable industry displayed an increased ability to acquire financing from a variety of public and private sources. The industry also made some of the most substantial capital investments ever. In recent months, however, there have been reports that some cable operators have been having difficulty financing the significant capital investments that they had been planning to make. For example, on October 24, 1996, TCI president John Malone was reported to have said that "[t]he days of heavy capital spending on cable are behind us" during a presentation to institutional investors at which he explained TCI's plans to cut back on system upgrades in its systems that are small or less-threatened competitively. 30. Cable Industry Financing in 1995: The cable industry has typically relied on various combinations of private and public financing, with the exact distribution of these combinations varying greatly from year to year. Redemptions caused private debt financing (i.e., debt held by banks, insurance companies, and institutional investors) to decrease by $808 million in 1995, while public debt financing increased by $4.5 billion. The remaining industry financing is obtained through a mixture of private equity (i.e., individuals, venture capital firms, investment banks, limited partnerships) and public equity offerings (i.e., stock markets). New private and public equity offerings totalled $1.1 billion and $4 billion, respectively, in 1995. Overall, the cable industry obtained $8.8 billion in new financing in 1995, which is an increase of $2.1 billion over the 1994 total. This growth in new financing during 1995 helped increase combined cash flow and new investment to the highest level ever. The $20 billion total combined figure in 1995 ($11.2 billion from cash flow plus $8.8 billion from new financing) was an increase of 20.1% over the $16.7 billion reported in 1994. 31. Cable Industry Financing: Recent Developments. The cable industry appears to be on a pace that will result in it obtaining significantly less in new capital in 1996 than in prior years. Cable operators are reported to have raised approximately $1.6 billion in capital during the first half of 1996. Included in this total was a net redemption of $1.6 billion of privately held debt; $2.6 billion raised in the bond market; and $626 million raised in the public equity market. If the industry continues to obtain new financing at this rate, it will raise a total of $3.2 billion in new financing for 1996, which is less than 45% of 1995's total. 32. Capital Expenditures. In 1995, the cable industry invested $5.4 billion in construction of new plant and equipment (including maintenance, inventory, system upgrades, converters, passing of new homes, and rebuilding of existing systems). This was a 42% increase over the $3.8 billion spent on construction in 1994. This also represents the third consecutive year that cable industry capital expenditures experienced double-digit growth. Of the $5.4 billion in capital expenditures, the industry spent $3.4 billion on the upgrade and build-out of existing systems. Approximately $1 billion was spent on new set-top converters and other inventory. In contrast, it was recently reported that TCI is going to reverse this pattern, and will begin spending more on set-top converters and less on system upgrades over the next few years. 33. Cable System Transactions. The number of mergers, acquisitions, and exchanges between MSOs increased from 64 in 1994 to 128 in 1995. The information for 1995 also marks a change in the seven year trend reported in prior reports that while total number of subscribers served by systems sold increased, the number of systems sold declined. This past year, the number of subscribers to, and homes passed by, the systems changing hands in these transactions both increased, by 46% and 38%, respectively. In addition, the total dollar value of the transactions increased 43% between 1994 and 1995. Consistent with the trend begun in 1994, however, the average dollar value per subscriber of these transactions decreased, in 1995 by 1.8% (from $1,869 to $1,836) and the average cash flow multiple decreased, in 1995 by 5.8% (from 10.3 to 9.7). Overall, the transactions announced in 1995 involved more subscribers and higher purchase prices than in any year since 1982. 34. For the nine months from January to September of 1996, 81 transactions were announced, involving 7.5 million subscribers, 12.1 million homes passed, and purchase prices totaling $15.6 billion dollars (which represents $2,078 per subscriber). While these totals all represent decreases over the first nine months of 1995, it is worth noting that this year's transactions, on average, have been much larger than those announced last year. Moreover, the price per subscribers is, on average, much higher thus far in 1996 than it was in 1995 ($2,078 versus $1,836). These results, however, appear to be largely the result of a single transaction, U S West Media Group's ("U S West") purchase of Continental Cablevision. 4. Status of Overbuilding 35. Finally, as we noted above, overbuilding was one of the first competitive situations experienced by incumbent cable operators. Since the 1995 Report, the development of new overbuilds by non-LEC entities continues to be limited. We are aware of only two new such non- LEC overbuilding plans. In the last year, the city of Raleigh, North Carolina, granted Fiber South a franchise to overbuild its incumbent operator, Time Warner. In addition, the city of Chicago, Illinois, granted 21st Century Cable TV a franchise to overbuild parts of the city encompassing 270,000 homes. B. Direct Broadcast Satellite Services 36. Direct broadcast satellite ("DBS") operators are like other MVPDs in that they: (1) downlink programming from many different satellites pursuant to contracts with programmers; (2) package the programming into service offerings; and (3) make those service offerings available to subscribers over a proprietary facility. However, DBS services use satellites instead of broadband wires or terrestrial microwave stations to transmit their programming to subscribers. In addition, we note that DBS operators have a public interest obligation to reserve between 4% and 7% of their channel capacity for noncommercial programming. 37. For the purposes of this 1996 Report, we include Primestar Partners, L.P. ("PRIMESTAR") and AlphaStar as DBS providers even though they currently do not use high- powered Ku-band frequencies allocated for DBS service as defined under the Commission's rules. Instead, they provide programming using medium-powered Ku-band frequencies allocated pursuant to the Commission's Fixed Satellite Service. Nonetheless, PRIMESTAR's and AlphaStar's services share many of the same attributes of the multichannel video programming services offered by the other DBS operators, and it appears that consumers and industry participants view their services as close substitutes for the services of MVPDs using DBS frequencies, such as DIRECTV and EchoStar. 38. Since we issued the 1995 Report, DBS subscribership has increased substantially, to the point that DBS systems have a higher combined subscribership than any other MVPD alternative to incumbent cable systems. As discussed below, it appears that the advent of price competition among DBS providers has contributed to the increase in DBS subscribership, with initial equipment costs dropping to as low as $199 plus installation costs. However, DBS providers continue to be unable to provide local broadcast network signals (and network programming), requiring DBS subscribers to obtain those signals over the air or through basic cable subscriptions. In addition, the first-year annual cost of DBS service remains significantly higher than for cable service and, if cable joins DBS systems in the use of digital encryption, many cable systems will be able to offer substantially more programming than can be offered by DBS systems. Nonetheless, most observers project continued strong growth for the DBS industry through the end of the decade. For example, two industry analysts recently projected that there would be a total of 13-15 million DBS households by the year 2000. Another observer projects that DBS operators will account for service to over 20% of all MVPD subscribers by the year 2000. 39. Subscribership. Subscribership to DBS services continued to increase rapidly over the past year. In the 1995 Report, the Commission noted that, according to industry reports, nearly 1.7 million households subscribed to DBS services at the end of September 1995, an increase of approximately 1.1 million subscribers from the previous year. Based on the revised total of 1.6 million households, it appears that DBS subscribership increased by approximately 2.0 million households during the twelve months between the end of September 1995 and the end of September 1996, to a total of nearly 3.6 million households. As of the end of October 1996, there were 3.82 million DBS subscribers. 40. Since DIRECTV and USSB began offering service in June 1994, DBS services have grown at a rate making DBS receiving equipment one of the most successful new consumer electronics product introductions in history in terms of units sold. DBS subscribership is anticipated to continue to grow rapidly over the next few months, with some reports over the summer projecting that over 5 million households may be receiving DBS service by the end of 1996. The DBS industry appears to have experienced somewhat slower growth in recent months, however, with DIRECTV and PRIMESTAR each revising downward their projections two times in recent months, and industry observers now projecting a year-end total of between 4.3 and 4.5 million DBS subscribers. These lower projections may not necessarily indicate a slower overall growth rate. As demonstrated in the tables in the appendix to this report, monthly increases in DBS subscribership have fluctuated significantly. In its relatively short history, the DBS industry has experienced two periods of significantly enhanced monthly increases in subscribership--October- December, 1995, and June-July, 1996, possibly due to heightened marketing during those periods. 41. Individual DBS Service Providers. DBS subscribers generally use relatively small dishes (18-24 inches for DIRECTV/USSB and EchoStar, and 36-39 inches for PRIMESTAR and AlphaStar) to receive the programming from the individual orbital location from which the DBS operator is transmitting the service. Both services and equipment are available to subscribers from a variety of retail outlets, including large national consumer electronics retailers. Two more DBS operators, EchoStar (18-24 inch dishes) and AlphaStar (36-39 inch dishes), initiated service since the 1995 Report was released. Consumers may now choose DBS services from four different sources (DIRECTV and USSB are treated as a single product offering for this purpose since they are complementary products). DIRECTV offers a high power DBS service to subscribers throughout the continental United States. Subscribers receive the service using the Digital Satellite System ("DSS"), which uses an 18-inch receiving dish "sold under the RCA, SONY, GE, HNS Insight, Proscan, Panasonic, Toshiba and Uniden brand names." DIRECTV reported that it served approximately 1.6 million subscribers at the end of June 1996, which is an increase of 167% over the 600,000 subscribers it reported serving at the end of June 1995. DIRECTV had 2.03 million subscribers at the end of October 1996. United States Satellite Broadcasting Company, Inc. ("USSB") provides service to subscribers using the same DSS receiving equipment, and one of the same satellites, as DIRECTV. According to USSB, DIRECTV and USSB "share DSS and supporting technology and offer 200 channels of complementary programming," and "jointly market and promote DSS and share an overall goal of maximizing DSS penetration of U.S. television households." The programming that USSB offers (and DIRECTV does not) includes HBO, Showtime, The Movie Channel, Cinemax, FLIX, Lifetime, MTV, Comedy Central, Nickelodeon, and VH- 1. As of the end of June 1996, USSB was reported to have approximately 60% as many subscribers as DIRECTV (or approximately 960,000 subscribers), with only a "small portion" of those subscribers not included in DIRECTV's subscriber total. PRIMESTAR PARTNERS, L.P. ("PRIMESTAR") currently offers service to subscribers throughout the continental United States using 36-inch dishes. PRIMESTAR is a joint venture of five cable MSOs, and GE American Communications, Inc. Using a satellite operating in the Fixed Satellite Service ("FSS"), PRIMESTAR provides 95 channels of programming. PRIMESTAR reported in its comments that it had 1,231,741 subscribers as of June 30, 1996, which is an increase of over 145% when compared with the approximately 500,000 subscribers it reported having in June 1995. PRIMESTAR had 1.55 million subscribers at the end of October 1996. PRIMESTAR commented that it "plans to continue its service on the medium power successor" to its current satellite, but it has been reported that PRIMESTAR may instead use eleven high- power DBS transponders to provide service using "developing compression technology that enables delivery of 150 channels to a dish 14 inches in size." EchoStar Communications Corp. initiated service in March 1996 under the name DISH Network, and offers over 100 channels of programming to subscribers throughout the continental United States. EchoStar passed the 200,000 subscriber mark in early October 1996, and served over 235,000 subscribers as of the end of October 1996. Directsat Corporation, an affiliate of EchoStar, launched its satellite on September 10, 1996, and the combined entity began delivering programming from the second satellite (which is at the same location--119ø) in November 1996. On August 30, 1996, the International Bureau granted an application filed by Direct Broadcast Satellite Corporation (DBSC) seeking permission to transfer to a wholly-owned subsidiary of EchoStar its DBS licenses at 61.5ø, which cannot be used to serve the entire continental United States. Instead, the licenses will permit EchoStar to use an additional eleven transponders to serve the eastern United States. EchoStar has stated that it intends to use those channels to provide "programming complementary to that offered by the DISH Network . . . [and] could also include Internet delivery applications, and in light of recent pronouncements from the U.S. Copyright Office, it may also be possible to include local programming to select large markets." AlphaStar, a subsidiary of Tee-Comm Electronics, Inc., a satellite dish manufacturer, reportedly began offering service on July 1, 1996. According to one source, AlphaStar would not provide subscriber figures, but company executives told the source that the service was adding subscribers at a steady, albeit slow rate, and that the company projected that it would have between 100,000 and 150,000 subscribers by the end of 1996. It is estimated that AlphaStar had approximately 12,000 subscribers at the end of October 1996. 42. Several other entities plan to initiate DBS services within the next few years. In January 1996, the Commission auctioned licenses for 28 DBS channels that could be used to provide approximately 150 channels of programming to subscribers throughout the continental United States using contemporary digital compression technology. MCI Communications Corp. won that auction, bidding $682 million for the licenses (EchoStar bid $650 million and TCI bid $298 million), and is expected to launch the first of two satellites in October 1997, with video programming service beginning on November 1, 1997 if the launch goes as planned. American Sky Broadcasting ("ASkyB"), a joint venture involving the FOX broadcast network and MCI Telecommunications, Inc., plans to offer a DBS service using MCI's satellites. Continental Satellite Corporation ("CSC") has been assigned a total of 22 DBS channels. Eleven of those DBS channels can be used to serve the eastern and central United States, and the other eleven can be used to provide service to the western and central United States. On November 21, 1995, CSC was granted an extension of its conditional construction permit to August 15, 1999, which will allow CSC to construct, launch, and begin operating its DBS system at two orbital locations. Dominion Video Satellite, Inc. has been assigned eight DBS channels that can be used to serve the eastern and central United States, and eight DBS channels that can be used to serve subscribers in the western and central United States. On October 7, 1996 Dominion withdrew its appeal of that assignment. 43. Last year, the Commission reported that the prices charged for DSS equipment used to receive programming from DIRECTV and USSB had started to decline, falling to as low as $597, and that equipment prices were expected to continue to decline as additional manufacturers began distributing their models. When EchoStar initiated service in June 1996, it offered receiving equipment for $199 to customers that signed up for a full year's programming (at $300), which was a significantly lower price than any of the prices offered for DSS equipment at that time. At least two DSS manufacturers, Thomson and Toshiba, lowered the prices for their basic models to $399 later in the summer, and DIRECTV announced on August 26, 1996 that it would offer a $200 rebate to subscribers that purchased any brand of DSS equipment and a one-year subscription to its "Total Choice" programming package. It has also been reported that price reductions are expected to continue, with one cable network CEO quoted as saying "[s]o far, we haven't heard too much about [DBS] cannibalizing major urban systems, . . . [b]ut from what they've told us, we expect [DBS] prices to fall even more and [cable erosion] to happen on a more significant basis beginning next year." 44. In addition to offering discounted prices, DBS providers are heavily marketing their services. According to one commenter, DBS companies are projected to spend a combined $300 million on advertising in 1996, as well as utilize affiliations with other major corporations to increase their market share. USSB, for example plans to launch a new advertising campaign on movie theater screens, and its dealers are giving new subscribers a $40 discount in addition to the one month's free programming when they buy USSB's 12 month programming package. PRIMESTAR reportedly indicated in October 1996 that it plans to spend over $20 million on promotional activities during the remaining months this year, including a renewal of its NASCAR sponsorship. 45. Over the past year, the trend toward bundling video programming with telecommunications and information services appears to have had an impact on the DBS industry. AT&T acquired a 2.5% interest in DIRECTV from Hughes with an option to increase its holdings by up to 30% during the next five years. AT&T ran a promotion from October 9 through October 14 during which it offered a $100 rebate on DIRECTV equipment to its long distance customers if they purchased one-year programming subscriptions for $354. On August 29, 1996, Cincinnati Bell announced agreements to market DIRECTV and USSB services and equipment to its customers. DIRECTV has also entered into an "agency agreement" with RCN, a SMATV operator using the assets that belonged to Liberty Cable to serve approximately 40,000 subscribers in New York City, whereby subscribers in buildings served by RCN can purchase programming from DIRECTV after they purchase a digital decoder box. 46. "Headend in the Sky" Service -- Providing Digital Direct Broadcast Service to MVPDs. Last year the Commission reported that TCI proposed to offer a "headend in the sky" ("HITS") service, which involved providing to other MVPDs the same programming feed distributed to PRIMESTAR subscribers. The subscribing MVPDs could then combine HITS service with local broadcast channels and transmit the programming package over the MVPDs' networks to their subscribers, who would use set top boxes to receive the service. The Commission also reported that other DBS operators, such as DIRECTV and EchoStar, suggested that they may also use their DBS facilities to provide service to MVPDs. In October 1996, TCI launched a test of HITS service delivering 80 channels of digital programming in addition to the analog programming that was already available to subscribers at a TCI system in West Hartford, Connecticut. The service is being offered without charge for a few weeks to months before a commercial test is initiated. 47. Preemption of Local Zoning Regulations. Section 207 of the 1996 Act directs the Commission to promulgate regulations prohibiting restrictions that "impair a viewer's ability to receive video programming services through devices designed for . . . direct broadcast satellite services." On August 6, 1996, the Commission fulfilled that requirement by adopting regulations that, among other things, prohibit restrictions, including state or local laws and regulations, that impair the "installation, maintenance, or use of" direct broadcast satellite antennas less than one meter in diameter or located in Alaska. 48. Developments Concerning Carriage of Local Broadcast Signals. DBS companies have commented in the past that they have a competitive disadvantage due to the fact that they cannot distribute local broadcast signals, because of technological and copyright law obstacles. They have been working on several possible solutions to those problems, including improved digital compression and spot beam technology that may permit the carriage of a large number of local broadcast channels within the spectrum available on a DBS satellite. With regard to the effect of copyright law on DBS operators' ability to carry local broadcast signals, in July 1996 ASkyB requested a declaratory ruling from the United States Copyright Office that DBS systems may, under the satellite carrier compulsory license, "retransmit the signals of network affiliated television broadcast stations to subscribers who reside within the local market served by those stations." Such a ruling would permit DBS operators to use some of their capacity to provide local broadcast programming in some major markets, which could address what has been identified as a substantial competitive disadvantage faced by DBS MVPDs. The Copyright Office replied: The Office has considered your arguments regarding localized retransmission of network stations, and we would not question the reporting of a network station that was retransmitted locally to subscribers. Such an opinion by the Office is not, of course, a resolution of the substantive rights of copyright owners or users, which, as I note above, must ultimately be determined by the federal courts. I am simply stating that inclusion of locally retransmitted network stations is not subject to challenge by the Copyright Office. It was reported that ASkyB will seek a reduction in copyright fees when the current fee schedule expires on July 1, 1997, and that it will also try to negotiate retransmission agreements with all of the local affiliates whose signals it plans to carry. C. Home Satellite Dishes 49. Unlike DBS subscribers, home satellite dish ("HSD") users employ relatively large (4-8 foot) dishes and often purchase programming through program packagers that are licensed by programmers to facilitate subscribers' receipt of their programming transmitted from various C-Band satellites. Because they are typically used to receive programming from satellites at several different orbital locations, most HSDs include motors that permit the receiving dishes to rotate and face the various satellites. HSD owners have access to more than 265 channels of programming placed on C-band satellites by programmers for receipt and distribution by MVPDs, of which 115 channels are scrambled and approximately 150 are unscrambled. HSD owners can watch the unscrambled channels without paying a subscription fee. To receive scrambled channels, however, an HSD owner must purchase an integrated receiver-decoder ("IRD") from an equipment dealer and pay a subscription fee to an HSD programming packager. Nationwide, approximately 30 program packagers offer packages of scrambled channels to HSD owners. Like DBS systems, however, HSD program packagers do not provide local broadcast station signals, which are generally not available on C-Band satellites. 50. As the Commission reported last year, it has proven difficult to obtain accurate estimates of the total number of HSD users, which includes: (1) viewers who subscribe to a packaged programming service, which affords them access to most of the same programming provided to subscribers of other MVPDs; (2) viewers who receive satellite programming services illegally without subscribing; and (3) viewers who receive only non- subscription programming. A recent estimate by industry analysts is that there are approximately 4.5 million HSD users overall, which is consistent with many estimates of last year's total, indicating little overall change in the number of HSD users. It is perhaps more illuminating to consider the number of subscribers to package programming services since they are the only C-band subscribers that can receive much of the same programming generally provided to cable subscribers. After reaching a peak of 2,379,900 authorized subscribers in December 1995, HSD package programming subscribership declined to 2,314,900 subscribers at the end of October 1996. Some observers attribute this decline to the growth of DBS services, citing in particular the fact that DBS equipment is substantially less expensive than the typical HSD, and has become much less expensive over the past year. D. Wireless Cable Systems 1. Multichannel Multipoint Distribution Service 51. Last year the Commission reported a trend among MMDS sytems toward the development of digital technology to boost channel capacity. That trend continues this year, with industry participants expressing their belief that digitalization will permit them to be more competitive with incumbent cable systems. Digitalized MMDS systems were authorized by the FCC in July and are just beginning to be deployed, with some predicted to become operational in the first half of 1997. Certain trends reported last year continue, including increasing subscribership and consolidations. LEC investment in wireless cable, which appeared to be increasing throughout the year, has recently become less certain due to Bell Atlantic's and NYNEX's announcement of the suspension of their agreement with CAI Wireless Systems, Inc. ("CAI"). 52. MMDS Auctions. On March 28, 1996, the Commission completed its auction of authorizations to provide MMDS in 493 Basic Trading Areas ("BTAs"), raising over $216 million after 181 rounds of bidding. The MMDS auctions were designed to distribute unused spectrum through competitive bidding while protecting the service areas of incumbent MMDS providers within the BTAs. As shown in Appendix D, Table 1, the ten leading bidders, in terms of their total amount bid, were eight publicly held and two privately held wireless cable companies. Interestingly, companies with LEC investment generally paid considerably more in this year's auction than did other MMDS companies, even after taking into account the size of the market and other factors. The top ten bidders made 77% of the total money bids, covering 62% of the available licenses. In addition to being high bidders, CAI, Pacific Telesis Group ("PacTel"), Heartland Wireless Communications, Inc. ("Heartland"), and People's Choice TV Corp. ("PCTV") Gold won many of the licenses for the major population centers. For example, as can be seen in Appendix D, Table 2, these operators won the ten largest BTAs, as ranked by population. Publicly held operators also won 36 of the top 40 markets. Heartland and American Telecasting, Inc. won the most licenses, 93 and 56 respectively, by concentrating primarily on licenses in small population BTAs. 53. Subscribership. Between the end of 1994 and the end of 1995, the total number of subscribers to wireless cable systems increased by 41%, from 600,000 to 847,000 subscribers. While this increase exceeded expectations, growth in 1996 has been slower than expected and predictions for the next few years vary greatly. At the beginning of this year, at least one analyst predicted subscriber growth would increase at a rate of more than 50% per year through 1996 and 1997, reaching 3 million subscribers by 1999. WCAI projects that by the year 2000, the wireless cable industry's subscribership will grow to over 4 million. Even if these projections bear out, this level of subscribership still represents only a fraction of the wired cable industry's 62.1 million subscribers served at the end of 1995. 54. Actual subscriber growth for the first half of 1996, however, has been less than 20%. In part, this is because operators planning to deploy digital wireless cable systems chose to delay heavy marketing efforts until the increased channel offerings made possible by digital technology were available. Between the end of 1994 and the end of 1995, the number of homes capable of receiving a wireless cable operator's signal (commonly referred to as homes seen) rose from 27.3 million to 29.2 million, a 7.% increase. The growth of subscribership, relative to homes seen, increased the industry's penetration rate from 2.2% at the end of 1994 to 2.7% at the end of 1995. 55. Financial Performance. The wireless cable industry's total revenues for 1995 were $302 million, a 49% increase from 1994. During 1995 the industry's negative cash flow decreased from $14.2 million in 1994 to $3.9 million in 1995. One analyst projects that the wireless cable industry will have positive cash flow in 1996. 56. Status of LEC Investment. In the 1995 Report, the Commission reported that Bell Atlantic, NYNEX and PacBell had all invested in wireless cable operations. In 1996, one new LEC, BellSouth, entered the wireless cable industry. However, late in 1996, Bell Atlantic and NYNEX announced a suspension of their investment in wireless. Also late in 1996, a proposed acquisition by PacTel of a wireless system in northern California collapsed, although PacTel states it is continuing with plans for a southern California digital wireless system. 57. On May 29, 1996, BellSouth won, in a court-run auction, the MMDS licenses for New Orleans, Louisiana. BellSouth announced its intentions to offer more than 100 digital channels of wireless cable programming in New Orleans by mid-1997. In that auction (in which BellSouth was the sole bidder), BellSouth agreed to pay $12 million for the rights to 30 analog wireless cable channels. BellSouth has also commenced negotiations with National Wireless Holdings, Inc. to acquire all of its wireless cable assets in the Miami, Florida area. On October 28, 1996, BellSouth announced that it had signed a letter of intent agreeing in principle to acquire Wireless Cable of Atlanta, Inc. ("WC of Atlanta") for stock valued at $43.5 million. On November 5, 1996, BellSouth announced that it had spent $13.3 million to purchase licenses in areas surrounding Atlanta from CS Wireless Systems, Inc. ("CS Wireless") and CAI. The licenses being purchased from WC of Atlanta, CS Wireless, and CAI are expected to allow BellSouth to reach 1.2 million line-of-sight homes in the Atlanta area. 58. On December 13, 1996, Bell Atlantic, NYNEX and CAI announced a one-year suspension of their 1995 joint business agreement and CAI's option to repurchase Bell Atlantic's and NYNEX' $100 million investment in CAI securities. The companies also announced the suspension of their plans to jointly launch wireless systems in Hampton Roads, Virginia, and Boston, Massachusetts. 59. Consolidation. The trend toward consolidation experienced by the non-LEC wireless cable industry in 1995 has continued into 1996. For example, on February 23, 1996, Heartland announced that it had closed five transactions, acquiring wireless cable systems with 7.6 million combined line-of-sight homes and 59,900 subscribers. To complete these acquisitions, Heartland issued $180 million in new common stock and assumed $20 million in pre- existing debt. 60. Simultaneous to the closing of these acquisitions, Heartland and CAI announced the creation of CS Wireless with systems serving 5.7 million line-of-sight homes and 58,400 subscribers as of March 31, 1996. For Heartland, the combined effect of the activity described in the preceding paragraphs resulted in a net increase of one million line-of-sight homes and 38,900 subscribers. 61. In addition, on July 29, 1996, Wireless One, Inc. acquired TruVision Wireless, Inc., increasing Wireless One's line-of-sight homes by approximately 2 million and subscribers by 15,435 as of April 30, 1996. After this acquisition, Wireless One was operating in 21 markets which had, as of April 30, 1996, 34,100 subscribers out of a total of over 2 million line-of-sight homes (plus licenses to serve 6.37 million additional line-of-sight homes). 62. Digital Developments. On July 10, 1996, the Commission issued a declaratory ruling which enables wireless cable operators, MMDS and ITFS licensees to increase their channel capacity and service offerings through the use of two digital modulation techniques, Quadrature Amplitude Modulation and Vestigial Sideband. The Commission ruled that these digital modulation techniques could be implemented without causing harmful electromagnetic interference to nearby analog or digital stations. The wireless cable industry hailed this regulatory development as a significant improvement in the competitive posture of the industry. 63. In order for wireless cable operators to provide digital services, subscribers must use specialized digital set-top converters. In May 1996, PCTV and American Telecasting announced the issuance of a joint request for proposals ("RFP") for a purchase of up to 500,000 digital set-top converters. Eight manufacturing companies responded to the RFP. In addition, PacTel has announced plans to launch in 1997 a digital wireless cable service in the Los Angeles and Orange County area, which encompasses four million homes. While PacTel has not disclosed any definite programming plans, it has stated that it will offer approximately 120 channels, including 14 broadcast stations, and 40 channels of near-video-on-demand. 64. In addition, since the 1995 Report, several wireless cable operators have begun to test technology which will allow them to use their systems to provide high- speed Internet access and other data services similar to those offered by other MVPDs. In May 1996, CAI began testing Internet access technology in Washington, DC, using technology capable of sending information to users at the rate of ten megabits per second with a normal telephone line used as the return path. In June 1996, CAI demonstrated the transmission of a signal which integrated both digital video (including local broadcasting stations and national cable television programming) and 10 megabit per second Internet access (with a telephony return path). In September 1996, CAI began testing technology which would allow 27 megabits per second Internet access using General Instrument SURFboard modems and a telephony return path. In addition to CAI's efforts, PCTV and American Telecasting have been conducting Internet access trials on American Telecasting's Lakeland, Florida system with the help of Zenith Electronics Corporation, Conifer Corporation, and Comwave. Recently, the Commission issued developmental authorizations to test two-way Internet access to American Telecasting for Henderson, Nevada, and to PCTV for Phoenix and Tuscon, Arizona. In addition, Atlantic Microsystems, Inc., a wholly- owned subsidiary of CAI, received a developmental authorization to develop and test a two-way digital system on two MDS channels in Hartford, Connecticut. 2. Local Multipoint Distribution Service 65. LMDS frequencies are microwave channels in the 28 GHz band that may be used to deliver two-way multichannel video programming as well as voice and data service. As with distribution using MMDS frequencies, LMDS requires that subscribers have a special antenna. The propagation characteristics of the 28 GHz band are such that an LMDS system must operate in multiple "cells" with radii of three to six miles in order to provide service to a metropolitan area that could be covered by a single wireless cable transmitter. With the exception of CellularVision of New York, L.P.'s ("CellularVision") 6,500-subscriber LMDS system in Brooklyn and Queens, New York, LMDS frequencies are not currently used to distribute video programming in the United States. The first fully commercial operation of 28 GHz technology, however, was launched in Caracas, Venezuela, in 1994. Canada recently issued licenses for 66 major and 127 lesser markets for what are known there as "local multipoint communications systems." 66. On July 17, 1996, the Commission adopted a frequency band plan that allocated 1000 MHz of spectrum to LMDS and permitted LMDS systems, geostationary and non-geostationary Fixed Satellite Service (FSS) systems, and feeder links for non- geostationary Mobile Satellite Service (NGSO/MSS or Big LEO) systems to operate in the 28 GHz Band. In the same order, the Commission proposed to allocate an additional 300 MHz of spectrum to LMDS at 31.0 - 31.3 GHz in order to provide greater technological flexibility for this nascent industry. The Commission also sought comment on whether incumbent LECs and cable operators should be eligible to bid at auction for a LMDS license in their geographic service area. Service and auction rules relating to LMDS will be established in the near future. E. Local Exchange Carriers 1. Introduction 67. The legal and regulatory changes that occurred in the past year as a result of passage of the 1996 Act are likely to have a significant effect on LEC entry into markets for the delivery of video programming. Given the short period of time since the passage of the 1996 Act, however, LEC entry into markets for the delivery of video programming has not changed dramatically. LECs represent a major competitive presence in only a few markets for the delivery of video programming. LECs continue to weigh their options for entry into markets for the delivery of video programming and continue to move toward that entry, by means of the technology (MMDS, wireline) and method (cable franchise, MMDS license, open video system) believed to be most appropriate for each company and local market. 2. Statutory Changes and Commission Action 68. As noted above, the 1996 Act fundamentally changed the statutory framework for LEC entry into markets for the delivery of video programming by repealing the telephone-cable cross-ownership restriction that had generally prohibited a common carrier from providing video programming directly to subscribers in its local telephone service area. Pursuant to Section 302 of the 1996 Act, LECs have four regulatory options for entering video programming delivery markets within their own regions: (1) Title III radio-based systems, such as MMDS; (2) Title II common carriage systems; (3) Title VI cable systems; or (4) new Title VI open video systems ("OVS"). While opening up new avenues for entry, this provision also prohibits: (1) a LEC from acquiring more than a 10% financial or management interest in an existing cable operator providing cable service within the LEC's local telephone service area; (2) a cable operator from acquiring more than a 10% financial or management interest in a LEC providing local telephone service in the cable operator's franchise area; and (3) joint ventures between cable operators and LECs in the same market to provide either video programming or telecommunications services in that market, subject to certain exceptions. 69. Section 302 of the 1996 Act and the regulations adopted to establish OVS provide that if a LEC certifies compliance with certain non-discrimination and other requirements established by the Commission, the open video system will be entitled to reduced regulation under Title VI. An open video system's carriage rates are entitled to a presumption that they are just and reasonable where one or more unaffiliated video programming providers occupy channel capacity on the system at least equal to that of the open video system operator and its affiliates. Open video systems are subject to the Commission's rules governing must carry, retransmission consent, program access, sports exclusivity, network nonduplication, syndicated exclusivity, and public, educational and governmental ("PEG") access channels. In addition, while open video systems are exempt from local cable franchise requirements, localities are permitted to assess a fee on an open video system's gross revenues at a rate not exceeding the franchise fee imposed by that locality on the local cable operator. 4. Current and Planned LEC Entry a. Video Delivery i. Status of VDT Systems 70. Last year, we reported that 16 applications for permanent, commercial VDT service had been approved by the Commission and two applications were pending before the Commission. None of the permanent, commercial systems were operational at that time. Bell Atlantic's Dover, New Jersey system was constructed and scheduled to begin service shortly after the release of the 1995 Report. The remaining systems were either in planning or in early construction stages. We also reported on the status of eight approved VDT trials. 71. VDT systems authorized prior to enactment of the 1996 Act had until November 6, 1996, to effect a transition to one of the four statutorily-recognized options for provision of video programming services. No action was required where trials had ended or were scheduled to end before the deadline, or where the permanent, commercial VDT systems had not begun operation. On October 17, 1996, the Commission approved Bell Atlantic's request for certification to operate its VDT system in Dover Township, New Jersey, as an OVS system. U S West has elected to pursue cable franchises for its former Omaha, Nebraska, VDT trial. BellSouth has obtained a cable franchise in Chamblee, Georgia, for the area served by its former VDT trial and has filed an election to utilize the cable regulatory option. Sprint has applied for cable franchises in Wake Forest and Wake County, North Carolina, and has notified the Commission that it will pursue this option for its VDT trials. ii. MMDS 72. In the 1995 Report the Commission noted that Bell Atlantic, NYNEX and PacBell had made significant investments in wireless cable. As noted above, BellSouth entered this domain this year with its acquisitions of licenses for a wireless cable system in New Orleans. However, as also noted above, Bell Atlantic and NYNEX have suspended their wireless cable ventures with CAI. Currently, the only operational MMDS system directly owned by a LEC is the 42,000 subscriber system in Riverside, California owned by PacBell. iii. Cable Franchises a. In-Region Cable Franchises 73. In the 1995 Report, we reported that a number of LECs had pursued cable franchises in their service areas as a means of providing video services to their customers. The most aggressive of the LECs in this area was and continues to be Ameritech. Ameritech has acquired 27 cable franchises in Illinois, Michigan, Ohio, and Wisconsin, to serve communities with a total population of more than 1.2 million. Seventeen of these cable franchises are currently operational. 74. In addition, in the last year, BellSouth has acquired cable franchises in seven areas in the southern United States. GTE has received five cable franchises, which will pass over 400,000 homes. PacBell has obtained cable franchises for San Jose and the surrounding Santa Clara County in California. SNET has received a state-wide cable franchise in Connecticut, where previously it had applied to provide VDT service. Finally, SBC has received authorization to perform an 18-month cable trial in Richardson, Texas, a suburb of Dallas. b. Out-of-Region Cable Systems 75. We previously reported on out-of-region cable systems owned by LECs. The major development in this area is the acquisition of Continental Cablevision, Inc., the third largest cable MSO with nearly 4.2 million subscribers, by U S West. Approximately 280,000 subscribers involved in the transaction were in-region, and the Commission granted a temporary waiver on October 18, 1996, to U S West so that it could complete the acquisition and subsequently sell these in-region systems. These systems are in addition to those, described above, of LECs electing to convert their VDT authorizations to cable franchises. iv. OVS 76. The Commission has certified three OVS operators. As noted above, on October 17, 1996, Bell Atlantic received approval for its certification to convert its Dover, New Jersey, VDT system to OVS. Bell Atlantic subsequently purchased the division of Futurevision which had been the only operating program package provider on the Dover system, and has begun offering programming on this system using those resources. MFS was granted certifications on December 9, 1996, for the operation of OVS systems in Boston and New York, both of which are being used to provide programming. On October 10, 1996, Digital Broadcasting Open Video Systems received approval to offer OVS service in southern California. v. Switched Digital Video 77. This year, Bell Atlantic announced plans to upgrade its infrastructure to a switched broadband network in Philadelphia and southeastern Pennsylvania, with eventual service to over 12 million homes and small businesses across the mid-Atlantic region over the next three years. NYNEX also recently announced plans for large-scale deployment of switched fiber networks in the Boston and New York areas, with plans to be able eventually to provide video to up to five million subscribers. b. Video Programming and Packaging 78. In the 1995 Report, we reported on two LEC joint ventures for video programming and packaging: Tele-TV, comprised of Bell Atlantic, NYNEX, and PacTel; and Americast, comprised of Ameritech, BellSouth, SBC, GTE, and Disney Corporation. Throughout most of the year, it was reported that both companies had made some progress toward providing video programming and packaging services. For instance, Tele-TV had begun to offer an analog-to-digital conversion service, and Americast announced that it would offer a basic national package to program packagers sometime in 1996. Despite this progress, trade press reports began warning in the summer of 1996 that the viability of both ventures was precarious, in part due to the proposed merger of SBC and PacTel. Recently, in fact, there have been reports indicating that Tele-TV's business plan is undergoing fundamental changes. Some reports indicate that the venture is being scaled back, and possibly, terminated and the LEC investors are shifting devotion of their resources to entry into markets for long distance services. The LEC investors, however, reportedly deny this scenerio and PacTel stated that funding will remain unchanged at $300 million a year for the next three years. 5. Conclusion 79. As with the 1995 Report, both the degree and the method of LEC planned entry into video programming services markets remains unclear, but now, as a result of the 1996 Act, LECs have four possible modes of entry. A large, nation-wide competitive presence has not been realized, and no single technology has been chosen for entry into the markets for the delivery of video programming. LECs continue to test various technologies and construct various types of systems for video delivery, and it appears that LECs will use different technologies as each situation warrants. Bell Atlantic was the only LEC to build and begin operating a VDT system before passage of the 1996 Act, and Bell Atlantic and MFS remain the only LECs with operational OVS systems in the nation. The other modes of current LEC entry are via wireless cable and cable franchises. Overall, while LECs may offer MVPD competition in some local markets in 1997, to date, LECs have yet to become a significant competitive presence. F. Satellite Master Antenna Television Systems 80. SMATV systems are private cable systems that do not use public rights-of-way, which allows them to operate without being subject to franchise requirements. SMATV systems are defined in the Communications Act as an exception to the definition of a cable system. Historically, SMATV systems generally served commonly-owned multiple dwelling units ("MDUs") such as apartments or condominiums, commercial establishments such as hotels, institutions (i.e., hospitals), or groups of buildings in close proximity such as universities or resort facilities. More recently, some SMATV systems have been using microwave transmissions linked to system headend(s) to serve multiple buildings that are not commonly-owned without using public rights-of-way. The 1996 Act amended that exception by easing the statutory restrictions on SMATV operators, permitting them to use wires to connect separately-owned buildings, provided they do not use public rights-of-way. This may permit significant SMATV system growth in areas where many different residential buildings can be interconnected without crossing public streets. 81. Industry estimates place the total number of SMATV residential subscribers as of September 1996 at approximately 1.05 million, an increase of 10.5% over the 950,000 subscribers reported in the 1995 Report. The estimated number of SMATV operators serving MDUs had risen to 5200 operators by December 1995, an increase of 41% since December 1994 when there were 3700 operators. Industry analysts attribute this growth to technical improvements which now make it profitable for operators to install SMATV systems in smaller MDUs. The result has been an increase in the overall number of systems, although many of these SMATV systems may serve only single MDUs. Industry reports suggest that SMATV growth is strongest in the South and Southwest, but is also growing in other regions such as New York City, Boston and Washington. At the same time, the SMATV industry has continued to experience system consolidations. Much of the growth in the larger SMATV operators has come by acquiring smaller operators. In fact, for the first eight months of 1996, the value of mergers and acquisitions has totaled approximately $65 million as compared with $75 million for all of 1995. 82. Many SMATV operators are installing more technologically advanced plant and equipment, and are moving aggressively with marketing and product innovations. Increasingly, SMATV systems are using 18 GHz microwave facilities to link headends to rooftop antennas and to link buildings, which increases efficiencies. While industry analysts have historically noted that many SMATV systems have been competitively hampered by limited channel capacity, a recent industry survey found that on average, SMATV operators had added six more channels since last year, raising total average channel capacity to 39.6 channels. In addition, some SMATV operators are experimenting with digitalization, and other SMATV operators are installing fiber optics to create the type of hybrid fiber coaxial ("HFC") architecture found in the most technically advanced cable systems. Still other SMATV operators are combining technologies to create "hybrid systems," such as DBS/SMATV or MMDS/SMATV systems as part of a "niche market" strategy. For example, Satellite Connection, a national C-Band programming company, has contracted with DIRECTV to provide programming for its 10 channel, all-digital DBS/SMATV system serving a 120 unit RV Park in Hon-Dah, Arizona. As described above, RCN has a venture with DIRECTV to provide programming to subscribers in its MDUs in metropolitan New York. In Melbourne, Florida, Coastal Wireless Cable Television has developed an MMDS/SMATV system to serve the large residential MDU and hotel/motel markets. 83. Increasingly, SMATV operators are also customizing their products and services to suit niche markets and MDU subscribers' needs. For example, many SMATV systems offer programming not available from their community's local franchise cable system, such as sports packages, concerts and other special programming. Some SMATV systems have added more advanced electronic features such as "picture-in-picture," "pick-and-pay" (or pay-per-view programming), interactive games and video-on-demand ("VOD") programming as part of their "custom-designed" programming packages for subscribers. Many of these SMATV systems also offer alarm line monitoring and closed circuit security cameras, a feature particularly important to many MDU residents. In addition, some of the larger SMATV operators, like OpTel and MTS, are also competing with the incumbent LECs to provide local and long distance telephony and Internet access to their SMATV subscribers in MDUs. 84. SMATV Operator Concerns. Several SMATV operators expressed concern that some of the provisions of the 1996 Act may affect the competitiveness of SMATV systems. OpTel raises concerns over potential interpretations of the 1996 Act's revised "effective competition" standard OpTel, RCN and Bartholdi raise concerns over the 1996 Act's provision exempting from the uniform rate structure provision cable systems subject to effective competition. Both of these provisions are the subject of pending proceedings, thus we decline to address them further in the context of this report. 85. RCN, Bartholdi and WCAI raise concerns over the demarcation point for inside wiring and the effect of the Commission's inside wiring rules on SMATV operators' competitiveness. The Commission is addressing the issues raised regarding access to inside wiring by competing MVPDs in a separate proceeding. G. Broadcast Television Service 86. Broadcast television service is both a source of video programming and a transmission medium for video programming. The number of commercial and noncommercial television stations increased to 1550 from 1542 over the last year. Although the overall audience for broadcast television programming has declined in the last year, it is still viewed by a large majority of the television audience. During the 1995-1996 television season, the four major networks (i.e., ABC, CBS, Fox, and NBC) accounted for a combined 62% share of prime time viewing among all television households; UPN and WB, the two newest networks, achieved a combined 9% share of prime time viewing. The amount of prime time programming provided by UPN and WB was six hours and five hours, respectively. The most recent data available for households subscribing to cable service indicates that, even in cable homes, programming originating on local broadcast television stations accounted for a combined 61% share of all day viewing in the 1994-95 television season, while non-premium cable networks and pay cable services achieved a combined 50% share of all day viewing. 87. Broadcast total advertising revenues reached $27.9 billion in 1995. Advertising revenues for the four major networks alone reached $12.4 billion in 1995, an increase of 4% over 1994. In addition, for the new season which began on September 15, 1996, ABC, CBS, Fox, and NBC received a record $5.8 billion in pre-season advertiser commitments, despite losing 8% of their prime time viewers last year. In comparison, cable programming networks received $3.7 billion in advertising revenue in 1995, an increase of 14% over 1994. 88. The role of broadcast television service as a directly-received transmission medium has continued to change in recent years, with fewer homes receiving broadcast signals directly over the air. Over-the-air broadcast television service continues to serve as the sole transmission medium for approximately one-quarter of all television households. It is also one means by which subscribers to satellite services (e.g., DBS) receive local signals because satellite services generally do not retransmit broadcast television signals or are limited in those areas that may be served with broadcast signals. 89. The ability of the broadcast spectrum to compete as a transmission medium with cable is effectively limited by the amount of broadcast spectrum and channels that are assigned to television markets. The scarcity of video programming outlets available via "over-the-air" broadcasting can have a significant impact on competition. In nearly all markets, the number of channels available solely through the broadcast transmission medium is considerably fewer than those available on most cable systems. WB attributes its difficulties in obtaining increased broadcast television coverage to the scarcity of unaffiliated broadcast stations in many markets. Essentially, WB asserts that a sixth broadcast network cannot attain national coverage solely by using local broadcast stations as affiliates and that it must rely on cable carriage. 90. Recently, the Commission has sought to increase the video distribution capacity of the current analog broadcast spectrum. In seeking comment on revisions to our local broadcast ownership rules, we noted that in many markets, several television broadcast station allotments remain vacant. Currently, local broadcasters in the market are forbidden from applying for licenses for these vacant allotments. The Commission invited comment on whether we should entertain a waiver request to the local television ownership rule to enable a current local broadcast television licensee to apply for a channel allotment that has remained vacant or unused for a long period, such as five years. 91. In making this proposal, we noted that "it may not be in the public interest to have allotted broadcast channels lie fallow -- particularly in markets where it might be possible to allow additional NTSC stations to come on the air without adversely impacting the proposed DTV allotment table and the transition to digital television." We stated that evidence that the allotment has remained vacant for a period of years "may suggest that the operation of another television station on a stand-alone basis in the community in question is not economically viable" and that the public interest may be advanced by permitting an existing licensee in the market to acquire a license for the currently-vacant allotment rather than allow the channel to remain unused. 92. To the extent that the capacity of the analog broadcast spectrum is expanded by these proposals, such expansion may eventually increase the analog broadcast spectrum's ability to compete with cable as a transmission medium. However, the amount of analog capacity available will still be limited until the transition to digital technology. 93. The Commission's effort to implement a swift transition to digital transmission technology also has the potential to significantly increase the capacity of the broadcast spectrum, and such a development might advance the ability of broadcast transmission to compete with cable. Most importantly, digital encoding and transmission technology will permit a station to broadcast multiple streams of Standard Definition Television ("SDTV") programming, a single High Definition Television ("HDTV") signal, a combination of the two, or a combination of video with other digital ancillary services. The increase in broadcast spectrum capacity that digital technology allows may in the future result in a broadcast transmission service that is better able to compete with cable systems. 94. In previous reports, we noted that low power television ("LPTV") stations can offer multichannel video programming services on a subscription basis and that such service exists in a rural area of Minnesota. Construction permits have been issued to a multichannel LPTV applicant in Pinconing, Michigan, and there is an eight-channel LPTV system operating in Anchorage, Alaska. However, such service remains extremely limited and does not appear to have a significant impact on competition in the video market. In addition, the potential for even more multichannel LPTV systems to become operational may be constrained by the current freeze on licensing LPTV stations within 100 miles of the 36 largest markets in order to preserve spectrum availability for the transition to digital television service. H. Other Entrants 1. Electric and Gas Utilities 95. Section 103 of the 1996 Act removed a significant regulatory barrier which had deterred registered public utility holding companies' entry into telecommunications, information services, and video markets. Specifically, prior to enactment of the 1996 Act, the Public Utility Holding Company Act of 1935 ("PUCHA") imposed strict "line of business" restrictions on registered public utility holding companies which sought to diversify into telecommunications or information services markets. Section 103 of the 1996 Act, which added a new Section 34 to PUHCA, now permits registered public utility holding companies to enter telecommunications industries without prior SEC permission through the acquisition or maintenance of an interest in an "exempt telecommunications company" or "ETC." Congress essentially eliminated disparate regulatory treatment among different types of utility companies by this action. 96. On September 12, 1996, the Commission adopted final rules to implement Section 103. Following Congress's mandate, the rules provide a straight-forward procedure for determining ETC status, thus expediting the entry of public utility holding companies into the telecommunications industry. Since enactment of the 1996 Act, the Commission has granted all 18 of the applications for a determination of ETC status filed thus far. Most of these ETCs have been affiliates of public utility holding companies such as Central and South West Corporation, Entergy Corporation, Northeast Utilities, American Electric Power, Allegheny Power, and the Southern Company. 97. Most registered public utility holding companies are entering telecommunications markets by providing service in voice and data markets. There also is some evidence, however, that registered public utility holding companies are beginning to contribute to the performance of MVPD markets. The Southern Company recently entered into a partnership with a real estate developer to develop a 303 unit apartment community in Duluth, Georgia. According to Southern, this complex will provide a one-stop utilities package for its residents, including energy management control, alarm monitoring, long distance telephone service, and wireless cable. The wireless cable package will reportedly be provided by Wireless Cable of Atlanta, and will provide basic and premium service, including HBO, Showtime and The Movie Channel. 98. The 1996 Act has spurred some entry by other utilities. Boston Edison and RCN announced an agreement to form a joint venture to provide local and long distance telephone service, video, high-speed Internet access and, eventually, energy management and property monitoring services. Similarly, KN Energy ("KN") is offering a "one-stop shopping" service in Scottsbluff, Nebraska, where KN will offer consumers satellite television service by the DISH network, as well as long distance service, wireless internet service, and energy management systems. A further example is the project wherein Metricom is working with PEPCO in Washington, DC, to build a network to provide wireless access to the Internet. 2. Internet Video 99. Last year we reported that software that would deliver real- time audio and video over the Internet was becoming available and that while the Internet had the potential to affect the video marketplace, it was too early to assess its impact. We still believe it is premature to assess the impact of the Internet on the video marketplace. However, at least one industry analyst reports that in the last year the number of Internet users increased by 50% and the demographic profile of users has shifted to reflect overall population averages. In addition, in the past year there have been developments in the ability of computer hardware and software to deliver video. 100. For example, this year Toshiba is offering a personal computer that offers built-in television and radio tuners in addition to audio-CD access and embedded speakers. Rather than offering television via the Internet, this personal computer reportedly incorporates existing television technology into a platform shared by a computer. Such a melding of television and computer hardware is presently the exception in video delivery by computer. 101. In addition, considerable commercial activity has been directed in the past year at software that renders video deliverable to any existing computer via an Internet connection. Currently there are two primary means to accomplish such video delivery: (1) downloading a video file for later playback; and (2) streaming. 102. Downloading a video file and the necessary software application to "play" the video file once it is opened is presently the most common way to receive video via a personal computer. While compression techniques used in this process significantly reduce the size of the video file, a typical consumer will expend considerably more time downloading the file than it will take to "play" it. The time to download a file depends on a number of factors, including: (1) the speed of the Internet connection; (2) how busy the server sending the video file is; and (3) the size of the video file. 103. A one-minute video could take 20-30 minutes or more to download to a personal computer if the consumer were using a 9600 baud modem connection to the Internet. Faster modems, different compression coding techniques, the user's hardware and software, and the speed of the actual Internet connection all factor into the time necessary to download a file. Ideal combinations of these factors can eliminate the need to download files before viewing them. A 10- megabyte file can be downloaded, on average, in the following times for different modem speeds, other factors remaining constant. Modem Speed/Type Transfer Time 9.6 Kbps modem 2.3 hours 14.4 Kbps modem 1.5 hours 28.8 Kbps modem 46 minutes 128 Kbps IDSN 10 minutes 1.54 Mbps T-1 connection 52 seconds 4 Mbps cable modem 20 seconds 10 Mbps cable modem 8 seconds 1.5 to 6.4 Mbps ADSL technology 12 to 53 seconds 104. "Streaming" is a means of receiving video from the Internet that eliminates both the wait time associated with downloading a video file and the storage of that file on the consumer's hard disk. Video using a streaming format can be viewed in real time by a consumer using a 28.8 Kbps telephone modem (or faster) connection. At least four Internet video consumer products have attracted attention and comment. 105. StreamWorks from Xing Technology of Arroyo Grande, California, permits both real time and on demand viewing of video by allowing users to access "streams" of encoded video packets from either a live feed or an encoded file. A viewer connected to a StreamWorks Internet server would view a video through a personal computer as though watching a TV obtaining its programming from a VCR. CU-SeeMee from White Pine offers a streaming tool used primarily for live videoconferencing, but which also permits viewing of recorded programming on a fixed schedule for all viewers. VDOnet Corporation of Palo Alto, California, offers VDOLive, a product incorporating adaptive streaming technology. 106. A third mechanism for video delivery is being developed for Java-enabled browsers. OnlineTV reports that in July it began offering real-time live video through its Internet site to anyone with a Java enabled browser. Online TV states that its video offerings do not require downloads, plug-ins, or installations. The company states that its goal is to become the first digital television network to bring regularly scheduled video content to the Internet. 107. Despite the technological advances embedded in these commercial services, it appears that consumer reaction to them continues to be tempered by issues related to the capacity and reliability of the Internet backbone and the speed at which an individual can receive data. The ability of the Internet to significantly impact the market for the delivery of video programming will likely remain tangential at least until higher data transfer speed becomes widely available. 108. Bundling of Video Services with Cable Modem and Other Services. As discussed in several places above, many MVPDs are beginning to combine their video service offerings with other services (e.g., local or long distance telephony, Internet access, cellular service, paging, music, etc.) in packages designed to win customers. Cable system operators and other MVPDs have shown considerable interest in deploying modems that permit subscribers to receive high-speed access to the Internet and, perhaps, other data transmission services. For example, a number of cable system operators recently announced large orders for cable modems, and the near-term deployment of Internet access services was one of the most discussed topics at a recent industry trade show. 109. The commercial viability of bundled services is unknown, but will depend on a number of factors, including consumer demand, service quality and the technical requirements of the bundled components. For example, some analysts maintain that the success of services offering access to the Internet through broadband cable wires may be threatened by technological issues. To the extent that bundling does emerge as technologically feasible and economically desirable for MVPDs, it has the potential to substantially affect competition in markets for the delivery of multichannel video programming. For example, according to one recent research report, nearly 80% of American households would like to receive these telecommunications services from a single provider, if the overall cost remained the same. 3. Interactive Video and Data Services 110. The interactive video and data service ("IVDS") is a point-to- multipoint, multipoint- to-point, short distance communications service in which licensees may provide information, or services to individual subscribers at locations within a service area, and subscribers may provide responses. This radio-based interactive service is available for a variety of uses that may be delivered by, and coordinated with, broadcast television, cable television, MMDS, DBS, or any other future television delivery technology. By itself, however, the service is not capable of delivering voice or full-motion video. Among the types of services that IVDS licensees may offer, in conjunction with video or data delivery systems, are polls, educational classes, home banking, and home shopping. 111. The Commission awarded 18 IVDS licenses by a lottery in 1993 and auctioned an additional 594 licenses in 1994. Each license permits service within a specified service area, which is equivalent to a cellular radio service area. 112. During 1996, the Commission made two significant revisions to its rules concerning IVDS. First, it revised the IVDS "build-out" requirement to eliminate the one-year requirement (requiring service to 10% of the population or area within the license service area), while retaining the three-year and five-year requirements (30% and 50%, respectively). Second, the Commission revised the rules to permit full mobile use of IVDS Response Transmitter Units ("RTUs"), which are the customer units. This latter change, especially, is expected to assist licensees in becoming competitive in the general telecommunications market. 113. At this time, however, it appears that IVDS services are not available to sufficient numbers of consumers to affect the video marketplace. The Commission intends to hold a second IVDS auction in early 1997 (current estimate), which will award an additional 856 licenses. This will permit additional licensees to fill-out the geographic areas in the country that currently have no licensees or service. IV. MARKET STRUCTURE CONDITIONS AFFECTING COMPETITION A. Horizontal Issues in Markets for the Delivery of Video Programming 114. In this section of the 1996 Report, we examine several issues concerning horizontal structure and rivalry in markets for the delivery of video programming. First, we discuss the market definition we used in the 1995 Report, and have used again here. Next, we examine changes since the 1995 Report in concentration and the extent of competition in local markets. Finally, we examine changes in concentration at the national and regional levels, including the effects of some recent cable mergers and acquisitions. 1. Market Definition 115. We begin our examination of horizontal issues by recalling our definition of the relevant market, which consists of two elements, a relevant product market ("relevant product") and a relevant geographic market ("relevant geographic area"). In the 1995 Report, we reaffirmed our use of the 1992 Cable Act's definition of "multichannel video programming service" as a starting point for the definition of the relevant product. We also repeated our belief that the relevant geographic area is local, rather than regional or national, because buyers' alternative sources of delivered video programming are limited to those sources available in the immediate area where buyers live. We also noted that commenters generally agreed on the cable franchise area as the relevant geographic area. 116. In the Notice, we invited comment on changes in the structure of markets for the delivery of video programming, including changes in the definition of the relevant product. Although no commenters explicitly addressed the definition of the relevant product in their filings, they relied (as in previous years) on the 1992 Cable Act's definition of "multichannel video programming service." As a result, we will continue to use this definition as the basis for the relevant product in the 1996 Report. We also sought comment in the Notice on the relevant geographic area and whether it has changed since the 1995 Report. As in past Reports, most commenters have generally relied on the cable franchise area as the relevant geographic area. 117. Because cable system operators, the largest distributors of multichannel video programming, remain subject to the franchise process, it is clearly necessary to take into account the cable franchise area in developing a definition of the relevant geographic area. However, we also need to consider other geographic areas because the service areas of rival MVPDs may be larger or smaller than cable franchise areas. Broadcast television and MMDS deliver multiple channels of video programming to entire metropolitan areas -- areas generally much larger than a cable franchise region. A SMATV may offer service to only one apartment building -- an area much smaller than a cable franchise. Satellite providers such as DIRECTV and Echostar offer service to the entire nation. These supply-side geographic areas, which are based on the "footprint" of the relevant supplier, are relevant because they influence the range of choices available to consumers (the demand side of the market). Because most customers cannot reasonably be expected to move to another community simply to receive better video programming, perhaps the most relevant starting point for the definition of the relevant geographic market is an assessment of the range of choices a typical consumer has among MVPD offerings to his or her home. 118. Based on these considerations, we find that the relevant geographic area for assessing MVPD competition is local and that its extent can be defined by the overlap of the "footprints" of the various service providers. This area of overlap determines the number of MVPD choices available to a typical household. Of equal importance is the relative attractiveness of the MVPD choices to the household. A rough approximation of their attractiveness is provided by the subscriber shares of the MVPDs in the local area. In order to obtain a summary measure of horizontal concentration in the typical local area, we will focus, in the next section, on aggregate national subscribership data, which generally reflect the amount, significance, price and quality of choices available to a typical American household. 2. Concentration in Local Markets 119. In both the 1994 and 1995 Reports, we concluded that local markets for the delivery of video programming were highly concentrated and characterized by substantial barriers to entry by potential distributors. We noted that, in general, sellers in highly concentrated markets may be able to coordinate their conduct, lessen competition, and increase their rates of return. As a result, a high degree of concentration accompanied by substantial barriers to entry may result in prices above competitive levels and sub-optimal product quality, innovation, and service. 120. In order to obtain a summary measure of concentration in local markets for the delivery of video programming, we calculated a Herfindahl-Hirschman Index ("HHI") for an average local market using national subscribership numbers as a surrogate for market share in the HHI. As we noted in the 1995 Report, the HHI is a measure of horizontal concentration that is calculated by summing the squared market shares of the sellers in a market. The United States Department of Justice ("DOJ") and Federal Trade Commission ("FTC") regularly use the HHI to evaluate the effects of proposed mergers on competition. The DOJ and FTC consider markets with an HHI below 1000 as "unconcentrated;" markets with an HHI between 1000 and 1800 are "moderately concentrated;" and markets with an HHI above 1800 are "highly concentrated." 121. This concentration measure suggests that, on average, local markets for the delivery of video programming remain highly concentrated. Using the nationwide total number of subscribers to cable and non-cable MVPDs found in Appendix F, Table 1, as a surrogate for measuring the availability and attractiveness of various options available to the average local market, we calculate an HHI of 7905, a decrease from the HHI of 8395 in September of 1995. While the HHI has decreased, an HHI of 7905 remains several times greater than the 1800 threshold at which a market may be considered "highly concentrated." The HHI decrease can be attributed to the measurable increase in the non-cable MVPD share of subscribers, which rose from less than 5% in 1992, to 9% at the end of September 1995, and 11% at the end of September 1996. 122. As noted in the 1995 Report, an alternative approach to measuring concentration in the average local market is to assign equal market shares to all MVPDs that have similar capabilities to serve subscribers in such a market. Under this approach, a market with five or fewer firms that have similar abilities to serve customers would be highly concentrated for purposes of a merger analysis. In most markets for the delivery of video programming, there are currently one cable operator and up to four rival DBS service providers. Thus, under this approach, a local market served by five video distributors with roughly comparable levels of deployed capacity would have an HHI of 2000, which is still in the highly concentrated range. In some programming delivery markets, there may also be, in addition to the cable operator and DBS providers, one or more of the following: (1) an overbuilder, (2) an MMDS provider, (3) some SMATV operators, and/or (4) some additional HSD providers. If these additional competing MVPDs have similar levels of capacity deployed in a market, then, the HHI in these markets would lie below the 1800 threshold for a highly concentrated market. It should be noted that this approach to assessing competition rests on the assumption that the available non-cable MVPDs offer services that are viewed as closely substitutable for cable services by subscribers. The actual degree of substitutability between cable and non-cable multichannel services is discussed above in the sections on the individual distribution technologies and below in the section on product differentiation. 3. Extent and Nature of Competition in Local Markets 123. Whether cable operators can exercise market power under the local conditions described above depends on other factors that affect the extent of competition. Two important factors that affect both the extent and nature of competition in video programming delivery markets are the ability of the existing alternative distributors to offer differentiated programming services and the conditions of entry. 124. Product Differentiation. The ability of MVPDs to create varieties of service offerings is an important factor that affects the extent of competition in video programming delivery markets. Such product differentiation affects the nature of competition and the benefits to consumers. On the one hand, consumers benefit from product differentiation by video programming distributors because more consumers will be satisfied by varied programming than would be satisfied if all distributors offered the same programming. On the other hand product differentiation allows a firm to raise prices without losing as many of its customers. To the extent there are few firms offering similar products and entry is difficult, individual firms may be able to differentiate their products to the point that there are few, if any, close substitutes. This allows them to exercise market power and reap economic profits and returns on investment that are greater than can be obtained in competitive markets. Where there are other products that consumers would switch to in response to relatively slight price changes or where entry is relatively easy, however, other firms will seek to obtain some of those profits, resulting in a product market where consumers have greater choices and pay prices that equal the average costs of production (which includes a normal return on investment). 125. Different MVPDs appear to be pursuing different strategies with regard to product differentiation relative to cable service. For example, DBS providers, which generally are unable to carry local broadcast programming at present, are emphasizing both the technical superiority of their digital service and their unique program offerings (e.g., their comprehensive sports packages) to differentiate their services from those of cable. By contrast, MMDS and SMATV systems generally provide programming and other services similar to those of the incumbent cable operator, and compete with the operator on price. Some SMATV operators, however, are attempting to differentiate their product by providing unique services such as security monitoring. LECs appear to be competing with incumbent cable operators on the basis of both price and product differentiation in those limited areas where LECs have begun to offer video distribution service. Cable overbuilders appear to compete principally on price. 126. Entry. The conditions of entry include any impediments that would-be sellers face in order to enter a market. To the extent that MVPDs face substantial impediments to entry into a video programming delivery market, consumers will have fewer potential new supply sources. Thus, the existence of impediments to entry, combined with the high concentration noted above, could enable incumbent cable operators to exercise market power by charging higher prices, being less responsive to customer desires, and/or being less efficient and innovative than a successful seller in a competitive market might be. 127. Potential entrants into video programming delivery markets face several substantial impediments. In order to distribute multichannel video programming, an entrant may (1) incur significant sunk costs, (2) have to obtain a license or certification from federal authorities or a franchise from local authorities, (3) face resistance at the local level from governmental agencies or bodies, and (4) face incumbent-generated regulatory or litigation challenges. Such impediments may be why new (non-DBS) entrants have not yet made major inroads into incumbent cable operators' share of subscribers. The 1996 Act attempts to promote entry into markets for the delivery of video programming. It remains to be seen, however, whether the 1996 Act and other developments will enable potential entrants to overcome these impediments. Examples of entry during the past year are discussed above in the sections on distribution technologies. 128. In all but a few local markets for the delivery of video programming, the vast majority of consumers still subscribe to the service of a single incumbent cable operator. The resulting high level of concentration, together with impediments to entry and product differentiation, mean that the structural conditions of markets for the delivery of video programming are conducive to the exercise of market power by cable operators. The continuing expansion of DBS, MMDS, and overbuilding is beginning to create an alternative to cable. It is difficult to precisely ascertain the impact DBS may be having on cable prices, program offerings and services in a particular local market. While at least one major cable MSO has announced that it is upgrading its systems to offer increased channel capacity and new programming in response to the nationwide presence of DBS, we note that on the other hand the US Bureau of Labor Statistics reports that the cable services segment of the Consumer Price Index has increased at a 8.5% compound annual rate for the eleven months from January 1996 to November 1996. At the same time, cable subscribership continues to increase, albeit at a reduced pace from last year. We do, however, see a definite competitive response benefitting consumers in the few local markets where, in addition to an incumbent cable operator and DBS, there is direct facilities based competition from MMDS or a cable overbuilder. In these markets, cable operators are adopting several strategies in response to new entry and increased competition, including lower prices, expanded program packages, and improved services. As non-cable video programming distributors expand further in the future, consumers may be able to rely more on competition for the benefits of lower prices and improved programming choices and less on regulation. However, as we noted in the 1995 Report, it is difficult to predict whether non- cable MVPDs ultimately will provide vigorous rivalry for cable operators or will remain competitors with small market shares or services that are highly differentiated from those of cable systems. 4. Concentration of Cable Systems at the National Level 129. In the 1995 Report, we noted that the 1992 Cable Act was concerned with, and placed limits on, the concentration of cable systems at the national level. These concerns and limits reflect the possibility that concentration in the distribution of video programming may have anticompetitive effects on the supply of programming networks to MVPDs. For example, if a few cable operators own a large fraction of multichannel distribution capacity and subscribers, they may be able to exercise "monopsony" buying power that would distort the market for the provision of programming networks to all MVPDs. 130. In assessing the potential for monopsony buying power in the MVPD programming network market, we have in prior Reports examined the percentage of cable subscribers of cable MSOs on a national basis. Between 1995 and 1996, concentration of cable systems at the national level increased, whether measured by the subscriber share of the four largest MSOs or by the HHI. In the 1995 Report, we found that the four largest cable MSOs served 55% of all cable subscribers nationwide, with TCI (with a subscriber share of 26%), Time Warner (16%), Continental (7%), and Comcast (6%) being the four largest. In the past year, the percentage of cable subscribers served by the four largest MSOs has risen to 61.40%, with TCI (27.94%), Time Warner (18.94%), Continental/U S West (7.69%), and Comcast (6.83%) remaining the four largest. Examination of changes in the national HHI for cable MSOs reveals a similar increase in concentration. These shares indicate a nationwide cable industry HHI of 1098 in 1995, a figure that increased significantly this year to 1326. 131. However, in assessing the true impact national concentration may have in the MVPD programming network market, we believe that it is now appropriate to consider the presence of allMVPDs and MVPD subscribers in national concentration figures, and not just cable MSOs and cable subscribers. As their subscribership increases, the significance of DBS, MMDS and SMATV operators in the MVPD programming network market also increases. As a result, in this and future Reports, we will examine national concentration measures for all MVPDs. While our focus has shifted, Appendix F, Table 2, demonstrates that cable MSOs continue to be the main distributors of multichannel video programming, with 89% of total MVPD subscribers. Significantly, Table 2 demonstrates the rapid growth of DBS systems such as DIRECTV/USSB and PRIMESTAR -- indeed, both DIRECTV/USSB and PRIMESTAR count among the top ten MVPDs nationwide. However, despite the significant inroads non-cable MVPDs have made in subscriber penetration, the largest cable MSOs remain the largest MVPDs. 132. Table 2 demonstrates that the share of the top four MVPDs (the four largest cable MSOs) of the nationwide MVPD subscribership market has increased in the past year. In 1995, the four largest cable MSOs (TCI, Time Warner, Continental, and Comcast), with almost 55% of all cable subscribers, served just under 50% of all MVPD subscribers. Table 2 demonstrates that these same four firms now serve 53.3% of all MVPD subscribers nationwide. 133. Increased national concentration among the four largest MVPDs is largely the result of merger and acquisition activity. Since the 1995 Report, each of the four top MVPDs has increased subscriber reach through acquisitions. TCI closed its purchase of Viacom's cable systems in July 1996, and Time Warner closed its purchase of Cablevision Industries Corporation ("CVI") in December 1995. In addition, U S West purchased Continental, the third largest MSO, with more than 4.2 million subscribers. When added to U S West's existing cable holdings, this acquisition makes US West the third largest MSO, with more than 4.7 million subscribers. Finally, Comcast acquired the cable television operations of the E.W. Scripps Company. 134. To assess the potential for monopsony power resulting from concentration in the MVPD programming network market, the shares in Table 2 can appropriately be translated into HHI figures because MVPD programming networks are often purchased on a "per- subscriber" basis. Table 2 shows the nationwide purchaser MVPD or HHI to be 1013 -- "moderately concentrated" under the Merger Guidelines approach. 135. The still relatively small nationwide share of subscribers to non-cable MVPD service -- 11% -- implies that MVPD programming networks generally cannot rely exclusively on these distributors as an outlet for their programming. The available evidence suggests that a successful launch of a new mass market national programming network -- that is, the initial subscriber requirement for long-term success -- requires that the new channel be available to at least ten to twenty million households. Non-cable MVPDs currently serve fewer than eight million subscribers nationwide, a figure that appears to be too small an audience in most circumstances to provide programmers a distribution mechanism that can substitute for cable. However, the presence and continued growth of these non-cable distribution channels may mitigate the dependence of programming networks on cable MSOs. 136. Our reexamination of national MVPD concentration reveals a moderate and increasing level of concentration at the national level. Continued non- cable MVPD growth -- especially from smaller firms such as Echostar and MMDS suppliers -- may tend to decrease national concentration levels. On the other hand, continued growth from larger non-cable MVPDs such as DIRECTV and PRIMESTAR could increase national MVPD concentration. However, in the event that non-cable MVPD subscribers increase, it may be possible that new MVPD programming networks will be able to substitute non-cable MVPDs for cable as a successful initial distribution outlet. 5. Regional Concentration of Cable Systems 137. In the 1995 Report, we noted that the desire of cable MSOs to develop "clusters" of contiguous cable systems appeared to be a major factor underlying many cable mergers, acquisitions, and exchanges ("swaps"). Cable MSOs continue their trend towards creating large regional system clusters. The number of clusters of systems serving at least 100,000 subscribers increased from 97 at year-end 1994 to 137 by year-end 1995. The latter number of clusters accounted for 50% of all cable subscribers. Among the largest MSOs, Time Warner had 32 clusters, TCI 32, Cox 9, and Comcast 6. Small MSOs continued to expand their clusters, too. In the past year, clusters have been created through both the sales of systems and also system-for- system swaps between MSOs. The three largest system-for-system swaps since the 1995 Report occurred when Continental swapped its systems in Illinois and Missouri for TCI's systems in eastern Massachusetts, and its systems in Virginia and Rhode Island for Cox's system in Weymouth and western Massachusetts, and TCI swapped its Springfield, Missouri, system for the Washington Post system in Santa Rosa, California. 138. In the 1995 Report, we noted that clustering could have both pro-competitive and anti-competitive effects. In response to the Notice, commenters reiterated the arguments in favor of the pro-competitive effects. For example, the NCTA and others continue to view clustering as creating scale economies through better engineering and system architecture, more efficient customer service, centralized administration, regional programming and advertising opportunities, and improved personnel management. It is also claimed that cable providers will be more competitive across a range of markets (e.g., video programming delivery, telecommunications, Internet access) if they are "full service providers" competing in all such markets and that they can best achieve that goal if their "core" cable subscribership is clustered. Finally, clustering also makes cable MSOs more similar in geographic scope to the Bell LECs. This, the MSOs say, levels the playing field on which they must enter telecommunications markets. To the extent that this last effect is pro- competitive, it exists principally in telecommunications markets, as opposed to video programming delivery markets. 139. Clustering could have an anti-competitive aspect to the extent that it reduces the amount of entry into video programming delivery markets. As noted in the 1994 Report, clustering eliminates the operators of adjacent cable systems as potential overbuilders. These operators are relatively low-cost potential overbuilders -- because they can use their existing headend and parts of their existing trunk lines to serve the new markets -- compared to overbuilding by the operator of a distant cable system. The potential cost saving is significant because the headend and trunk lines comprise about 25% of the capital investment of a cable system. However, the significance of any effect on the amount of entry appears small. First, overbuilding has not proved a major means of entry into video programming delivery markets. In addition, in recent instances where overbuilding has occurred or is planned, many of the overbuilders (e.g., LECs) have not been the operators of existing adjacent cable systems. Thus, while the Commission will continue to monitor the development of clusters of cable systems, this development does not appear to pose a significant risk to the growth of competition in video programming delivery markets, and may enable cable operators to compete more effectively in local markets for telephone and other telecommunications services. B. Vertical Integration in the Cable Industry 140. In this section, we provide information regarding the status of vertical integration in the cable industry by updating the information provided in the 1995 Report regarding the extent to which video programming services are affiliated with cable operators. We also provide information on the Commission's enforcement activities relating to the program access, program carriage, channel occupancy, and leased access rules implementing the 1992 Cable Act. 141. Competitive issues raised by vertical integration in the cable industry continue to be an important element of our analysis. As we noted in the 1995 Report, although vertical relationships can often have pro-competitive effects, under certain market conditions, strategic vertical restraints (achieved by vertical integration, exclusive distribution contracts or monopsonistic pressure) can also deter entry into the market for multichannel video programming distribution. These issues are discussed more fully below. 1. Status of Vertical Integration 142. The degree of vertical integration between cable system operators and satellite- delivered programming providers declined over the past year. Whereas 51% of the national satellite- delivered cable programming services were vertically integrated last year, this year we find that 44% of such programming services are vertically integrated, a decrease of nearly 14%. The decline in vertical integration appears to be largely the result of two factors. First, one of the largest programming providers, Viacom, sold its cable systems to TCI, which means that the following programming services are no longer vertically integrated: All News Channel, The Movie Channel, MTV, MTV Latino, Nickelodeon, Nick at Nite, Sci-Fi Channel, Showtime, USA Network, and VH- 1. Second, based on information available to the Commission, we find that 10 of the 16 programming services that have been launched since the 1995 Report are not vertically integrated. As a result of these two developments, 64 of the 145 (45%) national programming services in operation today, are vertically integrated. Last year, we found that 66 of the 129 (51%) services in operation were vertically integrated. Although the overall percentage of programming services that are vertically integrated has fluctuated since 1990 instead of following a clear trend, we note that the total number of non-vertically integrated programming services has increased in each of the past three years. 143. Overall, the size of vertically-integrated ownership interests has remained nearly the same. Cable MSOs, either individually or collectively, own 50% or more of 47 national cable programming networks, compared with 45 networks last year. 144. However, fewer of the most popular programming services are vertically integrated than was the case last year, although nearly half of the most popular networks remain affiliated with a cable MSO. In terms of subscribers, 12 of the top 25 most popular cable programming networks are vertically integrated, compared with 15 last year. The decline is the result of Viacom's sale of its cable systems, offset by the fact that a vertically-integrated network, Comedy Central, replaced a non-integrated network, WGN, on the list. Two more of the top 25 services (C-SPAN and C- SPAN 2), while not owned in the usual sense by cable operators, were developed with significant involvement by the cable industry. In terms of prime time ratings, eight of the top 15 cable programming networks are vertically integrated, which is a significant decline from last year when 11 of the 15 highest-rated cable networks were vertically integrated. 145. Vertical integration continues to involve principally the largest cable system operators. The eight largest cable MSOs have a stake in 63 of the 64 vertically-integrated services, or in 98% of all such services. TCI, the largest MSO, holds ownership interests in 34 national programming services, approximately 23% of all national cable programming networks. This represents a decrease in TCI's level of vertical integration since last year, when we reported that TCI held interests in 29.5% of all national programming services, due in part to the restructuring of the Time Warner-Turner transaction. Time Warner, the nation's second largest MSO, holds interests in 22 national programming services, or approximately 15.3% of all national programming services. This represents an increase from Time Warner's 14% in 1995. 146. Another change since the 1995 Report was the merger of Time Warner and Turner Broadcasting. However, the merger does not account for any increase in vertical ownership in this year's Report because last year cable system operators already had a combined ownership interest of greater than 40% in the Turner networks. On September 12, 1996, as a result of the merger review process, the FTC required a restructuring of the transaction. The FTC restructuring required the cancellation of long-term carriage agreements between TCI and several Turner networks. The consent agreement also forbids Time Warner from bundling carriage of "marquee" or "crown jewel" networks -- Time Warner cannot bundle HBO with any Turner networks, and Time Warner cannot bundle CNN, TNT and WTBS with any Time Warner networks. Time Warner is also prohibited from discriminating on the prices it offers for Turner programming networks to rival MVPDs, is required to report information on carriage agreements by its cable systems, and its cable systems are required to carry an all-news rival to CNN. 147. One other significant development in the past year has to do with the ownership of several regional sports programming networks. In 1996, News Corporation's Fox Television ("Fox TV") entered into a 50/50 joint venture with TCI and Liberty Media. Fox TV contributed cash and the fX national programming network into the joint venture, and Liberty contributed its Liberty Sports division, consisting primarily of Prime Sports regional cable sports network operations. The Prime Sports regional cable network, relaunched this Fall as Fox Sports Net, consists of nine regional sports networks with a combined 25 million subscribers nationwide. 148. Since the 1995 Report, 44 new cable services have made announcements about their plans to begin offering service. Of these 44 new networks, 25 plan to launch service during the fourth quarter of 1996. In addition, several services that had planned to launch service during the year since the 1995 Report did not do so. One reason given for not launching is that delays in the deployment of digital compression by cable systems have slowed their deployment. Without such compression, there is less channel capacity to accommodate a large number of new channels. 2. Access to Programming 149. The Commission established rules pursuant to the 1992 Cable Act concerning programming arrangements between MVPDs and satellite-delivered programming vendors (the "program access" and "program carriage" rules). These rules prohibit unfair competition and discriminatory practices by cable operators and vertically-integrated programmers that may inhibit competition from other MVPDs. In addition, the program access rules prohibit vertically- integrated programmers from entering into exclusive contracts with cable operators unless the arrangements are found by the Commission to be in the public interest. In making that public interest determination, the Commission is required to consider, and balance, five enumerated factors concerning the effect and duration of the exclusivity arrangement. 150. As the Commission has consistently noted, exclusive arrangements can be used to deter entry and inhibit competition from other MVPDs in markets for the delivery of multichannel video programming. We have also consistently recognized, however, that exclusive arrangements can often produce efficiency benefits for the parties involved, and may increase competition, which can produce lower prices and increased choice for consumers in programming and distribution markets. When it created the program access regime, Congress struck a balance between these opposing effects of exclusive programming arrangements, and the Commission has implemented that balance in its rules and determination of program access complaints. By targeting and eliminating those vertical restraints that can impair competition in markets for the distribution of multichannel video programming, the Commission's enforcement of these rules is designed to contribute to the long-term performance of both distribution markets and programming markets. Indeed, the program access rules have been credited as having been a necessary factor in the development of both the DBS and MMDS industries. 151. Commission Enforcement Activities. The Commission has resolved ten program access disputes since the 1995 Report. The Commission also denied a Petition for Reconsideration of a program access decision issued in 1995. These cases are described in detail in Appendix H. 152. Issues of Concern to Commenters in 1996. Many parties agree that the program access rules have helped emerging competitors to cable obtain access to programming, although other parties continue to argue that the rules are unnecessary. As discussed below, some commenters allege that denials of access to programming continue to inhibit competition and urge expansion of the program access rules. In particular, these parties argue for application of the program access regime to non-satellite delivered programming services and to programming services of non-vertically integrated vendors, both of which are issues that we have addressed in prior Reports. In addition, commenters urge expedited review of program access complaints, clarification of the exception for pre-existing exclusive contracts, expansion of the program access rules to allow the recovery of damages, and application of the program access rules to exclusive arrangements between vertically-integrated programmers and non-cable MVPDs. 153. Terrestrial Delivery. A number of commenters urge the Commission to expand the application of the program access rules to include all programming -- regardless of how it is distributed. In particular, they argue that, as fiber-optic wiring becomes cheaper and easier to deploy and use, delivery of programming by terrestrial means instead of via satellite may permit cable operators to abuse vertical relationships between themselves and programmers. This fear is raised particularly with regard to local sports networks. Other commenters, however, oppose the application of the program access rules to programming delivered by means other than satellite, arguing that it would be an unwarranted extension of the program access rules. 154. We recognize that improved technology and lower costs are improving the efficiency of terrestrial distribution of programming, particularly over fiber-optic facilities. As a result, it appears that it may become possible for a vertically-integrated programmer to switch from satellite delivery to terrestrial delivery for the purpose of evading the Commission's rules concerning access to programming. If a trend of such conduct were to occur, we would have to consider an appropriate response to ensure continued access to programming. To date, however, we have seen no evidence that such strategic conduct has actually occurred. 155. Non-Vertically Integrated Programming. Several parties argue for an extension of the program access rules to non-vertically integrated programmers. For example, Ameritech New Media requests that the Commission recommend to Congress that the law be clarified or changed to ensure that new MVPDs have access to non-vertically integrated video programming. In support, it cites press reports which state that two broadcast networks are offering exclusive carriage terms to incumbent cable operators for their new 24-hour news channels and asserts that such contracts could have a stifling effect on competition. In addition, WCAI filed an ex parte letter on November 18, 1996, alleging that several non-vertically integrated programmers are refusing outright to provide service to MMDS operators, and that other non- vertically integrated programmers expect to be paid surcharges by MMDS operators. WCAI argues that cable operators have the same power and incentive to induce non-vertically integrated programmers to deny competing MVPDs access to their programming as they do with respect to vertically- integrated programmers. Consequently, WCAI argues that the program access rules should be applied to all programming without regard to the degree of integration between programmers and cable operators. 156. Other commenters urge the Commission to reject these calls for expansion of the program access rules to cover non-vertically integrated programmers, arguing that such an interpretation is inapposite to both legislative intent and the policies underlying the rules. These commenters argue that Congress clearly intended to limit the power of cable operators and their affiliates rather than seeking to regulate programmers per se, and that Congress reaffirmed this intent by limiting the program access provisions in the 1996 Act to vertically-integrated programmers. They also argue that no meaningful evidence has been presented indicating that non-cable MVPDs are being denied access to programming from non- vertically-integrated programmers. Finally, commenters opposing extension of the program access rules to non- vertically-integrated programmers argue that such an extension would only impede the development of new programming, and would not promote competition with incumbent cable systems. 157. As in prior years, we recognize the concern raised by some parties that access to programming from non-vertically integrated programmers may inhibit competition in markets for the distribution of multichannel video programming. The evidence before us, however, is insufficient for us to make any determination concerning the effect, if any, that exclusive arrangements involving non-vertically integrated programmers may have on competition in local markets for the delivery of multichannel video programming. 158. Pre-Existing Exclusive Arrangements. Several commenters argue that the "grandfathering" provision of Section 628(h) of the Communications Act -- which exempts exclusive contracts entered into on or before June 1, 1990, and renewed or extended before October 5, 1992, from the public interest inquiry of exclusive contracts -- raises serious competitive concerns. For example, Ameritech New Media submits that local exchange carriers and their affiliates typically do not have any exclusive distribution contracts because LECs generally were barred at that time (before June 1, 1990) from providing video programming services. Thus, Ameritech New Media contends that it is disadvantaged vis-a-vis cable operators, in that cable operators are able to take advantage of the grandfathering provision, while LECs and their affiliates are not. After review, we find that we do not have -- and Ameritech New Media has not provided - - sufficient information to permit us to make any decision at this time regarding the alleged anti-competitive effects resulting from the grandfathering provisions of Section 628(h). 159. Expedited Enforcement. To improve enforcement of the existing rules, some commenters urge expedited review of program access complaints. As a preliminary matter, we believe the procedures established in our rules for program access complaints already provide for an expedited procedure to resolve such disputes, and that commenters have not presented any additional evidence to suggest that revising these procedures would further accelerate this process. Nonetheless, we reaffirm our commitment to follow Congress's clear mandate in both the 1992 Act and, most recently, the 1996 Act to promote competition as quickly as possible. Consequently, the Commission will continue both to process program access complaints in the most expeditious fashion possible, and to continue vigilant and meaningful enforcement policies in this area. 160. Penalties and Damage Awards. Several commenters argue that the Commission should provide for damage awards against parties found to have violated the program access rules. According to these parties, without a meaningful penalty, the program access provisions are insufficient, standing alone, to deter strategic vertical conduct by cable operators. Other parties disagree, arguing that a damages remedy is neither necessary nor appropriate under the program access rules. Although we recognize the concerns of the commenters, these parties have not provided sufficient evidence to persuade us that penalties are necessary at this time to ensure effective enforcement of our program access rules. 161. Sublicensing. OpTel, RCN and others assert that in markets where they compete against vertically integrated cable MSOs, the MSOs have refused to sublicense popular cable network programming, particularly local and regional sports and other popular satellite cable programming. OpTel and RCN contend that this refusal precludes them from offering an attractive program lineup. As a result, they claim to be disadvantaged in trying to attract subscribers and not to be able to compete effectively against the incumbent cable franchisee. 162. The parties raising these sublicensing concerns have filed program access complaints with the Commission concerning the same facts that form the basis for their assertions. We believe that those complaint proceedings are the appropriate arenas for examining the particular merits of their claims, and decline to interfere with those proceedings by addressing the comments in this Report. 163. Exclusive Arrangements with Non-Cable MVPDs. National Rural Telecommunications Cooperative ("NRTC") argues in its comments that it is unable to obtain the right to distribute programming it deems critical for competitive success because that programming is covered by exclusive arrangements with other non-cable MVPDs in areas unserved by cable. NRTC argues that its failure to receive the desired programming is the result of efforts by the vertically-integrated cable industry to stifle competition from non-cable MVPDs. TCI responds to NRTC's argument by pointing out that the Commission has explicitly rejected this concern, and argues that NRTC is in no position to complain about exclusive arrangements with its competitors since it also is the beneficiary of exclusive arrangements for access to programming. 164. As we discussed in response to NRTC's argument last year, the Commission has denied a petition by NRTC to include exclusive contracts between DBS operators (which are non- cable MVPDs) and vertically-integrated programmers within the per se prohibition of Section 628(c)(2)(C) of the Communications Act and Section 76.1002(c) of the Commission's rules. Instead, the Commission noted that NRTC, or any other aggrieved party, may pursue relief from such exclusive arrangements through other provisions of the program access and program carriage rules. We see no reason to revise our determination based on the record before us this year. b. Additional Competitive Issues Relating to Vertical Integration 165. Channel Occupancy Comments. In the Notice, we sought comments on the channel occupancy rules and their effect on competition. Pay-Per-View Network, Inc. d/b/a Viewer's Choice ("Viewer's Choice") states that the channel occupancy rules are unwarranted and are an artificial restraint that may deprive consumers of programming they prefer. Viewer's Choice claims that, while it is difficult to quantify the precise impact of the channel occupancy rules, these restrictions have limited the ability of affiliated cable systems to offer as many of its pay-per-view services as they might otherwise choose to do in response to consumer demand. It asserts that this limit also affects its ability to maximize its subscriber base and adversely affects its ability to obtain quality programming. Viewer's Choice concludes that the channel occupancy rules do not strike the intended balance between the risks of vertical integration and the benefits of the development of diverse programming. 166. We note that an appeal to the United States Court of Appeals for the District of Columbia Circuit by Bell Atlantic and Time Warner of the Commission's 1995 reconsideration decision of its channel occupancy rules is being held in abeyance by the court pending Commission resolution of certain reconsideration petition issues applicable to the channel occupancy rules. In light of this procedural status, it would be inappropriate to comment on the merits of these comments in this Report. 167. Leased Access. A further attempt to address concerns relating to media diversity is found in the statutory leased access requirements of cable operators. ValueVision International ("ValueVision"), references the Commission's tentative conclusion that the 1993 rules implementing the leased access provisions have failed to promote diverse sources of programming, and then asserts that it has "actually lost access to hundreds of thousands of cable subscribers under the implicit fee formula for leased access . . . ." Video Information Providers for Non-discriminatory Access ("VIPNA") recently conducted a survey of 149 cable systems in the top 100 markets and found that only eight percent of cable operators indicated that they were currently leasing capacity. Others have provided information suggesting that a market for leasing channel capacity does in fact exist, particularly for the provision of part-time programming. For example, in the leased access proceeding Cox Cable submitted information relating to such leasing on 13 of its systems. However, systematic information on the use of leased access channels was not available to us in the course of this proceeding and does not appear to be otherwise available. 168. In March of this year, the Commission stated its belief that the highest implicit fee formula is likely to overcompensate cable operators, and does not sufficiently promote the goals underlying the leased access provisions of the Communications Act, and proposed an alternative rate formula. In the Leased Access Further Notice, the Commission also considered a number of other issues relating to leased access: a possible transition period, the rate for part-time programming, tier and channel placement, and preferential treatment for nonprofit programmers. In general, leased access programmers support the Commission's proposed rate formula in opposition to cable operators and non-leased access programmers. For example, ValueVision supports the reforms proposed in the Leased Access Further Notice as a means to promote the carriage of leased access programming and seeks prompt action in that proceeding. However, independent non-leased access programmers such as Lifetime Television and Viacom claim that the pending proposals to provide a "regulatory boost for leased access programming only result in a further squeeze on channel capacity" and make it more difficult for independent programmers to gain cable carriage. As noted in the Leased Access Further Notice, the challenge before the Commission in completing the rulemaking is to promote leased access without adversely impacting the operation, financial condition, or market development of cable systems. 169. 1996 Telecommunications Act. In the Second OVS Report and Order, the Commission concluded that, pursuant to Section 653(c)(1)(a), the program access restrictions should apply to the conduct of open video system operators in the same manner as they currently apply to cable operators and common carriers or their affiliates that provide video programming directly to subscribers. The Commission concluded that it was appropriate to apply Section 628 to open video system operators by creating parallel provisions for cable operators and open video system operators. The Commission also determined that, in order to effectuate the purposes of the program access statute in the open video system context, open video system programming providers should be subject to the program access provisions. Specifically, we concluded that we would extend our program access rules to prohibit cable-affiliated satellite programmers and cable-affiliated open video system programming providers from entering into exclusive programming agreements, unless the Commission first determines that the exclusive arrangement is in the public interest under the five public interest factors listed in Section 628(c)(4). Finally, we found that open video system programming providers that provide more than one channel of programming clearly fit within the definition of an MVPD and are therefore entitled to the benefits of the program access provisions. C. Technical Advances 170. In the 1995 Report, the Commission noted that in anticipation of emerging competition in markets for the delivery of video services, many MVPDs were planning to enhance standard services and expand offerings to include new services, many of which require increased bandwidth and two-way network capabilities. We discussed the two primary strategies MVPDs were employing to increase capacity: upgrading wired network architecture and deploying digital compression. In this section, we update the status of MVPD efforts to develop and deploy new architectures and technologies to accomplish their competitive goals, and report on recent developments in subscriber interface products such as set-top boxes and modems. 1. Upgrading Wired Architectures 171. Deployment of fiber optic cable remains one of the key components of network upgrades for both cable companies and LECs. During the past year, the cable industry's deployment of fiber optic cable in its networks grew by over 18%, for a total of 81,323 route miles. During 1995, LEC deployment of fiber optic cable in their networks increased by 12%, or 22,871 sheath miles, to a total of 218,737 sheath miles of fiber optic cable in their networks. 172. Hybrid Fiber Coaxial Cable. As reported in the 1995 Report, both cable operators and LECs are deploying hybrid fiber coaxial cable ("HFC") architectures to upgrade their networks. Industry analysts report that HFC network architecture currently exists in approximately 35 percent of all cable systems, and that over one-third of all cable subscribers are served by systems employing HFC architecture. 173. Switched Digital Video. The other principal architecture primarily supported by LECs to upgrade video delivery capability in their networks is Switched Digital Video ("SDV"). Last year we noted that HFC advocates emphasized the lower cost of the HFC solution relative to installing fiber-to-the curb in an SDV architecture. We note here that at least one analyst asserts that while HFC is more cost effective when service penetration (percent of customers who actually buy the new video service) is low, once penetration reaches 40-60% SDV is the more cost-effective architecture. 174. HFC and SDV architectures each have their separate proponents. Currently GTE, Ameritech, Pacific Bell, BellSouth, Southern New England Telecommunications and U S West appear to favor deployment of HFC based architecture, while Bell Atlantic, NYNEX and SBC Communications appear to prefer SDV. 175. Fiber Optic Rings. MSOs are increasingly deploying regional hubs for interconnection of headends using high capacity fiber optic rings. According to NCTA, sharing main switching facilities potentially reduces equipment costs by as much as $7 million per switch. Proponents of the regional hub concept claim that it not only shares with other MSOs the economic costs and benefits but also speeds the deployment of advanced services such as telephony and interactive two-way services by allowing cable companies to interconnect with other telecommunications networks. 2. Digital Compression 176. As noted in the 1995 Report, digital compression, which radically reduces storage and transmission costs, is the other key strategy for increasing communications capacity. Last year we reported that various compression techniques had ratios as high as 10:1. This year, ratios as high as 24:1 have been tested. 177. DBS and MMDS. In the past year, DBS providers have continued to increase their use of digital technologies while MMDS operators were authorized to use digital transmission on ITFS, MDS and MMDS frequencies. 178. Digital Programming. By the end of this year, digital programming will be available from many major program suppliers. HBO reports that it has begun offering all of its HBO and Cinemax feeds in digital format. 179. In October, TCI launched an initial digital video rollout in Hartford, Connecticut, delivering 40 pay-per-view, 25 premium and 18 special interest basic channels. Other digital video sources that will reportedly be available by year end include: HBO/Cinemax - six channels (per time zone); Showtime/The Movie Channel -- five channels (per time zone); Sundance Channel and Flix -- one channel each; Viewer's Choice -- 11 channels. Additionally, in October, three cable programming services: Discovery Communications (TCI is a major investor), Arts & Entertainment and ESPN, launched new, digital only cable services. 3. Subscriber Interface 180. Set-Top Boxes. Set-top boxes or digital television receivers are necessary for customers to receive digital programming. The boxes on top of customers' TV sets will enable cable companies to offer as many as 300 channels and interactive digital television services including Internet access, video on demand, pay-per-view TV broadcasting, home shopping and electronic commerce, over the same cables by unscrambling information-packed digitized signals. While widespread deployment of digital set-top boxes has not yet occurred with the exception of DBS set- top boxes, various other entities are developing and deploying set-top boxes in limited areas. While the cost of digital set-top boxes has been a significant factor in delaying the implementation of digital technology, silicon-chip producers are predicting that advances in technology will result in decreased prices for mass produced digital set-top boxes. 181. On October 3, 1996, Cable Television Laboratories Inc. announced, along with representatives of the two major suppliers of digital video equipment, General Instruments and Scientific-Atlanta ("SA"), a set of de facto private sector standards (including encryption security) for digital cable equipment, which will allow set-top terminals and data modems built by different manufacturers to work together (interoperate) on the same cable system. 182. Universal Set-Top Box. Universal or "unity" boxes are envisioned as being capable of handling wireless cable, asymmetrical digital subscriber line (ADSL), switched digital video, fiber-coaxial and DBS services thereby promoting the universal compatibility and operability of digital cable and satellite TV systems. While there has been significant investment in digital set-top box technology during the past year, the production of a digital set-top package that is universally compatible, consumer affordable and provides adequate signal security has so far proven elusive. 183. There currently is disagreement between video retailers and DTH satellite providers regarding the protection of signal security in universal set-top boxes. The Satellite Broadcating and Communications Association of America ("SBCA") argues that if all security circuitry is hardwired into set-top boxes mass produced by third party manufacturers, the manufacturers will only have a vested interest in selling the boxes, not in maintaining the security of the encoded signal. To the contrary, Circuit City, a major retailer of video products, asserts that instead of hardwiring all security circuitry into universal set-top boxes, signal security can be maintained by using a common security interface that would allow all security circuitry to be placed on an item such as a card that could be inserted in the universal set-top box by the subscriber. 184. Asynchronous Digital Subscriber Line. Asynchronous digital subscriber line ("ADSL") is seen by some as a rival to ISDN and cable modems and is being tested by telephone companies for the delivery of information in video and multimedia formats. Currently, however, no LEC or cable system has begun commercial ADSL operations. In the past year, Ameritech, Pacific Bell, U S West Communications, Bell Atlantic Corp., BellSouth Corp. and GTE Corp. all announced Internet access trials using ADSL technology. V. ISSUES A. Legal and Regulatory Obstacles 1. Local and State Laws and Regulations 185. In the 1995 Report, the Commission noted that some local laws and regulations may create impediments to entry and competition in markets for the delivery of video programming. We cited local franchise regulations and zoning restrictions on video receiving equipment as examples of such impediments. The Commission voiced its continued support for clarification of Section 621(a) of the Communications Act, which prohibits the unreasonable denial of a competitive franchise. Specifically, we recommended that Congress clarify that Section 621(a) applies to all exclusive franchises, regardless of when they were adopted. Congress has not acted on this recommendation. The Commission also noted that local zoning regulations may inhibit competition in the video programming delivery market by preventing direct-to-home distributors' customers from installing receiving dishes. 186. In Section 207 of the 1996 Act, Congress required the Commission to promulgate rules prohibiting restrictions on viewers' ability to receive video programming from over-the-air broadcasts, MMDS services, or DBS services, and the Commission modified its rules to implement Section 207. In response to the Notice, commenters generally voiced concerns that local restrictions on receiving equipment have unreasonably restrained competition in markets for the delivery of video programming and expressed agreement with the responses by Congress and the Commission. In addition, NRTC urges the Commission to extend its preemption policy to protect renters and other viewers who do not own the property on which DBS equipment would be placed. NRTC also urges the Commission to replace its rebuttable presumption policy with a per se preemption standard for both government and non-government restrictions. 187. Commenters argue that other local and state laws and regulations impede entry into markets for the delivery of video programming. BellSouth generally identifies local franchising obstacles or delays as a substantial obstacle to successful entry. SBC notes that Texas imposes more requirements on LECs wishing to offer video service than the 1996 Act does. For example, Texas requires these LECs to offer video service through a separate subsidiary. In addition, LECs offering equipment or services to their video programming subsidiary must provide the same equipment and services to other video programming providers. SBC argues that these provisions of Texas law may deter entry by LECs and reduce competition in video delivery markets. 2. Federal Laws and Regulations 188. In the 1995 Report, the Commission cited its efforts and those of the courts to eliminate or reduce legal and regulatory impediments to entry into video programming delivery markets. Earlier in this Report, we reported on implementation items that may further reduce these impediments. In response to the Notice, a number of parties suggest additional changes to further promote competition in markets for the delivery of video programming. a. Cable Home Wiring 189. Several commenters argue that the Commission's cable home wiring rules continue to impede entry and competition. According to RCN, the Commission's rules establish a demarcation point in MDU buildings that is often inaccessible to competing video programming providers because it is imbedded inside the building's walls. RCN requests that the Commission change its rules to make the demarcation point accessible to all video programming providers. WCAI and Ameritech New Media agree with RCN's suggestion, arguing that entrants should have access to wiring dedicated to individual dwellings inside MDUs. GTE argues that the current rules concerning inside wiring in MDUs encourages incumbent cable system operators to use loop- through wiring, in which a single wire is used to serve multiple subscribers. The Commission's home wiring rules do not apply to loop-through wiring. 190. NCTA voices its opposition to proposals to allow rival video programming distributors to use a cable operator's inside wiring in MDU buildings. In general, NCTA argues that by leading to a single wire rather than multiple wires, these proposals will impede rather than promote competition. In particular, NCTA argues that moving the demarcation point will deter cable investment by increasing the risk that future upgrades will have to be given to rivals. 191. The comments addressing issues related to cable home wiring raise significant issues concerning cable operators' ability, under the Commission's current home wiring rules, to impede or prevent the entry of rival MVPDs by denying them access to cable wiring in MDU buildings. The Commission is currently addressing these issues in another proceeding, and we will not prejudice that proceeding by considering the issue in this proceeding. b. Copyright Act 192. In response to the Notice, commenters argue that federal laws and regulations prevent non-cable video programming providers from offering the range of programming choices that cable offers. In particular, although the Library of Congress, not the Commission, has jursidiction over the Copyright Act, several commenters argued that application of that law inhibits competition in markets for the delivery of video programming. In particular, NRTC argues that the Copyright Act creates a barrier to competition by preventing DBS services from offering network broadcast programming to most of their subscribers. NRTC suggests that the Commission petition Congress to eliminate this restriction. 193. The Broadcast Network Affiliates argue in opposition that the Satellite Home Viewer Act restricts DBS access to network programming in order to protect both the relationship between networks and their affiliated local stations and the copyright that the affiliates have purchased in free market transactions. The Broadcast Network Affiliates further argue that DBS providers are free to negotiate with the networks for a secondary retransmission license, but are not granted a compulsory license. 194. USTA raises a different argument about copyright law, expressing concern about inconsistencies between the Commission and the United States Copyright Office regarding the treatment of open video systems. USTA asserts that, while the Commission has determined that open video systems will be treated like cable operators for the purposes of applying the cable compulsory license of broadcast programming, the Copyright Office has asked for comments on this issue. USTA argues that exclusion of open video systems from the cable compulsory license will raise their costs and reduce competition with incumbent cable operators. As we noted earlier in this Report, the Copyright Office has been asked to issue a declaratory ruling on this issue. c. Pole Attachments 195. In the 1994 Report, the Commission suggested that the need of many cable operators to enter into "pole attachment agreements" in order to lease space on utility poles had reemerged as a potential impediment to competition in video programming delivery markets. The 1996 Act created a distinction between pole attachments used by cable systems solely to provide cable service and pole attachments used by cable systems or by telecommunications carriers to provide any telecommunications service. Section 703 of the 1996 Act amended Section 224 of the Communications Act to, among other things, make the existing just and reasonable pole attachment rate formulas temporarily applicable to telecommunications carriers and cable operators providing telecommunications services. Congress directed the Commission to issue new pole attachment formulas within two years of the effective date of the 1996 Act. Section 703 also mandated access to utility poles, ducts, conduits, and rights-of-way, except in certain specified situations. The Commission is currently considering issues related to pole attachments in separate proceedings. 3. Incumbent Behavior 196. In the 1995 Report, the Commission noted that strategic behavior by incumbent firms can create impediments to entry and competition by rival service providers. Strategic behavior may be designed to raise rivals' costs or decrease their access to customers. Because of the substantial sunk costs that entrants often must incur, strategic behavior by incumbents can deter entry by creating a credible threat that entry would be unprofitable. In that case, the entrants would be unable to recover their sunk costs because their systems could not be shifted to some other use. 197. In response to the Notice, commenters argue that cable operators are filing nuisance lawsuits, maintaining perpetual contracts, and offering selective discounts to disadvantage their rivals. Ameritech suggests that incumbents are engaging in strategic behavior to raise rivals' costs by nuisance lawsuits over franchise awards. In particular, Ameritech reports that incumbent cable operators have filed lawsuits seeking to block, delay, or invalidate competing cable franchises awarded to Ameritech. In another instance, it has been reported that the New England Cable Telecommunications Association filed suit in the Connecticut Supreme Court to appeal a decision by the Connecticut Department of Public Utility Control to grant a statewide cable television franchise to Southern New England Telephone. 198. Several commenters assert that cable operators have "perpetual" exclusive contracts with MDU owners that foreclose competition from new video distributors. OpTel claims that such contracts are "perpetual" because they are tied to the term of the MSO's franchise and any renewal or extensions thereof. In other words, argues OpTel, because franchise renewals and extensions for MSOs are all but automatic, the terms of these agreements are, for all practical purposes, "perpetual." Accordingly, OpTel urges the FCC to create a "fresh look" procedure which would permit MDU owners to "opt out" of "perpetual" MDU contracts for other competitive alternatives. 199. The NCTA counters that OpTel is in error when it suggests that exclusive cable agreements with MDUs are the result of a "monopoly" while agreements between non-cable MVPDs and MDUs are not. NCTA asserts that there is no evidence to suggest that the process by which a franchise cable operator negotiates with MDUs differs from negotiations between, for example, a SMATV operator and an MDU, nor does labelling such contracts as "perpetual" make them less valid. Furthermore, the NCTA notes that since there were SMATV operators in existence when many of these contracts were signed in the 1980s, SMATV operators could have competed for them then. In addition, TCI argues that "perpetual MDU contracts" do not exist. Instead, TCI states, cable agreements to serve MDU buildings are often negotiated for a term equal to the life of the existing franchise term. At the end of the existing franchise term, TCI asserts, the MDU manager is free to renew, renegotiate, or terminate the agreement. 200. Commenters also disagree as to whether incumbents are engaging in strategic behavior to decrease the returns to new entrants by selectively offering lower prices to those subscribers who have switched, or are likely to switch, to the entrants' video services. RCN asserts that incumbent cable operators offer discounts selectively to individual MDU residents who subscribe to, or are negotiating with, non-cable video programming providers. WCAI and OpTel argue that the "bulk discount" exception to the Commission's uniform rate structure rules should apply only where the discount is deducted from a bulk payment by the MDU building owner on behalf of the individual residents. NCTA states in opposition to WCAI and OpTel that the bulk discount exception is the subject of a separate proceeding, where NCTA has presented its arguments. B. Competitive Responses to Overbuilding 201. Entry into a video programming delivery market by a new distributor has elicited several different types of responses from the incumbent cable operator. An incumbent may respond to such a new rival by: (1) offering subscribers improvements in programming and other services; (2) reducing its prices by offering selective price discounts to some of its current subscribers, general discounts to all of its subscribers, or discounting a portion of its services (e.g., an upper tier, the Disney channel, etc.); (3) engaging in marketing efforts (e.g., advertising and telemarketing) to provide current and potential customers with information about its prices and services; and (4) seeking removal of regulations that limit its ability to respond to new entrants. 202. Although entry by a new video programming distributor using wireline delivery to subscribers may involve some duplication of assets (i.e., headend, distribution network, etc.) the gains to consumers in the form of lower prices and better services for customers of both the new entrant and the incumbent may outweigh the costs of such duplication. A recent study estimated that a franchise served by two cable systems (an overbuild area), on average, will have a 14% higher cost (including the cost of capital) than a single cable system serving the same franchise area. Nevertheless, the competition between the operators may result in lower prices and better services. 203. Preliminary evidence on how incumbent cable operators have responded to entry in a few markets is provided in the case studies below. We note that much of the evidence described below was obtained through press reports and thus must be viewed with caution. However, these case studies do provide some impression of the nature of competition in video programming delivery markets and how incumbent cable operators may respond to additional entry as it occurs in more markets in the future. 1. Case Studies a. Dover Township, New Jersey 204. Adelphia is the incumbent cable operator in Dover Township, New Jersey with a subscriber base between 26,000 and 27,000 customers. In January 1996, FutureVision, a division of Digital Broadband Applications Corp, leased the current LEC facilities of Bell Atlantic ("BA") and began to provide 62 channels of programming services in the Township. As of mid-October 1996, FutureVision (now acquired by BA) had signed up 2,600 customers from a marketing base of 3,125 homes. In addition, BA plans to expand its LEC facility by adding 323 digital channels to serve 16,000 homes by the end of 1996 and 28,000 homes by the end of 1997. Seven competing video programming providers have already reserved a total of 304 of the planned 323 digital channel expansion. 205. Since January 1996, both the incumbent cable operator and FutureVision have engaged in price competition resulting in a significant drop in their monthly services rates. Before FutureVision's entry, Adelphia charged $25.28 per month for its 66 channel basic service package. FutureVisions's initial monthly rate for its 62 channel basic service package was $19.95. After FutureVision's entry, Adelphia reduced its basic service rate by 25% from $25.28 to $18.95 and planned to offer 11 more channels to the subscribers in the area served by FutureVision. FutureVision in turn reduced its monthly rate to $14.95, a 21% reduction below the reduced price charged by Adelphia. 206. In addition to a reduction in monthly rates, Adelphia has announced that it will offer several expanded services, such as high-speed Internet access, local telephone service, a new analog set-top box with interactive features and future capability to offer up to 200 digital TV channels. Preliminary evidence on Adelphia's cable prices and services reported above suggests that Adelphia is offering selective price discounts to its current customers. 207. Adelphia has argued, in a separate proceeding, that its ability to respond to FutureVision's entry has been hampered by state and federal regulations. For example, Adelphia argues that the 30-day notice requirement for price changes imposed by the New Jersey Board of Public Utilities and delays resulting from the Commission's regulations governing programming changes disadvantage Adelphia in its ability to compete with FutureVision. In addition, Adelphia argues that the general consumer notice provisions requiring advance notice to its customers increase its costs and limit its ability to respond to changes initiated by FutureVision. 208. Adelphia petitioned for decertification and a finding of LEC effective competition under Section 623(1)(1)(D) of the 1996 Act. Under this provision, the presence of a video programming delivery provider (FutureVision) offering comparable cable service using the facility of a LEC (Bell Atlantic) subjects the incumbent cable operator (Adelphia) to effective competition and thus justifies deregulated rates. In October 1996, the Commission issued an order finding effective competition in Dover Township and deregulated cable service prices for Adelphia. In the Order, the Commission noted that competition in the Township had reduced monthly basic service rates. Also, the Commission found that cable subscribers are well aware of the availability of competitive video distribution services. Although BA's ability to serve some parts of the franchise area remains somewhat restricted, we concluded that competitive service was being offered in a manner sufficient to comply with the 1996 Act. b. Columbus, Ohio 209. Before June 1996, Coaxial Communications ("Coaxial") and Time Warner cable companies served the east and west sides of Columbus, Ohio, respectively. In June 1996, Ameritech started overbuilding in the Columbus area and launched a 78 channel cable service in direct competition with Time Warner and Coaxial. Ameritech first started to construct in Coaxial's service territory. By the end of 1998, 600,000 Columbus residents are expected to have access to Ameritech's cable services. Ameritech is currently offering 60 channel expanded basic service for $27.95 a month. This monthly charge is $1.95 less than Time Warner's charge for a 51 channel basic service and $2.00 more than Coaxial's rate for a 54 channel extended basic service. For the 16,000 subscribers in areas where Time Warner has upgraded its system, Time Warner reduced its basic service price to $26.95. 210. After Ameritech's entry, both Time Warner and Coaxial responded by adding the Disney channel to their expanded basic package at no additional charge. Ameritech includes the Disney channel in its expanded basic channel line up. Unlike the case in Dover, however, where subscribers were offered price reductions by both the incumbent and entrant, in Columbus, neither Ameritech nor the incumbent cable companies have engaged in sharp price discounting. Instead, they are engaged in an intense marketing effort to limit each other's penetration in the market. For example, to create demand for its service, Ameritech is using targeted telemarketing and direct mail to encourage Coaxial's subscribers to switch to Ameritech. Coaxial has responded by spending $250,000 in telemarketing and direct mail to Ameritech's subscribers pointing out Coaxial's price advantages. It has also initiated an incentive plan or ". . . bounty system that gives Coaxial installers and technicians a reward for every derailed [cancellation of] disconnect service call." Coaxial estimates that Ameritech has taken between 150 and 200 subscribers from its subscriber base of 98,000. 211. Both Time Warner and Coaxial, citing entry by Ameritech in their service areas, have filed for relief from cable rate regulations under the new provisions of the 1996 Act. In their petitions, Time Warner and Coaxial argue that they face effective competition in Columbus because: (1) Ameritech is a LEC; (2) Ameritech does not have any technical and regulatory impediments to entry into the Columbus franchise area and potential subscribers are aware of it; and (3) Ameritech offers video programming that is comparable to the incumbent's programming line up. On December 9, 1996, the Commission issued an order finding effective competition in the area served by Time Warner and deregulated cable services prices for Time Warner. 212. In this case, the competitive responses in the Columbus area were twofold: (1) the incumbents added a premium program to the extended channel line up; and (2) both incumbents and the entrant engaged in intensive marketing efforts. This type of non- price response is not surprising since overbuilding requires large start-up expenses which limit the entrant's ability to lower its rates. One of the incumbents, Coaxial, actually has a relative price advantage over Ameritech. c. Chamblee, Georgia 213. Scripps Howard Cable Company ("SH") has been providing cable services to the City of Chamblee, Georgia since 1984. Its system passes 2,887 homes in Chamblee and 44,491 homes in neighboring Dekalb County. In April 1996, BellSouth was granted a cable franchise by the City of Chamblee, and it began offering cable services utilizing the facilities it had constructed for the purpose of providing VDT service. BellSouth's facility passes approximately 700 homes that are in SH's service area. 214. The announced capacity of BellSouth's Chamblee cable system is 80 channels. BellSouth's channel lineup, the "Americast Programming Package," includes many popular cable channels, such as CNN, ESPN, the Disney Channel and the History Channel. BellSouth plans to include two-way video technology, video on demand, and high speed personal computing services as a part of its total package. It also plans to expand its service area to eventually encompass about 8,000 homes in Chamblee currently served by SH. 215. Information provided by BellSouth and SH indicates that both are competing on the basis of new service and limited term price discounts. For example, BellSouth and SH have undertaken major marketing initiatives to announce free new services and price discounts. After BellSouth's entry, SH announced that it would make substantial upgrades to its existing cable system and provide additional services at no extra charge to the cable subscribers in BellSouth's service area. It also offered a $3 per month discount to subscribers who signed a 12 month service commitment and added popular channels similar to those offered by BellSouth. In addition, SH promised to offer free cable service to its customers for June 1996 and reduce its rates to half price for the month of July. 216. BellSouth, in an apparent attempt to protect its subscriber base, offered its current cable subscribers several "free gifts" including Olympic Sponsorship Pin, free Caller ID telephone service, one free month of "Premiercast" basic cable service, and one free month of its advantage cable premium package to subscribers currently taking this package. 217. As a result of BellSouth's entry into the Chamblee market, SH has petitioned for relief from rate regulation, citing the new LEC effective competition provisions of the 1996 Act. In its petition, SH argues that since BellSouth, a LEC, is offering comparable cable programming, its Chamblee system is subject to "effective competition." d. Clearwater, Florida 218. Time Warner is the incumbent cable operator in Clearwater, Florida with 700,000 subscribers. Time Warner offers a (limited) basic service, which includes local broadcast stations, for $6.50. Its standard cable service, which includes the basic service plus 24 additional channels (including Disney, MTV, ESPN, TNT and USA) is offered at $21.95. In June 1996, GTE was granted a competing cable franchise in the City of Clearwater. The GTE network already passes 50,000 homes in the Clearwater-St. Petersburg area. GTE plans to expand service to 150,000 homes by the end of 1996. The monthly charge for GTE's 23 channel basic service tier is $10.95. A 63 channel cable programming service ("CPS") tier, (including Disney, MTV and Turner Classic Movie channel) is available at $25.95 per month. 219. According to GTE, Time Warner is offering additional programming services by adding premium programming to its most popular cable line up only to those households capable of receiving GTE's cable service. For example, GTE's most popular cable programming lineup included a number of premium channels like Disney, Turner Classic Movies and Cartoon Network. After GTE's entry, Time Warner announced that it would provide the Disney Channel for no additional charge to its basic subscribers in GTE's service areas. Time Warner has denied that it is reacting to the entry by GTE and claims that it will provide the same expanded services to its entire service area soon. In January 1997, however, Time Warner's west central Florida division rates will rise 10% everywhere except in Clearwater, in an attempt to keep and win back customers from GTE. 220. As a result of GTE's entry into the Clearwater market, Time Warner petitioned for relief from rate regulation in that market, citing the LEC effective competition provision of the 1996 Act. On December 12, 1996, the Commission released an order finding effective competition in Clearwater market and deregulated cable service prices for Adelphia. e. Omaha, Nebraska 221. In September 1995, U S West began a market trial of its VDT system in Omaha, Nebraska. The system currently passes approximately 50,000 homes and serves parts of the franchise areas of three incumbent cable operators, Cox, Time Warner, and TCI. TCI is the smallest incumbent with about 4,500 subscribers before the entry by U S West. U S West's subscriber base is estimated at 15,000, most of whom are former cable subscribers. According to industry observers, U S West's success in gaining subscribers in Omaha has been attributed to: good customer service; a new technology that uses cable-ready TV sets to provide cable services without the use of set-top boxes; and new services including fast cable modem access to the Internet. 222. In response to U S West's entry, some incumbent cable operators are offering expanded video programming, lower prices, and improved services. Both Cox and Time Warner have responded to U S West's entry. Douglas County Cablevision, owned by Time Warner, reduced its monthly rates to match the $19.95 rate charged by U S West for its most popular package. Cox has responded by offering a free "broadcast basic" service that includes C-SPAN and The Learning Channel, free cable installation, two months of free basic and expanded basic services, and two months of free HBO and Cinemax channels. f. Richardson, Texas 223. Southwestern Bell Video Services, Inc. ("SBVS"), a subsidiary of Southwestern Bell, has undertaken a video marketing trial in Richardson, Texas. The purpose of the trial is to determine the profitability of entering the market currently served by TCI, the incumbent cable company. 224. Information provided by SBVS indicates that TCI is responding to its entry by providing improved quality of service and special promotional incentives in selective parts of the service area. For example, Southwestern Bell points out that prior to the commencement of SBVS's market trial, TCI stepped up its promotional efforts. Specifically, SBVS alleges that TCI went door-to-door in the trial area, offering customers free pay-per-view movie coupons and video cassette tapes. g. Riverside County, California 225. In late 1991, Cross Country, an MMDS provider, entered the market and began providing service to part of Riverside County. Comcast is one of the many cable operators serving this area. It currently passes 210,000 homes. 226. Cross Country initially offered the lowest price service in the area. Although the service included a smaller number of channels than Comcast, 20,000 of Comcast's 93,000 subscribers switched to Cross Country within two years. The loss of subscribers by Comcast was attributed to two factors: customer dissatisfaction and Cross Country's $12.95 price for 21 channels of service compared to Comcast's higher price of $22.50 for 34 channels. Beginning in mid-1993, Comcast began to respond by improving its customer services and system reliability. The incumbent has also engaged in targeted telemarketing, advertising "blitzes" and a special door-to-door sales campaign to bring back lost subscribers. By the end of 1995, Comcast's subscribership level was back up to the level from prior to Cross Counrty's entry into the market. 227. Recently, Comcast started to offer discounts for a limited time to all former Comcast and current Cross Country subscribers. Under this "spring initiative," basic, expanded basic, Cinemax and three channels of HBO were offered at a price of $29.95 a month. This is a $10 per month discount from the regular price of $39.95. As a result, Comcast reported a gain of 1000 new subscribers. 2. Preliminary Findings 228. As competition has been emerging in the few markets described above, our observations appear to confirm initially that competition is developing along the lines predicted in, among other places, prior reports. In 1994, we wrote that we expected competition in markets for the delivery of video programming to be strongly affected by the fact that the provision of many such services requires substantial sunk cost investment. Last year we discussed the fact that the availability of close substitutes in the form of MVPDs offering services that share similar service attributes may be a significant factor in increased competition and improved market performance in markets for the delivery of multichannel video programming. As we explain above, this is because firms naturally seek to differentiate their products or services to minimize competition for their services. As competitors emerge, however, this becomes increasingly difficult, and firms are forced to compete with each other for customers. One recent example of this is the developing competition among DBS systems, which has led to strengthened competition between DBS systems and cable systems. 229. The actual case studies detailed above address competition between incumbent cable systems and MVPD entrants (in addition to the DBS operators that are operating in most local markets), many of whom are using similar wired delivery systems. In these cases, incumbents are facing competition from other MVPDs in addition to competition from DBS operators, and the evidence is largely consistent with our prior predictions concerning the likely development of competition in these markets. In the case studies, incumbent cable operators facing competition from MVPDs using wired delivery or MMDS technology in addition to DBS competitors appear to be responding in two principal ways: (1) by offering better customer services, new services, and new products; and (2) by offering lower prices or some form of price discounting. Similarly, MVPD entrants appear to be focusing on these two strategies in their efforts to win customers. 230. In the markets studied, incumbents generally increased their service offerings in an attempt to protect or maintain customer bases in the face of entry. Operators added new channels in Columbus, Chamblee, Clearwater, and Omaha. Although the numbers of channels offered by incumbents and entrants are obviously largely dependent on their respective system capacities (bandwidth), it appears that these incumbents may not have been fully utilizing their capacities prior to competitive entry. The experiences in Columbus and Chamblee also suggest that entrants may tend to enter the market with a larger channel line-up than the incumbent, perhaps as a result of newer technology or the need to offer a superior service in order to win customers. 231. There is also some evidence that incumbent cable operators have lowered prices to a limited extent when competing with LEC and other wired cable overbuilds. Unlike many other markets subject to emerging competition, in which the incumbents and competitors have responded by engaging in "price wars," however, it appears that both the cable operators and their LEC competitors initially have limited their use of price discounts to win new subscribers or to keep current subscribers, except in Dover and Omaha. Incumbent cable systems in Chamblee, Clearwater, Richardson, and Riverside appear to be limiting price reductions by discounting only for a short period of time, to only those customers who can switch to a competing service, or only if additional services are taken. 232. The incumbent operators in Dover, Chamblee, Columbus, and Clearwater have already petitioned for relief from current cable rate regulations on the ground that they face effective competition. In Dover and Columbus, the incumbents' petitions have been granted. We expect incumbents and entrants to compete differently where these petitions are granted by the Commission. Since the current rate regulations under certain circumstances prohibit cable operators from providing selective rate discounting, a deregulated cable operator may be more inclined to make such changes to maintain its subscriber base in the market. 233. We will continue to monitor the extent of competition as incumbent operators compete with new cable and operators and other MVPDs to gain subscribership. We believe that implementation of the 1996 Act together with technological improvements (e.g., digital technology and enlarged channel capacity) could make new entrants more effective competitors. Such competition in the marketplace is just emerging, however, making it impossible for us to predict the extent to which competition will develop over time and constrain cable systems' exercise of market power. VI. ADMINISTRATIVE MATTERS 234. This 1996 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). 235. It is ORDERED that the Secretary shall send copies of this 1996 Report to the appropriate committees and subcommittees of the United States House of Representatives and the United States Senate. 236. It is FURTHER ORDERED that the proceeding in CS Docket No. 96- 133 IS TERMINATED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX A List of Commenters Comments Ameritech New Media, Inc. Bartholdi Cable Company, Inc. Bell Atlantic BellSouth Corporation and BellSouth Telecommunications, Inc. CellularVision USA, Inc. DIRECTV, Inc. General Instrument Corporation Home Box Office National Cable Television Association, Inc. National Rural Telecommunications Cooperative OpTel, Inc. Pay-Per-View Network, Inc. d/b/a Viewer's Choice Primestar Partners L.P. Residential Communications Network, Inc. Satellite Business and Communications Association of America SBC Communications, Inc. TelQuest Ventures, L.L.C. The WB Television Network Time Warner Cable ValueVision International, Inc. Wireless Cable Association International, Inc. Reply Comments Ameritech New Media, Inc. Association of Maximum Service Television, Inc. Bartholdi Cable Company, Inc. Circuit City Stores, Inc. ESPN, Inc. GTE Service Corporation Lifetime Television Multi-Channel TV Cable Company, d/b/a Adelphia Cable Communications National Cable Television Association, Inc. National Rural Telecommunications Cooperative NBC Television Affiliates Association, CBS Television Affiliates Association and ABC Television Affiliates Association OpTel, Inc. Primestar Partners L.P. Scripps Howard Cable TV Company Superstar Satellite Entertainment Tele-Communications, Inc. TELE-TV United States Telephone Association U S WEST, Inc. Viacom, Inc. APPENDIX B TABLE 1 Cable Television Industry Growth: 1990 - 1995 (in millions) U.S. Television Households ("TH") Homes Passed ("HP") Basic Cable Subscribers ("Subs") Year Year-End Total Change From Previous Year Year-End Total Change From Previous Year Year-End Total Change From Previous Year National Saturation (HP/TH) TV Households Subscribing (Subs/TH) U.S. Penetration (Subs/HP) 1990 93.1 1.1% 86 3.9% 51.7 4.9% 92.4% 55.5% 60.1% 1991 92.1 (*) -1.1% 88.4 2.8% 53.4 3.3% 96.0% 58.0% 60.4% 1992 93.1 1.1% 89.7 1.5% 55.2 3.4% 96.3% 59.3% 61.5% 1993 94.2 1.2% 90.6 1.0% 57.2 3.6% 96.2% 60.7% 63.1% 1994 95.4 1.3% 91.6 1.1% 59.7 4.4% 96.0% 62.6% 65.2% 1995 95.9 0.5% 92.7 1.2% 62.1 4.0% 96.7% 64.8% 67.0% (*) Revised penetration figure based on 1990 Census Sources: U.S. Television Households - A.C. Nielsen Co. as of January of the following year. Taken from Veronis, Suhler & Associates, Subscribers to Subscription Video Services, The Veronis, Suhler & Associates Communications Industry Forecast, August 1996, at 128. Homes Passed and Basic Cable Subscribers - 1990 to 1994 - Paul Kagan Assoc., Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5; - 1995 - Paul Kagan Assoc., Inc., Pay TV Subscriber History, The Cable TV Financial Databook, July 1995, at 8. TABLE 2 Premium Cable Services: 1990 - 1995 (in millions) Premium Cable Service Subscribers Premium Units Year Year-End Total Change From Previous Year Year-End Total Change From Previous Year 1990 23.9 1.3% 41.5 1.0% 1991 24 0.4% 43.1 3.9% 1992 24.7 2.9% 44.4 3.0% 1993 26.4 6.9% 46.0 3.6% 1994 28.1 6.4% 51.1 11.1% 1995 N/A 54.2 6.1% Sources: Premium Cable Service Subscribers - Paul Kagan Assoc., Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5. Premium Units - Paul Kagan Assoc., Inc., Pay TV Subscriber History, The Cable TV Financial Databook, July 1996, at 8. Premium Units refers to the number of premium services subscribed to by a home, whereas Premium Cable Services Subscribers refers to the total number of homes subscribing to one or more premium services. TABLE 3 Channel Capacity of Cable Systems: 1994 - 1995 1994* 1995* 94-95 Change Channel Capacity Number of Systems Percent of Systems Number of Systems Percent of Systems 54 and over 1,435 14.3% 1,558 15.6% 8.57% 30 to 53 6,376 63.7% 6,376 63.8% 0.00% 20 to 29 1,167 11.7% 1,104 11.0% -5.40% 13 to 19 356 3.6% 353 3.5% -0.84% 6 to 12 653 6.5% 588 5.9% -9.95% 5 or less 17 0.2% 14 0.1% -17.65% Not available 1,212 1,133 Total 11,216 11,126 Systems with capacities of 30 or more channels 7,811 78.08% 7,934 79.40% 1.57% Systems with capacities of fewer than 30 channels Channe 2,193 21.92% 2,059 20.60% -6.11% * Figures are as of October 1, 1994 and October 1, 1995. "Percentage of Systems" calculation excludes "not available" data. Sources: 1994 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Cable Volume No. 63, 1995 Edition, at I-77. 1995 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Services Volume No. 64, 1996 Edition, at I-81. TABLE 4 Channel Capacity for Subscribers: 1994 - 1995 (in millions) 1994* 1995* 94-95 Change Channel Capacity Subscribers Percent of Subscribers Subscribers Percent of Subscribers 54 and over 23.02 41.5% 27.69 47.91% 20.29% 30 to 53 30.75 55.4% 28.56 49.41% -7.12% 20 to 29 1.37 2.5% 1.20 2.08% -12.41% 13 to 19 .11 0.2% .13 0.22% 18.18% 6 to 12 .24 0.04% .22 0.38% -8.33% 5 or less .00 0.0% .00 0.00% 0.00% Not available .87 1.50 Total 56.36 59.29 Systems with capacities of 30 or more channels 53.77 96.9% 56.25 97.32% 4.61% Systems with capacities of fewer than 30 channels 1.72 3.1% 1.55 2.68% -9.88% * Figures are as of October 1, 1994 and October 1, 1995. Sources: 1994 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Cable Volume No. 63, 1995 Edition, at I-77. 1995 - Warren Publishing, Inc., Channel Capacity of Existing Cable Systems, Television & Cable Factbook: Services Volume No. 64, 1996 Edition, at I-81. TABLE 5 Growth By Network Type: 1994 - 1995 1994 1995 94-95 Change Network Type Number of Networks Percent of Networks Number of Networks Percent of Networks In Number of Networks Basic/No-Charge 94 73.44% 102 74.45% 8.51% Premium 20 15.63% 21 15.33% 5.00% Pay Per View 8 6.25% 8 5.84% 0.00% Combination 6 4.69% 6 4.38% 0.00% Total 128 137 7.03% Source: National Cable Television Association, National Cable Video Networks By Type of Service: 1976 - 1995, Cable Television Developments, Spring 1996, at 6. TABLE 6 Cable Industry Revenue and Cash Flow: 1993 - 1995 1993 1994 1995 Year- End Total % Change From Previous Year Year- End Total % Change From Previous Year Year- End Total % Change From Previous Year Average Number of Basic Subscribers (mil.) 56.2 3.5% 58.5 4.1% 60.9 4.1% Revenue Segments (mil.) (mil. Regulated Tiers $15,169 12.9% $15,164 0.0% $16,858 11.1% Pay Tiers $4,625 -7.1% $4,522 -2.2% $5,063 12.0% Advertising $984 15.5% $1,077 9.5% $1,281 18.9% Pay-Per-View $452 11.9% $484 7.1% $813 68.0% Home Shopping $113 25.6% $127 12.4% $144 13.4% Miscellaneous + Installations $1,123 -12.4% $1,412 25.7% $926 -34.4% Total Revenue (mil.) $22,466 6.7% $22,786 1.4% $25,085 10.1% Revenue Per Avg. Sub $399.75 3.2% $389.50 -2.6% $411.90 5.8% Cash Flow (mil.) $10,100 4.1% $9,936 -1.6% $11,238 13.1% Cash Flow per Sub $179.72 0.1% $169.85 -5.5% $184.53 8.6% Cash Flow/Total Revenue 44.9% -2.6% 43.6% -2.9% 44.8% 2.8% Sources: 1993 and 1994 - Paul Kagan Assoc., Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5 and Paul Kagan Assoc., Inc., Estimated Capital Flows In Cable TV, The Cable TV Financial Databook, July 1995, at 92. 1995 - Paul Kagan Assoc., Inc., Paul Kagan's 10-Year Cable TV Industry Projections, The Cable TV Financial Databook, July 1996, at 10-11; Paul Kagan Assoc., Inc., Pay TV Subscriber History, The Cable TV Financial Databook, July 1995, at 8; and Paul Kagan Assoc., Inc., Estimated Capital Flows In Cable TV, The Cable TV Financial Databook, July 1996, at 115. TABLES 7A, 7B, 7C, and 7D Annual Cable Industry Revenue, Cash Flow, and Subscriber Informtion 1992 - 1995 The following pages contain tables detailing the data and the calculations used in the Commission's estimates of the cable industry's annual revenue and cash flow. To calculate the industry-wide estimates of revenue, we first calculate an average revenue per subscriber figure for each year by dividing the total revenue of the companies in the group by the total average subscribers of these companies for that year. Second, multiply this average revenue per subscriber figure by an estimate of the industry's average subscribership for the year. The same methodology was followed to calculate the industry-wide estimates of cash flow. The estimates differ from those released in the 1995 Report, due in part to the deletion this year of subscribers attributable to partially held and foreign subsidiaries and in part to the Commission having been able to collect additional data since last year's report which allows for more accurate estimates. Sources: Unless otherwise noted, the data used in these tables came from the companies' public filings with the Securities and Exchange Commission, their press releases, or discussions with company personnel. Some of the data taken from these sources have been adjusted to take into account acquisitions which occurred during each year. These adjustments are described in the notes for each table. Due to lack of data, adjustments have not been made for all acquisitions. The year-end industry subscriber estimates for 1992 to 1995 were taken from Table 1 of this Appendix General Notes: Unless otherwise noted, all "Year-End Subscribers" numbers are as of December 31 of the year in question. All "Average Subscribers", "Cable Revenue", and "Cable Cash Flow" numbers are for the fiscal year ending December 31 of the year in question. Unless otherwise noted, all data are for the companies' consolidated, domestic cable operations. Some data have been adjusted to remove subscribers, revenue, and cash flow from other sources (e.g. satellite operations.) Each company's "Average Subscribers" figure came from one of the three following sources: a company reported figure, an average of quarterly subscribership information, the mid-point of two year-end subscriber numbers. In each of the tables, the company referred to as "Enstar Partnerships" represents the combined results of ten separate partnerships associated with Falcon Holding Group. The partnerships are: Enstar Income Growth Program Five-A, Enstar Income Growth Program Five-B, Enstar Income Growth Program Six-A, Enstar Income Growth Program Six-B, Enstar Income Program 1984-1, Enstar Income Program II-1, Enstar Income Program II-2, Enstar IV-1, Enstar IV-2, Enstar IV-3. In each of the tables, the company referred to as "Jones Partnerships" represents the combined results of 21 separate partnerships associated with Jones Intercable. The partnerships are: Cable TV Fund 11-A Ltd, Cable TV Fund 11-B Ltd, Cable TV Fund 11-C Ltd, Cable TV Fund 11-D Ltd, Cable TV Fund 12-A Ltd, Cable TV Fund 12-B Ltd, Cable TV Fund 12-C Ltd, Cable TV Fund 12- D Ltd, Cable TV Fund 14-A Ltd, Cable TV Fund 14-B Ltd, Cable TV Fund 15-A Ltd, IDS/Jones Growth Partners 87-A Ltd, IDS/Jones Growth Partners 89-B Ltd, IDS/Jones Growth Partners II LP, Jones Cable Income Fund 1-A Ltd, Jones Cable Income Fund 1-B Ltd, Jones Cable Income Fund 1-C Ltd, Jones Growth Partners LP, Jones Growth Partners II LP, Jones Intercable Investors LP, Jones Spacelink Income Growth Fund 1-A. In the tables for 1994 and 1995, the company referred to as "Northland Partnerships" represents the combined results of 5 separate partnerships associated with Northland Communications Corporation. The partnerships are: Northland Cable Properties Four LTD Partnership, Northland Cable Properties Five LTD Partnership, Northland Cable Properties Six LTD Partnership, Northland Cable Properties Seven LTD Partnership, and Northland Cable Properties Eight LTD Partnership. TABLE 7A 1992 Cable Industry Revenue and Cash Flow Calculations Company Year-End Subscribers Average Subscribers Annual Cable Revenue (mil.) Monthly Cable Revenue Per Subscriber Annual Cable Cash Flow (mil.) Annual Cable Cash Flow Per Subscriber Average Cash Flow Margin TCI Communications, Inc. 9,900,000 9,811,500 $3,871.834 $32.89 $1,772.252 $180.63 45.8% Time Warner 5,554,000 5,463,250 $2,091.000 $31.89 $977.000 $178.83 46.7% Continental Cablevision 2,730,134 2,697,887 $1,113.475 $34.39 $488.330 $181.00 43.9% Comcast 2,583,000 2,528,500 $1,023.493 $33.73 $500.513 $197.95 48.9% Cox Communications 1,722,007 1,699,888 $652.100 $31.97 $275.100 $161.83 42.2% Cablevision Systems 1,262,000 1,317,000 $543.403 $34.38 $262.365 $199.21 48.3% Times Mirror 1,182,581 1,148,791 $423.130 $30.69 $164.984 $143.62 39.0% Viacom 1,116,300 1,101,550 $411.087 $31.10 $190.542 $172.98 46.4% Century Communications 907,000 905,800 $294.814 $27.12 $171.975 $189.86 58.3% Cablevision Industries 904,648 894,912 $359.803 $33.50 $173.790 $194.20 48.3% Adelphia Communications 814,688 803,685 $296.568 $30.75 $169.905 $211.41 57.3% Jones Partnerships 808,679 794,174 $342.103 $35.90 $114.625 $144.33 33.5% Providence Journal 722,000 512,500 $199.680 $32.47 $77.981 $152.16 39.1% Telecable 690,000 675,800 $268.400 $33.10 $116.393 $172.23 43.4% EW Scripps 673,100 659,375 $238.118 $30.09 $101.165 $153.43 42.5% KBLCOM 577,000 568,000 $235.258 $34.52 $95.016 $167.28 40.4% Lenfest Communications 477,130 458,588 $166.081 $30.18 $83.449 $181.97 50.2% Washington Post Co. 463,000 457,090 $174.098 $31.74 $77.535 $169.63 44.5% TCA Cable TV, Inc. 442,356 434,860 $141.887 $27.19 $70.399 $161.89 49.6% Multimedia Inc (Gannett) 410,000 387,500 $144.383 $31.05 $73.079 $188.59 50.6% Falcon Holding Group 332,207 329,664 $128.336 $32.44 $74.072 $224.69 57.7% Jones Intercable, Inc. 304,800 281,800 $82.033 $24.26 $34.150 $121.19 41.6% C-TEC Corp 217,382 212,369 $85.299 $33.47 $40.937 $192.76 48.0% Charter Comm. SE, LP 214,488 210,551 $69.261 $27.41 $35.658 $169.36 51.5% Garden State Cablevision 187,496 185,487 $84.877 $38.13 $48.083 $259.23 56.7% Bresnan Communications 157,553 152,877 $46.347 $25.26 $21.122 $138.16 45.6% Summit Communications 150,400 153,350 $59.600 $32.39 $35.800 $233.45 60.1% Marcus Cable 138,274 110,006 $38.310 $29.02 $19.982 $181.64 52.2% Insight Communications 133,816 129,758 $47.023 $30.20 $20.470 $157.76 43.5% Falcon Cable Systems 131,228 130,765 $50.616 $32.26 $25.556 $195.43 50.5% Rifkin Acquisition Partners 108,991 105,762 $36.935 $29.10 $17.911 $169.35 48.5% Enstar Partnerships 82,199 81,688 $27.810 $28.37 $11.740 $143.72 42.2% Galaxy Telecom 78,460 77,450 $25.919 $27.89 $10.116 $130.61 39.0% Falcon Classic Cable 43,868 41,911 $14.496 $28.82 $5.822 $138.91 40.2% Mercom, Inc. 34,118 33,905 $11.986 $29.46 $4.790 $141.28 40.0% Total For Group 36,254,903 35,557,989 $13,799.563 $32.34 $6,362.606 $178.94 46.1% Total For Industry 55,200,000 54,300,000 $21,073.078 $32.34 $9,716.227 $178.94 46.1% Notes: - TCI and Comcast - On December 2, 1992, Storer Communications, Inc., which had been jointly owned by TCI (50%) and Comcast (50%), was consolidated into those two companies. Storer's revenue ($595.668 million) and cash flow ($288.503 million) for 1992 up to that date was split and added into TCI and Comcast's totals. TCI and Comcast's average subscribership for 1992 was calculated assuming each had half of Storer's 1991, year-end subscribership (1,646,000) for the whole year. - Continental - When Continental reports its basic subscribership, it includes, on an equity basis, subscribers from its partially owned affiliates. Those subscribers were removed from the 1991 (118,361) and 1992 (125,866) year-end subscriber numbers. Therefore, the 1992 average subscribers number has been adjusted as well - Century - Revenue and cash flow are for the 12 months ending November 30, 1992. Its year- end subscriber number is as of May 31, 1992. - Adelphia - Adelphia's average subscribers, revenue, and cash flow are for the 12 months ending December 31, 1992. Its year-end subscriber number is as of that date. - Jones Partnerships, Garden State, Enstar Partnerships - Year-end 1991 and 1992 average subscribership figures were estimated using the growth exhibited from 1992 to 1995. - TCA - TCA's average subscribers, revenue, and cash flow are for the 12 months ending January 31, 1993. Its year-end subscriber number is as of that date. TABLE 7B 1993 Cable Industry Revenue and Cash Flow Calculations Company Year-End Subscribers Average Subscribers Annual Cable Revenue (mil.) Monthly Cable Revenue Per Subscriber Annual Cable Cash Flow (mil.) Annual Cable Cash Flow Per Subscriber Average Cash Flow Margin TCI Communications, Inc. 10,285,000 10,092,500 $4,153.000 $34.29 $1,858.000 $184.10 44.7% Time Warner 5,756,000 5,683,500 $2,208.000 $32.37 $1,035.000 $182.11 46.9% Continental Cablevision 2,763,229 2,746,682 $1,175.408 $35.66 $527.592 $192.08 44.9% Comcast 2,648,000 2,615,500 $1,092.746 $34.82 $551.971 $211.04 50.5% Cox Communications 1,784,337 1,753,172 $692.779 $32.93 $270.059 $154.04 39.0% Cablevision Systems 1,379,000 1,337,138 $633.207 $39.46 $281.352 $210.41 44.4% Times Mirror 1,208,398 1,195,490 $470.410 $32.79 $198.123 $165.73 42.1% Viacom 1,094,100 1,105,200 $416.000 $31.37 $181.696 $164.40 43.7% Cablevision Industries 957,508 942,377 $391.710 $34.64 $191.600 $203.32 48.9% Century Communications 934,000 932,000 $311.151 $27.82 $181.455 $194.69 58.3% Adelphia Communications 868,195 844,219 $318.293 $31.42 $177.664 $210.45 55.8% Jones Partnerships 850,409 829,544 $354.462 $35.61 $115.314 $139.01 32.5% Providence Journal 738,000 730,000 $281.590 $32.14 $114.110 $156.32 40.5% Telecable 717,000 703,500 $286.680 $33.96 $123.832 $176.02 43.2% EW Scripps 701,000 687,950 $251.792 $30.50 $105.260 $153.01 41.8% KBLCOM 605,000 591,000 $244.067 $34.41 $95.742 $162.00 39.2% Lenfest Communications 550,703 513,917 $197.630 $32.05 $100.476 $195.51 50.8% Intermedia Partners IV 493,000 452,050 $171.800 $31.67 $70.800 $156.62 41.2% Washington Post Co. 482,000 472,500 $185.721 $32.76 $81.917 $173.37 44.1% TCA Cable TV, Inc. 457,061 451,761 $154.920 $28.58 $77.670 $171.93 50.1% Multimedia Inc (Gannett) 417,000 413,500 $164.598 $33.17 $85.462 $206.68 51.9% Falcon Holding Group 329,902 331,055 $137.769 $34.68 $79.444 $239.97 57.7% Jones Intercable, Inc. 313,800 309,300 $99.438 $26.79 $35.097 $113.47 35.3% Charter Comm. SE, LP 226,110 220,299 $77.013 $29.13 $39.340 $178.58 51.1% C-TEC Corp 224,849 221,116 $93.550 $35.26 $44.328 $200.47 47.4% Garden State Cablevision 192,222 189,859 $90.824 $39.86 $52.810 $278.15 58.1% Bresnan Communications 174,009 165,781 $51.902 $26.09 $22.925 $138.28 44.2% Summit Communications 157,000 153,700 $61.229 $33.20 $37.400 $243.33 61.1% Insight Communications 142,317 138,067 $51.008 $30.79 $24.455 $177.12 47.9% Marcus Cable 141,323 139,799 $52.307 $31.18 $26.841 $192.00 51.3% Falcon Cable Systems 129,740 130,484 $53.743 $34.32 $26.585 $203.74 49.5% Rifkin Acquisition Partners 115,793 112,392 $41.470 $30.75 $20.015 $178.08 48.3% Helicon Group 82,184 82,184 $29.448 $29.86 $12.633 $153.72 42.9% Enstar Partnerships 81,880 82,040 $30.026 $30.50 $12.752 $155.44 42.5% Galaxy Telecom 77,618 78,039 $27.285 $29.14 $11.305 $144.86 41.4% Falcon Classic Cable 45,533 44,701 $16.785 $31.29 $6.169 $138.01 36.8% Mercom, Inc. 34,714 34,416 $12.606 $30.52 $5.116 $148.65 40.6% Total For Group 38,157,934 37,526,727 $15,082.367 $33.49 $6,882.310 $183.40 45.6% Total For Industry 57,200,000 56,200,000 $22,587.343 $33.49 $10,306.943 $183.40 45.6% Percent Change From Previous Year 3.62% 3.50% 7.19% 3.56% 6.08% 2.49% -1.03% Notes: - Continental - When Continental reports its basic subscribership, it includes, on an equity basis, subscribers from its partially owned affiliates. Those subscribers were removed from the 1993 (131,771) year-end subscriber number. Therefore, the 1993 average subscribers number has been adjusted as well. Continental's revenue results were adjusted for the removal of its satellite operations. This reduced its revenue by $1.755 million. - Cox - Cox's revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue by $15.195 million and increased its cash flow by $1.533 million. - Century - Revenue and cash flow are for the 12 months ending November 30, 1993. Its year-end subscriber number is as of May 31, 1993. - Adelphia - Adelphia's average subscribers, revenue, and cash flow are for the 12 months ending December 31, 1993. Its year-end subscriber number is as of that date. - TCA - TCA's average subscribers, revenue, and cash flow are for the 12 months ending January 31, 1994. Its year-end subscriber number is as of that date. TABLE 7C 1994 Cable Industry Revenue and Cash Flow Calculations Company Year-End Subscribers Average Subscribers Annual Cable Revenue (mil.) Monthly Cable Revenue Per Subscriber Annual Cable Cash Flow (mil.) Annual Cable Cash Flow Per Subscriber Average Cash Flow Margin TCI Communications, Inc. 11,121,000 10,703,000 $4,288.000 $33.39 $1,789.000 $167.15 41.7% Time Warner 6,000,000 5,864,000 $2,242.000 $31.86 $989.000 $168.66 44.1% Comcast 3,307,000 3,252,500 $1,328.355 $34.03 $630.968 $193.99 47.5% Continental Cablevision 2,938,550 2,850,890 $1,191.948 $34.84 $526.993 $184.85 44.2% Cox Communications 1,851,726 1,818,032 $714.208 $32.74 $269.357 $148.16 37.7% Cablevision Systems 1,768,000 1,632,650 $754.393 $38.51 $334.248 $204.73 44.3% Times Mirror 1,274,908 1,241,653 $497.690 $33.40 $205.074 $165.16 41.2% Viacom 1,139,100 1,123,275 $406.200 $30.14 $155.200 $138.17 38.2% Cablevision Industries 1,001,927 982,982 $402.863 $34.15 $189.519 $192.80 47.0% Adelphia Communications 957,954 934,401 $347.606 $31.00 $184.389 $197.33 53.0% Century Communications 945,000 955,000 $321.681 $28.07 $174.474 $182.70 54.2% Jones Partnerships 907,323 878,866 $364.461 $34.56 $108.995 $124.02 29.9% Providence Journal 771,000 754,500 $284.990 $31.48 $111.973 $148.41 39.3% Telecable 751,000 734,000 $302.000 $34.29 $131.000 $178.47 43.4% EW Scripps 739,200 722,575 $255.356 $29.45 $100.128 $138.57 39.2% KBLCOM 690,000 647,500 $255.356 $32.86 $99.688 $153.96 39.0% Lenfest Communications 577,377 564,040 $212.800 $31.44 $105.711 $187.42 49.7% Intermedia Partners IV 528,000 509,817 $190.200 $31.09 $74.000 $145.15 38.9% Washington Post Co. 498,000 490,000 $182.140 $30.98 $80.525 $164.34 44.2% TCA Cable TV, Inc. 468,662 462,265 $166.326 $29.98 $81.852 $177.07 49.2% Multimedia Inc (Gannett) 432,000 425,000 $165.406 $32.43 $84.124 $197.94 50.9% Falcon Holding Group 340,681 335,292 $138.229 $34.36 $79.518 $237.16 57.5% Jones Intercable, Inc. 309,300 311,550 $103.335 $27.64 $40.019 $128.45 38.7% Charter Comm. SE, LP 242,124 234,117 $82.854 $29.49 $39.632 $169.28 47.8% C TEC Corp 238,201 231,525 $95.078 $34.22 $44.583 $192.56 46.9% Marcus Cable 222,735 182,512 $63.629 $29.05 $31.129 $170.56 48.9% Bresnan Communications 202,636 188,323 $61.380 $27.16 $25.783 $136.91 42.0% Garden State Cablevision 195,966 194,094 $92.514 $39.72 $52.265 $269.28 56.5% Summit Communications 165,000 161,000 $62.873 $32.54 $37.400 $232.30 59.5% Insight Communications 153,523 148,537 $52.820 $29.63 $25.645 $172.65 48.6% Falcon Cable Systems 133,249 131,495 $52.896 $33.52 $24.639 $187.38 46.6% Rifkin Acquisition Partners 124,059 119,926 $44.889 $31.19 $20.879 $174.10 46.5% Northland Partnerships 95,355 87,500 $28.932 $27.55 $12.567 $143.62 43.4% Helicon Group 84,573 84,573 $31.664 $31.20 $15.281 $180.68 48.3% Enstar Partnerships 84,218 83,049 $30.107 $30.21 $12.130 $146.06 40.3% Galaxy Telecom 80,287 78,953 $27.285 $28.80 $10.237 $129.66 37.5% Falcon Classic Cable 46,912 46,223 $17.382 $31.34 $7.885 $170.59 45.4% Cencom Inc. Cab. Prtnrs II 43,000 41,800 $16.258 $32.41 $6.698 $160.25 41.2% Mercom, Inc. 37,324 36,019 $12.927 $29.91 $5.052 $140.26 39.1% Total For Group 41,466,870 40,243,430 $15,889.031 $32.90 $6,917.560 $171.89 43.5% Total For Industry 59,700,000 58,450,000 $23,077.403 $32.90 $10,047.141 $171.89 43.5% Percent Change From Previous Year 4.37% 4.00% 2.17% -1.76% -2.52% -6.27% -4.59% Notes: - TCI - TCI's revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue by $30 million and its cash flow by $12 million. - Comcast - In December, 1994, Comcast acquired the cable holdings of Maclean Hunter. Comcast's revenue and cash flow assume the acquisition had occurred at the beginning of the year. Comcast's average subscriber number was calculated assuming that it had controlled the Maclean Hunter subscribers (550,000) for the entire year. -Continental - When Continental reports its basic subscribership, it includes, on an equity basis, subscribers from its partially owned affiliates. Those subscribers were removed from the 1994 (142,335) year-end subscriber number. Therefore, the 1994 average subscribers number has been adjust as well. Continental's revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue by $6.029 million and increased its cash flow by $1.9 million. - Cox - Cox's revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue by $22.1 million and increased its cash flow by $0.831 million. - Century - Revenue and cash flow are for the 12 months ending November 30, 1994. Its year-end subscriber number is as of May 31, 1994. - Adelphia - Adelphia's average subscribers, revenue, and cash flow are for the 12 months ending December 31, 1994. Its year-end subscriber number is as of that date. - TCA - TCA's average subscribers, revenue, and cash flow are for the 12 months ending January 31, 1995. Its year-end subscriber number is as of that date. TABLE 7D 1995 Cable Industry Revenue and Cash Flow Calculations Company Year-End Subscribers Average Subscribers Annual Cable Revenue (mil.) Monthly Cable Revenue Per Subscriber Annual Cable Cash Flow (mil.) Annual Cable Cash Flow Per Subscriber Average Cash Flow Margin TCI Communications, Inc. 12,494,000 12,183,000 $4,936.000 $33.76 $2,081.800 $170.88 42.2% Time Warner 9,769,000 9,545,500 $3,743.440 $32.68 $1,549.000 $162.28 41.4% Continental Cablevision 4,066,795 4,002,805 $1,695.263 $35.29 $705.272 $176.19 41.6% Comcast 3,407,000 3,357,000 $1,454.932 $36.12 $718.455 $214.02 49.4% Cox Communications 3,248,759 3,215,878 $1,287.016 $33.35 $510.998 $158.90 39.7% Cablevision Systems 2,061,200 1,904,425 $905.155 $39.61 $392.416 $206.05 43.4% Viacom 1,179,500 1,165,000 $444.400 $31.79 $182.900 $157.00 41.2% Marcus Cable 1,154,718 1,110,352 $325.414 $24.42 $173.597 $156.34 53.3% Century Communications 1,100,000 1,046,000 $349.641 $27.86 $177.210 $169.42 50.7% Cablevision Industries 1,041,768 1,028,942 $423.212 $34.28 $203.133 $197.42 48.0% Adelphia Communications 1,002,760 993,284 $390.413 $32.75 $204.145 $205.53 52.3% Jones Partnerships 902,345 904,834 $391.772 $36.08 $122.852 $135.77 31.4% EW Scripps 766,400 756,850 $279.482 $30.77 $118.074 $156.01 42.2% Lenfest Communications 596,366 586,872 $232.155 $32.97 $115.361 $196.57 49.7% TCA Cable TV, Inc. 574,473 529,512 $200.867 $31.61 $99.982 $188.82 49.8% Intermedia Partners IV 554,000 539,100 $211.800 $32.74 $87.000 $161.38 41.1% Media One (US West) 527,000 513,500 $215.000 $34.89 $100.000 $194.74 46.5% Washington Post Co. 518,000 508,000 $194.142 $31.85 $81.988 $161.39 42.2% Multimedia Inc (Gannett) 458,000 452,250 $174.941 $32.24 $89.703 $198.35 51.3% Jones Intercable, Inc. 439,400 374,350 $135.350 $30.13 $49.428 $132.04 36.5% Falcon Holding Group 419,288 379,985 $142.608 $31.27 $95.442 $251.17 66.9% C TEC Corp 333,920 286,061 $127.079 $37.02 $57.858 $202.26 45.5% Charter Comm. SE, LP 249,106 245,615 $88.624 $30.07 $42.842 $174.43 48.3% Bresnan Communications 209,459 206,048 $70.389 $28.47 $28.555 $138.58 40.6% Garden State Cablevision 200,086 198,026 $92.815 $39.06 $51.176 $258.43 55.1% Insight Communications 163,923 159,293 $57.108 $29.88 $28.115 $176.50 49.2% Galaxy Telecom 162,400 161,663 $57.459 $29.62 $22.800 $141.03 39.7% Falcon Cable Systems 135,475 134,362 $52.935 $32.83 $23.915 $177.99 45.2% Rifkin Acquisition Partners 132,271 128,165 $50.208 $32.65 $23.429 $182.80 46.7% Northland Partnerships 102,766 99,061 $35.181 $29.60 $14.579 $147.17 41.4% Helicon Group 87,632 86,615 $35.225 $33.89 $17.141 $197.90 48.7% Enstar Partnerships 85,342 84,780 $31.405 $30.87 $13.022 $153.60 41.5% Falcon Classic Cable 47,957 47,435 $18.363 $32.26 $8.263 $174.20 45.0% Cencom Inc. Cab. Prtnrs II 44,500 43,750 $17.046 $32.47 $7.245 $165.59 42.5% Mercom, Inc. 38,853 38,089 $13.939 $30.50 $5.191 $136.29 37.2% Total For Group 48,274,462 47,016,397 $18,880.779 $33.46 $8,202.886 $174.47 43.4% Total For Industry 62,100,000 60,900,000 $24,456.137 $33.46 $10,625.139 $174.47 43.4% Percent Change From Previous Year 4.02% 4.19% 5.97% 1.71% 5.75% 1.50% -0.21% Notes: - TCI - On January 26, 1995, TCI acquired Telecable. TCI's results have been adjusted as though the transaction took place on January 1, 1995. This increased TCI's revenue by $25 million and its cash flow by $10.8 million (calculated by applying Telecable's 1994 cash flow margin to the $25 million.) TCI's average subscribership was calculated assuming that this acquisition occurred at the beginning of the year. TCI's revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue by $207 million and its cash flow by $10 million. TCI's cash flow was increased by $38 million to account for special strategic initiatives and a customer retention program. - Time Warner - During 1995, Time Warner (TW) completed four acquisitions. TW's revenue, cash flow, and average subscribers were all adjusted as though these acquisitions had taken place at the beginning of the year. On April 1, 1995, TW entered into a partnership with Advance/Newhouse which had 1.5 million subscribers at the time of the deal. This added $137 million to TW's 1995 revenue and $46 million to its 1995 cash flow. On May 2, 1995, TW acquired Summit Communications which had 165,000 subscribers at the end of 1994. This added $22 million to TW's 1995 revenue and $11 million to its cash flow. On July 6, 1995, TW acquired KBLCOM, a subsidiary of Houston Industries Inc., which had 690,000 subscribers at the end of 1994. This added $139 million to TW's 1995 revenue and $72 million to its cash flow. On July 6, 1995, TW acquired from Houston Industries the half of Paragon Communications which TW did not already own, which had 967,000 subscribers at the end of 1994. This added $179 million to TW's 1995 revenue and $45 million to its cash flow. - Continental - On October 5, 1995, Continental acquired the cable holdings of the Providence Journal Company. In addition, Continental made several other smaller acquisitions during the year (Cablevision of Chicago, Columbia Cable of Michigan, Consolidated Cablevision of California, and N-COM). Continental's data have been adjusted as though these transactions took place at the beginning of the year. This increased Continental's revenue by $289.919 million ($221.998 million for Providence and $67.921 million for the other acquisitions) and its cash flow by $104.421 million ($79.107 million for Providence and $25.314 million for the other acquisitions.) Continental's average subscribership was calculated assuming that these acquisitions had occurred at the beginning of the year. This increased Continental's 1994 year-end subscriber number by 1,000,265 (771,000 for Providence and 229,265 for the other acquisitions.) When Continental reports its basic subscribership, it includes, on an equity basis, subscribers from its partially owned affiliates. Those subscribers were removed from the 1995 year-end subscriber number (123,364). Therefore, the 1994 average subscribers number has been adjusted as well. Continental's revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue by $37.048 million and its cash flow by $4.3 million. - Cox - On February 1, 1995, Cox acquired Times Mirror's cable holdings. Cox's results have been adjusted as though this transaction took place at the beginning of the year. Cox's revenue and cash flow assume the acquisition had occurred at the beginning of the year. Cox's average subscriber number was calculated assuming that it had controlled the Times Mirror subscribers for the entire year. Cox's revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue by $41.084 million and increased its cash flow by $0.598 million. - Marcus - On January 1, 1995, Marcus acquired cable systems from Crown Media, Inc., which added 193,300 subscribers to its 1994 year-end subscriber figure. On November 1, 1995, Marcus acquired cable systems from Sammons Communications, Inc. Marcus' results have been adjusted as though this transaction took place at the beginning of the year. Marcus' revenue was increased by $129.32 million ($116.388 million for the first nine months of the year plus one-ninth of that number for October) and its cash flow was increased by $77.327 million ($69.594 million for the first nine months of the year plus one- ninth of that number for October.) Marcus' year-end 1994 subscriber figure was increased by 650,000 subscribers (the subscribership of the acquired systems on March 30, 1995.) - Century - Revenue and cash flow data are for the 12 months ending November 30, 1995. Its year-end subscriber number is as of May 31, 1995. - Adelphia - Adelphia's average subscribers, revenue, and cash flow are for the 12 months ending December 31, 1995. Its year-end subscriber number is as of that date. - TCA - TCA's average subscribers, revenue, and cash flow are for the 12 months ending January 31, 1996. Its year-end subscriber number is as of that date. TABLES 8A and 8B Quarterly Cable Industry Revenue and Cash Flow Informtion 1st Quarter 1994 - 2nd Quarter 1996 These pages contain tables detailing the data and the calculations used in the Commission's estimates of the cable industry's annual revenue and cash flow. To calculate the industry-wide estimates of revenue, we first calculate an average revenue per subscriber figure for each quarter by dividing the total revenue of the companies in the group by the total average subscribers of these companies for that quarter. Second, multiply this average revenue per subscriber figure by an estimate of the industry's average subscribership for the quarter. The same methodology was followed to calculate the industry-wide estimates of cash flow. The data in the tables adheres to the following guidelines: Unless otherwise noted, all revenue and cash flow numbers are for the quarters ending March 31, June 30, September 30, and December 31 of the year in question. Unless otherwise noted, all of the data used in these tables came from the companies' public filings with the Securities and Exchange Commission, their press releases, or discussions with company personnel. Some of the data taken from these sources have been adjusted to take into account acquisitions which occurred during the year. Due to lack of data, adjustments have not been made for all acquisitions. Whenever possible, each company's end of quarter subscriber data were used. However, when such data were not available on a quarterly bases, they were estimated using a strait line average of year-end subscriber figures. Unless otherwise noted, all data are for the companies' consolidated, domestic cable operations. Some data has been adjusted to remove subscribers, revenue, and cash flow from other sources (e.g. satellite operations). All company and industry revenue and cash flow numbers are in millions of dollars. All per subscriber revenue and cash flow numbers are in dollars, per subscriber, per year. The two tables are sorted in descending order by the companies' year-end, 1995 subscribership. The estimates differ from those released in the 1995 Report, due in part to the deletion this year of subscribers attributable to partially held and foreign subsidiaries and in part to the Commission having been able to collect additional data since last year's report which allows for more accurate estimates. Table 8A Quarterly Revenue for Cable System Operators: 1st Quarter, 1994 - 2nd Quarter, 1996 ($ in millions) 1994 1995 1996 Operator 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter TCI $1,060.0 $1,075.0 $1,065.0 $1,088.0 $1,170.0 $1,225.0 $1,253.0 $1,288.0 $1,303.0 $1,406.0 Time Warner Inc $551.0 $560.0 $552.0 $579.0 $885.3 $930.3 $941.0 $987.0 $1,164.0 $1,191.0 Continental Cable $293.9 $294.6 $294.9 $308.5 $312.4 $323.5 $332.6 $436.8 $452.1 $460.2 Comcast $260.6 $267.0 $265.6 $272.0 $347.0 $362.5 $368.5 $376.9 $382.3 $396.0 Cox Communications $300.0 $302.7 $297.5 $311.9 $305.0 $319.0 $324.6 $338.5 $339.8 $338.1 Cablevision Systems $168.7 $182.3 $193.6 $209.8 $211.4 $226.1 $230.6 $237.1 $251.8 $263.2 Viacom $100.7 $103.5 $100.4 $101.6 $106.0 $110.0 $114.0 $114.4 $116.7 $120.0 Marcus Cable $13.2 $12.8 $17.7 $20.9 $37.0 $38.5 $38.7 $97.0 $102.7 $107.0 Cablevision Industries $100.0 $101.7 $103.0 $103.7 $103.6 $106.4 $108.7 $110.1 - - Adelphia Comm. $80.1 $84.0 $90.8 $92.7 $94.0 $96.9 $97.1 $102.5 $107.1 $111.0 EW Scripps $62.4 $63.3 $63.9 $65.8 $67.0 $69.8 $71.1 $71.6 $76.3 $77.2 TCA Cable TV Inc $39.8 $41.1 $42.1 $43.3 $44.0 $49.1 $52.8 $55.0 $57.6 $69.4 Multimedia Inc $41.2 $42.0 $40.9 $41.3 $41.9 $43.6 $44.3 $45.2 $47.2 $48.0 Insight Comm. $13.0 $13.1 $13.2 $13.5 $13.8 $14.3 $14.4 $14.7 $15.3 $15.4 Total for Group $3,084.8 $3,143.1 $3,140.7 $3,252.0 $3,738.3 $3,914.9 $3,991.4 $4,274.7 $4,416.0 $4,602.5 Total for Industry $5,789.9 $5,900.8 $5,800.0 $5,867.1 $5,955.4 $6,166.7 $6,278.9 $6,495.7 $6,633.4 $6,777.0 % Change From Prev Year's Quarter 3.9% 2.9% 1.5% 2.5% 2.9% 4.5% 8.3% 10.7% 11.4% 9.9% Table 8B Quarterly Cash Flow for Cable System Operators: 1st Quarter, 1994 - 2nd Quarter, 1996 ($ in millions) 1994 1995 1996 Operators 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter TCI $450.0 $452.0 $423.0 $476.0 $508.8 $518.0 $526.0 $540.0 $502.0 $549.0 Time Warner Inc $244.0 $256.0 $242.0 $247.0 $371.3 $370.6 $390.0 $400.0 $480.0 $494.0 Continental Cable $133.6 $129.2 $128.1 $136.0 $135.8 $137.9 $142.7 $181.5 $187.3 $194.9 Comcast $127.0 $130.0 $129.0 $131.9 $165.0 $182.6 $182.0 $188.8 $184.3 $200.0 Cox Communications $121.8 $123.7 $110.0 $118.7 $123.5 $126.6 $127.8 $135.9 $134.3 $134.0 Cablevision Systems $73.6 $84.3 $89.0 $87.3 $94.4 $91.7 $103.5 $102.7 $102.0 $111.1 Viacom $40.2 $40.8 $36.5 $37.7 $42.3 $45.0 $47.7 $47.9 $45.6 $47.8 Marcus Cable $6.5 $5.8 $8.5 $10.4 $18.4 $19.3 $19.1 $47.2 $45.9 $49.8 Cablevision Industries $47.4 $47.5 $48.2 $46.4 $48.0 $49.7 $52.2 $53.4 - - Adelphia Comm. $42.2 $44.4 $49.0 $48.7 $48.9 $51.5 $50.3 $53.4 $55.8 $58.8 EW Scripps $24.3 $23.1 $24.3 $25.5 $27.2 $29.0 $29.9 $32.2 $31.4 $33.7 TCA Cable TV Inc $19.1 $20.2 $20.8 $21.8 $21.8 $24.1 $26.4 $27.6 $28.2 $31.6 Multimedia Inc $21.3 $21.5 $20.2 $21.2 $20.8 $22.6 $22.7 $23.6 $24.0 $24.1 Insight Comm. $6.3 $6.2 $6.4 $6.7 $6.7 $7.0 $7.2 $7.2 $7.7 $7.9 Total for Group $1,357.3 $1,384.7 $1,335.1 $1,415.3 $1,632.9 $1,675.6 $1,727.5 $1,841.4 $1,828.6 $1,936.6 Total for Industry $2,547.5 $2,599.7 $2,465.5 $2,553.4 $2,601.4 $2,639.4 $2,717.5 $2,798.1 $2,746.8 $2,851.6 % Change From Prev Year's Quarter -2.1% -3.4% -6.5% 0.6% 2.1% 1.5% 10.2% 9.6% 5.6% 8.0% Notes: 1994 - TCI - TCI's revenue was adjusted for the removal of its satellite operations. This reduced its revenue by $6 million in the second quarter, $7 million in the third quarter, and $17 million in the fourth quarter. - Continental - Continental's revenue and cash were adjusted for the removal of its satellite operations. This reduced its revenue by $0.421 million in the first quarter, $0.437 million in the second quarter, $1.3 million in the third quarter, and $3.871 million in the fourth quarter. Continental's cash flow increased by $0.422 million in the first quarter, $0.422 million in the second quarter, $0.456 million in the third quarter, and $0.6 million in the fourth quarter. - Cox - Cox's revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue by $4.3 million in the first quarter, $4.7 million in the second quarter, $6 million in the third quarter, and $7.2 million in the fourth quarter. Cox's cash flow was increased by $0.3 million in the second quarter, $0.7 million in the third quarter, and reduced by $0.3 million in the fourth quarter. - TCA - TCA's revenue and cash flow are for the quarters ending April 30, July 31, and October 31, 1994, and January 31, 1995. 1995 - TCI - TCI's revenue was adjusted for the removal of its satellite operations. This reduced its revenue by $24 million in the first quarter, $37 million in the second quarter, $57 million in the third quarter, and $89 million in the fourth quarter. On January 26, 1995, TCI acquired Telecable. TCI's results have been adjusted as though the transaction took place on January 1. This increased TCI's first quarter revenue by $25 million and its first quarter cash flow by $10.8 million (calculated by applying Telecable's 1994 cash flow margin to the $25 million). TCI's average subscribership was calculated assuming that this acquisition occurred at the beginning of the year. TCI's cash flow in the fourth quarter was increased by $38 million to account for special strategic initiatives and a customer retention program. - Time Warner - During 1995, Time Warner (TW) completed four acquisitions (for details, see the notes to Table 7D.) TW's revenue and cash flow were adjusted as though these acquisitions had taken place at the beginning of the year. TW's revenue was increased by $307.31 million in the first quarter and 170.335 in the second quarter of 1995. TW's cash flow was increased by 115.317 in the first quarter and $51.603 million in the second quarter. - Continental - Continental's revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue by $6.202 million in the first quarter, $7.977 million in the second quarter, $9.8 million in the third quarter, and $13.069 million in the fourth quarter. Continental's cash flow was reduced by $0.6 million in the first quarter, $0.6 million in the second quarter, $0.9 million in the third quarter, and $2.2 million in the fourth quarter. - Cox - Cox's revenue and cash flow were adjusted for the removal of its satellite operations. This reduced its revenue by $8.1 million in the first quarter, $9.1 million in the second quarter, $10.5 million in the third quarter, and $13.4 million in the fourth quarter. Cox's cash flow was increased $0.7 million in the first quarter and by $1.1 million in the second quarter and decreased by $0.6 million in the third quarter and by $0.6 million in the fourth quarter. - Marcus - On November 1, 1995, Marcus acquired cable systems from Sammons Communications, Inc. Marcus' fourth quarter results have been adjusted as though this transaction took place at the beginning of the quarter. Marcus' revenue was increased by $12.932 million (one-ninth of Sammons' revenue for the first nine months of the year) and its cash flow was increased by $7.733 million (one-ninth of Sammons' revenue for the first nine months of the year.) Marcus' fourth quarter average subscribers was calculated assuming it had Sammons' 664,700 subscribers for the entire quarter (the subscribership of the acquired systems on the acquisition date.) - TCA - TCA's revenue and cash flow are for the quarters ending April 30, July 31, and October 31, 1995, and January 31, 1996. TABLE 9 Acquisition and Disposition of Capital: 1989 - 1995 ($ in million) Year Private Debt Public Debt Private Equity Public Equity Total Capital Raised From Financing Sources* Sum Raised % of Total Sum Raised % of Total Sum Raised % of Total Sum Raised % of Total 1989 $6,494 80% $840 10% $726 9% $108 1% $8,168 1990 $4,637 81% $490 9% $597 10% $0 0% $5,724 1991 $689 16% $912 22% $1,290 30% $1,350 32% $4,241 1992 ($1,762) -69% $2,400 93% $1,710 67% $220 9% $2,568 1993 ($3,583) -186% $5,280 274% $62 3% $165 9% $1,924 1994 $4,772 71% $1,089 16% $409 6% $461 7% $6,731 1995 ($808) -9% $4,500 51% $1,109 13% $3,976 45% $8,778 Total: 1989-1995 $10,439 $15,511 $5,903 $6,280 $38,134 Share of 7 Year Total 27% 41% 15% 16% 100% Average Raised Per Year $1,491 $2,216 $843 $897 $5,448 * Total Capital Raised From Financing Sources = Private Debt + Public Debt + Private Equity + Public Equity Sources: - 1989 - Paul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, Jun. 1993, at 86. - 1990 - Paul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, Jun. 1994, at 92. - 1991 - Paul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, Jul. 1995, at 92. - 1992 to 1995 - Paul Kagan Assoc., Inc., Estimated Capital Flows in Cable TV, The Cable TV Financial Databook, Jul. 1996, at 115. TABLE 10 System Transactions: 1994 - 1995 1994 1995 94-95 Change 1/95 to 9/96 1/96 to 9/96 94-95 Change Number of Systems Sold 64 128 100% 110 81 -26.4% Total Number of Subscribers 7,504,177 10,937,652 45.8% 9,568,648 7,494,095 -21.7% Average System Size 117,253 85,450 -27.1% 86,988 92,520 6.4% Number of Homes Passed 12,492,997 17,216,963 37.8% 14,986,646 12,148,059 -18.9% Avg. # of Homes Passed 195,203 134,507 -31.1% 136,242 149,976 10.1% Total Dollar Value (mil.) $14,025.3 $20,083.2 43.2% $17,498.5 $15,574.4 -11.0% Average Dollar Value $219.1 $156.9 -28.4 $159.1 $192.3 20.9% Dollar Value Per Home Passed $1,123 $1,166 3.8% 1,168 $1,282 9.8% Dollar Value Per Subscriber $1,869 $1,836 -1.8% 1,829 $2,078 13.6% Cash Flow Multiple 10.3 9.7 -5.8% 9.6 10.0 9.4% Source: 1994 and 1995 - Paul Kagan Assoc., Inc., Year-To-Date Cable System Sale Summary, Cable TV Investor, Jan. 26, 1996, at 11. 1/95 to 9/95 and 1/96 to 9/96 - Paul Kagan Assoc., Inc., Year-To-Date Cable System Sale Summary (Through September 1996), Cable TV Investor, Oct. 21, 1996, at 12. APPENDIX C TABLE 1 Subscribers to DBS & HSD Programming Services Source: Industry trade association research based on company self- reporting. DTH Subscribers, SkyREPORT, Feb. 1996, at 8 (table); DTH Subscribers, SkyREPORT, Oct. 1996, at 8 (table). TABLE 2 Monthly Subscriber Growth of DBS & HSD Programming Services Source: Derived from industry trade association research based on company self-reporting. DTH Subscribers, SkyREPORT, Feb. 1996, at 8 (table); DTH Subscribers, SkyREPORT, Nov. 1996, at 8 (table). APPENDIX D FCC MDS Auction Information Table 1: Top Ten Bidders by Total Value of Bids Bidder Bidder Description Total Amount Bid Number of Licenses Won CAI Wireless Publicly Held $48,824,000 32 Pacific Telesis LEC $20,758,000 11 Heartland Wireless Publicly Held $19,785,000 93 Wireless One Publicly Held $16,013,000 36 TruVision Publicly Held $13,641,000 27 PCTV Gold Publicly Held $10,960,000 28 Satellite Microcable Corp Private $10,539,000 4 Wireless Telecom Private $9,930,000 15 American Telecasting Publicly Held $9,370,000 56 Wireless One of NC LLC Publicly Held $6,724,000 6 Total for all BTAs $216,300,000 493 Table 2: Winning Bids in Top Ten Markets by Population Basic Trading Area POPS Bidder Bidder Description Bid New York 18,051,000 CAI Wireless Publicly Held $18,410,000 Los Angeles 14,550,000 Pacific Telesis LEC $10,657,000 Chicago 8,182,000 PCTV Gold Publicly Held $351,000 San Francisco 6,421,000 Pacific Telesis LEC $6,000,000 Philadelphia 5,899,000 CAI Wireless Publicly Held $747,000 Detroit 4,705,000 PCTV Gold Publicly Held $233,000 Dallas 4,330,000 Heartland Wireless Publicly Held $1,285,000 Boston 4,134,000 CAI Wireless Publicly Held $1,405,000 Washington 4,119,000 CAI Wireless Publicly Held $4,242,000 Houston 4,054,000 PCTV Gold Publicly Held $285,000 APPENDIX E TOP TEN SMATV OPERATORS (Ranked by Number of Units Passed) 1996 RANK COMPANY (1995 Rank) NUMBER OF PROPERTIES (MDUs) UNITS PASSED* 1 Interactive Cable Systems (1) 700 230,000 2 OpTel (2) 550 197,130 3 Cable Plus (4)** 337 119,200 4 Mid-Atlantic Cable (7) 114 70,000 5 CAI Wireless 211 57,410 6 Liberty (10) 190 42,000 7 MultiTechnology Services (14) 115 35,000 8 Edward Rose & Sons (12) 60 32,830 9 Telecom Satellite (15) 41 17,400 10 Wireless Cable of Atlanta (30) 35 14,500 TOTAL 2,353 815,470 NOTES: * The data do not include information on hospitals, hotels/motels and prisons. ** The statistics for Cable Plus have been revised to reflect the acquisition of Apollo Cable's systems in Northern California, Arizona and the Pacific Northwest. See Paul Kagan Associates, Apollo Cable Sale Complete, Private Cable Investor, May 31, 1996 at 5. SOURCES: Paul Kagan Associates, Inc., Top 20 Private Cable Operators, Private Cable Investor, Dec. 31, 1994 at 5; Top Private Cable Operators, Dec. 31, 1995 at 2; Paul Kagan Associates, Apollo Cable Sale Complete, Private Cable Investor, May 31, 1996 at 5. APPENDIX F ASSESSMENT OF COMPETING TECHNOLOGIES Technology Used Subscribers (i) 1992 1993 1994 Sept. 1995 Sept. 1996 (1) TV Households Pct. Change 93,100,00 94,200,000 1.18% 95,400,0001.27% 95,900,0000.52% 97,000,000 1.15% (2) MVPD Households(ii) Pct. Change Pct. of Households 57,530,000 61.79% 60,283,000 4.79% 63.99% 63,936,620 6.06% 67.02% 67,275,350 5.22% 70.15% 71,628,540 6.47% 73.84% (3) Cable Subs. (iii) Pct. Change Pct. of MVPD Total 55,200,000 95.95% 57,200,000 3.62% 94.89% 59,700,000 4.37% 93.37% 61,500,0003. 02% 91.42% 63,525,000 3.29% 88.69% (4) MMDS Subs. Pct. Change Pct. of MVPD Total 323,000 0.56% 397,000 22.91% 0.66% 600,00051.13 % 0.94% 800,000 33.33% 1.19% 1,206,250 50.78% 1.68% (5) SMATV Subs. Pct. Change Pct. of MVPD Total 984,000 1.71% 1,004,000 2.03% 1.67% 850,000 -15.34% 1.33% 950,000 11.76% 1.41% 1,050,000 10.53% 1.47% (6) HSD Subs. Pct. Change Pct. of MVPD Total 1,023,000 1.78% 1,612,000 57.58% 2.67% 2,178,000 35.11% 3.41% 2,341,000 7.48% 3.48% 2,320,100 -0.89% 3.24% (7) DBS Subs. Pct. Change Pct. of MVPD Total < 70,000 0.12% 602,000 760.00% 0.94% 1,675,000 178.24% 2.49% 3,525,000 110.45% 4.92% (8) OVS Subs. (iv) Pct. Change Pct. of MVPD Total 2,190 0.0% (9) VDT Subs. (Trials) (v) Pct. Change Pct. of MVPD Total 6,620 0.01% 9,350 41.24% 0.01% 0 -100.00% 0.00% NOTES: (i) Totals for number 1992-94 are year-end totals unless otherwise indicated. Some numbers have been rounded. (ii) The total number of MVPD households is likely to be somewhat less than the given figure due to households subscribing to the services of more than one MVPD. See e.g. 1994 Report, 9 FCC Rcd 7480 74 (1994). The number of such households is likely low, however, so the given total can be seen as a reasonable estimate of the number of MVPD households. (iii) The Cable subscriber count for 1995 was revised to reflect the September estimate for that year. (iv) This system was formally Bell Atlantic's VDT system in Dover Township, New Jersey, which has been converted to an OVS system. See footnote (v) below. (v) The 1996 Act repealed the VDT framework. Telephone companies have been given four options as MVPD providers: the cable franchise, MMDS, common carrier or OVS. For details, see Supra Section I.D. These trials were converted to an OVS format and cable franchises. See footnote (iv) above. SOURCES: (1) United States Television households: 1992-94 from A. C. Nielsen Co. as of January of the following year cited by Veronis, Suhler & Associates, Homes Passed by Cable and Incidence of Subscription, The Veronis, Suhler & Associates Communications Industry Forecast, July 1995, at 145; 1995 from Nielsen Media Research as cited in Broadcasting & Cable, Oct. 23, 1995, at 62; and 1996 from Nielsen Media Research as cited in Broadcasting & Cable, Oct. 7, 1996 at 34. The 1995-96 figures are for September. (2) Total MVPD households were calculated by summing the total number of subscribers listed under each of the categories of the various technologies. Because there were no permanent VDT subscribers, trial VDT subscriber figures were used in 1994-95. (3) Cable subscribers: 1992-94 from Paul Kagan Associates, Inc., History of Cable and Pay-TV Subscribers and Revenues, Cable TV Investor, June 30, 1995, at 5; 1995-96 from Paul Kagan Associates, Inc., Paul Kagan's 10-Year Cable TV Industry Projections, The Cable TV Financial Databook, 1996 at 11. The 1995 figure was updated to reflect information from the 1996 Databook. The FCC estimated the September 1995 and 1996 figures. (4) MMDS subscribers: 1992-94 from Paul Kagan Associates, Inc., Wireless Cable Industry Projections,1992-2002, The 1995 Wireless Cable Databook, Jan. 1995, at 23; and 1995 from WCAI Comments, at 2. The 1995 figure is for June. The 1996 figure is from Paul Kagan Associates, Inc., Wireless Cable Futures, Wireless Cable Investor, Jan. 31, 1996, at 2. The FCC estimated the September 1996 figure. (5) SMATV subscribers: 1992-1994 based on discussion with John Mansell, Senior Analyst, Paul Kagan Associates, Inc. and reference to Cable & Pay TV Census - - December, Marketing New Media, Dec. 19, 1994, at 4; and 1995-96 from discussions with John Mansell, Senior Analyst, Paul Kagan Associates, Inc., Private Cable Investor, Oct 19, 1995, and Nov. 5, 1996. (6) HSD subscribers: 1992 from C-Band Subscriptions in the Sky (Chart), SkyREPORT, 1st Q 1994 at 12, and information provided by the SkyTRENDS research staff based on the number of General Instrument authorizations for receipt of scrambled programming; 1993 from Subscription Data from General Instrument VC II+ Authorizations (Chart), SkyREPORT, Oct. 1994, at 21; 1994 from 1994 Net Authorizations (Chart), SkyREPORT, Feb. 1995, at 9; 1995 from DTH Subscribers, SkyREPORT, Oct. 1995, at 6. (The 1992-95 HSD subscriber figures were reduced by 1% to account for the estimated number of Canadian subscribers.); and 1996 from Harry Thibeadeau, Manager of Industry Affairs, SBCA, Oct. 15, 1996 and DTH Subscribers Chart, SkyREPORT, Oct. 1996, at 8. The 1995- 96 figures are for September. (7) DBS subscribers: 1993 from Let the Games Begin, SkyREPORT, May 1994, at 2; 1994 from Kent Gibbons, DBS: We're Walking the Walk, Multichannel News, Jan. 16, 1995, at 3, 52; 1995 from DTH Subscribers, SkyREPORT, Oct. 1995, at 6; and 1996 from DTH Subscribers Chart, SkyREPORT, Oct. 1996, at 8. The 1995-96 figures are for September. (8) OVS subscribers: 1996 from Bell Atlantic Comments at 5. The 1996 figure is for September. (9) VDT Trial subscribers: 1994-95 from Section 214 Applications, ex parte letters and associated filings with the FCC. The 1994 and 1995 figures are for October. TABLE 2 1996 Cable MSO Horizontal Concentration Nationwide Rank Company Pct. of Subs. 1 TCI 27.94 2 Time Warner 18.94 3 Continental 7.69 4 Comcast 6.83 Top 4 61.40 5 Cox 5.32 6 Cablevision Systems 4.47 7 Adelphia 2.75 8 Jones Intercable 2.40 9 Marcus 2.02 10 Falcon 1.89 Top 10 80.24 Top 25 91.47 Top 50 96.59 HHI 1326 TABLE 3 1996 MVPD Horizontal Concentration Nationwide Rank Company Pct. of Subs. 1 TCI 24.25 2 Time Warner 16.44 3 Continental/US West 6.68 4 Comcast 5.93 Top 4 53.30 5 Cox 4.62 6 Cablevision Systems 3.88 7 DirecTV/USSB 2.95 8 Adelphia 2.39 9 Primestar 2.18 10 Jones Intercable 2.08 Top 10 71.40 Top 25 83.86 Top 50 89.68 HHI 1013 TABLE 4 Changes In Concentration Of The Cable Industry 1990-1996 1990 1991 1992 1993 1994 1995 1996 Top Share 24.0 24.5 25.2 24.3 24.8 25.9 28.0 Top 2 Share 36.7 37.1 37.9 36.9 37.3 42.1 46.9 Top 3 Share 42.0 42.3 43.2 42.3 42.4 48.9 54.6 Top 4 Share 45.6 46.0 48.2 47.2 47.2 54.6 61.4 Top 10 Share 61.6 61.4 64.6 63.2 63.3 73.2 80.2 Top 25 Share 80.8 80.2 84.5 83.1 83.4 88.5 91.5 Top 50 Share 91.2 90.9 94.5 93.1 92.4 95.2 96.6 HHI 866 872 928 880 898 1098 1326 Data for 1996 taken from The Kagan Media Index, August 31, 1996 at 8, 14; Paul Kagan Assoc., Top 100 Cable System Operators as of March 31, 1996, Cable TV Investor, June 20, 1996 (Insert); Paul Kagan Assoc., Top Private Cable Operators, Private Cable Investor, December 31, 1995 at 2; Paul Kagan Assoc., Apollo Cable Sale Complete, Private Cable Investor, May 31, 1996, at 5 and SEC documents. Data for 1995 taken from, supra, App. G, Tbls. 2-3. Data for 1990 through 1994 were calculated from information contained in Paul Kagan Assocs., Inc., Cable TV Financial Databook 14 (1991); Paul Kagan Assocs., Inc., Pay TV Subscriber History, Cable TV Financial Databook 12 (1992); Paul Kagan Assocs., Inc., Pay TV Subscriber History, Cable TV Financial Databook 12 (1993); and Paul Kagan Assocs., Inc., Pay TV Subscriber History, Cable TV Financial Databook 14 (1994), Paul Kagan Assoc., Inc. The data for the years 1990-94 have been recalculated after discussions with Paul Kagan Associates personnel concerning that company's methodology for including consolidated, non- consolidated and international subscribers. International subscribers have been deducted from TCI's subscriber totals in 1991-93 and the estimate of TCI's subscribers in 1994 was similarly modified assuming continuation of historical trends. The figure for TCI's subscribership in 1990 is based on information contained in TeleCommunications, Inc., Form 10-K, Dec. 31, 1990, at I-2 to I-4. TABLE 5 Cable System Transactions November 1995 - October 1996 DATE BUYER SELLER SYSTEM(S) PRICE** (MIL.) BASIC SUBS. PRICE/ SUB.*** CASH FLOW MULT. TRANSACTION DETAILS Nov. 95 Cablevision Systems (CVS) United Video Cablevision Westchester Co., NY $13.81 5,400 $2,557 10.3 Nov. 95 FrontierVision Operating Partners, LP C4 Media Southeast GA; TN; VA $44.70 40,400 $1,107 8.5 Nov. 95 FrontierVision Operating Partners, LP Cox Communications KY; OH $118.80 77,900 $1,525 10.4 Nov. 95 FrontierVision Operating Partners, LP United Video Cablevision ME; OH $120.39 88,000 $1,368 8.5 Nov. 95 Halcyon Communications Cablevision of TX; Empire Communications & Empire Cable of AR AR; OK $8.71 8,675 $1,003 6.7 Sale includes 29 systems Dec. 95 Anderson Pacific Corp. Douglas Cable Communications IA; IL; KS; NE; MO $17.07 16,000 $1,067 8.1 Dec. 95 Charter Communications Premiere Cable/ Masada SC $36.00 21,300 $1,690 9.1 Acquisition adds 10 systems and 21,300 subs. to Charter's SC cluster. Dec. 95 Falcon Holdings Group Falcon First, Inc. AL; GA; NY $133.12 54,950 $2,423 12.2 Dec. 95 Mediacom, LLC Benchmark Cablevision Ridgecrest, Trona & Kern, CA $20.80 11,000 $1,891 7.5 Dec. 95 TCA/Donrey Media Group Partnership Donrey Media Group AR; CA; OK $101.61 60,000 $1,693 9.6 TCA & Donrey Media Group form partnership to own Donrey's 5 systems Dec. 95 Universal Cable Communications Douglas Cablevision Mason, TX $0.94 800 $1,100 8.3 Jan. 96 Century Communications Chino Valley Cablevision Chino, CA $40.60 20,700 $1,961 10.1 Jan. 96 Charter Communications Genesis Cable Picken Co., SC $8.40 4,500 $1,872 9.2 Acquisition boosts Charter's SC cluster Jan. 96 Continental Cablevision* TCI* Andover, Cape Cod, Nantucket & Waltham, MA $172.40 100,600 $1,714 9.9 Systems raise Continental's eastern MA cluster to 780,000 subs. DATE BUYER SELLER SYSTEM(S) PRICE** (MIL.) BASIC SUBS. PRICE/ SUB.*** CASH FLOW MULT. TRANSACTION DETAILS Jan. 96 TCI* Continental Cablevision* Belleville & Scott AFB, IL; metro St. Louis, MO $172.40 95,800 $1,800 9.8 Systems raise TCI's MO & IL clusters to 250,000 subs. Jan. 96 Friendship Cable of AR Cablevision of TX III, LP; Empire Cable of AR, Inc. AR; MO $4.50 4,700 $970 6.4 Jan. 96 Friendship Cable of TX Center Cable of St. Augustine Center & St. Augustine, TX $3.90 3,000 $1,285 13.0 Jan. 96 Galaxy Telecom, LP Vista LP, Vista Narrag. AL; LA; MS; TN $21.30 17,400 $1,225 7.6 Jan. 96 GTR, Inc. Fulton TV Cable Co. Fulton, Mantachie, Tremont, & Itwamba Co., MS $3.00 3,300 $900 6.8 Jan. 96 High Mountain Westar Group Darby, Ennis & W. Yellowstone, MT $1.40 2,000 $708 5.5 Jan. 96 Intermedia Partners Annox, Inc. Robertson, TN $4.70 2,300 $2,100 9.4 Jan. 96 Rifkin Acquisition Partners Mid-Tennessee Cable Hickory Hill, Lebanon & McMinnville, TN $62.00 32,800 $1,851 10.4 Jan. 96 Rifkin Acquisition Partners Rifkin Cablevision of NJ Pulaski, TN $10.20 12,100 $843 7.6 Feb. 96 Continental Cablevision Meredith Cable MN-based MSO $124.00 74,400 $1,667 10.1 Feb. 96 FrontierVision Operating Partners, LP Americable of ME St. Francis, Canton, Trenton, Columbia Falls, Levant, Glenburn, Denmark and Sebago, ME $3.50 3,200 $1,111 8.0 Feb. 96 Post-Newsweek Columbus TV Cable Columbus, MS $23.00 15,700 $1,465 9.5 Feb. 96 US West Media Group Continental Cablevision 16 States $9,631.00 4,200,000 n/a 10.5 Feb. 96 Wander Telecomm. Cablevision of TX III, LP; Empire Comm., Inc. Pinal, Navajo & Gila Cos., AZ; NV $2.50 2,800 $911 6.0 Feb. 96 Wander Telecomm. Phoenix, Blackrock NV; CA $2.20 2,000 $1,075 7.5 Mar. 96 Cox Communications * Time Warner* Hampton & Williamsburg, VA $78.80 45,300 $1,740 9.4 Systems add to Cox's Hampton Road's cluster DATE BUYER SELLER SYSTEM(S) PRICE** (MIL.) BASIC SUBS. PRICE/ SUB.*** CASH FLOW MULT. TRANSACTION DETAILS Mar. 96 Time Warner* Cox Communications * Myrtle Beach, SC; TX $78.80 44,600 $1,767 10.4 Additions to TW's clusters in SC & TX Mar. 96 Fanch Cablevision Tele-Media NC; VA $240.50 160,000 $1,503 9.0 Mar. 96 Galaxy Telecom, LP* TCI of Kansas* Northern MS $15.40 10,000 $1,537 9.0 System trade gives Galaxy Telecom 30,000 subs. in MS cluster Mar. 96 TCI of Kansas* Galaxy Telecom, LP* Shawnee Co. & Topeka, KS $15.40 7,000 $2,195 11.9 Mar. 96 General Communications Prime Cable of AK;Alaskan Cable Network; AK Cablevision Anchorage, AK $280.60 101,000 $2,778 11.8 Mar. 96 Olympus Communications Adelphia South FL $110.00 54,000 n/a n/a Adelphia is restructuring its partnership with Telesat Cablevision Mar. 96 Prime Cable Apollo Communications, SW Las Vegas, NV $7.10 5,400 $1,309 8.3 Mar. 96 TCI Knight-Ridder KY; NJ; NY $770.00 370,000 $2,081 9.1 TCI acquires remaining 50% interest in TKR Cable Co., and 15% share in TKR I, II & III partnerships from Knight-Ridder Apr. 96 Cable Plus, Inc. Apollo Communications, SW WA; OH; CA $12.10 11,600 $1,052 6.8 Apr. 96 Charter Communications Cencom Cable Income Partners, LP Ft. Carson, CO; Ft. Gordon, GA; Ft. Riley, KS; Hopkinsville, KY; Maryville, IL; Camp LeJeune & Tryon, NC; Ashland & Clarksville, TN; TX $211.10 100,000 $2,111 9.3 Apr. 96 Continental Cablevision* Cox Communications * Weymouth and Western MA $83.70 47,700 $1,756 9.9 Acquired systems are contiguous to Continental's systems in Quincy and Springfield, MA DATE BUYER SELLER SYSTEM(S) PRICE** (MIL.) BASIC SUBS. PRICE/ SUB.*** CASH FLOW MULT. TRANSACTION DETAILS Apr. 96 Cox Communications * Continental Cablevision* James City/York Cos., VA; Pawtucket, RI $83.71 48,700 $1,718 9.3 Acquired systems add to Cox's 260,000 subs. in Hampton Roads/ Newport News, VA cluster Apr. 96 Fanch Cablevision, IN Simmons Communications KY; IN $133.00 83,300 $1,598 8.8 Apr. 96 Galaxy Telecom, LP Cablevision of TX; Empire Communications; High Plains Cablevision, Inc KS-based systems $9.60 9,000 1,066 7.0 Apr. 96 Galaxy Telecom, LP Midcontinent Cable Systems Co. of NE Cedar Rapids, Genoa, Newman Grove, St. Edwards, Silver Creek, IA; Meadow Grove, NE $1.70 1,300 $1,296 8.9 Apr. 96 Lenfest Jones Intercable, Inc. (Jones Communications) Turnersville, NJ $84.50 36,000 $2,347 10.1 Systems add to Lenfest's 900,000 subs. cluster in PA, NJ and DE Apr. 96 RW/ Fanch-One Co. Fanch Cablevision of IN 15 States $373.50 243,300 $1,536 8.9 Apr. 96 Teleview, Inc. Falcon Holdings GA based system $15.00 9,500 $1,579 12.6 Apr. 96 TimeWarner/ Fanch/ Blackstone Grp. Cablevision Partnership (TW Fanch) Time Warner PA; WV $205.20 130,000 $1,578 9.0 TW will own 49.5% of this partnership with 373,000 subs. in 17 states May 96 Cablevision Systems (CVS), Cablevision of Framingham A-R Cable Services; A-R Cable Ptnrs; Cablevision of Newark; & Cablevision of Framingham Holdings, Inc. NJ; MA $593.00 297,800 $1,991 10.4 Cablevision Systems (CVS) acquires Warburg Pinkus Investors' minority interest their A-R Cable Systems partnership, adds to 100,000 subs CVS already controls, for total of 420,000 subs. May 96 InterMedia Partners Tellico Cable, Inc. Loundon City, TN $1.70 1,460 $1,164 7.0 Acquisition adds to Intermedia's TN cluster; InterMedia also has clusters in western Carolinas and eastern Georgia DATE BUYER SELLER SYSTEM(S) PRICE** (MIL.) BASIC SUBS. PRICE/ SUB.*** CASH FLOW MULT. TRANSACTION DETAILS May 96 Starkville Cablevision, Inc. Torrence Cablevision Southeast, Inc. Scooba, MS $0.20 200 $1,000 7.0 May 96 TCI (acquires remaining 50% in joint venture) US Cable Group (USC) Lake Co, IL; IN; Allamuchy & Paterson, NJ $213.80 87,500 $2,443 10.7 TCI acquires remaining 50% of partnership's 175,000 subs. Partners will sell systems with 60,000 subs. in FL, GA, NY & SC; Deal removes USC, the 34th largest MSO, from US cable industry. Jun. 96 Anderson Pacific Corp. Douglas Cable Communications IL; IA $9.40 7,600 $1,237 7.5 Jun. 96 Charter Communications TCI Columbus, GA $15.80 13,000 $1,215 7.0 Acquisition adds to Charter's 400,000 subs. cluster in Southeast Jun. 96 Falcon Holdings Group Falcon Cable Systems CA; western OR $247.40 135,600 $1,825 9.7 Jun. 96 Helicon Partners I PCI Sun Cable Jasper, TN $11.40 8,200 $1,382 7.6 Jun. 96 New Path Communications Great Plains Fontanell, IA $0.20 200 $1,027 7.0 Jun. 96 TCA* TCI* Ft. Smith, AR; Sallisaw, OK $50.30 30,000 $1,676 9.5 TCA adds to its AR cluster Jun. 96 TCI* TCA* Vallejo, CA $50.30 28,000 $1,796 9.5 TCI adds to its San Francisco area cluster Jun. 96 TCI Columbine Cablevision Columbine, CO $54.00 31,000 $1,742 n/a TCI adds to its Colorado cluster Jun. 96 Torrence Cablevision Gulf-American Group AL; FL; GA; LA; MS $5.10 8,000 $638 5.3 Jul. 96 FrontierVision Operating Partners, LP Phoenix Grassroots ME; NH $9.60 7,000 $1,371 8.4 Jul. 96 Helicon Partners I Clear-Vu Cable Summerville, GA; & Trenton/ Dayton, OH $18.20 12,300 $1,530 8.1 Jul. 96 Helicon Partners I FrontierVision Operating Partners LP Chartsworth, Eton & Murray Co., GA $8.60 5,700 $1,509 8.2 Jul. 96 InterMedia Partners Cablevision Co. Davidson & Williamson Cos., TN $1.70 1,300 $1,283 8.0 DATE BUYER SELLER SYSTEM(S) PRICE** (MIL.) BASIC SUBS. PRICE/ SUB.*** CASH FLOW MULT. TRANSACTION DETAILS Jul. 96 Marcus Cable Frankfort Cable Communications, Inc. Frankfort, IN $6.70 5,600 $1,196 9.5 System increases Marcus's IN cluster to 110,000 subs. Jul. 96 Marcus Cable FrontierVision Operating Partners, LP Brookhaven, MS $2.60 2,400 $1,079 7.5 Jul. 96 Mediacom LLC Booth American Kern Valley, CA $11.00 7,000 $1,571 8.8 Jul. 96 Raystay Co. Americable N. Middleton & Carlisle Barracks, PA $0.80 600 $1,393 7.5 Jul. 96 Roy L. Baker Clinton Cable Clinton Co., KY $1.40 1,300 $1,111 7.1 Jul. 96 TCI Cablevision of GA Balkin Cable Holdings, LP; W.A.V San Francisco Bay Area, CA $19.60 12,300 $1,594 8.8 Jul. 96 TCI* Washington Post* Santa Rosa, CA $76.50 48,000 $1,542 8.7 Jul. 96 Washington Post* TCI* Springfield, MO $76.50 53,000 $1,442 9.1 Aug. 96 Century Communications Jones Growth Partners II Anaheim, Yorba Linda & Orange Co. (part), CA $36.00 17,000 $2,102 10.5 Acquired systems increase Century's Los Angeles cluster Aug. 96 Century Communications Jones Intercable, Inc. (Jones Communications) Oxnard & Los Angeles & Ventura Cos. (parts), CA $104.00 59,000 $1,750 9.9 Acquired systems increase Century's Los Angeles cluster Aug. 96 Charter Communications KC Cable Associates LP (KKR) Long Beach, Signal Hill & Los Angeles Co. (part), CA $150.00 70,000 $2,143 8.6 Acquired systems increase Charter's souther California cluster to 250,000 subscribers Aug. 96 FrontierVision Operating Partners, LP American Cable KY; IN $146.00 83,400 $1,751 14.0 Aug. 96 FrontierVision Operating Partners, LP SRW, Inc.'s Pennsylvania/ Ohio Cable OH; PA $3.80 3,300 $1,152 7.5 Aug. 96 FrontierVision Operating Partners, LP Triax OH; KY $85.00 53,800 $1,580 10.2 Aug. 96 InterMedia Partners TCI Greenville & Spartenburg, SC $196.20 115,000 $1,693 8.6 Systems add to InterMedia's 150,000 subscribers southeast cluster DATE BUYER SELLER SYSTEM(S) PRICE** (MIL.) BASIC SUBS. PRICE/ SUB.*** CASH FLOW MULT. TRANSACTION DETAILS Aug. 96 Jones Communications (formerly Jones Intercable) Maryland Cable Partners Prince George's Co., MD $235.00 87,000 $2,701 9.5 Acquired system is adjacent to Jones' 160,000 subs. system in southern Prince George's County & increases Jones' Washington, DC cluster to 400,000 subscribers Aug. 96 Northland Communications Marcus Cable Moses Lake, WA $20.00 12,500 $1,568 9.5 Aug. 96 Shenandoah Cable FrontierVision Operating Partners, LP Woodstock & New Market, VA $8.50 5,000 $1,700 9.4 Sep. 96 Cambridge Classic Cable Albuquerue, NM; southwest WA; northwest OR $22.90 13,000 $1,760 8.5 Sep. 96 InterMedia Partners OCB Cablevision, Inc. Bogart & Watkinsville, & Clarke & Oconee Cos., GA $8.30 6,300 $1,333 8.1 Sep. 96 Sep. 96 Moffet Communications Benchmark Communications Palm Coast, FL $29.70 10,000 $2,965 9.2 Sep. 96 Pine State Gateway Cablevision Chesterfield, NH $2.90 2,500 $1,170 7.9 Sep. 96 Pine Tree Highland Stoddard, Harrisville, Marlow, Nelson & Sullivan, NH $0.80 800 $1,037 7.2 Sep. 96 Roseville Communications Corp. (RCC) Jones Intercable, Inc. (Jones Communications) Roseville, CA $32.00 16,000 n/a n/a LEC buys in-region cable system Sep. 96 TCA Classic Cable Van Buren et al., AR $9.60 8,000 $1,199 8.1 Sep. 96 TCI Jones Spacelink Rosenburg, TX $5.50 2,900 $1,896 10.8 Sep. 96 TCI Jones Cable Income Fund 1-B/C (Jones Communications) Brighton, Broomfield, & Adams & Boulder Cos., CO $33.80 18,500 $1,825 9.5 Systems add to TCI's 415,000 subs. in Denver cluster Oct. 96 Fanch Cablevision Northern Ohio IN; OH; PA $9.40 6,800 $1,387 8.3 1995-96 TOTAL $16,341.84 7,510,860 $2,070 1996 TOTAL $15,725.90 7,895,285 $2,094 NOTES: * System swaps ** The transaction prices are from Kagan. The transaction price is dependent upon the terms of each deal and may or may not include debt. *** The calculations of Price/Subscriber are from Kagan. These calculations are subject to rounding and reporting inconsistencies. SOURCES: CEA Represents Companies in Sammons Transactions, Private Cable & Wireless Cable, May 1996, at 28; D & A Announces Systems Sales, Independent Cable News, Jan. 1996, at 21; Daniels & Associates Represents Sellers, Private Cable & Wireless Cable, Jun. 1996, at 42; Price Colman, Indie Telco Buys Cable System, Broadcasting & Cable, Oct. 21, 1996, at 44; Deals, CableFAX Daily, Jul. 31, 1996, at 1; John M. Higgins, KKR Finally Exiting Cable, Multichannel News, Aug. 26, 1996, at 51; InterMedia Concentrates on Clusters in Southeast, Multichannel New, Jul. 15, 1996, at 60; Paul Kagan Associates, Inc., Announced/Proposed Cable System Sales, Cable TV Investor, Dec. 18, 1995, at 7; Jan. 26, 1996, at 11; Feb. 29, 1996, at 10; Mar. 15, 1996, at 7; Apr. 12, 1996, at 9; May 21, 1996, at 13; Jun. 20, 1996, at 8; Jul. 23, 1996, at 8; Aug. 21, 1996, at 10; Sept. 20, 1996, at 11; Oct. 21, 1996, at 12 Paul Kagan Associates, Inc., Second Half 1995 Announced/Proposed Cable System Sales Ranked by Price, Cable TV Finance, Feb. 21, 1996, at 4; HPC Puckett Handles Refinancing, System Sales, Private Cable & Wireless Cable, Jun. 1996, at 43; Jones Sells Systems for $140 million, Broadcasting & Cable, Aug. 26, 1996, at 47; Jones, TCI Cut Deal for Denver Systems, Cable World, Sept. 16, 1996, at 3; Jim McConville, Cable Concentrates on Future, Broadcasting & Cable, Jun. 24, 1996, at 54; Marcus Completes System Buy, Broadcasting & Cable, Aug. 12, 1996 at 68; Mass Media, Comm. Daily, Dec. 1, 1995; Dec. 8, 1995; Dec. 15, 1995; Jan.16, 1996; Jan. 17, 1996; Jan. 19 1996; Jan. 28 1996; Feb. 13, 1996; Feb. 26, 1996; Mar. 1, 1996; Mar. 11, 1996; Mar. 27, 1996; Mar. 29, 1996; Apr. 2, 1996; Apr. 5, 1996; Apr. 16, 1996; Apr. 19, 1996; Apr. 25, 1996; Apr. 29, 1996; May 2, 1996; May 3, 1996; May 14, 1996; May 21, 1996; May 28, 1996; Jun. 4, 1996; Jun. 10, 1996; Jul. 3, 1996; Jul. 10, 1996; Jul. 25, 1996; Jul. 31, 1996; Aug. 2, 1996; Aug. 5, 1996; Aug. 6, 1996; Aug. 20, 1996; Aug. 21, 1996; Sep. 16, 1996; Sep. 17, 1996;Sep. 18, 1996; Oct. 1, 1996 at 5; Oct. 3, 1996 at 5; Oct. 8, 1996 at 5; Oct. 21, 1996; Oct. 28, 1996; KC Neel, System Sales, Cable World, Jun. 3, 1996, at 37; Consolidation: MSOs Execute More System Trades, Cable World, Aug. 26, 1996, at 50; US West Media Group and Continental Cablevision Close Merger (Press Release), U S West Media Group, Nov. 15, 1996 APPENDIX G Table 1 MSO Ownership in National Programming Services Programming Service Launch Date Ownership Percentage Action Pay-Per-View Sept-90 TCI (22) Time Warner (15) AMC Oct-84 Cablevision Systems (75) Animal Planet Jun-96 TCI (49), Cox (24.7) BET Jan-80 TCI (22) Time Warner (15) BET on Jazz Jan-96 TCI (22) Time Warner (15) The Box Dec-85 TCI (5) Bravo Feb-80 Cablevision Systems (50) Cartoon Network Oct-92 Time Warner (100) Catalog 1 Apr-94 Time Warner (50) Cinemax Aug-80 Time Warner (100) CNN Jun-80 Time Warner (100) CNN International Jan-95 Time Warner (100) CNNfn (The Financial Net.) Dec-95 Time Warner(100) Comedy Central Time Warner (50) Court TV Jul-91 TCI (33.3) Time Warner (33.3) Continental (33.3) The Discovery Channel Jun-85 TCI (49) Cox (24.6) E! Entertainment Jun-90 Time Warner (49.0) Continental (10.3) Comcast (10.3) Cox (10.4) TCI (10.3) Encore Apr-91 TCI (90) Encore Love Stories Jul-94 TCI (90) Programming Service Launch Date Ownership Percentage Encore Westerns Jul-94 TCI (90) Encore Mysteries Jul-94 TCI (90) Encore Action Sept-94 TCI (90) Encore True Stories and Drama Sept-94 TCI (90) Encore WAM! America's Youth Network Sept-94 TCI (90) The Family Channel Apr-77 TCI (20) Faith & Values Jun-84 TCI (49) FIT TV Oct-93 TCI (20) fX Oct-94 TCI (50) FXM Oct-94 TCI (50) Gems International Television Apr-93 Cox (50) The Golf Channel Jan-95 Continental (20.2), Comcast, Cablevision Systems, Adelphia Great American Country Dec-95 Jones (**) HBO Nov-72 Time Warner (100) HBO 2 Dec-75 Time Warner (100) HBO 3 Oct-93 Time Warner (100) Headline News Jan-82 Time Warner (100) Home Shopping Network Jul-85 TCI (80) Home Shopping Network II Sept-86 TCI (80) Independent Film Channel Sep-94 Cablevision Systems (50) The International Channel Jul-90 TCI (45) Intro Television Sept-94 TCI (100) Jones Computer Network Sept-94 Jones (81) Programming Service Launch Date Ownership Percentage The Learning Channel Nov-80 TCI (49) Cox (24.7) Mind Extension University Nov-87 Jones (66) Much Music USA Jul-94 Cablevision Systems (50) Newsport Feb-94 Cablevision Systems (25) Outdoor Life Channel Jul-95 Cox (41), Continental (23), Comcast (22.5) Ovation: The Fine Arts Network Apr-96 Time Warner (**) Prime Deportiva Mar-95 TCI (100) Prime Network Jan-93 TCI (33) Cablevision Sys. (25) Product Information Network Apr-94 Cox (50) Jones (**) Adelphia (**) QVC Nov-86 Comcast (57.4) TCI (42.6) Q2 Sept-94 Comcast (57.4) TCI (42.6) Request Television Nov-85 TCI (40) Request 2 Jul-88 TCI (40) Request 3-5 Sept-93 TCI (40) Sega Channel TCI (33), Time Warner (33) Speedvision Dec-95 Cox (39.0) Continental (22.1) Starz! Feb-94 TCI (49.9) The Sunshine Network Mar-88 Cox (5.3) TBS Time Warner (100) Television Food Network Nov-83 Continental (15), Scripps-Howard (13.17),Cox (1.9) Adelphia, C- TEC (**) TNT Oct-88 Time Warner (100) Turner Classic Movies Apr-94 Time Warner (100) Programming Service Launch Date Ownership Percentage Viewers Choice Nov-85 Cox (20), Time Warner (17) Continental (12), Comcast (11), TCI (10) Viewers Choice: Hot Choice Jun-86 Cox (20), Time Warner (17) Continental (12), Comcast (11), TCI (10) Viewers Choice: Continuous Hits 1,2,3 Feb-93 Cox (20), Time Warner (17) Continental (12), Comcast (11), TCI (10) * Denotes ownership percentage of less than 5%. ** Ownership percentage not available. Source: Annual Reports of various MSOs. Table 2 Existing National Programming Services Without A Cable Operator Holding An Ownership Interest Programming Service Launch Date A&E Television Network Feb-84 Adam & Eve Channel Feb-94 All News Channel Nov-89 America's Health Network Mar-96 ANA Television Network Unavailable Asian American Satellite TV Jan-92 C-SPAN 2* Jun-86 C-SPAN* Mar-79 Cable Video Store Apr-86 Canal Sur Aug-91 Canal de Noticias NBC Mar-93 Channel America Television Network Jun-88 Children's Cable Network May-95 CineLatino Dec-94 (in U.S.) Classic Sports Network May-95 Classic Arts Showcase May-94 CMT: Country Music Television Mar-83 CNBC Apr-89 Consumer Resource Network Dec-94 Crime Channel Jul-93 Deep Dish Jan-86 Disney Channel Apr-83 DRAGnet Dec-95 Programming Service Launch Date Employment Channel Feb-92 ESPN Sep-79 ESPNEWS Nov-96 ESPN2 Oct-93 Ethnic-American Broadcasting Co. 1992 EWTN: The Catholic Network Aug-81 Flix! Apr-91 Foxnet Jul-91 Fox News Channel (FNC) Oct-96 Galavision Oct-79 Gay Entertainment Television Nov 95 Home & Garden Dec-94 Jewish Television Network Jan-81 Kaleidoscope: America's Disability Network (incorporating the Silent Network) Jun-90 Lifetime Television Feb-84 Lottery Channel Nov-95 Mor Music TV Aug-92 MTV: Music Television Aug-81 MTV Latino Oct-93 MSNBC (replaces America's Talking) Jul-96 NASA Television Jul-91 National & International Singles Television Network Apr-95 NET - Political NewsTalk Network (formerly National Empowerment Television) Dec-93 Nickelodeon Apr-79 Programming Service Launch Date Nick at Nite Jul-85 Nostalgia Channel Feb-85 The 90s Channel Nov-89 The Game Show Network Dec-94 The Inspirational Network (INSP) Apr-78 The Filipino Channel Apr-94 The History Channel Jan-95 The Movie Channel (TMC) Dec-79 Playboy Network (formerly Playboy Channel) Nov-82 Popcorn Channel Nov-95 Prevue Feb-88 Sci-Fi Channel Sep-92 SCOLA Aug-87 Showtime Jul-76 SingleVision Jun-94 Spice May-89 Sundance Channel Feb-96 Telemundo Jan-87 TNN: The Nashville Network Mar-83 The Travel Channel Feb-87 Trinity Broadcasting Network Apr-78 Trio Sep-94 TV Asia Apr-93 TV-Japan Jul-91 U Network Oct-89 Univision Sep-76 Programming Service Launch Date ValueVision Oct-91 VH-1 Jan-85 Via TV Network Aug-93 Video Catalog Channel Oct-91 The Weather Channel May-82 Worship Network Sep-92 Z Music Mar-93 * Currently, there are no MSO ownership interests in C-SPAN and C-SPAN 2. However, several MSOs support C-SPAN and are represented on the board of directors as voting members. 1995 Competition Report. Source: NCTA Comments, 1996; Broadcasting and Cable, April 29, 1996, at 61-78. TABLE 3 Planned National Programming Services With Ownership Interests Held by a Cable Operator Programming Service MSO Affiliation Expected Launch Date BET Movies/STARZ!3 TCI & Time Warner Feb-97 CNNSI Time Warner Dec-96 Jones Health Network Jones Cable 1996 Jones Language Network Jones Cable TBA M2: Music Television Cablevision Systems TBA The Parents Channel Malofilm Communications 1996 Soap TV Fifth Dimension Communications Dec-96 The Singles Network Rainbow Programming 1996 TCI/Microsoft Channel TCI 1996 World African Network Time Warner 1996 TBA - To Be Announced Sources: NCTA Comments, Table 9 July 19, 1996. TABLE 4 Planned National Programming Services Without A Cable Operator Holding An Ownership Interest Programming Service Expected Launch Date Air & Space Network TBA American West Network TBA Animal Vision: The Animal Channel 2nd Qtr 97 Anti-Aging Network, The 4th Qtr 96 Applause Networks Dec-96 Arena (formerly Classic Music Channel) 4th Qtr 96 Art & Craft Network TBA Arts & Antiques Network Dec-96 Axon (formerly XTV) 4th Qtr 97 The Auto Channel 1st Qtr 97 Automotive Television Network (ATN) Dec-96 Benefit Network 1998 Biography Channel, The TBA Boating Channel 2nd Qtr 97 Booknet Jan-97 The Cable Consortium TBA Career & Education Opportunity Network 3rd Quarter 1997 Catalogue TV Jan-97 CEO Channel 4th Qtr 96 Channel 500 TBA CHOP TV 4th Qtr 96 Collectors Channel Spring 97 FAD TV (Fashion & Design Channel) Late 96 Fashion Network TBA (Launched regionally in NY & CT) Programming Service Expected Launch Date Fitness Interactive Television (formerly FXTV Fitness and Exercise Television) 4th Qtr 1996 Gaming Entertainment Television Oct-96 Global Village Network 4th Qtr 96 Golden American Network 4th Quarter 1996 The Gospel Network 4th Quarter 1996 Hobby Craft Network 1996 Home Improvement TV Network TBA Horizons Cable Network TBA Jackpot Channel, The TBA Kid City 4th Qtr 97 - 1st Qtr 98 The Love Network Dec-96 (or Apr-97) MBC Movie Network, The TBA New Science Network 1997 ORB TV 1997 Parent Television 4th Qtr 96 Merchandise Entertainment Television TBA Parenting Satellite TV Network 4th Quarter 1996 The Pet Television Network 1st Qtr 97 Premiere Horse Network Jan-97 Prime Life Network TBA Real Estate TV Network 2nd Qtr 97 Recovery Net/The Wellness Channel Limited Launch Feb 96 (Dec-96) The Seminar Channel TBA Sewing & Needles Arts Network TBA The Success Channel 1996 Talk TV Network 1997 Programming Service Expected Launch Date Technology Channel, The TBA TRAX Television Network Late 1996 TV 5 Sep-97 Sources: NCTA Comments, 1996; Broadcasting and Cable, April 29, 1996, at 61-79. TABLE 5 Top Eight Major MSO Ownership in National Programming MSO Rank in Order by Subscribers Services Subs. (Mil.) TCI Time Warner Contin- ental Cable- vision Comcast Cox Cable- vision Sys. Adelphia Jones Cable Action Pay- Per-View1/ 7.2 22.0% 15.0% Animal Planet 49.0% 24.7% AMC 61.0 75.0% BET 1/ 45.0 22.0% 15.0% BET Jazz 1/ 0.8 22.0% 15.0% The Box 21.1 5.5% Bravo 22.5 50.0% Cartoon 2/ 28.1 100.0% Catalog 1 50.0% Cinemax 8.9 100.0% CNN 2/ 68.6 100.0% CNNfn - The Financial Network 2/ 6.2 100.0% CNN Int'l 2/ 5.5 100.0% Comedy Central 40.8 50.0% Court TV 26.7 33.3% 33.3% 33.3% Discovery 68.0 49.0% 24.6% Encore Thematic Multiplex: Love Stories 9.3 90.0 % Encore 2: Westerns * 90.0% Services Subs. (Mil.) TCI Time Warner Contin- ental Cable- vision Comcast Cox Cable- vision Sys. Adelphia Jones Cable Encore 3: Mystery * 90.0% Encore 4: Action * 90.0% Encore 5: True Stories * 90.0% Encore 6: WAM! America's Youth Network * 90.0% E! Entertainment 40.0 10.3% 50.0% 10.3% 10.3% 10.4% Faith & Values Channel 25.7 49.0% The Family Channel 65.4 20.3% FIT TV 7.2 20.3% fX 50.0% FXM 50.0% GEMS Television 6.0 50.0% The Golf Channel 3/ 3.0 20.2% 3/ 3/ 3/ Great American Country * x HBO 1 20.8 100.0% HBO 2 * 100.0% HBO 3 * 100.0% Headline News 2/ 61.1 22.6% 18.6% x x Services Subs. (Mil.) TCI Time Warner Contin- ental Cable- vision Comcast Cox Cable- vision Sys. Adelphia Jones Cable Home Shopping Net. (HSN) 49.2 80.4% Home Shopping II * 80.4% Independent Film Channel 3.0 50.0% International Channel 7.5 45.0% Intro Television 9.2 100.0% Jones Computer Network 1.5 81.0% Learning Channel 48.5 49.0% 24.6% Mind Extension University 26.0 66.0% MuchMusic 4.0 50.0% Newsport 6.5 33.0% 25.0% Outdoor Life 3.9 23.0% 22.5% 41.0% Ovation: The Fine Arts Net. * Prime Deportiva 2.7 Prime Network 48.4 33.0% 25.0% Product Information Network 5.4 50.0% 5/ 5/ QVC 56.1 42.6% 57.4% Q2 11.3 42.6% 57.4% Services Subs. (Mil.) TCI Time Warner Contin- ental Cable- vision Comcast Cox Cable- vision Sys. Adelphia Jones Cable Request Television: Request 1 35.0 40.0% Request Television: Request 2 * 40.0% Request Television: Request 3-5 * Sega Channel * 33.0% 33.0% Speedvision Network 1.2 22.1% 39.0% x Starz! 3.3 48% The Sunshine Network 3.8 7.5% 5.3% TBS 2/ 68.5 100.0% TV Food Network 4/ 17.0 15.0% 4/ 4/ TNT 2/ 67.5 100.0% Turner Classic Movies 2/ 10.0 100.0% Viewers Choice 16.0 10.0% 17.0% 12.0% 11.0% 20.0% Viewers Choice: Continuous Hits 1, 2, 3,4 ** 10.0% 17.0% 12.0% 11.0% 20.0% Viewers Choice: Hot Choice ** 10.0% 17.0% 12.0% 11.0% 20.0% Sources: Subscriber count was obtained from Paul Kagan Assocs., Inc., Cable TV Programming, July 31,1996 at 12 and National Cable Television Assoc., Cable Television Developments, Spring 1996. Ownership percentages were obtained from MSO's 10K Reports; Cablevision, July 15, 1996 at 66; Ownership interests reported for earlier periods may not reflect current ownership. Notes: x Indicates percentage of ownership is less than 5%. * Indicates subscriber amount is not available. ** Subscribership of 16.0 million includes all six Viewers Choice channels (See NCTA Cable Television Developments, Spring 1996, at 82). 1/ A programming service of BET Holdings, Inc. See BET Holdings, Inc., 7/31/94 Annual Report at 34. 2/ Previously a Turner Broadcasting programming service. 3/ Official ownership percentages of Comcast, Cablevision Systems, and Adelphia, in The Golf Channel are not available. 4/ Voting partners in Television Food Network & percentages of ownership include Scripps Howard (13.17%) and Landmark (12.00%). Others having less than 5% interest are: Adelphia Communications, Times Mirror, and C-TEC. Percentages provided by Mr. John Davis of Wiley, Rein, and Fielding, Sep 21, 1995. 5/ Percentage of ownership is not available. TABLE 6 Vertical Integration: Top 25 Programming Services by Subscribership Rank Programming Network (Top 25) Number of Subscribers (Millions) MSO Ownership Interest in Network 1 CNN 68.6 Time Warner 2 ESPN 68.6 None 3 TBS 68.5 Time Warner 4 C-SPAN 64.5 None 5 USA Network 68.0 None 6 Discovery 68.0 TCI, Cox 7 TNT 67.8 Time Warner 8 Nickelodeon/Nick at Nite 66.7 None 9 TNN (The Nashville Network) 63.0 None 10 The Family Channel 65.4 TCI 11 Arts & Entertainment (A&E) 65.1 None 12 Lifetime 64.6 None 13 MTV 64.1 None 14 The Weather Channel 63.3 None 15 Headline News 61.4 Time Warner Rank Programming Network (Top 25) Number of Subscribers (Millions) MSO Ownership Interest in Network 16 AMC (American Movie Classics) 61.0 Cablevision Systems 17 CNBC 58.6 None 18 QVC 56.4 Comcast, TCI 19 VH-1 55.1 None 20 HSN 49.7 TCI 21 The Learning Channel (TLC) 49.5 TCI, Cox 22 C-SPAN II 45.2 None 23 BET 45.0 TCI, Time Warner 24 Prevue Channel 44.1 None 25 Comedy Central 40.8 TCI Current as of July 31, 1996 Sources: Paul Kagan Associates, Cable TV Programming, July 31, 1996, at 10. TABLE 7 Vertical Integration: Top Fifteen Programming Services by Ratings By Prime Time Rating Rank Programming Service MSO with Ownership Interest 1 TNT TCI, Time Warner (others have 5% or less) 2 TBS TCI, Time Warner (others have 5% or less) 3 ESPN None 4 USA Network None 5 Lifetime None 6 Cartoon Network TCI, Time Warner (others have 5% or less) 7 Arts & Entertainment None 8 The Family Channel TCI 9 Discovery TCI, Cox 10 TNN (The Nashville Network) None 11 CNN TCI, Time Warner (others with 5% or less) 12 The Learning Channel TCI, Cox 13 BET TCI, Time Warner 14 Sci-Fi Channel None2 15 The Weather Channel None Sources: Paul Kagan Associates, Cable TV Programming, Prime-Time Ratings, July 1996, at 10. APPENDIX H Program Access Matters Resolved 1. In a program access complaint involving exclusivity decided in 1996, Corporate Media Partners d/b/a Americast ("Americast") and Ameritech New Media, Inc. ("New Media") alleged that they had been denied access to Home Box Office ("HBO") programming as a result of Continental Cablevision, Inc.'s ("Continental") and HBO's exclusive contract. In denying the complaint, the Cable Services Bureau concluded that parties to an exclusive contract may enforce an exclusivity provision with respect to newly-acquired systems, where the contract included an after-acquired systems provision that was made part of the contract prior to June 1, 1990. 2. The Cable Services Bureau denied a program access complaint filed by the American Cable Company ("American Cable") against TeleCable of Columbus, Inc. ("TeleCable") alleging violations of Section 628(b). The Cable Services Bureau found that TeleCable's exclusive programming agreements with Sci-Fi and ESPN were permissible under Section 628(h)'s exemption of exclusive programming contracts because neither service was vertically integrated at the time the complaint was filed. 3. The Bureau also dismissed several complaints alleging violations of the Commission's program access rules on video dialtone ("VDT") platforms. Interface Communications Group, Inc., Digital Broadband Applications Corp. and Residential Communications Network of Massachusetts, Inc. separately filed complaints against Cablevision Systems Corp., Rainbow Programming Holdings, Inc., and American Movie Classics Co., alleging violations of the Commission's program access rules. Because the 1996 Act repealed the Commission's VDT rules and policies and the Commission now requires operating VDT systems to convert to one of the four options available under the 1996 Act, the Bureau dismissed the above referenced complaints as moot. 4. Two other cases were dismissed in the last year after complainants filed to withdraw their complaints. CAI Wireless Systems, Inc. ("CAI") and Connecticut Choice Television, Inc., ("CCT") filed a program access complaint against Cablevision Systems, Inc., Rainbow Programming Holdings, Inc., SportsChannel New England and SportsChannel New York, alleging that defendants refused to provide SportsChannel New England and SportsChannel New York programming to CCT for use by Southern New England Telephone's ("SNET") video dialtone trial service and refused to provide SportsChannel New England programming to CAI for its wireless cable system. Because SNET withdrew its plans to offer VDT service, CAI and CCT filed on February 1, 1996 to withdraw their program access complaint. On March 4, 1996, the Bureau dismissed the complaint without prejudice. Similarly, CAI and CCT filed a program access complaint against Cablevision Systems, Inc., and Madison Square Garden Network, Inc., alleging that defendants refused to provide programming to CAI and CCT. On February 1, 1996, CAI and CCT filed to withdraw their complaint and on March 4, 1996, the Bureau dismissed the complaint without prejudice. 5. In a discrimination case resolved in 1996, Consumer Satellite Systems, Satellite Receivers, Ltd, Galaxy Satellite Services, Inc., A&L Satellite, Inc., Programmers Clearing House, Inc., American Programming Service, Inc., ("Complainants") filed a price discrimination complaint in 1994 against United Video Satellite Group, Inc., and its wholly owned subsidiary UV Corp., d/b/a/ Superstar Satellite Entertainment ("Superstar"), alleging that Superstar had discriminated against complainants with respect to rates for programming purchased from Superstar in violation of Section 628. The parties, assisted by Commission staff, settled the matter and the case has been dismissed. 6. In an appeal of a 1995 Order, the Cable Services Bureau denied a Petition for Reconsideration by SportsChannel Associates ("SportsChannel"), seeking reconsideration of the Cable Services Bureau's decision in CellularVision of New York v. SportsChannel Associates. In the CellularVision Order, the Cable Services Bureau found that SportsChannel, an affiliate of Cablevision Systems, discriminated against CellularVision in the sale of SportsChannel New York ("SCNY") programming in violation of Section 628(c)(2)(B) of the Communications Act and Section 76.1002(b) of the Commission's rules. As a result, the Bureau ordered SportsChannel to sell its SCNY programming to CellularVision on non-discriminatory terms within 45 days from the release date of the Order. In denying the Petition for Reconsideration, the Cable Services Bureau found, based on the record, that SportsChannel's arguments did not warrant reversal of the Cable Services Bureau's decision, and that SportsChannel's stated concerns regarding signal security did not constitute a legitimate business reason for refusing to provide programming to CellularVision. 7. Finally, two other cases were dismissed in the last year after the parties filed Joint Stipulations of Dismissal. In one matter, OpTel, Inc. ("OpTel") filed a program access complaint against Century Southwest Cable Television, Inc. ("Century"), alleging that Century had denied OpTel access to Prime Ticket Networks, L.P. ("Prime Ticket") programming pursuant to an exclusivity agreement that was not validly grandfathered pursuant to Section 628(h). OpTel also alleged that Century had violated Section 628(c)(2)(B) by unreasonably refusing to sell OpTel its Prime Ticket programming. In the other matter, TELE-TV Media L.P. ("TELE-TV") and Pacific Bell Video Services ("Pacific Bell") filed a complaint alleging similar violations against Century Communications Corporation and Prime Ticket Networks, L.P. (d.b.a. Prime Sports West). With respect to the OpTel matter, with assistance from Commission staff, the parties filed a Joint Stipulation of Dismissal requesting dismissal of the complaint, resulting in an agreement by Century to waive its exclusive rights to Prime Ticket's programming with respect to all other MVPDs, including, but not limited to OpTel. Shortly after resolution of the OpTel matter, the parties filed a similar Joint Stipulation with respect to the complaints by TELE-TV and Pacific Bell. Thus, the Cable Services Bureau issued orders dismissing both matters.
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