FCC Releases Reports on Video Competition and Cable Industry Pricing

On February 4, 2005, the FCC released its “Eleventh Annual Report on the Status of Competition in the Market for the Delivery of Video Programming” (the “Competition Report”), as well as the related “Report on Cable Industry Prices” (the “Pricing Report”). The two reports collectively updated the FCC’s earlier annual reviews and explored the current status of the cable industry and other multichannel video programming distributors (“MVPDs”).

Both reports reflected an increasing sensitivity by the FCC to the competitive challenges facing the cable industry today. This year’s Competition Report noted that, although cable continues to have the largest market share in the distribution of video programming, its market share declined from 73.6% in 2003 to 71.6% in 2004, while DBS’ market share increased from 22.7% to 25.1% in the same time period. The Competition Report further noted that, while cable subscribership increased only slightly from the previous year, the DBS industry reported “nearly double-digit rates of growth.” DirecTV and EchoStar are now the second- and fourth-largest MVPDs in the country, respectively. The Competition Report attributed much of DBS’ subscriber growth to enactment of the Satellite Home Viewer Improvement Act of 1999, allowing DBS providers to offer local and network broadcast signals into their local markets. (These rules were recently extended, and refined, through the Satellite Home Viewer Extension and Reauthorization Act of 2004.) The Competition Report also noted that although DBS rates have generally increased over the past year, a recent survey ranked EchoStar and DirecTV first and second, respectively, in customer satisfaction among 13 major MVPDs. Finally, it reported that DBS operators have moved away from free-equipment promotions requiring year-long service contracts and towards promoting equipment leasing on a monthly basis.

The Competition Report also looked at other competitive alternatives to cable. Notably, the FCC acknowledged the recent announcements by several ILECs of plans to provide video service over fiber-to-the-premises (“FTTP”) networks. By contrast, the FCC reported reduced competition from other competitive alternatives to cable, finding that the market share for MMDS or wireless cable systems remained static, at 0.22% of all MVPD households (approximately 200,000 subscribers), and that the market share of SMATV systems declined slightly to 1.19% (approximately 1.1 million subscribers) in 2004. Not surprisingly, the FCC referenced the Report and Order it released on October 14, 2004, encouraging the development of Broadband-Over-Powerline or “BPL” technologies, but it also reported that electric and gas utilities currently are providing services mostly in rural, “scattered locations.” The Competition Report also indicated that Broadband Service Provider or “BSP” overbuilders faced considerable financial difficulties in 2004, although some may emerge from bankruptcy soon, as RCN did this past December. Internet video was not recognized as significant competition to the cable industry yet, given the poor quality exhibited by streaming technologies.

The Competition Report further noted that subscriber numbers for premium cable declined from 35.3 million homes in 2002 to 34.8 million in 2003, and that subscriber numbers for basic cable were projected to increase only marginally, from 66 million in 2003 to 66.2 million in 2004. At the same time, the FCC generally accepted the NCTA’s estimate that 95% of television households were passed by cable in 2004, rejecting challenges to NCTA’s data from NRTC. The Competition Report stated that cable revenue grew to $54.3 billion in 2003, an 11.5% increase over 2002, and was projected to grow by an additional 10.8% to $60.2 billion in 2004.

The Pricing Report indicated that the average monthly rate for cable service increased by 5.4% to $45.32 in 2004, but noted that the rate of increase appears to be slowing down, from a 7.8% increase the year earlier. The FCC reported that cable stock prices fell 8.2% from June 2003 to June 2004. It cited Kagan for the proposition that the decline may be attributed to investor concerns about competition from DBS and the recent announcement by ILECs regarding their development of FTTP. The Competition Report also reflected a reversal of the earlier trend in cable system acquisitions, noting Kagan’s conclusion that the nine transactions in the first six months of 2004 constituted the smallest number of cable transactions since they were first tracked, in 1982. It stated that cable acquisition prices ranged from $1,259 per subscriber up to $3,225 per subscriber, averaging $2,321.

Finally, the FCC considered horizontal and vertical integration in the distribution of video programming. The Competition Report indicated that the HHI index, which is used to measure market concentration in the purchase of video programming, declined marginally from 1134 in June 2003 to 1097 in March 2004. It also reported that the total number of national satellite-delivered programming networks increased from 339 in 2003 to 388 in 2004, while the percentage of networks owned in part or whole by cable operators decreased from 33% to 23%.

If you would like a copy of the Competition Report (approximately 113 pages) or the Pricing Report, or have any questions concerning their content, please contact us.