![](media/image1.wmf){width="1.1416666666666666in" height="2.0in"}

> **Federal Communications Commission**

**Office of Plans and Policy**

**445 12th Street, SW**

**Washington, DC 20554**

# 

# 

# 

**OPP Working Paper Series**

+--------------+-------------------------------------------------------+
| 37           | Broadcast Television:                                 |
|              |                                                       |
|              | Survivor in a Sea of Competition                      |
+--------------+-------------------------------------------------------+

September 2002

> Jonathan Levy
>
> Marcelino Ford-Livene
>
> Anne Levine

The FCC Office of Plans and Policy\'s Working Paper Series presents
staff analysis and research in various states. These papers are intended
to stimulate discussion and critical comment within the FCC, as well as
outside the agency, on issues in telecommunications policy. Titles may
include preliminary work and progress reports, as well as completed
research. The analyses and conclusions in the Working Paper Series are
those of the authors and do not necessarily reflect the views of other
members of the Office of Plans and Policy, other Commission staff, or
the Commission itself. Given the preliminary character of some titles,
it is advisable to check with authors before quoting or referencing
these Working Papers in other publications. This document is available
on the FCC\'s World Wide Web site at http://www.fcc.gov/opp/. The inside
back cover contains a partial list of previous titles.

**Broadcast Television: Survivor in a Sea of Competition**

Jonathan Levy[^1]

Marcelino Ford-Livene

Anne Levine

Federal Communications Commission

September 2002

OPP Working Paper No. 37

The FCC Office of Plans and Policy\'s Working Paper Series presents
staff analysis and research in various states. These papers are intended
to stimulate discussion and critical comment within the FCC, as well as
outside the agency, on issues in telecommunications policy. Titles may
include preliminary work and progress reports, as well as completed
research. The analyses and conclusions in the Working Paper Series are
those of the authors and do not necessarily reflect the views of other
members of the Office of Plans and Policy, other Commission staff, or
the Commission itself. Given the preliminary character of some titles,
it is advisable to check with authors before quoting or referencing
these Working Papers in other publications.

**Abstract**

The television broadcast industry has entered the new millennium in good
shape, but with many challenges on the horizon. Although the past decade
has seen a continuing erosion of broadcast audience and advertising
shares, television advertising prices and revenues have continued to
grow. DBS and the expansion in cable availability and channel capacity
have created an increasingly competitive environment for television
broadcasting. This will lead to continuing audience fragmentation and
further pressure on broadcast advertising revenues. The increasing
competition for program production resources has led to an increase in
production costs. The future profitability of the broadcast industry
will depend on how it responds to competition and cost pressures, and on
whether it can harness new technologies such as DTV and interactive
services to its benefit.

Contents

[I. Introduction 1](#i.-introduction)

[II. The Market for Video Media 3](#ii.-the-market-for-video-media)

[III. The Economics of Television Financing Methods
7](#iii.-the-economics-of-television-financing-methods)

[Introduction 7](#introduction)

[The Impact of Financing Methods on Video Programming Availability
7](#the-impact-of-financing-methods-on-video-programming-availability)

[Aggregate Trends in Video Advertising
9](#aggregate-trends-in-video-advertising)

[IV. Broadcast Television 18](#iv.-broadcast-television)

[Overall Industry Trends 18](#overall-industry-trends)

[Television Networks 27](#television-networks)

[Television Stations 29](#television-stations)

[Summary 38](#summary)

[V. Cable Television 40](#v.-cable-television)

[The Nature of Cable Television 40](#the-nature-of-cable-television)

[Availability and Subscribership of Cable Television
44](#availability-and-subscribership-of-cable-television)

[Cable Operator Revenues 45](#cable-operator-revenues)

[The Competitive Impact of Cable on Broadcast Television
46](#the-competitive-impact-of-cable-on-broadcast-television)

[Conclusions 49](#conclusions)

[VI. Direct-to-Home Satellite Transmissions
51](#vi.-direct-to-home-satellite-transmissions)

[Direct-to-Home Satellite Services
52](#direct-to-home-satellite-services)

[DBS Public Interest Obligations 56](#dbs-public-interest-obligations)

[DBS as a Competitor in the Market for Multichannel Video Programming
Distribution
56](#dbs-as-a-competitor-in-the-market-for-multichannel-video-programming-distribution)

[Conclusion 61](#conclusion)

[VII. Other Video Media Delivery Platforms
62](#vii.-other-video-media-delivery-platforms)

[Introduction 62](#introduction-1)

[MMDS 62](#mmds)

[Overbuilders 64](#overbuilders)

[Utilities 65](#utilities)

[Local Exchange Carriers 66](#local-exchange-carriers)

[The Internet 68](#the-internet)

[Home Video Products 71](#home-video-products)

[Theatrical Films 73](#theatrical-films)

[Video and PC Game Platforms and Applications
73](#video-and-pc-game-platforms-and-applications)

[Conclusion 75](#conclusion-1)

[VIII. Technological Developments 76](#viii.-technological-developments)

[Introduction 76](#introduction-2)

[Video Compression Technologies 77](#video-compression-technologies)

[Digital Television 78](#digital-television)

[Digital Rights Management 90](#digital-rights-management)

[Interactive Television 92](#interactive-television)

[Personal Video Recorders 96](#personal-video-recorders)

[Conclusion 100](#conclusion-2)

[IX. Advertising Market Developments
102](#ix.-advertising-market-developments)

[Introduction 102](#introduction-3)

[Changes in Advertising Market Structure
102](#changes-in-advertising-market-structure)

[Current Trends and New Advertising Formats
106](#current-trends-and-new-advertising-formats)

[Interactive Advertising Targeting Children Raises Concerns
110](#interactive-advertising-targeting-children-raises-concerns)

[Privacy and Interactive Advertising
112](#privacy-and-interactive-advertising)

[Conclusion 112](#conclusion-3)

[X. The Market for Broadcast and Non-Broadcast Video Programming
114](#x.-the-market-for-broadcast-and-non-broadcast-video-programming)

[Introduction 114](#introduction-4)

[Repeal of Syndication and Financial Interest Rules
114](#repeal-of-syndication-and-financial-interest-rules)

[The Programming Marketplace 115](#the-programming-marketplace)

[From Pitch to Fall Line-Up 116](#from-pitch-to-fall-line-up)

[Prime Time Programming Trends 117](#prime-time-programming-trends)

[Independent Production 118](#independent-production)

[Repurposing and Summer Programming
120](#repurposing-and-summer-programming)

[Sports Programming 122](#sports-programming)

[Cable Programming 123](#cable-programming)

[Comparative Expenditures 130](#comparative-expenditures)

[Conclusion 133](#conclusion-4)

[XI. Conclusions 134](#xi.-conclusions)

[Television Stations 134](#television-stations-1)

[Television Networks 135](#television-networks-1)

[Rival Delivery Systems 136](#rival-delivery-systems)

[Technological Change 136](#technological-change)

[Programming 138](#programming)

[The Final Analysis 139](#the-final-analysis)

Tables

Table 1: Availability of Video Media [4](#__RefHeading___Toc21199286)

Table 2: End-User Expenditures on Various Video Media 1990-2000
[6](#__RefHeading___Toc21199287)

Table 3: Total Advertising Volume, Video Advertising Volume, and GDP
[10](#__RefHeading___Toc21199288)

Table 4: Components of Video Advertising (millions of current \$)
[13](#__RefHeading___Toc21199289)

Table 5: Components of Video Advertising (millions of 1982-84 \$)
[14](#__RefHeading___Toc21199290)

Table 6: Components of Video Advertising (Percentage of Total Video
Advertising Volume) [15](#__RefHeading___Toc21199291)

Table 7: Television Stations On Air [19](#__RefHeading___Toc21199292)

Table 8: TV Viewing by Cable and Non-Cable Households, 1990-91 and
2000-01 (hours/week) [20](#__RefHeading___Toc21199293)

Table 9: All Day Viewing Shares, Cable and Non-Cable Households
[21](#__RefHeading___Toc21199294)

Table 10: Prime Time Viewing Shares by Channel Type
[23](#__RefHeading___Toc21199295)

Table 11: Comparison of Cable Television Share of Total Video
Advertising Revenues and Cable Television All-Day Viewing Shares
[24](#__RefHeading___Toc21199296)

Table 12: Primetime Household Delivery (in thousands)
[25](#__RefHeading___Toc21199297)

Table 13: Average Revenue per Television Station Based on Aggregate
Data, Current and Constant Dollars [32](#__RefHeading___Toc21199298)

Table 14: Average Revenues, Expenses, Pre-tax Profits, and Cash Flow of
Commercial Television Stations, 2000 [33](#__RefHeading___Toc21199299)

Table 15: Average Revenues, Expenses, Pre-tax Profits, and Cash Flow of
Commercial Television Stations, 1990 [34](#__RefHeading___Toc21199300)

Table 16: Average Profits of Commercial TV Stations as a Percentage of
Net Revenues, 1975-2000 [34](#__RefHeading___Toc21199301)

Table 17: Average Inflation-Adjusted Net Revenues of Commercial TV
Stations, 1975-2000 (1982-1984 = 100) [36](#__RefHeading___Toc21199302)

Table 18: Expense Items of Commercial Broadcast Stations by Selected
Market Size, 2000 (% of Total Expenses)
[37](#__RefHeading___Toc21199303)

Table 19: Expense Items of Commercial Broadcast Stations by Selected
Market Size, 1990 (% of Total Expenses)
[37](#__RefHeading___Toc21199304)

Table 20; Programming Expenses of Commercial Broadcast Stations,
1975-2000 (% of Total Expenses) [38](#__RefHeading___Toc21199305)

Table 21: Cable Subscribers and Homes Passed
[41](#__RefHeading___Toc21199306)

Table 22. Cable Operator Revenues (\$mil)
[46](#__RefHeading___Toc21199307)

Table 23; System Capacity, July 2001 [48](#__RefHeading___Toc21199308)

Table 24: Direct-to-Home Subscribers and Cable Subscribers
[51](#__RefHeading___Toc21199309)

Table 25: Estimated Share of U.S. TV Home Set Usage by Program Source
[62](#__RefHeading___Toc21199310)

Table 26: Internet Video Statistics [70](#__RefHeading___Toc21199311)

Table 27: VCR Penetration [71](#__RefHeading___Toc21199312)

Table 28: Home Video Spending, Rental and Retail (\$ Millions)
[72](#__RefHeading___Toc21199313)

Table 29: Video and PC Game Growth [74](#__RefHeading___Toc21199314)

Table 30: Consumer HDTV Survey [82](#__RefHeading___Toc21199315)

Table 31: Television Ads Not Watched (Prime Time)
[99](#__RefHeading___Toc21199316)

Table 32: Programming Expenditures (\$mil)
[131](#__RefHeading___Toc21199317)

**Figures**

Figure 1: Cable and Satellite Usage: Subscribers/TVHH (%)
[52](#__RefHeading___Toc21199283)

Figure 2: Sample Diagram of One Type of Data Broadcast Network
Architecture [89](#__RefHeading___Toc21199284)

Figure 3: Tollin/Robbins Roster (2002-2003 Season)
[119](#__RefHeading___Toc21199285)

# I. Introduction

This study updates Office of Plans and Policy Working Paper 26, released
in June 1991 ("Working Paper 26"). That paper and this one address
changes over time in the competitive position of the television
broadcasting industry and present some cautious predictions for the
future. The approach is to examine audience shares, advertising
revenues, and profitability of television networks and stations in some
depth based primarily on published sources, supplemented with some
discussions with network staff, analysts, and representatives of the
advertising community. That examination is followed by a review of
developments in the cable and direct broadcast satellite sectors, the
major multichannel video program distribution platforms. The paper also
considers developments in technology, advertising, and programming.

Working Paper 26 concluded that broadcast television "has suffered an
irreversible long-term decline in audience and revenue share, which will
continue throughout the current decade." This prediction has proved to
be accurate, but it is fair to say that Working Paper 26 overestimated
the severity of the impact on actual television industry performance and
profitability. The decline in broadcast advertising as a share of total
video advertising revenues was much smaller than the decline in
broadcast audience shares. Moreover, the absolute level of both network
and station advertising revenues actually increased, even in real terms
(with the exception of a dip in 2001, from which it appears that the
industry will recover). The television broadcast industry is larger, in
terms of stations on the air, than it was then, and no full power
stations have gone dark. Although the available data have limitations,
it appears that, overall, the television station sector is at least as
profitable as it was ten years ago.

Networking remains a viable and efficient program distribution
technique, and the number of broadcast networks has actually increased.
However, profit margins in that business are and were very small.
Working Paper 26 predicted that digital compression would be a crucial
technological development during the 1990's, and that has certainly been
true, both in the cable and Direct Broadcast Satellite (DBS) contexts.
It predicted rising programming costs and measures taken to adjust to
them, such as a shift in the composition of programming toward less
expensive genres. Finally, Working Paper 26 recommended relaxing various
FCC media ownership rules in light of increased competition. Whether or
not it was due to the paper, the Commission has, in some cases with
Congressional instructions, eliminated the network-cable crossownership
rule, relaxed the dual network and television duopoly rules, eliminated
the broadcast-cable crossownership rule, and relaxed but not eliminated
the television multiple ownership rule.

The present paper finds that, notwithstanding declining audience shares
for broadcast television compared to cable in the aggregate, network and
station audiences remain much larger than the audience for any
particular cable network. This is the primary reason why broadcast
advertising revenues have remained relatively strong. Broadcasting has
survived a substantial increase in multichannel video programming
distribution ("MVPD") penetration and analysis and projections suggest
that this penetration is flattening out. While MVPD subscribers will
continue to increase their viewing of nonbroadcast programming, absent a
major change in the media landscape, broadcasting will retain its
relative audience size edge and hence its basic source of support. One
possible major event is the rise of the personal video recorder which
could undermine the revenue base for broadcasting. On the other hand,
technological developments such as Interactive Television hold out the
possibility of preserving and even enhancing broadcast television's
advertising base.

The paper is organized as follows. Chapter II provides a brief overview
of the size and structure of the video sector. Chapter III reviews some
analyses of the impact on consumer welfare of video market structure
(including a comparison of results under subscription payment and
advertiser support for television). Chapter III also provides a
retrospective look at trends in video advertising revenues. Chapter IV
provides a detailed analysis of the television broadcasting sector,
while Chapters V, VI, and VII review the impact of cable, DBS, and other
technologies, respectively, on broadcast television. Chapter VIII
considers important changes in technology, Chapter IX examines changes
in the structure of the advertising market, and chapter X examines the
market for video programming. Conclusions are found in Chapter XI (no
reference to the bankruptcy code intended), which also serves as an
executive summary of the paper.

# II. The Market for Video Media

Working Paper 26 chronicled the evolution of the market for video media
from the mid-1970's to 1990. During this period, video media
availability expanded from broadcast television and movie theaters (with
a smattering of cable television carrying mostly retransmitted broadcast
signals) to a world in which cable television (supplemented by C-Band
home satellite dish systems) brought a substantial range of
non-broadcast programming to the home and movies were available for home
viewing on videocassette not too long after theatrical release.

Since 1990, both the availability of broadcast television and the use of
alternative video distribution platforms have expanded. In the broadcast
space, the number of over-the-air broadcast television stations
available to the median household increased by from ten (10) stations in
1990 to approximately thirteen (13) stations in 2001.[^2] During this
same time, as demonstrated by Table 1, the use of alternative video
distribution platforms increased.[^3] As of 2001, 65 percent of
television households subscribed to cable service, up from 55.5 percent
in 1990. The increase has occurred despite a relatively small rise in
cable availability during this period. The share of television
households passed by cable was 96.7 percent in 2001, up from 92.4
percent in 1990.[^4] In 1990, DBS was not yet available, and only a
small share of television households subscribed to home satellite dish
("HSD") service.[^5] As of year-end 2001, approximately 17.7 percent of
television households subscribed to satellite-delivered video services,
most of them DBS. Table 1 also indicates that the penetration of players
for pre-recorded media, videocassette players and DVD players, has
increased noticeably in recent years.

Not only has the use of non-broadcast video distribution platforms
expanded over the past decade, but the channel capacity on those
platforms has also increased over that time. Indeed, most cable systems
have expanded capacity significantly, and the satellite services offer
channel capacity greater than virtually any cable system.[^6] This
expanded channel capacity coincides with an increase in the availability
of non-broadcast, cable origination video programming networks. In 1990,
there were only about 70 cable origination networks available to
multichannel video program distributors ("MVPDs") for carriage.[^7] By
year-end 2001, there were nearly 287 national non-broadcast, cable
origination networks available for carriage.[^8]

[]{#__RefHeading___Toc21199286 .anchor}Table 1: Availability of Video
Media

  --------------------- ------------ ---------- ---------- ---------- ---------- ---------- ------------ -----------
                                                                                                         

                        **1975**     **1980**   **1985**   **1990**   **1995**   **2000**   **2001**     **2010p**

  **Total               71.5^(2)^    81.8       87.6       94.8       97.5       104.1      107.4        123.3
  Households^(1)^                                                                                        
  (mil)**                                                                                                

  **TV Households^(1)^  69.6^(2)^    79.9       85.9       93.1       95.9       102.2      105.5        121.1
  (mil)**                                                                                                

                                                                                                         

  **Cable Subs/TVHH     14.1%^(3)^   24.0%      42.7%      55.5%      64.8%      67.0%      65.0%        61.4%
  (%)**                                                                                                  

  **Cable HP/TVHH (%)** 33.2%^(4)^   43.7%      75.3%      92.4%      96.7%      96.7%      96.7%        96.6%

  **Satellite Subs/TVHH 0.0%         0.0%       0.0%       0.9%       4.8%       15.7%      17.7%        22.3%
  (%)**                                                                                                  

  **Cable+Sat.          14.1.0%      24.0%      42.7%      56.4%      69.6%      82.7%      82.7%        83.7%
  Subs/TVHH(%)**                                                                                         

  **VCR Homes/TVHH      0.0%         1.0%       27.7%      66.1%      79.7%      86.1%      85.2%^(5)^   n/a
  (%)**                                                                                                  

  **DVD Homes/TVHH      0.0%         0.0%       0.0%       0.0%       0.0%       8.8%       13.0%        n/a
  (%)**                                                                                                  

                                                                                                         

                                                                                                         
  --------------------- ------------ ---------- ---------- ---------- ---------- ---------- ------------ -----------

\*Data is year-end unless otherwise noted

**Sources:** Total HH and TVHH: (1975-2001):Television Bureau of
Advertising, Inc., Television Households, Trends in Television, at
http://www.tvb.org (citing Nielsen). (2010p): Kagan World Media,
Broadband Cable Financial Databook, July 2002, at 10. Cable Subs: (1975
and 2010p): Kagan World Media, Broadband Cable Financial Databook, July
2002, at 7 and 10; (1980-2001): Paul Kagan Associates, Cable TV
Investor, May 24, 2002, at 9. Cable HP: (1975-2001): Paul Kagan
Associates, Cable TV Investor, May 24, 2002, at 9; (2010p): Kagan World
Media, Broadband Cable Financial Databook, July 2002, at 10. DBS and
C-Band Subs (Satellite Subs): (1995-2010p): Kagan World Media, Economics
of Basic Cable Networks 2002, Sept. 2001, at 23-27. C-Band Subs: (1990):
1995 MVPD Competition Report at Table G-1. VCR and DVD Homes:
(1990-2001): Veronis Suhler, Communications Industry Forecast, 2001, at
192 and 194. (1980 and 1985): Television Bureau of Advertising, Inc.,
Cable, Pay Cable & VCR Households, Trends in Television, at
http:///www/tvb.org.

**Notes:**

^(1)^Except where otherwise noted, data is reported by the source as of
Jan 1 of the next year (e.g., figure reported for 2001 are actually Jan
1, 2002)

^(2)^ Data is as of September of that year.

^(3)^ Based on cable sub data that is not year-end, rather is an average
of subscribers over the course of 1975.

^(4)^ Based on 1976 data.

^(5)^ Based on an estimate, not an actual count.

Despite the proliferation in the number of non-broadcast programming
networks, and despite the increase in availability of non-broadcast
programming, broadcasters still attract substantial revenues to support
the production, acquisition, and distribution of programming. Table 2
gives a rough indication of the relative size of various sectors of the
video market, by providing figures on end user expenditures (advertising
plus direct viewer payment) for broadcast television, cable television,
DBS, and filmed entertainment.[^9] The table shows that in 1990 total
expenditures (by advertisers) on broadcast television were \$26.7
billion, compared to a total of advertiser and subscriber expenditures
on cable television of \$18.4 billion. By the year 2000, broadcast
expenditures had risen by 67.7 percent, to reach \$44.8 billion.
Expenditures on cable television also equaled \$44.8 billion in 2000, an
increase of 143.5 percent since 1990. Cable plus DBS expenditures in
2000 were \$53.3 billion, so the increase in expenditures on pay media
(cable plus DBS in 2000 over cable in 1990) was 189.5 percent.[^10] As
noted above, the 1990-2000 time period saw a major increase in the
number of cable networks. Even considering the modest increase since
1990 in broadcast networks, broadcasting continues to generate more
revenue than cable on a per-network basis. Within the filmed
entertainment category it is clear that home video (which more than
doubled in revenue from 1990 to 2000) rather than box office receipts
(which rose by 48 percent from 1990 to 2000) is the major growth area.
By comparison, US GDP grew by 73.7 percent during this period.

[]{#__RefHeading___Toc21199287 .anchor}Table 2: End-User Expenditures on
Various Video Media 1990-2000

  ------------------------------ -------------- ------------- ------------
                                                              

                                 **1990**       **1995**      **2000**

  **Broadcast TV**               **26,716**     **32,720**    **44,802**

  Network Ad Revenues            9,963          11,600        15,888

  Syndication Ad Revenues        1,109          2,016         3,108

  Stations' Advertising Revenues 15,644         19,104        25,806
  (local+national spot)                                       

  **Cable TV Operators^(1)^**    **16,604**     **22,898**    **34,352**

  Video Subscriptions^(2)^       16,128         21,823        31,922

  Advertising Revenues           476            1,075         2,430

  **Basic Cable Network          **1,797**      **3,972**     **10,456**
  Advertising Revenue**                                       

  **Total Cable Video-Related    **18,401**     **26,870**    **44,808**
  Revenue**                                                   

  **DBS Revenue**                **0**          **663**       **8,467**

  Video Subscriptions            0              663           8,440

  Advertising^(3)^               0              0             27

  **Total Subscription           **18,401**     **27,533**    **53,275**
  Video-related Revenue**                                     

  **Filmed Entertainment^(4)^**  16,129         21,023        29,906

  Box Office                     5,022          5,494         7,453

  Home Video                     11,107         15,529        22,453

                                                              
  ------------------------------ -------------- ------------- ------------

**Sources:** Broadcast TV Revenues: *See* Table 4. Cable Operator
Revenues: Kagan World Media, Cable TV Investor, May 24, 2002, at 9.
Cable Network Revenues: Kagan World Media, The Economics of Basic Cable
Networks DBS Revenues: Kagan World Media, The State of DBS 2002, Dec.
2001, at 16. Filmed Entertainment Revenues: Veronis Suhler,
Communications Industry Forecast, July 2001, at 203.

**Notes:**

^(1)^ Only video-related revenues are listed here. Revenues from
installations, equipment and non-video services like high-speed Internet
access services and telephony are not included.

^(2)^Includes home shopping commissions.

^(3)^DBS advertising is the equivalent of cable's "local avails," though
they are sold as national time.

^(4)^The data source for filmed entertainment includes expenditures on
television programming as a third category. Because programming is an
input into television, cable, and DBS services, it is not listed
separately under filmed entertainment.

# III. The Economics of Television Financing Methods

## Introduction

Broadcast television in the United States is financed by the sale of
advertising time. Other video media generally have two revenue
streams---subscription fees from viewers and advertising revenues. The
different financing methods of course affect the financial viability of
video media, as well as the range of programming that these media find
it profitable to present. This chapter briefly reviews the ways that
financing methods influence the range of programming made available and
then examines trends in the availability of advertising revenues to
support broadcast programming. Later chapters discuss in more detail the
financing of broadcast and cable television and technological changes,
such as the personal video recorder and interactive television, that may
have a significant impact on the future flow of advertising revenues to
video programmers.

## The Impact of Financing Methods on Video Programming Availability[^11]

Video programming, like other types of intellectual property, has the
characteristic that consumption by one viewer does not reduce the amount
available for others. Hence, assuming that a program has been produced
and that it is being transmitted, the cost of serving an additional
viewer is zero.[^12] In order to maximize consumer welfare from the
transmission, the optimal price is also zero. At this price, all who
value the program more than its cost of delivery gain access to the
program. Of course, a zero price will not lead to efficient production
of video programming, since there would be no compensation to producers.

When television is supported by advertising, the revenue that a program
attracts is based roughly on the size of the audience it attracts
(demographic composition is also important) and the value of that
audience to the advertisers who have bought time on the program. The
value of the programming to the viewers will differ from the value of
the audience to the advertisers. Viewers of broadcast programs cannot
express the intensity of their preference for the programs. All they can
do is tune in or not tune in. By contrast, pay media permit subscribers
to (imperfectly) register the intensity of their preferences for
different programs and networks. Broadly speaking, advertiser-supported
channels tend to cater to the mass audience and pay channels to more
specialized audiences. Even within the broadcasting sector, however, an
increase in the number of channels available will make it profitable for
at least some broadcasters to cater to segments of the audience,
[e.g.]{.underline}, particular demographic groups. While many cable
channels are narrowly targeted, some do provide mass appeal programming.

Owen and Wildman provide a useful summary of the economics of program
choice.[^13] Drawing on their own and others' theoretical work, they
note that both advertiser-supported and pay television are subject to
three biases. Compared to the benefits that viewers receive, both
delivery systems are biased against minority-taste programming, against
high-cost programming, and in favor of "mass appeal" programming
(programming that attracts large audiences). Because pay television
subscribers can indicate the intensity of their programming preferences
via subscription payments, the biases are weaker for pay than for
advertiser-supported television.

Ideally, the policy maker would like to know which video media market
structure leads to maximum consumer welfare. Although theory suggests
that a competitive pay television industry performs better than a
monopoly pay television industry, the relative ranking of a monopoly
advertiser-supported industry, a competitive advertiser-supported
industry, and a competitive pay television industry depends on the
nature of viewer preferences for programming ([i.e.]{.underline},
whether tastes are relatively homogeneous or whether preferences vary
widely across viewers) Of course, the real-world situation is even more
complex, since we have both pay and advertiser-supported video
programming distributors.

We can conclude, based on revealed subscriber willingness to pay, that
cable and DBS subscribers value those services highly. If we knew that
the "qualtity" of broadcast service had not declined, we could say
unambiguously that the welfare of subscribers to cable and DBS was
higher than it would be in their absence. We could also conclude in this
case that nonsubscribers to pay media were at least not worse off than
before. Quality is, of course, elusive to define let alone measure. We
do know that the quantity of television broadcast service has increased
over time, as measured by the number of stations on the air. And we can
speculate that even if broadcast quality has declined, the nonbroadcast
services to which 85 percent of US television households subscribe
probably more than compensate even taking subscription fees into
account. The situation of those who do not subscribe to pay television
is less clear. If they are people who value video highly but whose
income prohibits them from purchasing video service, then they are
vulnerable to declines in the quality of broadcast service. If they are
people, rich or poor, who place a low value on video service generally,
then they will be less affected by any quality decline.

The balance of this study examines the advertising and programming
markets in which television broadcasters operate and the impact of new
media and technologies with a view to understanding how changes in these
areas have and will affect the broadcasting industry and consumers. The
first step is to consider advertising---the financial base of broadcast
television.

## Aggregate Trends in Video Advertising

Advertising revenues fund the television broadcasting industry, so any
assessment of that industry must consider developments in the market for
advertising. This section examines the growth of advertising revenues
over the past 25 years or so, and how the composition of those revenues
has changed. Chapter IX discusses structural changes on both the "buy"
and "sell" sides of the market; [i.e.]{.underline}, the rise of
companies that own (and sell advertising time in) multiple program
channels and the consolidation of advertising agencies.

*The Growth and Composition of Advertising Revenues*

Television advertising is one component of a larger advertising market.
One standard source of data on advertising presents information for the
following categories: newspapers, magazines, broadcast television, cable
television, radio, yellow pages, direct mail, business papers, out of
home (including billboards), internet, and miscellaneous.[^14] Depending
on the product or service being advertised, the purpose of the
advertisement ([e.g.]{.underline}, creating brand awareness, introducing
a new product, announcing a sale), and the target audience, many of
these media may serve as substitutes for one another. Because different
advertisers may wish to reach different demographic groups, an
advertising exposure in a particular television program will be worth
different amounts to each, depending on the demographic composition of
the audience.

Chapter IV presents data showing that the composition of viewing has
shifted over time, with cable increasing at the expense of broadcast
television. This suggests that broadcast and cable advertising are, at
some level, substitutes for one another, and the remainder of this
chapter concentrates on those categories.[^15] Table 3 presents
historical data on Gross Domestic Product (GDP) and various categories
of advertising. Because advertising demand is cyclical, it is important
to examine data over a long period of time. The cyclical components
come, in part, from demand generated by political campaigns,
presidential and Congressional, and from the Olympics. The significant
drop in expenditures in 2001 compared to 2000 is due in part to these
considerations. The year 2000 featured not only the Summer Olympics but
presidential and congressional elections as well. The collapse of the
"dot com" sector also likely contributed to the decline. Moreover, the
tragedy of September 11, 2001 and its aftermath undoubtedly had an
impact on the level of advertising. It is premature to project any
long-term downturn in advertising expenditures based on the 2001
experience.

[]{#__RefHeading___Toc21199288 .anchor}Table 3: Total Advertising
Volume, Video Advertising Volume, and GDP

![](media/image2.wmf){width="7.13125in" height="5.3694444444444445in"}

It is also important to note that the advertising data in table 3 and
the other tables in this section are gross revenue data. That is, they
depict gross payments by advertisers, including agency commissions. The
dataset is valuable because it provides consistent information over a
long time period for all advertising categories. It is better used for
examining trends in advertising than for assessing for a particular year
the funding available for supporting particular sectors of the media
industry.

Because advertising is designed, broadly speaking, to provide
information about goods and services offered for sale, it has exhibited
a stable relationship to GDP, a measure of the economy's total output.
The share of total advertising in GDP has ranged between 1.7 and 2.5
percent of GDP in the period from 1975-2001, having ratcheted up in the
mid-1980's. It is too early to tell whether the somewhat more modest
upward jump in the late 1990's represents any kind of longer term shift.

The share of video (broadcast plus cable) advertising has increased over
time, doubling from 1975 to 2000. This increase has been accompanied by
a decline in the newspaper share of total advertising revenues from 27.6
percent in 1980 to 19.8 percent in 2000.[^16]

The video advertising market can be divided into two major
sub-markets---national and local. The national market includes network
advertising, "national spot," and syndication. Networks, both broadcast
and cable, sell time to national advertisers, with broadcast networks
reaching virtually 100 percent of television households and cable
networks reaching no more than about 80 percent via cable, Direct
Broadcast Satellite, and other distribution platforms.[^17] National
spot advertising is sold by stations to national advertisers, who
aggregate national or regional coverage by purchasing advertising spots
from stations in multiple markets.[^18] The syndication sector refers to
advertisements sold in syndicated programs (programs that are
distributed to ad hoc groups of stations assembled by syndicators).
Television stations participate in the local as well as the national
spot advertising markets. Cable television system advertising sales are
virtually all local.

Table 4 provides data on the components of video advertising from
1975-2001 in current dollars. Total video advertising volume has been
steadily increasing over the years, with the exception of dips in 1991
and 2001. The same pattern holds for broadcast network and national and
local television station spot advertising. The syndication sector has
grown steadily as have total cable advertising and cable network
advertising. Local cable advertising, [i.e.]{.underline}, advertising
sold by local cable television systems[^19], dipped slightly in 2001.

Table 5 presents the components of video advertising in constant
dollars. The pattern is similar to that of table 4, but the constant
dollar figures reveal more clearly the cyclical nature of the
advertising market. For example, broadcast network advertising volume in
constant dollars exhibits an upward trend over the 1975-2001 period, but
it falls in 1991, 1993, 1997, 1999, and 2001. Three of these years
(1993, 1997, and 2001) follow election and Olympics years. The other two
(1991 and 1999) follow years of Congressional elections and 1991 was a
recession year.

Table 6 provides the percentage distribution of the components of video
advertising. The most striking feature is the expansion of cable's share
in total video advertising. Cable accounted for no video advertising in
1975, but had risen to 28.5 percent of the total in 2001. The
composition of video advertising has also shifted slightly away from
national to local, with the national share dropping from 74.7 percent to
70.8 percent from 1975 to 2001. Within the national video advertising
sector, the rise of cable is particularly pronounced, with the cable
share of national video advertising rising from zero in 1975 to 30.9
percent in 2001.[^20] A comparison of television station sales of local
advertising spots with total local cable system advertising sales shows
that the cable share in 2001 was 23 percent.

This retrospective examination of aggregate advertising revenues reveals
that all components of video advertising have been growing over time but
that the cable components have been growing much faster than the
broadcasting components. Cable accounted for 41.4 percent of the total
increase in video advertising revenues from 1990 to 2000.

The longstanding stable relationship between GDP and advertising volume
suggests that all of the video advertising sectors will continue to grow
over time. Indeed, a recently released prediction by Veronis Suhler
Stevenson (VSS) forecasts that broadcast television advertising spending
will grow at a compound annual rate of 3.6 percent from 2001-2006.[^21]
VSS put the 1996-2001 growth rate at 2.7 percent, a figure heavily
influenced by the 2001 drop in advertising revenues. It is also safe to
assume that cable shares of total video advertising will continue to
grow.

[]{#__RefHeading___Toc21199289 .anchor}Table 4: Components of Video
Advertising (millions of current \$)

![](media/image3.wmf){width="8.498611111111112in"
height="4.927777777777778in"}

[]{#__RefHeading___Toc21199290 .anchor}Table 5: Components of Video
Advertising (millions of 1982-84 \$)

![](media/image4.wmf){width="8.49236111111111in"
height="5.020138888888889in"}

[]{#__RefHeading___Toc21199291 .anchor}Table 6: Components of Video
Advertising (Percentage of Total Video Advertising Volume)

![](media/image5.wmf){width="8.497222222222222in"
height="4.346527777777778in"}

Advertising agency sources suggest that there is particular room for
growth in the cable system sector. Earlier on, it was difficult to
assemble full coverage of a local market via cable. This was due to
fragmentation of ownership of cable systems within local markets and the
limited availability of intermediaries to aggregate cable system
availabilities to achieve full coverage. Two things have changed in this
regard. First, cable multiple system operators (MSOs) are increasingly
acquiring "clusters" of cable systems in individual markets. Second,
cable "interconnects" are much more widespread and sophisticated than
they were, say, ten years ago. Interconnects sell time and distribute
advertisements on behalf of cable operators in a particular market,
simplifying the task of an advertising buyer wishing to reach the market
via cable. Interconnects also facilitate delivery of advertisements
targeted to a particular geographic area within a market. This is an
advantage for some advertisers, since a local television station
advertisement of necessity reaches the station's full service area and
is priced accordingly.[^22]

Just as it would be inappropriate to place too much predictive emphasis
on one down year (2001), it is not possible to glean too much insight
from the network advertising time sales for the current season that took
place a few months ago. Nevertheless it is worth noting that they did
show a fairly sizeable increase over last year's figures. Network
advertising, both broadcast and cable, is sold in two ways. There is an
"upfront" market and a "scatter" market. The television "season" begins
in September and networks sell a substantial majority of their
advertising time in the upfront market that took place this year in
early summer. The upfront market allows buyers to negotiate volume
discounts and to lock in a base level of advertising availabilities for
the coming season. During the season, advertisers make additional
purchases as their needs and priorities become clearer. Press reports
indicate that this year's broadcast network upfront sales were up by
around 14 percent over last year, while the cable network upfront market
grew by roughly 15 percent over last year.[^23]

While concurring that 2002 upfront sales are bigger than expected, Bear
Stearns adds a note of caution, pointing out that the increases are due
only in part to rising prices ("cost per thousand" or "CPM"). In part
the increased revenues are a consequence of networks selling a larger
portion of their total inventory in the upfront market than they did
last year. In other words, apparently this year fewer sales will take
place in the scatter market.[^24] Bear Stearns also comments on the
local television advertising sector, raising the prospect of double
digit growth in the second half of 2002.[^25]

Based on available evidence at this point, it appears that a solid and
gradually expanding advertising revenue base will be available to
support broadcast television programming. Future chapters will examine
trends on the cost side of the programming industry and the likelihood
that cable will cut further into broadcast advertising revenues. The
chapters on technological change and the future of advertising will also
consider developments, such as the personal video recorder (PVR) that
have the potential to cut significantly into the revenue base and
possible industry response strategies. If the PVR or some other
development, substantially changes the relationship between GDP and
video advertising, then the assumptions and predictions cited here of
current trends basically continuing would have to be revised.

# IV. Broadcast Television

## Overall Industry Trends

Working Paper 26 painted a somewhat pessimistic picture of the future of
broadcasting. While some of the report's predictions have come true, and
while the broadcasting industry continues to face competitive and
technological challenges, 2002 finds the industry in pretty good shape.
The report referred to "an irreversible long-term decline in audience
and revenue shares, which will continue throughout the current decade."
It highlighted the important role that digital video compression would
play in making nonbroadcast media stronger competitors by increasing
their channel capacity. It raised the possibility that some television
stations might go dark.

It is certainly true that television broadcast audience shares have
continued to drop significantly and that the television share of total
video advertising revenues has also continued to decline. However,
broadcast advertising revenue shares have declined much less than
viewing shares and, although 2001 was a tough year for television
advertising, the actual level of advertising revenues has generally
continued to grow. No television broadcast stations have turned in their
licenses and gone dark. Indeed, the number of full power stations has
increased substantially over the last ten years. This chapter reviews
the financial and competitive position of the television industry over
the past ten years and assesses the impact on its financial health of
competitive and some regulatory developments during that time period.

Table 7 shows that the total number of television stations has continued
to grow over the past decade, increasing from 1,442 to 1,619 between
1990 and 2000. This increase of 12.3 percent is almost entirely due to
new UHF stations, and nine out of ten of them were commercial rather
than educational stations. The result is that the number of stations
available off-air to the average US television household rose from 11.7
in 1990 to 13.1 in 1996, the last year for which Nielsen published this
information.[^26] In view of the limited number of stations that came on
the air between 1996 and 2000, the current figure is not likely to be
much higher than 13.1.

In 1990, 35 percent of commercial television stations were classified as
"independent," [i.e.]{.underline}, not affiliated with a broadcast
network.[^27] One important development of the past decade has been the
entry of several new broadcast networks---UPN, the WB,and Paxson in
particular---so the number of independent stations is far fewer now than
it was in 1990. Network entry is discussed in more detail later in this
chapter.

[]{#__RefHeading___Toc21199292 .anchor}Table 7: Television Stations On
Air

![](media/image6.wmf){width="5.393055555555556in"
height="4.440277777777778in"}

Total viewing of television has continued to expand over the past ten
years, rising from 6 hours 53 minutes per household in 1990 to its
highest level ever, 7 hours 35 minutes, in 2000.[^28] Table 8 shows that
cable households watch much more total television and much less
broadcast television than broadcast-only households.[^29] Households
that choose to subscribe to cable likely have particularly strong
demands for video programming. If cable were not available, these
households would probably have watched more broadcast television than
broadcast-only households do. However, it is unlikely that differences
in viewer tastes for video account for the entire difference. The
availability of a larger quantity of desirable programming on cable
almost surely also plays a role.

Table 8 shows that in 1990-91 broadcast-only households watched 41.6
hours of television per week, while cable households watched 54.7 hours
per week, of which 31.9 were of broadcast stations and 22.8 were of
cable networks. Thus, cable households watched almost ten fewer hours of
broadcast programming per week than did broadcast-only households. The
gap increased to almost 19 hours per week in 2000-01. Moreover, the
average cable subscriber reduced broadcast programming viewing by five
hours per week between 1991 and 2001.

[]{#__RefHeading___Toc21199293
.anchor}![](media/image7.wmf){width="6.541666666666667in"
height="4.257638888888889in"}Table 8: TV Viewing by Cable and Non-Cable
Households, 1990-91 and 2000-01 (hours/week)

Table 9 chronicles trends in all-day viewing shares in total, cable, and
non-cable households.[^30] By 2001 cable accounted for close to half of
all-day viewing over all television households. In cable households, its
share was 57.4 percent. The table 9 figures make it clear that cable has
cut substantially into the broadcast audience. The cable viewing share,
measured across all television households, rose from 25.7 percent in
1990 to 46.6 percent in 2000. The cable share grew by 90 percent (13.5
to 25.7) from 1985 to 1990, 28 percent from 1990 to 1995, and 41 percent
from 1995 to 2000.

[]{#__RefHeading___Toc21199294 .anchor}Table 9: All Day Viewing Shares,
Cable and Non-Cable Households

![](media/image8.wmf){width="8.49375in" height="5.225in"}

A similar pattern of broadcast share erosion is present in the prime
time daypart, as illustrated by Table 10. For example, the cable share
rose from 20 percent in 1990 to 43.1 percent in 2000. This trend has
apparently continued with cable achieving a 54 percent primetime share
in June 2002 and a cable trade association reporting that, over the
2001-02 season, advertiser-supported cable achieved higher primetime
ratings than did the seven major commercial broadcast networks.[^31]

An increase in the cable viewing share can be driven by at least two
factors---increased viewing of cable programming within existing cable
households and an increase in the share of television households that
subscribe to cable. As table 24 in chapter VI indicates, total MVPD
subscribership has increased substantially since 1990. The increase in
the second half of the decade due to the advent of DBS is particularly
notable. With regard to the future, 86 percent of US television
households now subscribe to an MVPD, mostly cable or DBS.[^32] While DBS
is still growing, at least some of its subscribers come from cable.
There is not nearly as much room for MVPD growth as there used to be,
and some of the current non-subscribers may be people with a limited
taste for video. Thus, further MVPD subscriber expansion is probably not
going to be a substantial source of increased cable viewing shares.

Table 8 shows, however, that cable subscribers have been increasing
their viewing of cable programming, from 22.8 hours per week in 1991 to
36.2 hours in 2001. One could speculate that this increase was driven in
part by expansion in the range of cable programming available, a
consequence of increases in cable channel capacity and in the number of
cable networks from which cable operators (and subscribers) can choose.
To the extent that channel capacity and programming availability
continue to grow, then broadcast shares are likely to continue to fall.

[]{#__RefHeading___Toc21199295 .anchor}Table 10: Prime Time Viewing
Shares by Channel Type

![](media/image9.wmf){width="4.215277777777778in"
height="3.7270833333333333in"}

Notwithstanding the decline in broadcast viewing shares over time,
advertising revenues have not dropped proportionately. Table 11 compares
broadcast and cable shares of total video advertising revenues with
broadcast and cable shares of all-day viewing of advertiser-supported
programming.[^33] The universe of viewing for this table consists of
advertiser-supported cable programming and programming of commercial
broadcast stations. Pay cable and public television are not
included.[^34] The last row of the table shows the cable advertising
share as a percentage of the cable viewing share. If cable and broadcast
advertising were perfect substitutes, one would expect the ratio to be
equal to one (although the converse is not true). The fact that cable's
revenue share is lower than its viewing share suggests that advertisers,
overall, value broadcast exposures more highly than cable exposures. The
fact that the ratio is rising toward one suggests that cable advertising
is becoming a closer substitute for broadcast advertising and that cable
is likely to make further inroads into the broadcast advertising share.

[]{#__RefHeading___Toc21199296 .anchor}Table 11: Comparison of Cable
Television Share of Total Video Advertising Revenues and Cable
Television All-Day Viewing Shares

![](media/image10.wmf){width="5.5777777777777775in"
height="7.622916666666667in"}

The obvious question is why broadcast advertising is, overall, so much
more attractive to advertisers. The general consensus of advertising,
broadcast, and cable industry personnel consulted is that the broadcast
audience is more valuable because of its greater size and national
reach. It would be possible in principle to put together a national
audience via a purchase of time on multiple cable networks, but the
audience would not necessarily be unduplicated. The same person might
see the advertisement on more than one network. Also, the transactions
costs of negotiating with multiple cable networks are higher than those
of dealing with a single broadcast network.

Table 12 provides historical data on prime time household delivery
([i.e.]{.underline}, the number of households viewing particular
categories of stations) for broadcast and cable outlets. When
considering the data in table 12 it is important to keep in mind that
the definition of "network affiliate" changed with the 1999-00 season,
moving from affiliates of the four commercial networks (ABC, CBS, NBC,
FOX) to affiliates of seven commercial networks (the four plus UPN, WB,
and Paxton). Hence the most meaningful comparison is probably of total
commercial broadcast households delivered over time with basic and total
cable households delivered over time. Commercial broadcast household
delivery has dropped steadily since 1985, except for a small rise in
2001. Cable household delivery has risen steadily over the years.
However the increase in cable household delivery has been accompanied by
a massive rise in the number of cable networks. As suggested above, the
efficiency and value of an advertising buy is a function of the size of
the audience on the individual network on which an advertisement is
being purchased. No one buys "all cable households."

![](media/image11.wmf){width="6.204861111111111in"
height="3.0930555555555554in"}

[]{#__RefHeading___Toc21199297 .anchor}Table 12: Primetime Household
Delivery (in thousands)

For this reason, it is instructive to examine households delivered on a
per network basis. The four major commercial networks (ABC, CBS, NBC,
and FOX) delivered 42,366,000 primetime households during the 1989-90
season and 32,761,000 primetime households during the 1999-00 season.
The average number of households delivered per network was 10.6 million
in the earlier year and 8.2 million in the later year. During the
1999-00 season, UPN delivered an average of 2.7 million households in
prime time and the WB delivered an average of 2.6 million
households[^35] During the year 2000, the four cable networks with the
largest audiences were USA, TBS, Lifetime, and Nick at Nite. [^36] The
average number of households delivered per network was 1.4 million (for
the full sample of 33 networks it was 0.6 million). In 1990, the four
largest were USA, TBS, ESPN, and CNN, with an average number of
households delivered per network of 1.1 million (for the full sample of
15 networks it was 0.5 million).

Thus, in 1990, the major broadcast networks delivered audiences on
average nine times as big as those for the largest cable networks. In
2000 the broadcast audience averaged 5.6 times the size of the cable
audience on a per network basis. Even the new broadcast networks UPN and
WB delivered audiences almost twice as big as the largest cable networks
and four times as large as the average cable network. Although this
scenario is based on prime time household delivery, it is illustrative
of the conditions that keep broadcast advertising revenues
disproportionately large relative to overall broadcast viewing shares.
At the same time, the fact that the gap in broadcast and cable network
prime time audience size is narrowing suggests once again that cable
will continue to expand its advertising revenue share at the expense of
broadcasting.

The preceding discussion utilized comparisons of total households
delivered by cable and broadcast channels. In fact, advertisers are
frequently concerned with reaching specific demographic groups and make
their purchases accordingly. Although a detailed analysis of advertising
markets is beyond the scope of this paper, the following brief
discussion is designed to demonstrate that, even taking demographics
into account, the broad conclusion regarding the greater value of
broadcast network advertising exposures remains valid.

Depending on the nature of the product and the particular message,
different advertisers are interested in reaching different demographic
groups with their messages. Thus, while some advertisers in some cases
might merely purchase "tonnage," and pay for the slots that they buy
based on the size of the total audience, many if not most "buys",
particularly on the national level, are based on demographics such as
"Adults 18-49," "Women 18-34," or "Men 25-54." Advertisers are
frequently interested in other demographic characteristics of the
audience, such as income.

Media Dynamics, Inc. reports advertising "cost per thousand" ("CPM")
estimates for the 2000-01 season for various video media, dayparts, and
demographic groups.[^37] For the big three broadcast networks, the CPM
in prime time over all households reached is \$15.75. However, the price
by demographic ranges from \$11.35 for "Adults 18+" to \$77.35 for "Men
18-34." The corresponding figure for "Women 18-34" is \$61.50 and for
"Adults 25-54" it is \$21.35. The patterns are broadly similar in other
dayparts and for the "spot" advertising rates that television stations
receive.[^38]

Turning to a comparison of broadcast and cable CPMs, data are available
in prime time for three different categories of cable network: "youth,"
"mass," and "upscale." The all households CPMs range from \$6.75 for
mass to \$11.15 for upscale, compared to the network level of \$15.75.
The upscale figure for "Men 18-34" is \$86.15, even higher than the
comparable figure for broadcast networks, illustrating the value of the
relatively homogeneous demographics that some cable networks can
deliver. Nevertheless, in general, cable advertisements do sell at a
significant CPM discount to broadcast. A recent analysis of 2001-02 data
from a different source suggests that the cable "discount" ranged from
30 to 60 percent, depending on the daypart and the demographic target of
the cable network. Interestingly enough, the analysis showed that the
cable discount is apparently slightly larger than it was four years back
during the 1997-98 season.[^39]

## Television Networks

The last ten years have seen substantial changes in the structure of the
television network business. These changes were to a great extent set
off by changes in the regulatory environment. The major event was the
repeal of the Commission's syndication and financial interest ("fin
syn") rules, but the relaxation of the dual-network rule also played a
role.[^40] The fin syn rules essentially prohibited television networks
from owning any of their prime time entertainment programming. The dual
network rule prohibited any company from owning more than one television
network. The current version of the rule merely prohibits the big four
commercial networks from merging with each other.

As television networks increased the amount of programming produced
"in-house," the movie studios, which had produced most prime time
programming, apparently began to fear that it would become more
difficult for them to find outlets for their programming. It is likely
that the desire to ensure the availability of a distribution outlet for
their programming provided at least some of the motivation for the
studios Viacom and Warner Brothers to launch the UPN and WB networks,
respectively. This factor may also have played a role in the decision by
Disney to purchase ABC and Viacom to purchase CBS. Even if one were to
concede that the motivation to launch UPN and WB was primarily
defensive, it is still true that well over 200 television stations found
it advantageous to affiliate with these networks, suggesting that
networking remains a valuable program distribution technique. The
emergence of the smaller "Pax" network is also consistent with this. The
repeal of the dual network rule permitted Viacom to purchase UPN
alongside CBS and for NBC to acquire the Spanish language network
Telemundo.

Notwithstanding the entry into television networking, the business is
currently not particularly profitable. Precise data are not publicly
available, but most observers suggest that, in the aggregate, the
networks are losing money. [^41] It is certainly true that their
revenues have been growing only very slowly. Table 5 shows that, in real
terms, network advertising revenues grew at an average annual rate of
2.1 percent from 1990-2000. The large and increasing share of network
video advertising accounted for by cable networks suggests that
broadcast networks are feeling significant competitive pressure. In
addition, it appears that programming costs have been rising.

The networks have adopted various measures to respond to the competitive
environment and cost pressures that they face. On the revenue side, they
have been able to raise prices (costs per thousand) fairly steadily.
Primetime broadcast network CPMs have risen from \$9.74 in 1990 to
\$13.42 in 2000, an average annual growth rate of 3.8 percent.[^42] They
have also been able to increase the quantity of advertising
availabilities for sale by adding more commercial minutes per hour. An
advertising industry compilation indicates that the big four commercial
networks increased hourly commercial minutes by 16.4 percent from 1991
to 2000, from an average of seven minutes and 47 seconds to an average
of nine minutes and three seconds.[^43] Many observers doubt that it
will be possible to increase further the number of commercial minutes
per hour on network television. Too many advertising interruptions could
reduce viewer willingness to watch network programming and too much
advertising clutter could reduce advertiser willingness to pay for
network advertising exposures.

On the cost side, different networks have adopted a variety of
approaches to containment. NBC has reduced the amount of expensive
sports programming in its schedule. Several networks have increased the
amount of news magazine type programming and reality programming in
their schedules.[^44] Various networks have resorted to "repurposing"
programming. Repurposing generally refers to exhibiting a program on
cable very shortly after it runs on broadcast, say within the same week.
Chapter X provides a more detailed look at network programming
strategies.

As the next section of this chapter shows, profit margins remain high
for a large segment of the television station business. Network
programming is, of course, a major input into the service that stations
provide, and they presumably value it highly. Hence it is possible that
some of the revenue problems of the networks will be solved via
evolution in the relationship between networks and affiliates.[^45]
Currently most networks pay some "network compensation" to affiliates.
In 2000, network compensation accounted for 4.3 percent of net revenues
on average of affiliates of ABC, CBS, and NBC.[^46] Interestingly
enough, the reported figure for Fox is -1.4 percent. This underlines the
possibility that, to finance network programming in the future,
affiliates may need to contribute directly to the networks. This could
happen via direct payments or a change in the division of advertising
availabilities within and adjacent to network programs, some of which
are now assigned to affiliates.[^47]

An additional possibility for networks and stations, for that matter, is
to secure a second revenue stream via cash payments by cable and DBS
operators for retransmission consent. Historically, most broadcasters
have opted for (or settled for) in-kind compensation from cable
operators in exchange for retransmission consent---the right to program
a channel on the cable system or some cable advertising availabilities.
In the event that broadcast stations were able at some point to secure
cash payments for retransmission consent, it would clearly be due in
significant measure to the value of network-supplied programming, so the
network would likely participate in any revenue from retransmission
consent.

## Television Stations

This subsection examines in some detail trends in profitability, cash
flow, and expenditures for television broadcast stations. It does not
examine one key aspect of the television station environment---the
transition from analog to digital television. That subject is addressed
in Chapter VIII, the review of technological change.

As indicated above, the number of television stations has increased by
12.3 percent from 1990 to 2000. The increase in the number of networks
since 1990 means that many more stations are now network affiliates than
in 1990. Of the 1,248 commercial television stations in 2000, over 1,000
are affiliated with one of the seven largest commercial networks.[^48]
In addition to the increase in the number of networks since 1990, the
Commission's recently-relaxed television duopoly rules are likely to
affect the profitability of stations that become parts of duopolies, but
it is too early to assess that effect quantitatively.[^49]

The year 2001 was a difficult one for television stations and the
decline in advertising revenues during that year had a significant
negative impact on their financial situation. As argued in chapter III,
however, the industry is expected to recover from this year. Rather than
emphasizing this one year excessively in the present analysis, the
approach is to examine longer term trends. The review of television
station profitability herein draws on the aggregate advertising revenue
data cited in chapter III and data from the National Association of
Broadcasters [Television Financial Reports]{.underline}. The [Television
Financial Reports]{.underline} provide a wealth of data on television
stations, based on a survey, and aggregated into various categories.
This paper uses the data extensively, but it has certain limitations
with respect to various reported performance ratios.[^50]

Table 13 contains data on total television station advertising revenues
(national spot plus local spot) and also on total broadcasting
advertising revenues per commercial station in current and constant
dollars. It is important to look at both because network programming is
an input, a crucial input, into the service distributed by television
stations to viewers. From 1990-2000 the average annual growth rate of
both categories of current dollar revenue was in the neighborhood of 4.5
percent, while in constant dollars it was around one percent. A revenue
growth rate of one percent in constant dollars does not appear too
favorable, but it is still higher than the 1980-1990 average annual
growth rate, which was actually negative for total broadcast advertising
revenue per station during this period. This may be due in part to the
fact that the number of commercial stations increased by 49 percent from
1980-1990 and only 14 percent from 1990-2000.

Tables 14 and 15 provide data for 2000 and 1990, respectively, on
average net revenues, expenses, profits, and cash flow of commercial
television stations by market size. In 2000, both profits and cash flow
data are positive in every category and quite robust particularly for
the larger markets. Dollar values of profits and cash flow are reported
in addition to their percentages of net revenue because the data on
which the calculations are based do not permit precise calculations of
margins.[^51] In 1990, the cash flows are positive in every category. It
appears that cash flow margins for the average station have increased
over the past decade. The 1990 profit figures are negative in four of
the smaller market size categories; in every category but one, profits
and profit margins are up in 2000 over 1990.

In addition to averages, the [Television Financial Report]{.underline}
also provides 25^th^ percentile data for all of the categories cited in
tables 14 and 15. For 2000 every market size category showed positive
cash flow, while the pre-tax profit levels were mostly negative but
small in magnitude. For 1990, all but one market category had positive
cash flow and all but one had negative pre-tax profits. While caution
should be used in drawing inferences from these data, it does appear
that, even among the less profitable stations, the situation probably
did not deteriorate since 1990.[^52]

Station revenues are predominantly from advertising, but some network
affiliates receive "network compensation" payments from the parent
network. In 2000 these payments averaged 3.2 percent of net revenues for
big three affiliate stations.[^53] Network compensation looms larger for
stations in the smaller markets, as illustrated by the fact that the
average in 2000 was 2.4 percent for the top 25 markets and 6.3 percent
for markets outside the top 100. In 1990, the average level of
compensation for big three affiliates was 5.1 percent of net revenues,
so this category of revenue has declined.

[]{#__RefHeading___Toc21199298 .anchor}Table 13: Average Revenue per
Television Station Based on Aggregate Data, Current and Constant Dollars

(All figures except number of stations and growth rates in millions of
dollars)

![](media/image12.wmf){width="7.1in" height="6.3in"}

Table 16 provides profits as a percentage of net revenues for affiliate
and independent stations over the 1975-2000 period and compares the
figures with comparable data for the 500 largest industrial
corporations. The data show that margins for big three network
affiliates have risen slightly over the past 25 years and compare very
favorably to margins for the largest corporations. Historically,
independent station margins have been lower than those for network
affiliates, but still above the largest corporation level. The year 2000
figure for independents is probably not too significant, since by 2000
most stations were affiliates of one network or another. The relatively
high year 2000 margins of ABC compared to NBC probably do not reflect
the current realities, given the relatively strong performance of the
NBC network and the relatively weak current performance of the ABC
network. The negative profits for the Paxson affiliates are unlikely to
prompt the owners of those stations to turn in their licenses. The owner
of some of those stations has estimated that the channel 60-69 spectrum
band in which many of them are located will bring as much as \$30-36
billion at auction.[^54]

[]{#__RefHeading___Toc21199299
.anchor}![](media/image13.wmf){width="5.9222222222222225in"
height="5.311805555555556in"}Table 14: Average Revenues, Expenses,
Pre-tax Profits, and Cash Flow of Commercial Television Stations, 2000

[]{#__RefHeading___Toc21199300 .anchor}Table 15: Average Revenues,
Expenses, Pre-tax Profits, and Cash Flow of Commercial Television
Stations, 1990

![](media/image14.wmf){width="5.361111111111111in"
height="4.290972222222222in"}

[]{#__RefHeading___Toc21199301 .anchor}Table 16: Average Profits of
Commercial TV Stations as a Percentage of Net Revenues, 1975-2000

![](media/image15.wmf){width="7.113888888888889in"
height="2.8333333333333335in"}

Table 17 uses the NAB [Television Financial Report]{.underline} data to
calculate average television station net revenues in constant dollars
and should be reviewed in comparison with table 13. Table 13 is based on
aggregate advertising revenues and yields a 2000 figure of \$12 million
per station in constant dollars. This is certainly the same order of
magnitude as the 2000 figures from the NAB data, which adds some
certainty that the picture is roughly correct.[^55] They confirm that,
by and large, station revenues in constant dollars have not grown much.
The decline in net revenues from 1995-2000 for independent stations is
likely a consequence of the fact that many stations that were
independents in 1995 had affiliated with one of the new networks by
2000.

Tables 18 and 19 provide a breakdown of station expenses for several
market size categories in 2000 and 1990 respectively. The tables show
that the share of expenses devoted to programming and production has
fallen for all size categories but the share of expenses devoted to news
has increased in all categories. Of course, the averages mask increases
for some stations and decreases for others. Some stations have, in fact,
dropped local news service in recent years.[^56]

News expenditures, of course, vary by station category as well. Thus, in
2000 big three affiliates averaged 27.2 percent of expenses for news.
The figure for Fox was 12.5 percent, UPN 7.6 percent, WB 10.1 percent,
Pax 0 percent, and 16.8 percent for independents. In both years the
share of programming in expenses rises with market size. This is due to
the fact that even network affiliates acquire some syndicated
programming and this programming is priced based on market size.

[]{#__RefHeading___Toc21199302 .anchor}Table 17: Average
Inflation-Adjusted Net Revenues of Commercial TV Stations, 1975-2000
(1982-1984 = 100)

![](media/image16.wmf){width="5.935416666666667in"
height="5.653472222222222in"}

[]{#__RefHeading___Toc21199303 .anchor}Table 18: Expense Items of
Commercial Broadcast Stations by Selected Market Size, 2000 (% of Total
Expenses)

![](media/image17.wmf){width="5.822916666666667in" height="2.3125in"}

[]{#__RefHeading___Toc21199304 .anchor}Table 19: Expense Items of
Commercial Broadcast Stations by Selected Market Size, 1990 (% of Total
Expenses)

![](media/image18.wmf){width="5.256944444444445in" height="2.125in"}

Table 20 examines more closely station programming expenses over time
for affiliates (ABC, CBS, and NBC only) and independents. For both
categories of station, the share of news in expenses has risen steadily.
The "other" category is a residual, calculated by subtracting broadcast
rights, news, and music licensing fees from total programming expenses.
Other therefore includes (and is probably best interpreted as an upper
bound on) the share of expenses devoted to non-news local programming.
There is no strong trend in the data, but the share dropped from 1995 to
2000 for both affiliates and independents. The decline in the
programming expenses share for independents from 1995-2000 is likely a
consequence of many formerly independent stations affiliating with one
of the new networks during the 195-2000 period.

[]{#__RefHeading___Toc21199305 .anchor}Table 20; Programming Expenses of
Commercial Broadcast Stations, 1975-2000 (% of Total Expenses)

![](media/image19.wmf){width="5.572916666666667in"
height="4.957638888888889in"}

## Summary

Television broadcasting viewing shares and shares of video advertising
revenue continued to fall during the past decade. That the revenue share
fell much more slowly than the viewing share is explained by the fact
that broadcast audience on a per-network basis remain much larger than
cable network audiences on a per-network basis. This keeps broadcast
advertising availabilities, on the whole, more valuable than cable
advertising availabilities. However, cable advertising revenue shares
are rising and moving closer to cable viewing shares, suggesting that
cable advertising is becoming a closer substitute for broadcast
advertising. While broadcast audiences remain much larger than cable
audiences, the ratio (comparing the largest four broadcast and cable
networks in primetime) has dropped from about nine to one down to about
five to one.

Broadcast revenues, whether it be for networks or stations, have risen
gradually in absolute terms over the 1990-2000 period, although 2001 saw
a significant (but likely transitory) drop. Programming costs continue
to rise. The program production and distribution environment has changed
over the past decade, with the elimination of the syndication and
financial interest and dual network rules, the entry of new broadcast
networks, and the increased ownership and production of primetime
programming by networks and their sister studios.

Television networking by itself continues to be roughly a breakeven
business while television station margins remain rather robust. The
efficiency of networking and the value of network programming to
affiliates, along with the strong margins realized by many television
stations, means that the networks will, in fact, obtain the financial
support they need to continue in operation. Television stations will
face increasing competition in the local spot advertising market as
cable interconnects become more widespread and sophisticated.

# V. Cable Television

Cable television remains the most significant competitor to over-the-air
broadcast television. Cable television was originally developed to
provide broadcast television to areas with poor over-the-air reception.
The first cable systems were built in 1955, at which time there were
approximately 250,000 subscribers and grew to only 750,000 subscribers
during the next five years.[^57] It wasn't until the creation of
non-broadcast or "cable-origination" programming that cable
subscribership began to proliferate. With the development of such cable
programming networks as HBO, CNN, and ESPN, cable operators began to
find a market for cable in urban areas as well as the predominately
rural areas that were first served. Table 21 provides data on
subscribership for various categories of cable service. It shows that by
1975, basic subscribership had reached nearly 9.8 million and only five
years later, with the addition of even more cable origination networks
such as MTV, TBS, and USA, cable subscribership grew to more than 19.2
million. As of year-end 2001, there were approximately 287 national and
approximately 56 regional satellite-delivered cable origination
programming networks available for carriage over cable networks and
nearly 69 million cable television subscribers.[^58] Table 21 reports an
estimate that by 2010, there will be more than 74 million basic cable
subscribers.

## The Nature of Cable Television

Some people subscribe to cable television with the sole intent of
obtaining better reception of local broadcast signals, though it is not
known exactly how many. The vast majority, however, subscribe to cable
in order to obtain increased programming options, though many of those
subscribers also benefit from the improved reception of local broadcast
networks. Yet others subscribe to cable television to receive better
reception of local broadcast networks, while seeking increased
programming options through subscription programming services from a
non-cable subscription video provider such as direct broadcast satellite
("DBS").[^59]

Currently, most cable system operators offer five categories of service:
the basic service tier ("BST"); the expanded basic tier, otherwise known
as the cable programming service tier ("CPST"); the digital tier, (which
offers channel capacity for both additional "basic" cable origination
networks and additional premium and

pay-per-view networks); premium services, also known as "pay" services
(offered in

[]{#__RefHeading___Toc21199306 .anchor}Table 21: Cable Subscribers and
Homes Passed

  ------------------------ ----------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
                                                                                                         

                           **1975**    **1980**   **1985**   **1990**   **1995**   **2000**   **2001**   **2010p**

  **Total Households^(1)^  71.5^(2)^   81.8       87.6       94.8       97.5       104.1      107.4      123.3
  (mil)**                                                                                                

  **TV Households^(1)^     69.6^(2)^   79.9       85.9       93.1       95.9       102.2      105.5      121.1
  (mil)**                                                                                                

                                                                                                         

  **Basic Cable**                                                                                        

  Cable Homes Passed (mil) 23.1^(3)^   34.9       64.7       86.0       92.7       98.8       102.0      117.0

  Basic Subscribers (mil.) 9.8^(4)^    19.2       36.7       51.7       62.1       68.5       68.6       74.3

  Cable HP/TVHH (%)        33.2%       43.7%      75.3%      92.4%      96.7%      96.7%      96.7%      96.6%

  Basic Subs/TVHH (%)      14.1%       24.0%      42.7%      55.5%      64.8%      67.0%      65.0%      61.4%

  Basic Subs/Cable HP(%)   42.4%       55.0%      56.7%      60.1%      67.0%      69.3%      67.3%      63.5%

                                                                                                         

  **Premium (\"Pay\")                                                                                    
  Cable**                                                                                                

  Premium Subscriptions    0.47        9.1        29.9       41.5       45.8       59.69      64.8       84.3
  (mil)                                                                                                  

  Premium Households (mil) 1.0^(3)^    9.1        21.8       23.9       29.6       35.6       36.1       42.2

                                                                                                         

  **Digital Cable**                                                                                      

  Digital Cable            \-          \-         \-         \-         \-         10.1       16.7       62.5
  Subscribers (mil)                                                                                      

  Digital Subs/Basic Subs  \-          \-         \-         \-         \-         14.7%      24.3%      84.1%
  (%)                                                                                                    

                                                                                                         
  ------------------------ ----------- ---------- ---------- ---------- ---------- ---------- ---------- -----------

**Sources:** Total HH and TVHH: (1975-2001): Television Bureau of
Advertising, Inc., Television Households, Trends in Television, at
http://www.tvb.org (citing Nielsen). (2010p): Kagan World Media,
Broadband Cable Financial Databook, July 2002, at 10. Cable Subs and
Premium Subs: (1975 and 2010p): Kagan World Media, Broadband Cable
Financial Databook, July 2002, at 7 and 10; (1980-2001): Kagan World
Media, Cable TV Investor, May 24, 2002, at 9. Cable HP and Premium
Households: (1975-2001): Kagan World Media, Cable TV Investor, May 24,
2002, at 9; (2010p): Kagan World Media, Broadband Cable Financial
Databook, July 2002, at 10. Digital Subs: (2000): Kagan World Media,
Broadband Cable Financial Databook, July 2001, at 10; (2001 and 2010p):
Kagan World Media, Broadband Cable Financial Databook, July 2002, at 10.

**Notes:**

^(1)^Except where otherwise noted, data is reported by the source as of
Jan 1 of the next year (e.g., figure reported for 2001 are actually Jan
1, 2002).

^(2)^ Data is as of September of that year.

^(3)^1976 data

^(4)^ Data is not year-end, but is an average of subscribers over the
course of 1975.

both the analog and digital tiers); and pay-per-view ("PPV") services
(also offered in both the analog and digital tiers). Some cable
operators have also begun to offer their customers such video products
as video-on-demand ("VOD") and high-definition television ("HDTV")
formatted programming. Most cable operators also offer their customers
non-video services, (e.g., high-speed Internet access, cable telephony,
digital audio programming, and interactive services such as electronic
programming guides, and video gaming). By offering these non-video,
ancillary services, cable operators are able to attract and retain
subscribers more easily than without these services. These services also
provide additional revenue streams for cable operators.

The basic service tier ("BST") includes, at minimum, all local broadcast
signals distributed by the cable operator, along with any public,
educational, and government ("PEG") access channels that the local
franchise authority requires the system operator to carry on the basic
tier.[^60] Pursuant to the Communications Act, cable operators have an
obligation to set aside a specified number of channels, based on their
total channel capacity for the carriage of local broadcast signals.[^61]
At the discretion of the cable operator, this tier may also include
additional program services such as national or regional
satellite-delivered cable origination networks. Currently, more than 50
percent of cable systems voluntarily carry superstation TBS on the BST
and approximately 25 percent of all cable systems report carrying either
Discovery, CNN, or ESPN.[^62]

Consumers pay a flat monthly fee for the BST package of channels. As of
July 2001, the industry-wide average price of the BST was \$12.84.[^63]
The BST is the lowest level of service offered by cable operators, and
is required for any additional level of service.[^64] With a few
exceptions (e.g., PEG access channels, public television stations), most
of the programming offered on the BST is advertiser-supported.

The CPST provides all analog video programming distributed over the
system that is not on the basic service tier and for which the operator
does not charge a per-channel or per-program basis.[^65] Most of the
programming carried on the CPST is advertiser-supported national and
regional cable origination networks. Subscribers do not need to
subscribe to the CPST to subscribe to other, higher tiers of cable
service such as premium or pay-per-view.[^66]

The digital tier was first introduced commercially in 1996 and provides
additional channels of basic and premium services through the use of
digital compression technologies.[^67] Digital service was initially
offered by cable operators as a response to the entry of high-capacity
DBS services to the multichannel marketplace. DBS offered and continues
to offer greater channel capacity than cable systems and also superior
video quality. In some cases, the video programming offered on cable's
digital tier is offered at a higher quality than standard analog video.
In other cases, the digital tier is used simply to compress more
analog-quality channels into the same bandwidth.

At year-end 1996, there were approximately 100,000 digital video
subscribers, and just three years later, there were approximately 7.2
million digital video subscribers.[^68] As Table 21 shows, there are
approximately 16.7 million digital video subscribers by year-end 2001,
and it is estimated that by 2010, there will be more than 62 million
digital video subscribers.

Premium cable services are channels of service offered on an a la carte
basis. Sometimes these channels are marketed in groups of channels for
special discounts. Premium cable services include such well-known cable
networks as HBO, Showtime, and Cinemax. These services rarely include
advertising and derive revenue primarily through the subscription fee
charged for each service. Premium services are offered in analog and
also on the digital tier. In 1990, there were five premium networks
available for carriage over cable systems.[^69] By 1995, 21 premium
networks are available to cable operators for distribution over their
systems.[^70] By 2001, with expanded channel capacity enabled by digital
compression, there were 40 premium cable networks available for delivery
over cable systems.[^71] The premium service model allows consumers to
pay for those networks that have the most value to them, as opposed to
purchasing groups of general programming and niche networks available on
the basic, expanded basic, and digital basic tiers.

Pay-per-view services offer video programming on a program-by-program
basis for a fee. Programming offered includes movies, sporting events,
concerts, and other similar programming. Pay-per-view services rarely
include advertisements and derive revenue primarily through the fees
charged per-program. In 1990, there were seven pay-per-view networks
offering pay-per-view services to cable operators for carriage on their
systems.[^72] The number of pay-per-view networks has remained
relatively stable over the last decade. As of 2001 there are 11
pay-per-view networks available for carriage over cable systems.[^73]

Video-on-demand ("VOD") is the newest video service category being
developed and deployed by cable operators. VCD services are similar to
pay-per-view services in that video-on-demand provides mostly
advertising-free material on a program-by-program basis. The subscriber
may choose from a wide array of programming and pick the time of
viewing. Some operators are opting to offer video-on-demand via the
subscription model ("SVOD"). In the SVOD model, the subscriber pays one
monthly fee for unlimited access to a finite library of select
programming. This model more closely resembles the premium service tier,
and may offer fewer programming options than standard video-on-demand
services. In contrast to the pay-per-view model, in which programming is
essentially cablecast (the same) to every home at network-selected
times, VOD systems both subscription and standard, utilize a server
located in the cable operator's headend (or central office). Consumers
may choose from a number of video programming selections at virtually
any time, with VCR-like pause and rewind capabilities. Video-on-demand
is largely in test-phase, though commercial deployments have begun in a
few systems.[^74]

## Availability and Subscribership of Cable Television

Table 21 provides data on the availability and subscribership of cable
television since 1975. It shows that, since 1990, at least 90 percent of
television households have had access to cable television. The
percentage has been rising gradually over that period. The homes passed
data in Table 21 are drawn from Kagan World Media ("Kagan"). This is the
only consistent source of time series homes passed figures available.
However, a comparison of the Kagan 2001 homes passed figure with one
from Warren Communications News reveals a significant discrepancy. The
Kagan figure is 102 million, while the Warren Communications News figure
is 89.6 million.[^75] This difference suggests that the Kagan data
should be used with some caution and that they are probably most
reliable as a trend indicator rather than a precision estimate for any
one year. Nevertheless, it is reasonable to conclude that the share of
television households passed by cable is very high and rising gradually
over time. Those homes not passed by cable are likely located in rural,
sparsely-populated areas. Given the virtually nationwide presence of DBS
and the cost of building cable infrastructure in areas with low
population density, these homes may never be served by cable.

Bearing in mind the caveats about the cable homes passed figures, Table
21 shows that the share of television households with access to cable
that chose to subscribe jumped from 60 to 67 percent from 1990 to 2001.
As a share of total television households, cable subscribership jumped
from 56 percent in 1990 to 67 percent in 2000, before dropping in 2001
to 65 percent. The slow growth in homes passed as a fraction of
television households, the apparent flattening out of cable penetration
of total television households, the flattening out of subscribers as a
percentage of homes passed, and the fact that only 13.6 percent of
television households do not subscribe to some form of multichannel
video programming distribution service,[^76] all are consistent with the
conclusion that cable is approaching a saturation point. The KAGAN
projections for 2010 in Table 21 are also consistent with this
conclusion, showing cable penetration of television households in 2010
at 61.4 percent and an average annual subscribership growth rate from
2001-2010 of under one percent, slower than the expected growth rate for
television households.

The expected decline in cable penetration of television households is
undoubtedly due in part to the development of other attractive delivery
systems, [e.g.]{.underline}, DBS. Chapter VI discusses DBS and presents
and analyzes comparative data on cable and DBS penetration. It should be
noted that the pattern of consumer demand for new non-video and video
services that cable and, in some cases DBS, will offer will also affect
penetration patterns. For example, cable operators provide or will
provide high-speed Internet access and cable telephony, as well as
video-on-demand. Strong consumer take up of these services (not all of
which can be provided in a comparable way by DBS) could lead to a higher
than expected cable subscribership in the future.

## Cable Operator Revenues

Table 22 provides comparative data on cable operator revenues. Perhaps
the most striking feature of the table, consistent with the discussion
in the previous

paragraph, is the expected jump in "advanced services"
([e.g]{.underline}, Internet access, cable telephony) revenues. The jump
in subscription revenues for advanced analog and digital services
attests to the value subscribers apparently place on expanded
programming choice. Pay-per-view and video-on-demand revenues are
currently quite

modest, but are poised to increase, and the data show a modest increase
in home shopping and advertising revenues for cable operators.[^77]
These share increases come at the expense of the traditional basic and
pay subscription categories. Basic subscription revenues are expected to
continue growing significantly in absolute terms, but pay revenues will
grow, and indeed already have been growing at a very low

[]{#__RefHeading___Toc21199307 .anchor}Table 22. Cable Operator Revenues
(\$mil)

  ------------------------------- ------------ ------------ ------------ ------------ ------------
                                  **1990**     **1995**     **2000**     **2001**     **2010p**

                                                                                      

  **Cable Operator Revenue**                                                          

  Basic/Expanded Basic            10,674       16,860       24,729       27,031       41,890

  Premium Revenue ("Pay")         5,105        4,306        5,115        5,617        6,961

  PPV/VOD                         253          498          751          993          5,623

  Advanced Analog/Digital         0.0          30           1,088        2,365        11,407

  Home Shopping Commissions       96           129          239          260          530

  Advertising Revenue             476          1,075        2,430        2,430        6,216

  Install and Equipment Revenue   1,068        1,888        2,451        2,463        2,698

  High-speed Internet access,     0.0          0.0          1,164        2,835        19,316
  cable telephony, and video                                                          
  games                                                                               

  **Total Revenue**               **17,672**   **24,786**   **37,967**   **43,994**   **94,641**

                                                                                      

  **Percent of Total Revenue**                                                        

  Basic/Expanded Basic            60.4%        68.0%        65.1%        61.4%        44.3%

  Premium Revenue ("Pay")         29.0%        17.4%        13.5%        12.8%        7.4%

  PPV/VOD                         1.4%         2.0%         2.0%         2.3%         5.9%

  Advanced Analog/Digital         0.0%         0.1%         2.9%         5.4%         12.1%

  Home Shopping Commissions       0.5%         0.5%         0.6%         0.6%         0.6%

  Advertising Revenue             2.7%         4.4%         6.4%         5.5%         6.6%

  Install and Equipment Revenue   6.0%         7.6%         6.4%         5.6%         2.9%

  High-speed Internet access,     0.0%         0.0%         3.1%         6.4%         20.4%
  cable telephony, and video                                                          
  games                                                                               

                                                                                      
  ------------------------------- ------------ ------------ ------------ ------------ ------------

> **Sources:** (1990-2001): Kagan World Media, Cable TV Investor, May
> 24, 2002, at 9; (2010p): Kagan World Media, Kagan's 10-Year Cable TV
> Industry Projections, Broadband Cable Financial Databook 2002, July
> 2002, at 10.

rate. This is true notwithstanding an increase in the number of pay
channels and pay service subscriptions. The likely explanation for this
is increased competition from home video. The same phenomenon also
possibly explains the low level of PPV revenues.

## The Competitive Impact of Cable on Broadcast Television

Considering the enormous value that consumers continue to place on cable
television viewing options, it is no wonder that (as documented in
Chapter IV) viewership shares of non-premium cable networks have
continued to grow over the past decade, while viewership shares of
broadcast television stations have steadily declined. Both cable
subscribership and viewing patterns in cable households depend on the
menu of programming offered by cable. Growth in programming options
(both in terms of an increased number of networks offered and increased
quality of programming) have and will continue to increase the
popularity of cable television relative to broadcast television.

*Programming Choice Factors*

Chapter X contains a detailed examination of cable programming. For now,
it is important to note that, while cable's collective share of the
viewing audience has been increasing over the years, ratings for
individual networks (and programs) remain quite low. The Television
Bureau of Advertising provides an analysis of "season-to-date" network
ratings, covering the period from August 27, 2001-May 26, 2002.[^78] It
shows the following prime time ratings for the major broadcast networks:
NBC 8.6, CBS 8.0, ABC 6.4, and Fox 5.0. The corresponding figures for
the top four cable networks are: Lifetime 1.7, TBS 1.4, TNT 1.4, and USA
1.3.[^79] The same source provides a listing of the top 100 programs on
broadcast and cable for various periods.[^80] The May 2002 compilation
reveals that 92 of the top 100 programs were on broadcast television.
The top five were all broadcast programs. Their ratings ranged from
12.8-16.0. The highest-rated cable program was number 76, and the
ratings for the top five cable programs ranged from 2.0-3.4. The eight
cable programs that ranked within the top 100 included three from
children's network Nickelodeon, one MTV reality program ("The
Osbournes"), one professional wrestling show, and three Sunday night
movies on Lifetime.

These data illustrate that, while cable programmers do provide some
general interest channels, in the mold of traditional broadcast
services, in many cases, they program to a particular audience niche,
[e.g.]{.underline}, children, young adults, sports fans, etc. One
additional niche worthy of note is news. Chapter X documents the
significant increase in news service provided via cable, including in
many markets local news. Ten years ago local broadcast stations were the
only providers of local television news.

*Technological Factors*

Cable operators have invested substantial sums over the past decade to
upgrade channel capacity, both by expanding bandwidth and by employing
digital compression. From 1990 to 2000, the share of cable subscribers
served by cable systems with 54 or more analog channels increased from
24 percent to 62 percent.[^81] In the absence of information on the
number of channels devoted to digitally compressed signals and the
precise compression ratio used, however, it is not possible to infer
from these data the number of channels available to cable subscribers.
The Commission's recent cable industry price survey provides some data
on this subject.

Table 23 provides survey data on cable system capacity and channel
allocation as of July 2001. It shows that approximately two--thirds of
all cable systems have facilities that provide bandwidth of 750 MHz or
above. The average system capacity in the survey is 659 MHz and it
devotes 82.5 channels, or 495 MHz, to video delivery.[^82] If the

[]{#__RefHeading___Toc21199308 .anchor}Table 23; System Capacity, July
2001

  ---------------------------------------------------- ------------------
                                                       

  **Average system capacity (MHz)**                    659

                                                       

  **Percent of Cable Systems with capacity of:**       

  330 MHz and below                                    8.40%

  331 through 749 MHz                                  25.65%

  750 MHz and above                                    65.95%

                                                       

  **Number of 6-MHz activated channels:**              

  Devoted to analog service                            70.95

  Devoted to digital service                           11.55

  Total number of channels                             82.5

                                                       
  ---------------------------------------------------- ------------------

> **Source***: Implementation of Section 3 of the Cable Television
> Consumer Protection and Competition Act of 1992*, *Statistical Report
> on Average Prices for Basic Service, Cable Programming Services, and
> Equipment*, MM Docket No. 92-266, Report on Cable Industry Prices, 17
> FCC Rcd at 6313, Tbl. 11 (2002). These figures are based on sampling
> derived from a survey administered by the Commission. For detailed
> survey methodology, *see Id*., 17 FCC Rcd at 6304.

digital channels are provided at a 10:1 compression ratio, then the
average system could, in theory, be offering 187 channels.

The combination of increased channel capacity and, as documented above,
a growing share of television households passed by cable and, since
1994, DBS, means cable networks can begin to approach the national reach
of the biggest broadcast networks. The big four broadcast networks each
reach around 98 percent of television households. KAGAN provides
subscribership data for cable networks as of June 30, 2002.[^83]
Utilizing the January 2002 television household estimate of 105.5
million, the largest cable network, TBS, reached 83 percent of
television households, and 11 other cable networks reached at least 80
percent of television households. In 1990, the largest cable network was
ESPN, and it reached only 62 percent of television households.[^84]

The relatively slow growth of individual cable network audience sizes
suggests that even the mass appeal cable networks will not soon approach
the audience size of broadcast networks. The increases in channel
capacity and homes passed, however, do suggest that the gap between
cable network and broadcast network audience sizes, which has been
narrowing, will continue to do so. And the same factors suggest that
cable subscribers will have an increasingly wide range of program
channels from which to choose, so that cable will continue to chip away
at total broadcast audience sizes.

In addition, at the time of Working Paper 26, VOD was a relatively
fledgling product. These services were expected to attract subscribers
because of the improved quality and advanced timeshifting capabilities
these technologies could offer. Because cable operators have instead
shifted the focus to system upgrades and installation of digital
capability, cable operators have yet to launch VOD widespread. Many are
waiting until their systems are fully digital-ready before launching
VOD. As discussed in Working Paper 26, video-on-demand and pay-per-view
allow the customer greater flexibility than broadcast services,
increasing the relative value of these MVPD platforms compared to
broadcasting. The economics of VOD and PPV also could have significant
potential to impact the broadcast market because the ability to charge
for single highly-valued events could come closer than conventional
cable services to measuring consumer's tastes for programming.

*Psychological Factors That Influence Cable Viewing*

It appears that many cable subscribers watch broadcast channels in part
out of habit and in part due to lack of good information on cable
program availability. While consumer habit may be reasonably stable,
multichannel video programmers are devising technologically advanced
ways to disseminate programming information to consumers.

While most changes in viewer habit are largely evolutionary, versus
revolutionary, certain events may accelerate the process of change,
increasing both cable subscribership and viewing of cable by
subscribers. For example, since the Persian Gulf War, consumers have
become accustomed to 24-hour news coverage of world-wide and national
interest events. Again, a gradual shift in viewing patterns is more
likely than a radical change in the relative popularity of broadcast
television and cable. Willingness to subscribe to cable may be sensitive
to income as well as programming choices and habitual or convenience
factors. Economic theory shows that one would expect the demand for
cable services to increase as consumers' income rises.[^85]

## Conclusions 

Cable television has significantly expanded the reach of non-broadcast
networks. These services are very valuable to viewers because they
provide highly targeted programming not otherwise available. Although
cable subscriber growth appears to be slowing, increased channel
capacity and flexibility in viewing options may make cable subscribers
shift viewing more to cable programming from broadcast. Again, radical
changes in the popularity of cable programming are not anticipated and
changes in the relative popularity of cable over broadcast will likely
be evolutionary not revolutionary.

# VI. Direct-to-Home Satellite Transmissions

The most significant technological advance in the distribution of video
media of the last ten years is the widespread deployment of direct
broadcast satellite systems. In 1990, direct-to-home satellite
transmission services (also known as "satellite-to-home") were comprised
mostly of home satellite dish systems in the C-Band. As Table 24 shows,
in 1990, there were approximately 760,000 C-Band subscribers.[^86] By
year-end 2001, however, there were less than one million home satellite
C-Band subscribers left, but

[]{#__RefHeading___Toc21199309 .anchor}Table 24: Direct-to-Home
Subscribers and Cable Subscribers

  ----------------------------- ---------- ---------- ---------- ---------- ---------- -----------
                                                                                       

                                **1985**   **1990**   **1995**   **2000**   **2001**   **2010p**

                                                                                       

  **Total Households^(1)^       87.6       94.8       97.5       104.1      107.4      123.3
  (mil)**                                                                              

  **TV Households^(1)^ (mil)**  85.9       93.1       95.9       102.2      105.5      121.1

                                                                                       

  **Cable Subscribers (mil.)**  36.7       51.7       62.1       68.5       68.6       74.3

  **Satellite Subscribers       0.0        0.8        4.6        16.0       18.7       27.0
  (mil.)**                                                                             

  C-Band Subscribers^(2)^ (mil) 0.0        0.8^(3)^   2.4        1.2        0.8        0.0

  DBS Subscribers (mil)         0.0        0.0        2.2        14.8       17.9       27.0

  **Satellite + Cable           36.7       52.5       66.7       84.5       87.3       101.3
  Subscribers (mil)**                                                                  

                                                                                       

  **Satellite Subs/TVHH (%)**   0.0%       0.9%       4.8%       15.7%      17.7%      22.3%

  **C-Band Subs/TVHH(%)**       0.0%       0.9%       2.5%       1.2%       0.8%       0.0%

  **DBS Subs/TVHH (%)**         0.0%       0.0%       2.3%       14.5%      17.0%      22.3%

  **Satellite + Cable/TVHH      42.7%      56.4%      69.6%      82.7%      82.7%      83.7%
  (%)**                                                                                

                                                                                       
  ----------------------------- ---------- ---------- ---------- ---------- ---------- -----------

**Sources: Total HH and TVHH:** (1975-2001):Television Bureau of
Advertising, Inc., *Television Households,* Trends in Television, at
http://www.tvb.org (citing Nielsen). (2010p): Kagan World Media,
Broadband Cable Financial Databook, July 2002, at 10. **Cable Subs:**
(1975 and 2010p): Kagan World Media, Broadband Cable Financial Databook,
July 2002, at 7 and 10; (1980-2001): Kagan World Media, Cable TV
Investor, May 24, 2002, at 9. **DBS and C-Band Subs:** (1995-2010p):
Kagan World Media, Economics of Basic Cable Networks 2002, Sept. 2001,
at 23-27. **C-Band Subs:** (1990): 1995 MVPD Competition Report at Table
G-1.

**Notes:**

\* All data is year-end unless otherwise noted.

^(1)^Except where otherwise noted, data is reported by the source as of
Jan 1 of the next year (e.g., figure reported for 2001 are actually Jan
1, 2002).

^(2)^ Receipt of video programming through the use of a C-Band dish does
not require a subscription, therefore there are a greater number of
C-Band users than there are C-Band subscribers. There is no way to track
the total number of C-Band users, only the number of subscribers.

^(3)^ 1991 Data.

more than 17.9 million direct broadcast satellite subscribers, together
comprising nearly 20 percent of the subscription video market.[^87] In
fact, in the last ten years, the rapid growth of the subscription video
services market has been largely due to direct to home satellite
services, namely direct broadcast satellite services. Figure 1 shows
that the usage of cable and satellite services combined appears to be
leveling off at around 83 percent of television households.[^88]
Projections for 2010 cable and satellite subscribership indicate that
usage will continue this pattern.[^89]

[]{#__RefHeading___Toc21199283 .anchor}Figure 1: Cable and Satellite
Usage: Subscribers/TVHH (%)

**Source data:**

TVHH: Television Bureau of Advertising, Inc., Trends in Television, at
http://www.tvb.org (citing Nielsen). Cable Subs: Kagan World Media,
Cable TV Investor, May 24, 2002, at 9. Satellite Subs: Kagan World
Media, Economics of Basic Cable Networks 2002, Sept. 2001, at 23-27,
except 1990 C-Band Subs: 1995 MVPD Competition Report at Tbl G-1.

## Direct-to-Home Satellite Services

Direct-to-home satellite systems ("satellite-to-home") use satellites to
deliver video programming directly to subscribers. As Table 24
indicates, there are two types of satellite-to-home services: home
satellite dish ("HSD") services in the C-Band frequency, and direct
broadcast satellite ("DBS") services in the Ku-band frequency. Both
offer subscribers many of the same video programming services typically
provided by cable systems, in addition to some offerings not typically
available from cable systems.

*Home Satellite Dish*

HSD is the original satellite-to-home service offered to consumers, and
involves the home reception of signals transmitted by satellites
operating generally in the C-Band frequency.[^90] HSD technology was
first developed in 1976, and commercialized in 1980. HSD users employ a
4-8 foot dish to receive unscrambled programming for free (subject to
section 705(b) of the Communications Act),[^91] and scrambled
programming purchased in a secondary market from program packagers that
are licensed to facilitate subscribers' receipt of video programming.

Owners of HSD systems have access to more than 500 channels of
programming placed on C-Band satellites by programmers. Approximately
350 of these programming channels are unscrambled and approximately 150
are scrambled.[^92] In order to receive one or more scrambled channels,
an HSD owner must purchase an integrated receiver-decoder ("IRD") from
an equipment dealer and then pay a monthly or annual subscription fee to
a program packager. HSD systems are typically designed to receive
programming from several different satellites at several different
orbital locations. As such, most HSDs include motors that permit the
receiving dishes to rotate and receive signals from these many
satellites. Space considerations and zoning regulations restrict many
viewers' ability to install the large antenna needed for HSD reception.

At its peak of popularity in 1994, there were an estimated 4.5 million
active HSD users, roughly half of whom subscribed to one or more
programming services.[^93] As Table 24 shows, however, that the number
of HSD subscriptions appears to have peaked in 1995, with an estimated
2.4 million authorized subscribers. As of year-end 2001, there were a
little less than 1 million home satellite dish system subscribers
remaining, and an unknown number of active system users. Much of the
decline in HSD subscribership results from owners switching to DBS
services. Not only are DBS systems smaller in size and easier to
maintain, but they are also less expensive than the typical HSD
equipment.

Future growth of the HSD industry is unlikely. Nevertheless, HSD remains
the delivery vehicle for a core, niche contingent of satellite
subscribers. Many existing HSD transponder leases extend past 2010, and
in 2000, six new satellites were launched to replace older
satellites.[^94] The primary use of these satellites will be to
distribute programming to cable headends, but they can also serve the
HSD industry. Furthermore, new, digital equipment for C-Band HSD systems
continue to be developed and made available to subscribers.[^95]

*Direct Broadcast Satellites -- Medium Power DBS*

At the time of the release of Working Paper 26, medium power Ku-band,
Fixed Satellite Service (also referred to as "medium power DBS"), was
being offered to consumers by Primestar Partners, LP.[^96] Primestar was
a joint venture owned by five of the major cable MSOs and GE American
Communications, Inc., which owned the satellite used by Primestar.
Primestar began operating as a medium-power Ku-band service provider in
1991. Subscribers used a 36 or 40 inch dish to obtain programming. At
year-end 1998, prior to it's acquisition by high-power DBS operator
DirecTV, Primestar offered 160 channels of video programming, similar in
type to the programming now being offered by DirecTV.[^97]

Over the last ten years many other entrants (other than Primestar), have
received licenses to offer medium power DBS service and a few actually
offered service. None of these firms ever attained significant
subscribership, and none remain in the market today.

*Direct Broadcast Satellites -- High Power DBS*

High-power Ku-band DBS service is also known simply as DBS. DBS offers
high-power satellite service to subscribers who have a special 18-inch
receiving dish. Each DBS operator transmits over 200 channels of video
programming to subscribers from specific orbital locations. Permissible
orbital locations are established by international telecommunications
regulations (treaties) and Commission rules. Since launched in 1994, DBS
has advanced substantially as a viable competitor to cable and broadcast
television.[^98] Currently there are two major DBS operators offering
service to consumers: DirecTV, owned by Hughes Corp., and Echostar
Corp.[^99]

Table 24 shows that DBS subscribership has grown substantially since it
began offering service in 1994. At the end of 1994, DBS service had
approximately 600,000 subscribers.[^100] By year-end1995, there were
more than 2.2 million subscribers. As Exhibit 1 shows, subscribership
has continued to climb. At year-end 1996, there were about 4.3 million
DBS subscribers; by year-end 1997, there were more than 6.4 million DBS
subscribers; by year-end 1998, there were more than 8.8 million
medium-power and high-power DBS subscribers; and as of year-end 2000,
DBS providers had nearly 14.8 million subscribers. As of year-end 2001,
there were approximately 18 million DBS subscribers. As of June 2002,
DirecTV was providing service to more than 10 million subscribers, and
Echostar had approximately 7.5 million subscribers. [^101] There is some
overlap, however, between cable and DBS subscribership. Of the
approximately 60 percent of DBS subscribers with access to cable, around
24 percent subscribe to cable in addition to DBS, primarily to receive
local broadcast signals.[^102]

## DBS Public Interest Obligations[^103]

On November 19, 1998, the Commission adopted rules implementing Section
25 of the 1992 Cable Act, which imposed certain public interest
obligations on DBS providers.[^104] The statute requires DBS service
providers to set aside a percentage of channel capacity for
non-commercial programming of an educational or informational nature. In
implementing the statutory requirement, the Commission ruled that DBS
providers must set‑aside four percent of their channel capacity
exclusively for non-commercial programming of an educational or
informational nature.[^105] In carrying out Congress\'s mandate, the
Commission balanced two important goals \-- providing DBS subscribers
access to a greater diversity of non-commercial, educational
programming, and providing flexible rules for an industry that promises
to provide significant competition to cable television. As specifically
required by statute, DBS licensees must also comply with the political
broadcasting rules of Section 312(a)(7) of the Communications Act,
granting candidates for federal office reasonable access to broadcasting
stations, and Section 315 of the Act, which requires that licensees
provide equal opportunities for those candidates to use broadcast
stations at the lowest unit charge.

## DBS as a Competitor in the Market for Multichannel Video Programming Distribution

Today, DBS is a significant competitor in the market for the delivery of
multichannel video programming distribution service ("MVPD"). DBS
systems are a particularly significant source of MVPD services in areas
where cable is not available. Furthermore, DBS provides a much higher
channel capacity than most, if not all, cable systems choose to provide,
thereby opening the market further for niche programming that could not
be supported otherwise, providing highly-targeted advertising
opportunities. Like cable, DBS operators offer video programming
packages for a monthly fee, premium channels, and pay-per-view services.

DBS services offer many features that consumers rate highly, such as
digital picture quality, compact disc sound clarity, increased channel
capacity and programming options, and near video-on-demand movies. For
many consumers, the large number of channels and programming variety was
the initial draw to DBS services, especially sports and movies. DBS
offers certain packages of out-of-market sports programming not
elsewhere available to consumers.

DBS providers have also begun to offer two-way high-speed Internet
access to consumers. For example, DirecTV offers two-way Internet access
services to their subscribers under the brand name DirecPC, and
consumers can receive video and high-speed Internet access through one
satellite dish called the DirecDUO.[^106]

In addition, DirecTV and EchoStar both provide subscribers with
high-definition television ("HDTV") programming. In 2001, DirecTV
premiered HDNet, an HDTV channel that will show Major League Baseball
games, National Hockey League games, qualifying events for the 2002
Winter Olympic games, and other non-sports entertainment
programming.[^107] DirecTV also carries HBO, Showtime, and select
pay-per-view movies in HDTV format.[^108] EchoStar carries HBO,
Showtime, CBS, Discovery, and select pay-per-view movies in HDTV
format.[^109]

The primary disadvantage of DBS with respect to cable television systems
has traditionally been the relative availability to carry local network
signals via satellite systems. In the past, both copyright law and
technical limitations on channel capacity restricted the ability of DBS
providers to carry local broadcast signals. In turn, this appears to
have impeded DBS's ability to compete effectively with cable television.

In 1988, Congress passed the Satellite Home Viewer Act (\"SHVA\").[^110]
SHVA granted a limited exception to the exclusive programming copyrights
enjoyed by television networks and their affiliates because it
recognized that some households were unable to receive network station
signals over the air.[^111] The exception was a narrow compulsory
copyright license that direct-to-home (DTH) satellite video
providers[^112] were allowed to use for retransmitting signals of a
defined class of television network stations[^113] \"to persons who
reside in unserved households\" (also known as "white areas").[^114]
SHVA also contained a \"superstation\" compulsory copyright license with
no geographic restrictions. Under SHVA, DirecTV and Primestar and
Echostar each offered retransmission of distant broadcast signals to
unserved households.

On November 29, 1999, a revision of the Satellite Home Viewer Act
("SHVA") was enacted.[^115] Under the Satellite Home Viewer Improvement
Act of 1999 (\"SHVIA\"), satellite providers are allowed to retransmit
television broadcast signals on a local into local basis. During the six
month period after the date of the enactment of SHVIA, DBS providers
were allowed to retransmit local signals without consent.[^116]
Thereafter, DBS operators were subject to retransmission consent rules
similar to those established for cable operators.[^117]

SHVIA also directed the Commission to undertake and complete rulemakings
related to satellite carriage of broadcast stations within one year of
enactment on November 29, 2000. As required by SHVIA, the Commission
established rules to implement carriage of broadcast signals,
retransmission consent, and program exclusivity with respect to
satellite carriage of broadcast stations.[^118] Pursuant to SHVIA, these
rules require that where a DBS provider chooses to offer
local-into-local service pursuant to the statutory copyright license, it
must carry all of the local stations within that market that request
carriage.[^119]

As of October 2002, DirecTV will offer for a fee, the local affiliates
of ABC, CBS, NBC, and FOX in 51 markets, and a national PBS feed with
every local station package.[^120] Similarly, EchoStar transmits a local
network package to its subscribers for a fee, and offers the national
PBS feed as an added option.[^121] DirecTV reports that its overall
subscriber levels have increased by 20 percent due to the provisioning
of local broadcast channel service, and that 47 percent of its customers
to whom it is available take a local channel package.[^122]

The vertical integration of non-broadcasting programming networks with
cable operators is also an issue of continuing concern for DBS
providers. The Commission's "program access rules," first adopted in
1993, prohibit unfair and discriminatory acts and prohibit or limit the
types of exclusive programming contracts that may be entered into
between cable operators and vertically-integrated programming vendors.
In essence, the rules guarantee DBS access to satellite-delivered cable
programming. DBS considers access to cable origination programming very
important.[^123] The program access provisions, however, only apply to
satellite delivered programming.[^124] Programming services distributed
by any other means are not subject to the program access
requirements.[^125] As a result, some argue that vertically-integrated
programming vendors may have the incentive and ability to modify the
distribution of their programming, using fiber optics or other
non-satellite means, thereby removing the programming from the purview
of the program access provisions, and thusly withhold valuable
programming from DBS operators.[^126] On June 13, 2002, the Commission
extended for five years the statutory prohibition on exclusive contracts
for satellite-delivered cable or satellite-delivered broadcast
programming between cable operators and their affiliated programmers
which was set to expire on October 5, 2002, but determined that it does
not have the discretion to expand the prohibition to terrestrially
delivered programming or non-vertically integrated programming.

DBS has also faced obstacles to competitive success in suburban and
urban areas. Although the size of satellite dishes has shrunk
significantly over the last ten years, many consumers were faced with
local zoning restrictions and limits imposed by building managers and
community associations on the use of satellite dishes for the reception
of video programming. The Commission has preempted zoning restrictions
by landlords, homeowner associations, etc., on dishes 1 meter or less in
diameter.[^127] Moreover, Commission rules on the use of
over-the-air-reception devices ("OTARD"), prohibit restrictions that
impair the installation, maintenance or use of antennas used to receive
video programming.[^128] Effective January 22, 1999, the Commission
amended the rule so that it applies to rental property where the renter
has an exclusive use area, such as a balcony or patio. The rule applies
to viewers who place satellite dishes that meet size limitations on
property that they own or rent and that is within their exclusive use or
control, including condominium owners and cooperative owners, and
tenants who have an area where they have exclusive use, such as a
balcony or patio, in which to install the antenna.[^129] The rule does
not apply to common areas that are owned by a landlord, a community
association, or jointly by condominium or cooperative owners. Other
conditions, however, may continue to limit DBS access for some viewers.
For instance, DBS antennas must face south to receive an acceptable
quality signal from the satellite, which transmits the video programming
service. Therefore, renters and property owners who do not have
south-facing exclusive use areas cannot opt for DBS service.[^130]

## Conclusion

Consumers have adopted the DBS service at one of the fastest rates of
any consumer good in history. The presence of DBS in the market for the
delivery of video programming has expanded the market such that now
almost all televisions households have access to subscription video. In
addition, the competitive presence of DBS has forced cable to expand
channel capacity and service options. Although DBS cannot now provide
the advantage of local advertising availabilities, through its
substantially expanded channel capacity, and ability to serve areas not
reached by cable, DBS extends carriage opportunities for non-broadcast
networks and by providing additional viewers for national advertising
opportunities.

Although DBS providers are not required to provide local broadcast
signals into local markets, consumer demand has prompted them to provide
local-into-local service in many markets.[^131] Although this will serve
to deliver broadcast television programming even more widely, it will
also serve to shore up the popularity of non-broadcast networks and the
pay television model. DBS has significantly solidified the pay-TV
landscape, and promises to remain an enticing option for consumers for
the foreseeable future.

# VII. Other Video Media Delivery Platforms

## Introduction

Consumers have several options for sources of video programming, in
addition to free terrestrial broadcast television, cable and DBS. These
include Multichannel Multipoint Distribution Service ("MMDS"), cable
overbuilders of one kind or another, VHS tapes, DVDs, theatrical films,
and IP-based video streams and downloads over the Internet. These video
programming sources and viewing options clearly increase viewers'
choices and affect the broadcast television market. The cumulative
effect of these alternatives may become considerable. As Table 25
suggests, the explosion of cable, DBS and home video, as well as video
games has lured viewers away using their television sets to watch only
broadcast television. Several of these alternative video programming
sources are briefly discussed below.

[]{#__RefHeading___Toc21199310 .anchor}Table 25: Estimated Share of U.S.
TV Home Set Usage by Program Source

*Annual Averages*

+-----------------------+------+------+------+------+------+------+
|                       | E    | E    | E    | E    | E    | E    |
|                       | arly | arly | arly | arly | arly | arly |
|                       |      |      |      |      |      |      |
|                       | 1    | 1    | 1    | 1    | 1    | 2    |
|                       | 950s | 960s | 970s | 980s | 990s | 000s |
+-----------------------+------+------+------+------+------+------+
| ABC/CBS/NBC           | 60%  | 58%  | 55%  | 49%  | 31%  | 21%  |
+-----------------------+------+------+------+------+------+------+
| DuMont                | 4    | \-   | \-   | \-   | \-   | \-   |
+-----------------------+------+------+------+------+------+------+
| Fox/WB/UPN/PAX        | \-   | \-   | \-   | \-   | 2    | 8    |
+-----------------------+------+------+------+------+------+------+
| Network               | 30   | 29   | 25   | 23   | 18   | 10   |
| Affiliates[^132]      |      |      |      |      |      |      |
+-----------------------+------+------+------+------+------+------+
| Independent           | 6    | 11   | 16   | 20   | 16   | 11   |
| Stations[^133]        |      |      |      |      |      |      |
+-----------------------+------+------+------+------+------+------+
| PBS Stations          | \-   | 2    | 4    | 3    | 3    | 3    |
+-----------------------+------+------+------+------+------+------+
| Pay Cable             | \-   | \-   | \-   | 4    | 4    | 6    |
+-----------------------+------+------+------+------+------+------+
| Basic Cable[^134]     | \-   | \-   | 1    | 3    | 20   | 35   |
+-----------------------+------+------+------+------+------+------+
| VCR Play              | \-   | \-   | \-   | \-   | 5    | 5    |
+-----------------------+------+------+------+------+------+------+
| Video Games           | \-   | \-   | \-   | 1    | 1    | 1    |
+-----------------------+------+------+------+------+------+------+
| PPV                   | \-   | \-   | \-   | \-   | \-   | \-[^ |
|                       |      |      |      |      |      | 135] |
+-----------------------+------+------+------+------+------+------+
| Ave. Hours of Set     | 35   | 39   | 46   | 51   | 54   | 62   |
|                       |      |      |      |      |      |      |
| Usage (Weekly)[^136]  |      |      |      |      |      |      |
+-----------------------+------+------+------+------+------+------+

Source: Media Dynamics, TV Dimensions 2001 Report (2001).

## MMDS

Working Paper 26 discussed video distribution as provided by MMDS. MMDS
systems, often referred to as \"wireless cable,\" transmit video
programming and other services to subscribers through 2GHz microwave
frequencies, using Multipoint Distribution Service (\"MDS\") and leased
access channel capacity on Instructional Television Fixed Service
(\"ITFS\") channels.[^137] At the time of the release of Working Paper
26, MMDS was a promising competitor to traditional wireline cable
services. Working Paper 26 noted that wireless cable subscribership was
around 180,000 and growing.[^138] By year-end 1996, MMDS provided
service to almost 1.2 million subscribers.[^139] As of December 2001,
though, there were only about 700,000 MMDS subscribers out of the 36
million homes capable of receiving an MMDS signal (\"homes
seen\").[^140]

Clearly, MMDS has not become a significant competitor in the market for
the delivery of video programming since the release of Working Paper 26.
MMDS provides competition to the cable industry in limited areas only,
and subscribership remains low and declining. Despite its lack of
promise as a future competitor in the market for video programming,
however, or perhaps because of its lack of promise, many MMDS providers
are currently focusing on data transmissions rather than video service.
Some believe the MMDS industry is in fact transitioning from offering
video programming to offering data services instead. In 1998, the
Commission released the *Two-Way Order* permitting MDS/ITFS licensees to
construct digital two-way systems that could provide high-speed,
high-capacity broadband service, including two-way Internet service via
cellularized communication systems.[^141] In addition, on September 6,
2001, the Commission adopted a *First Report and Order and Memorandum
Opinion and Order* ("*First R&O/MO&O*") in the New Advanced Wireless
Services proceeding, which made the spectrum used by MMDS services
potentially available for advanced mobile and fixed terrestrial wireless
services, including 3G and future generations of wireless systems.[^142]
The Commission decided not to relocate the existing licensees or
otherwise modify their licenses.[^143] In addition, the Commission
recognized that it will have to explore the service rules that would
apply to permit mobile operations in the 2.5-2.69 GHz band in a separate
future proceeding.[^144]

## Overbuilders

The term "overbuild" describes the situation in which a second cable
operator enters a local market in direct competition with an incumbent
cable operator. In these markets, the second operator, or "overbuilder,"
lays wires in the same area as the incumbent, "overbuilding" the
incumbent's plant, thereby giving consumers a choice between cable
service providers. Many overbuilders are LECs or utility companies as
discussed below.

Historically, overbuilding incumbent cable systems has been economically
difficult. Overbuilders appear to be attempting to overcome the economic
difficulties of overbuilding by building systems that are more advanced
than those of the incumbent cable operators. Building advanced systems
allows these overbuilders, (also known as broadband service providers or
\"BSPs\"), to offer a bundle of services, such as video, voice, and
high-speed Internet access, which may increase per subscriber revenue
and decrease churn. Overbuilders, or BSPs, have also become extremely
careful in selecting communities to overbuild, focusing their efforts on
communities with high population density for the highest potential
subscriber base. But even with their selective strategy, BSPs face
considerable challenges. BSPs are also facing difficulties in obtaining
capital. As a result, many BSPs have scaled back plans, reduced capital
expenditures, reduced staffs, or shut down operations altogether.[^145]
BSPs also face difficulties obtaining franchises. As a result, many BSPs
have been taking advantage of open video system rules stemming from the
1996 Act to help them gain entre into local communities. Nevertheless,

At the time of Working Paper 26, the number of overbuilders was
relatively small, although overbuild activity picked up significantly in
1995. By June 2001, competing franchises had been awarded covering more
than 460 communities in 38 states.[^146] However, just because a
franchise is awarded does not mean it is operational. After a franchise
is awarded, it can take a significant amount of time for the franchisee
to build, or gain access to, a network over which to provide video
service. For example, in June 1999, Ameritech held 108 franchises but
offered service in only 90 communities.

Competition from overbuilders is important part of competition to
incumbent cable operators in local markets. But the future of
competition from overbuilds is uncertain. Capital constraints are just
one of many difficulties being faced by overbuilders. And access to
programming remains crucial to their survival.

## Utilities

At the time of Working Paper 26, electric and gas utilities were
foreclosed from entering the video program distribution marketplace by
the Public Utility Holding Company Act of 1935 (\"PUHCA\"). PUHCA
imposed strict "line of business" restrictions on registered public
utility holding companies which sought to diversify into
telecommunications or information services markets.[^147] This changed,
however with the 1996 Telecommunications Act. Section 103 of the 1996
Act, which added a new Section 34 to PUHCA, permitted 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" (\"ETC\").[^148] This
removed a significant regulatory barrier which had previously deterred
registered public utility holding companies' entry into
telecommunications, information services, and video markets.

On September 12, 1996, the Commission adopted final rules to implement
Section 103. Following Congress's mandate, the rules provided a
straight-forward procedure for determining ETC status, thus expediting
the entry of public utility holding companies into the
telecommunications industry.[^149] Shortly thereafter, registered public
utility holding companies entered into partnerships to provide a package
of services including video service.

Electric and gas utilities continue to move forward with ventures
involving multichannel video programming distribution, but are not yet
major competitors in the telecommunications or cable markets.[^150]
Because electric and gas utilities own fiber optic networks in some
areas, and generally have access to public rights-of-way in the areas
they serve; however, they could become competitively significant in the
future, especially in specific local markets.

Some utilities seek to offer video program distribution services on
their own, while others, like RCN have partnered with broadband service
providers to provide a package of services to consumers. It also appears
that some utilities, particularly some municipal utilities in rural
areas, have built advanced telecommunications networks offering a full
range of services where incumbent cable operators and telephone
companies are not willing to do so.

The largest utility to provide video programming distribution services
is RCN which operates subscription video services in New York City,
Washington, D.C., Washington, D.C. suburbs, South San Francisco,
California, Boston, Massachusetts, and its suburbs, Northern New Jersey,
and suburbs of Philadelphia.[^151] By the first quarter of 2001, RCN
passed more than 1.4 million homes and a total of 443,011 video
subscribers, although some of these are subscribers to incumbent cable
systems it operates. [^152]

Although electric and gas utilities are not yet major competitors in the
telecommunications or video distribution marketplace, utilities do in
many cases, constitute the only competition to incumbent cable operators
in specific local markets. But new entrants continue to report
difficulties negotiating franchises, entering MDUs, gaining access to
equipment, and gaining access to popular programming.[^153] (*see*
discussion of program access issues in Chapter 10 of this report ). If
utilities are to remain competitive, many of these issues will need to
be addressed.

## Local Exchange Carriers

At the time of Working Paper 26, entry into the video marketplace by
local exchange carriers ("LECs") was not expected. At that time, local
telephone companies were prohibited by statute and federal regulation
from providing video programming directly to subscribers within their
service areas.[^154] Although LECs were permitted to provide video
programming outside their telephone service areas, and channel service
to unaffiliated cable operators within their service areas, few LEC
participated in such ventures.[^155]

In 1992, the Commission adopted orders creating a framework for LEC
participation in the video program distribution marketplace consistent
called "video dialtone" which spurred increased interest in video
program distribution by LECs.[^156] In 1995, LECs obtained authority to
pursue entry through construction of cable systems. [^157] In addition,
LECs began in 1995 to pursue video program distribution through
investments in, and acquisitions of, wireless providers, though none of
these operators currently remain in the MMDS business.[^158] Later, the
1996 Act created LEC options to replace the video dialtone framework
through open video systems ("OVS.")[^159]

Ameritech was the most aggressive and the most significant of the LECs
offering subscription video service, acquiring as many as 111 franchises
by 1999, serving as many as 250,000 subscribers, before it (as SBC) sold
the franchised systems to cable overbuilder, WideOpenWest in May
2001.[^160]

A number of small LECs are using VDSL to offer a bundle of services,
including multichannel video, over phone lines. It is estimated that
approximately 40 to 50 mostly-small LECs, are using VDSL technology to
provide video to an aggregate of approximately 100,000 subscribers.
[^161] Companies are also deploying, or investigating deploying, video
over the lower bandwidth asymmetric digital subscriber line service
(\"ADSL\"). Because of the lower capacity, video over ADSL involves an
IP-based video-on-demand service, rather than full-fledged multichannel
video. Between 5,000 and 10,000 households currently subscribe to ADSL
video-on-demand service.[^162] It is too early to tell what kind of
impact these technologies will have on the marketplace.

Incumbent LECs have largely exited the video business, though there are
a few exceptions. BellSouth, in addition to reselling DBS service,
continues to operate some overbuild cable systems.[^163] A number of
smaller LECs are offering, or preparing to offer, video service over
existing telephone lines (*see* discussion of "VDSL" in this Section).
By-and-large, however, incumbent LECs do not appear to be potentially
significant competitors in the market for video programming, even in
local markets.

## The Internet

The Internet provides not only a platform for the delivery of video
programming, but it also supports a collection of other applications
that may take time away from watching television. For example, the
availability of real-time and downloadable video over the Internet
("Internet video") has increased greatly since the late 1990s.[^164] The
number of homes with access to the Internet, the number of home users
accessing Internet video, and the amount of Internet video content has
also increased over the last year. As of December 2001, an estimated
56.4% of all U.S. households had Internet access, compared with 52% as
of July 2000.[^165] Additionally, as of July 2001, 41 million
residential Web users had accessed streaming video.[^166] However,
Internet video is not currently viewed by the Commission as a direct
competitor to traditional video services, despite evidence of continued
interest in Internet video deployment and use.[^167]

The Commission suggests that broadcast-quality Internet video service
requires a high-speed broadband connection of about 300 kilobits per
second ("kbps") or higher.[^168] The number of high-speed lines
connecting homes and businesses to the Internet increased by 33% during
the second half of 2001, from 9.6 million to 12.8 million lines,
compared to a 36% increase, from nearly 7.1 million to 9.6 million
lines, during the first half of 2001.[^169] Of the 12.8 million
high-speed lines in service at the end of 2001, 11 million served
residential and small business subscribers, a 41% increase from the 7.8
million residential and small business high-speed lines reported six
months earlier. About 7.4 million of the 12.8 million high-speed lines
were advanced services lines that provide services at speeds exceeding
200 kbps in both directions, an increase of 25% during the second half
of 2001. About 5.8 million of the 7.4 million advanced services lines
served residential and small business subscribers.

At the end of 2001, the presence of high-speed service subscribers was
reported in all 50 states, the District of Columbia, Puerto Rico and the
Virgin Islands. High-speed service was also reported in 79% of the
nation's zip codes, compared to 78% in June 2001 and 73% at the end of
2000. High-speed asymmetric DSL ("ADSL") lines in service increased by
47% during the second half of 2001, from nearly 2.7 million to over 3.9
million lines, compared to a 36% increase, from nearly 2 million to 2.7
million lines, during the preceding 6 months. High-speed Internet
connections over coaxial cable systems (cable modem service) increased
by 36% during the final six months of 2001, from 5.2 million to 7.1
million lines. By comparison, cable modem service increased by 45%, from
nearly 3.6 million to 5.2 million lines, during the first half of 2001.
The presence of high-speed service subscribers were reported in 98% of
the most densely populated decile of zip codes at the end of 2001, the
same percentage at the end of 2000, and in 43% of the least densely
populated decile, compared to 28% at the end of 2000.

For zip codes ranked by median family income, high-speed subscribers
were reported present in 97% of the top one-tenth of zip codes and in
63% of the bottom one-tenth of zip codes at the end of 2001. The
comparable figures for 2000 were 96% and 55%.

There are a number of recent significant legal, business and
technological developments in the Internet video industry. Some Internet
video providers face difficulties with U.S. copyright laws.[^170]
Despite these obstacles, Internet users continue to download software
for accessing Internet video. Streaming video websites continue to
operate. Nielsen/Net Ratings estimates that Microsoft's Windows Media
Player has over 24.7 million users, while, RealNetworks' RealPlayer has
more than 24.4 million users (See Table 26).[^171] The amount of video
programming content on the Internet also continues to grow.[^172] Some
traditional broadcast and cable television programmers offer Internet
video versions of their programming or supplemental programming.

[]{#__RefHeading___Toc21199311 .anchor}Table 26: Internet Video
Statistics

+-------------------------------------------------+-----------+-------+
|                                                 | 2000      | 2001  |
+-------------------------------------------------+-----------+-------+
|                                                 |           |       |
+-------------------------------------------------+-----------+-------+
| Internet access from home                       | 56%       | 58%   |
|                                                 |           |       |
| (% of U.S. population)                          |           |       |
+-------------------------------------------------+-----------+-------+
| Total web users who have ever accessed          | 35        | 41    |
| streaming video (millions)                      |           |       |
+-------------------------------------------------+-----------+-------+
| Microsoft Windows Media Player users (millions) | 9.4       | 24.7  |
+-------------------------------------------------+-----------+-------+
| RealNetworks RealPlayer users (millions)        | 25.3      | 24.4  |
+-------------------------------------------------+-----------+-------+
|                                                 |           |       |
+-------------------------------------------------+-----------+-------+
| SOURCES: FCC, Annual Assessment of the Status   |           |       |
| of Competition in Markets for the Delivery of   |           |       |
| Video Programming, 2000 and 2001                |           |       |
+-------------------------------------------------+-----------+-------+

As of August 2002, RealNetworks had 750,000 subscribers to its RealOne
premium service. RealOne streams audio and video from content providers
such as ABCNews.com, E!, FoxSports.com, Major League Baseball and
CNN.[^173] According to a recent study, U.S. consumers spent \$300
million to access Web content in the first quarter of 2002. This
represents a 155% increase from the same period in 2001.[^174]

Partnerships and marketing agreements between Web sites and
entertainment companies continue to exist. In August 2001, MGM,
Paramount, Sony Pictures, Universal and Warner Bros. announced a joint
venture called Movielink to distribute movies on-demand over the
Internet.[^175] Movielink has equal investments from these five
studios.[^176] Movielink's goal is to do more than just promote
Internet-delivered VOD.[^177] Its management believes that, over time,
VOD will become a significant way consumers watch recorded material
because of its convenience.[^178] Whether the demand for the service
results in a profitable business model is an open question. Thus, the
Internet may be able to support and deliver fairly traditional video
programming and PPV plus much more.

## Home Video Products

Analysts estimate that Americans watch an average of 58 hours of movies
at home each year.[^179] It is estimated that 89.9 million U.S.
households, or about 85.2% of all television households, have at least 1
VCR (See Table 27). Nearly 46 million households own at least 2
VCRs.[^180]

[]{#__RefHeading___Toc21199312 .anchor}Table 27: VCR Penetration

  -------------- ----------------------------- -------------------------------
                                               

  Year           VCR Households (Millions)     \% of Television Households

  1975           0.00                          0.0

  1980           0.84                          1.1

  1985           17.74                         20.7

  1990           61.5                          66.1

  1995           76.4                          79.7

  2000           88.0                          86.1

  2001           89.9\*                        85.2\*

                                               

  Source:                                      
  Television                                   
  Bureau of                                    
  Advertising,                                 
  Inc., \"Cable                                
  and VCR                                      
  Households;"                                 
  \*Estimates                                  
  only from                                    
  Veronis Suhler                               
  (2001).                                      
  -------------- ----------------------------- -------------------------------

By the end of 2001, the number of homes with DVD players reached
approximately 13.7 million.[^181] Analysts estimate that 26.5 million
homes will have DVDs players by the end of 2004.[^182] Approximately 2
million homes have laser disc players.[^183] In 2000, the total spent on
home video cassette rentals was \$10.27 billion, while the total spent
on home video cassette sales was \$7.55 billion.[^184] In 2000, the
total spent on home video DVD rentals was \$600 million, and the total
spent on home video DVD sales was \$4.03 billion.[^185] Overall, U.S.
consumers spent approximately \$22.45 billion renting and buying
prerecorded video in 2000 (See Table 28).[^186]

[]{#__RefHeading___Toc21199313 .anchor}Table 28: Home Video Spending,
Rental and Retail (\$ Millions)

  ----------------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
                                                                                                

                    Video      Video      Total      DVD       DVD Sales  Total DVD  Total      Growth of
                    Cassette   Cassette   Video      Rentals              Spending   Video      Home Video
                    Rentals    Sales      Cassette                                   Cassette   Market
                                          Spending                                   and DVD    Spending
                                                                                     Spending   

                                                                                                

  1990              \$7,755    \$3,352    \$11,107   n/a       n/a        n/a        \$11,107   n/a

  1992              \$9,064    \$3,834    \$12,898   n/a       n/a        n/a        \$12,898   7.10%

  1994              \$9,516    \$5,497    \$15,013   n/a       n/a        n/a        \$15,013   7.50%

  1996              \$9,223    \$7,640    \$16,863   n/a       n/a        n/a        \$16,863   8.60%

  1998              \$9,635    \$8,443    \$18,078   \$19      \$411      \$430      \$18,508   9.10%

  2000              \$10,273   \$7,550    \$17,823   \$600     \$4,030    \$4,630    \$22,453   16.20%

  2002\*            \$10,342   \$6,825    \$17,167   \$1,012   \$7,989    \$9,001    \$26,168   5.10%

  2004\*            \$10,339   \$5,790    \$16,129   \$1,421   \$10,560   \$11,981   \$28,110   2.40%

                                                                                                 

  SOURCE: Veronis                                                                               
  Suhler,                                                                                       
  *Communications                                                                               
  Industry                                                                                      
  Forecast*, 2001                                                                               

  \*Projected                                                                                   
  ----------------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------

In the last year, DVDs have doubled their share of both the rental and
sales markets, accounting for 6.9% of all rental revenue and 16% of
sales revenues.[^187] Thus, the expenditures on home video products make
it clear that viewers will spend large sums of money for small
quantities of highly-valued programming. The video retail industry is
the largest source of revenue for movie studios, generating
approximately half of their revenues in 2000.[^188] Since 1997, the
largest video chains and several movie studios have shared rental
revenues.[^189] The video retail industry is competitive, with about
19,800 video specialty stores selling or renting home video
programming.[^190] More than 8,000 retail outlets, such as supermarkets
and drugstores, rent videos.[^191] Mass merchandise stores such as
Wal-Mart and Target, and electronics chain stores such as Best Buy and
Circuit City, compete with specialty video stores in the sale of
videos.[^192] The Internet is also now a source for video rentals[^193]
and sales.[^194] In recent years, the home video industry has
consolidated, with many independent operators selling to larger concerns
or closing their businesses.[^195]

## Theatrical Films

Analysts estimate that Americans go out to an average of 5.4 movies a
year, up from 4.5 three decades ago.[^196] U.S. box office receipts rose
8.5% in 2001 to \$8.35 billion.[^197] Even with a 4% increase in the
average ticket price, more people went to the movies in 2001 than in any
year since 1998.[^198] The top draws of 2001 were films that appealed to
younger audiences: \"Harry Potter,\" which grossed over \$300 million in
the U.S., followed by \"Lord of the Rings\" with \$270 million and the
animated \"Monsters, Inc.\" with \$251 million. Analysts predict that
box office receipts will advance another 10% in 2002 and grow at annual
rate of 7.2% from 2001 to 2006, resulting in annual receipts of \$11.9
billion by 2006.[^199] Box office hits will continue to be largely
driven by blockbuster hits.

## Video and PC Game Platforms and Applications

Video game consoles and PCs have provided interactive forms of
entertainment to consumers for more than 25 years. [^200] According to
the Interactive Digital Software Association ("IDSA"), approximately 56%
of the most frequent PC and video game console players have played games
for six or more years, while 60% expect to play games ten years from
now. Moreover, 60% of all Americans age six and older, or about 145
million people, play PC and video console games. The average age of a
game player is 28 years old, and 43% of game players are female. In
2001, about 31% of game players played games online, up from 24% in 2000
and 18% in 1999. More than 37% of Americans who own game consoles or PCs
report that they also play games on mobile devices like handheld
systems, personal digital assistants ("PDAs") and cell phones. With
today's new technologies, the possibilities for interactivity seem
endless for video console, PC and educational software ("Edutainment")
titles.[^201]

The video game industry has developed advanced technology that offers
game players a rich, immersive interactive entertainment experience,
which many find more compelling than passive art forms such as broadcast
television or feature films. Advancements in video game console
technology continue to position the console as a competitive media
platform. The modern-day game console industry took shape in 1985 when
Nintendo introduced the 8-bit Nintendo Entertainment System ("NES").
Soon thereafter, the 16-bit Sega Genesis System was launched, followed
by Super NES. In the early 1990s, the PC game business surged with the
introduction of CD-ROMs, falling prices for multimedia PCs, and the
introduction of high-level 3D graphics cards.

Recent advancements in game console technology have spurred the growth
of this industry. In 1995-1996, Sony PlayStation and Nintendo 64
launched a new generation of game consoles. In 1999 and 2000, more
powerful and multi-functional game consoles were introduced as platforms
for home video and audio entertainment. For example, Sony's PlayStation
2 consisted of a 300-MHz processor that allowed users to not only play
games, but also watch DVDs and listen to audio CDs. Sega launched its
Dreamcast console -- the first 128-bit game console.

The year 2000 affirmed the durability and maturity of the PC and video
game console industry, as gaming software sales reached \$6.02 billion
(See Table 29). Video game rentals also rose in 2000, generating \$919
million compared to \$880 million in

1999\.

[]{#__RefHeading___Toc21199314 .anchor}Table 29: Video and PC Game
Growth

+-------+---------------------------------+----------------------------+
|       | Video and PC Game               | Video and PC Game          |
|       |                                 |                            |
|       | Software Unit Sales (millions)  | Software Sales (billions)  |
+-------+---------------------------------+----------------------------+
| 1996  | 105                             | \$3.7                      |
+-------+---------------------------------+----------------------------+
| 1997  | 133                             | \$4.4                      |
+-------+---------------------------------+----------------------------+
| 1998  | 181                             | \$5.5                      |
+-------+---------------------------------+----------------------------+
| 1999  | 215                             | \$6.1                      |
+-------+---------------------------------+----------------------------+
| 2000  | 219                             | \$6.02                     |
+-------+---------------------------------+----------------------------+
| 2001  | 225                             | \$6.3                      |
+-------+---------------------------------+----------------------------+
| So    |                                 |                            |
| urce: |                                 |                            |
| I     |                                 |                            |
| ntera |                                 |                            |
| ctive |                                 |                            |
| Di    |                                 |                            |
| gital |                                 |                            |
| Sof   |                                 |                            |
| tware |                                 |                            |
| A     |                                 |                            |
| ssoci |                                 |                            |
| ation |                                 |                            |
| (     |                                 |                            |
| 2002) |                                 |                            |
+-------+---------------------------------+----------------------------+

The total U.S. video game industry grew to \$9.4 billion in 2001,
breaking 1999\'s all-time record of \$6.9 billion.[^202] Video and PC
game software sales accounted for almost two-thirds of the total
industry sales with 225 million game software units sold. Sales growth
in 2001 was triggered in part by the launch of 3 new gaming systems --
Nintendo\'s GameCube and Game Boy Advance and Microsoft\'s Xbox. The
number of game console units sold increased 39%, while sales in dollar
terms more than doubled, rising 120%. Next-generation console systems
such as Sony Playstation 2, GameCube and Xbox, selling at higher price
points, led to a triple-digit increase of over 120% in dollars for
annual 2001 versus 2000.

In portables, Game Boy Advance continued to surpass its predecessors,
Game Boy and Game Boy Color. In fact, Game Boy Advance dominated the
portable market in 2001 with a 22% increase in hardware unit share,
compared to the prior year.

## Conclusion

Despite the decline of MMDS and LEC involvement in the market for the
delivery of video programming, the number of video programming sources
that consumers can choose from is growing. Since the release of Working
Paper 26, digital technology has made pre-recorded video, theatrical
movies and PC and video games more attractive alternatives for the
average consumer. The market for high-quality pre-recorded video remains
robust, as DVD sales continue to grow. As broadband deployment and
consumer adoption increase, more viewers may opt to access and pay for
more innovative Internet video streaming and downloads. Theatrical films
and video games will continue to compete for eyeballs 24 hours a day,
seven days a week. Video game consoles will become more of a mainstream
media platform. Utilities and other overbuilders continue to challenge
incumbent cable operators. The cumulative effect of these alternatives
may become considerable.

# VIII. Technological Developments

## Introduction

The entertainment and communications industries are in the midst of a
digital revolution. Digital technologies have the potential to radically
change the economics of video distribution and the range of services
delivered to viewers. This chapter examines several technological
developments, all based on digital transmission of video programming.
The purpose of this discussion is to explore (1) how broadcasters will
use their digital spectrum and DTV technology, and (2) how digital
technology will affect competition among broadcast and non-broadcast
video media.

To remain competitive, broadcasters must embrace, or at least respond to
several new technologies. Over the past ten years, video compression and
encoding technologies have increased the ability of broadcasters and
other competitive video distributors to transmit video over various
systems and networks including the Internet. These technologies have
increased capacity to provide not only "analog quality" program streams
but also better picture and sound.

Transitioning from analog to digital technology has increased the
picture and sound quality for consumers. It has created new categories
of service, such as interactive services (e.g., those utilizing two-way
communications). These categories may enhance services available today
such as PPV and home shopping. If significant consumer demand and
profitable business models develop for interactive services, new
entertainment forms may emerge.

The digital transition is leading to an increased emphasis on copy
protection and digital rights management. Any digital distribution
system should have an adequate method of permitting access to the
product while protecting copyright owners' legitimate interests. Some
multichannel analog video programming is encrypted and it appears that
virtually all multichannel digital video programming is or will be
encrypted. This ensures that only authorized subscribers get access.
Copy protection engages after content has been decrypted in the
subscriber's premises. As discussed below, digital rights management for
broadcast programming, which arrives "in the clear," might be handled
somewhat differently.

This chapter briefly discusses the technological developments outlined
above. While there are many cutting-edge technologies that can be
discussed in detail, the intent of this chapter is to highlight several
that are relevant to this analysis. Digital video compression is
examined first, followed by DTV and ancillary services, digital rights
management, ITV and PVRs.

## Video Compression Technologies

Digital video compression is a digital signal processing technique that
permits transmission of a television signal using less bandwidth than is
currently needed (6MHz for terrestrial broadcast signals and cable and
24 MHz for satellite signals). A full 6MHz DTV signal consists of a
packet stream of approximately 19.4 Mbps. Digital video compression
technology is applicable to all of the video delivery systems --
satellite, cable, broadcast, and wireless cable. Cable and DBS have a
"head start" over broadcasters in the application of this technology.
For a given compression ratio, twice as many National Television
Standards Committee ("NTSC") signals can be transmitted via a 24MHz
satellite transponder as via a 6MHz terrestrial channel.

Digital video is recorded and played digitally, i.e. in on-on
bits.[^203] Traditional analog video -- video consumers have viewed in
their homes for over 60 years -- is recorded and played back in analog
format, or in analog wave forms. Due to its versatility, digital video
has several advantages over analog video. In addition to editing
capability, storage ease and transmission, it can be retrieved from an
analog source, such as the standard over the air NTSC analog
source.[^204]

For digitized audio-visual content to be truly high-quality and
versatile, it has to be encoded. MPEG, which stands for Moving Picture
Experts Group, is the name of a family of hardware and software
standards used for encoding[^205] and compressing audio-visual
information (e.g., movies, video, music) in a digital format.[^206] The
major advantage of MPEG compared to other video and audio coding formats
is that MPEG files are much smaller for the same quality. MPEG uses very
sophisticated compression techniques.[^207] Without digital compression,
the distribution of audio-visual content to consumers via delivery
systems such as residential broadband would not be possible because
uncompressed content requires too much bandwidth.

The key effects of compression technology are not only a substantial
increase in channel capacity but also a concomitant reduction in the
cost of a channel. Thus, delivery systems that utilize compression are
able to offer a substantial degree of time diversity. This means viewers
can now receive separate feeds of cable and broadcast networks for each
time zone in the United States, in addition to the offering of staggered
starting times for the showing of PPV movies. In other words, a PPV
programmer can transmit a box office hit several times each night, with
starting times every ten minutes or so during prime time. Since viewers
do not have to wait very long for the start of their movie selection,
this service has been characterized as "near video-on-demand"
("NVOD").[^208]

Working Paper 26 predicted that the reduction in the cost of channel
capacity would also lower the barriers to entry for new channels.
Working Paper 26 also expected more development of special interest or
"niche" channels. While more program channels are now carried by cable
operators and DBS providers, the reduction in channel capacity cost has
not necessarily resulted in lower barriers to entry. While capacity may
increase, this factor alone does not guarantee distribution of video
programming content. There are a numerous other factors which affect
which channels and what programs are distributed. Chapter Ten contains a
more extensive discussion and analysis of this point.

## Digital Television

*DTV: Brief Historical Background*[^209]

For almost 60 years, television broadcasters have transmitted signals
based on the NTSC standard.[^210] However, since 1941 improvements or
modifications include: (1) the introduction of color television in 1953,
(2) "ghost canceling" provisions to enhance picture clarity, (3) the use
of a previously unused portion of the transmission signal called the
"vertical blanking interval" to send closed captioning, and (4)
stereophonic sound.

To explore the issues posed by DTV, the Commission issued its *First
Notice of Inquiry of Advanced Television Service* in July 1987.[^211] It
also appointed a 25--member advisory panel called the Advisory Committee
on Advanced Television Services (ACATS). ACATS reviewed the technical
issues and recommended an advanced television system to the Commission.
ACATS collaborated with the Advanced Television Systems Committee
("ATSC"), an industry group, to recommend a series of technical
specifications. By early 1993, this combined group affirmed the
superiority of digital over analog.

This finding prompted seven entities, each with their own views and
ideas regarding advanced television standards, to form a coalition to
pool their expertise. They called this coalition the Grand
Alliance.[^212] Working with ACATS, the Grand Alliance agreed jointly to
develop a new standard. By November 1995, ACATS formally recommended a
set of prototype DTV protocols (the "Grand Alliance Standards") to the
Commission.

In December 1996, the Commission adopted the Grand Alliance Standards
for terrestrial broadcasting with some modifications.[^213] The
standards covered five major technical subsystems: (1) scanning, (2)
video compression, (3) audio compression, (4) packetized data transport,
and (5) radio frequency transmission. The standards also included 18
distinct scanning formats -- a compromise that satisfied the interests
of various industries (broadcasting, television set manufacturers, film
studios, and computer and software makers) while ensuring greater
flexibility in the use of DTV.

The Telecommunications Act of 1996 ("1996 Act") established the
framework for licensing DTV spectrum to existing broadcasters.[^214]
Existing broadcasters are assigned a new DTV license and an additional 6
MHz channel to facilitate the transition from analog to DTV. They retain
their original 6 MHz channel for analog broadcasts until the expected
completion of the transition, when each licensee must return the channel
to the Commission.[^215]

To help broadcasters meet the target transition deadline of December 31,
2006, the Commission developed a schedule for the introduction of DTV
that was designed to ensure that Americans receive a digital signal by
the year 2002.

When Congress passed the Balanced Budget Act of 1997, it specified that
broadcasters could keep their analog television service beyond 2006
under several conditions, including:

> 1\) If one or more of the largest television stations in a market do
> not begin DTV transmission by the 2006 deadline through no fault of
> their own; or
>
> 2\) If fewer than 85% of the television households in a market are
> able to receive DTV signals (either off the air or through a
> cable-type service that includes all local DTV stations).[^216]

The last exception -- often referred to as "the 85% rule" -- has the
potential to delay the cutoff of analog signals and the eventual return
of spectrum beyond 2006. One possible reason for this may be that the
85% rule relies, to a certain extent, on consumer demand and adoption of
DTV equipment.[^217]

*Station Build-out*

Congress set December 31, 2006 as the target date for ending television
broadcaster's analog transmissions. To meet this date, television
stations must invest in new equipment, which can include antennas,
digital transmitters and encoders, and additional transmission lines.
The overall cost of building the DTV stations is more burdensome for
some broadcasters than for others. Many stations are experiencing
problems obtaining funding to pay for the transition to DTV.[^218]

In November 2001, the Commission adopted a temporary rule allowing
stations to build less than maximum broadcast facilities and to reduce
the amount stations must spend to meet the initial requirements for DTV
transmission.[^219] The Commission also stated that in limited
circumstances it will now consider financial hardship as a ground for
extending the applicable construction deadline.[^220] Stations seeking
an extension of time to construct DTV facilities on this basis must
provide detailed evidence that the cost of meeting the minimum build-out
requirements exceeds the station\'s financial resources.

*Must Carry*

In 2001, the Commission adopted rules resolving a number of technical
and legal matters related to the cable carriage of digital broadcast
signals. In its *Report and Order*, it noted that MSOs are currently
undertaking significant cable system upgrades, including digital
build-outs.[^221] It stated that a commercial or non-commercial
digital-only television station can immediately assert its right to
carriage on a cable system. The Commission also said that a television
station that returns its analog spectrum and converts to digital
operation must be carried by cable systems. The Commission's action was
one of a series of steps to facilitate the transition from analog to
DTV.

The Commission also reviewed the issue of material degradation of the
digital signal during transmission. It noted that a cable operator would
not materially degrade a DTV signal if the cable operator carried less
than the full 19.4 Mbps transmitted by a broadcaster.[^222] The
Commission stated that Section 614(b)(4)(A) of the Communications Act of
1934, as amended by the 1996 Act,[^223] requires that cable operators
shall provide the same "quality of signal processing and carriage" for
broadcasters' signals as they provide for any other type of signal.
Consequently, in the context of mandatory carriage of digital broadcast
signals, a cable operator may not provide a digital broadcast signal in
a lesser format or lower resolution than that afforded to any digital
programmer (e.g., non-broadcast cable programming, other broadcast
digital program, etc.) carried on the cable system, provided, however,
that a broadcast signal delivered in HDTV must be carried in HDTV.[^224]
The Commission's January 2001 DTV Must Carry Order contains an initial
determination that the requirement for cable operators to carry "primary
video" refers to a single digital programming stream and
"program-related" content.[^225] Petitions to reconsider this decision
are currently before the Commission. Moreover, the statute is clear that
fee-based DTV services are considered ancillary and supplementary and
are not subject to must carry obligations. For these reasons,
broadcasters may well need to seek commercial arrangements with cable
(and DBS) operators for carriage of at least some Interactive Television
material.[^226]

*Consumer Adoption*

Consumer adoption is a major factor critical to the success of DTV. Key
issues include (1) how soon will consumers appreciate high-definition or
other value-added DTV programming and services;[^227] (2) when will
consumers choose to purchase DTV sets; (3) which companies will
manufacture DTV sets and sell them in retail outlets; and (4) how much
will the DTV sets cost?

To date, consumer acceptance of DTV has been limited, but adoption rates
are encouraging. Many consumers consider DTV a new viewing experience
and do not posses enough information to justify the purchase of a new
DTV set. Companies have pondered why consumers are or are not purchasing
DTV equipment. Surveys, such as the Consumer HDTV Survey conducted by
the Consumer Electronics Association (CEA), consistently point to
several reasons, including the cost of the DTV sets and the lack of
available high-definition or value-added DTV programming (See Table 30).

[]{#__RefHeading___Toc21199315 .anchor}Table 30: Consumer HDTV Survey

+----------------------------+-------+-------+-------+--------+------+
|                            | *     | **Lik | **Sh  | *      | **   |
|                            | *Over | ely** | ort-T | *Poten | Shor |
|                            | all** |       | erm** | tial** | t-Te |
|                            |       | **H   |       |        | rm** |
|                            |       | DTV** | **L   | **     |      |
|                            |       |       | ikely | HDTV** | *    |
|                            |       | **Bu  | Bu    |        | *Buy |
|                            |       | yer** | yer** | **B    | er** |
|                            |       |       |       | uyer** |      |
+----------------------------+-------+-------+-------+--------+------+
| Premiere of Favorite TV    | 60%   | 69%   | 73%   | 56%    | 66%  |
| Movie                      |       |       |       |        |      |
|                            | 45%   | 53%   | 63%   | 41%    | 50%  |
| Super Bowl                 |       |       |       |        |      |
|                            | 31%   | 34%   | 44%   | 29%    | 39%  |
| World Series               |       |       |       |        |      |
|                            | 23%   | 27%   | 34%   | 21%    | 28%  |
| Academy Awards             |       |       |       |        |      |
|                            | 22%   | 26%   | 29%   | 20%    | 25%  |
| Daytona 500                |       |       |       |        |      |
|                            | 22%   | 26%   | 31%   | 20%    | 24%  |
| NCAA Final Four            |       |       |       |        |      |
|                            | 21%   | 25%   | 29%   | 19%    | 26%  |
| Grammy Awards              |       |       |       |        |      |
|                            | 20%   | 25%   | 33%   | 17%    | 21%  |
| NBA Final                  |       |       |       |        |      |
|                            | 13%   | 13%   | 12%   | 13%    | 16%  |
| Stanley Cup                |       |       |       |        |      |
|                            | 12%   | 18%   | 20%   | 8%     | 8%   |
| The Masters                |       |       |       |        |      |
|                            | 12%   | 12%   | 16%   | 12%    | 19%  |
| WWF Wrestling              |       |       |       |        |      |
|                            | 10%   | 11%   | 12%   | 9%     | 12%  |
| Triple Crown Horse Races   |       |       |       |        |      |
|                            | 8%    | 9%    | 13%   | 7%     | 9%   |
| World Cup Soccer Finals    |       |       |       |        |      |
|                            | 6%    | 8%    | 13%   | 4%     | 7%   |
| America's Cup              |       |       |       |        |      |
+----------------------------+-------+-------+-------+--------+------+
| Source: CEA Market         |       |       |       |        |      |
| Research -- Consumer       |       |       |       |        |      |
| Perspectives of Digital    |       |       |       |        |      |
| Television III (2002)      |       |       |       |        |      |
+----------------------------+-------+-------+-------+--------+------+

Many content producers are developing high-definition or value-added DTV
programming, and it is important for all the industries and companies
that stand to gain from the success of DTV to promote this new content
to consumers.[^228]

*Powell Proposal*

FCC Chairman Michael K. Powell and previous FCC Chairmen and
Commissioners have noted that there are many different players in the
broadcast, cable, satellite, programming and consumer electronics
industry that play a vital role in the development of DTV in the
U.S.[^229] While some observers see progress towards that goal, efforts
to achieve this result are hampered by what is termed a
"chicken-and-egg" dilemma facing the widespread adoption of DTV. [^230]
In other words, broadcasters are concerned about the number of DTV sets
that are manufactured by consumer electronics companies and are made
available to consumers at retail outlets. Broadcasters are also
concerned about the prospects of cable and DBS operators carrying
broadcaster's digital channels for subscriber's enjoyment. The consumer
electronics industry is concerned about federal mandates requiring
manufacturers to install DTV tuners in sets because consumers may find
the sets too expensive and unnecessary. MSOs, DBS operators and the
consumer electronics industry are concerned about local and network
television and cable programmers' efforts to provide compelling HDTV
programming with mass appeal.

To provide a near-term boost to the DTV transition, FCC Chairman Powell
presented a voluntary plan to key industry players.[^231] The intent of
the proposal was to provide an immediate spur to the transition by
giving consumers a reason to invest in digital technology today while
work continues on resolving the longer-term issues associated with the
transition. While the plan was not intended to be comprehensive or to
undermine the importance of other DTV issues under discussion, it sought
to advance two key goals: (1) increase the level of compelling digital
content available to consumers; and (2) provide cable subscribers access
to that content over their cable systems.

Specifically, Chairman Powell's proposal called for the following
voluntary industry actions:

> 1\. [Top Four Broadcast Networks (ABC, CBS, Fox and NBC), HBO and
> Showtime]{.underline}
>
> Provide high-definition or other "value-added DTV programming" during
> at least 50% of their prime-time schedule, beginning with the
> 2002-2003 season.[^232]
>
> 2\. [Broadcast Licensees]{.underline}
>
> By January 1, 2003, or as soon thereafter as they commence
> broadcasting, DTV affiliates of the top four networks in markets 1-100
> will obtain and install the equipment necessary to pass through
> network DTV without degradation of signal quality (e.g., pass through
> HD programming, if that is what its network provides).[^233]
>
> 3\. [Cable Operators]{.underline}
>
> By January 1, 2003, cable systems with 750 MHz or higher channel
> capacity will:
>
> A\) Offer to carry, at no cost, the signals of up to five broadcast or
> other digital programming services that are providing value-added
> digital programming during at least 50% of their prime-time schedule.
>
> B\) Provide cable subscribers the option of leasing or purchasing a
> single set-top box that allows for the display of high definition
> programming.[^234]
>
> C\) Market the digital television products the operator provides,
> including on their systems and in monthly bills, so that consumers
> know what programming is available and how they can receive it over
> the cable plant.
>
> 4\. [Direct Broadcast Satellite Operators]{.underline}
>
> By January 1, 2003, carry the signals of up to five digital
> programming services that are providing value-added digital
> programming during at least 50% of their prime-time schedule.
>
> 5\. [Consumer Electronic Equipment Manufacturers and
> Retailers]{.underline}
>
> A\) Commit to meeting the demand for cable set-top boxes that allow
> for the display of high definition programming.
>
> B\) Market broadcast, cable and satellite DTV options at
> point-of-sale.
>
> C\) Include over-the-air DTV tuners in new broadcast television
> receivers according to the following schedule:

-   Sets 36" and above -- 50% of units to have DTV tuners by January
    1,2004; 100% by January 1,2005;

-   Sets 25"-35" -- 50% of units to have DTV tuners by January 1,2005;
    100% by January 1,2006;

-   Sets 23"-24" -- 100% of units to have DTV tuners by December 31,
    2006.

> D\) Include digital input(s) (e.g., 1394/5C and/or DWHDCP) on all new
> HD-capable television receivers and display devices by January 1,
> 2004.

The plan received widespread support. In July 2002, Chairman Powell
noted that virtually every industry -- cable, broadcast and satellite --
had either fully embraced the plan, or made real commitments to advance
the transition.[^235] As a result of the committed efforts of these
industries, many of the key elements of the DTV transition are beginning
to fall into place.[^236]

*DTV Tuner Plan*

In August 2002, the Commission adopted a *Second Report and Order and
Second Memorandum Opinion and Order* that gives consumers access to
digital programming by requiring over-the-air DTV tuners in nearly all
new television sets by 2007.[^237] By enacting a five-year rollout
schedule that starts with larger, more expensive television sets, the
Commission hopes to minimize the costs for equipment manufacturers and
consumers.

The Commission noted that DTV receivers are a necessary element of
broadcast television service in the same way that analog television
receivers have been since the inception of analog television service.
Although analog receivers are still dominant today, that will change as
the transition to DTV progresses. The Commission said that its
jurisdiction is established by the 1962 All Channel Receiver Act
("ACRA"), which provides it with the authority to require that
television sets be capable of adequately receiving all frequencies
allocated by the Commission for television broadcasting. The authority
provided under the ACRA applies to all devices used to receive broadcast
television service, not just those used to receive analog signals.

The Commission said the roll-out schedule reflects and accounts for the
following points: (1) inclusion of DTV reception capability in new
television receivers requires the redesign of product lines; (2) prices
are declining and will decline faster as economies of scale are achieved
and production efficiencies are realized over time; and (3) prices of
large television sets have been declining at a rate of \$100 to \$800
per year, so the additional cost of the DTV tuner may be partially or
completely offset by the general price decline. The Commission said this
plan will ensure that new television receivers include a DTV tuner on a
schedule as close as economically feasible to the December 31, 2006
deadline.

Specifically, the Commission's order requires that all television
receivers with screen sizes greater than 13 inches and all television
receiving equipment, such as VCRs and DVD players/recorders, be required
to include DTV reception capability after July 1, 2007, according to the
following schedule:

> 1\. [Receivers with screen sizes 36 inches and above]{.underline} --
> 50% of a responsible party's units must include DTV tuners effective
> July 1, 2004; 100% of such units must include DTV tuners effective
> July 1, 2005.
>
> 2\. [Receivers with screen sizes 25 to 35 inches]{.underline} -- 50%
> of a responsible party's units must include DTV tuners effective July
> 1, 2005; 100% of such units must include DTV tuners effective July 1,
> 2006.
>
> 3\. [Receivers with screen sizes 13 to 24 inches]{.underline} -- 100%
> of all such units must include DTV tuners effective July 1, 2007.
>
> 4\. [TV Interface Devices]{.underline} -- VCRs and DVD
> players/recorders, etc. that receive broadcast television signals --
> 100% of all such units must include DTV tuners effective July 1, 2007.

The Commission temporarily declined to adopt labeling requirements for
television receivers that are not able to receive any over-the-air
broadcast signals. It stated that it is unclear when, or if, such
products will become commercially available or how they will be
marketed. The Commission will continue to monitor the state of the
marketplace and take additional steps if necessary to protect consumers'
interests.

*Ancillary Services*

Given the DTV transition and advancements in digital compression,
broadcasters are struggling to figure out what to do with the extra
bandwidth capacity. Some plan to use the additional capacity to offer
consumers more television channels.[^238] Others are delivering high
definition programming.[^239] Several plan to use the extra bandwidth
capacity to offer ancillary, supplemental, and perhaps even interactive
services. However, for the service to be fully interactive, a return
channel is required.

The technical standards for DTV operation approved by the Commission
provide broadcasters with a range of service opportunities. To
strengthen DTV's chances for success, the Commission in 1997 decided to
allow broadcasters to use their channels according to their best
business judgment, as long as broadcasters continued to offer at least
one stream of free programming to consumers.[^240] Thus, broadcasters
must provide a free digital video programming service that is at least
comparable in resolution to today's service and aired during the same
time periods as today's analog service.

Broadcasters are granted great flexibility in how they use their new
spectrum, provided that uses do not interfere with the provision of
over-the-air television programming. Broadcasters are still bound by the
public interest standards that apply to broadcast television. DTV
license holders must also pay the Federal Government a fee for ancillary
and supplemental (subscription) DTV services. In requiring fees for
proposed subscription services, Congress' goal is to ensure that
broadcasters pay approximately what they might pay if the spectrum were
auctioned.[^241] Thus, the public receives some portion of the value of
the spectrum assigned to broadcasters.

In October 2001, the Commission ruled that noncommercial educational
("NCE") broadcasters are required to use their entire DTV bitstream
capacity primarily for nonprofit, noncommercial, educational broadcast
services.[^242] It also ruled that the statutory prohibition against the
broadcast of advertisements on NCE television stations applies only to
broadcast programming streams provided by NCE licensees, but does not
apply to any ancillary or supplementary services presented on their
excess DTV channels that do not constitute broadcasting. The Commission
further ruled that NCE licensees must pay a fee of 5% of gross revenues
generated by ancillary or supplementary services provided on their DTV
service. The Commission said it would not establish a bright line test
to define the term "primarily" but will instead define it as a
"substantial majority" of a NCE station's entire digital capacity,
measured on a weekly basis.[^243]

The Commission said that allowing advertising on NCE broadcasters'
ancillary or supplementary services that are non-broadcasting would
permit NCE stations flexibility in providing such services as well as
enhance their ability to raise revenue for their support and the
transition to digital television. However, the Commission said that at
the same time, observing the ban on advertising on any free-over-the air
service will preserve NCE licensees' fundamental mission of providing a
nonprofit, noncommercial, educational broadcast service. The Commission
concluded that NCE licensees are not exempt from the statutory
requirement to pay fees on revenues generated by the remunerative use of
their excess digital capacity, even when those revenues are used to
support their mission related activities.

Broadcasters have included data in their television signals for years.
Date and time stamps, closed-captioning information and second language
audio programming are the kinds of data that can be embedded in the
current analog television signal. However, broadcasters are developing
new digital products and services to help make the most use of their
channels by using the Commission's *Fifth Report and Order* as a
guideline. One of these new digital services is "data broadcasting" or
"datacasting."[^244]

Exhibit 2 shows an example of one type of data broadcast network
architecture and how it works.[^245] A content producer or distributor
typically delivers encoded data electronically or by means of physical
media to the data broadcasting ingest center or network operations
center ("NOC").

[]{#__RefHeading___Toc21199284 .anchor}Figure 2: Sample Diagram of One
Type of Data Broadcast Network Architecture

![](media/image20.wmf){width="6.098611111111111in"
height="3.5118055555555556in"}

Because the data is digitized it can represent text, audio, video,
graphics, software applications or even control information. Once the
data is received, the data broadcaster formats the data, adding error
and data-loss protection. The data is then scheduled for "playout" over
satellite and terrestrial communication facilities. Client usage
statistics and network errors are analyzed in the NOC. The NOC can also
encrypt material and authorize its reception by subscribers if
necessary. Television stations that are a part of the data broadcasting
network form the nodes in the network. Content and necessary broadcast
playlists are received at the nodes via satellite or fiber optic Wide
Area Networks ("WANs"), and are stored in the node server. Content is
injected into the node\'s ATSC bit stream and transmitted over-the-air
with the station\'s television signal.

The client[^246] uses a receiving device comprised of a terrestrial
antenna, a demodulator and an ATSC receiver to tune into encrypted data
broadcasts from one or more nodes. Registered clients are able to
decrypt this material and cache it, or display it if it is streamed. The
client may also filter content based on user preferences selected and
stored in a file.

Data broadcasting allows broadcasters to distribute data at phenomenal
speeds using accessible opportunistic bandwidth. Broadcasters can take
advantage of the tremendous throughput inherent in the channel because
they have a full 6MHz DTV signal consisting of a packet stream with a
speed of approximately 19.4 Mbps. Data broadcasting takes advantage of
the variations in required video data rates to provide an auxiliary
service with a steady, average rate of data delivery over an established
time interval.[^247]

The data that is broadcast is embedded as digital data in existing
television signals in the same way that teletext services use spare
lines at the top of television picture frames. Data can be carried
either by terrestrial broadcast, DBS or cable transmission. A receiver
(e.g. satellite, UHF/VHF tuner) and a data broadcast decoder are
required to receive the data. The advantage of data broadcasting is that
data is transmitted instantly to anyone capable of receiving a
television signal with the necessary receiver.

In homes and workplaces, consumers can use receivers plugged into PVRs
or other STBs, PCs or other storage-type devices to capture the digital
signal. Once captured, the receiver separates the data bits from the
television programming bits to display the data on-screen or to save on
a hard drive for later use.

Broadcasters are pursuing a wide range of data broadcasting
opportunities in the consumer, small office/home office and business
marketplace.[^248] As with many new digital technologies, the challenge
is to develop products and services with profitable business models.
This is tremendously important to broadcasters, who are searching for
ways to develop new revenue streams.

## Digital Rights Management

Movie studios, television networks, computer-chip makers, software
companies and consumer electronics manufacturers agree that DTV programs
must be protected from unfettered distribution over the Internet by
consumers.[^249] Many people in the creative community want to protect
against unauthorized distribution of their works.[^250] As one media
executive laments, "when viewers can download the entire season of a
show from the Internet for free and without commercial advertising, what
value does syndication have?"[^251]

In August 2002, the Commission issued an *NPRM* designed to facilitate
the transition to DTV and to explore whether it can and should mandate
the use of a copy protection mechanism for digital broadcast television,
and what impact such regulation would have on consumers.[^252] It noted
that the current lack of digital broadcast copy protection may be a key
impediment to the DTV transition's progress. Without a digital copy
protection scheme that prevents the unauthorized copying and
redistribution of digital media, content owners assert that they will
not permit the digital broadcast of high quality programming. Without
such programming, consumers may be reluctant to buy DTV receivers and
equipment, thereby delaying the DTV transition.

Private industry negotiations have reached consensus on a technical
"broadcast flag" standard (ATSC Standard A65/A) that would limit copying
of some programming aired by broadcast-TV stations. However, there is no
universal agreement on the use and implementation of the flag. There is
also no industry agreement on how to enforce digital broadcast copy
protection. The *NPRM* seeks comment on the jurisdictional basis for
Commission action in this area and whether it should intercede in this
matter.

If Commission-mandated digital broadcast copy protection rules are
needed, the *NPRM* asks the following questions: (1) is the broadcast
flag the appropriate technological model to be used; and (2) is a
government mandate requiring broadcasters and content providers to embed
the broadcast flag (or other content control mark) within digital
broadcast programming necessary?

Regarding reception of the digital broadcast signal, the *NPRM* asks
questions in several areas. For example, should the Commission mandate
that consumer electronics devices recognize and give effect to the
broadcast flag (or other content control mark)? What is the appropriate
point in a consumer electronics device at which digital broadcast copy
protection should begin? Would a digital broadcast copy protection
system be effective in protecting digital broadcast content from
improper redistribution? Would digital broadcast copy protection work
for digital broadcast stations carried on cable or DBS systems, and if
so, how? Should the Commission mandate the use of specific copy
protection technologies (such as DTCP/5C or HDCP) in consumer
electronics devices that are designed to respond to the broadcast flag?
And, if so, how would a particular technology receive approval for use
and who would be the appropriate entity to make that decision?

Consumers will be affected if the Commission adopts a rule mandating the
adoption of a broadcast flag or other digital broadcast copy protection
mechanism. This also raises several questions that must be considered.
For example, will requirements to protect digital outputs interfere with
the ability to send DTV content across secure digital networks? What is
the impact of digital broadcast copy protection mechanisms on existing
and future electronic equipment? Will digital broadcast copy protection
have an effect on the development of new consumer technologies?

## Interactive Television

The Commission has not previously defined ITV. It has, however,
characterized ITV as a service that supports subscriber-initiated
choices or actions that are related to one or more video programming
streams.[^253] ITV is evolving rapidly and the services it provides may
enable increased viewer control of the television viewing experience by
permitting the integration of video and data services -- including
Internet content - and by allowing real-time interaction with other
viewers.[^254] In connection with its review of the AOL Time Warner
merger, the Commission issued a *Notice of Inquiry* to consider whether
industry-wide rules were needed to address any impediments to the
development of ITV services and markets.[^255] The NOI sought to gather
a more complete record on the ITV industry, generally, and the
deployment of ITV services by cable operators, in particular.

The Commission attempted to identify the major technical resources or
"building blocks" necessary for the provision of ITV services
(particularly high-speed ITV services) and, if it was determined that a
general nondiscrimination principal should be adopted, how it should be
applied to the provision of the building blocks.[^256] The components
identified by the Commission in the *ITV NOI* are as follows: a video
pipeline associated with interactive content (*e.g.,* the MPEG video
stream), a two-way connection (*e.g.*, via the Internet) and specialized
customer premises equipment (*e.g*., the interactive television set-top
box).[^257] This narrow definition of what constitutes ITV was developed
to address the concerns certain parties had with the merger between AOL
and Time Warner. The scope of ITV services available to the public is
much broader than what was contemplated by the Commission in the NOI.

ITV services are currently being offered by television broadcasters,
cable programmers, cable operators, satellite carriers and third party
interactive service providers, with the broadcasters and programmers
concentrating on enhanced television and ITV-over-television
applications and the cable and satellite operators developing
video-on-demand and personal video recorder technologies. The ITV
services, described in detail below, are often referred to as single
screen applications where all of the activity is received and processed
either through the television receiver or the set top box provided by
the cable operator, satellite carrier, or the ITV service provider.
Programs or applications that require a viewer to access a computer,
while watching television, are known as two screen services and are not
generally accepted as true ITV. However, two-screen applications are
being deployed in the interim to provide simple interactivity (*e.g*.,
users are able to log on to the associated website to retrieve more
information, or participate in polls and/or quizzes). Some examples of
current ITV applications are provided below.

*Enhanced Television*

Enhanced television services generally allow the viewer to obtain more
information on certain programming, purchase products, permit the
manipulation of the video image, or provide input on questions posed by
the program distributor.[^258] With this type of technology, the
subscriber accesses a graphic interface, overlay, or a screen that wraps
around the displayed video signal(s), providing supplementary
information related to the video display or a related t-commerce
transaction opportunity.[^259]

While broadcast television stations were among the first delivery
systems to offer enhanced television services to viewers, cable
operators have recently entered the fray. AOL Time Warner, for example,
has deployed technology allowing subscribers to change and manipulate
camera angles when viewing sports programming. Oceanic Cable, AOL Time
Warner's cable division in Hawaii, has recently launched this type of
ITV service using software developed by NDS.[^260] Interactive polling
is another growth area in the ITV field, and another type of interactive
service Oceanic Cable is now providing to its Hawaii cable television
subscribers. The application presents banner strips on subscribers'
television screens asking them to answer questions and taking votes
during programs and advertisements. Subscribers reply using their remote
controls with the results then compiled and presented to the
audience.[^261]

*Internet Over Television*

Internet over television gives a subscriber the ability to launch an
Internet browser on the subscriber's television screen, and navigate
between surf, chat, and email applications.[^262] Depending on the
system, a subscriber may have the ability to view a program or
commercial using a remote control or wireless keypad device. The
subscriber can click on a hyperlink that appears on the screen while the
user is watching regular programming and be taken to the corresponding
website containing the supplemental information through a process called
"channel hyperlinking."[^263]

*Electronic Program Guides*

Electronic Program Guides ("EPGs") are on-screen directories of
programming delivered through various means, including cable plant,
telephone lines, and over-the-air broadcast signals.[^264]
Original-generation EPGs are not interactive, but rather continually
scroll programming listings. These EPGs are generally delivered as
discrete video programming channels. Newer, interactive EPGs, ("IPGs")
however, allow users to sort and search programming, give program
descriptions, provide reminders of upcoming programming, and take users
to programming they select. Interactive EPGs can be transmitted via the
Vertical Blanking Interval ("VBI")[^265] of analog channels, or may be
transmitted as stand-alone digital data streams. The distributors of
EPGs are MVPDs such as cable and DBS operators.[^266] The sellers of
EPGs are EPG companies.[^267] Gemstar,[^268] the current market leader
in the provision of EPGs, has contracted with AT&T for provision of EPGs
on AT&T cable systems, and several other operators such as Comcast,
Charter, and Intermedia. Some regard interactive EPGs as the most
important interactive application because they act as electronic
gateways to the variety of services offered by multichannel video
programming distributors.[^269]

*Video-on-Demand*

Video-on-Demand ("VOD") is analogous to the PVR in its function.[^270]
VOD permits subscribers to instantly access video programming of any
kind for a small fee for each event ordered.[^271] Subscribers are able
to pause, fast-forward or rewind programming in the same manner as
permitted by a traditional video recorder. VOD is an evolved form of
pay-per-view where subscribers do not have to wait to view desired
programming. VOD requires video servers[^272] with hundreds of gigabytes
of storage as well as a digital set top box in the subscriber's
home.[^273] Cable systems, and to some extent, local telephone companies
have the necessary upstream and downstream architecture and bandwidth to
offer VOD. The major issues facing the rollout of VOD by cable operators
includes: (1) channel capacity; (2) set top box deployment[^274]; (3)
tiering and marketing decisions; (4) pricing decisions; and (5) content.
In a key development for delivering VOD, Comcast has agreed to launch a
video-on-demand system that is combined with Gemstar's EPG in a Motorola
set top box.[^275] This integration of technologies simplifies
subscriber selection and ordering of VOD programming options.[^276]
Other variants of VOD include:

[Subscription Video-on-Demand]{.underline}

Subscription Video-on-Demand ("SVOD") functions like VOD, but has a
different marketing structure.[^277] Rather than pay for each event
viewed, the subscriber pays an additional monthly fee, on top of a
premium service fee, to access certain programming on an at-will basis.
For example, a subscriber would pay an additional \$3.00 more per month
for HBO which would allow him to access certain programming, such as
"Sex and the City" or "The Sopranos," for instantaneous viewing. Charter
Communications has recently launched an SVOD package in several of its
systems where subscribers can access children's' programming provided by
several cable programmers and PBS for a \$9.00 flat fee.[^278]

[Near Video-on-Demand]{.underline}

As mentioned earlier in this chapter, NVOD is similar to VOD in that the
subscriber selects the individual program for a fee, but the video is
not delivered instantaneously. Rather, the program starts at certain
time intervals, likely every ten minutes or so, and the user switches
between video streams to simulate fast-forward, rewind, etc. The program
is likely to be stored at the headend, while the program is stored on
video servers for traditional VOD.

*Other ITV services*

There are other types of ITV services that are being developed by
technology firms and deployed by either cable operators or satellite
carriers. One burgeoning area is interactive gaming where, for example,
individuals with high speed Internet access can engage in multiplayer
games through certain websites. Also, there are several firms that have
developed software permitting subscribers to place wagers on sporting
events. However, the legality of this type of ITV service is
questionable absent legislation permitting its deployment.

## Personal Video Recorders

Since the 1970s, devices and services such as the VCR and PPV television
have increased personalization of television viewing.[^279] Instead of
passively receiving whatever broadcasters choose to show the public,
control over content and when it is viewed is shifting from the
broadcaster to the viewer.[^280] Increased penetration of digital video
services and new home video technologies such as the PVR mean the trend
towards personal television will be even more pervasive in the
future.[^281]

A PVR is a device connected to a television set, either embedded in an
STB or as a stand-alone device, which uses a hard disk drive, software,
and other technology to digitally record and access programming. PVR
technology allows a consumer to pause, replay, rewind, fast-forward and
otherwise time-shift television programs.[^282] While PVRs cannot play
prerecorded videocassettes or DVDs, they make it relatively simple to
record pay-per-view signals or other content from digital platforms,
such as DBS, and provide the user with the same level of control over
the playback of a movie as home video provides.

The devices are "smart" in that they can select shows for a user based
on a particular topic, categorization or prior viewing habits. Users
simply select the shows they are interested in from the television
viewing guide with the press of a button. PVRs enable the user to skip
past commercials in recorded material with one simple click.

Compared to the launch of other consumer electronic devices such as the
DVD player, consumer adoption of PVRs has been marginal but promising.
However, the integration of PVR functionality with other devices, such
as television sets or STBs, should rapidly increase deployment and
consumer adoption.[^283] Integrated products allow service operators to
bundle their services, which may provide an attractive business model
while undercutting retail sales of standalone PVR units.[^284] Although
the market for PVRs is still small at approximately \$38 million in
2001, analysts project the market to reach about \$35 million in 2002
with an anticipated growth rate of approximately 12.6% per year to \$61
million in 2005.[^285]

Studies show that most consumers may not purchase a stand-alone PVR in
the near future because the VCR satisfies most of their current
recording needs.[^286] Price and lack of product knowledge are also
factors limiting sales of stand-alone PVRs. For example, the average
cost of a PVR was approximately \$304 in 2001 compared to \$309 in 2000
and the initial \$460 in 1999. These prices are quite high relative to
the average price of a VCR, which was \$72 in 2001 and \$83 in 2000. A
PVR combined with an NVOD subscription service may prove to be a better
model for video programming distribution instead of pure VOD, which
requires a considerable amount of bandwidth. A device which combines a
PVR with a DVD recorder ("DVD-R") may also be an attractive consumer
product because of its ability to make permanent copies of programs on a
DVD from the PVR.[^287]

Several companies offer PVRs, including ReplayTV Inc. and TiVo, Inc.
Last year, ReplayTV announced that it would no longer sell PVRs directly
to consumers, but would focus on licensing its technology to cable and
other television-oriented companies.[^288] In August 2001, Sonicblue
acquired ReplayTV, and announced that it again would sell PVRs over the
Internet and at select retail outlets.[^289] TiVo, the market leader,
has an installed customer base of more than 280,000. The second
generation box, TiVo Series 2, currently sells for approximately
\$399.99 and operates with any television system: antenna, cable,
digital cable, satellite and combination.[^290] TiVo is offered on a
subscription basis for approximately \$10 a month.[^291] About 20% of
its reported 200,000 subscribers receive the service through DirecTV
using an STB that combines DBS and PVR functions.[^292] In addition,
EchoStar offers STBs, the DISHPlayer and the DishPVR, with PVR
capabilities.[^293]

One television executive notes that consumer adoption of PVRs has not
been as widespread as predicted.[^294] Consumers may adopt the PVR, much
like the VCR and every other new form of entertainment, but the PVR may
not have quite the same effect as experts assume.[^295]

Another broadcast executive compares potential revenue losses from
skipped commercials and the disk storage of copyrighted programming to
the current massive losses threatening the music industry.[^296] He
estimates that almost one million households (or less than 1% of total
television viewers) currently use PVR devices on a regular basis.[^297]
He cautions that if cable and satellite operators continue plans to
integrate PVR technology into their STBs, within five to ten years there
might not be any commercial ads on television.[^298] In his opinion
consumers may be asked to pay for programming if the networks lose
advertisers. He warns that PVRs could present a real threat to the
television industry, translating into a future cost to American
consumers of approximately \$250 annually per household through cable
subscriber fee increases or conversion to "pay for" services of
advertiser‑supported basic cable networks.[^299]

A different network head, who admits to owning a PVR, suggests that PVR
users might not be inclined to skip past commercials during sporting
events because the commercials are sports-related and almost weave into
the programming.[^300] For instance, during televised golf tournaments,
players often talk about equipment during the commercials.[^301] The
content of the commercials tends to be compatible with the format of the
golf show.[^302] Thus, golf enthusiasts might "stay tuned" during the
commercial breaks to find out what brand of golf ball or golf club their
favorite professional golfer endorses.

Overall, there is a growing concern that given the opportunity to skip
through entire commercial and promotional pods during a network break, a
large number of consumers will choose to skip. This concern may be
valid, considering a recent study which concluded that people who watch
recorded television shows on PVRs skip past commercials over 71% of the
time (See Table 31).[^303] The study noted that the skip rate for PVR
users was more than four times that of viewers watching shows recorded
on a VCR.[^304] The skip rate was also more than 65% higher with PVR
users than with people who actively ignored commercials on live
television.[^305]

[]{#__RefHeading___Toc21199316 .anchor}Table 31: Television Ads Not
Watched (Prime Time)[^306]

+-------------+------+------+------+------+-------+-------+-------+
| Summary \-- |      |      |      |      |       |       |       |
| Sort by     |      |      |      |      |       |       |       |
| \"Fast      |      |      |      |      |       |       |       |
| Forward     |      |      |      |      |       |       |       |
| PVR...\"    |      |      |      |      |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
|             |      |      |      |      |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
|             |      | **   | **   | **   | *     | *     | *     |
|             |      | Fast | Fast | Fast | *Fast | *Fast | *Fast |
|             |      | F    | F    | F    | Forw  | Forw  | Forw  |
|             |      | orwa | orwa | orwa | ard** | ard** | ard** |
|             |      | rd** | rd** | rd** |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
|             | **Ac | **V  | **P  | **Of | **Of  | **Of  | **Of  |
|             | tive | ideo | VR** | V    | Video | PVR   | PVR   |
|             | ly** | Tap  |      | ideo | Ta    | Recor | Recor |
|             |      | ed** |      | Tap  | ped** | ded** | ded** |
|             | *    |      |      | ed** |       |       |       |
|             | *Ign |      |      |      |       |       |       |
|             | ored |      |      |      |       |       |       |
|             | on** |      |      |      |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
|             | **   | **   | **   | **C  | **Ne  | **    | **Ne  |
|             | Live | TV** | TV** | able | twork | Cable | twork |
|             | TV   |      |      | TV** | TV**  | TV**  | TV**  |
|             | \*** |      |      |      |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
|             |      |      |      |      |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Fast Food   | 4    | 2    | 9    | 2    | 25.4% | 94.4% | 94.7% |
|             | 4.4% | 3.7% | 4.6% | 2.2% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Credit      | 6    | 1    | 9    | 1    | 23.1% | 93.5% | 93.7% |
| Cards       | 2.8% | 8.8% | 3.6% | 4.2% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Upcoming    | 7    | 2    | 9    | 1    | 27.6% | 92.4% | 93.7% |
| Program     | 4.2% | 1.4% | 3.4% | 5.8% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Mortgage    | 7    | 1    | 9    | 1    | 19.8% | 91.1% | 93.5% |
| Financing   | 3.9% | 9.6% | 2.7% | 9.4% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Home        | 4    | 1    | 8    | 1    | 22.8% | 80.4% | 93.6% |
| Products    | 0.6% | 7.2% | 8.5% | 3.3% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Personal    | 6    | 1    | 8    | 1    | 16.9% | 80.3% | 91.2% |
| Improvement | 8.2% | 4.3% | 5.6% | 2.4% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Pet Related | 5    | 1    | 8    | 1    | 21.3% | 80.2% | 84.6% |
|             | 5.7% | 6.2% | 1.9% | 2.8% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Soft drinks | 2    | 8.7% | 8    | 6.1% | 9.8%  | 80.7% | 82.9% |
|             | 1.9% |      | 1.4% |      |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Male        | 6    | 1    | 7    | 1    | 19.7% | 75.6% | 82.1% |
| Hygiene     | 3.8% | 5.1% | 8.2% | 2.4% |       |       |       |
| Products    |      |      |      |      |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| National    | 5    | 1    | 7    | 1    | 26.1% | 65.7% | 79.4% |
| Automotive  | 2.6% | 8.4% | 1.3% | 5.3% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Feminine    | 4    | 1    | 6    | 8.7% | 19.2% | 50.3% | 78.6% |
| Products    | 1.3% | 3.7% | 4.1% |      |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Local       | 5    | 1    | 6    | 1    | 19.3% | 57.5% | 68.2% |
| Automotive  | 8.1% | 4.6% | 2.8% | 0.4% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Specialty   | 3    | 1    | 6    | 1    | 24.1% | 55.2% | 64.9% |
| Clothing    | 2.7% | 5.6% | 1.3% | 3.7% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| National    | 3    | 1    | 6    | 1    | 22.2% | 58.3% | 62.7% |
| Dept Store  | 7.8% | 6.9% | 0.8% | 2.5% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Home        | 1    | 1    | 5    | 1    | 25.8% | 41.2% | 68.8% |
| Improvement | 6.2% | 7.9% | 6.7% | 0.2% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Local Dept  | 2    | 1    | 5    | 8.8% | 13.4% | 52.6% | 61.3% |
| Store       | 1.6% | 0.2% | 5.1% |      |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Movie       | 1    | 1    | 4    | 1    | 13.6% | 29.7% | 41.3% |
| Trailers    | 1.3% | 5.9% | 7.3% | 1.9% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Drug        | 3    | 1    | 4    | 1    | 15.7% | 41.2% | 49.7% |
|             | 1.7% | 3.1% | 6.9% | 1.2% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Beer        | 4.4% | 5.1% | 3    | 4.9% | 5.3%  | 20.1% | 35.6% |
|             |      |      | 2.7% |      |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Unweighted  | 4    | 1    | 7    | 1    | 19.5% | 65.3% | 74.8% |
| Avg.        | 2.8% | 5.6% | 1.0% | 2.4% |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Samples     | *8,  | *1,  | *    |      |       |       |       |
|             | 654* | 148* | 976* |      |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
|             |      |      |      |      |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+
| Source: CNW |      |      |      |      |       |       |       |
| Marketing   |      |      |      |      |       |       |       |
| Research    |      |      |      |      |       |       |       |
| (2002)      |      |      |      |      |       |       |       |
+-------------+------+------+------+------+-------+-------+-------+

Overall, with PVR users, commercials on cable fared a bit better than on
network television. However, in the top "turn-off" categories of fast
food, credit cards, mortgage financing and home products, the statistics
were virtually the same as network-run commercials.[^307]

While the broadcast and advertising industries are concerned about
viewers skipping commercials, it is foreseeable that the PVRs
personalization functionality may radically affect the advertising
model.[^308] The concept of primetime may become much less important, as
programs are viewed other than when they are broadcast. Scheduling
programs and the significance of ratings during specific time periods
may change the rules for airtime pricing.[^309]

PVR manufacturers acknowledge that advertisers are concerned about the
commercial skipping features of the PVR. One manufacturer has announced
a new initiative that demonstrates how advertisers can establish far
deeper communication with consumers by using key functions of a PVR to
transform the traditional 30-second commercial into
"advertainment."[^310] Using the new advertainment capabilities,
advertisers will be able to provide an electronic tag for commercials
that come into view of PVR subscribers. Simply clicking the PVR remote
control while the commercials are on the television screen will
transport the PVR subscriber to a "video showcase" area where the viewer
can watch innovative advertiser-produced and branded entertainment. This
strategy gives advertisers new abilities, including (1) telescoping
30-second commercials that viewers can watch; (2) branded video
showcases stored on the PVR hard drive; (3) lead generation and request
for information features; and (4) real-time audience measurement
data.[^311]

## Conclusion

There are technological advancements and deployment concerns, economics
issues, regulatory challenges and consumer adoption questions that
broadcasters face as they compete in the media industry. However, MPEG
compression and encoding technologies have increased the ability for
broadcasters and other competitive video distributors to transmit video
over video distribution systems and the Internet.

The transition from analog to digital television is underway.
Ultimately, the DTV transition will shift into high gear when three
factors come together: (1) a critical mass of high-definition or
value-added digital content; (2) distribution of that content to
consumers; and (3) DTV sets in consumer's hands. For some broadcasters,
securing financing to pay for station equipment is difficult.[^312] Many
worry that some broadcasters will not meet the transition
deadline.[^313] Cable operators feel pressure to carry broadcaster's
digital signals. Consumers are evaluating the value proposition of DTV
sets and programming, and are encouraged by the sharp picture and
superior sound quality. Local and network television, cable programmers
and other content producers are offering more DTV programming in their
program schedules. Broadcasters, movie studios, television networks,
computer-chip makers, software companies and consumer electronics
manufacturers are concerned about digital rights management and
copyright protection but cannot agree on a solution.

Broadcasters are developing plans to utilize portions of the excess
capacity in the spectrum to offer ancillary, supplemental and
interactive services. To date, however, the vast majority of television
stations have not acted on these plans. This is likely due to the
uncertain business models for such new services. If significant demand
and profitable business models develop, these additional services may
generate new revenue streams and help defray the costs of the station's
digital build-out. It appears that the growth of the ITV industry
continues to proceed at a cautious pace. Ancillary and interactive
services are slowly gaining consumer acceptance and are slowly becoming
available through cable operators and satellite carriers as well as
broadcast television stations. The rollout of ITV services will
accelerate as (1) content owners and video programming distributors form
strategic alliances; (2) the cost of providing ITV services continues to
decline; (3) the deployment of two-way capable STBs increases; and (4)
the transition to a digital environment progresses. PVRs may increase
consumer's programming options and alter behavior patterns. The
Commission will continue to monitor this line of business and report,
where appropriate, on new developments and issues that may arise in the
future.

Overall, technological developments increase the opportunities,
challenges and competition faced by broadcasters. These digital
technologies may permit broadcasters to become multichannel,
multi-revenue stream video programming providers. However, these
developments per se do not change the apparent scenario for broadcast
television in the near term -- a continuing gradual decline in viewing
shares. If new services are developed and successfully deployed by
competitors, the potential exists for rapid erosion of broadcasting's
share.

# IX. Advertising Market Developments

## Introduction

This chapter briefly considers and discusses changes in the advertising
market both in terms of market structure and in terms of new advertising
formats. The advertising market has experienced consolidation, both on
the buy and sell-sides in recent years.

With regard to new advertising formats, the arrival of interactive
capability may present new models and opportunities for advertisers.
However, given the valuable consumer feedback and data retrieval
capabilities of interactive formats, any potential added value also
raises issues relating to the protection of children and consumer
privacy. Thus, advertisers and broadcasters may have to balance their
interests in targeting and monetizing eyeballs versus the viewer's
interest in privacy.

## Changes in Advertising Market Structure

*Sell-Side Consolidation*

Over the past ten years the major broadcast networks have either entered
the business of cable network provision or expanded an already existing
smaller presence. In 1990, ABC and NBC each had some cable network
holdings. Disney's purchase of ABC increased the portfolio of cable
networks associated with ABC, while NBC has added modestly to its cable
holdings over the decade. Fox started two cable networks in the 1990's
and also bought and sold the Family Channel. CBS had modest purchased
cable holdings of its own at the time of its purchase by Viacom. In
addition to expanding the group of cable networks under common ownership
with CBS, Viacom also recently added a second broadcast network, UPN, to
the mix. AOL Time Warner started out as a cable network owner and then
added the WB, a broadcast network.[^314]

Consolidated media companies who own television and radio stations,
cable channels and print publications can offer advertisers a wide
variety of package deals.[^315] For example, in May 2001 Procter &
Gamble Co. and Viacom Plus, the cross‑media sales and marketing unit of
Viacom, announced the creation of a cross‑platform marketing
partnership.[^316] The agreement encompassed marketing initiatives for
Proctor & Gamble brands across twelve Viacom television properties in
the United States: CBS Television Network, MTV, MTV2, VH1,
Nickelodeon/Nick at Nite, CMT, BET, UPN, TV Land, Paramount Television,
King World and Comedy Central. Cross‑platform marketing partnerships
offer advertisers \"one‑stop shopping\" to leverage and integrate brand
messages across a media company\'s full range of advertising‑based
assets. According to industry estimates, cross‑platform agreements will
represent up to 40% of media buys in the future.[^317]

There are many business reasons for media mergers and consolidations.
Companies join forces to expand their packaging, content production and
distribution platforms (such as AOL Time Warner); to be self‑sufficient
supplier‑distributors (as with Viacom and CBS); to strategically change
or reposition themselves (as when Westinghouse bought CBS and Vivendi
bought Universal); or for a company\'s cash resources (as when Viacom
bought Blockbuster).[^318] Media owners suggest that consolidation can
lead to lower cost structures and higher revenues as a result of more
advertising and cross-promotional opportunities.[^319]

Broadcast television executives at companies which own two stations in a
market believe that their companies gain greater influence with
advertisers.[^320] For example, a station group which owns two
television stations and one or two sports networks in a city such as New
York, NY or Los Angeles, CA is in a position to have a powerful voice
with advertisers.[^321] Other benefits include cost-control, higher
profit margins and better‑quality news and entertainment for
viewers.[^322] If a company owns multiple stations in a market, the
company can have a strong position in the syndication business, and the
opportunity to grow its own syndication business or to have more
leverage when dealing with third parties.[^323]

Media executives also suggest that vertical integration in the media
business is beneficial because a vertically integrated company has an
opportunity to generate revenue not only as a program producer but also
from advertising on its local television stations, domestic cable and
international channels.[^324] Successful shows make money, and a
program's wide-spread appeal can be monetized in a vertically integrated
organization.

Some media executives suggest that consolidation among advertising
agencies contributes to smaller advertising revenues because of greater
information flow among advertisers.[^325] Before consolidation occurred
in the advertising and marketing services industry, broadcasters
discreetly sold ad space to diverse and independent agencies.[^326]
Today, broadcasters sell ad space to agency networks with knowledge of
similar sales arrangements, which tends to decrease ad prices.[^327]

*Buy-Side Consolidation*

There has been a considerable amount of consolidation, merger and
acquisition activity not only among advertising agency clients, but also
within the advertising and marketing service industry. Over the last few
years, there has been acceleration in the rate of account consolidation
that has moved business to the top consolidated advertising agency
networks and holding companies at an unprecedented rate.[^328] These
large companies, such as WPP Group, Interpublic Group of Cos. and
Omnicom Group, participate, via their subsidiaries, in many other areas
beyond traditional advertising such as public relations, promotional
sales and event marketing.[^329]

Advertising industry analysts suggest that ad agency clients will
continue to consolidate their accounts at fewer ad agency networks for
several reasons, including pricing leverage, elimination of redundant
costs and inefficiencies and brand harmony.[^330] The relationship and
planning may still be down on the agency or subsidiary level but the
purchase negotiation is typically done on a consolidated basis.
Moreover, more accounts will be consolidated as merger and acquisition
activity continues among clients. While there has always been pricing
pressure by clients in search of price concessions when soliciting bids,
the leverage a client has over an agency when that agency is its sole
supplier creates an opportunity for the client to seek special price
considerations. Clients note that it is expensive to have multiple
agency relationships due to agency costs which include back office
functions, legal support and additional staff. Frequently, it makes
better business sense to consolidate an account due to cost
redundancies. While price is still not likely the main criteria for an
account move, it is becoming more and more of an incentive to readdress
an agency relationship and shop around.

Media buyers appear to have a stronger position in the industry today
than ever before. Consolidation on the buy-side has occurred for several
reasons, including: 1) consolidation within advertising and marketing
services companies; 2) acquisitions; and 3) account movement. The major
agency networks and holding companies have realized that they can
achieve greater leverage and service their clients better by having
larger media buying organizations. Within the last few years, all of the
major holding companies have pooled most of the media buying functions
out of their agency networks and created a stand-alone entity. OMD was
formed through the media buying business at DDB and BBDO at Omnicom.
Mindshare is the media buying business of both Ogilvy Mather and J.
Walter Thompson at WPP Group, and Magna Global is the umbrella for all
of the media business within Interpublic.

Agency networks and holding companies are aggressively combining their
own internal media businesses and acquiring others to attain scale and
to secure more business from clients. Scalability is particularly
important when pursuing media business. Larger media advertising buyers
may benefit from stronger relationships with the media and better media
rates. Given the escalating costs of mass media in the late 1990s, even
the slightest ad price discount is meaningful to a large client.

Securing a price discount, however, can be problematic for several
reasons. As the agency networks acquire more subsidiaries, they face the
challenge of realizing synergy within the new larger network.[^331] To
be successful, they must get their individual subsidiaries cooperating
with each other to offer clients a fully integrated suite of advertising
and marketing services, while making sure that the costs of servicing
the client are fairly apportioned.[^332] Another reason is that the
potential exists for client conflicts.[^333] While many clients will
insist that a competitor is not represented by the same agency, some
global clients may try to claim category exclusivity for the entire ad
agency.[^334] Clients may also want to keep business at several agencies
for creative diversity.[^335] Because of the need for creative
flexibility and trend-driven ad campaigns, clients will often spread
business to several places or review their agency contracts on a regular
basis. Furthermore, using different agencies may enable each brand
manager to pursue his or her own style and create different strategies
for different product lines within a company.[^336]

It would stand to reason that the more dollars a media buying company
has within its network, the more leverage that company will have in
negotiating pricing and placement of advertising dollars for their
clients. A decade ago, there were three major television networks and 25
leading media buying entities. The balance of power was clearly with the
sellers of advertising space. At issue is whether that pendulum has
switched today, given that there are only a handful of top media buyers
and a multitude of sellers, as cable and other national networks
evolve.[^337] One reason in favor of agency consolidation was that
agency networks and holding companies, with their massive combined
spending, were supposed to bring clients more clout in the upfront
television buying market, which typically lasts no longer than a
week.[^338] However, it has been suggested by some sellers and buyers at
midsize media agencies that the larger agency networks tend to be the
slowest and bulkiest players in the market.[^339] Because of their size
in terms of dollars and number of clients, they have to balance
competing needs, which hampers the negotiation process. While size does
earn agency networks a certain amount of clout at the bargaining table,
they might not be able to use their size to negotiate from a position of
strength. By not moving quickly, they are not able to react because they
have so many client accounts to service. As a result, they may cut hasty
last-minute deals, mostly on terms favorable to media sellers, or risk
being left out of the market.[^340] Many believe that these shops are so
large they cannot force networks to lower prices because they cannot
afford to pull out of deals. They have so much money and so many clients
at stake they are practically forced to compromise. As one top industry
executive has noted, "an agency's ability to make a deal is commensurate
with its ability to walk away."[^341]

## Current Trends and New Advertising Formats

*Product Placement and Sponsor-Supplied Programming*

If, as expected, integrated PVRs become popular, broadcasters must find
additional revenue streams. As discussed in Chapter VIII of this paper,
some in the broadcast industry are looking to DTV and ITV to provide new
revenue opportunities. Regardless of the type of technological
advancement, broadcasters must ensure that they provide ad buyers the
greatest number of advertising and promotional options. Proactive
advertising companies, for example, are already looking at future
opportunities within sponsorship and product placement. Increasingly,
marketers are shouldering production expenses in return for benefits or
rewards that may include product placement, sponsorships, and in some
cases, sweepstakes. On behalf of their advertising clients, media
companies are even staging and paying for parties and corporate events,
developing elaborate promotions and mailings and agreeing to do unusual
product placements.[^342]

Movie viewers may be used to seeing commercial goods placed in films,
but product placement will appear on all the broadcast networks, as well
as on some cable shows, during the 2002-2003 television season.[^343]
One reason television and cable networks are chasing such partnerships
is to help offset rising production costs in a weak advertising
environment. These networks are eager to capitalize on the fast-growing
demand from marketers to push beyond the limits of traditional
commercials.

In 2002, Johnson & Johnson and AOL Time Warner Inc.'s TNT cable network
entered into an arrangement where Johnson & Johnson agreed to fund two
movies for TNT.[^344] TNT agreed to support the movie with a
multi-million dollar promotional campaign, spreading it across various
sister properties owned by AOL Time Warner. Johnson & Johnson agreed to
pay for the production of the film in exchange for extensive sponsorship
rights. It also received about half of each movie's television ad
inventory to promote its own products. Such partnerships illustrate the
recent trend toward high-profile consumer brand companies entering into
financial arrangements which result in the anticipated outcome -- credit
from consumers for bringing audiences quality entertainment.[^345]

Today, even on the cable networks, sponsor-supplied programming may not
be as prominent as it was from 1942 to 1960, the so-called "Golden Age"
of the broadcast networks.[^346] At that time, marketers such as General
Electric, Texaco, Kraft Foods, Proctor and Gamble, Colgate Palmolive and
Philip Morris together with ad agencies such as BBDO, Foote, Cone &
Belding, J. Walter Thompson Co. and Young & Rubicam were involved in
producing shows for ABC, CBS and NBC. Decades later, that joint venture
concept moved into the barter-syndication realm via advertisers like
Colgate. On network cable, Bristol Myers -- now Bristol Myers Squib --
supplied the "Alive & Well" series to USA Network in the 1970s. Today,
advertisers such as Proctor & Gamble still supply some programming for
broadcasting. Proctor & Gamble's daytime programs "As the World Turns"
and "Guiding Light" continue to run. During primetime, Proctor & Gamble
has a partnership role with Paramount Television in the airing of
"Dawson's Creek" and the syndicated "Star Trek: Deep Space Nine."

Programmers find that advertisers are interested in financing shows
focused on outdoorsy and family-oriented genres, plus those emphasizing
male and female interests. The male-oriented, outdoor-themed shows in
particular afford product placement opportunities.[^347] For instance,
at the cable network ESPN, most of its outdoor and fishing programs are
pre-sold to advertisers -- meaning they are sponsor-supplied or
pre-sponsored. Nearly all secure one-year commitments to see how the
shows will perform in the ratings. When the shows arrive with a pre-sold
title sponsor, ESPN gives the sponsor exclusivity in the client
category. However, the presenting sponsors must purchase the majority of
the commercial time within the program. Accounts in bartered programs
must buy additional inventory elsewhere on the schedule.

Individual consumer product companies are not the only entities
financing network or cable channel programming. Firms representing an
entire product category are also sponsoring and financing
category-themed programming in exchange for category exclusivity.[^348]
In exchange for advertisers accepting production expenses, they receive
commercial time, sponsorship rights and product placements during the
actual show. Advertisers believe these efforts will help break through
the "clutter" of network commercials. However, partnerships between
advertisers and content producers can lead to constraints in the ability
to sell time to advertisers not in the partnership -- especially those
whose products are in a similar category (*e.g.*, a program sponsored by
one brewing company may not be able or willing to sell ads to another
brewing company).[^349]

Broadcaster's business models face mounting challenges as viewers
continue to channel surf each time a scene ends, or opt to skip a
commercial with the aid of a PVR.[^350] Media and advertising companies
are looking at future opportunities within sponsorship and product
placement. However, there may be legal and regulatory issues that could
potentially restrict or limit product placement options. Many network
executives indicate they are open to sponsor-supplied programs and
detailed product placement schemes as long as the network retains
editorial control. Yet, why would an advertiser invest millions of
dollars without expecting to have at least some control over how it is
used?

Recurring questions include:

1.  How can a network please two large account marketers, competing in
    the same category, when one marketer underwrites a successful show
    and has its product displayed within the show itself and also in the
    commercials?

2.  How will viewers react to shows that are developed, produced and
    sponsored by advertisers whose (a) products are featured prominently
    in the show and (b) whose commercials are aired during the breaks?

3.  How will the creative talent such as writers, directors, actors and
    producers react to editorial control being given to the advertisers?

4.  Who will take responsibility for the content and quality of the
    show?

Ultimately, time will tell whether product placement and sponsorship
significantly add to the broadcaster's bottom line.

*Interactive Advertisements*

For broadcasters and other providers of video programming with business
models based on advertising, digital technology may provide new
interactive advertising opportunities for media buyers and incremental
revenue for ad sellers. The concept of ordering a product or service via
electronic communication is not new; e-commerce, where lets consumers
purchase goods and services via the Internet, has been a rapidly growing
industry[^351] since the mid-1990s.[^352] In fact, a recent study
predicts that global business-to-consumer e‑commerce transaction
revenues will grow from \$88 billion in 2002 to \$361 billion in
2007.[^353] The PC is expected to remain as the dominant platform for
e‑commerce transactions over the next five years.[^354] Transaction
revenues from fixed Internet or PC‑based e‑commerce will grow from
almost \$80 billion in 2002 to \$255 billion in 2007.[^355] Analysts
also note that television based e‑commerce (t-commerce) has significant
potential as an alternative for PC‑based e‑commerce. They forecast that
it could account for almost 20% of total e‑commerce revenues by 2007,
while contributing to slowing growth in PC‑based e‑commerce.[^356]

For some time now, viewers have also had the opportunity to tune into
infomercials or shopping channels. The success of home shopping channels
has been tied to appealing product mixes, user-friendly call-in ordering
systems and solid customer service. If this approach is utilized with
t-commerce, the potential payoff from selling a product or service
directly to the TV viewer is intriguing not only to broadcasters, but
also to ad agencies and large marketers.

Interactive service opportunities such as PPV and VOD, opened up by
conditional access technologies, have the potential for giving
broadcasters many options for attracting more revenue. By offering a
number of unique formats for interactive ads, broadcasters benefit by
assisting ad agencies in targeting specific groups of customers based on
location or other criteria that are recorded in a conditional access
system. Depending upon the model and the underlying strategy,
interactive advertisements can offer broadcasters and advertisers: (1)
the ability to directly target specialized market cross sections; (2)
the chance to gather valuable consumer data based on surveys and user
requests; and (3) the opportunity to offer interactive contests and
quizzes as viewing incentives. Moreover, the ability to target
individuals with a personalized message is particularly appealing for
advertisers.

The prospect of interactive advertising is a fundamental shift from mass
market advertising to a more focused and response-based process, and a
reliable feedback mechanism to measure ad effectiveness.[^357]
Interactive advertising, along with t-commerce, represent a fundamental
change in the way companies will advertise and market and the way
consumers will see advertising in the future. Today, many major
advertisers and ad agencies view interactive ads as an experimental
platform and are struggling to balance new interactive concepts with
traditional brand-building functions. Moreover, the added element of
transaction capability adds more challenges such as (1) providing a good
product mix with an easy-to-use ordering system; (2) managing customer
service; and (3) offering compelling graphical user interfaces.

## Interactive Advertising Targeting Children Raises Concerns

Clearly, regulatory restrictions and consumer acceptance pose a
tremendous challenge, when one considers the potential
transaction-oriented focus of t-commerce and interactive advertising.
Parents, community organizations, industry groups, politicians and
regulators may have concerns about the captivating nature of interactive
ads. There may be an interest in limiting or controlling access by
children and teenagers, particularly if t-commerce functionality is
offered. Both Congress and the Commission have noted that (1) television
plays a significant role in the lives of children; (2) it has great
potential to contribute to children's development, and (3) Congress has
a substantial interest in promoting children's welfare.[^358]

The Commission has placed obligations on broadcasters to protect the
interests of children, given broadcaster's responsibility as trustees of
the public airwaves. In 1974, the Commission instituted a wide ranging
inquiry into children's programming and advertising practices, which led
to publication of the *Children's Television Report and Policy
Statement* ("*1974 Policy Statement"*).[^359] The Commission concluded
that children are more "trusting and vulnerable to commercial 'pitches'
than adults" and that children "cannot distinguish conceptually between
programming and advertising."[^360]

In 1990, Congress enacted the Children's Television Act of 1990
("CTA").[^361] The objective of Congress in enacting the CTA was to
increase the amount of educational and informational programming on
television.[^362] The CTA imposed two principal requirements. First,
commercial television broadcast licensees and cable operators had to
limit the amount of commercial matter that could be aired during
children's programs to not more than 10.5 minutes per hour on weekends
and not more than 12 minutes per hour on weekdays. Second, the
Commission had to consider whether all television broadcast licensees
had served "the educational and informational needs of children through
the licensee's overall programming, including programming specifically
designed to serve such needs."[^363]

In October 2000, the Commission issued an *NPRM* seeking comment on how
existing children's television obligations, developed with analog
technology in mind, should be adapted to apply to DTV.[^364] The *NPRM*
noted that DTV offers a range of possible applications, including
potential revenue generating video and data services, such as
subscription television, interactive services, time-shifted video
programming and new video/information services.[^365]

At issue in the *NPRM* proceeding is how the Commission's children's
programming advertising limits and policies will apply to DTV
broadcasters. By converging Internet capabilities with broadcasting, DTV
permits a new level of interactivity between broadcasters, advertisers
and viewers. Clearly this capability offers great potential for
enhancing the educational value of children's programs by, for example,
permitting children to click on icons that appear on the screen during
the program which take them to websites with more in-depth information
about the topics covered in the program. However, the interactive
capabilities of DTV also allow for the direct sale of goods and services
over the television. This capability presents marketers with new
opportunities to reach children, which raises concerns in light of the
difficulty young children have in distinguishing commercials from
programming and the particular vulnerability of children to advertising.

The Commission is considering children's advertising and programming
policy issues regarding:

> \(1\) applicability to free over-the-air channels, or to all digital
> channels both free and pay,
>
> \(2\) prohibition of all direct links to commercial websites during
> children's programming,
>
> \(3\) prohibition of the use of DTV interactivity capability in
> children's programs to sell products, and
>
> \(4\) changing the definition of "commercial matter" to include some
> or all types of program interruptions that do not currently contribute
> toward the commercial limits.[^366]

## Privacy and Interactive Advertising

In addition to child protection issues, privacy issues concerning the
aggregation, use and confidentiality of consumers viewing and purchasing
information also pose challenges to the widespread acceptance of
interactive ads. If these concerns become obstacles, interactive
advertising formats will have to allow for parental control over the
content viewed by different family members. They will also have to
provide a guaranteed level of privacy and security, especially if these
formats allow for consumers to purchase products or services.

Opinions vary as to the likelihood for success of interactive
advertising and its underlying technological platform. Despite the
economic, technical, regulatory and programming challenges inherent in
deploying an ITV platform that can support interactive advertising,
industry executives and analysts still believe that ITV has great
long-term potential.[^367] However, as audiences become more fragmented,
some in the industry believe that ITV producers will have to create
content for each audience base, making the sheer volume of content
needed difficult in terms of cost and time to produce.[^368] With
respect to interactive advertising, others suggest that there will
surely be faster, less expensive ways to produce advertisements and
programming catered to ITV in the future. [^369] To be successful,
interactive advertising must be designed to work in a hybrid, integrated
environment that incorporates the best of advertising with the best of
broadcast television.[^370]

## Conclusion

There have been changes in the advertising market both in terms of
market structure and in terms of new advertising formats. The
advertising market has experienced consolidation, both on the buy and
sell-sides in recent years. Media owners suggest that consolidation can
lead to lower cost structures and higher revenues as a result of more
advertising and cross-promotional opportunities. Broadcast television
executives at companies which own two stations in a market believe that
their companies gain greater influence with advertisers. Buyers of
advertising have also faced consolidation activity in their industry.
These consolidations have been the result of several factors, including
consolidation within advertising and marketing services companies,
acquisitions and account movement. Product placement and
sponsor-supplied programming are not new concepts, but they may provide
additional revenue for broadcasters. New advertising formats promise to
present new models and opportunities for advertisers. However, given the
valuable consumer feedback and data retrieval capabilities of
interactive formats, any potential added value also raises issues
relating to the protection of children and consumer privacy. The
Commission is reviewing issues related to potential effects that DTV and
interactivity may have on children's advertising and programming. Thus,
advertisers and broadcasters may have to balance their interests in
targeting and monetizing eyeballs versus the viewer's interest.

# X. The Market for Broadcast and Non-Broadcast Video Programming

## Introduction 

This section provides a brief overview of the financial interest and
syndication rules ("Fin-Syn"), which were repealed in the mid 1990s, and
discusses the evolution of the programming market after the repeal of
those rules. The section then discusses prime time programming trends
and the role of independent production in the programming market. The
section also briefly discusses some recent trends, including repurposing
and summer programming. The section also reviews the status of
programming in the cable arena---with a particular focus on sports and
news programming. It is clear that since Working Paper 26, television
programming has undergone monumental changes as producers have found
increasing outlets to display programming, most notably over the cable
platform.

## Repeal of Syndication and Financial Interest Rules

Like the program distribution market, the program production market has
also undergone significant changes since the release of Working Paper
26. Broadcast network program production in particular has experienced a
significant shift over the last decade. From 1970 through the early
1990's, the broadcast networks were subject to Fin-Syn.[^371] These
rules prohibited any network from acquiring financial interest in
television programs produced wholly, or in part, by a person other than
the television network; networks could only purchase rights from the
producer to air such programming, or alternatively, they could produce
programming entirely in-house. Later, pursuant to Consent Decree entered
into between the Department of Justice and each of the respective
networks (NBC in 1978, and ABC & CBS in 1980), the amount of in-house
program production activity was limited. Furthermore, under the Fin-Syn
rule, the networks could not engage in the business of syndication for
programming distributed over the network, but produced outside the
network. For programs wholly produced by the networks, the Fin-Syn rule
required that, if the program was to be syndicated, the networks were
required to sell their syndication rights to others.

But since the release of Working Paper 26, all of these regulations have
been eliminated. In January 1993, the Commission repealed significant
portions of Fin-Syn.[^372] Then in November 1993, in response to a joint
motion filed by the three networks, the U.S. District Court for the
Central District of California entered an order lifting the prohibitions
imposed upon the three networks pursuant to the 1978 and 1980 Consent
Decrees.[^373] In September 1995, the Commission eliminated the
remaining Fin-Syn rules.[^374]

Since these regulations were eliminated, the market for broadcast
program production has evolved significantly. Many challenges and trends
have emerged in the programming marketplace. Some of these were evident
during 2001-2002 and continue in the 2002-2003 broadcast network season.
They are briefly discussed below.

## The Programming Marketplace

In the days before multimedia competition, the primary way networks
increased advertising revenues was to increase audience shares. The
networks could increase the total audience by (1) adding television
households or (2) by increasing hours of viewing of existing viewers.
The networks could also increase their audience shares by luring viewers
away from other networks. In these cases, spending more money on
development and production as a way to generate more popular programming
was a rational strategy, as long as doing so resulted in equal or
greater increases in advertising revenues.

Since the release of Working Paper 26, however, there have been several
notable changes in the network program production market. The Fin-Syn
rules were repealed, and production costs have skyrocketed. Because of
(1) changes in demographics and work behavior, (2) audience
fragmentation, and (3) the enormous clutter of video programming and
sources, broadcast network program viewing per household is declining.

To adapt to these changes, the networks have developed programming
strategies with an eye towards developing brand awareness to
differentiate themselves from each other. Broadcast networks and their
parent companies are also concentrating on controlling more of the
programming they distribute.[^375] When a network controls its product,
it may realize several advantages. It can become involved early on in
the show development process to attract the desired demographic and
build the brand. It may also have the ability to negotiate better terms
with the sister studio than with a third-party studio, with the
corporate parent as the ultimate beneficiary. This could mean more
leverage in negotiations with other production studios. Also, there may
be the opportunity for the network to repurpose content on sister
networks (cable and broadcast) and leverage it on-line at a lower
incremental cost to the network.

The broadcast network business remains highly volatile due to the fact
that every show that a network runs is not an overnight success with
viewers. Before the repeal of the Fin-Syn rules, the major studios
provided lots of programming. Even then, there were several joint
ventures with independent producers seeking financing from a studio.
With the repeal of the Fin-Syn rules, networks can own their own
programming and pool together some the costs and risks associated with
developing and producing shows. These factors contributed to various
merger and network startup activity in the television industry.

## From Pitch to Fall Line-Up

The process whereby an idea for a network series makes it into the fall
line-up can be costly, tedious and stressful for producers, writers,
directors, talent and network programmers and schedulers. The process
starts with network executives reviewing a series of pitches, which come
from sources such as aspiring affiliated or non-affiliated writers and
producers, affiliated or non-affiliated studios that have writers and
producers under contract, talent agencies and even the actors
themselves. For example, in the drama category alone, a network
programming department can hear between 250-300 pitches for an upcoming
season. The network may then purchase roughly 50 scripts, paying
anywhere from tens of thousands of dollars to an outright guarantee
depending on the track record and prestige of the writer or creator. The
network may then select and produce ten or so pilots. Networks conduct
extensive scheduling meetings and test the pilots in front of network
executives and randomly-selected or targeted audiences.[^376] As a
result, of the ten that are produced, maybe six or seven make it to the
fall schedule. Out of this six or seven, perhaps only two may be
selected for a second year of production.[^377]

*Programming Costs*

The broadcast network business is very risky because good content tends
to be expensive and the advertising base has not been large enough to
support all the networks with an economic return for all. [^378] Thus,
the economics surrounding series network television production are
extremely imperfect. The costs associated with producing dramatic and
sitcom programming have changed since the repeal of the Fin-Syn rules.
The estimated cost of producing one hour long drama episode is up from
\$1.1 -- \$1.5 million (during Fin-Syn) to \$1.4 -- \$1.6 million (after
Fin-Syn).[^379] Episodes of programs such as NBC's "ER" can cost ten
times that amount to produce.[^380] For a half-hour sitcom episode, the
estimated production cost is up from \$400,000 -- \$900,000 (during
Fin-Syn) to \$550,000 -- \$1.2 million (after Fin-Syn). [^381] Programs
such as NBC's "Friends" can cost much more than that per episode to
produce each week. Also, "movies of the week" (MOWs) also pose
production challenges because they can cost upwards of \$3.5 million to
produce. Rising costs and poor ratings have led to most of the networks
discontinuing the production of MOWs.[^382]

The high cost of programming can stem from the high cost of talent,
which does not help the economics of the network or the studio.[^383]
Yet, from the studio's perspective, if a show in which it has an
ownership interest is successful for 100 episodes, that show can be
syndicated or licensed in a foreign market.[^384] Recent trends
indicate, however, that many syndication and foreign market
opportunities are diminishing rapidly.

## Prime Time Programming Trends

The amount of prime time hours produced by the networks has increased
since the early 1990s. During the 1993-1994 broadcast season, the Big
Four networks produced 18%--34% of their primetime hours.[^385] However,
for the 2002-2003 season, the Big Four networks will produce 49%--67% of
their primetime hours.[^386]

A large proportion of the shows aired by the networks are produced by
sister studios. For example, of the 94 weekly hours of prime-time
programming planned for the 2002-2003 broadcast season, only 21.5 hours
of that programming (approximately 23%) is produced by a studio not
affiliated with any one of the major broadcast networks.[^387] On
average, 57% of the programming aired by the major networks is
affiliated with that network. Fox aired the most affiliated programming
during primetime, airing nearly 58% of its primetime hours with
programming from Fox studios.

For the 2002-2003 season, a large portion of shows produced are aired on
sister networks.[^388] With the exception of AOL Time Warner studio,
networks carry a high proportion of sister studio shows, leaving few
studio shows to air on non-affiliated networks.[^389] NBC studios air
100% of their shows on the NBC network, while Disney studios air 88% of
their shows on the ABC network. Compared to the 2001-2002 season, each
studio's percentage is roughly the same.

A large percentage of pilots ordered by sister networks are picked
up.[^390] For the 2002-2003 season, AOL Time Warner studios ordered and
picked up the highest number of total pilots with a total of 11. It also
had the highest percentage of its pilots picked up with 40%, while NBC
studios had the lowest with 20%.

In addition, almost every studio had a higher percentage of pilots
picked up by an affiliated network versus pilots originally ordered by
that network for the 2002-2003. For example, 96% of Disney studios'
pilots were ordered by ABC, and 100% of these pilots were picked up by
ABC. Although the Fox broadcast network originally ordered only 59% of
Fox studios total pilot production, it picked up 88% of Fox studios'
final output.[^391] There may be several reasons for this, such as (1)
the network is picking up pilots it did not originally order to help out
sister studios, or (2) they may have underestimated their need for new
pilots, and their sister studios helped them out. In either case, the
networks and their sister studios appear to be leveraging vertical
integration. The one exception was AOL Time Warner studio, where 59% of
AOL Time Warner studios' pilots were ordered by The WB, but 55% of those
ordered pilots were picked up by The WB.[^392]

## Independent Production

*Case Study #1: Tollin/Robbins*

The number of independent production companies has declined due to the
high costs associated with financing the development and sustained
production of network television programming. Yet, some independent and
non-affiliated production companies continue to operate. In the
independent production arena, smaller companies have found that they
need to secure financing from a strategic partner or larger entity and
diversify their business in order to compete. For example,
Tollin/Robbins Productions is involved in all forms of entertainment --
reality series, comedy and drama series, motion pictures and talent
management.[^393] It has nine series in production for the 2002-2003
season, including four destined for The WB's primetime schedule (See
Figure 3).

[]{#__RefHeading___Toc21199285 .anchor}Figure 3: Tollin/Robbins Roster
(2002-2003 Season)

  ---------------------- ------------- ------------ -----------------------
  **Series**             **Network**   **Season**   **Co-Production
                                                    Partner**

  All That               Nickelodeon   9            Nickelodeon Productions

  Arli\$\$               HBO           7            \-

  Birds of Prey          WB            1            Warner Bros. Television

  The Back Sash          WB            Midseason    Warner Bros. Television

  Cousin Skeeter         Nickelodeon   6            Nickelodeon Productions

  The Nick Cannon Show   Nickelodeon   2            \-

  Slamball               TNN           1            Telepictures
                                                    Productions

  Smallville             WB            2            Warner Bros. Television

  What I Like About You  WB            1            Warner Bros. Television

                                                    

  Source: Electronic                                
  Media (2002)                                      
  ---------------------- ------------- ------------ -----------------------

To better handle the exposure to financial risk on the deficit financing
of television series programming, Tollin/Robbins was purchased by Clear
Channel Communications. With Clear Channel as a parent company, it now
has access to deep pockets and the promotional synergies of numerous
radio stations, billboards and television stations.[^394]

*Production Companies Face Challenges*

Ironically, success can prove to be problematic for production
companies. Even if a production company is able to get one or more
series picked up by a network, it has to keep them on the air. Trends
suggest that in order to remain in business, a production company must
not only develop network television programming that gets picked up by a
network, but it must also minimize its exposure to downside risks by
securing financing from a third party or major studio.[^395] Otherwise,
if a production company cannot keep its show on the air, the potential
upside from possible syndication or foreign licensing revenues is lost.
It is almost certain that it may never recover from the production
deficits. The burdens associated with keeping several deficit-financed
shows on the air, maintaining strong network ties and relinquishing
significant ownership stakes has led high-profile independent production
entities such as Sony's Columbia Tristar Television Studio and the
Artists Television Group to either close or exit the new network
television series production business.[^396] In Columbia TriStar\'s
case, the studio spent more than \$75 million on long‑term
talent‑holding deals over a two year period, which left it typically
carrying significant deficits while its network co‑production partners
were largely off the hook.[^397]

*Case Study #2: Television Production Deals*

While the trend is for more programming to be supplied by a sister
studio, not all of a network's programs are supplied by the sister
studio. Growing in their place are situations where producers enter into
production deals directly with the broadcast networks.[^398]

Some networks have opted for "work-made-for-hire" deals with production
companies that are staffed by members of the screen actor and writer's
guilds.[^399] These independent contractor-type production companies
usually have an infrastructure in place and maintain autonomy.[^400]
They can also create a streamlined process in dealing with writers,
producers, directors and actors.

Broadcast networks desire to air the best programs that work and bring
in a large audience share while containing front-end costs.[^401]
Production deal negotiations take into account the track record and
leverage of the producer along with the network's desire to broadcast a
winning show while keeping costs down. Thus, networks are eager to work
with successful writing and non-writing producers, directors and others
who have solid track records. Most of the networks, however, try to
offer high-profile producers lower front-end salaries in exchange for
greater financial rewards on the back-end cable network and domestic or
international syndication sales of prime-time television series.[^402]
Because of (1) the increase in the number of distribution outlets
(*e.g.*, cable channels), (2) the decrease in available syndication
fees, and (3) the collapse of the foreign market, there are no
guarantees that an agreement to accept more of an interest in the
backend will be lucrative.

Some non-affiliated production companies, such as Tollin/Robbins
Productions, HBO Independent Productions (HIP) and Regency Television,
are guaranteed a level of discretionary financing to do most of the
legwork in corralling big-name talent for television series.[^403] In
the case of Tollin/Robbins, which has a production deal with Warner
Bros. Television, this has paved the way for Tollin/Robbins' talent
management division to deliver Nickelodeon teen star Amanda Bynes for
The WB\'s fall 2002 comedy "What I Like About You."[^404]

## Repurposing and Summer Programming

Broadcast networks have engaged in the practice offering their cable
network counterparts shared exhibition on certain prime‑time dramas and
sitcoms in order to aggregate viewers to make up for declining
ratings.[^405] The ultimate goal of this practice, called "repurposing,"
is to provide a solution to escalating programming costs.[^406]

Given (1) the recent rise in the popularity of some cable programming,
and (2) the desire to schedule more original scripted programming in the
summer, some made-for-cable scripted programming is now being licensed
to broadcast networks for a second shared broadcast window. In 2002, for
example, "Monk" (produced by Disney's Touchstone) which aires on the USA
Network, is now being licensed to ABC for a second shared
broadcast.[^407]

If this practice continues, the trend towards the sharing of the
licensing costs could serve as another business model for the broadcast
networks to program more of their summer schedules with original
scripted programming. However, it remains to be seen whether scripted
series will have the same upside in the ratings as non-scripted,
reality-based programming.

ABC Entertainment and the ABC Television Entertainment Group also broke
ground with traditional cable network players in striking a two-year
development deal with HIP.[^408] Under the terms of the deal, HIP
develops and produces series programming funded by ABC and for broadcast
on the network.[^409]

The summertime ratings success of cable programming has forced the
networks to develop new strategies for attracting summer audiences.
Before the rise in cable's summer audience share, the broadcast networks
were primarily concerned with getting as much mileage as possible out of
each original series, given the high production cost of each
program.[^410] That meant reruns, and with its lower ad rates, summer
was the natural destination.[^411] However, in response to cable's
summertime success, broadcast networks have turned to developing and
producing reality shows, some scripted series and specials-turned-series
for broadcast during the summer months. This creates an incremental cost
to the network because, but for the success of cable, the networks would
air reruns and not finance programming to be aired during the summer.
Even with its lower ad rates, the summer season has become an important
battleground. If nothing else, its symbolic importance to cable looms
large. If the cable networks can beat the broadcast networks in summer,
similar success in fall and spring may not be far behind.[^412] This
might lead to a situation in the not too distant future where the
broadcast networks and the cable networks are competing 52 weeks a year
with some category of original programming.[^413]

## Sports Programming

The current trend in sports programming is that the number of games
covered is increasing, but costly to produce. Where very few televised
sports result in a profit for a network, they remain effective platforms
for promoting unrelated television programs and broadcast networks are
paying billions of dollars for the right to broadcast these games. The
expensive broadcast rights are resulting, however, in the migration of
more sports programming to cable television. For example, the National
Basketball Association ("NBA") entered into a six-year, \$4.6 billion
deal with Disney and AOL Time Warner.[^414] This deal shifts 90% of NBA
games to basic cable and relies as heavily on subscriber fees and other
media platforms as it does on advertising for economic support. This
trend may continue, since broadcast and even cable networks no longer
singularly can command the hefty advertising premiums needed to offset
record high multiyear license fees, particularly in the wake of
declining viewer ratings.

When pursuing sport's rights, it appears that there may be a benefit of
owning multiple networks to share programming costs and aggregating
audience to garner advertising dollars. Perhaps the only way to generate
revenue is to amortize the license costs over a broader range of media
outlets, including cable, broadcast TV and radio, print and the
Internet.

ABC, CBS, NBC and Fox each spend more than \$1 billion annually on
sports rights, compared with an estimated \$750 million on series and
entertainment programs and \$400 million on news. Additionally, the
networks have to pay huge costs to produce sports programming, while
little or none of this expense is absorbed by the network affiliates.
This model may change, and affiliates may be forced to bear some of the
cost to provide sports programming to viewers. However, since the
networks have lost more than an estimated \$1 billion on sports
telecasts in 2001, they may opt for more "time buy" sales of
advertiser-sponsored soccer, motorcycling and other sports.[^415]

## Cable Programming 

The substantial increases in MVPD channel capacity over the last decade,
due to cable system upgrades, the advent of DBS, and the application of
digital compression technology, have supported a concomitant increase in
the number of cable networks available, both national and regional. This
section examines trends in cable programming.

Cable networks fall into two broad categories and several subcategories.
Some cable channels provide general interest fare and "look like"
broadcast networks, while the majority target niche audiences (although
some "niches" are fairly large). The difference between "general
interest" and "niche" is a bit blurry at the boundary. As the number of
broadcast networks has increased, they have found it more and more
profitable to target certain demographic groups with their programming.
In the cable context, general interest channels include such networks as
TNT, USA, and Lifetime. Lifetime, of course, targets the female
audience. Some might call that a "niche," but it is broader than the
"young women" demographic at which many programs on the WB broadcast
network are aimed. General interest networks tend attract the largest
audiences among cable networks and for that reason are most able to
support original scripted programming.

There are several popular "niches" for cable programming. Among them are
sports, news, children's programming, and music. Along with the niche
concept, to understand cable programming it is also useful to consider
the concept of branding. Cable programmers work not only to forge and
promote an identity for a single channel, but, once a successful brand
has been created, leverage it into new companion networks. Coordinated
efforts go beyond the cable network sphere. Increasingly, broadcast and
cable networks, often under common ownership, coordinate some of their
programming activities. The remainder of this subsection examines cable
program network development in light of these categories and concepts.

*General Interest Programming*

There are, of course, some cable networks that provide general interest
programming not unlike that of the broadcast networks. For example, USA
Network, Lifetime, and TNT fall into this category. And pay networks
such as HBO also provide some series programming and made for cable
movies in addition to the theatrical films that remain a large share of
their total schedules. In order to examine the question of network
ownership and control of programming from a cable perspective, then, the
most fruitful approach appears to be to examine some of these networks.
The following brief sketch is based on discussions with staff at the
four networks mentioned above.

General interest cable networks still rely on off-network or other
previously exhibited programming for a substantial portion of their
primetime schedules, and thus much less original programming than
broadcast television. Lifetime's all-day schedule includes more than 50
percent original programming, with a disproportionate share in prime
time. Of the original programming close to half is owned by Lifetime.
Data on USA Network's primetime schedule indicate noticeably lower
levels of original and network-owned programming. TNT's original
programming is a small share of the total schedule, but it is
concentrated in prime time. On the premium network side, HBO's all day
schedule includes 23 percent of scheduled hours devoted to original
programming.

*Niche Programming*

Many cable programming networks target niche audiences, such as news,
sports, and music. In general, the news channels produce all of their
own programming, although they may acquire some footage from outside
suppliers. Even though the sports networks produce their own coverage of
sporting events, these networks generally spend a significant amount to
acquire the rights to air sporting events. The music channels mostly
began with music videos as their staple programming. The channels
generally do not own the videos, but they are usually acquired without
payment, since the music producers value the publicity of network
exposure. The music channels continue to exhibit videos but have also
moved into longer form programming as well (some of which is original
programming), but much of that is not scripted series. Examples include
reality programming such as "The Osbornes" on MTV and
documentaries/biographies such as "Behind the Music" on VH1.

[Sports]{.underline}

The provision of sports programming warrants special attention because
of its widespread appeal and strategic significance for video program
distributors. Regional sports programming in particular has been, and
continues to be, an important segment of programming for all video
program providers.[^416] According to a 2000 survey, between 40 and 58
percent of cable subscribers would be less likely to subscribe to cable
service if it lacked local sports.[^417] Cable overbuilders have
frequently noted that access to sports programming is so essential to
the success of a cable system that many operators will pay exorbitant
prices and agree to entertain other less attractive business
arrangements just to obtain it.[^418]

It is clear that the advent of cable and DBS has vastly increased the
total amount of sports programming available and has brought coverage of
plenty of sports programming that was not and would not be transmitted
via broadcast television. Some have argued that this has been
accompanied by \"migration\" of some sports programming from broadcast
to cable television and other pay media. A 1994 Commission inquiry
concluded that there was little evidence of migration of sports
programming from broadcast to cable.[^419] This report does not purport
to update that inquiry. It is worth noting, however, the distinction
between the following two situations. Some sports programming that was
on broadcast television and has moved to cable would, in fact, still be
on broadcast television if cable did not carry it. Other sports
programming that has moved from broadcast to cable television may have
done so due to declining broadcast audience levels and would not, in
fact, have remained available on broadcast even if it were not carried
on cable. Conceptually, one might not want to count as \"migration\"
programming that is dropped from broadcast television due to declining
audience ratings. It is possible that some local coverage of baseball
games is in this category.

Increasingly, cable operators have acquired interests in sports
programming networks and sports franchises, and more and more key
programming is controlled by a few of the largest cable MSOs.[^420] The
most widely distributed sports programming network, ESPN, is owned by
Disney. EPSN reaches 81 million television households through a variety
of delivery technologies. Although ESPN dominates national sports
programming, regional sports distribution is dominated by Fox Sports
Net, which owned 69 percent (20 of 29) of all regional sports networks
as of June 2001. Fox Sports Net, jointly owned by News Corp. and
Cablevision, reaches 77 million television households.[^421] Both News
Corp. and Disney also have interests in sports teams and sports venues
making them vertically integrated at all levels of the sports industry.
Fox/Liberty also has an ownership interest in Cablevision\'s other
sports businesses and networks, including the Madison Square Garden
Network, the Madison Square Garden arena complex, and the New York
Knicks National Basketball Association (\"NBA\") and Rangers National
Hockey League (\"NHL\") teams.[^422] Comcast Corporation (\"Comcast\")
holds a 66% interest in a partnership named Comcast-Spectacor, which
owns the Philadelphia Flyers NHL team, the Philadelphia 76ers NBA team,
and the CoreStates Spectrum and CoreStates Center sports arenas.[^423]
Comcast Spectacor has also entered into a joint venture agreement with
the Philadelphia Phillies Major League Baseball (\"MLB\") team to create
SportsNet.[^424]

[News]{.underline}

At the time of the release of Working Paper 26, local news programming
was one significant programming advantage held by broadcasters over
cable. Cable systems have carried local news services since at least
1986, when Cablevision first launched its local news network "News 12
Long Island," and provision of local news is increasing. Most regional
news networks cover a single city or other limited geographic market, or
subsections of that market. Networks provide such localized information
as local and regional news, public affairs programming, local and
regional government assembly sessions, school closings, and coverage of
high school sports.[^425] News networks are increasingly moving into
smaller markets and market subsets. Cablevision Systems Corp., for
example, has three "hyperlocal\" news channels in the New York
designated market area (\"DMA\").[^426] Such networks are viable because
of the lower cost of digital production (compared with analog news
production). Furthermore, regional and local news programming networks
can offer lower advertising rates than local broadcast stations in these
smaller markets attracting advertising dollars as easily as their
larger, more national competitors. As of July 2002, as many as 22.3
million cable subscribers had access to local or regional news
programming.[^427]

Despite their local nature, twenty-four hour local news services compete
for ratings with national news services like CNN and broadcast
news.[^428] Again, digital production allows these local news networks
to be cost competitive in large and small markets alike.[^429] A
regional news channel in a major market can cost between \$15 and \$20
million a year to operate, and cable operator license fees and
advertising revenues have recently begun to cover more of the channels\'
operating costs.[^430] New England News (a regional news channel), for
example, receives 60 percent of its revenues from subscriber fees from
cable operators, charging nearly as much as CNN.[^431]

While some analysts believe that regional news programming has not yet
reached \"critical mass,\" many predict that regional news programs
could become a significant competitive force in the video programming
marketplace. [^432] As of June 2001, 36 percent of the 80 regional
programming networks counted (29 networks), were regional news networks.
Unlike sports programming, regional and local news networks have a more
diverse ownership. Some regional news networks are vertically integrated
with cable MSOs, but many are not.[^433]

[Children's Programming]{.underline}

Children's programming networks are among the most popular of all cable
networks. In the second quarter of 2001, children-oriented programming
networks ranked among the top three networks in terms of full-day
ratings averages, and children's programs ranked among the most highly
rated of all cable network programs. Children's networks are an
instrumental element to any cable operator lineup, with Nickelodeon and
the Carton Network reaching more than 80 million households.

*Branding*

In order to differentiate themselves from one another and from the
broadcast networks, cable networks are by and large distinctly branded.
Most have accomplished this through specialized, or niche programming,
as described above. General audience networks brand themselves as well
in order to distinguish themselves from one another and from the general
audience broadcast networks. Many have done this by introducing an
increasing amount of original programming and marquee events. Carriage
by cable operators depends on a well-established brand and distinct
value to subscribers. Below is a discussion of some of the strategies
cable networks have used to uniquely position themselves with respect to
cable operators.

[Original vs. Acquired]{.underline}

Cable networks continue to consider the proper balance of original
programming and repurposed programming. Repurposed programming is less
risky because its relative popularity has been proven during its initial
run, but original programming helps the network better establish brand
identity. Broadcast and cable origination programmers alike, however,
find it difficult to create, develop, and see to completion, original
production programming.

There is significant risk in developing an original concept and
producing it in a way that will appeal to viewers. Program producers
often find it difficult to recoup their initial investments in program
development. Since original production programming is deficit financed,
the programming must be developed first before it can begin to generate
a return on investment. In the past, broadcasters have relied on
syndication for a substantial portion of the return on investment.
Specifically, the foreign market has been the most lucrative market for
syndication sales, but this is rapidly changing. Whereas in the past,
there was a tremendous foreign market for American productions, this is
becoming less so. Foreign producers are rapidly entering the market and
there is less of a need for American programming. This could have
substantial impact on the domestic market for program production causing
a greater reluctance to sink large investments in original programming.
Although this is more applicable to broadcast programming, it is also
true for cable network programming, as cable networks begin to provide
more and more original programming in order to establish brand identity.

As Table 32 shows, basic cable networks and premium networks alike are
spending more of their programming dollars on original programming.
Table 32 also shows that cable networks will continue to spend more
money on original programming than on acquired programming.

[Quality vs. Economy]{.underline}

Working Paper 26 noted that increased expenditures on programming would
likely become a less effective profit-maximizing strategy for cable
networks, and that the new strategy might be to offer lower quality
programming to contain costs. Today, networks must strike a delicate
balance between expensive programming and cost effective programming.
Networks continue to struggle to find the most effective strategy to
please audiences, cable operators, and to some degree, advertisers as
well. Networks must find the most accurate mix of quality and price that
will appeal to cable operators. Networks have learned that more
expensive programming does not necessarily generate larger audiences.
Nevertheless, some networks opt to spend a great deal of money on a few
marquee programs to help establish brand name recognition for the
network, while disbursing the balance of programming dollars on less
expensive, more broad appeal programming. Brand name recognition
promotes overall efficiency for the networks; if viewers can come to
expect a certain amount quality of programming from a particular
network, then the network will not have to expend as much to promote the
balance of its lesser quality or lesser cost programming to attract
viewers or advertisers.

[Brand Extensions]{.underline}

A recent trend in cable origination programming is brand extension.
Brand extension helps cable networks, and ultimately operators, create
significant additional value from new networks by extending the brand of
existing networks. As such, many cable operators have decided to carry
derivative or "multiplex" programming of the established cable
networks.[^434] The Commission first reported this trend in the 1998
MVPD Competition Report, when it noted that there was a general trend by
existing programming service providers, regardless of whether they were
vertically integrated with MSOs, to create derivative programming
services or brand extensions of their programming offerings.[^435] For
example, The Discovery Channel, affiliated with Liberty Media and Cox
Communications, has launched several new "Discovery" networks, including
Animal Planet, Discovery Civilization, Discovery En Espanol, Discovery
Health, Discover Home & Leisure, Discovery Kids, Discovery Science,
Discovery Wings, and Discovery Travel and Living.[^436] Similarly, HBO,
affiliated with AOL Time Warner, has launched several new "HBO" networks
including HBO Plus, HBO Signature, HBO Comedy, HBO Family and HBO
Zone.[^437] Viacom, a major program provider that is not affiliated with
any MVPD, has also utilized derivative programming and brand extension
approaches. Viacom\'s MTV has launched such MTV derivatives as MTV2, MTV
"S', and MTV "X ". Another non-vertically integrated program provider,
Lifetime Television has launched a new "Lifetime" network called the
Lifetime Movie Network, which airs made-for-television movies and
theatrical films targeted to women.[^438]

*Cooperative Efforts with Broadcasters*

In spite of competition in such areas as news and sports programming,
many broadcasters and cable networks are joining forces to provide
programming. In some cases, the ventures are jointly produced
programming, blending brand-name recognition and viewing flexibility.
For example, NBC News is carried on both broadcast and cable through the
NBC broadcast network and by CNBC and MSNBC cable networks. Similarly,
ABC's Sports is a joint effort of ABC broadcast network and ESPN cable
network. Other joint efforts include NBC's efforts with cable network
CourtTV to present several jointly produced news magazine segments. In
other cases, the venture is one of immediate repurposing, either from
broadcast to cable within a week's time (e.g. name shows), or vice versa
(e.g., Monk). Most recently, ABC entered into a "first look" programming
deal with HBO Independent Producers to jointly create new programming
for the broadcast television audience. Under the deal, HBO will develop
and produce series programming for broadcast on ABC, while ABC will
finance the production, possible in partnership with HBO.

There has been significant consolidation on the network side of the
business. In addition to affecting advertising sales and cross-promotion
opportunities, this process has allowed the networks' to spread their
programming and scheduling expertise over a wider range of product and
thus use that expertise more efficiently. Viacom has assembled the
largest network group, encompassing broadcast networks CBS and UPN in
addition to following cabvle networks: BET, Country Music Television,
MTV, CH1, Nickelodeon, TV Land, The National Network, Showtime/The Movie
Channel, and 50 percent of Comedy Central. [^439] Disney holdings
include ABC, the Disney Channel, Toon Disney, the Family Channel, 80
percent of ESPN and its progeny, 50 percent of Lifetime, 37.5 percent of
Arts and Entertainment and the History Channel, and 39.5 percent of E!
Entertainment Network. GE's portfolio includes NBC, CNBC, 50 percent of
MSNBC, and 25 percent each of Arts and Entertainment, American Movie
Classics, Bravo, and the History Channel. AOL Time Warner owns two
thirds of the WB broadcast network, along with CNN, Headline News.the
Cartoon Network, TNT, TBS Superstation, three quarters of HBO/Cinemax,
58 percent of Court TV and 37.3 percent of Comedy Central. Fox owns the
Fox broadcast network as well as national cable networks Fox News
Channel, and FX, along with more than a dozen regional sports networks.

## Comparative Expenditures

This subsection provides estimates of the expenditures on programming of
cable networks, broadcast networks, and broadcast stations. For the
purposes of this discussion, it is assumed that cable systems do not
spend money on program production directly. Estimates for basic and pay
cable networks are available from PKA, while estimates for broadcasting
networks and stations must be constructed from available data. The
figures appear in Table 32.

Working Paper 26 contains a discussion of revenues and programming
expenditures of broadcast and cable networks. It develops an estimate
that broadcast networks spend .65 of their gross revenues on
programming.[^440] Applying that figure to year 2000 four-network gross
advertising revenues yields an estimate of \$10.3 billion, or \$2.6
billion per network. A contemporaneous trade press estimate indicates
that the big four each spend around \$2.15 billion on programming, for a
total of \$8.6 billion.[^441] It appears reasonable to assume, then,
that each of the big four networks spends \$2.2-2.6 billion per year on
programming. Table 4 provides a1990 network advertising revenue figure
of \$9.963 billion, so using the estimating procedure of this paragraph,
1990 network programming expenditures were \$6.5 billion. [^442]

Table 32 indicates that basic cable network programming expenditures in
2000 were equal to 40.8 percent of network revenues, a noticeably lower
fraction than assumed in the broadcast network case. The figure for pay
networks is 51 percent. A lower ratio for cable than broadcast networks
is plausible, given that there are many dozens of cable networks and
only four broadcast networks in the figures reported herein. The ratio
of basic plus premium cable, to total broadcast programming
expenditures, was 30.7 percent in 1995 and 48.6 percent in 2000.

[]{#__RefHeading___Toc21199317 .anchor}Table 32: Programming
Expenditures (\$mil)

  --------------------------- ---------- ---------- ---------- ---------- ----------
                              **1990**   **1995**   **2000**   **2001**   **2010**

  **BROADCAST^(1)^**                                                      

  **Total Broadcast           25,607     30,704     41,694     n/a        n/a
  Revenues**                                                              

  **Total Broadcast           11,216     13,386     17,114     n/a        n/a
  Programming Expenditures**                                              

  Networks                    6,476      7,540      10,327     n/a        n/a

  Stations                    4,740      5,846      6,787      n/a        n/a

  **Expenditures/Revenues     43.8%      43.6%      41.0%      n/a        n/a
  (%)**                                                                   

                                                                          

  **BASIC CABLE NETWORKS**                                                

  **Total Basic/Expanded      2,976      6,562      15,857     17,867     40,690
  Basic Network Revenue**                                                 

  **Total Basic/Expanded      1,437      2,933      6,471      7,206      15,496
  Basic Programming                                                       
  Expenditures**                                                          

  Original Programming        593        1,356      3,548      3,973      9,883
  Expenditures (incl. News)                                               

  Original % of Total         41.3%      46.2%      54.8%      55.1%      63.8%

  Programming Acquisition     844        1,577      2,923      3,233      5,613
  Expenditures (incl. Sports)                                             

  Acquired % of Total         58.7%      53.8%      45.2%      44.9%      36.2%

  **Expenditures/Revenues     48.3%      44.7%      40.8%      40.3%      38.1%
  (%)**                                                                   

                                                                          

  **PREMIUM CABLE NETWORKS**                                              

  **Total Premium Network     n/a        2,319      3,609      3,979      5,626
  Revenue**                                                               

  **Total Premium Network     n/a        1,175      1,846      2,062      2,982
  Programming Expenditures**                                              

  Original Programming        n/a        365        604        701        1,193
  Spending                                                                

  Original % of Total         n/a        31.1%      32.7%      34.0%      40.3%

  Theatrical Movie Licensing  n/a        810        1,242      1,361      1,789

  Movie Licensing % Total     n/a        68.9%      67.3%      66.0%      60.0%

  **Expenditures/Revenues     n/a        50.7%      51.1%      51.8%      53.0%
  (%)**                                                                   

                                                                          
  --------------------------- ---------- ---------- ---------- ---------- ----------

**Sources:** Broadcast data: Staff estimate based on data in Table 4 and
NAB Television Financial Report, 1995 and 2001 editions. Basic cable
data: Kagan World Media, Economics of Basic Cable Networks 2002, Dec.
2001, at 23-28. Premium cable data: Kagan World Media, The State of DBS
2002, Sept. 2001, at 273-274; Kagan World Media, Pay TV Newsletter, July
2002.

**Notes:**

**^(1)^**Syndication is not accounted for.

The Table 32 estimates for television station expenditures on
programming, both purchased and original (including local news, etc.),
are based on the NAB Television Financial Reports. They are rough
estimates and are subject to the caveats mentioned above regarding the
Television Financial Report data.[^443] The categories in the report
that include programming expenses are programming, production, and news.
In 2000 (2001 Television Financial Report at 2-3), those categories
accounted for .291 of net revenues on average. Moreover, agency
commissions were .14 of gross advertising revenues, national and
regional representative commissions were .064 of the relevant national
and regional advertising revenues, and national and regional advertising
revenues were .4 of total gross advertising revenues. The report also
lists three other revenue categories: "Tradeouts and Barter," "Network
Compensation," and "Other Broadcast-related Revenues." In 2000, these
accounted for .077 of net revenues. These figures allow calculation of a
conversion factor from gross advertising revenues to net revenues (from
advertising and other sources) of .904.[^444] The Television Financial
Report indicates that programming expenditures are .291 of net revenues,
so they are .291\*.904=.263 of gross advertising revenues for
2000.[^445] The earliest year for which the data from Television
Financial Report permit a similar calculation is 1994, and the procedure
outlined in this paragraph yields a programming expenditures factor of
.303 of gross advertising revenues. [^446]

Table 4 contains data on television station gross advertising revenues
(national plus local spot) for 1990 and 2000. The figures are \$15.644
billion in 1990 and \$25.806 billion in 2000. Applying the relevant
factors yields the table 38 estimates of \$4.7 billion for 1990 and
\$6.8 billion for 2000 programming expenditures by television stations.

It is now possible to compare cable and broadcast programming
expenditures. The 2000 total for basic plus premium cable is \$8.3
billion, compared to \$10.3 billion for broadcast networks and \$6.8
billion for broadcast stations. In terms of total resources devoted to
program acquisition, broadcast networks alone outspend cable networks.
Mroeover, on a per-network basis, broadcast networks spend far more than
cable networks on programming. Although 1990 data on pay cable network
expenditures are not available, table 38 suggests that broadcast
networks far outstripped cable networks in 1990, since basic and premium
cable1995 total programming expenditures of \$4.1 billion are smaller
than broadcast networks' 1990 programming expenditures of \$6.5 billion.

## Conclusion

The repeal of the Fin/Syn rules allowed networks to take ownership of
studios and shows and resulted in considerable consolidation, with all
the broadcast networks now sharing the same parent with at least one
full-service television production studio.[^447] While not every
television studio owns a network, every network but NBC has a
full-service sister studio. Networks have also outsourced production
efforts to independent contractors as a way to curb deficit financing of
programming. The repeal of Fin/Syn has also led to the networks
increasingly taking equity stakes in third-party studio productions,
thus ensuring their participation in possible upside from syndication
sales, while potentially lowering their costs and potential risk.[^448]
Plenty of data are available regarding broadcast network ownership of
programming, but only limited information was available regarding cable
ownership. It suggests a lower level of network ownership of programming
for general interest cable networks compared to broadcast networks.

In the cable sphere, expanded channel capacity has increased the number
of cable channels available. Some are of the general interest variety,
but most cater to niche interests, such as news, sports, music, or
children. Expenditures on programming by both cable networks and
broadcasters (networks and stations) has risen over the past decade.
Broadcasters continue to spend more than cable, particularly if the
comparison is made on a per-network basis.

# XI. Conclusions

The year 2001 was a difficult year in many respects, including for video
advertising revenues. However, just as the television industry recovered
from the last revenue drop in 1991, indications are that it will recover
from this one as well. A review of longer term trends suggest that, as
it entered the new millennium, the television industry was in fairly
good financial shape and continues to provide a high level of service to
viewers and a valuable platform for advertisers to reach the public with
their messages.

The television industry faces competitive and technological challenges,
some of them the same ones that were facing them ten years ago.
Non-broadcast channels delivered by cable (and now DBS) continue to eat
into broadcast audience shares. On the other hand, television broadcast
programming (primetime in particular) continues to attract audiences far
larger on a per network basis than cable. The small per network
audiences for cable are one important reason why broadcasters have been
able to increase their advertising revenues over the past decade in the
face of viewing share declines. Although the advertising dollars did not
shift proportionately from broadcast to cable, the broadcasting share of
video advertising revenues continued to drop. It appears that cable
advertising has become a better substitute than before for broadcast
advertising, so it is likely that, in the future, cable audience share
gains will be more strongly reflected in advertising revenue share
gains. On the other hand, in retrospect, some of the predictions of
Working Paper 26 appear to have been too pessimistic.

## Television Stations

The number of television stations has grown by over 12 percent since
1990, and none have gone dark. Gross advertising revenues per station,
in both nominal and real terms, were higher in 2000 than in 1990.
Additionally, the latest industry-wide performance data available (for
the year 2000) indicate that the television station sector is at least
as profitable in 2000 as it was in 1990. Cash flow figures are
particularly robust, and this is true across all market sizes. The
limited data available suggest that the bulk of locally-produced
programming is news and that, as a percentage of total expenditures, per
station spending on news has risen on average for all market sizes. On
the other hand, anecdotal evidence suggests that some stations have cut
back on their news programming over the past decade.

Television networking remains a very efficient method of program
distribution, and it appears that the formation of new broadcast
networks during the past decade (a development not anticipated in
Working Paper 26) has strengthened the position of many formerly
independent stations. Well over 200 stations are affiliated with the new
networks WB, UPN, and Paxton. Although hard evidence is not yet
available, it is likely that the relaxation of the television duopoly
rule (recommended in Working Paper 26) has strengthened the position of
some of the formerly weaker stations. On the other side of the
competitive ledger, cable systems are becoming stronger competitors in
the local advertising market, as cable system clustering and the
increasing sophistication of cable interconnects make local cable a more
efficient advertising buy.

## Television Networks

In the aggregate, television networking is a barely profitable business.
Most observers believe that currently the seven commercial broadcast
networks are losing money (with substantial profits for NBC outweighed
by losses by others). On the other hand, 20 years ago, networking also
was a marginally profitable business. Although the impetus for forming
the UPN and WB networks may well have been the desire of studios to
ensure some distribution capacity for their program output, the reality
is that the number of television networks has risen not fallen, and
that, as mentioned above, previously independent stations were quite
willing to affiliate.

Regulatory changes have substantially affected the television network
environment. The biggest influence was the repeal of the Commission's
former syndication and financial interest rules (along with the
termination of related consent decrees that the big three networks had
signed with the Justice Department). The relaxation of the Commission's
dual network rule also was of some importance. Once it became possible
for television networks to own primetime programming without
restriction, it apparently became attractive for the movie studios, who
were the primary producers of television programming, to affiliate with
a network. Network ownership can provide assured distribution for some
of the sister studio's product. Thus, Viacom and Warner formed the UPN
and WB networks, respectively. Disney purchased ABC and Viacom acquired
CBS.

In addition to network-studio combinations, another important structural
development has been the combination of broadcast and cable networks in
the same company. This makes it possible for network companies to spread
their expertise in program selection, promotion, and advertising sales
over a larger range of outputs ([i.e.]{.underline}, networks) and
possibly realize some economies of scope in network operation. The
aggregation of broadcast and cable networks into a single company also
apparently allows efficient sharing of the costs of the rights to some
major sports and also has affected the manner in which advertising is
bought and sold. This aggregation also can facilitate (although it is
not a prerequisite for) "repurposing" of broadcast programming. The idea
is to re-use a broadcast program (whether it be a newscast, a drama, or
a comedy) on an appropriate cable channel and thereby increase the
revenue it generates.

Notwithstanding all of the difficulties that broadcast networks face,
from declining advertising revenue shares to rising costs of program
production, their output is a major portion of the programming schedule
of over 1,000 commercial television stations, and, overall, those
stations enjoy rather high margins. Hence, one should not place too much
emphasis on the meager aggregate profits of television networks. It is
likely that, as time goes on, the networks will find ways for their
affiliates to contribute more to programming costs.

## Rival Delivery Systems

The television broadcasting industry faces challenges both from current
multichannel video programming distributors and from technological
developments as well. The data suggest that cable and DBS are and will
continue to be major video distribution rivals to broadcast television.
Both have grown substantially in subscribership over the past decade,
particularly the rapid expansion of DBS since its 1994 launch. The rate
of growth of cable subscribership has flattened and, within the next ten
years, the same is likely to occur with DBS. A simple extrapolation of
subscriber penetration trends suggests that cable plus DBS penetration
of television households will peak at somewhere between 80 and 85
percent, with other platforms accounting for a small additional share of
households.

The advent of DBS, cable investment in increased capacity, and the
application of digital compression technology means that MVPD
subscribers now have access to a far larger menu of programming choices
than they did in 1990. The growing share of cable subscribers choosing
the digital tier suggests that they are taking advantage of the expanded
range of programming on offer. This, of course, is one of the primary
explanations for the increase in cable viewing shares. Moreover,
although the rate of increase in MVPD subscribership is slowing, the
trends toward increased viewing hours of cable programming and decreased
viewing hours of broadcast programming continue in cable and DBS
households.

Viewers also are spending more money on prerecorded media. The
development of the DVD, with its higher picture and sound quality
compared to videocassettes, has fueled this expansion. Sales and rentals
of cassettes also remain robust.

## Technological Change

Broadcast television has always been an industry with a single revenue
stream (advertising) which has put it at some disadvantage to MVPDs,
with their dual revenue streams (advertising and subscription fees).
Technological developments have the potential both to threaten the
advertising base of broadcast television and to provide new revenue
stream opportunities.

Although the current penetration of PVRs is quite low, this device poses
a potential threat to the advertising revenue base of television. The
PVR functions as a kind of combination search engine and digital
recorder. It enables viewers to "time shift" their favorite programs
(reducing the value of time-sensitive advertisements actually viewed)
and to skip commercials entirely. It appears that the industry is taking
the "threat" of PVRs seriously and taking or contemplating various
measures to respond. One possibility is to make the advertisements more
interesting or entertaining, so people will want to watch. Another
possibility is increasing use of product placements within the actual
programming, thus making the advertising message harder to avoid. One
unresolved factor in this regard is the limit of viewer tolerance for
product displays of this nature.

Perhaps the single biggest technological development in broadcast
television since Working Paper 26 has been the beginning of the
transition to DTV. Well over 500 stations are transmitting in digital
mode now. The remaining commercial stations were subject to a May, 1,
2002 deadline to commence transmissions and most have received
short-term waivers. DTV offers broadcasters a substantial increase in
transmission capacity, which they can use to provide HDTV, multiple
streams of standard quality programming, data broadcasting, or some
combination of these services. Broadcasters are permitted to offer
services for a fee on their DTV channels, so there is a possibility for
the elusive second revenue stream. Beginning DTV transmissions requires
a fairly significant up-front investment in facilities, but the precise
range of services that will be provided over time is not yet obvious.

An increasing amount of HDTV programming is being transmitted and, when
the cost of DTV reception equipment declines further, the mass of US
consumers will benefit. On the other hand, it is fair to say that
business models for other DTV services have yet to emerge. Among the
business issues yet to be resolved is the carriage of fee-based DTV
services by cable and DBS providers. Because the Commission's broadcast
signal carriage rules do not require carriage of ancillary and
supplementary services, carriage would have to come as the result of a
commercial agreement between the broadcaster and the cable or DBS
operator. Among the issues that would likely be subject to negotiation
is the split of revenues that the broadcaster's service would earn.

Many of the services under discussion for DTV can be placed under the
heading of "Interactive Television," or ITV. ITV is a term for which a
clear consensus definition has not yet emerged. The one common thread in
the ITV discussion is subscriber/viewer interaction. Somehow the
subscriber or viewer exercises control over or reacts to what she sees
on the screen. The interaction could be to choose among streams of
information or programming delivered in real time; to choose to access
supplementary material that has been previously transmitted and stored
on a hard drive at the viewer's premises; or it could be to use some
sort of return channel to request the transmission of particular
content, to make a purchase or conduct another type of transaction.
Digital transmission is not a prerequisite for ITV, although it is fair
to say that the bulk of ITV applications rely on digital transmissions.

In view of the fact that neither the broadcast industry nor any of its
competitors has yet demonstrated a compelling ITV business model, it is
necessary to be cautious in commenting on the possible long-run impact
of ITV. A few observations can be made, however. First, ITV has the
potential to target advertisements precisely, and even individually, to
viewers. This could ultimately make advertising more valuable and ensure
that viewers who could skip advertisements do not do so. Targeting
techniques raise issues of viewer privacy and proper treatment of child
viewers.

Second, broadcasters rely on MVPD delivery platforms to reach most
households. They will need to make commercial arrangements with the MVPD
for carriage of their ITV content and, at least in the case of cable,
probably need a commercial arrangement for the return path, if a return
path is needed. In the case of off-air broadcast transmissions, the
return path would likely be a dialup telephone connection, a cable
modem, or DSL. In the case of DBS, the situation is less clear, but the
telephone return path currently appears more likely than a
satellite-based return path.

The third observation applies to all of the technological developments
discussed, and that is that none of them appear to benefit broadcasting
differentially compared to other video delivery platforms. Hence, while
these developments are likely to benefit consumers, their impact on the
relative position of broadcast television is more questionable. To the
extent that new technology moves broadcasting from a one-revenue stream
world to a multiple-revenue stream world, it will put broadcasting on a
more similar footing to MVPDs than before.

## Programming

The last decade has seen a substantial increase in the number of
programming networks available, including an expansion in the number of
broadcast networks. While the broadcast networks continue to cater to
the mass audience, there is a greater tendency to target their
programming to particular demographic groups. On the cable side,
although some networks (including some of the most popular ones)
continue to provide general interest programming, the growth has
primarily been in niche services, providing, [e.g.]{.underline},
children's, sports, news, music, nature, or lifestyle programming.

Program costs have risen substantially in recent years, probably due to
the expansion in demand, continuing a trend identified in Working Paper
26. The decline in foreign demand for syndicated US programming has
reduced one source of revenue from which to recover production costs.
Broadcast networks have adopted a variety of approaches as a response to
rising costs. None is applicable across all situations and none is the
definitive answer to the cost challenge. Network responses include the
following. With regard to high-cost sports programming, at least one
network has reduced its total exposure, while others have signed deals
that spread sports rights over broadcast and cable networks. Responses
to the increasing cost of scripted programming include repurposing
(re-using programming by running it on a cable channel almost
simultaneously to the broadcast run) and some increased use of
unscripted news magazine or reality programming. To the extent that
reality programming is introduced during the summer as a response to new
cable programming, it would actually represent a cost increase over the
re-runs previously shown at this time of year.

On the program production side, the rising upfront costs of broadcast
network entertainment programming appear to have perpetuated a structure
in which most programming is produced by or in association with a large
scale company that can spread the production risk over a large range of
programs. The repeal of the syndication and financial interest rules has
meant that most of these large scale companies are integrated
network-studio firms. Currently the major broadcast networks own
anywhere from one half to two thirds of their primetime programming, but
there is some anecdotal evidence that the pendulum may be swinging back
in the other direction. It is also important to note a trend in which
some top level producers or writers are signing exclusive or
"first-look" deals with studios, a situation that positions them
somewhere in between "independent" and "in-house."

On the cable side, most cable general entertainment networks go through
a process of evolution in which they begin with almost exclusively
programming drawn from the broadcast networks or films and move
eventually to a greater level of original programming, including some
that is produced in-house. Only fragmentary information is available on
cable network ownership of its programming.

## The Final Analysis

Broadcast television is certainly a survivor, even a vigorous survivor.
It still provides the most popular and widely viewed video programming.
It is swimming in a sea of competition and it is fair to say that the
currents of cable and DBS rivalry will only strengthen. Working Paper 26
made some predictions about the future of broadcasting and recommended
some policy changes. In retrospect, some of those predictions were too
pessimistic, so this paper is more circumspect. Although broadcast
television's competitive position is likely to erode further, the fact
that it is still delivering on a per-network basis audiences roughly
five times the size of the largest cable networks, suggests that any
further decline is likely to be gradual. The future of broadcasting will
depend on its ability to continue to provide valuable programming on a
cost-effective basis and to respond to the challenges and grasp the
opportunities that new technology has to offer.

Working Papers Series

Office of Plans and Policy

Federal Communications Commission

Broadcast Television: Survivor in a Sea of Competition, by Jonathan
Levy, Deputy Chief Economist Marcelino Ford-Livene, Office of Plans and
Policy and Anne Levine, Media Bureau; Working Paper #37, September 2002;
pp. 139

The Potential Relevance to the United States of the European Union's
Newly Adopted Regulatory Framework for Telecommunications, by J. Scott
Marcus, Office of Plans and Policy; Working Paper #36, July 2002; pp. 32

Horizontal Concentration in the Cable Television Industry: An
Experimental Analysis, by Mark M. Bykowsky, William W. Sharkey; Office
of Plans and Policy, and Anthony M. Kwasnica; Pennsylvania State
University, Smeal College of Business Administration; Working Paper #35,
June 2002; (Revised July 2002); pp. 115

A Competitively Neutral Approach to Network Interconnection, by Jay M.
Atkinson, Christopher C. Barnekov; Economists in the Competitive Pricing
Division, Common Carrier Bureau; Working Paper #34, December 6, 2000;
pp. 36

Bill and Keep at the Central Office As the Efficient Interconnection
Regime, by Patrick DeGraba, Deputy Chief Economist; Working Paper #33,
December 2000. pp. 43

The Digital Handshake: Connecting Internet Backbones, Michael Kende,
Director of Internet Policy Analysis; Working Paper #32, September 2000.
pp. 50

The FCC and the Unregulation of the Internet, by Jason Oxman, Counsel
for Advanced Communications; Working Paper #31, July 1999. pp. 29

Internet Over Cable: Defining the Future In Terms of the Past, by
Barbara Esbin, Associate Bureau Chief, Cable Service Bureau; Working
Paper #30, August 1998. pp. 130

Digital Tornado: The Internet and Telecommunications Policy, by Kevin
Werbach; Working Paper #29, March 1997. pp. 98

Putting It All Together: The Cost Structure of Personal Communications
Services, by David P. Reed; Working Paper #28, November 1992. NTIS PB93
114882 pp. 86

Changing Channels: Voluntary Reallocation of UHF Television Spectrum, by
Evan R. Kwerel and John R. Williams; Working Paper #27, November 1992.
NTIS PB93 114874 pp. 146

Broadcast Television in a Multichannel Marketplace, by Florence Setzer
and Jonathan Levy; Working Paper #26, June 1991. NTIS #PB91 201749;
\$23.00; pp. 180

What Makes the Dominant Firm Dominant?, by John Haring and Kathy Levitz;
Working Paper #25, April 1989. NTIS PB89 190425; pp. 29

Through the Looking Glass: Integrated Broadband Networks, Regulatory
Policy, and Institutional Change, by Robert Pepper; Working Paper #24,
November 1988. NTIS #PB89 136923; pp. 106

Loosening the Ties that Bind: Regulating the Interstate
Telecommunications Market for the 1990\'s, by Kathleen B. Levitz;
Working Paper #23, February 1987. NTIS #PB87 220265; pp. 52

[^1]: ^^ The authors would like to thank then numerous staff from the
    television and cable networks, the investment analysis community,
    advertising agencies, and trade associations who gave generously of
    their time and expertise to help us. The authors alone are
    responsible for the analysis and conclusions herein. Special thanks
    to Kenneth R. Carter of OPP for crucial assistance in preparing this
    report.

[^2]: Working Paper 26, at 13. Nielsen last reported the number of
    over-the-air broadcast televisions stations available to the median
    household in 1996 as 13. Nielsen Media Research, Television Audience
    1996, at 13. Nielsen has not reported this figure since, but we do
    not believe this number has changed substantially over the last five
    years. We base this estimation partly on the fact that the total
    number of new stations overall has not increased substantially.
    *See* Table 4.

[^3]: See Chapter VIII for a discussion of some other platforms which
    have limited usage. In addition, note that the footprint of the DBS
    services covers the entire contiguous United States, but, because a
    clear line of sight to the southern sky is needed for reception, DBS
    is not available to 100 percent of television households.

[^4]: *See* discussion in Chpater V, *infra* regarding the reliability
    of the homes passed data.

[^5]: The large size of HSD antennas and local zoning restrictions meant
    that the service was not effectively available to a large fraction
    of households.

[^6]: These services are discussed in detail in Chapters V and VI.

[^7]: See Rate Deregulation & the Commission's Policies Relating to the
    Provision of Cable Television Serv., Report on Competition, MM
    Docket No. 89-600, Report ("1990 Cable Report"), 5 FCC Rcd 4962,
    5106-07 (1990).

[^8]: NCTA, *National Video Programming Services: 1994-2001*, Cable
    Developments 2002, May 2002, at 23. In the Commission's Annual
    Report on the Status of Competition in the Market for the Delivery
    of Video Programming, the Commission estimated the number of
    national programming services at 294. NCTA notes in its latest Cable
    Developments, that there were errors in this calculation, and that
    the number of national programming networks was actually 287. *See*
    Video *Annual Assessment of the Status of Competition in the Market
    for the Delivery of Video Programming*, CS Docket No. 01-129, Eighth
    Annual Report ("2001 MVPD Competition Report"), 17 FCC Rcd 1244,
    1309-10 ¶ 157 (2002).

[^9]: The figures are not precise measures of the resources available to
    broadcasters, cable operators, DBS operators, or film producers to
    acquire and distribute programming, since the advertising figures
    are gross expenditures. Nor do they separate out the costs of
    distribution infrastructure and programming for the four (five, if
    one separates theatrical and home video distribution) delivery
    platforms. Moreover, because advertiser valuation of viewer
    exposures is not the same as viewer valuation of programming, and
    because direct payments for video programming underestimate their
    total value to consumers, the figures do not reflect the total value
    to consumers of video programming.

[^10]: Table 2 does not include HSD revenues or revenues from other
    delivery platforms ([e.g.]{.underline}, MMDS) that have low
    subscriber levels.

[^11]: For a more detailed discussion of this topic, see generally Owen,
    Bruce and Wildman, Steven, [Video Economics]{.underline} (Cambridge,
    MA: Harvard University Press) 1992 ("Owen and Wildman") and Setzer,
    Florence and Levy, Jonathan, [Broadcast Television in a Multichannel
    Marketplace]{.underline}, chapter II; OPP Working Paper 26, Federal
    Communications Commission, June 1991.

[^12]: "Additional viewer" must be understood as an additional viewer
    who is within the range of a broadcast station or DBS operator's
    signal or who is connected to a cable system carrying the signal.

[^13]: Owen and Wildman at 148-150.

[^14]: Television Bureau of Advertising, www.tvb.org

[^15]: A detailed analysis of substitutability among advertising media
    is beyond the scope of this paper, but see Silk, Alvin et al.,
    "Íntermedia Substitutability and Market Demand by National
    Advertisers." Working Paper 8624, National Bureau of Economic
    Research (December 2001); available at www.nber,org/papers/w8624.

[^16]: Television Bureau of Advertising, "Trends in Advertising Volume."
    Available at
    [www.tvb.org/tvfacts/trends/advolume](http://www.tvb.org/tvfacts/trends/advolume);
    visited Jne 26, 2002.

[^17]: Multichannel video programming distributors (MVPDs), such as
    cable television and Direct Broadcast Satellite services are
    subscribed to by about 85 percent of US television households [2001
    MVPD Competition]{.underline} Report, 17 FCC Rcd 1244 (2002), Table
    C-1.No cable network is carried by every MVPD. However, 12 cable
    networks reach more than 80 percent of television households, with
    TBS having the largest reach at 82.7 percent. See Paul Kagan
    Associates, [Cable Television Investor]{.underline}, July 29, 2002,
    p. 14 and table 1 in chapter II.

[^18]: Broadcast networks distribute their programming to affiliates via
    regional satellite feeds, so they have the flexibility to sell
    regional as well as national exposures.

[^19]: Cable operators generally pay cable networks a per-subscriber fee
    and receive in return the right to retransmit the network's
    programming and the right to sell some of the advertising
    availabilities within the program stream.

[^20]: If the focus is narrowed to network advertising sales only
    ([i.e]{.underline}, national spot and syndication are not included),
    the cable network share in 2001 was 45.4 percent.

[^21]: Veronis Suhler Stevenson "Veronis Suhler Stevenson Issues Annual
    Communications Industry Forecast," August 5, 2002 PR Newswire. See
    also [Communications Daily]{.underline}, August 27, 2002 (quoting
    Standard and Poor's chief economist to the effect that television
    advertising revenue will grow by 3.5 percent this year, will pick up
    momentum in 2003, but will not return to the rapid growth levels of
    the mid and late 1990's).

[^22]: Discussions with advertising agency personnel suggest that local
    cable can be attractive to different categories of advertising
    buyer. The discussion in the text emphasizes developments that
    appear to make local cable advertising an increasingly good
    substitute for local broadcast advertising. However, observers point
    out that cable also is attractive for low-budget local advertisers
    who may see it as much a substitute for local radio as for local
    television.

[^23]: [Electronic Media]{.underline}, July 8, 2002, p. 2 and
    [Multichannel News]{.underline}, July 22, 2002 p. 2.

[^24]: "Upfront on the Upfront." Bear Stearns Equity Research
    Entertainment; June 7, 2002.

[^25]: "Television Broadcasting: Local TV Advertising; Can It Post
    Double-Digit Growth in Second-Half 2002?" Bear Stearns Equity
    Research, Media; June 2002.

[^26]: Nielsen Media Research, [Television Audience 1996]{.underline}
    (1997) contains average station per household figures for 1990 and
    1996

[^27]: Working Paper 26 Table 3, p. 15.

[^28]: Neilsen Media Research, cited by the Television Bureau of
    Advertising at www.tvb.org.

[^29]: The data for table 8 come from Nielsen. Unless otherwise
    specified, "cable viewing" data includes viewing via the other
    multichannel video program distributors, such as DBS.

[^30]: Viewing shares in this report are presented based on the sum of
    household delivery. Taking account of multiset viewing, the figures
    are percentages of total viewing and sum to 100 percent.

[^31]: See "Editorial: Networks need to get serious about summer."
    [Electronic Media]{.underline}, July 22, 2002, p. 10. See also "A TV
    First: Ad-supported Cable Wins Primetime Viewership Race for Entire
    2001/2002 Season," available at
    [www.cabletvadbureau.com](http://www.cabletvadbureau.com/); visited
    Sept. 29, 2002.

[^32]: [2001 MVPD Competition]{.underline} Report, 17 FCC Rcd 1244
    (2002),

[^33]: The comparison could not be done for prime time due to the lack
    of data on total cable and broadcast advertising revenues for the
    prime time daypart.

[^34]: In 2000 and 2001, Nielsen separated out "all other cable" from
    pay and basic. This is not included in the universe of
    advertiser-supported programming. See notes to table 11.

[^35]: Nielsen data compiled by Bear Stearns in Bear Stearns Equity
    Research, Media, [Broadcast Television Fact Book]{.underline} ; May
    2002, p. 122.

[^36]: Paul Kagan Associates, Economics of Basic Cable Networks 2002, p.
    61.

[^37]: See Media Dynamics, Inc., [TV Dimensions 2001]{.underline} at 60.

[^38]: Data are available for spot rates received by affiliates of the
    big three networks. For all households, the average CPM is \$17.45.
    [Id.]{.underline} The rate is slightly higher than the network rate
    of \$15.75. This is likely a reflection of the fact that most
    network advertising is bought in bulk during the "upfront" market
    and also the lower transactions costs associated with purchasing
    national exposure via a single transaction as opposed to assembling
    coverage from multiple sources in the spot market.

[^39]: John M. Higgins and Allison Romano, "Cheaper by the thousand."
    [Broadcasting and Cable]{.underline} Feb. 4, 2002, at 20-28.

[^40]: See [Report and Order in MM Docket No. 95-]{.underline}39 (Review
    of the Syndication and Financial Interest Rules), 10FCC Rcd 12165
    (1995) and [Report and Order]{.underline} in MM Docket No. 00-108
    (Amendment of Section 73.658(g) of t he Commission's Rules -- The
    Dual Network

    Rule), 16 FCC Rcd 11114 (2001).

[^41]: See Bear Stearns Diversified Entertainment Equity Research,
    Media, Diversified Entertainment, [We Are Family]{.underline}, May
    2002, p. 5 (stating that the big three commercial networks were
    marginally profitable in the 1980's and that in 2002 the six major
    commercial networks, taken together, will lose money).

[^42]: "Network Television Cost and CPM Trends," in [Trends in
    Media]{.underline}, Television Bureau of Advertising, at
    [www.tvb.org/tvfacts/index.html](http://www.tvb.org/tvfacts/index.html),
    visited Aug. 13, 2002. The 2000 figure includes seven
    networks---ABC, CBS, NBC, Fox, UPN, WB, and Pax.

[^43]: Bear Stearns, [Broadcasting/TV&Radio]{.underline}, Equity
    Research Media, November 2001, p. 23.

[^44]: Reality programming has lower production cost than scripted
    series, so adding reality programming to the regular season lineup
    cuts production costs. On the other hand, to the extent reality
    programming is introduced during the summer, replacing reruns, then
    it does not actually result in lower programming costs. Reality
    programming is unlikely to represent a long term solution to the
    cost pressures networks face.

[^45]: A discussion of a pending petition for revision of Commission
    rules governing network-affiliate relations is beyond the scope of
    this paper.

[^46]: National Association of Broadcasters, [Television Financial
    Report]{.underline}, 2001 edition, p. 34.

[^47]: Some have argued that the way for network companies to become
    more profitable is to buy additional stations with high profit
    margins. While this could raise the profitability of the resulting
    combination, it is not clear that purchase of a station is required
    in order to effect a change in the revenue split between stations
    and networks.

[^48]: According to network company staff, the big four commercial
    networks have anywhere from 176 to 213 affiliates. The others have
    smaller numbers of affiliates**.**

[^49]: See [Broadcasting and Cable]{.underline}, January 21, 2002, p.
    60, for a list of duopoly combinations.

[^50]: The [Television Financial Report]{.underline} provides average
    figures for a variety of measures. It also provides various
    performance ratios, which are calculated by first averaging the
    numerator values, then averaging the denominator values, and the
    calculating the quotient. The problem with this procedure is best
    illustrated by an example. Suppose that two stations had ratios of
    profit to net revenues of one-fourth and one-sixth, respectively.
    The average profit to net revenue ratio for the two is 5/24.
    However, the financial report calculation procedure is to average
    the numerators and denominators and then divide, yielding an
    estimate of 1/5.

[^51]: The National Association of Broadcasters [Television Financial
    Report]{.underline} provides average figures for profits, cash flow,
    net revenues, etc. for each station category. Dividing, for example,
    the average cash flow figure by the average net revenue figure,
    gives a result that is different from what would be obtained if the
    quotient were first calculated for each station and then averaged.
    This does not, of course, affect the sign of the calculated
    percentages, and the magnitudes are roughly correct. See note 49,
    [supra.]{.underline}

[^52]: See National Association of Broadcasters, [Television Financial
    Report]{.underline}, 1991 and 2001 eds. The 25^th^ percentile figure
    is the one that has 75 percent of the observations in the sample
    above it. It is, of course, true that the identity of stations in
    the "bottom quarter" may have changed from 1990 to 2000.

[^53]: National Association of Broadcasters, [Television Financial
    Report]{.underline}, 1991 and 2001 eds.

[^54]: See "Bud Paxson leads deal to clear analog channels for wireless
    use." [Electronic MediaU, Feb. 26, 2001, p. 32.]{.underline}

[^55]: There are, of course, differences in the two data sets. The Table
    13 data do not include network compensation, but do include gross
    advertising revenues, including agency commissions, so they
    overestimate what is available to stations. The table 17 data
    include network compensation and do use net advertising revenues,
    but, as the introduction to the 2001 [Television Financial
    Report]{.underline} makes clear (at i), several large market NBC and
    Fox stations that had previously participated in the survey did not
    do so in 2000. This likely explains the precipitous drop in the Fox
    net revenue figure from 1995 to 2000.

[^56]: See Dan Trigoboff, "The news not out of Topeka," [Broadcasting
    and Cable]{.underline}, April 22, 2002, p. 12 (noting that the
    third-ranked station in Topeka, DMA 138, has dropped local news, as
    have some stations in other markets).

[^57]: Kagan World Media, *History of Cable and Pay TV Subscribers And
    Revenues*, Cable TV Investor, May 24, 2002, at 8.

[^58]: See NCTA, National Video Programming Services: 1994-2001, Cable
    Program Services, Cable Developments 2002, May 2002, at 23, 27-212;
    see also Table 21.

[^59]: While some DBS subscribers do receive local broadcast signals via
    their DBS service pursuant to the Satellite Home Viewer Improvement
    Act of 1999, DBS subscribers in approximately 158 DMA's are not
    provided with local broadcast network signals via satellite. DBS can
    offer distant network signals, but only to a portion of DBS
    households (only those households unserved by local network
    affiliates over the air).

[^60]: 47 U.S.C. § 543(b)(7); 47 C.F.R. § 76.901(a).

[^61]: 47 U.S.C. § 534(a), (b)(1), 47 C.F.R § 76.56(b) (obligations to
    carry local commercial stations); 47 U.S.C. § 535(a), (b); 47 C.F.R.
    § 76.56(a) (obligations to carry qualified noncommercial stations).
    Under these statutory provisions and the Commission\'s rules,
    commercial broadcast television stations may elect whether they will
    be carried by local cable television systems. 47 U.S.C.
    § 325(b)(3)(B); 47 C.F.R. § 76.64(f). The must carry provisions of
    the 1992 Cable Act also directed the Commission to initiate a
    proceeding at the time that it prescribes modified standards for
    what is now referred to as digital television (\"DTV\") and "to
    establish any changes in the signal carriage requirements of cable
    television systems necessary to ensure cable carriage of such
    broadcast signals of local commercial television stations which have
    been changed to conform with such modified standards.\" This
    provision is codified as Section 614(b)(4)(B) of the Communications
    Act, 47 U.S.C. § 543(b)(4)(B). In the 1996 Act, Congress stated that
    no ancillary or supplementary broadcast service shall have must
    carry rights. 47 U.S.C. § 336(b)(3) which was added to the
    Communications Act by Section 201 of the 1996 Act In the context of
    adopting digital television standards, the Commission sought comment
    on relevant must carry rules or policies that might be needed both
    during the transition to DTV and once DTV has replaced the current
    analog system. *Advanced Television Systems and Their Impact Upon
    the Existing Television Broadcast Service*, MM Dkt. No. 87-268,
    Fourth Notice of Proposed Rulemaking and Third Notice of Inquiry, 10
    FCC Rcd 10540, 10552-10554 (1995). Depending on the rules that the
    Commission may ultimately adopt, if any, cable and OVS operators
    subject to the must carry rules would be required to allocate a
    portion of their channel capacity to the carriage of DTV signals.

[^62]: Information gathered in re: Implementation of Section 3 of the
    Cable Television Consumer Protection and Competition Act of 1992,
    Statistical Report on Average Prices for Basic Service, Cable
    Programming Services, and Equipment, MM Docket No. 92-266, Report on
    Cable Industry Prices, 17 FCC Rcd 6301, 6308, Tbl. 1 (2002).

[^63]: Implementation of Section 3 of the Cable Television Consumer
    Protection and Competition Act of 1992, Statistical Report on
    Average Prices for Basic Service, Cable Programming Services, and
    Equipment, MM Docket No. 92-266, Report on Cable Industry Prices, 17
    FCC Rcd 6301, 6308, Tbl. 1 (2002).

[^64]: Implementation of Section 3 of the Cable Television Consumer
    Protection and Competition Act of 1992, Buy-Through Prohibition, MM
    Docket No. 92-262, Order, 8 FCC Rcd 2274 (1993); Implementation of
    Section 3 of the Cable Television Consumer Protection and
    Competition Act of 1992, Tier Buy-Through Prohibitions, MM Docket
    No. 92-262, Order, 7 FCC Rcd 8672 (1992).

[^65]: 47 U.S.C. § 543(l)(2); 47 C.F.R. § 76.901(b).

[^66]: Implementation of Section 3 of the Cable Television Consumer
    Protection and Competition Act of 1992, Buy-Through Prohibition, MM
    Docket No. 92-262, Order, 8 FCC Rcd 2274 (1993); Implementation of
    Section 3 of the Cable Television Consumer Protection and
    Competition Act of 1992, Tier Buy-Through Prohibitions, MM Docket
    No. 92-262, Order, 7 FCC Rcd 8672 (1992).

[^67]: *See* Paul Kagan Assocs., Inc., *Paul Kagan's 10-Year Cable TV
    Industry* Projections, The Cable TV Financial Databook, July 1996,
    at 11; *see also* Paul Kagan Assocs., Inc., *Paul Kagan's 10-Year
    Cable TV Industry* Projections, The Cable TV Financial Databook,
    July 1997, at 10.

[^68]: *See* Paul Kagan Assocs., Inc., *Paul Kagan's 10-Year Cable TV
    Industry* Projections, The Cable TV Financial Databook, July 1997,
    at 10; Paul Kagan Assocs., Inc., *Paul Kagan's 10-Year Cable TV
    Industry* Projections, The Cable TV Financial Databook 2000, July
    2000, at 10.

[^69]: NCTA, *National Cable Video Networks by Type of Service*, Cable
    Television Developments, Apr. 1994, at 7-A.

[^70]: NCTA, *National Cable Video Networks by Type of Service
    1976-1995*, Cable Television Developments, Spring 1996, at 6.

[^71]: NCTA, *National Cable Video Networks by Type of Service
    1980-2000*, Cable Television Developments 2001, Fall 2001, at 8.

[^72]: NCTA, *National Cable Video Networks by Type of Service*, Cable
    Television Developments, Apr. 1994, at 7-A.

[^73]: NCTA, *National Cable Video Networks by Type of Service
    1980-2000*, Cable Television Developments 2001, Fall 2001, at 8.

[^74]: Kagan World Media, *Major U.S. VOD Deployments and Trials*,
    Broadband Cable Financial Databook 2002, July 2002, at 79.

[^75]: Warren Publishing, Television and Cable Factbook 2002, Services
    Volume, at G-3.

[^76]: *See* Video *Annual Assessment of the Status of Competition in
    the Market for the Delivery of Video Programming*, CS Docket No.
    01-129, Eighth Annual Report ("2001 MVPD Competition Report"), 17
    FCC Rcd 1244, 1338.

[^77]: Advertising is an important source of revenue for cable networks.
    See Chapter X.

[^78]: "Season-to-Date Broadcast v. Cable Primetime Ratings: 2001-2002,"
    in "Viewer Track" section, available at http://www.tvb.org/rcentral.

[^79]: Cable networks tend to have somewhat lower total day ratings
    compared to prime time. *See e.g,* Kagan World Media, Cable
    Programming Investor, at 11

[^80]: "Top 100 Programs on Broadcast & Cable: May-2002," in "Viewer
    Track" section, available at http://www.tvb.org/rcentral.

[^81]: Warren Publishing, Television and Cable Factbook: 1990 Edition,
    at C-385, and 2001 Edition, at F-2.

[^82]: The remaining capacity its used to provide non-video services
    such as high-speed Internet access services and cable telephony.

[^83]: Kagan World Media, Cable Program Investor, July 29, 2002 at 14.

[^84]: Kagan World Media, Economics of Basic Cable Networks 2002, at 50.
    TVHH from Table 1

[^85]: In its 2001 Annual *Report on Cable Industry Prices* ("Price
    Survey"), the Commission analyzed demand for cable services by
    creating a demand equation model. Based on its analysis, the
    Commission found that changes in median household income has a
    direct relationship to demand (i.e., as this variables increases,
    the demand for cable service increases), since, as income rises,
    households can better afford cable service. *Implementation of
    Section 3 of the Cable Television Consumer Protection and
    Competition Act of 1992*, *Statistical Report on Average Prices for
    Basic Service, Cable Programming Services, and Equipment*, MM Docket
    No. 92-266, Report on Cable Industry Prices, 17 FCC Rcd 6313 (2001).

[^86]: In 1990, there were approximately 1.4 million active C-Band
    users, of which more than half subscribe to packaged programming
    services. *See* Working Paper 26, at 95.

[^87]: C-Band and DBS make up 20 percent of the total MVPD market. *See*
    Table of Competing technologies in the 2001 MVPD Competition Report,
    17 FCC Rcd 1244, 1338.

[^88]: Since DBS does not provide local broadcast stations in every
    market and some subscribers subscribe to both cable and DBS
    services. We do not account for the overlap in this regard.

[^89]: Kagan World Media, Broadband Cable Financial Databook, July 2002
    at 10, and The State of DBS 2001 at 3.

[^90]: Satellites in the C-Band frequency are also used to transmit
    programming to cable operators via C-Band receiving dishes at the
    cable central office or "headend."

[^91]: *See* 47 U.S.C. § 605(b) (satellite cable programming for private
    viewing).

[^92]: *Annual Assessment of the Status of Competition in Markets for
    the Delivery of Video Programming*, CS Docket No. 97-141, Fourth
    Annual Report ("1997 MVPD Competition Report"), 13 FCC Rcd 1034,
    1077 ¶ 68 (1998).

[^93]: How Many DTH Households Are Out There Anyway?, SkyReport, Oct.
    1994, at 1.

[^94]: *Annual Assessment of the Status of Competition in the Market for
    the Delivery of Video Programming*, CS Docket No. 00-132, Seventh
    Annual Report ("2000 MVPD Competition Report"), 16 FCC Rcd 6005,
    6045 ¶ 85 (2001).

[^95]: *Id.* Although most C-Band satellite receivers are analog and do
    not receive digital signals, C-band customers may buy a digital
    decoder/receiver in order to access and view digital programming.

[^96]: Inquiry into the Development of Regulatory Policy in Regard to
    Direct Broadcast Satellites, Docket No. Report & Order, 90 FCC 2d
    676 (1982).

[^97]: Kagan World Media, *The State of DBS* 2002, July 2002, at 56.

[^98]: On June 17, 1994, DirecTV and United States Satellite
    Broadcasting Co., Inc. ("USSB") began providing high-power DBS
    service via a jointly owned satellite. *Implementation of Section 19
    of the 1992 Cable Act* (*Annual Assessment of the Status of
    Competition in the Market for the Delivery of Video Programming*),
    CS Docket No. 94-48, First Report ("1994 MVPD Competition Report"),
    9 FCC Rcd 7442 ¶ 63 (1994). Echostar Communications Corp. initiated
    service in March 1996. Echostar Communications Corp., *Echostar II
    Reaches Final Orbit* (press release), Sept. 30, 1996.

[^99]: In 1999, DirecTV merged with USSB. *See* United States Satellite
    Broadcasting Co., Inc. Transferor and DirecTV Enterprises, Inc.
    Transferee*; For Consent to Transfer of Control of the United States
    Satellite Broadcasting Co., Inc. and DirecTV Enterprises, Inc. for
    Consent to Transfer Control of the USSB II Authorization to Operate
    a Direct Broadcast Satellite System Using Five Channels at the 101
    W.L. Orbital Location; Authorization to Construct, Launch, and
    Operate a Direct Broadcast Satellite System Using Three Channels at
    110 W.L. Orbital Location; and the Related Earth Registration*,
    (Call Sign E930437); Order and Authorization, 14 FCC Rcd 4585
    (1999). In 1999, Hughes, the parent company of DirecTV, acquired
    PrimeStar. *See Tempo Satellite, Inc., Assignor and DirecTV
    Enterprises, Inc., Assignee, Application for Consent to Assign
    Authorization to Construct, Launch and Operate a Direct Broadcast
    Satellite System Using 11 Frequencies at the 119 degrees W.L.
    Orbital Location, TCI Satellite Entertainment, Inc., Transferor And
    Primestar, Inc., Transferee, Application for Transfer of Control of
    Tempo Satellite, Inc. Echostar Satellite Corporation And Directsat
    Corporation, Applications for Special Temporary Authority to Operate
    a Direct Broadcast Satellite System*, Order and Authorization
    ("Primestar Order"), 14 FCC Rcd. 7946 (1999).Dominion Video
    Satellite, Inc., a self-described Christian, family oriented DBS
    service, uses 2 transponders on an Echostar satellite offering 20
    channels of video programming. Dominion has fewer than 1 million
    subscribers, and estimates that 60 to 65 percent of its subscribers
    also subscribe to Echostar's DISH Network. 2000 MVPD Competition
    Report, 16 FCC Rcd at 6038 ¶ 64. The Commission has granted the
    authority for R/L DBS Company to provide DBS service, but it has yet
    to commence service *In re: Application of R/L DBS Company For
    Assignment of Continental Satellite Corporation's Direct Broadcast
    Satellite Construction Permit*, Memorandum Opinion and Order, DA
    97-725 (1997); In re: Petition of *R/L DBS Company, LLC, For
    Extension of its Direct Broadcast Satellite Construction Permit*,
    Memorandum Opinion and Order, DA 00-2852 (2000).

[^100]: Kagan World Media, The State of DBS 2002, July 2002, at 4.

[^101]: Hughes Electronics Corp, *Hughes Second Quarter 2002 Results TS
    Driven By Strong DirecTV U.S. Financial Performance* (press
    release), July 15, 2002; Hughes Electronics Corp.,
    http://www.directv.com/ DTVAPP/see/Landing.jsp; Echostar
    Communications Corp., *Echostar Reports Second Quarter 2002
    Financial Results* (press release), August 15, 2002.

[^102]: *Annual Assessment of the Status of Competition in Markets for
    the Delivery of Video Programming*, CS Docket No. 99-230, Sixth
    Annual Report ("1999 MVPD Competition Report"), 15 FCC Rcd 978,
    1011-1012 ¶ 70 (2000).

[^103]: Cable also has public interest obligations. See Chapter VI.

[^104]: Implementation of Section 25 of the Cable Television Consumer
    Protection and Competition Act of 1992, Direct Broadcast Satellite
    Public Interest Obligations, MM Docket No. 93-25, Report and Order,
    ("DBS Public Interest Order"), 13 FCC Rcd 23254 (1998).

[^105]: See Federal Communications Commission, Commission Implements
    Public Interest Obligations for Direct Broadcast Satellite Service,
    MM Docket 93‑25, FCC News Release (Nov. 19, 1998).

[^106]: *See* http://www.direcpc.com. DirecTV also continues to offer
    its one-way high-speed access service, with a telephone line return
    path.

[^107]: Monica Hogan, *DirecTV Readies HDTV Sports Net*, Multichannel
    News, Sept. 4, 2001.

[^108]: Monica Hogan, *DirecTV Readies HDTV Sports Net*, Multichannel
    News, Sept. 4, 2001*.* To receive DirecTV's HDTV service,
    subscribers must purchase either an HDTV set with a built-in DirecTV
    receiver, or a separate decoder box, and a second satellite dish
    that is capable of receiving the signals. *See*
    http://www.directv.com:80/yourservice/yourservicepages/0,1125,384,00.html.

[^109]: Monica Hogan, *DirecTV Readies HDTV Sports Net*, Multichannel
    News, Sept. 4, 2001. To receive EchoStar's HDTV service, subscribers
    must purchase a second dish, use a specialized decoder box, and pay
    an extra fee. *See*
    http://www.dishnetwork.com/content/programming/locals/cbshd/index.shtml
    and http://www.dishnetwork.com/ppv/features/hdtv/hdtv.html.

[^110]: 17 U.S.C. § 119.

[^111]: H.R. Rep. No. 103-703, at 5 (1994) (Congress enacted the SHVA so
    that \"households that cannot receive over-the-air broadcasts or
    cable can be supplied with television programming via home satellite
    dishes\"); S. Rep. No. 103-407, at 5 n.2 (1994) (the restriction on
    satellite delivery of network signals \"actually refers to those
    geographic areas where subscribers are unable to receive the signal
    of a particular network\"); H.R. Rep. No. 100-187(I), at 14-15, 18,
    26, *reprinted in* 1988 U.S.C.C.A.N. 5638 (1988) (\"The distribution
    of network signals is restricted to unserved households; that is,
    those that are unable to receive an adequate over-the-air
    signal.\").

[^112]: More specifically, the license is available to satellite
    carriers defined as an entity that uses the facilities of a
    satellite or satellite service licensed by the Commission and
    operates in the Fixed‑Satellite Service under part 25 of title 47 of
    the Code of Federal Regulations.

[^113]: Under 17 U.S.C. § 119(d)(2), the term \"network station\" means:
    (A) a television broadcast station, including any translator station
    or terrestrial satellite station that rebroadcasts all or
    substantially all of the programming broadcast by a network station,
    that is owned or operated by, or affiliated with, one or more of the
    television networks in the United States which offer an
    interconnected program service on a regular basis for 15 or more
    hours per week to at least 25 of its affiliated television licensees
    in 10 or more States; or (B) a noncommercial educational broadcast
    station (as defined in section 397 of the Communications Act of
    1934)

[^114]: 17 U.S.C. §§ 119(a)(1), (d)(9), and (d)(10). The term \"unserved
    household" is defined by SHVA as a household that: (A) cannot
    receive, through the use of a conventional outdoor rooftop receiving
    antenna, an over‑the‑air signal of grade B intensity (as defined by
    the Federal Communications Commission) of a primary network station
    affiliated with that network, and (B) has not, within 90 days before
    the date on which that household subscribes, either initially or on
    renewal, to receive secondary transmissions by a satellite carrier
    of a network station affiliated with that network, subscribed to a
    cable system that provides the signal of a primary network station
    affiliated with that network.

[^115]: Pub. L. No. 106-113, § 1000(9), 113 Stat. 1501 (enacting S.
    1948, including the Satellite Home Viewer Improvement Act of 1999
    (\"SHVIA\"), Title I of the Intellectual Property and Communications
    Omnibus Reform Act of 1999 (\"IPACORA\"), relating to copyright
    licensing and carriage of broadcast signals by satellite carriers,
    codified in scattered sections of 17 and 47 U.S.C.).

[^116]: *See* 47 U.S.C. § 325(b)(2).

[^117]: *See* 47 U.S.C. § 325(b)(3)(C)(I) directing the Commission to
    establish election time periods for satellite carrier retransmission
    consent consistent with those established pursuant to the 1992 Cable
    Act.

[^118]: Implementation of the Satellite Home Viewer Improvement Act
    1999: Broadcast Signal Carriage Issues, Retransmission Consent
    Issues, CS Docket Nos. 00-96, 99-363, Report and Order, 16 FCC Rcd
    1918 (2000); Technical Standards for Determining Eligibility For
    Satellite-Delivered Network Signals Pursuant To the Satellite Home
    Viewer Improvement Act, ET Docket No. 00-90, Report, 15 FCC 24321
    (2000); Implementation of the Satellite Home Viewer Improvement Act
    of 1999: Application of Network Non-Duplication, Syndicated
    Exclusivity, and Sports Blackout Rules To Satellite Retransmissions
    of Broadcast Signals, CS Docket No. 00-2, Report and Order, 15 FCC
    22548 (2000); Implementation of the Satellite Home Viewer
    Improvement Act of 1999, Enforcement Procedures for Retransmission
    Consent Violations, Order, 15 FCC Rcd 2522 (2000); Implementation of
    the Satellite Home Viewer Improvement Act of 1999, Retransmission
    Consent Issues: Good Faith Negotiation and Exclusivity, CS Docket
    No. 99-363, First Report and Order, 15 FCC Rcd 5445 (2000).

[^119]: SHVIA provides DBS carriers with the opportunity to carry local
    stations in a Designated Market Area ("DMA") pursuant to a statutory
    copyright license similar to the one provided cable operators. If
    DBS carriers elect this option in a DMA, however, they must carry
    all the local stations in the DMA, effective January 1, 2002. The
    satellite industry challenged the SHVIA must-carry provisions. *See*
    DirecTV, Echostar, SBCA v. FCC & USA, No. 01-1151 (Fourth Circuit).
    In this consolidated case, the satellite carriers sought review of
    the Commission\'s Order implementing the statute. They also appealed
    a June 19, 2001, judgment of the United States District Court for
    the Eastern District of Virginia, which granted the government\'s
    motion to dismiss their complaint challenging the SHVIA. On December
    7, 2001, the United States Court of Appeals for the Fourth Circuit
    denied these petitions for review and affirmed the United States
    District Court for the Eastern District of Virginia's opinion. *See
    Satellite Broadcasting and Communications Association v. FCC*, No.
    01-1151 *et al.* (4^th^ Cir. 2001). The Supreme Court has denied
    these petitions as well. *Satellite Broadcasting Communications
    Assoc v. FCC*, 275 F.3d 337 (4th Cir. 2001), cert. denied, 122 S.
    Ct. 2588 (2002).

[^120]: Satellite Business News Fax Update, Sept. 25, 2002.

[^121]: *See* http://www.skyreport.com/skyreport/local.htm.

[^122]: 2001 MVPD Competition Report, 17 FCC at 1273-74 ¶ 59.

[^123]: *See* 2001 MVPD Competition Report, 17 FCC Rcd at 1314.

[^124]: *See* I*mplementation of the Cable Television Consumer
    Protection And Competition Act of 1992, Development of Competition
    and Diversity in Video Programming Distribution: Section 628(c)(5)
    of the Communications Act,*

    *Sunset of Exclusive Contract Prohibition*, CS Docket 02-190, Report
    and Order ("*Program Access Report &* Order") FCC 02-176, ¶¶ 123-41;
    8 FCC Rcd at 3416-23; *see also* 47 C.F.R. §§ 76.1000 *et seq.*

[^125]: *See* 1994 MVPD Competition Report ¶¶ 182-83

[^126]: For example, regional clustering of systems combined with a
    system\'s ownership of one or more regional programming networks may
    create one such opportunity for cable operators to shift (regional)
    programming to terrestrial distribution to facilitate denial of the
    programming to competitors. *See Program Access Report &* Order, FCC
    02-176, ¶¶ 123-41.

[^127]: The satellite dishes may be of any size in Alaska.

[^128]: 47 C.F.R. § 1.4000

[^129]: Restrictions on Over-the-Air Receptions Devices: Television
    Broadcast, Multichannel Multipoint Distribution and Direct Broadcast
    Satellite Services, CS Docket No. 96-83, Second Report and Order, 13
    FCC Rcd 23874 (1998); Restrictions on Over-the-Air Receptions
    Devices: Television Broadcast, Multichannel Multipoint Distribution
    and Direct Broadcast Satellite Services, CS Docket No. 96-83, Order
    on Reconsideration, 14 FCC 19924 (1999).

[^130]: DBS also expresses concern regarding potential interference from
    newly authorized MVDDS service. The Commission has determined,
    however, that it is technically feasible for MVDDS and DBS to share
    spectrum and that such sharing can be accomplished under an already
    existing fixed allocation in the 12.2-12.7 GHz band. This allocation
    requires that MVDDS not cause harmful interference to incumbent DBS
    services *See* *Amendment of Parts 2 and 25 of the Commission's
    Rules to Permit Operation of NGSO FSS Systems Co-Frequency With GSO
    and Terrestrial Systems in the Ku-Band Frequency Band; Amendment of
    the Commission's Rules to Authorize Subsidiary Terrestrial Use of
    the 12.2-12.7 GHz Band by Direct Broadcast Licensees and Their
    Affiliates; and Applications of Broadwave USA, PDC Broadband
    Corporation, and Satellite Receivers, Ltd., to Provide A Fixed
    Service in the 12.2-12.7 GHz Band*, ET Docket No. 98-206, RM-9147,
    RM-92-45, First Report and Order and Further Notice of Proposed
    Rulemaking, 16 FCC Rcd 4096 (2001).

[^131]: The DBS signal carriage rules require that where DBS elects to
    carry a local signal into a local market, it must carry all of the
    local signals in that market.

[^132]: Includes syndicated shows.

[^133]: Excludes WTBS and Fox or other on-air networks; includes
    syndicated shows.

[^134]: Includes WTBS.

[^135]: Less than 1%.

[^136]: Counts multiple-set usage to different sources at the same time
    as separate exposures.

[^137]: Amendment of Parts 21 and 74 of the Commission\'s Rules with
    Regard to Filing Procedures in the Multipoint Distribution Service
    and in the Instructional Television Fixed Service and Implementation
    of Section 309(j) of the Communications Act - Competitive Bidding,
    MM Docket. No. 94-131 and PP Docket No. 93-253, Report and Order, 10
    FCC Rcd at 9589, 9593 ¶ 7 (1995).

[^138]: Working Paper 26, at 110.

[^139]: Paul Kagan Assoc., Inc., *Wireless Cable Sub Count and Revenue
    Projections, 1996-2000*, Wireless Cable Investor, Dec. 31, 1996, at
    10-11; Paul Kagan Assoc., Inc., *Wireless Cable Sub Cont and Revenue
    Projections 1997-2001*, Wireless/Private Cable Investor, March 25,
    1998, at 4-5.

[^140]: NCTA, *Cable & Telecommunications Industry Overview 2001*, Cable
    Television Developments 2001, at 11*.*

[^141]: Amendment of Parts 21 and 74 to Enable Multipoint Distribution
    Service and Instructional Television Fixed Service Licensees to
    Engage in Fixed Two-Way Transmissions, MM Docket No. 97-217, Report
    and Order, 13 FCC Rcd. 19112 (1998), recon., 14 FCC Rcd 12764
    (1999), further recon., 15 FCC Rcd 14566 (2000).

[^142]: See Amendment of Part 2 of the Commission's Rules to Allocate
    Spectrum Below 3GHz for Mobile and Fixed Services to Support the
    Introduction of New Advanced Wireless Services, Including Third
    Generation Wireless Systems, ET Docket No. 00-258, First Report and
    Order and Memorandum Opinion and Order, 16 FCC Rcd 17222 (2001).

[^143]: See Amendment of Part 2 of the Commission's Rules to Allocate
    Spectrum Below 3GHz for Mobile and Fixed Services to Support the
    Introduction of New Advanced Wireless Services, Including Third
    Generation Wireless Systems, ET Docket No. 00-258, First Report and
    Order and Memorandum Opinion and Order, 16 FCC Rcd 17222 (2001).

[^144]: See Amendment of Part 2 of the Commission's Rules to Allocate
    Spectrum Below 3GHz for Mobile and Fixed Services to Support the
    Introduction of New Advanced Wireless Services, Including Third
    Generation Wireless Systems, ET Docket No. 00-258, First Report and
    Order and Memorandum Opinion and Order, 16 FCC Rcd 17222 (2001).

[^145]: See New Broadband Players Retreat From Cable, Telecom Markets,
    Comm. Daily, Apr. 11, 2001, at 2-3.

[^146]: Kagan World Media, *Cable TV Franchising Competition,* 1995-1998
    *Franchise Awards*, The Broadband Cable Financial Databook, 2001, at
    76-79.

[^147]: A registered public utility holding company could only enter
    into "any business (other than the business of a public utility
    company as such)" that was reasonably incidental, or economically
    necessary or appropriate to the operations of one or more integrated
    public-utility systems...which the \[SEC\] shall find necessary or
    appropriate in the public interest or for the protection of
    investors or consumers and not detrimental to the proper functioning
    of such systems or systems. PUHCA Section 11 (b)(1).

[^148]: According to new PUHCA Section 34(a)(1), an ETC is "any person
    determined by the 'Federal Communications Commission to be engaged
    directly or indirectly, wherever located, through one or more
    affiliates (as defined in Section 2(a)(11)(B) of PUHCA), and
    exclusively in the business of providing: (A) telecommunications
    services; (B) information services; (C) other services or products
    subject to the jurisdiction of the Commission; or (d) products or
    services that are related or incidental to the provision of a
    product or service described in (A), (B), or (C)."

[^149]: In re Implementation of Section 34(a)(1) of the Public Utility
    Holding Company Act of 1935, as added by Section 103 of the
    Telecommunications Act of 1996, GC Docket No. 96-101, Report &
    Order, 11 FCC Rcd 11377 (1996).

[^150]: 2001 MVPD Competition Report, 17 FCC Rcd 1293 ¶ 104.

[^151]: 2000 MVPD Competition Report, 16 FCC Rcd at 6063. RCN is not
    building within Philadelphia itself because it was unable to reach a
    franchise or OVS agreement with the city. *See, e.g.*, *Mass Media*,
    Comm. Daily, Feb. 16, 2001, at 7.

[^152]: 2001 MVPD Competition Report, 17 FCC Rcd 1295 ¶ 109.

[^153]: 2002 Program Access Report and Order, 17 FCC Rcd 12124 ¶¶ 28,
    50, and 67; 2001 MVPD Competition Report, 17 FCC Rcd 1293-94 ¶ 106.

[^154]: Section 613 (b) of the Communications Act, 47 U.S.C. § 533 (b),
    prohibited a common carrier from providing video programming
    directly to subscribers in its telephone service area, either
    directly, or indirectly through an affiliate owned by, operated by,
    controlled by, or under common control with a common carrier. That
    statutory provision was referred to as the cross-ownership ban. In
    1990, the Commission further restricted LECs to strict carrier-user
    relationships with cable operators, except in rural areas where
    telephone companies were permitted to provide video programming to
    subscribers within their service areas. *See* 47 C.F.R. §§ 63.54,
    63.58 (1990).

[^155]: *See* 1994 MVPD Competition Report, 9 FCC Rcd 7442 ¶ 103.

[^156]: *See* *Telephone Company-Cable Television Cross Ownership Rules,
    Sections 63.54-63.58*, Further Notice of Proposed Rulemaking, First
    Report and Order and Second Further Notice of Inquiry, 7 FCC Rcd 300
    (1991), recon., 7 FCC Rcd 5069 (1992), aff\'d sub nom., National
    Cable Television Association v. FCC, 33 F.3rd 66 (D.C. Cir. 1994);
    *Telephone Company-Cable Television Cross Ownership Rules, Sections
    63.54-63.58*, Second Report and Order, Recommendation to Congress,
    and Second Further Notice of Proposed Rulemaking, 7 FCC Rcd 5781
    (1992), appeal pending sub nom., Mankato Citizens Telephone Company,
    No. 92-1404 (D.C. Cir. filed Sept. 9, 1992) and modified on recon.,
    FCC 94-269, \_ FCC Rcd \_ (rel. Nov. 7, 1994) (Video Dialtone
    Reconsideration Order).

[^157]: In August 1995, the Commission streamlined the Section 214
    process for LECs to construct stand alone cable systems within their
    local service areas. The streamlined Section 214 procedures apply
    only to telephone companies that have obtained injunctions barring
    the Commission from enforcing the cable-telco cross-ownership ban.
    Telephone companies already had blanket Section 214 authority to
    operate cable systems outside their telephone service areas.
    *Telephone Co.-Cable Television Cross-Ownership Rules*,
    §§ 63.54-63.58, CC Docket No. 87-266, Fourth Report & Order, 11 FCC
    Rcd 818 (1995), *summarized at* 60 Fed. Reg. 44280 (1995), *petition
    for review pending, Ameritech Corp. v. FCC*, No. 95‑1423 (D.C. Cir.
    filed Aug. 18, 1995) and No. 95‑1441 (DC Cir. filed Aug. 25, 1995);
    *GTE Serv. Corp. v. FCC*, No. 95-1488 (DC Cir. filed Sept. 22,
    1995).

[^158]: Bell Atlantic NYNEX, PacBell, Bell South, and GTE all made
    significant investments in wireless cable between 1995 and 2001,
    serving as many as 130,000 subscribers in aggregate, but none of
    these operators currently remain in the MMDS business. *See* CAI
    Wireless Systems, Inc., *Prospectus* 5 (Sept. 21, 1995); Paul Kagan
    Assoc., Inc., *Wireless Cable Public and Private Funding, June 1994
    Through May 1995*, Wireless Cable Investor, May 31, 1995, at 1: Paul
    Kagan Assoc., Inc., *Wireless Cable Public Bond Offerings*, Wireless
    Cable Investor, June 30, 1995, at 1. In July 1995, PacBell acquired
    Cross Country which had wireless systems in PacBell\'s local
    telephone service area. Pacific Telesis Group, *Pacific Telesis
    Becomes Nation\'s First Telco To Offer Wireless Cable Television*
    (News Release), July 25, 1995; *see also* 2001 MVPD Competition
    Report, 17 FCC Rcd 1291 ¶ 101; 2000 MVPD Competition Report, 16 FCC
    Rcd 6061, ¶ 121; 1999 MVPD Competition Report, 15 FCC Rcd 1036 ¶ 122

[^159]: 47 U.S.C. § 571(a)(3)-(4).

[^160]: SBC Sells Americast Cable Overbuild Systems To Wide Open West,
    Comm. Daily, May 25, 2001, at 2-3.

[^161]: Matt Stump, *In Omaha, Cox and Qwest Wage Three-Way Contest*,
    Broadband Week, Oct. 1, 2001; Roger Bindl, Next Level
    Communications, *Video In Telephony*, Nov. 9, 2001; Karen Brown,
    *Getting the Picture? Telcos Struggle With Unfocused Video Market*,
    Broadband Week, June 4, 2001.

[^162]: Roger Bindl, Next Level Communications, *Video In Telephony*,
    Nov. 9, 2001.

[^163]: Kagan World Media, *Cable TV Competitive Franchise, 1995-*2001,
    Broadband Cable Financial Databook 2001, July 2001, at 76-80.

[^164]: Internet video provided in real-time is also known as "streaming
    video."

[^165]: *Understanding Broadband Demand: A Review of Critical Issues*,
    Office of Technology Policy Report, U.S. Department of Commerce,
    September 2002, p. 5.; See Amanda Cantrell, *Growth of Internet
    Access Slows Dramatically in U.S.*, The Industry Standard, Aug. 14,
    2001.

[^166]: Arbitron, Inc., Arbitron/Edison Media Research Study Reveals
    Most "Streamies" First Accessed Webcasting within the Last Year
    (press release), Sept. 5, 2001 (citing Nielsen// Net Ratings data).

[^167]: The Commission recently suggested that, given the nascent stage
    of the Internet video industry, it is premature to consider Internet
    video to be a full competitive alternative. *Amendment of Section
    73.658(g) of The Commission's Rules -- The Dual Network Rule*, MM
    Docket No. 00-108, Report and Order, 16 FCC Rcd 11114, 11120 (2001).
    In addition, industry sources believe that Internet video still is
    substandard to broadcast quality and that hurdles remain to watching
    video on a computer screen. Robert La Franco, *The Serious Game:
    Digital Video is Still Off-track*, Red Herring Online, Aug. 22,
    2001, at
    http://www.redherring.com/ind...01&doc_id=170020017&rh_special_report_id=;
    Alan Goldstein, *Test Pattern: Yahoo Still Trying to Tune in
    Potential of Broadcast.com*, The Dallas Morning News Online, July 3,
    2001, at http://www.dallas
    news.com/cgi-bin/...hnology/409092_yahoo_03bus.AR.html; *Dot.Bomb
    Won't Slow Streaming Media Growth*, CERF Predicts, Comm. Daily, Apr.
    27, 2001, at 5-6; Chris Wallace, *Is Streaming Video Dead?*, ZDNet,
    Mar. 19, 2001, at
    http://www.zdnet.com/filters/printerfriendly/0,6061,2697806-2,00.html;
    *Streaming Media Poised for Big Growth, Speakers Say*, Comm. Daily,
    June 21, 2001, at 5-6.

[^168]: *See* 2000 Report, 16 FCC Rcd at 6054 (this data from this
    source is cited throughout this paragraph and the following twp
    paragraphs).

[^169]: *See* News Release *Federal Communications Commission Releases
    Data on High-Speed Services for Internet Access*, July 23, 2002,
    <http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-224580A1.doc>
    (accessed August 11, 2002).

[^170]: JumpTV.com Pullout Doesn't End Debate on Streaming TV Copyright,
    Comm. Daily, Oct. 15, 2001, at 3-4.

[^171]: *RealNetworks Fuses Programs into Service*, Reuters, Sept. 23,
    2001, at http://news.cnet.com/news/0-1005-200-7277594.html;
    *RealNetworks Melds Audio, Video Platforms*, InternetNews.com, Sept.
    24, 2001, at http://www.internetnews.com/streaming-news/article
    /0,,861_889 881,00.html.

[^172]: http://www.breaktv.com; http://www.feedroom.com;
    http://www.intv.net; http://www.television.com; http://
    www.broadcast.com; http://www.tvtaxi.com;
    http://www.tvworldwide.com.

[^173]: *See* <http://news.com.com/2100-1023-947617.html> and
    <http://news.com.com/2100-1023-944242.html> (both accessed August 6,
    2002).

[^174]: *See* <http://news.com.com/2100-1023-947617.html> (accessed
    August 6, 2002) citing a survey conducted by the Online Publishers
    Association (OPA) and Web measurement company ComScore Networks.

[^175]: Bruce Orwall, *Five Studios Join Venture for Video on Demand,*
    Wall Street Journal, Aug. 17, 2001, at A3.

[^176]: Ken Kerschbaumer, *Leading Studios' VOD Charge*, Broadcasting
    and Cable, February 4, 2002.

[^177]: *Id*.

[^178]: *Id*.

[^179]: *See* W. Michael Cox and Richard Alm, *Off the Books*, Reason
    Magazine, Vol. 34, Issue 4, August 1, 2002, citing Veronis Suhler's
    & Associates' Annual Communications Industry Forecast (Veronis
    Suhler).

[^180]: Veronis Suhler at 6, 26. Other sources provide alternative
    estimates of VCR penetration ranging between approximately 87
    percent to over 93 percent of all television households. See,
    *e.g.*, Hollywood Entertainment 10-K *citing* Adams Media Research
    statistics; Veronis Suhler at 191.

[^181]: Veronis Suhler at 192, 194.

[^182]: Veronis Suhler at 6, 18. Hollywood Entertainment citing the DVD
    Entertainment Group estimates a 27 percent penetration for DVDs by
    the end of 2001. The number of DVD households is expected to grow
    significantly as DVD player prices continue to decline. The average
    DVD player now sells for \$193, down from an average price of \$298
    in 1999, and compared to the average VCR price of \$73. Christopher
    Stern, *Blockbuster Switching Focus to DVDs*, Washington Post, Sept.
    11, 2001, at E1, 12.

[^183]: Tom Shales, *Shall We Dance? With DVD, Indeed*, Washington Post,
    June 2, 1999, at C1.

[^184]: *Id*. at 194.

[^185]: *Id*.

[^186]: Id. at 191.

[^187]: *Id.* at 12, 16. Retailers, both video specialty stores and
    others, are allotting increasing amounts of shelf space to DVDs;
    Christopher Stern, *Blockbuster Switching Focus to DVDs*, Washington
    Post, Sept. 11, 2001, at E1, 12.

[^188]: *See*, *e.g.*, Hollywood Entertainment 10-K citing Adams Media
    Research statistics (the movie studios' 2000 home video revenues of
    \$9.5 billion represented 54.8 percent of their \$17.4 billion
    domestic revenue), Blockbuster 10-K *citing* Paul Kagan Associates
    statistics (the movie studios' 2000 home video revenues of \$7.9
    billion represents 44.3 percent of their \$17.8 billion domestic
    revenue).

[^189]: Veronis Suhler at 13-14; *2000 Report*, 16 FCC Rcd at 6058.

[^190]: *See*, *e.g*., Veronis Suhler at 8; (Viacom 10-K).

[^191]: *Id*.

[^192]: Videos also can be borrowed from public libraries.

[^193]: For example, for a monthly fee of \$19.95, Netflix allows
    consumers to rent DVDs from its Internet site with the movies sent
    to the consumer and returned to the company through the mail. *See*
    http://www.netflix.com. In addition, consumers in several markets
    can search Blockbusters' inventory over the Internet and reserve
    videos online before going to the store to pick them up. *See*
    http://www.blockbuster.com.

[^194]: For example, Best Buy and Amazon.com sell video programming
    through their Internet sites. *See* http://www.bestbuy.com and
    http://www.amazon.com. Express.com is limited to the sales of DVDs.
    *See* http://www.express.com. Previously, Blockbuster and Hollywood
    Entertainment, using its reel.com web site, sold video programming
    over the Internet. However, both companies now are withdrawing from
    e-commerce and focusing on providing entertainment news and
    information on their sites. *See* http://www.blockbuster.com and
    http://www.reel.com. *See also 2000 Report*, 16 FCC Rcd at 6058-9.

[^195]: For example, video superstores (*e*.*g*., Blockbuster,
    Hollywood) have a 58.9 percent share of the video rental business.
    Veronis Suhler at 10. Etna comments that it is difficult for small
    independent video businesses to compete against the large video
    chain stores because of their revenue sharing agreements with the
    movie studios. Etna Comment at 1-2.

[^196]: *See* W. Michael Cox and Richard Alm, *Off the Books*, Reason
    Magazine, Vol. 34, Issue 4, August 1, 2002, citing Veronis Suhler.

[^197]: Christopher Grimes, *The Americas -- Lord of the Rings Tops
    Oscar List*, Financial Times, February 13, 2002.

[^198]: Jack Mathews, *Box Office Boasts Record Run*, New York Daily
    News, January 1, 2002.

[^199]: PR Newswire, Veronis Suhler Stevenson Issues Annual
    Communications Industry Forecast (2002), August 5, 2002.

[^200]: *State of the Industry Report 2000-2001*, Interactive Digital
    Software Association (IDSA) at 5.

[^201]: The rest of this discussion of video and PC game platforms and
    applications is based on the *State of the Industry Report
    2000-2001*, IDSA (2002).

[^202]: NPD Funworld Report.

[^203]: *See* Newton's Telecom Dictionary (14^th^ Ed. 1998) definition
    of digital video.

[^204]: It can also be taken from an analog video camera and a VCR.
    Analog video is typically recorded on tape, such as a VCR. Digital
    video is typically recorded on a hard disk (magnetic or optical) or
    on a CD-ROM.

[^205]: Encoding is the process by which traditional forms of audio
    (cassette, compact disc, radio, etc.) and video (VHS, Beta,
    television, movies, etc.) media are converted into a digital format
    that allows their distribution and broadcast, in streaming or
    downloadable form, over the Internet or other digital distribution
    system. There are many different formats and standards for encoding,
    depending on whether it is streaming or download.

[^206]: MPEG is most commonly known as a compression scheme for full
    motion video.

[^207]: <http://www.mpeg.org/MPEG/index.html#mpeg> (accessed June 19,
    2002).

[^208]: An alternative to near video-on-demand is pure video-on-demand
    or VOD, a service that allows many users to request the same videos
    or movies at the same time or anytime. Video on demand requires a
    high-end video server with hundreds of gigabytes of storage.
    Successful deployment of VOD services by operators has faced several
    challenges, including the high cost of provisioning the necessary
    complex equipment and the lack of consumer research on whether
    consumers are prepared to pay the price that will be necessary to
    sustain a profitable business model.

[^209]: DTV is sometimes referred to as "advanced television," or ATV.
    Because ATV embraces any enhancements to the existing television
    format (known as the NTSC standard, for National Television Systems
    Committee), ATV is a more inclusive term than "digital television"
    or "high-definition television." Once digital technology proved
    feasible and the most desirable technical standard for advanced
    television, the term DTV became virtually synonymous with ATV. See,
    e.g., *In the Matter of Advanced Television Systems and Their Impact
    upon the Existing Television Broadcast Service,* Notice of Proposed
    Rule Making, 6 FCC Rcd 7024 n.1 (discussing the definition of
    "ATV"). See also, Adva*nced Television Systems and Their Impact Upon
    the Existing Television Broadcast Service,* Fourth Report and Order,
    11 FCC Rcd 17771, 17773 (1996)(discussing the introduction of the
    term "DTV") (Fourth Report and Order).

[^210]: *In the Matter of Advanced Television Systems and Their Impact
    on the Existing Television Broadcast Service,* Notice of Inquiry, 2
    FCC Rcd 5125, 5126 (1987) (Notice of Inquiry on ATV) (discussing the
    evolution of the NTSC standard and noting that "the NTSC
    transmission standard has proven to be remarkably durable and
    adaptable to changes over the years").

[^211]: Notice of Inquiry on ATV.

[^212]: The seven members of the Grand Alliance were AT&T (now Lucent
    Technologies), General Instrument Corporation, Massachusetts
    Institute of Technology, Philips Electronics North American
    Corporation, Thomson Consumer Electronics, The David Sarnoff
    Research Center and Zenith Electronics Corporation.

[^213]: Fourth Report and Order.

[^214]: *See* 47 U.S.C. § 336.

[^215]: The Balanced Budget Act of 1997 Act directs the FCC to auction
    the so-called analog spectrum in 2002. The spectrum may be returned
    to the FCC and reassigned as early as 2006. 47 U.S.C. §
    309(j)(14)(A)-(C) (1998).

[^216]: Balanced Budget Act of 1997, Pub. L. No. 105-33 § 3003, 111
    Stat. 251, 267 (1997). Some industry observers question whether the
    full transition to DTV and the return of analog spectrum will be
    consummated by 2006, as intended by the Balanced Budget Act of 1997.
    This view stems from doubts about consumer enthusiasm for DTV if
    sets are too expensive and, in turn, a likely triggering of the two
    contingency clauses adopted by Congress in 1997. Based on existing
    projections of the market penetration of DTV over the next 8 years,
    many analysts believe it is unlikely that 85 percent of households
    will be equipped to receive DTV by 2006. Josh Bernoff, a principal
    analyst with Forrester Research, an independent market research firm
    based in Cambridge, Massachusetts, estimates that only 23 percent of
    U.S. households (nearly 20 million) will have DTV sets by 2004 and
    only 48 percent (42 million) by the year 2007. See Statement by Josh
    Bernoff, Forrester Research, Transcript of Meeting of the Advisory
    Committee on the Public Interest Obligations of Broadcasters, at
    33-34 (Jan.16, 1998) (on file with the Advisory Committee
    Secretariat).

[^217]: See Many Broadcasters Will Not Meet May 2002 Digital Television
    Deadline, Report to the Ranking Minority member, Subcommittee on
    Telecommunications and the Internet, Committee on Energy and
    Commerce, House of Representatives, U.S. General Accounting Office,
    GAO-020466, April 2002, p. 12.

[^218]: *Id*.

[^219]: *See* *In the Matter of Review of the Commission's Rules and
    Policies Affecting the Conversion to Digital Television*, MM Docket
    No. 00-39, Memorandum Opinion and Order on Reconstruction, FCC
    01-330 (2001). See also
    <http://www.fcc.gov/Bureaus/Mass_Media/News_Releases/2001/nrmm0114.html>
    (accessed August 12, 2002).

[^220]: *Id*.

[^221]: *In the Matter of Carriage of Digital Television Broadcast
    Signals,* First Report and Order and Further Notice of Proposed
    Rulemaking in CS Docket No. 98-120. 16 FCC Rcd 2598 (2001).

[^222]: *Id*. at p. 32-33.

[^223]: *Id*.; See also 47 U.S.C. 534.

[^224]: *Id*. The Commission recognized that it may be especially
    burdensome for small systems with limited channel capacity (such as
    systems with fewer than 330 MHz) to carry a HDTV signal if they are
    not otherwise providing any HDTV programming. In this regard, it
    noted that mandatory carriage is limited to one-third of the cable
    system's capacity. It also recognized that carriage of a HDTV signal
    using 8-VSB pass-through may require the allocation of more than 6
    MHz of bandwidth due to the difference in channel alignments between
    broadcast over-the-air transmission and cable carriage. An 8-VSB
    pass-through of a broadcast station may straddle two cable channels
    and result in the loss of additional channels in the system (i.e.,
    the cable operator is not able to use these additional channels to
    carry other programming). Therefore, if a small system, which is not
    otherwise carrying any HDTV signals, is required to carry a
    broadcast signal in HDTV such that it straddles two channels in this
    way, it may include all of its lost spectrum when calculating its
    one-third capacity.

[^225]: See *In the Matter of Carriage of Digital Television Broadcast
    Signals,* First Report and Order and Further Notice of Proposed
    Rulemaking in CS Docket No. 98-120, 16 FCC Rcd 2598 (2001.

[^226]: See the discussion of Interactive Television later in this
    section and the discussion of Interactive Advertisements in Chapter
    IX.

[^227]: Value-added DTV programming could be high-definition, innovative
    multicasting, interactive, etc. - so long as it gives consumers
    something significantly different than what they currently receive
    in analog. This would include something more than a single stream of
    standard-definition digital programming.

[^228]: HDNet is a network devoted largely to sports programming,
    showing major league baseball games, NHL games, Olympic events and
    other sports ranging from Arena Football, gymnastics, auto racing,
    lacrosse and even Dallas Mavericks\' cheerleader tryouts.

[^229]: *See* Statement by FCC Chairman Michael K. Powell: *DTV Plan
    Update -- Progress for Consumers*, July 11, 2002,
    <http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-224218A1.doc>
    (accessed July 17, 2002); See Statement by FCC Chairman William E.
    Kennard: *Industry Agreement Will Jump Start Digital Television*,
    February 23, 2000,
    <http://www.fcc.gov/Speeches/Kennard/Statements/2000/stwek013.html>
    (accessed July 17, 2002); *See "American Family Goes Digital,"*
    Remarks of FCC Commissioner Susan Ness Before the California Cable
    Television Association Western Show in Los Angeles, CA, December 16,
    1999, <http://www.fcc.gov/Speeches/Ness/spsn913.html> (accessed July
    17, 2002); See *"DTV and DARS: Let's Get On With It*," Speech by FCC
    Chairman Reed Hundt before the NAB State Leadership Conference in
    Washington, *D.C.*, February 24, 1997,
    <http://www.fcc.gov/Speeches/Hundt/spreh706.html> (accessed July 17,
    2002).

[^230]: http://www.iconocast.com/issue/9001,1,0402,17,1.html

[^231]: *See* *Letter Regarding Digital Television Plan* by FCC Chairman
    Michael K. Powell to Senator Ernest F. Hollings, Chairman, Committee
    on Commerce, Science and Transportation, April 4, 2002,
    <http://www.fcc.gov/commissioners/powell/hollings_dtv_letter-040402.pdf>
    (accessed July 17, 2002). Chairman Powell did note in his letter to
    Chairman Hollings that "these goals sometimes get caught up in the
    policy debates over copy protection and cable compatibility for
    "plug and play" sets, and it is sometimes assumed that progress must
    wait until those broader issues are resolved. In my view, we can and
    should pursue these goals even as I've continue to work on the
    broader issues. I do not minimize the importance of copy protection
    and "plug and play" cable compatibility. These are issues that can
    and must be resolved. But I do not believe that we must defer all
    progress on the digital television transition until we do. The plan
    is purely voluntary but, as you can see, contemplates that each
    relevant industry will play a significant role. I intend to seek
    commitments along these lines in the near future."

[^232]: As noted earlier, value-added DTV programming could be
    high-definition, innovative multicasting, interactive, etc.

[^233]: Stations broadcasting DTV programming will inform viewers of
    their digital content

    through on-air promotional announcements over their analog broadcast
    facilities.

[^234]: These devices will include digital connectors (e.g., 1394/5C
    and/or DWHDCP) at the request of the consumer.

[^235]: *See* Statement By FCC Chairman Michael K. Powell, *DTV Plan
    Update -- Progress for Consumers*, July 11, 2002,
    <http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-224218A1.doc>
    (accessed September 26, 2002).

[^236]: *Id*.

[^237]: See In the Matter of Review of the Commission's Rules and
    Policies Affecting the Conversion to Digital Television, MM Docket
    No. 00-39, Second Report and Order and Memorandum Opinion and Order,
    FCC 01-330 (2002).

[^238]: The Interactive Television (iTV) Guide, Version 1.0, ING Barings
    Report, September 2000, p. 26.

[^239]: *Id*.

[^240]: In the Matter of Advanced Television Systems and Their Impact
    Upon Existing Television Broadcast Service, Fifth Report and Order,
    MM Docket No. 87-268 (1997).

[^241]: *See* 47 U.S.C. 336(e)(2)(B).

[^242]: In the Matter of Ancillary or Supplemental Use of Digital
    Television Capacity by Noncommercial Licensees, Report and Order, MM
    Docket No. 98-203 (2001).

[^243]: It said the use of a weekly period would provide NCE stations
    with sufficient flexibility because stations typically schedule
    their programming on a weekly basis.

[^244]: *See* <http://www.redherring.com/mag/issue85/mag-iblast-85.html>
    (accessed July 16, 2002);
    <http://www.wired.com/news/business/0,1367,34831,00.html> (accessed
    July 16, 2002); <http://www.current.org/tech/tech006nets.html>
    (accessed July 16, 2002);
    <http://www.broadbandweek.com/news/010122/010122_through_data.htm>
    (accessed July 16, 2002).

[^245]: *See* <http://www.hd-plus.com/iblast.html> (accessed September
    25, 2002).

[^246]: Clients are devices and software that request information.

[^247]: *Id*.

[^248]: Capitol Broadcasting has built an operational datacasting
    facility it calls "TotalCast," which is broadcast via WRAL-TV/DT in
    Raleigh, NC. TotalCast includes video-on-demand (VOD) from
    WRAL-TV/DT news, a custom news "microsite" from WRAL.com, computer
    games, short films, software, and other local programming. Received
    content may be stored on an end user's computer hard disk, where it
    is available for nearly instant access. *See*
    <http://www.digitaltelevision.com/2002/january/feature2.shtml>
    (accessed July 16, 2002). iBlast, a datacasting network, launched a
    game service called iBlast Games at the 2002 E3 conference on May
    17, 2002. According to company officials, the game service is
    capable of delivering up to 10 gigabytes of game content per day.
    iBlast Games will be available in selected cities nationwide in
    2002. *See* iBlast press release,
    [www.iblastgames.com](http://www.iblastgames.com/) (accessed
    September 26, 2002).

[^249]: Paige Albiniak, *Raising the Flag on Copy Protection*,
    Broadcasting and Cable, June 10, 2002, p. 25.

[^250]: Testimony of Richard D. Parsons, CEO, AOL Time Warner, before
    the House Committee on Energy and Commerce Subcommittee on
    Telecommunications and the Internet Hearing "*Ensuring Content
    Protection in the Digital Age*," April 25, 2002.

[^251]: *Id*.

[^252]: *See* *In the Matter of Digital Broadcast Copy Protection*,
    Notice of Proposed Rulemaking, MB Docket No. 02-230 (2002).

[^253]: Nondiscrimination in the Distribution of Interactive Television
    Services Over Cable, Notice of Inquiry, 16 FCC Rcd 1321 (2001) ("ITV
    NOI").

[^254]: *See Id.* at 1322.

[^255]: ITV NOI, supra.

[^256]: *ITV NOI*, 16 FCC Rcd at 1329.

[^257]: *ITV NOI*, 16 FCC Rcd at 1324-25.

[^258]: Id.

[^259]: Id.

[^260]: *See* NDS Announcement: Hawaii To Experience Oceanic Time
    Warner's New "Sportsview." NDS Press Release, September 19, 2002.

[^261]: Oceanic Cable has rolled out this type of service using Navic's
    set top data services software. *See* Karen Brown, *Oceanic*
    *Unveils Interactive Duo*, Multichannel News, September 18, 2002.

[^262]: *See* *PowerTV press release regarding Internet over TV
    Application*, April 3, 2001,
    <http://www.powertv.com/News/2001_news/04_03_01_news.html> (accessed
    July 22, 2002).

[^263]: Interactive Television -- Turning Couch Potatoes into Mouse
    Potatoes, Donaldson, Lufkin & Jenrette Report, December 1999, p. 1.

[^264]: *AOL Time Warner*, 16 FCC Rcd 6547 (2001).

[^265]: Newton's Telecom Dictionary (14^th^ Ed. 1998) defines the VBI
    as: The interval between television frames in which the picture is
    blanked to enable the trace (which "paints" the screen) to return to
    the upper left hand corner of the screen, from where the trace
    starts, once again to paint a new screen.

    This time period is the equivalent of 21 scanning lines. The VBI is
    used to transmit data to organize the television picture, as well as
    other data. Line 21 of the VBI is reserved for distribution of
    closed captioning information. *See* *Closed Captioning and Video
    Description of Video Programming*, *Implementation of Section 305 of
    the Telecommunications Act of 1996, Video Programming
    Accessibility*, Report, MM Docket No. 95-176, 11 FCC Rcd 19214
    (1996).

[^266]: Some set-top boxes and television sets will have EPGs technology
    built inside.

[^267]: In addition, some ITV providers may provide interactive EPGs as
    part of their ITV service. Other EPG companies, besides Gemstar, are
    WorldGate (who provides "TV Gateway" for WorldGate subscribers) and
    Liberate Tribune.

[^268]: On July 11, 2000, Gemstar and TV Guide, Inc. announced the
    completion of their merger, in which TV Guide, Inc. will become a
    wholly owned subsidiary of Gemstar. TV Guide, Inc*., Gemstar
    International Group Limited and TV Guide, Inc. Announce Completion
    of Their Merger* (press release) July 11, 2000.

[^269]: *See* Gene Feroglia, *Portal Shmortal---It's the IPG That
    Counts*, Multichannel News, August 27, 2001 ("What cable operators
    cannot lose sight of is the fact that the most crucial application
    available is the interactive program guide. . . .For the viewer, the
    IPG is the application that makes life easier by providing a tool to
    effectively navigate among programming options.")

[^270]: SeaChange International Inc., Concurrent Computer Corp., nCube
    Corp., Intertainer Inc., and DIVA are currently the principal VOD
    product and service vendors. (Note: DIVA filed for bankruptcy
    protection in May 2002.)

[^271]: James Chiddix, President of AOL Time Warner's Interactive
    Personal Video Division, has stated that "The one kind of
    interactive television that makes money today is video-on-demand."
    *See* Matt Stump, *Time Warner's Chiddix on State of VOD*,
    Multichannel News, November 5, 2001.

[^272]: A video server is a device that stores video information on hard
    disks or optical disk drives. See Newton's Telecom Dictionary
    (17^th^ Ed. 2001) at p. 748.

[^273]: A conditional access system is a necessary component of any
    video delivery system providing VOD. Conditional access is an
    electronic security system set up to prevent theft of service.

[^274]: A set top box with a hard drive can remove some network
    congestion caused by interactive applications, such as VOD.

[^275]: See Comcast's VOD System First to Link With Gemstar, Hollywood
    Reporter, October 4, 2001.

[^276]: Mark Hess, Comcast Vice President for Digital Services, has
    stated that the integration of Gemstar's EPG with SeaChange's VOD
    system "will help the company launch interactive TV services on the
    Motorola box." *See id.*

[^277]: SVOD initially launched in four markets: Columbia, S.C. (Time
    Warner), Cincinatti, OH (Time Warner), Cleveland, OH (Adelphia), and
    New York City (Cablevision). Matt Stump, *Approaches Differ, But
    Product Remains SVOD*, Multichannel News, November 5, 2001.

[^278]: Matt Stump, *Quietly, Cable VOD Efforts Head Toward Critical
    Mass*, Multichannel News, November 5, 2001.

[^279]: Stuart Thomson and Aalia Walker, *Datafile*, Cable and Satellite
    Europe, September 1, 2001.

[^280]: *Id*.

[^281]: *Id*.

[^282]: TiVo Inc., SEC Form 10-K405, March 30, 2000 ("TiVo 10-K");
    ReplayTV Inc., SEC Form S-1/A, May 1, 2000 ("ReplayTV S-1/a").

[^283]: *Id*.

[^284]: *Id*.

[^285]: Bear, Stearns & Co. Inc., Hard Lines Retailing: Consumer
    Electronics Report (2002) at p. 32.

[^286]: *Id*., citing an eBrain Market Research Study from July 2001.
    (Note that all the figures used in this paragraph are from the
    Bear,Stearns & Co. Report).

[^287]: *Id*., at p. 32.

[^288]: *2000 Report*, 16 FCC Rcd at 6059-60.

[^289]: Natalie Weinstein, *Sonicblue Completes ReplayTV Acquisition*,
    CNET News.com, Aug. 2, 2001, at
    http://news.cnet.com/newx/0-1006-200-6762533.html; Khanh T.L. Tran,
    *TiVo, Sonicblue Still See the Bright Side*, Wall Street Journal,
    Aug. 31, 2001, at B3. Sonicblue also plans to provide Ethernet
    capabilities in order to offer a subscription service for niche
    programming. Michael Grotticelli, *Reviving ReplayTV,* Broadcasting
    & Cable, Sept. 10, 2001, at 32.

[^290]: Bear, Stearns Hard Lines Retailing: Consumer Electronics, p. 32.

[^291]: http://www.tivo.com; Walter S. Mossberg, *Personal Technology,
    SuperSet-Top Boxes Put Viewers in Charge, Change TV Habits*, Wall
    Street Journal, Feb. 22, 2001, at B1. *See also 1999 Report*, 15 FCC
    Rcd at 1035.

[^292]: *TiVo Reports Subscriber Increases, Lower Losses*, Satellite
    Business News Fax Update, May 30, 2001, at 2;
    http://www.directv.com.

[^293]: http://www.dishnetwork.com/content/products/receivers/index.shtml.

[^294]: Michael Freeman, *Execs Debate Issues at TCA: Product
    Placements, PVR Use Top Agenda*, Electronic Media, Vol: 21, No. 29,
    July 22, 2002 (citing remarks by Leslie Moonves, President, CBS
    Television).

[^295]: *Id*.

[^296]: Michael Freeman, *Execs Debate Issues at TCA: Product
    Placements, PVR Use Top Agenda*, Electronic Media, Vol.: 21, No. 29,
    July 22, 2002 (citing remarks by Jamie Kellner, Chairman, Turner
    Broadcasting).

[^297]: *Id*.

[^298]: Comm. Daily, Vol. 22, No. 135, July 15, 2002 (citing remarks by
    Jamie Kellner, Chairman, Turner Broadcasting).

[^299]: *Id*.

[^300]: Lisa de Morales, *The TV Column*, The Washington Post, July 25,
    2002 (citing remarks by Bob Wright, CEO, NBC).

[^301]: *Id*.

[^302]: *Id*.

[^303]: Marla Matzer Rose, *Study: PVR Users Skip 71% of Ads*, Hollywood
    Reporter, July 3, 2002, citing research study from CNW Marketing
    Research.

[^304]: *Id*.

[^305]: The research characterizes "ignoring" live TV as getting a
    snack, starting a conversation or taking a bathroom break.

[^306]: Data table compiled by CNW Marketing Research and used with
    permission from Art Spinella of CNW. CNW Marketing Research is
    primarily known for its automotive research, and the study was done
    mainly to learn about viewer habits in the automotive category.
    While its methodology was not designed to be definitive for other
    categories, the results may offer a window into the still‑new world
    of PVRs, a worrisome area for advertisers concerned about avoidance
    of commercials. Total sample size: all surveyed were over age 18;
    8,146 people watched live TV; 1,159 used videotapes and 944 were PVR
    owners. The survey is part of a larger television interactive study
    with a total sample size in excess of 18,000.

[^307]: *Id*.

[^308]: Stuart Thomson and Aalia Walker, *Datafile*, Cable and Satellite
    Europe, September 1, 2001.

[^309]: *Id*.

[^310]: See New TiVo Advertainment Debuts as Part of Best Buy National
    'Go Mobile' press release, May 16, 2002.

[^311]: *Id*.

[^312]: See Many Broadcasters Will Not Meet May 2002 Digital Television
    Deadline, GAO-020466, April 2002.

[^313]: *Id*.

[^314]: See Chapter X, "*Cooperative Efforts with Broadcasters*"
    subsection for more detail on this issue.

[^315]: *Consolidation Good for Public, Advertisers, Karmazin Tells
    TVB*, Comm. Daily, Vol. 22, Issue 59, March 27, 2002, citing remarks
    by Mel Karmazin, President, Viacom.

[^316]: Proctor &Gamble and Viacom Plus Announce Major Marketing
    Partnership, PR Newswire, May 31, 2001.

[^317]: *Id*.

[^318]: Diane Mermigas, *Not All Mergers Made in Heaven*, Electronic
    Media, Vol. 21, No. 25 June 24, 2002.

[^319]: WPSG-TV, KYW Newsradio, KYW-TV to Debut Headline Service on
    UPN57 This Fall; Local News, Weather and Traffic to be Updated Every
    10 Minutes, PR Newswire, June 3, 2002.

[^320]: Sallie Hofmeister, *Q&A with Murdoch Empire's Chief Engineer*,
    Los Angeles Times, September 2, 2001, citing remarks by Peter
    Chernin, Chief Operating Officer, News Corp. News Corp. holds and
    85% stake in Fox Entertainment Group Inc. which operates the Fox
    Television Stations unit (Fox Television).

[^321]: *Id*.

[^322]: Business Brief, Fox Entertainment Group Inc.: Pact is Set to Buy
    WPWR-TV in Chicago From Newsweb, The Wall Street Journal, June 28,
    2002. See also Entravision Communications Corporation Reports First
    Quarter2002 Results, PR Newswire, May 9, 2002.

[^323]: Sallie Hofmeister, *Q&A with Murdoch Empire's Chief Engineer*,
    Los Angeles Times, September 2, 2001.

[^324]: Id.

[^325]: *Id*.

[^326]: *Id*.

[^327]: *Id*.

[^328]: Bear, Stearns & Co. Inc., *Advertising & Marketing Services
    Report*, March 2002 at 6.

[^329]: It is important to note that these other areas are often not
    reflected in many industry statistics.

[^330]: Much of the discussion in this working paper regarding buy-side
    consolidation is taken from the Bear, Stearns Advertising &
    Marketing Services Report (2002).

[^331]: Richard Tomkins, *Commercial Break-up*, The Financial Times,
    July 15, 2002.

[^332]: *Id*.

[^333]: *Id*.

[^334]: Bear, Stearns Report at 11.

[^335]: *Id*.

[^336]: *Id*.

[^337]: According to industry analysts, the top ten companies control an
    estimated 39% of the revenues in the advertising industry. However,
    as a percentage of the entire marketing industry, this figure is
    more like 25%.

[^338]: Richard Linnett and Wayne Friedman, *Sellers: Mega-shops Slow in
    Upfront*, Advertising Age, June 24, 2002 at 3.

[^339]: *Id*.

[^340]: *Id*.

[^341]: *Id*. (citing John Mandel, CEO, MediaCom).

[^342]: Matthew Rose and Suzanne Vranica, *Prolonged Ad Slump Puts Media
    in the Mood to Pander to Buyers*, Wall Street Journal, May 9, 2002.

[^343]: Frank Ahrens, The Spy Who Loved Nokia, and Other Next-Stage Ads:
    TV Plots Thicken With Real Brands, The Washington Post, September
    28, 2002.

[^344]: Suzanne Vranica, *Reisenberg is the Marrying Kind*, Wall Street
    Journal, May 3, 2002.

[^345]: Id.

[^346]: Jim Forkan, *On Some Cable Shows, the Sponsors Take Charge*,
    Multichannel News, June 4, 2001. (The discussion in this paragraph
    and the next two paragraphs is drawn from this article).

[^347]: According to an Outdoor Channel executive, the Outdoor Channel
    has aired a variety of sponsor-supplied programs including: Hunting
    with Penn's Woods (a game-call marketer), Hunting with Country (from
    camouflage designer Mossy Oak) and Primos' Truth About Hunting (from
    Primos Hunting Calls).

[^348]: Suzanne Vranica, *FX Faces Headaches with 'World Beer Games*,*'*
    Wall Street Journal, May 3, 2002.

[^349]: *Id*.

[^350]: See Brian Lowry, *Going Far Beyond Product Placement*, Los
    Angeles Times, July 10, 2002.

[^351]: eMarketer's Global Report notes that year 2004 projections of
    total worldwide e‑commerce revenues range from \$963 billion
    (ActivMedia Research) to \$4 trillion (Forrester Research). IDC
    Research expects total e‑commerce revenues of \$2.8 trillion and
    Goldman Sachs & Co. expects revenues of \$3.48 trillion

[^352]: Phillip Swann, *Is the Future Now?* Response TV, February 1,
    2002.

[^353]: See *B2C E-Commerce: Key Messages and Forecasts Report* by Ovum
    Research,
    <http://www.ovum.com/go/product/latestresearch/008308.htm>,
    (accessed August 9, 2002).

[^354]: Id.

[^355]: *Id*.

[^356]: *Id*.

[^357]: Jeremy Thorp, *What Benefits Do Interactive and Enhanced TV
    Service Provide?*, Broadcast Engineering, Vol. 43, No. 3, March 1,
    2001.

[^358]: *In the Matter of Children's Television Obligations Of Digital
    Television Broadcasters*, Notice of Proposed Rulemaking, MM Docket
    No. 00-167 at 2 (2000). *See also* S. Rep. No. 227, 101st Cong., 1st
    Sess. 17 (1989) ("Senate Report").

[^359]: Children's Television Report and Policy Statement, 50 FCC 2d 1
    (1974), affd., Action for Children's Television v. FCC, 564 F.2d 458
    (D.C. Cir. 1977) ("1974 Policy Statement").

[^360]: *1974 Policy Statement*, 50 FCC 2d at 11. The Commission stated
    its expectation that the industry would eliminate "host selling" and
    product "tie-ins," use separation between programs and commercials
    during children's programming, and honor the industry's voluntary
    advertising guidelines for children's programs.

[^361]: Children's Television Act of 1990, Pub. L. No. 101-437, 104
    Stat. 996-1000, *codified at* 47 U.S.C. §§ 303a, 303b, 394. The
    Senate Report on the CTA cited the Commission's 1984 decisions as
    precipitating factors in the enactment of the CTA. *See* Senate
    Report at 4-5.

[^362]: Senate Report at 1.

[^363]: In August 1996, the Commission adopted its current educational
    programming rules enforcing the CTA. *See Report and Order, Policies
    and Rules Concerning Children's Television Programming*, MM Docket
    No. 93-48, 11 FCC Rcd 10660 (1996) ("*Children's Programming Report
    and Order*"). The Commission first adopted rules implementing the
    CTA's educational programming mandate in 1991. These rules included
    a very flexible definition of educational programming, did not
    establish quantitative guidelines regarding the amount of
    educational programming licensees were required to provide, and did
    not include measures designed to inform the public about educational
    programming. Within a few years after these initial rules took
    effect, questions began to be raised regarding the effectiveness of
    the new rules, and in particular about the content of the programs
    stations claimed were educational. The Commission's rules included
    several measures to improve public access to information about the
    availability of children's "core" programming. The Commission
    defined "core" programming as regularly scheduled, weekly
    programming of at least 30 minutes, aired between 7:00 a.m. and
    10:00 p.m., that had the significant purpose of serving the
    educational and informational needs of children ages 16. The program
    had to be identified as core programming when aired and in
    information provided to program guide publishers.

[^364]: In the Matter of Children's Television Obligations Of Digital
    Television Broadcasters, Notice of Proposed Rulemaking, MM Docket
    No. 00-167 at 2-3 (2000).

[^365]: *Id*.

[^366]: *Id*.

[^367]: Comm. Daily, Experts Say Interactive TV Profits Still Are Years
    Away, Vol. 21, Issue 41, March 1, 2001.

[^368]: Jeremy Thorp, *What Benefits Do Interactive and Enhanced TV
    Service Provide?*, Broadcast Engineering, Vol. 43, No. 3, March 1,
    2001.

[^369]: *Id*.

[^370]: *Id*.

[^371]: In the Matter of Amendment of Part 73 of the Commission's Rules
    and Regulations With Respect to Competition and Responsibility in
    Network Television Broadcasting, Report and Order, Docket No. 12782,
    ("Fin Syn"), 23 FCC 2d 382 (1970).

[^372]: In the Matter of Evaluation of the Syndication and Financial
    Interest Rules, MM Docket No. 90-162, Second Report and Order, 8 FCC
    Rcd 3282, recon. Granted in part, In the Matter of Evaluation of the
    Syndication and Financial Interest Rules, MM Docket No. 90-162,
    Memorandum Opinion and Order, 8 FCC Rcd 8270 (1993), aff'd sub nom.
    Capital Cities/ABC, Inc. v. Fcc, 29 F.3d 309 (7^th^ Cir. 1994).

[^373]: United States v. National Broadcasting Company, 842 F. Supp. 402
    (C.D. Cal. 1993).

[^374]: Review of the Syndication and Financial Interest Rules, Sections
    73.659 -- 73.663 of the Commission's Rules, MM Docket No. 95-39,
    Report and Order, 10 FCC Rcd 12165 (1995).

[^375]: Bear, Stearns & Co. Inc., Diversified Entertainment, May 2002 at
    8 (parts of the discussion in this section are drawn from the Bear,
    Stearns Report).

[^376]: The general consensus among networks executives interviewed is
    that the number one consideration for scheduling is what show is
    going to work, not whether it is owned by the network, sister studio
    or parent company.

[^377]: Information based on interviews with broadcast network
    executives and company sources.

[^378]: Bear Stearns Diversified Entertainment Equity Research, Media,
    Diversified Entertainment, [We Are Family]{.underline}, May 2002 at
    9.

[^379]: Michael Freeman, *Special Report: The New Economics of TV*,
    Electronic Media, January 28, 2002.

[^380]: See Marcelino Ford-Livene, *The Digital Dilemma*, Federal
    Communications Law Journal, Vol. 51, No. 3, May 1999 at 606, fn. 4.

[^381]: *Id*.

[^382]: Information based on interviews with broadcast network
    executives and company sources.

[^383]:

[^384]: *Id*.

[^385]: Figures from Bear, Stearns, "Primetime Hours Produced by
    Network---1993-1994, 1997-1998, 2002-2003 Broadcast
    Seasons---Percent" (2002)

[^386]: *Id*. (Note that for 2002-2003 season, CBS and UPN are
    combined).

[^387]: Data from company insiders, presentations and Bear, Stearns &
    Co. Inc. (2002) (Note that the number of shows represents the
    beginning of the 2002-2003 broadcast season. Each studio received
    full credit for its participation in a co-production. Pre-scheduled
    mid-season replacements were given full credit. CBS and UPN are
    combined).

[^388]: *Id*.

[^389]: *Id*.

[^390]: *Id*.

[^391]: *Id*.

[^392]: Id.

[^393]: Michael Freeman, For Whom Production Tolls: Small Tollin/Robbins
    Outfit Becoming a Giant Killer, Electronic Media, August 12, 2002.

[^394]: *Id*.

[^395]: *Id*.

[^396]: Michael Freeman, *Special Report: The New Economics of TV*,
    Electronic Media, January 28, 2002.

[^397]: *Id*.

[^398]: Michael Freeman, *TV in Transition: Invasion of the Pod Deals*,
    Electronic Media, August 19, 2002.

[^399]: A network may opt for a "work made for hire" arrangement if the
    contractor has expertise in a particular category and it makes sense
    to use their services. However, the network may force the contractor
    to partner with an affiliated or non-affiliated production company
    as a condition of the deal.

[^400]: Freeman, TV in Transition: Invasion of the Pod Deals.

[^401]: *Id*.

[^402]: *Id*.

[^403]: *Id*.

[^404]: *Id*.

[^405]: Freeman, Special Report: The New Economics of TV.

[^406]: *Id*.

[^407]: Michael Freeman, *Rethinking Repurposing*, Electronic Media,
    August 12, 2002.

[^408]: *Id*.

[^409]: *Id*.

[^410]: Editorial: *Networks Need to Get Serious About Summer*,
    Electronic Media, July 22, 2002.

[^411]: *Id*.

[^412]: \"The Sopranos\" hit a record-shattering high note for HBO on
    Sunday, September 15, 2002, as the pay-cable series\' long-deferred
    fourth-season premiere dominated the ratings. Estimates from Nielsen
    Media Research indicate that 13.4 million people were watching one
    of HBO\'s channels while \"The Sopranos\" aired -- the pay
    channel\'s biggest audience ever, eclipsing the show\'s 2001
    premiere by 2 million viewers. That audience would have placed
    \"Sopranos\" sixth among all prime-time programs during the previous
    week -- a stunning figure given that HBO is received by roughly a
    third of the U.S. television viewing households. The program easily
    won its time period, beating all the broadcast networks (some of
    which had not yet launched their new seasons). *See* Brian Lowry,
    *Bada Bing!*, Los Angeles Times, September 18, 2002.

[^413]: Michael Freeman, *Summer Strategy Becomes Necessity*, Electronic
    Media, July 29, 2002.

[^414]: Diane Mermigas, *NBA Passes Over to Disney and AOL,* Electronic
    Media, January 28, 2002 (much of the discussion of dollar amounts
    mentioned in this sports programming section are drawn from this
    article).

[^415]: *Id*.

[^416]: Of the 80 regional cable channels identified in 2001, 29, or 36
    percent, were sports channels. *See* 2001 Video Competition Report,
    App. D, Tbl. D-3.

[^417]: *See* 2000 Video Competition Report, 17 FCC Rcd at 1354-1356.

[^418]: Ameritech Comments in the 1997 Video Competition Report; 1998
    Video Competition Report, 13 FCC Rcd at 24298-99 and 24380-81.

[^419]: In the Matter of Implementation of Section 26 of the Cable
    Television Consumer Protection and Competition Act of 1992, Inquiry
    into Sports Programming Migration, Final Report, 9 FCC Rcd 3440
    (1994).

[^420]: Bell Atlantic Comments in the 1997 Video Competition Report

[^421]: NCTA, *Regional Cable Networks*, Cable Developments 2002, May
    2002, at 171-194.

[^422]: Liberty Media Press Release, Cablevision\'s Rainbow Media and
    Fox/Liberty Complete Transaction to Create Sports Partnership, Dec.
    18, 1997, at 1

[^423]: See Memorandum Opinion and Order In the Matter of DirecTV, Inc.
    Complainant, v. Comcast Corporation, Comcast-Spectacor, L.P.,
    Comcast SportsNet, Defendants, DA 98-2151 (rel. Oct. 27, 1998) at
    ¶ 7.

[^424]: See Memorandum Opinion and Order In the Matter of DirecTV, Inc.
    Complainant, v. Comcast Corporation, Comcast-Spectacor, L.P.,
    Comcast SportsNet, Defendants, DA 98-2151 (rel. Oct. 27, 1998) at
    ¶ 7.

[^425]: Deborah D. McAdams, Cable News Nets Go Small, Broadcasting &
    Cable, Sept. 27, 1999, at 48.

[^426]: The use of digital production technology has enabled the
    provision of "hyper-local news." Marianne Paskowski, *Dolan\'s
    \'Hyperlocalism*\', Multichannel News, Oct. 5, 1998, at 52.

[^427]: NCTA, Cable Developments 2002, at 171-194

[^428]: Variety, *News Derby Upset by Dark Horse*, John Dempsy and Gary
    Levin, Sept. 22-28, 1997, at 71.

[^429]: Deborah D. McAdams, Cable News Nets Go Small, Broadcasting &
    Cable, Sept. 27, 1999, at 44.

[^430]: Variety, *News Derby Upset by Dark Horse*, John Dempsy and Gary
    Levin, Sept. 22-28, 1997, at 71.

[^431]: Variety, *News Derby Upset by Dark Horse*, John Dempsy and Gary
    Levin, Sept. 22-28, 1997, at 71.

[^432]: Variety, News Derby Upset by Dark Horse, John Dempsy and Gary
    Levin, Sept. 22-28, 1997, at 71.

[^433]: Cablevision, the seventh largest MSO, owns news networks,
    including MSG Metro Traffic and Weather in New York and the News 12
    group of regional news services in Connecticut, New Jersey, and
    Westchester County and Long Island, New York. *See also* 2001 Video
    Competition Report, 17 FCC Rcd at 1354.

[^434]: Multiplexing is use of programming related to an original
    network.

[^435]: Annual Assessment of the Status of Competition in Markets for
    the Delivery of Video Programming, CS Docket No. 98-102, Fifth
    Annual Report ("1998 Report"), 13 FCC Rcd 24284, 24376-7, 24380
    (1998).

[^436]: 1998 Video Competition Report, 13 FCC Rcd at 24429-24453; 2001
    Video Competition Report, 17 FCC Rcd at 1344-1364.

[^437]: 2001 Video Competition Report, 17 FCC Rcd at 1345.

[^438]: 2001 Video Competition Report, 17 FCC Rcd at 1350.

[^439]: Ownership information in this paragraph are taken from Bear
    Stearns Broadcast/Entertainment Research, "Ratings Race," Week 37
    01/02 (6/3/02-6/9/02).

[^440]: WP 26 at 150. The estimate is based on the following chain of
    reasoning. FCC data for 1980 indicate that networks' net advertising
    revenues were .806 of gross advertising revenues, and a 1991 trade
    press estimate stated that networks spend 75-80 percent of their
    budget on programming. Assuming budgets are based on 100 percent of
    net revenues, network programming expenses would be between .605 and
    .685 of gross revenues. On that basis, WP 26 used a factor of .65.

[^441]: Mermigas, Diane "NBC passes over to Disney and AOL," [Electronic
    Media]{.underline}, Jan. 28, 2002.

[^442]: WP 26 estimated that three network programming expenditures in
    1995 would be \$7.9 billion, based on estimated gross advertising
    revenues of \$12.2 billion. In fact, four-network advertising
    revenues for 1995 turned out to be \$11.6 billion. The implied level
    of programming expenditures (for four networks) is thus \$7.5
    billion. Clearly, the predictions were over-optimistic

[^443]: See note 49, supra, for a discussion of the manner in which
    average ratios are constructed in the Television Financial Reports.
    Note also that some Fox and NBC affiliates that had previously
    participated did not take part in the 2000 survey.

[^444]: To derive net advertising revenues from gross advertising
    revenues, it is necessary to subtract out all commissions. Agency
    commissions are .14 and representatives' commissions are .064, but
    they apply to only .4 of all gross revenues. Hence, one must
    subtract (.14 + .064\*.4) =.166 to get from gross to net advertising
    revenues. Net revenues are equal to net advertising revenues plus
    other revenues, and other revenues are equal to .077\* net revenues.
    Hence, net revenues= .834\*gross ad revenues + .077\* net revenues
    and net revenues = .904\*gross ad revenues.

[^445]: Programming expenditures are taken as the some of the program,
    production, and news categories in the TVFB.

[^446]: See 1995 TVFB at 2-3. The programming/net revenue ratio is .333.
    Agency commissions were .144 of gross ad revenues, national and
    regional advertising was .44 of the total and representatives'
    commissions were .058 of that total. Hence, net advertising revenues
    were .144+(.058\*.44)=.170. Thus net advertising revenues are .83 of
    gross advertising revenues. The other revenue categories account for
    .087 of net revenues. Therefore, total net revenue =.83\* gross
    advertising revenue plus .087\* net revenue, and net revenue
    =.909\*gross advertising revenue. Thus programming expenditures are
    .333\*.909 =.303 of gross ad revenues.

[^447]: Bear, Stearns Diversified Entertainment Equity Research, Media,
    Diversified Entertainment, [We Are Family]{.underline}, May 2002, p.
    10.

[^448]: Id.