*Pages 1--148 from  Microsoft Word - 21727.doc*
 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
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 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.
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 Broadcast  Television:  Survivor  in  a  Sea  of  Competition
 Jonathan  Levy    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.
   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.
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 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.
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 Contents  I.  INTRODUCTION  1
 II.  THE  MARKET  FOR  VIDEO  MEDIA  3
 III.  THE  ECONOMICS  OF  TELEVISION  FINANCING  METHODS  7
 INTRODUCTION  7  THE  IMPACT  OF  FINANCING  METHODS  ON  VIDEO  PROGRAMMING  AVAILABILITY  7
 AGGREGATE  TRENDS  IN  VIDEO  ADVERTISING  9
 IV.  BROADCAST  TELEVISION  18
 OVERALL  INDUSTRY  TRENDS  18  TELEVISION  NETWORKS  27
 TELEVISION  STATIONS  29  SUMMARY  38
 V.  CABLE  TELEVISION  40
 THE  NATURE  OF  CABLE  TELEVISION  40  AVAILABILITY  AND  SUBSCRIBERSHIP  OF  CABLE  TELEVISION  44
 CABLE  OPERATOR  REVENUES  45  THE  COMPETITIVE  IMPACT  OF  CABLE  ON  BROADCAST  TELEVISION  46
 CONCLUSIONS  49
 VI.  DIRECT-  TO-  HOME  SATELLITE  TRANSMISSIONS  51
 DIRECT-  TO-  HOME  SATELLITE  SERVICES  52  DBS  PUBLIC  INTEREST  OBLIGATIONS  56
 DBS  AS  A  COMPETITOR  IN  THE  MARKET  FOR  MULTICHANNEL  VIDEO  PROGRAMMING  DISTRIBUTION  56
 CONCLUSION  61
 VII.  OTHER  VIDEO  MEDIA  DELIVERY  PLATFORMS  62
 INTRODUCTION  62  MMDS  62
 OVERBUILDERS  64  UTILITIES  65
 LOCAL  EXCHANGE  CARRIERS  66  THE  INTERNET  68
 HOME  VIDEO  PRODUCTS  71  THEATRICAL  FILMS  73
 VIDEO  AND  PC  GAME  PLATFORMS  AND  APPLICATIONS  73  CONCLUSION  75
 VIII.  TECHNOLOGICAL  DEVELOPMENTS  76
 INTRODUCTION  76  VIDEO  COMPRESSION  TECHNOLOGIES  77
 DIGITAL  TELEVISION  78
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 DIGITAL  RIGHTS  MANAGEMENT  90  INTERACTIVE  TELEVISION  92
 PERSONAL  VIDEO  RECORDERS  96  CONCLUSION  100
 IX.  ADVERTISING  MARKET  DEVELOPMENTS  102
 INTRODUCTION  102  CHANGES  IN  ADVERTISING  MARKET  STRUCTURE  102
 CURRENT  TRENDS  AND  NEW  ADVERTISING  FORMATS  106  INTERACTIVE  ADVERTISING  TARGETING  CHILDREN  RAISES  CONCERNS  110
 PRIVACY  AND  INTERACTIVE  ADVERTISING  112  CONCLUSION  112
 X.  THE  MARKET  FOR  BROADCAST  AND  NON-  BROADCAST  VIDEO  PROGRAMMING  114
 INTRODUCTION  114  REPEAL  OF  SYNDICATION  AND  FINANCIAL  INTEREST  RULES  114
 THE  PROGRAMMING  MARKETPLACE  115  FROM  PITCH  TO  FALL  LINE-  UP  116
 PRIME  TIME  PROGRAMMING  TRENDS  117  INDEPENDENT  PRODUCTION  118
 REPURPOSING  AND  SUMMER  PROGRAMMING  120  SPORTS  PROGRAMMING  122
 CABLE  PROGRAMMING  123  COMPARATIVE  EXPENDITURES  130
 CONCLUSION  133
 XI.  CONCLUSIONS  134
 TELEVISION  STATIONS  134  TELEVISION  NETWORKS  135
 RIVAL  DELIVERY  SYSTEMS  136  TECHNOLOGICAL  CHANGE  136
 PROGRAMMING  138  THE  FINAL  ANALYSIS  139
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 Tables  TABLE  1:  AVAILABILITY  OF  VIDEO  MEDIA  4
 TABLE  2:  END-  USER  EXPENDITURES  ON  VARIOUS  VIDEO  MEDIA  1990-  2000  6  TABLE  3:  TOTAL  ADVERTISING  VOLUME,  VIDEO  ADVERTISING  VOLUME,  AND  GDP  10
 TABLE  4:  COMPONENTS  OF  VIDEO  ADVERTISING  (MILLIONS  OF  CURRENT  $)  13  TABLE  5:  COMPONENTS  OF  VIDEO  ADVERTISING  (MILLIONS  OF  1982-  84  $)  14
 TABLE  6:  COMPONENTS  OF  VIDEO  ADVERTISING  (PERCENTAGE  OF  TOTAL  VIDEO  ADVERTISING  VOLUME)  15
 TABLE  7:  TELEVISION  STATIONS  ON  AIR  19  TABLE  8:  TV  VIEWING  BY  CABLE  AND  NON-  CABLE  HOUSEHOLDS,  1990-  91  AND  2000-
 01  (HOURS/  WEEK)  20  TABLE  9:  ALL  DAY  VIEWING  SHARES,  CABLE  AND  NON-  CABLE  HOUSEHOLDS  21
 TABLE  10:  PRIME  TIME  VIEWING  SHARES  BY  CHANNEL  TYPE  23  TABLE  11:  COMPARISON  OF  CABLE  TELEVISION  SHARE  OF  TOTAL  VIDEO  ADVERTISING
 REVENUES  AND  CABLE  TELEVISION  ALL-  DAY  VIEWING  SHARES  24  TABLE  12:  PRIMETIME  HOUSEHOLD  DELIVERY  (IN  THOUSANDS)  25
 TABLE  13:  AVERAGE  REVENUE  PER  TELEVISION  STATION  BASED  ON  AGGREGATE  DATA,  CURRENT  AND  CONSTANT  DOLLARS  32
 TABLE  14:  AVERAGE  REVENUES,  EXPENSES,  PRE-  TAX  PROFITS,  AND  CASH  FLOW  OF  COMMERCIAL  TELEVISION  STATIONS,  2000  33
 TABLE  15:  AVERAGE  REVENUES,  EXPENSES,  PRE-  TAX  PROFITS,  AND  CASH  FLOW  OF  COMMERCIAL  TELEVISION  STATIONS,  1990  34
 TABLE  16:  AVERAGE  PROFITS  OF  COMMERCIAL  TV  STATIONS  AS  A  PERCENTAGE  OF  NET  REVENUES,  1975-  2000  34
 TABLE  17:  AVERAGE  INFLATION-  ADJUSTED  NET  REVENUES  OF  COMMERCIAL  TV  STATIONS,  1975-  2000  (1982-  1984  =  100)  36
 TABLE  18:  EXPENSE  ITEMS  OF  COMMERCIAL  BROADCAST  STATIONS  BY  SELECTED  MARKET  SIZE,  2000  (%  OF  TOTAL  EXPENSES)  37
 TABLE  19:  EXPENSE  ITEMS  OF  COMMERCIAL  BROADCAST  STATIONS  BY  SELECTED  MARKET  SIZE,  1990  (%  OF  TOTAL  EXPENSES)  37
 TABLE  20;  PROGRAMMING  EXPENSES  OF  COMMERCIAL  BROADCAST  STATIONS,  1975-  2000  (%  OF  TOTAL  EXPENSES)  38
 TABLE  21:  CABLE  SUBSCRIBERS  AND  HOMES  PASSED  41  TABLE  22.  CABLE  OPERATOR  REVENUES  ($  MIL)  46
 TABLE  23;  SYSTEM  CAPACITY,  JULY  2001  48  TABLE  24:  DIRECT-  TO-  HOME  SUBSCRIBERS  AND  CABLE  SUBSCRIBERS  51
 TABLE  25:  ESTIMATED  SHARE  OF  U.  S.  TV  HOME  SET  USAGE  BY  PROGRAM  SOURCE  62  TABLE  26:  INTERNET  VIDEO  STATISTICS  70
 TABLE  27:  VCR  PENETRATION  71  TABLE  28:  HOME  VIDEO  SPENDING,  RENTAL  AND  RETAIL  ($  MILLIONS)  72
 TABLE  29:  VIDEO  AND  PC  GAME  GROWTH  74  TABLE  30:  CONSUMER  HDTV  SURVEY  82
 TABLE  31:  TELEVISION  ADS  NOT  WATCHED  (PRIME  TIME)  99  TABLE  32:  PROGRAMMING  EXPENDITURES  ($  MIL)  131
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 Figures
 FIGURE  1:  CABLE  AND  SATELLITE  USAGE:  SUBSCRIBERS/  TVHH  (%)  52  FIGURE  2:  SAMPLE  DIAGRAM  OF  ONE  TYPE  OF  DATA  BROADCAST  NETWORK
 ARCHITECTURE  89  FIGURE  3:  TOLLIN/  ROBBINS  ROSTER  (2002-  2003  SEASON)  119
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 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  1990s,  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
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 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  televisions  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.
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 II.  The  Market  for  Video  Media
 Working  Paper  26  chronicled  the  evolution  of  the  market  for  video  media  from  the  mid-  1970s  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.  1
 During  this  same  time,  as  demonstrated  by  Table  1,  the  use  of  alternative  video  distribution  platforms  increased.  2  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.  3  In  1990,  DBS  was  not  yet  available,  and  only  a  small  share  of  television
 households  subscribed  to  home  satellite  dish  (  HSD)  service.  4  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.  5  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
 1  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.
 2  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.  3  See  discussion  in  Chpater  V,  infra  regarding  the  reliability  of  the  homes  passed  data.
 4  The  large  size  of  HSD  antennas  and  local  zoning  restrictions  meant  that  the  service  was  not  effectively
 available  to  a  large  fraction  of  households.  5  These  services  are  discussed  in  detail  in  Chapters  V  and  VI.
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 (  MVPDs)  for  carriage.  6  By  year-  end  2001,  there  were  nearly  287  national  non-broadcast,  cable  origination  networks  available  for  carriage.  7
 Table  1:  Availability  of  Video  Media
 1975  1980  1985  1990  1995  2000  2001  2010p  Total  Households  (1)  (mil)  71.5  (2)  81.8  87.6  94.8  97.5  104.1  107.4  123.3
 TV  Households  (1)  (mil)  69.6  (2)  79.9  85.9  93.1  95.9  102.2  105.5  121.1
 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.  Subs/  TVHH(%)  14.1.0%  24.0%  42.7%  56.4%  69.6%  82.7%  82.7%  83.7%
 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
 6  See  Rate  Deregulation  &  the  Commissions  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).
 7  NCTA,  National  Video  Programming  Services:  1994-  2001,  Cable  Developments  2002,  May  2002,  at  23.
 In  the  Commissions  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).
12
 5
 entertainment.  8  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.  9  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.
 8  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.
 9  Table  2  does  not  include  HSD  revenues  or  revenues  from  other  delivery  platforms  (e.  g.,  MMDS)  that
 have  low  subscriber  levels.
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 6
 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  (local+  national  spot)  15,644  19,104  25,806
 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  Advertising
 Revenue  1,797  3,972  10,456  Total  Cable  Video-  Related
 Revenue  18,401  26,870  44,808  DBS  Revenue  0  663  8,467
 Video  Subscriptions  0  663  8,440  Advertising  (3)  0  0  2  7
 Total  Subscription  Video-  related  Revenue  18,401  27,533  53,275
 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  cables  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.
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 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  10
 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.  11  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
 10  For  a  more  detailed  discussion  of  this  topic,  see  generally  Owen,  Bruce  and  Wildman,  Steven,  Video
 Economics  (Cambridge,  MA:  Harvard  University  Press)  1992  (  Owen  and  Wildman)  and  Setzer,  Florence  and  Levy,  Jonathan,  Broadcast  Television  in  a  Multichannel  Marketplace,  chapter  II;  OPP  Working  Paper
 26,  Federal  Communications  Commission,  June  1991.  11  Additional  viewer  must  be  understood  as  an  additional  viewer  who  is  within  the  range  of  a  broadcast
 station  or  DBS  operators  signal  or  who  is  connected  to  a  cable  system  carrying  the  signal.
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 8
 to  cater  to  segments  of  the  audience,  e.  g.,  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.  12  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.,  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.
 12  Owen  and  Wildman  at  148-  150.
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 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.,  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.  13  Depending  on  the  product  or  service  being  advertised,  the  purpose  of  the  advertisement  (e.  g.,  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.  14  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.
 13  Television  Bureau  of  Advertising,  www.  tvb.  org
 14  A  detailed  analysis  of  substitutability  among  advertising  media  is  beyond  the  scope  of  this  paper,  but
 see  Silk,  Alvin  et  al.,  ntermedia  Substitutability  and  Market  Demand  by  National  Advertisers.  Working  Paper  8624,  National  Bureau  of  Economic  Research  (December  2001);  available  at
 www.  nber,  org/  papers/  w8624.
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 10
 Table  3:  Total  Advertising  Volume,  Video  Advertising  Volume,  and  GDP
 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  economys  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-  1980s.  It  is  too  early  to  tell  whether  the  somewhat  more  modest  upward  jump  in  the  late  1990s  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
 GDP
 Total  Ad
 Volume
 VideoAd
 Volume
 Broadcast
 Ad
 Volume
 Cable  Ad
 Volume
 Total  Ad
 Volume  as
 Percentage
 of  GDP
 Total  Video
 Ad  Volume
 as
 Percentage
 of  GDP
 Total
 Broad  cast
 Ad  Volume
 as
 Percentage
 of  GDP
 Total  Cable
 Ad  Volume
 as
 Pe  rcentage
 of  GDP
 1975  1,635,  200  27,  900  5,263  5,263  0  1.71  0.32  0.32  0
 1980  2,795,  600  53,  570  11,488  11,  416  72  1.92  0.41  0.41  0.0026
 1985  4,213,  000  94,  900  21,287  20,  298  989  2.  25  0.  51  0.  48  0.  0235
 1990  5,803,  200  129,968  29,247  26,  616  2,  631  2.  24  0.  50  0.  46  0.  0453
 1991  5,986,  200  128,352  28,606  25,  461  3,  145  2.  14  0.  48  0.  43  0.  0525
 1992  6,318,  900  133,750  31,079  27,  249  3,  830  2.  12  0.  49  0.  43  0.  0606
 1993  6,642,  300  140,956  32,471  28,  020  4,  451  2.  12  0.  49  0.  42  0.  0670
 1994  7,054,  300  153,024  36,342  31,  133  5,  209  2.  17  0.  52  0.  44  0.  0738
 1995  7,400,  500  165,147  38,886  32,  720  6,  166  2.  23  0.  53  0.  44  0.  0833
 1996  7,813,  200  178,113  43,824  36,  046  7,  778  2.  28  0.  56  0.  46  0.  0995
 1997  8,318,  400  191,307  45,643  36,  893  8,  750  2.  30  0.  55  0.  44  0.  1052
 1998  8,781,  500  206,697  49,513  39,  173  10,  340  2.35  0.56  0.45  0.1177
 1999  9,268,  600  222,308  52,581  40,  011  12,  570  2.40  0.57  0.43  0.1356
 2000  9,872,  900  243,680  60,257  44,  802  15,  455  2.47  0.61  0.45  0.1565
 2001  10,  082,  200  231,287  54,423  38,  887  15,  536  2.29  0.54  0.39  0.1541
 Sources:  Television  Bureau  of  Advertising;  Trends  in  GDP/  Total  AdVolume/  TV  Ad  Volume,  Trends  in  Advertising  Volume,
 available  at  www.  tvb.  org/  tvfacts/  trends,  visitedJune  26,  2002.  For  GDP2001,  see  USDepartment  of  Commerce,  Bureau
 of  Economic  Analysis,  "Gross  Domestic  Product:  Second  Quarter  2002(  preliminary),"available  at
 www.  bea.  doc.  gov/  bea/  newsrel/  gdpnewsrelease.  htm,  visited  Sept.  24,  2002.
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 11
 newspaper  share  of  total  advertising  revenues  from  27.6  percent  in  1980  to  19.8  percent  in  2000.  15
 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.  16  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.  17  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.,  advertising  sold  by  local  cable  television
 systems  18  ,  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  cables  share  in  total  video
 advertising.  Cable  accounted  for  no  video  advertising  in  1975,  but  had  risen  to  28.5
 15  Television  Bureau  of  Advertising,  Trends  in  Advertising  Volume.  Available  at
 www.  tvb.  org/  tvfacts/  trends/  advolume;  visited  Jne  26,  2002.  16  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  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,  July  29,  2002,  p.
 14  and  table  1  in  chapter  II.  17  Broadcast  networks  distribute  their  programming  to  affiliates  via  regional  satellite  feeds,  so  they  have
 the  flexibility  to  sell  regional  as  well  as  national  exposures.  18  Cable  operators  generally  pay  cable  networks  a  per-  subscriber  fee  and  receive  in  return  the  right  to
 retransmit  the  networks  programming  and  the  right  to  sell  some  of  the  advertising  availabilities  within  the  program  stream.
19
 12
 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.  19  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.  20  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.
 19  If  the  focus  is  narrowed  to  network  advertising  sales  only  (i.  e,  national  spot  and  syndication  are  not
 included),  the  cable  network  share  in  2001  was  45.4  percent.  20  Veronis  Suhler  Stevenson  Veronis  Suhler  Stevenson  Issues  Annual  Communications  Industry
 Forecast,  August  5,  2002  PR  Newswire.  See  also  Communications  Daily,  August  27,  2002  (quoting  Standard  and  Poors  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  1990s).
20
 13
 Table
 4:
 Components
 of
 Video
 Advertising
 (millions
 of
 current
 $)
 National
 Plus
 Local
 National
 Local
 Total
 Video  Advertising  Volume
 Total  Broadcast  Advertising  Volume
 Total
 Cable
 Advertising  Volume
 National  Video  Advertising  Volume
 Broadcast  Network  Advertising  Volume
 National  Spot  Advertising  Volume
 Syndic
 ation
 Advertising  Volume
 Cable  Network  Advertising  Volume
 Local  Video  Advertising  Volume
 Local
 Spot  Advertising
 Volume
 Local
 Cable
 Advertising  Volume
 1975
 5,263
 5,
 263
 0
 3,
 929
 2,306
 1,
 623
 0
 0
 1,334
 1,
 334
 0
 1980
 11,
 488
 11,
 416
 72
 8,
 509
 5,
 130
 3,
 269
 50
 60
 2,
 979
 2,
 967
 12
 1985
 21,
 287
 20,
 298
 989
 15,
 377
 8,
 060
 6,
 004
 520
 793
 5,
 910
 5,
 714
 196
 1990
 29,
 347
 26,
 716
 2,
 631
 20,
 860
 9,
 963
 7,
 788
 1,
 109
 2,
 000
 8,
 487
 7,
 856
 631
 1991
 28,
 606
 25,
 461
 3,
 145
 20,
 296
 9,
 533
 7,
 110
 1,
 253
 2,
 400
 8,
 310
 7,
 565
 745
 1992
 31,
 079
 27,
 249
 3,
 830
 21,
 970
 10,
 249
 7,
 551
 1,
 370
 2,
 800
 9,
 109
 8,
 079
 1,
 030
 1993
 32,
 471
 28,
 020
 4,
 451
 22,
 880
 10,
 209
 7,
 800
 1,
 576
 3,
 295
 9,
 591
 8,
 435
 1,
 156
 1994
 36,
 342
 31,
 133
 5,
 209
 25,
 554
 10,
 942
 8,
 993
 1,
 734
 3,
 885
 10,
 788
 9,
 464
 1,
 324
 1995
 38,
 886
 32,
 720
 6,
 166
 27,
 235
 11,
 600
 9,
 119
 2,
 016
 4,
 500
 11,
 651
 9,
 985
 1,
 666
 1996
 43,
 824
 36,
 046
 7,
 778
 30,
 797
 13,
 081
 9,
 803
 2,
 218
 5,
 695
 13,
 027
 10,
 944
 2,
 083
 1997
 45,
 643
 36,
 893
 8,
 750
 31,
 907
 13,
 020
 9,
 999
 2,
 438
 6,
 450
 13,
 736
 11,
 436
 2,
 300
 1998
 49,
 513
 39,173
 10,340
 34,644
 13,736
 10,659
 2,
 609
 7,640
 14,869
 12,
 169
 2,
 700
 1999
 52,
 581
 40,011
 12,570
 36,736
 13,961
 10,500
 2,
 870
 9,405
 16,025
 12,
 860
 3,
 165
 2000
 60,
 257
 44,
 802
 15,
 455
 43,
 025
 15,
 888
 12,
 264
 3,
 108
 11,
 765
 17,
 232
 13,
 542
 3,
 690
 2001
 54,
 423
 38,
 887
 15,
 536
 38,
 514
 14,
 300
 9,
 223
 3,108
 11,883
 15,909
 12,
 256
 3,
 653
 Source:
 Television
 Bureau
 of
 Advertising;
 Trends
 in
 Advertising
 Volume,
 available
 at
 www.
 tvb.
 org/
 tvfacts/
 trends,
 visited
 June
 26,
 2002.
 Note:
 The
 1990
 total
 broadcast
 advertising
 volume
 figure
 obtained
 by
 adding
 up
 its
 components
 in
 the
 source
 is
 100
 million
 dollars
 lower
 than
 the
 total
 reported
 in
 the
 source.
 This
 table
 reports
 the
 higher
 figure.
21
 14
 Table
 5:
 Components
 of
 Video
 Advertising
 (millions
 of
 1982-  84
 $)
 National
 Plus
 Local
 National
 Local
 Total
 Video  Advertising  Volume
 Total  Broadcast  Advert
 is
 ing
 Volume
 Total  Cable  Advertis
 ing
 Volume
 National  Video  Advertising  Volume
 Broadcast  Network  Advertising  Volume
 National  Spot  Advertising  Volume
 Syndication  Advertising  Volume
 Cable  Network  Advertis
 ing
 Volume
 Local  Video  Advertising  Volume
 Local
 Spot  Advertising
 Volume
 Local  Cable  Advertising  Volume
 1975
 9,
 783
 9,
 783
 0
 7,
 303
 4,286
 3,
 017
 0
 0
 2,480
 2,
 480
 0
 1980
 13,
 942
 13,
 854
 87
 10,
 326
 6,226
 3,
 967
 61
 73
 3,615
 3,
 601
 15
 1985
 19,
 783
 18,
 864
 919
 14,291
 7,
 491
 5,
 580
 483
 737
 5,
 493
 5,310
 182
 1990
 22,
 454
 20,
 441
 2,013
 15,960
 7,
 623
 5,
 959
 849
 1,530
 6,
 493
 6,011
 483
 1991
 21,
 003
 18,
 694
 2,309
 14,902
 6,
 999
 5,
 220
 920
 1,762
 6,
 101
 5,554
 547
 1992
 22,
 152
 19,
 422
 2,730
 15,659
 7,
 305
 5,
 382
 976
 1,996
 6,
 493
 5,758
 734
 1993
 22,
 471
 19,
 391
 3,080
 15,834
 7,
 065
 5,
 398
 1,
 091
 2,280
 6,
 637
 5,837
 800
 1994
 24,
 522
 21,
 007
 3,515
 17,243
 7,
 383
 6,
 068
 1,
 170
 2,621
 7,
 279
 6,386
 893
 1995
 25,
 516
 21,
 470
 4,046
 17,871
 7,
 612
 5,
 984
 1,
 323
 2,953
 7,
 645
 6,552
 1,
 093
 1996
 27,
 931
 22,
 974
 4,957
 19,628
 8,
 337
 6,
 248
 1,
 414
 3,630
 8,
 303
 6,975
 1,
 328
 1997
 28,
 438
 22,
 986
 5,452
 19,880
 8,
 112
 6,
 230
 1,
 519
 4,019
 8,
 558
 7,125
 1,
 433
 1998
 30,
 376
 24,
 033
 6,344
 21,254
 8,
 427
 6,
 539
 1,
 601
 4,687
 9,
 122
 7,466
 1,
 656
 1999
 31,
 561
 24,
 016
 7,545
 22,050
 8,
 380
 6,
 303
 1,
 723
 5,645
 9,
 619
 7,719
 1,
 900
 2000
 34,
 992
 26,
 017
 8,975
 24,985
 9,
 226
 7,
 122
 1,
 805
 6,832
 10,007
 7,
 864
 2,143
 2001
 30,
 730
 21,
 958
 8,772
 21,747
 8,
 075
 5,
 208
 1,
 755
 6,710
 8,
 983
 6,920
 2,
 063
 Source:
 Table
 4
 and
 U.
 S.
 Bureau
 of
 Labor
 Statistics,
 "Consumer
 Price
 Index
 for
 all
 Urban
 Consumers,"
 available
 at
 http://
 data.
 bls.
 gov/
 servlet/
 SurveyOutputServlet
 ,
 visited
 August
 9,
 2002.
22
 15
 Table
 6:
 Components
 of
 Video
 Advertising
 (Percentage
 of
 Total
 Video
 Advertising
 Volume)
 National
 Plus
 Local
 National
 Local
 Tot
 al
 V
 i
 deo
 Advertising  Volume
 Tot
 al  Broadcast  Advertising  Volume
 Total  Cable  Advertis
 ing
 Volume
 National  Video  Advertising  Volume
 Broadcast  Network  Advertising  Volume
 National  Spot  Advertising  Volume
 Syndicatio  n  Advertising  Volume
 Cable  Network  Advertising  Volume
 Local  Video  Advertising  Volume
 Local
 Spot  Advertising
 Volume
 Local  Cable  Advertising  Volume
 1975
 100.
 0
 100.
 0
 0.0
 74.
 7
 43.8
 30.
 8
 0.
 0
 0.
 0
 25.
 3
 25.3
 0.
 0
 1980
 100.0
 99.4
 0.
 6
 74.1
 44.
 7
 28.
 5
 0.
 4
 0.5
 25.9
 25.
 8
 0.
 1
 1985
 100.0
 95.4
 4.
 6
 72.2
 37.
 9
 28.
 2
 2.
 4
 3.7
 27.8
 26.
 8
 0.
 9
 1990
 100.0
 91.0
 9.
 0
 71.1
 33.
 9
 26.
 5
 3.
 8
 6.8
 28.9
 26.
 8
 2.
 2
 1991
 100.0
 89.0
 11.
 0
 71.0
 33.
 3
 24.
 9
 4.
 4
 8.4
 29.0
 26.
 4
 2.
 6
 1992
 100.0
 87.7
 12.
 3
 70.7
 33.
 0
 24.
 3
 4.
 4
 9.0
 29.3
 26.
 0
 3.
 3
 1993
 100.
 0
 86.
 3
 13.7
 70.
 5
 31.4
 24.
 0
 4.
 9
 10.
 1
 29.
 5
 26.
 0
 3.
 6
 1994
 100.
 0
 85.
 7
 14.3
 70.
 3
 30.1
 24.
 7
 4.
 8
 10.
 7
 29.
 7
 26.
 0
 3.
 6
 1995
 100.
 0
 84.
 1
 15.9
 70.
 0
 29.8
 23.
 5
 5.
 2
 11.
 6
 30.
 0
 25.
 7
 4.
 3
 1996
 100.
 0
 82.
 3
 17.7
 70.
 3
 29.8
 22.
 4
 5.
 1
 13.
 0
 29.
 7
 25.
 0
 4.
 8
 1997
 100.
 0
 80.
 8
 19.2
 69.
 9
 28.5
 21.
 9
 5.
 3
 14.
 1
 30.
 1
 25.
 1
 5.
 0
 1998
 100.
 0
 79.
 1
 20.9
 70.
 0
 27.7
 21.
 5
 5.
 3
 15.
 4
 30.
 0
 24.
 6
 5.
 5
 1999
 100.
 0
 76.
 1
 23.9
 69.
 9
 26.6
 20.
 0
 5.
 5
 17.
 9
 30.
 5
 24.
 5
 6.
 0
 2000
 100.
 0
 74.
 4
 25.6
 71.
 4
 26.4
 20.
 4
 5.
 2
 19.
 5
 28.
 6
 22.
 5
 6.
 1
 2001
 100.
 0
 71.
 5
 28.5
 70.
 8
 26.3
 16.
 9
 5.
 7
 21.
 8
 29.
 2
 22.
 5
 6.
 7
 Source:
 Table
 4
23
 16
 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  stations  full  service  area  and  is  priced  accordingly.  21
 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
 years  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  years  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.  22
 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.  23  Bear  Stearns  also  comments  on  the  local  television
 advertising  sector,  raising  the  prospect  of  double  digit  growth  in  the  second  half  of  2002.  24
 21  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.
 22  Electronic  Media,  July  8,  2002,  p.  2  and  Multichannel  News,  July  22,  2002  p.  2.
 23  Upfront  on  the  Upfront.  Bear  Stearns  Equity  Research  Entertainment;  June  7,  2002.
 24  Television  Broadcasting:  Local  TV  Advertising;  Can  It  Post  Double-  Digit  Growth  in  Second-  Half
 2002?  Bear  Stearns  Equity  Research,  Media;  June  2002.
24
 17
 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.
25
 18
 IV.  Broadcast  Television
 Overall  Industry  Trends
 Working  Paper  26  painted  a  somewhat  pessimistic  picture  of  the  future  of  broadcasting.  While  some  of  the  reports  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.  25  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.,  not  affiliated  with  a  broadcast  network.  26  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.
 25  Nielsen  Media  Research,  Television  Audience  1996  (1997)  contains  average  station  per  household
 figures  for  1990  and  1996  26  Working  Paper  26  Table  3,  p.  15.
26
 19
 Table  7:  Television  Stations  On  Air
 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.  27  Table  8  shows  that  cable  households  watch  much  more  total  television  and  much  less  broadcast  television  than  broadcast-  only  households.  28
 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
 27  Neilsen  Media  Research,  cited  by  the  Television  Bureau  of  Advertising  at  www.  tvb.  org.
 28  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.
 1975  1980  1985  1990  1995  2000
 Number  of  Stations
 Total  953  1,  011  1,  197  1,  442  1,  532  1,  619  VHF  609  625  641  672  688  688
 Commercial  514  516  520  547  562  564
 Educational  95  109  121  125  126  124
 UHF  344  386  556  770  844  931  Commercial  192  218  363  545  599  684
 Educational  152  168  193  225  245  247
 Total  Commercial  706  734  883  1,  092  1,  161  1,  248
 Total  Educational  247  277  314  350  371  371
 %  Change  Over  5  Years
 Total  6.1%  18.  4%  20.  5%  6.  2%  5.  7%  VHF  2.6%  2.  6%  4.  8%  2.  4%  0.  0%
 Commercial  0.4%  0.  8%  5.  2%  2.  7%  0.  4%
 Educational  14.  7%  11.  0%  3.3%  0.8%  -1.  6%
 UHF  12.  2%  44.  0%  38.  5%  9.  6%  10.  3%  Commercial  13.  5%  66.  5%  50.  1%  9.  9%  14.  2%
 Educational  10.  5%  14.  9%  16.  6%  8.  9%  0.  8%
 Total  Commercial  4.0%  20.  3%  23.  7%  6.  3%  7.  5%
 Total  Educational  12.  1%  13.  4%  11.  5%  6.  0%  0.  0%
 SOURCE:  Warren  Communications  News,  Television  and  Cable  Factbook,  2001  ed.
27
 20
 2000-  01.  Moreover,  the  average  cable  subscriber  reduced  broadcast  programming  viewing  by  five  hours  per  week  between  1991  and  2001.
 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.  29  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.
 29  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.
 1990-  91  2000-  01
 Broadcast-Only
 Households  Households  Difference
 Broadcast-Cable
 Only
 Households
 Cable
 Households  Difference
 Total  TV  Viewing  41.  6  54.  7  13.  1  45.  3  63.  0  17.  7
 Total  Broadcast  41.  6  31.  9  -9.  7  45.  3  26.  8  -18.5  Network  Affiliates*  29.  4  24  -5.  4  29.  4  20.  8  -8.  6
 Independents**  10.  3  8.  1  -2.2  12.  9  4.  7  -8.  2
 PBS  1.9  1.  3  -0.  6  3.0  1.  3  -1.  7
 Total  Cable  --  22.  8  --  36.  2
 Ad-  Supported  --  18.  2  --  29.  8
 Premium  Pay  --  4.6  --  4.  0  All  Other  Cable***  --  --  --  2.  4
 Source:  Cabletelevision  Advertising  Bureau,  Cable  TV  Facts  1992  ed.,  p.  6  and  2002  ed.  p.  41.
 Notes:  *  Network  affiliates  ABC/  CBS/  NBC  in  1990-  91  and  ABC/  CBS/  NBC/  FOX  in  2000-  01.
 **  WB/  UPN/  PAX  affiliates  and  independents.
 ***  This  category  was  not  listed  separately  in  1990-  91.  It  includes  cable  networks  neither  ad-supported
 nor  premium  pay,  e.  g.,  pay  per  view,  home  shopping.
28
 21
 Table
 9:
 All
 Day
 Viewing
 Shares,
 Cable
 and
 Non-  Cable
 Households
 All
 Households
 Cable
 Households
 Non-
 Cable
 Households
 1984/
 8
 5
 1989/
 90
 1994/
 95
 1999/
 00
 2000/
 01
 1984/
 85
 1989/
 90
 1994/
 95
 1999/
 20002000/
 01
 1984/
 85
 1989/
 90
 1994/
 95
 1999/
 00
 2000/
 01
 Network  Affiliates
 63.5
 52.4
 53.
 2
 39.9
 37.4
 52.
 8
 43.
 0
 44.1
 35.
 2
 33.1
 74.3
 70.
 7
 77.2
 66.
 7
 64.
 9
 Independents
 20.2
 19.0
 11.
 0
 10.7
 10.2
 19.
 8
 15.
 0
 8.
 1
 7.
 8
 7.
 4
 21.
 9
 24.
 2
 17.8
 27.
 0
 28.
 4
 Local
 14.4
 13.3
 na
 na
 na
 11.
 3
 9.
 3
 na
 na
 na
 18.
 1
 22.
 2
 na
 na
 na
 Distant
 and  Superstations
 5.
 8
 5.7
 na
 na
 na
 8.
 5
 5.
 6
 na
 na
 na
 3.
 8
 2.
 0
 na
 na
 na
 Public
 2.9
 2.
 9
 2.
 8
 2.
 8
 2.7
 2.
 8
 2.
 8
 2.
 7
 2.
 1
 2.
 1
 3.8
 5.
 1
 5.0
 6.
 3
 6.
 7
 Cable
 13.5
 25.7
 33.
 0
 46.6
 49.7
 24.
 5
 39.
 3
 45.0
 54.
 9
 57.4
 --
 --
 --
 --
 --
 Basic
 7.
 7
 20.
 0
 27.
 5
 38.1
 41.1
 14.
 2
 29.
 9
 37.8
 44.
 9
 47.3
 --
 --
 --
 --
 --
 Pay
 5.8
 5.
 7
 5.
 5
 5.
 5
 5.4
 10.
 4
 9.
 3
 7.2
 6.
 4
 6.2
 --
 --
 --
 --
 --
 Other
 0.
 0
 0.0
 0.
 0
 3.0
 3.
 2
 0.
 0
 0.
 0
 0.0
 3.
 6
 3.8
 --
 --
 --
 --
 --
 Total
 100.0
 100.
 0
 100.
 0
 100.0
 100.
 0
 100.
 0
 100.
 0
 100.0
 100.
 0
 100.0
 100.
 0
 100.
 0
 100.0
 100.
 0
 100.
 0
 Sources:
 Cabletelevision
 Advertising
 Bureau,
 Inc.;
 Cable
 TV
 Facts,
 1986,
 1991,
 1996,
 2001,
 and
 2002
 eds.
 Notes:
 Affiliates
 includes
 ABC,
 CBS,
 and
 NBC
 in
 all
 years
 and
 Fox
 starting
 with
 1994/
 95.
 WB/
 UPN/
 PAX
 affiliates
 are
 included
 under
 "independents."
 WTBS
 is
 included
 under
 "Basic
 Cable"
 in
 all
 years
 except
 1984/
 85.
 In
 1999/
 00
 and
 2000/
 01,
 the
 source
 breaks
 out
 "All
 Other
 Cable,"
 which
 includes
 cable
 networks
 "that
 are
 neither
 ad-
 supported
 nor
 premium
 pay,"
 such
 as
 home
 shopping
 or
 pay-
 per-
 view.
 For
 1984/
 85
 and
 1989/
 90,
 the
 source
 divides
 the
 "Independent"
 category
 into
 local,
 distant,
 and
 superstations.
 Some
 non
 -
 cable
 households
 receive
 distant
 signals
 via
 satellite.
 Shares
 are
 normalized
 to
 sum
 to
 100
 (totals
 originally
 exceeded
 100
 due
 to
 multi-
 set
 use).
29
 22
 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.  30
 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.  31  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.
 30  See  Editorial:  Networks  need  to  get  serious  about  summer.  Electronic  Media,  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;  visited  Sept.  29,  2002.
 31  2001  MVPD  Competition  Report,  17  FCC  Rcd  1244  (2002),
30
 23
 Table  10:  Prime  Time  Viewing  Shares  by  Channel  Type
 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.  32  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.  33  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  cables  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.
 32  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.  33  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.
 1984/  85  1989/  90  1994/  95  1999/  00  2000/  01
 Network
 Affiliates  69.  2  57.  3  58.4  50.9  49.  6
 Independents  15.  0  19.  1  9.  7  3.4  3.  5
 Public  3.7  3.  6  3.  5  2.  6  2.  6
 Basic  Cable  6.  5  14.  5  23.9  35.3  36.  5
 Pay  Cable  5.  6  5.  5  4.  4  5.2  5.  2
 All  Other
 Cable  0.  0  0.  0  0.  0  2.6  2.  6
 Commercial
 Broadcast  84.  1  76.  4  68.1  54.3  53.  0
 Source:  Neilsen  Galaxy  Explorer.
 Notes:  Shares  are  normalized  to  100  to  account  for
 multiset  usage.  Affiliates  are  Big  4  up  to  1994/  95;  seven
 afterwards.  "All  Other  Cable"  is  cable  networks  neither
 ad-  supported  nor  premium  pay,  e.  g.,  pay-  per-  view,  home
 shopping.
31
 24
 Table  11:  Comparison  of  Cable  Television  Share  of  Total  Video  Advertising  Revenues  and  Cable  Television  All-  Day  Viewing  Shares
 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
 1984  1985  1990  1995  2000  2001
 Total  Video
 Advertising  Revenues  ($  millions)  20,  043  21,  287  29,  247  38,  886  60,  257  54,  423
 Broadcast  ($  mil  li  ons)  19,310  20,298  26,616  32,  720  44,  802  38,  887
 Cable  ($  millions)  733  989  2,  631  6,  166  15,455  15,  536
 Broadcast  Share  (%)  96.  3  95.4  91.0  84.1  74.4  71.  5
 Cable  Share  (%)  3.  7  4.  6  9.  0  15.  9  25.  6  28.  5
 Broadcast  Share  of  All-day
 Viewing  of  Ad-Supported
 Programmi  ng
 (%)  90.72  91.  58  78.13  70.  00  57.  04  53.  70
 Cable  Share  of  All-  day
 Viewing  of  Ad-  supported
 Programming(%)  9.  28  8.  42  21.88  30.  00  42.  96  46.  30
 Cable  Advertising  Share  as  a  Percentage
 of  Cable  Viewing
 Share  39.  4  55.2  41.1  52.9  59.7  61.  7
 Sources:  Advertising  data  from  "Trends  in  Advertising  Volume,"  Television  Bureau  of
 Advertising,  available  at  www.  tvb.  org/  tvfacts/  trends,  visited  June  26,  2002.  Viewing  data
 from  Cable  TV  Facts,  Cabl  et  elevis  i  on  Advert  is  ing  Bureau  (vari  ous  years),  except  1984
 from  Cable  Tel  evisi  on  Devel  opments,  September  1991,  National  Cable  and
 Telecommunications  Association.
 Notes:  Viewing  shares  data  are  based  on  the  sum  of  US  household  delivery  of
 advertiser-  supported  programming;  i.  e.,  network  and  independent  broadcast  stat  ions
 and  advertiser-  supported  cable,  and  so  sum  to  100.  For  2000  and  2001,  the  source
 separates  out  "all  other  cable,"  which  includes  channels  neither  ad-  supported  nor
 premium  pay  (e.  g.,  home  shopping  channels  and  pay-  per  view).  This  category  is  not
 included  in  the  calculations  in  this  table.  To  the  extent  that  viewing  of  this  nature  was
 included  in  basic  cable  in  earlier  years,  the  cable  viewing  shares  of  ad  supported
 programming  are  biased  upward  and  the  cabl  e  ad  shares  as  a  perc  entage  of  cabl  e
 viewing  shares  are  biased  downward.  Viewing  shares  data  are  for  a  viewing  year,  not  a
 calendar  year  (i.  e.,  year  2000  data  are  for  the  viewing  year  beginni  ng  in  Fal  l  1999).
32
 25
 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.,  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.
 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
 Network
 Affiliates
 Indep.
 Stations
 Public
 S  tations
 Comm.
 Broadcast
 Total
 Broadcast
 Total
 Bas  ic
 Cable
 Pay
 Cable
 A  ll
 Other
 Cable
 Cable
 Total
 1984-  85  38,035.  2  8,235.3  2,  207.4  46,270.5  48,  477.  9  3,  056.  4  3,396.0  6,  452.  4
 1989-  90  33,616.  5  10,959.9  2,  026.2  44,576.4  46,  602.  6  8,  289.  0  3,315.6  11,604.  6
 1994-  95  36,729.  0  6,201.0  2,  098.8  42,930.0  45,  028.  8  15,168.6  3,  052.8  18,221.  4
 1999-  00  34,776.  0  2,116.8  2,  016.0  36,892.8  38,  908.  8  24,192.0  3,  528.0  1,  915.  2  29,635.  2
 2000-  01  35,156.  8  2,452.8  2,  044.0  37,609.6  39,  653.  6  26,061.0  3,  474.8  2,  044.  0  31,579.  8
 Source:  Calculated  from  Nielsen  Galaxy  Explorer  ratings  data  and  households/  rating  point
 from  Bear  Stearns,  Television  Broadcasting:  Broadcast  Television  Factbook,  May  2002,  p.
 122.
 Note:  Up  to  1998-  99  affiliates  are  big  4;  afterwards  includes  WB,  UPN,  Pax.  Up  to  1998-99,
 pay-  per-  view  is  in  basic;  afterwards,  pay-  per-  view  and  pay  audio  are  in  "all  other  cable."
 Network  affiliates  figure  for  1998-  99,  the  last  year  in  which  only  the  big  four  networks  were
 included,  is  31,  509.  8.
33
 26
 in  prime  time  and  the  WB  delivered  an  average  of  2.6  million  households  34  During  the  year  2000,  the  four  cable  networks  with  the  largest  audiences  were  USA,  TBS,  Lifetime,
 and  Nick  at  Nite.  35  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.  36
 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
 34  Nielsen  data  compiled  by  Bear  Stearns  in  Bear  Stearns  Equity  Research,  Media,  Broadcast  Television
 Fact  Book  ;  May  2002,  p.  122.  35  Paul  Kagan  Associates,  Economics  of  Basic  Cable  Networks  2002,  p.  61.
 36  See  Media  Dynamics,  Inc.,  TV  Dimensions  2001  at  60.
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 27
 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.  37
 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.  38
 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  Commissions  syndication  and  financial  interest  (  fin  syn)  rules,  but  the  relaxation  of  the  dual-  network
 rule  also  played  a  role.  39  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
 37  Data  are  available  for  spot  rates  received  by  affiliates  of  the  big  three  networks.  For  all  households,  the
 average  CPM  is  $17.45.  Id.  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.
 38  John  M.  Higgins  and  Allison  Romano,  Cheaper  by  the  thousand.  Broadcasting  and  Cable  Feb.  4,
 2002,  at  20-  28.  39  See  Report  and  Order  in  MM  Docket  No.  95-  39  (Review  of  the  Syndication  and  Financial  Interest
 Rules),  10FCC  Rcd  12165  (1995)  and  Report  and  Order  in  MM  Docket  No.  00-  108  (Amendment  of  Section  73.658(  g)  of  t  he  Commissions  Rules    The  Dual  Network
 Rule),  16  FCC  Rcd  11114  (2001).
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 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.  40  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.  41  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.  42  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.  43  Various  networks  have
 40  See  Bear  Stearns  Diversified  Entertainment  Equity  Research,  Media,  Diversified  Entertainment,  We
 Are  Family,  May  2002,  p.  5  (stating  that  the  big  three  commercial  networks  were  marginally  profitable  in  the  1980s  and  that  in  2002  the  six  major  commercial  networks,  taken  together,  will  lose  money).
 41  Network  Television  Cost  and  CPM  Trends,  in  Trends  in  Media,  Television  Bureau  of  Advertising,  at
 www.  tvb.  org/  tvfacts/  index.  html,  visited  Aug.  13,  2002.  The  2000  figure  includes  seven  networks  ABC,  CBS,  NBC,  Fox,  UPN,  WB,  and  Pax.
 42  Bear  Stearns,  Broadcasting/  TV&  Radio,  Equity  Research  Media,  November  2001,  p.  23.
 43  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.
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 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.  44  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.  45  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.  46
 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
 44  A  discussion  of  a  pending  petition  for  revision  of  Commission  rules  governing  network-  affiliate  relations
 is  beyond  the  scope  of  this  paper.  45  National  Association  of  Broadcasters,  Television  Financial  Report,  2001  edition,  p.  34.
 46  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.
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 largest  commercial  networks.  47  In  addition  to  the  increase  in  the  number  of  networks  since  1990,  the  Commissions  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.  48
 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.  The  Television  Financial  Reports  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.  49
 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
 47  According  to  network  company  staff,  the  big  four  commercial  networks  have  anywhere  from  176  to  213
 affiliates.  The  others  have  smaller  numbers  of  affiliates.  48  See  Broadcasting  and  Cable,  January  21,  2002,  p.  60,  for  a  list  of  duopoly  combinations.
 49  The  Television  Financial  Report  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.
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 31
 calculations  are  based  do  not  permit  precise  calculations  of  margins.  50  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  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.  51
 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.  52  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.
 50  The  National  Association  of  Broadcasters  Television  Financial  Report  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.
 51  See  National  Association  of  Broadcasters,  Television  Financial  Report,  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.
 52  National  Association  of  Broadcasters,  Television  Financial  Report,  1991  and  2001  eds.
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 32
 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)
 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
 Television
 Station  Advertising
 Volume
 Broadcast  Advertising
 Revenue
 Total
 Comme  rcia  l  Television
 S  tations
 TV  Station
 Advertising
 Revenue
 per  Station  in  Current
 Dolla  rs
 Broadcast
 Advertising
 Revenue
 Per  Station  in  Current
 Dollars
 Television  Station
 Advertising
 Revenue
 per  Station  in  Constant
 Dollars
 Broadcast
 Advertising
 Revenue
 per  Station  in  Constant
 Dolla  rs
 1975  2,957  5,263  706  4.  2  7.5  7.  8  13.  9
 1980  6,236  11,416  734  8.  5  15.  6  10.  3  18.  9
 1985  11,  718  20,298  883  13.3  23.0  12.3  21.4
 1990  15,  644  26,616  1092  14.  3  24.  4  11.  0  18.  6
 1991  14,  675  25,461  1098  13.  4  23.  2  9.8  17.0
 1992  15,  630  27,249  1118  14.  0  24.  4  10.  0  17.  4
 1993  16,  235  28,020  1138  14.  3  24.  6  9.9  17.0
 1994  18,  457  31,133  1145  16.  1  27.  2  10.  9  18.  3
 1995  19,  104  32,720  1161  16.  5  28.  2  10.  8  18.  5
 1996  20,  747  36,046  1174  17.  7  30.  7  11.  3  19.  6
 1997  21,  435  36,893  1205  17.  8  30.  6  11.  1  19.  1
 1998  22,  828  39,173  1204  19.  0  32.  5  11.  6  20.  0
 1999  23,  360  40,011  1216  19.  2  32.  9  11.  5  19.  8
 2000  25,  806  44,802  1248  20.  7  35.  9  12.  0  20.  8
 2001  21,  479  38,887  1302  16.  5  29.  9  9.3  16.9
 Average
 Annual
 Growth  Rate
 1980-  1990  6.  86%  5.67%  0.63%  -0.  12%
 Average
 Annual
 Growth  Rate
 1990-  2000  4.  43%  4.73%  0.96%  1.  18%
 Sources:  Tables  3,  4,  5
40
 33
 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  $30-  36  billion  at  auction.  53
 Table  14:  Average  Revenues,  Expenses,  Pre-  tax  Profits,  and  Cash  Flow  of  Commercial  Television  Stations,  2000
 53  See  Bud  Paxson  leads  deal  to  clear  analog  channels  for  wireless  use.  Electronic  MediaU,  Feb.  26,
 2001,  p.  32.
 Market
 Rank
 Ave  rage  Net
 Revenue
 ($  Million)
 Ave  rage
 Expenses
 ($  Million)
 Average  Pre-Tax
 P  rofit
 ($  Million)
 P  rofit  as
 %  of  Net
 Revenue
 Average
 Cash  Flow
 ($  Million)
 Cash  Flow  as
 %  of  Net
 Revenue
 1-  10  60.2  32.3  27.8  46.2%  33.  5  55.  6%
 11-  20  34.6  23.4  11.3  32.7%  15.  5  44.  8%
 21-  30  27.0  20.4  6.  5  24.  1%  10.8  40.0%  31-  40  19.  0  15.  5  3.  5  18.  4%  7.  3  38.  4%
 41-  50  14.0  12.7  1.  3  9.3%  4.9  35.0%
 51-  60  13.  7  10.  2  3.  5  25.  5%  5.  9  43.  1%
 61-  70  11.0  8.  8  2.2  20.0%  4.5  40.9%  71-  80  9.  7  9.  5  0.  2  2.  1%  3.  0  30.  9%
 81-  90  10.8  8.  7  2.0  18.5%  4.1  38.0%
 91-  100  9.  4  8.  7  0.  7  7.  4%  3.  2  34.  0%  101-  110  7.8  6.  8  1.0  12.8%  3.0  38.5%
 111-  120  6.  8  6.  4  0.  4  5.  9%  2.  1  30.  9%
 121-  130  6.  8  6.  2  0.  6  8.  8%  2.  1  30.  9%
 131-  150  5.7  5.  1  0.6  10.5%  1.9  33.3%  151-  175  5.3  4.  6  0.7  13.2%  1.9  35.8%
 176+  4.0  3.  4  0.7  17.5%  1.5  37.5%
 Source:  National  Association  of  Broadcasters,  Television  Financial  Report,  2001  ed.,  pp.  2-33.
 Note:  In  1990  the  Report  included  depreciation,  amortization,  and  interest  in  total  expenses,
 but  in  2000  it  did  not.  For  consistency,  the  total  expense  figures  herein  have  been  adjusted
 to  include  these  categories  in  total  expenses.  Hence,  pre-  tax  profit  equals  net  revenue  less
 expenses,  while  cash  flow  equals  net  revenue  less  expenses  other  than  depreciation,
 amort  izat  ion,  and  interest.
41
 34
 Table  15:  Average  Revenues,  Expenses,  Pre-  tax  Profits,  and  Cash  Flow  of  Commercial  Television  Stations,  1990
 Table  16:  Average  Profits  of  Commercial  TV  Stations  as  a  Percentage  of  Net  Revenues,  1975-  2000
 Table  17  uses  the  NAB  Television  Financial  Report  data  to  calculate  average  television  station  net  revenues  in  constant  dollars  and  should  be  reviewed  in
 Year  Affiliates*  ABC  CBS  NBC  Fox  UPN  WB  Pax
 Indep.
 Stations
 500  Largest  Industrial
 Corporations
 1975  26.2%  8.1%  1980  29.1%  17.1%  4.5%
 1985  29.9%  13.3%  3.9%
 1990  22.6%  6.  4%  4.1%  1995  29.8%  29.  1%  24.5%  34.  8%  25.9%  21.8%
 2000  30.2%  38.  0%  23.7%  25.  2%  5.  6%  21.8%  27.  5%  -154.0%  42.3%  6.8%
 SOURCES:  1975  and  1  980,  FCC,  Pub  lic  Notice,  "TV  Broad  ca  st  Financia  l  Data,"  Aug  u  st  2  ,  197  6  and  August  10,
 1981;  o  ther  years,  National  Association  o  f  Broad  ca  sters,  Television  Fina  n  cial  Rep  o  rt,  199  1  ,  1996,  and  2001  eds.;
 50  0  larg  e  st  corporations,  1  97  5  a  nd  1980,  Sta  tistical  Abstract  o  f  the  United  Sta  tes:  1990  (110th  ed.),  p.  542.  For
 1998,  Sta  tistical  Abstract  of  the  United  States:  1998  (118th  ed.),  p.  564.  For  2000,  Fortune,  April  1  6,  2001,  p.  F-  19.
 Note:  *ABC/  C  BS/  NBC  affiliates  only.
 Market
 Rank
 Ave  ra  g  e  Net
 Revenue
 ($  Million)
 Ave  rage
 Expenses
 ($  Million)
 Ave  rage  P  re-  Tax
 Profit
 ($  Million)
 P  rofit  as
 %  of  Net
 Revenue
 Ave  rage
 Cash  Flow
 ($  Million)
 Cash  Flow  as
 %  of  Net
 Revenue
 1-  10  58.  4  41.8  16.6  28.  4%  20.  1  34.  4%
 11-  20  27.  3  23.  2  4.  2  15.  4%  7.  2  26.  4%
 21-  30  22.  4  18.  7  3.  7  16.  5%  7.  2  32.  1%  31-  40  14.6  13.  4  1.  2  8.  2%  4.5  30.8%
 41-  50  11.3  10.  4  0.  9  8.  0%  2.9  25.7%
 51-  60  9.  6  9.  2  0.4  4.  2%  3.  0  31.  3%
 61-  70  8.  5  8.  1  0.4  4.  7%  2.  5  29.  4%  71-  80  7.  3  6.  9  0.4  5.  5%  1.  8  24.  7%
 81-  90  6.3  5.  6  0.  7  11.1%  1.8  28.6%
 91-  100  7.  0  6.  4  0.5  7.  1%  2.  0  28.  6%  101-  110  6.  2  6.  7  -0.  6  -9.  7%  1.  5  24.  2%
 111-  120  4.  8  5.  0  -0.  2  -4.  2%  1.  4  29.  2%
 121-  130  4.0  4.  4  -0.  4  -10.0%  1.1  27.5%
 131-  150  3.  8  3.  9  -0.  1  -2.  6%  1.  2  31.  6%  151-  175  3.6  3.  2  0.  4  11.1%  1.2  33.3%
 176+  2.  8  2.  6  0.2  7.  1%  0.  9  32.  1%
 SOURCE:  National  Association  o  f  Broadca  sters,  Television  Financial
 R  eport,  1991  edition  ,  pp.  1  -16.
42
 35
 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.  54  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.  55
 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.
 54  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  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.  55  See  Dan  Trigoboff,  The  news  not  out  of  Topeka,  Broadcasting  and  Cable,  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).
43
 36
 Table  17:  Average  Inflation-  Adjusted  Net  Revenues  of  Commercial  TV  Stations,  1975-  2000  (1982-  1984  =  100)
 1975  1980  1985  1990  1995  2000
 Revenues  ($  Million)
 Affilia  tes*  6.  3  8.  0  12.  1  12.  1  12.  1  11.9  ABC  12.  3  14.5
 CBS  11.  3  10.6
 NBC  12.  7  10.4
 Fox  11.  4  5.4  UPN  7.2
 W  B  13.7
 Pax  0.9
 Independents  7.  5  9.  4  12.  2  12.  3  12.  7  10.3
 %  Change  in  Revenues**
 Affilia  tes*  27.  0%  50.7%  0.7%  -0.  2%  -2.  0%  ABC  17.  7%
 CBS  -5.  8%
 NBC  -18.  6%
 Fox  -52.  3%  UPN
 W  B
 Pax
 Independents  25.  3%  30.0%  0.8%  3.4%  -19.2%
 SOURCES:  1975  and  1980,  FCC,  Public  Notice,  "TV  Broadcast  Financial  Data,"  August  2,
 1976  and  August  10,  1981;  other  years,  National  Association  of  Broadcasters,  Television
 Financial  Report,  1991,  1996,  and  2001  eds.;  numbers  inflation-  adjusted  using  Bureau  of
 Labor  Statistics  "Consumer  Price  Index  for  all  Urban  Consumers,"  available  at
 http://  data.  bls.  gov/  servlet/  SurveyOutputServlet,  visited  August  9,  2002.
 Notes:*  ABC/  CBS/  NBC  affiliates  only.
 **  Percent  change  over  previous  five  years.
44
 37
 Table  18:  Expense  Items  of  Commercial  Broadcast  Stations  by  Selected  Market  Size,  2000  (%  of  Total  Expenses)
 Market  Rank  Engineering  Programming  and  Production  News  Sales  Advertising  and  Promotion  General  and  Administrative
 1-  10  8.  9%  35.  1%  23.  2%  12.  8%  4.  8%  15.1%  41-  50  8.  4%  25.  2%  22.  7%  16.  7%  5.  0%  21.9%
 91-  100  9.  2%  23.  9%  20.  2%  16.  9%  4.  2%  25.7%  131-  150  8.  5%  22.  5%  20.  1%  18.  1%  3.  6%  27.2%
 176+  10.  0%  20.  8%  18.  6%  18.  0%  3.  5%  29.  0%
 Source:  National  Association  of  Broadcasters,  Television  Financial  Report,  2001
 Table  19:  Expense  Items  of  Commercial  Broadcast  Stations  by  Selected  Market  Size,  1990  (%  of  Total  Expenses)
 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.
 Market
 Rank  Engineering
 Programming
 and
 Production  News  Sales
 Advertising
 and
 Promotion
 General  and
 Administrative
 1-  10  7.7%  47.  1%  19.  1%  7.7%  6.2%  12.  1%
 41-  50  8.  0%  35.  3%  17.  6%  12.8%  4.9%  21.  4%
 91-  100  9.  2%  31.  9%  15.3%  15.  5%  4.  2%  24.  0%
 131-  150  11.  6%  26.  7%  16.5%  17.  3%  3.  6%  24.  3%
 176+  13.  3%  21.  6%  15.  0%  18.4%  3.9%  27.  8%
 Source:  National  Association  of  Broadcasters,
 Television  Financial  Report,  1991
45
 38
 Table  20;  Programming  Expenses  of  Commercial  Broadcast  Stations,  1975-  2000  (%  of  Total  Expenses)
 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.
 1975  1980  1985  1990  1995  2000
 AFFILIATES*
 Programming  42.  8  42.  5  50.  9  55.  9  53.  6  52.  6  Broadcast  Rights  12.  1  11.  5  13.  7  22.  6  15.  4  15.  2
 News  --  --  23.  9  24.  5  27.  3  27.  2
 Music  License  Fees  2.5  2.  0  1.7  1.  5
 Other  --  --  10.  8  6.  8  9.  2  8.7
 INDEPENDENTS
 Programming  48.  8  49.  4  60.  9  66.  1  62.  4  39.  3
 Broadcast  Rights  26.  8  32.  6  44.  6  50.  9  41.  7  11.  9  News  --  --  5.  0  6.  0  9.  6  16.8
 Music  License  Fees  1.7  1.  1  1.0  1.  1
 Other  --  --  9.  6  8.  2  10.  1  9.5
 SOURCES:  1975  and  1980,  FCC,  Public  Notice,  "TV  Broadcast  Financial  Data,"
 August  2  ,  1976  and  August  10,  1981;  other  years,  National  Association  o  f
 Broadcasters,  Televis  ion  Financial  Report,  1986,  1991,  1996,  and  2001  eds.
 NOTES:  *ABC,  CBS,  and  NBC  affiliates  only
 Expense  categories  from  the  original  FCC  reports  are  used.  The  "Programming"
 category  consists  o  f  the  NAB  categories  of  programming  and  production  and  news.
 The  "Other"  category  is  a  residual  calculated  as  programming  less  broadcast  rights
 less  news  less  music  license  fees.  Expenditures  for  locally-produced  non-  news
 programming  would  fall  in  this  category.  The  1986  and  1991  reports  include
 Depreciation  and  Amortization  and  Interest  in  total  expenses,  but  the  1996  and  2001
 reports  do  not.  The  expense  figures  used  to  calculate  the  percentages  in  this  table
 have  these  categories  removed.
46
 39
 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.
47
 40
 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.  56  It  wasnt  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.  57  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).  58
 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
 56  Kagan  World  Media,  History  of  Cable  and  Pay  TV  Subscribers  And  Revenues,  Cable  TV  Investor,  May
 24,  2002,  at  8.  57  See  NCTA,  National  Video  Programming  Services:  1994-  2001,  Cable  Program  Services,  Cable
 Developments  2002,  May  2002,  at  23,  27-  212;  see  also  Table  21.  58  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  DMAs  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).
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 Table  21:  Cable  Subscribers  and  Homes  Passed
 1975  1980  1985  1990  1995  2000  2001  2010p
 Total  Households  (1)  (mil)  71.5  (2)  81.8  87.6  94.8  97.5  104.1  107.4  123.3  TV  Households  (1)  (mil)  69.6  (2)  79.9  85.9  93.1  95.9  102.2  105.5  121.1
 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  (mil)  0.47  9.1  29.9  41.5  45.8  59.69  64.8  84.3
 Premium  Households  (mil)  1.0  (3)  9.1  21.8  23.9  29.6  35.6  36.1  42.2
 Digital  Cable  Digital  Cable  Subscribers  (mil)  -  -  -  -  -  10.1  16.7  62.5
 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
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 to  carry  on  the  basic  tier.  59  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.  60  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.  61
 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.  62  The  BST  is  the  lowest
 level  of  service  offered  by  cable  operators,  and  is  required  for  any  additional  level  of  service.  63  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.  64  Most  of  the  programming  carried  on  the  CPST  is  advertiser-  supported  national  and  regional  cable  origination  networks.  Subscribers  do
 59  47  U.  S.  C.    543(  b)(  7);  47  C.  F.  R.    76.901(  a).
 60  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.
 61  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).  62  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,
 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).  64  47  U.  S.  C.    543(  l)(  2);  47  C.  F.  R.    76.901(  b).
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 not  need  to  subscribe  to  the  CPST  to  subscribe  to  other,  higher  tiers  of  cable  service  such  as  premium  or  pay-  per-  view.  65
 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.  66  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  cables  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.  67  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.  68  By  1995,  21  premium  networks  are  available  to  cable  operators  for  distribution  over  their  systems.  69  By  2001,  with  expanded  channel
 capacity  enabled  by  digital  compression,  there  were  40  premium  cable  networks  available  for  delivery  over  cable  systems.  70  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.
 65  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).  66  See  Paul  Kagan  Assocs.,  Inc.,  Paul  Kagans  10-  Year  Cable  TV  Industry  Projections,  The  Cable  TV
 Financial  Databook,  July  1996,  at  11;  see  also  Paul  Kagan  Assocs.,  Inc.,  Paul  Kagans  10-  Year  Cable  TV  Industry  Projections,  The  Cable  TV  Financial  Databook,  July  1997,  at  10.
 67  See  Paul  Kagan  Assocs.,  Inc.,  Paul  Kagans  10-  Year  Cable  TV  Industry  Projections,  The  Cable  TV
 Financial  Databook,  July  1997,  at  10;  Paul  Kagan  Assocs.,  Inc.,  Paul  Kagans  10-  Year  Cable  TV  Industry  Projections,  The  Cable  TV  Financial  Databook  2000,  July  2000,  at  10.
 68  NCTA,  National  Cable  Video  Networks  by  Type  of  Service,  Cable  Television  Developments,  Apr.  1994,
 at  7-  A.  69  NCTA,  National  Cable  Video  Networks  by  Type  of  Service  1976-  1995,  Cable  Television  Developments,
 Spring  1996,  at  6.  70  NCTA,  National  Cable  Video  Networks  by  Type  of  Service  1980-  2000,  Cable  Television  Developments
 2001,  Fall  2001,  at  8.
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 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.  71  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.  72
 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  operators  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.  73
 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.  74
 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
 71  NCTA,  National  Cable  Video  Networks  by  Type  of  Service,  Cable  Television  Developments,  Apr.  1994,
 at  7-  A.  72  NCTA,  National  Cable  Video  Networks  by  Type  of  Service  1980-  2000,  Cable  Television  Developments
 2001,  Fall  2001,  at  8.  73  Kagan  World  Media,  Major  U.  S.  VOD  Deployments  and  Trials,  Broadband  Cable  Financial  Databook
 2002,  July  2002,  at  79.  74  Warren  Publishing,  Television  and  Cable  Factbook  2002,  Services  Volume,  at  G-  3.
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 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,  75  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.,
 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,  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.  76  These  share  increases  come
 at  the  expense  of  the  traditional  basic  and  pay  subscription  categories.  Basic
 75  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.
 76  Advertising  is  an  important  source  of  revenue  for  cable  networks.  See  Chapter  X.
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 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
 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,  cable  telephony,  and  video  games  0.0  0.  0  1,164  2,835  19,316
 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,  cable  telephony,  and  video  games  0.0%  0.0%  3.1%  6.4%  20.4%
 Sources:  (1990-  2001):  Kagan  World  Media,  Cable  TV  Investor,  May  24,  2002,  at  9;  (2010p):  Kagan  World  Media,  Kagans  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.
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 Programming  Choice  Factors
 Chapter  X  contains  a  detailed  examination  of  cable  programming.  For  now,  it  is  important  to  note  that,  while  cables  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.  77  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.  78  The  same  source  provides  a  listing  of
 the  top  100  programs  on  broadcast  and  cable  for  various  periods.  79  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  childrens  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.,  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.  80  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  Commissions  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
 77  Season-  to-  Date  Broadcast  v.  Cable  Primetime  Ratings:  2001-  2002,  in  Viewer  Track  section,
 available  at  http://  www.  tvb.  org/  rcentral.  78  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  79  Top  100  Programs  on  Broadcast  &  Cable:  May-  2002,  in  Viewer  Track  section,  available  at
 http://  www.  tvb.  org/  rcentral.  80  Warren  Publishing,  Television  and  Cable  Factbook:  1990  Edition,  at  C-  385,  and  2001  Edition,  at  F-  2.
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 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.  81  If  the
 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.  82  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.  83
 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.
 81  The  remaining  capacity  its  used  to  provide  non-  video  services  such  as  high-  speed  Internet  access
 services  and  cable  telephony.  82  Kagan  World  Media,  Cable  Program  Investor,  July  29,  2002  at  14.
 83  Kagan  World  Media,  Economics  of  Basic  Cable  Networks  2002,  at  50.  TVHH  from  Table  1
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 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  consumers  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.  84
 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
 84  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).
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 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.
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 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.  85  By  year-  end  2001,  however,  there  were  less  than  one  million  home  satellite  C-  Band  subscribers  left,  but
 Table  24:  Direct-  to-  Home  Subscribers  and  Cable  Subscribers
 1985  1990  1995  2000  2001  2010p
 Total  Households  (1)  (mil)  87.6  94.8  97.5  104.1  107.4  123.3
 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  (mil.)  0.0  0.  8  4.6  16.0  18.7  27.0  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  Subscribers  (mil)  36.7  52.5  66.7  84.5  87.3  101.3
 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.  86  In  fact,  in  the  last  ten  years,  the  rapid
 growth  of  the  subscription  video  services  market  has  been  largely  due  to  direct  to  home
 85  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.  86  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.
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 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.  87  Projections  for  2010  cable  and  satellite  subscribership  indicate  that  usage  will  continue  this  pattern.  88
 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.
 87  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.  88  Kagan  World  Media,  Broadband  Cable  Financial  Databook,  July  2002  at  10,  and  The  State  of  DBS
 2001  at  3.
 0.0%
 10.0%
 20.0%
 30.0%
 40.0%
 50.0%
 60.0%
 70.0%
 80.0%
 90.0%
 1990  1991  1992  1993  1994  1995  1996  1997  1998  1999  2000  2001  Cable  Subs/  TVHH  (%)
 Satellite  Subs/  TVHH  (%)
 Cable+  Satellite  Subs/  TVHH(%)
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 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.  89  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),  90  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.  91  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.  92  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.  93  The  primary  use  of  these  satellites  will  be  to  distribute
 programming  to  cable  headends,  but  they  can  also  serve  the  HSD  industry.
 89  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.  90  See  47  U.  S.  C.    605(  b)  (satellite  cable  programming  for  private  viewing).
 91  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).
 92  How  Many  DTH  Households  Are  Out  There  Anyway?,  SkyReport,  Oct.  1994,  at  1.
 93  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).
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 Furthermore,  new,  digital  equipment  for  C-  Band  HSD  systems  continue  to  be  developed  and  made  available  to  subscribers.  94
 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.  95  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  its  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.  96
 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
 94  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.  95  Inquiry  into  the  Development  of  Regulatory  Policy  in  Regard  to  Direct  Broadcast  Satellites,  Docket  No.
 Report  &  Order,  90  FCC  2d  676  (1982).  96  Kagan  World  Media,  The  State  of  DBS  2002,  July  2002,  at  56.
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 broadcast  television.  97  Currently  there  are  two  major  DBS  operators  offering  service  to  consumers:  DirecTV,  owned  by  Hughes  Corp.,  and  Echostar  Corp.  98
 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.  99  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.  100  There  is  some
 overlap,  however,  between  cable  and  DBS  subscribership.  Of  the  approximately  60
 97  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.  98  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  Echostars  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  Corporations  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).  99  Kagan  World  Media,  The  State  of  DBS  2002,  July  2002,  at  4.
 100  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.
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 percent  of  DBS  subscribers  with  access  to  cable,  around  24  percent  subscribe  to  cable  in  addition  to  DBS,  primarily  to  receive  local  broadcast  signals.  101
 DBS  Public  Interest  Obligations  102
 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.  103  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.  104  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
 101  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).
 102  Cable  also  has  public  interest  obligations.  See  Chapter  VI.
 103  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).
 104  See  Federal  Communications  Commission,  Commission  Implements  Public  Interest  Obligations  for
 Direct  Broadcast  Satellite  Service,  MM  Docket  93-  25,  FCC  News  Release  (Nov.  19,  1998).
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 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.  105
 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.  106  DirecTV  also  carries  HBO,  Showtime,  and  select  pay-per-  view  movies  in  HDTV  format.  107  EchoStar  carries  HBO,  Showtime,  CBS,  Discovery,
 and  select  pay-  per-  view  movies  in  HDTV  format.  108
 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  DBSs  ability  to  compete  effectively  with  cable  television.
 In  1988,  Congress  passed  the  Satellite  Home  Viewer  Act  ("  SHVA").  109  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.  110  The  exception  was  a  narrow  compulsory
 105  See  http://  www.  direcpc.  com.  DirecTV  also  continues  to  offer  its  one-  way  high-  speed  access  service,
 with  a  telephone  line  return  path.  106  Monica  Hogan,  DirecTV  Readies  HDTV  Sports  Net,  Multichannel  News,  Sept.  4,  2001.
 107  Monica  Hogan,  DirecTV  Readies  HDTV  Sports  Net,  Multichannel  News,  Sept.  4,  2001.  To  receive
 DirecTVs  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.  108  Monica  Hogan,  DirecTV  Readies  HDTV  Sports  Net,  Multichannel  News,  Sept.  4,  2001.  To  receive
 EchoStars  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.  109  17  U.  S.  C.    119.
 110  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.").
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 copyright  license  that  direct-  to-  home  (DTH)  satellite  video  providers  111  were  allowed  to  use  for  retransmitting  signals  of  a  defined  class  of  television  network  stations  112  "to
 persons  who  reside  in  unserved  households"  (also  known  as  white  areas).  113  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.  114  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.  115  Thereafter,  DBS  operators  were  subject  to  retransmission  consent  rules  similar  to  those  established  for
 cable  operators.  116
 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
 111  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.
 112  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)
 113  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.
 114  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.).  115  See  47  U.  S.  C.    325(  b)(  2).
 116  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.
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 exclusivity  with  respect  to  satellite  carriage  of  broadcast  stations.  117  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.  118
 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.  119  Similarly,  EchoStar  transmits  a  local  network  package  to  its  subscribers  for  a  fee,  and  offers  the  national  PBS  feed  as  an  added  option.  120  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.  121
 The  vertical  integration  of  non-  broadcasting  programming  networks  with  cable  operators  is  also  an  issue  of  continuing  concern  for  DBS  providers.  The  Commissions
 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.  122  The  program
 117  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).
 118  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  Virginias  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).
 119  Satellite  Business  News  Fax  Update,  Sept.  25,  2002.
 120  See  http://  www.  skyreport.  com/  skyreport/  local.  htm.
 121  2001  MVPD  Competition  Report,  17  FCC  at  1273-  74    59.
 122  See  2001  MVPD  Competition  Report,  17  FCC  Rcd  at  1314.
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 access  provisions,  however,  only  apply  to  satellite  delivered  programming.  123  Programming  services  distributed  by  any  other  means  are  not  subject  to  the  program
 access  requirements.  124  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.  125  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.  126
 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.  127  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.  128  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
 123  See  Implementation  of  the  Cable  Television  Consumer  Protection  And  Competition  Act  of  1992,
 Development  of  Competition  and  Diversity  in  Video  Programming  Distribution:  Section  628(  c)(  5)  of  the  Communications  Act,
 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.
 124  See  1994  MVPD  Competition  Report    182-  83
 125  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.  126  The  satellite  dishes  may  be  of  any  size  in  Alaska.
 127  47  C.  F.  R.    1.4000
 128  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).
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 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.  129
 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.  130  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.
 129  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  Commissions  Rules  to  Permit  Operation  of
 NGSO  FSS  Systems  Co-  Frequency  With  GSO  and  Terrestrial  Systems  in  the  Ku-  Band  Frequency  Band;  Amendment  of  the  Commissions  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).
 130  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.
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 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.
 Table  25:  Estimated  Share  of  U.  S.  TV  Home  Set  Usage  by  Program  Source  Annual  Averages
 Early  1950s  Early  1960s  Early  1970s  Early  1980s  Early  1990s  Early  2000s
 ABC/  CBS/  NBC  60%  58%  55%  49%  31%  21%  DuMont  4  -  -  -  -  -
 Fox/  WB/  UPN/  PAX  -  -  -  -  2  8  Network  Affiliates  131  30  29  25  23  18  10
 Independent  Stations  132  6  11  16  20  16  11  PBS  Stations  -  2  4  3  3  3
 Pay  Cable  -  -  -  4  4  6  Basic  Cable  133  -  -  1  3  20  35
 VCR  Play  -  -  -  -  5  5  Video  Games  -  -  -  1  1  1
 PPV  -  -  -  -  -  -  134  Ave.  Hours  of  Set
 Usage  (Weekly)  135  35  39  46  51  54  62  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
 131  Includes  syndicated  shows.
 132  Excludes  WTBS  and  Fox  or  other  on-  air  networks;  includes  syndicated  shows.
 133  Includes  WTBS.
 134  Less  than  1%.
 135  Counts  multiple-  set  usage  to  different  sources  at  the  same  time  as  separate  exposures.
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 Television  Fixed  Service  ("  ITFS")  channels.  136  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.  137  By  year-  end  1996,  MMDS  provided  service  to  almost  1.2  million
 subscribers.  138  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").  139
 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.  140  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.  141  The  Commission  decided  not  to  relocate  the  existing  licensees  or
 otherwise  modify  their  licenses.  142  In  addition,  the  Commission  recognized  that  it  will
 136  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).  137  Working  Paper  26,  at  110.
 138  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.
 139  NCTA,  Cable  &  Telecommunications  Industry  Overview  2001,  Cable  Television  Developments  2001,
 at  11.  140  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).  141  See  Amendment  of  Part  2  of  the  Commissions  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).  142  See  Amendment  of  Part  2  of  the  Commissions  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).
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 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.  143
 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  incumbents  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.  144  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.  145  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.
 143  See  Amendment  of  Part  2  of  the  Commissions  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  New  Broadband  Players  Retreat  From  Cable,  Telecom  Markets,  Comm.  Daily,  Apr.  11,  2001,  at
 2-  3.  145  Kagan  World  Media,  Cable  TV  Franchising  Competition,  1995-  1998  Franchise  Awards,  The
 Broadband  Cable  Financial  Databook,  2001,  at  76-  79.
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 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.  146  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").  147  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  Congresss  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.  148  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.  149  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.
 146  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).
 147  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).  148  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).
 149  2001  MVPD  Competition  Report,  17  FCC  Rcd  1293    104.
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 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.  150  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.  151
 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.  152  (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.  153  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.  154
 150  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.
 151  2001  MVPD  Competition  Report,  17  FCC  Rcd  1295    109.
 152  2002  Program  Access  Report  and  Order,  17  FCC  Rcd  12124    28,  50,  and  67;  2001  MVPD
 Competition  Report,  17  FCC  Rcd  1293-  94    106.  153  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).
 154  See  1994  MVPD  Competition  Report,  9  FCC  Rcd  7442    103.
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 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.  155  In  1995,  LECs  obtained  authority  to  pursue  entry  through  construction  of  cable  systems.
 156  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.  157  Later,  the  1996  Act  created  LEC  options  to
 replace  the  video  dialtone  framework  through  open  video  systems  (  OVS.)  158
 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.  159
 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.  160  Companies  are  also  deploying,  or  investigating
 155  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).  156  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).
 157  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  158  47  U.  S.  C.    571(  a)(  3)-(  4).
 159  SBC  Sells  Americast  Cable  Overbuild  Systems  To  Wide  Open  West,  Comm.  Daily,  May  25,  2001,  at
 2-  3.  160  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.
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 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.  161  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.  162  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.  163  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.  164  Additionally,  as  of  July  2001,  41  million
 residential  Web  users  had  accessed  streaming  video.  165  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.  166
 161  Roger  Bindl,  Next  Level  Communications,  Video  In  Telephony,  Nov.  9,  2001.
 162  Kagan  World  Media,  Cable  TV  Competitive  Franchise,  1995-  2001,  Broadband  Cable  Financial
 Databook  2001,  July  2001,  at  76-  80.  163  Internet  video  provided  in  real-  time  is  also  known  as  streaming  video.
 164  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.
 165  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).  166  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  Commissions  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
 Wont  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.
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 The  Commission  suggests  that  broadcast-  quality  Internet  video  service  requires  a  high-  speed  broadband  connection  of  about  300  kilobits  per  second  (  kbps)  or
 higher.  167  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.  168  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  nations  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.  169  Despite  these  obstacles,  Internet  users  continue  to  download  software  for  accessing  Internet  video.  Streaming  video  websites  continue
 to  operate.  Nielsen/  Net  Ratings  estimates  that  Microsofts  Windows  Media  Player  has  over  24.7  million  users,  while,  RealNetworks  RealPlayer  has  more  than  24.4  million
 167  See  2000  Report,  16  FCC  Rcd  at  6054  (this  data  from  this  source  is  cited  throughout  this  paragraph
 and  the  following  twp  paragraphs).  168  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).
 169  JumpTV.  com  Pullout  Doesnt  End  Debate  on  Streaming  TV  Copyright,  Comm.  Daily,  Oct.  15,  2001,  at
 3-  4.
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 users  (See  Table  26).  170  The  amount  of  video  programming  content  on  the  Internet  also  continues  to  grow.  171  Some  traditional  broadcast  and  cable  television  programmers
 offer  Internet  video  versions  of  their  programming  or  supplemental  programming.
 Table  26:  Internet  Video  Statistics
 2000  2001
 Internet  access  from  home  (%  of  U.  S.  population)  56%  58%
 Total  web  users  who  have  ever  accessed  streaming  video  (millions)  35  41
 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.  172  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.  173
 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.  174  Movielink  has  equal  investments  from  these
 five  studios.  175  Movielinks  goal  is  to  do  more  than  just  promote  Internet-  delivered  VOD.  176  Its  management  believes  that,  over  time,  VOD  will  become  a  significant  way
 consumers  watch  recorded  material  because  of  its  convenience.  177  Whether  the  demand  for  the  service  results  in  a  profitable  business  model  is  an  open  question.
 170  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.
 171  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.  172  See  http://  news.  com.  com/  2100-  1023-  947617.  html  and  http://  news.  com.  com/  2100-  1023-  944242.  html
 (both  accessed  August  6,  2002).  173  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.
 174  Bruce  Orwall,  Five  Studios  Join  Venture  for  Video  on  Demand,  Wall  Street  Journal,  Aug.  17,  2001,  at
 A3.  175  Ken  Kerschbaumer,  Leading  Studios  VOD  Charge,  Broadcasting  and  Cable,  February  4,  2002.
 176  Id.
 177  Id.
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 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.  178  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.  179
 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.  180  Analysts  estimate  that  26.5  million  homes  will  have  DVDs
 players  by  the  end  of  2004.  181  Approximately  2  million  homes  have  laser  disc  players.  182  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.  183  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.  184  Overall,  U.  S.  consumers  spent  approximately  $22.45  billion  renting  and  buying  prerecorded  video  in  2000  (See  Table  28).  185
 178  See  W.  Michael  Cox  and  Richard  Alm,  Off  the  Books,  Reason  Magazine,  Vol.  34,  Issue  4,  August  1,
 2002,  citing  Veronis  Suhlers  &  Associates  Annual  Communications  Industry  Forecast  (Veronis  Suhler).  179  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.
 180  Veronis  Suhler  at  192,  194.
 181  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  $73.  Christopher  Stern,  Blockbuster  Switching  Focus  to  DVDs,  Washington  Post,  Sept.  11,  2001,  at  E1,  12.
 182  Tom  Shales,  Shall  We  Dance?  With  DVD,  Indeed,  Washington  Post,  June  2,  1999,  at  C1.
 183  Id.  at  194.
 184  Id.
 185  Id.  at  191.
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 Table  28:  Home  Video  Spending,  Rental  and  Retail  ($  Millions)
 Video  Cassette
 Rentals
 Video  Cassette
 Sales
 Total  Video
 Cassette  Spending  DVD  Rentals  DVD  Sales  Total  DVD  Spending
 Total  Video
 Cassette  and  DVD
 Spending
 Growth  of  Home
 Video  Market
 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.  186
 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.  187  Since  1997,  the  largest  video  chains  and  several
 movie  studios  have  shared  rental  revenues.  188  The  video  retail  industry  is  competitive,  with  about  19,800  video  specialty  stores  selling  or  renting  home  video  programming.  189
 More  than  8,000  retail  outlets,  such  as  supermarkets  and  drugstores,  rent  videos.  190  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.  191  The  Internet  is  also  now  a  source  for  video  rentals  192  and  sales.  193  In  recent
 186  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.
 187  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).  188  Veronis  Suhler  at  13-  14;  2000  Report,  16  FCC  Rcd  at  6058.
 189  See,  e.  g.,  Veronis  Suhler  at  8;  (Viacom  10-  K).
 190  Id.
 191  Videos  also  can  be  borrowed  from  public  libraries.
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 years,  the  home  video  industry  has  consolidated,  with  many  independent  operators  selling  to  larger  concerns  or  closing  their  businesses.  194
 Theatrical  Films
 Analysts  estimate  that  Americans  go  out  to  an  average  of  5.4  movies  a  year,  up  from  4.5  three  decades  ago.  195  U.  S.  box  office  receipts  rose  8.5%  in  2001  to  $8.35
 billion.  196  Even  with  a  4%  increase  in  the  average  ticket  price,  more  people  went  to  the  movies  in  2001  than  in  any  year  since  1998.  197  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.  198  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.  199  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
 192  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.
 193  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.  194  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.  195  See  W.  Michael  Cox  and  Richard  Alm,  Off  the  Books,  Reason  Magazine,  Vol.  34,  Issue  4,  August  1,
 2002,  citing  Veronis  Suhler.  196  Christopher  Grimes,  The  Americas    Lord  of  the  Rings  Tops  Oscar  List,  Financial  Times,  February  13,
 2002.  197  Jack  Mathews,  Box  Office  Boasts  Record  Run,  New  York  Daily  News,  January  1,  2002.
 198  PR  Newswire,  Veronis  Suhler  Stevenson  Issues  Annual  Communications  Industry  Forecast  (2002),
 August  5,  2002.  199  State  of  the  Industry  Report  2000-  2001,  Interactive  Digital  Software  Association  (IDSA)  at  5.
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 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  todays  new  technologies,  the  possibilities  for  interactivity  seem  endless  for  video  console,  PC  and  educational  software  (  Edutainment)  titles.  200
 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,  Sonys  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.
 Table  29:  Video  and  PC  Game  Growth  Video  and  PC  Game
 Software  Unit  Sales  (millions)  Video  and  PC  Game  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  Source:  Interactive  Digital  Software  Association  (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.  201  Video  and  PC  game  software  sales  accounted  for
 200  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).  201  NPD  Funworld  Report.
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 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.
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 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  subscribers  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.
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 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.  202  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.  203
 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  204  and  compressing  audio-  visual  information  (e.  g.,  movies,  video,  music)  in  a  digital  format.  205  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.  206  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
 202  See  Newtons  Telecom  Dictionary  (14  th  Ed.  1998)  definition  of  digital  video.
 203  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.
 204  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.
 205  MPEG  is  most  commonly  known  as  a  compression  scheme  for  full  motion  video.
 206  http://  www.  mpeg.  org/  MPEG/  index.  html#  mpeg  (accessed  June  19,  2002).
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 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).  207
 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  208
 For  almost  60  years,  television  broadcasters  have  transmitted  signals  based  on  the  NTSC  standard.  209  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.  210  It  also  appointed  a  25  member
 advisory  panel  called  the  Advisory  Committee  on  Advanced  Television  Services
 207  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.  208  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,  Advanced  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).
 209  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).  210  Notice  of  Inquiry  on  ATV.
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 (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.  211  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.  212  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.  213  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.  214
 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
 211  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.
 212  Fourth  Report  and  Order.
 213  See  47  U.  S.  C.    336.
 214  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).
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 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).  215
 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.  216
 Station  Build-  out
 Congress  set  December  31,  2006  as  the  target  date  for  ending  television  broadcasters  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.  217
 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.  218  The  Commission  also  stated  that  in  limited  circumstances  it  will  now  consider  financial  hardship  as  a  ground
 for  extending  the  applicable  construction  deadline.  219  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.
 215  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).  216  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.
 217  Id.
 218  See  In  the  Matter  of  Review  of  the  Commissions  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).  219  Id.
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 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.  220  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  Commissions  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.  221  The  Commission  stated  that  Section  614(  b)(  4)(  A)  of  the
 Communications  Act  of  1934,  as  amended  by  the  1996  Act,  222  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.  223  The  Commissions
 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.  224  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
 220  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).  221  Id.  at  p.  32-  33.
 222  Id.;  See  also  47  U.  S.  C.  534.
 223  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  systems  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.
 224  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.
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 commercial  arrangements  with  cable  (and  DBS)  operators  for  carriage  of  at  least  some  Interactive  Television  material.  225
 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;  226  (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).
 Table  30:  Consumer  HDTV  Survey
 Overall  Likely  HDTV
 Buyer
 Short-Term
 Likely  Buyer
 Potential  HDTV
 Buyer
 Short-Term
 Buyer
 Premiere  of  Favorite  TV  Movie  Super  Bowl
 World  Series  Academy  Awards
 Daytona  500  NCAA  Final  Four
 Grammy  Awards  NBA  Final
 Stanley  Cup  The  Masters
 WWF  Wrestling  Triple  Crown  Horse  Races
 World  Cup  Soccer  Finals  Americas  Cup
 60%  45%
 31%  23%
 22%  22%
 21%  20%
 13%  12%
 12%  10%
 8%  6%
 69%  53%
 34%  27%
 26%  26%
 25%  25%
 13%  18%
 12%  11%
 9%  8%
 73%  63%
 44%  34%
 29%  31%
 29%  33%
 12%  20%
 16%  12%
 13%  13%
 56%  41%
 29%  21%
 20%  20%
 19%  17%
 13%  8%
 12%  9%
 7%  4%
 66%  50%
 39%  28%
 25%  24%
 26%  21%
 16%  8%
 19%  12%
 9%  7%
 Source:  CEA  Market  Research    Consumer  Perspectives  of  Digital  Television  III  (2002)
 225  See  the  discussion  of  Interactive  Television  later  in  this  section  and  the  discussion  of  Interactive
 Advertisements  in  Chapter  IX.  226  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.
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 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.  227
 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.  228  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.  229  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  broadcasters  digital  channels  for  subscribers  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.  230  The  intent  of  the  proposal  was  to
 provide  an  immediate  spur  to  the  transition  by  giving  consumers  a  reason  to  invest  in
 227  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.
 228  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:  Lets  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).  229  http://  www.  iconocast.  com/  issue/  9001,1,0402,17,  1.  html
 230  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  Ive  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.
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 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  Powells  proposal  called  for  the  following  voluntary  industry  actions:
 1.  Top  Four  Broadcast  Networks  (ABC,  CBS,  Fox  and  NBC),  HBO  and  Showtime
 Provide  high-  definition  or  other  value-  added  DTV  programming  during  at  least  50%  of  their  prime-  time  schedule,  beginning  with  the
 2002-  2003  season.  231
 2.  Broadcast  Licensees  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).  232
 3.  Cable  Operators  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.  233
 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.
 231  As  noted  earlier,  value-  added  DTV  programming  could  be  high-  definition,  innovative  multicasting,
 interactive,  etc.  232  Stations  broadcasting  DTV  programming  will  inform  viewers  of  their  digital  content
 through  on-  air  promotional  announcements  over  their  analog  broadcast  facilities.  233  These  devices  will  include  digital  connectors  (e.  g.,  1394/  5C  and/  or  DWHDCP)  at  the  request  of  the
 consumer.
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 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  Commissions  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    50%  of  a  responsible  partys  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    50%  of  a  responsible  partys  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    100%  of  all  such  units  must  include  DTV  tuners  effective  July  1,  2007.
 4.  TV  Interface  Devices    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
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 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.  237  Others  are  delivering  high  definition  programming.  238  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  DTVs  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.  239  Thus,  broadcasters  must  provide  a  free  digital  video  programming  service  that  is  at  least  comparable  in  resolution
 to  todays  service  and  aired  during  the  same  time  periods  as  todays  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.  240  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.  241  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
 237  The  Interactive  Television  (iTV)  Guide,  Version  1.0,  ING  Barings  Report,  September  2000,  p.  26.
 238  Id.
 239  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).  240  See  47  U.  S.  C.  336(  e)(  2)(  B).
 241  In  the  Matter  of  Ancillary  or  Supplemental  Use  of  Digital  Television  Capacity  by  Noncommercial
 Licensees,  Report  and  Order,  MM  Docket  No.  98-  203  (2001).
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 substantial  majority  of  a  NCE  stations  entire  digital  capacity,  measured  on  a  weekly  basis.  242
 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  Commissions  Fifth  Report  and  Order  as  a  guideline.  One  of  these  new  digital  services  is  data  broadcasting  or  datacasting.  243
 Exhibit  2  shows  an  example  of  one  type  of  data  broadcast  network  architecture  and  how  it  works.  244  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).
 242  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.  243  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).  244  See  http://  www.  hd-  plus.  com/  iblast.  html  (accessed  September  25,  2002).
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 Figure  2:  Sample  Diagram  of  One  Type  of  Data  Broadcast  Network  Architecture
 Content  Producers  and  Distributors  Encoding,  Storage,
 Program  Servers,  Network  Management
 Fiber  Optic  Cable
 Local  Network  Affiliates/  TV  Stations
 Consumer
 receiver  antenna
 Satellite
 Digital  TV  Antenna
 TV
 Network  Operating  Center
 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  245  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
 245  Clients  are  devices  and  software  that  request  information.
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 an  auxiliary  service  with  a  steady,  average  rate  of  data  delivery  over  an  established  time  interval.  246
 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.  247  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.  248  Many  people  in  the  creative  community  want  to  protect  against  unauthorized  distribution  of  their  works.  249
 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?  250
 246  Id.
 247  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  users  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  (accessed  September  26,  2002).
 248  Paige  Albiniak,  Raising  the  Flag  on  Copy  Protection,  Broadcasting  and  Cable,  June  10,  2002,  p.  25.
 249  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.
 250  Id.
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 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.  251  It  noted  that  the  current  lack  of  digital  broadcast  copy
 protection  may  be  a  key  impediment  to  the  DTV  transitions  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?
 251  See  In  the  Matter  of  Digital  Broadcast  Copy  Protection,  Notice  of  Proposed  Rulemaking,  MB  Docket
 No.  02-  230  (2002).
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 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.  252  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.  253  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.  254  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.  255  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).  256  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.
 252  Nondiscrimination  in  the  Distribution  of  Interactive  Television  Services  Over  Cable,  Notice  of  Inquiry,
 16  FCC  Rcd  1321  (2001)  (  ITV  NOI).  253  See  Id.  at  1322.
 254  ITV  NOI,  supra.
 255  ITV  NOI,  16  FCC  Rcd  at  1329.
 256  ITV  NOI,  16  FCC  Rcd  at  1324-  25.
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 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.  257  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.  258
 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  Warners  cable  division  in  Hawaii,  has  recently  launched  this  type  of  ITV  service  using  software  developed  by  NDS.  259  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.  260
 Internet  Over  Television
 Internet  over  television  gives  a  subscriber  the  ability  to  launch  an  Internet  browser  on  the  subscribers  television  screen,  and  navigate  between  surf,  chat,  and
 email  applications.  261  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.  262
 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-
 257  Id.
 258  Id.
 259  See  NDS  Announcement:  Hawaii  To  Experience  Oceanic  Time  Warners  New  Sportsview.  NDS
 Press  Release,  September  19,  2002.  260  Oceanic  Cable  has  rolled  out  this  type  of  service  using  Navics  set  top  data  services  software.  See
 Karen  Brown,  Oceanic  Unveils  Interactive  Duo,  Multichannel  News,  September  18,  2002.  261  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).  262  Interactive  Television    Turning  Couch  Potatoes  into  Mouse  Potatoes,  Donaldson,  Lufkin  &  Jenrette
 Report,  December  1999,  p.  1.
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 air  broadcast  signals.  263  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)  264  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.  265  The  sellers  of  EPGs  are  EPG
 companies.  266  Gemstar,  267  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.  268
 Video-  on-  Demand
 Video-  on-  Demand  (  VOD)  is  analogous  to  the  PVR  in  its  function.  269  VOD  permits  subscribers  to  instantly  access  video  programming  of  any  kind  for  a  small  fee
 for  each  event  ordered.  270  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  271  with  hundreds  of  gigabytes  of  storage  as
 263  AOL  Time  Warner,  16  FCC  Rcd  6547  (2001).
 264  Newtons  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).  265  Some  set-  top  boxes  and  television  sets  will  have  EPGs  technology  built  inside.
 266  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.
 267  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.
 268  See  Gene  Feroglia,  Portal  Shmortal  Its  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.)  269  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.)
 270  James  Chiddix,  President  of  AOL  Time  Warners  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  Warners  Chiddix  on  State  of  VOD,  Multichannel  News,  November  5,  2001.
 271  A  video  server  is  a  device  that  stores  video  information  on  hard  disks  or  optical  disk  drives.  See
 Newtons  Telecom  Dictionary  (17  th  Ed.  2001)  at  p.  748.
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 well  as  a  digital  set  top  box  in  the  subscribers  home.  272  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  273  ;  (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  Gemstars  EPG  in  a  Motorola  set  top  box.  274  This  integration  of  technologies  simplifies  subscriber  selection  and  ordering  of  VOD  programming
 options.  275  Other  variants  of  VOD  include:
 Subscription  Video-  on-  Demand
 Subscription  Video-  on-  Demand  (  SVOD)  functions  like  VOD,  but  has  a  different  marketing  structure.  276  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  childrens  programming  provided  by  several  cable  programmers  and  PBS
 for  a  $9.00  flat  fee.  277
 Near  Video-  on-  Demand
 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
 272  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.  273  A  set  top  box  with  a  hard  drive  can  remove  some  network  congestion  caused  by  interactive
 applications,  such  as  VOD.  274  See  Comcasts  VOD  System  First  to  Link  With  Gemstar,  Hollywood  Reporter,  October  4,  2001.
 275  Mark  Hess,  Comcast  Vice  President  for  Digital  Services,  has  stated  that  the  integration  of  Gemstars
 EPG  with  SeaChanges  VOD  system  will  help  the  company  launch  interactive  TV  services  on  the  Motorola  box.  See  id.
 276  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.
 277  Matt  Stump,  Quietly,  Cable  VOD  Efforts  Head  Toward  Critical  Mass,  Multichannel  News,  November  5,
 2001.
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 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.  278  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.  279  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.  280
 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.  281
 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.  282  Integrated  products
 allow  service  operators  to  bundle  their  services,  which  may  provide  an  attractive  business  model  while  undercutting  retail  sales  of  standalone  PVR  units.  283  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.  284
 278  Stuart  Thomson  and  Aalia  Walker,  Datafile,  Cable  and  Satellite  Europe,  September  1,  2001.
 279  Id.
 280  Id.
 281  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).  282  Id.
 283  Id.
 284  Bear,  Stearns  &  Co.  Inc.,  Hard  Lines  Retailing:  Consumer  Electronics  Report  (2002)  at  p.  32.
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 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.  285  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.  286
 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.  287  In  August  2001,  Sonicblue  acquired  ReplayTV,  and  announced  that  it
 again  would  sell  PVRs  over  the  Internet  and  at  select  retail  outlets.  288  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.  289  TiVo  is
 offered  on  a  subscription  basis  for  approximately  $10  a  month.  290  About  20%  of  its  reported  200,000  subscribers  receive  the  service  through  DirecTV  using  an  STB  that
 combines  DBS  and  PVR  functions.  291  In  addition,  EchoStar  offers  STBs,  the  DISHPlayer  and  the  DishPVR,  with  PVR  capabilities.  292
 One  television  executive  notes  that  consumer  adoption  of  PVRs  has  not  been  as  widespread  as  predicted.  293  Consumers  may  adopt  the  PVR,  much  like  the  VCR  and
 285  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).  286  Id.,  at  p.  32.
 287  2000  Report,  16  FCC  Rcd  at  6059-  60.
 288  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.
 289  Bear,  Stearns  Hard  Lines  Retailing:  Consumer  Electronics,  p.  32.
 290  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.
 291  TiVo  Reports  Subscriber  Increases,  Lower  Losses,  Satellite  Business  News  Fax  Update,  May  30,
 2001,  at  2;  http://  www.  directv.  com.  292  http://  www.  dishnetwork.  com/  content/  products/  receivers/  index.  shtml.
 293  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).
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 every  other  new  form  of  entertainment,  but  the  PVR  may  not  have  quite  the  same  effect  as  experts  assume.  294
 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.  295  He  estimates  that  almost  one  million  households  (or  less  than  1%  of  total  television  viewers)  currently  use  PVR  devices  on  a
 regular  basis.  296  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.  297  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.  298
 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.  299  For  instance,  during  televised  golf  tournaments,  players  often  talk  about  equipment  during
 the  commercials.  300  The  content  of  the  commercials  tends  to  be  compatible  with  the  format  of  the  golf  show.  301  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).  302  The  study  noted  that  the  skip  rate  for  PVR  users  was  more  than  four  times  that  of  viewers  watching  shows  recorded  on  a
 294  Id.
 295  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).
 296  Id.
 297  Comm.  Daily,  Vol.  22,  No.  135,  July  15,  2002  (citing  remarks  by  Jamie  Kellner,  Chairman,  Turner
 Broadcasting).  298  Id.
 299  Lisa  de  Morales,  The  TV  Column,  The  Washington  Post,  July  25,  2002  (citing  remarks  by  Bob  Wright,
 CEO,  NBC).  300  Id.
 301  Id.
 302  Marla  Matzer  Rose,  Study:  PVR  Users  Skip  71%  of  Ads,  Hollywood  Reporter,  July  3,  2002,  citing
 research  study  from  CNW  Marketing  Research.
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 VCR.  303  The  skip  rate  was  also  more  than  65%  higher  with  PVR  users  than  with  people  who  actively  ignored  commercials  on  live  television.  304
 Table  31:  Television  Ads  Not  Watched  (Prime  Time)  305
 Summary  --  Sort  by  "Fast  Forward  PVR"
 Fast  Forward  Fast  Forward  Fast  Forward  Fast  Forward  Fast  Forward  Fast  Forward
 Actively  Ignored  on  Video  Taped  PVR  Of  Video  Taped  Of  Video  Taped  Of  PVR  Recorded  Of  PVR  Recorded
 Live  TV*  TV  TV  Cable  TV  Network  TV  Cable  TV  Network  TV
 Fast  Food  44.4%  23.7%  94.6%  22.2%  25.4%  94.4%  94.7%
 Credit  Cards  62.8%  18.8%  93.6%  14.2%  23.1%  93.5%  93.7%
 Upcoming  Program  74.2%  21.4%  93.4%  15.8%  27.6%  92.4%  93.7%
 Mortgage  Financing  73.9%  19.6%  92.7%  19.4%  19.8%  91.1%  93.5%
 Home  Products  40.6%  17.2%  88.5%  13.3%  22.8%  80.4%  93.6%
 Personal  Improvement  68.2%  14.3%  85.6%  12.4%  16.9%  80.3%  91.2%
 Pet  Related  55.7%  16.2%  81.9%  12.8%  21.3%  80.2%  84.6%
 Soft  drinks  21.9%  8.7%  81.4%  6.1%  9.8%  80.7%  82.9%
 Male  Hygiene  Products  63.8%  15.1%  78.2%  12.4%  19.7%  75.6%  82.1%
 National  Automotive  52.6%  18.4%  71.3%  15.3%  26.1%  65.7%  79.4%
 Feminine  Products  41.3%  13.7%  64.1%  8.7%  19.2%  50.3%  78.6%
 Local  Automotive  58.1%  14.6%  62.8%  10.4%  19.3%  57.5%  68.2%
 Specialty  Clothing  32.7%  15.6%  61.3%  13.7%  24.1%  55.2%  64.9%
 National  Dept  Store  37.8%  16.9%  60.8%  12.5%  22.2%  58.3%  62.7%
 Home  Improvement  16.2%  17.9%  56.7%  10.2%  25.8%  41.2%  68.8%
 Local  Dept  Store  21.6%  10.2%  55.1%  8.8%  13.4%  52.6%  61.3%
 Movie  Trailers  11.3%  15.9%  47.3%  11.9%  13.6%  29.7%  41.3%
 Drug  31.7%  13.1%  46.9%  11.2%  15.7%  41.2%  49.7%
 Beer  4.4%  5.1%  32.7%  4.9%  5.3%  20.1%  35.6%
 Unweighted  Avg.  42.8%  15.6%  71.0%  12.4%  19.5%  65.3%  74.8%  Samples  8,654  1,148  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
 303  Id.
 304  The  research  characterizes  ignoring  live  TV  as  getting  a  snack,  starting  a  conversation  or  taking  a
 bathroom  break.  305  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.
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 financing  and  home  products,  the  statistics  were  virtually  the  same  as  network-  run  commercials.  306
 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.  307  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.  308
 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.  309  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.  310
 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  consumers  hands.  For  some  broadcasters,  securing
 financing  to  pay  for  station  equipment  is  difficult.  311  Many  worry  that  some  broadcasters  will  not  meet  the  transition  deadline.  312  Cable  operators  feel  pressure  to  carry
 306  Id.
 307  Stuart  Thomson  and  Aalia  Walker,  Datafile,  Cable  and  Satellite  Europe,  September  1,  2001.
 308  Id.
 309  See  New  TiVo  Advertainment  Debuts  as  Part  of  Best  Buy  National  Go  Mobile  press  release,  May  16,
 2002.  310  Id.
 311  See  Many  Broadcasters  Will  Not  Meet  May  2002  Digital  Television  Deadline,  GAO-  020466,  April  2002.
 312  Id.
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 101
 broadcasters  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  stations  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  consumers  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  broadcastings  share.
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 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  viewers  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.  Disneys  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  1990s  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.  313
 Consolidated  media  companies  who  own  television  and  radio  stations,  cable  channels  and  print  publications  can  offer  advertisers  a  wide  variety  of  package  deals.  314
 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.  315  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
 313  See  Chapter  X,  Cooperative  Efforts  with  Broadcasters  subsection  for  more  detail  on  this  issue.
 314  Consolidation  Good  for  Public,  Advertisers,  Karmazin  Tells  TVB,  Comm.  Daily,  Vol.  22,  Issue  59,
 March  27,  2002,  citing  remarks  by  Mel  Karmazin,  President,  Viacom.  315  Proctor  &Gamble  and  Viacom  Plus  Announce  Major  Marketing  Partnership,  PR  Newswire,  May  31,
 2001.
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 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.  316
 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).  317  Media  owners  suggest  that
 consolidation  can  lead  to  lower  cost  structures  and  higher  revenues  as  a  result  of  more  advertising  and  cross-  promotional  opportunities.  318
 Broadcast  television  executives  at  companies  which  own  two  stations  in  a  market  believe  that  their  companies  gain  greater  influence  with  advertisers.  319  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.  320  Other  benefits  include  cost-  control,  higher  profit  margins  and  better-  quality  news  and  entertainment  for  viewers.  321  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.  322
 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.  323  Successful  shows  make  money,
 and  a  programs  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.  324  Before  consolidation  occurred  in  the  advertising  and  marketing  services
 316  Id.
 317  Diane  Mermigas,  Not  All  Mergers  Made  in  Heaven,  Electronic  Media,  Vol.  21,  No.  25  June  24,  2002.
 318  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.  319  Sallie  Hofmeister,  Q&  A  with  Murdoch  Empires  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).
 320  Id.
 321  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.
 322  Sallie  Hofmeister,  Q&  A  with  Murdoch  Empires  Chief  Engineer,  Los  Angeles  Times,  September  2,
 2001.  323  Id.
 324  Id.
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 industry,  broadcasters  discreetly  sold  ad  space  to  diverse  and  independent  agencies.  325  Today,  broadcasters  sell  ad  space  to  agency  networks  with  knowledge  of  similar  sales
 arrangements,  which  tends  to  decrease  ad  prices.  326
 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.  327  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.  328
 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.  329  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
 325  Id.
 326  Id.
 327  Bear,  Stearns  &  Co.  Inc.,  Advertising  &  Marketing  Services  Report,  March  2002  at  6.
 328  It  is  important  to  note  that  these  other  areas  are  often  not  reflected  in  many  industry  statistics.
 329  Much  of  the  discussion  in  this  working  paper  regarding  buy-  side  consolidation  is  taken  from  the  Bear,
 Stearns  Advertising  &  Marketing  Services  Report  (2002).
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 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.  330  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.  331  Another  reason  is  that  the  potential  exists  for  client
 conflicts.  332  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.  333  Clients  may  also  want  to  keep  business  at  several  agencies  for  creative  diversity.  334  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.  335
 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.  336  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.  337  However,  it  has
 been  suggested  by  some  sellers  and  buyers  at  midsize  media  agencies  that  the  larger
 330  Richard  Tomkins,  Commercial  Break-  up,  The  Financial  Times,  July  15,  2002.
 331  Id.
 332  Id.
 333  Bear,  Stearns  Report  at  11.
 334  Id.
 335  Id.
 336  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%.
 337  Richard  Linnett  and  Wayne  Friedman,  Sellers:  Mega-  shops  Slow  in  Upfront,  Advertising  Age,  June  24,
 2002  at  3.
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 agency  networks  tend  to  be  the  slowest  and  bulkiest  players  in  the  market.  338  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.  339  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  agencys  ability  to  make  a  deal  is  commensurate  with  its  ability  to  walk  away.  340
 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.  341
 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.  342  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
 338  Id.
 339  Id.
 340  Id.  (citing  John  Mandel,  CEO,  MediaCom).
 341  Matthew  Rose  and  Suzanne  Vranica,  Prolonged  Ad  Slump  Puts  Media  in  the  Mood  to  Pander  to
 Buyers,  Wall  Street  Journal,  May  9,  2002.  342  Frank  Ahrens,  The  Spy  Who  Loved  Nokia,  and  Other  Next-  Stage  Ads:  TV  Plots  Thicken  With  Real
 Brands,  The  Washington  Post,  September  28,  2002.
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 TNT.  343  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  movies  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.  344
 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.  345  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  &  Gambles  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  Dawsons
 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.  346  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.  347  In  exchange  for  advertisers  accepting  production  expenses,  they
 343  Suzanne  Vranica,  Reisenberg  is  the  Marrying  Kind,  Wall  Street  Journal,  May  3,  2002.
 344  Id.
 345  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).  346  According  to  an  Outdoor  Channel  executive,  the  Outdoor  Channel  has  aired  a  variety  of  sponsor-supplied
 programs  including:  Hunting  with  Penns  Woods  (a  game-  call  marketer),  Hunting  with  Country  (from  camouflage  designer  Mossy  Oak)  and  Primos  Truth  About  Hunting  (from  Primos  Hunting  Calls).
 347  Suzanne  Vranica,  FX  Faces  Headaches  with  World  Beer  Games,    Wall  Street  Journal,  May  3,  2002.
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 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).  348
 Broadcasters  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.  349  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  broadcasters  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,
 348  Id.
 349  See  Brian  Lowry,  Going  Far  Beyond  Product  Placement,  Los  Angeles  Times,  July  10,  2002.
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 where  lets  consumers  purchase  goods  and  services  via  the  Internet,  has  been  a  rapidly  growing  industry  350  since  the  mid-  1990s.  351  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.  352  The  PC  is  expected  to  remain  as  the  dominant  platform
 for  e-  commerce  transactions  over  the  next  five  years.  353  Transaction  revenues  from  fixed  Internet  or  PC-  based  e-  commerce  will  grow  from  almost  $80  billion  in  2002  to
 $255  billion  in  2007.  354  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.  355
 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.  356  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
 350  eMarketers  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
 351  Phillip  Swann,  Is  the  Future  Now?  Response  TV,  February  1,  2002.
 352  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).  353  Id.
 354  Id.
 355  Id.
 356  Jeremy  Thorp,  What  Benefits  Do  Interactive  and  Enhanced  TV  Service  Provide?,  Broadcast
 Engineering,  Vol.  43,  No.  3,  March  1,  2001.
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 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  childrens  development,  and  (3)  Congress  has  a
 substantial  interest  in  promoting  childrens  welfare.  357
 The  Commission  has  placed  obligations  on  broadcasters  to  protect  the  interests  of  children,  given  broadcasters  responsibility  as  trustees  of  the  public  airwaves.  In
 1974,  the  Commission  instituted  a  wide  ranging  inquiry  into  childrens  programming  and  advertising  practices,  which  led  to  publication  of  the  Childrens  Television  Report  and
 Policy  Statement  (  1974  Policy  Statement).  358  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.  359
 In  1990,  Congress  enacted  the  Childrens  Television  Act  of  1990  (  CTA).  360  The  objective  of  Congress  in  enacting  the  CTA  was  to  increase  the  amount  of  educational
 and  informational  programming  on  television.  361  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  childrens  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
 357  In  the  Matter  of  Childrens  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).
 358  Childrens  Television  Report  and  Policy  Statement,  50  FCC  2d  1  (1974),  affd.,  Action  for  Childrens
 Television  v.  FCC,  564  F.  2d  458  (D.  C.  Cir.  1977)  (  1974  Policy  Statement).  359  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  childrens  programming,  and  honor  the  industrys  voluntary  advertising  guidelines  for  childrens
 programs.  360  Childrens  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  Commissions  1984  decisions  as  precipitating  factors  in  the  enactment  of  the  CTA.  See  Senate  Report  at  4-  5.
 361  Senate  Report  at  1.
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 through  the  licensees  overall  programming,  including  programming  specifically  designed  to  serve  such  needs.  362
 In  October  2000,  the  Commission  issued  an  NPRM  seeking  comment  on  how  existing  childrens  television  obligations,  developed  with  analog  technology  in  mind,
 should  be  adapted  to  apply  to  DTV.  363  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.  364
 At  issue  in  the  NPRM  proceeding  is  how  the  Commissions  childrens  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  childrens  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  childrens  advertising  and  programming  policy  issues  regarding:
 (1)  applicability  to  free  over-  the-  air  channels,  or  to  all  digital  channels  both  free  and  pay,
 362  In  August  1996,  the  Commission  adopted  its  current  educational  programming  rules  enforcing  the
 CTA.  See  Report  and  Order,  Policies  and  Rules  Concerning  Childrens  Television  Programming,  MM  Docket  No.  93-  48,  11  FCC  Rcd  10660  (1996)  (  Childrens  Programming  Report  and  Order).  The
 Commission  first  adopted  rules  implementing  the  CTAs  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
 Commissions  rules  included  several  measures  to  improve  public  access  to  information  about  the  availability  of  childrens  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.
 363  In  the  Matter  of  Childrens  Television  Obligations  Of  Digital  Television  Broadcasters,  Notice  of
 Proposed  Rulemaking,  MM  Docket  No.  00-  167  at  2-  3  (2000).  364  Id.
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 (2)  prohibition  of  all  direct  links  to  commercial  websites  during  childrens  programming,
 (3)  prohibition  of  the  use  of  DTV  interactivity  capability  in  childrens  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.  365
 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.  366  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.  367  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.  368  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.  369
 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
 365  Id.
 366  Comm.  Daily,  Experts  Say  Interactive  TV  Profits  Still  Are  Years  Away,  Vol.  21,  Issue  41,  March  1,
 2001.  367  Jeremy  Thorp,  What  Benefits  Do  Interactive  and  Enhanced  TV  Service  Provide?,  Broadcast
 Engineering,  Vol.  43,  No.  3,  March  1,  2001.  368  Id.
 369  Id.
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 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  childrens  advertising  and  programming.  Thus,  advertisers  and  broadcasters  may  have  to  balance  their  interests  in  targeting  and  monetizing
 eyeballs  versus  the  viewers  interest.
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 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  1990s,  the  broadcast  networks  were  subject  to
 Fin-  Syn.  370  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.
 371  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
 370  In  the  Matter  of  Amendment  of  Part  73  of  the  Commissions  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).
 371  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),  affd  sub  nom.  Capital  Cities/  ABC,  Inc.  v.  Fcc,  29  F.  3d  309  (7  th  Cir.  1994).
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 Consent  Decrees.  372  In  September  1995,  the  Commission  eliminated  the  remaining  Fin-  Syn  rules.  373
 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.  374  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
 372  United  States  v.  National  Broadcasting  Company,  842  F.  Supp.  402  (C.  D.  Cal.  1993).
 373  Review  of  the  Syndication  and  Financial  Interest  Rules,  Sections  73.659    73.  663  of  the  Commissions
 Rules,  MM  Docket  No.  95-  39,  Report  and  Order,  10  FCC  Rcd  12165  (1995).  374  Bear,  Stearns  &  Co.  Inc.,  Diversified  Entertainment,  May  2002  at  8  (parts  of  the  discussion  in  this
 section  are  drawn  from  the  Bear,  Stearns  Report).
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 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.  375
 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.  376
 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.  377  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).  378  Episodes  of  programs  such  as  NBCs  ER  can  cost  ten  times  that  amount  to  produce.  379  For  a  half-hour
 sitcom  episode,  the  estimated  production  cost  is  up  from  $400,000    $900,000
 375  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.
 376  Information  based  on  interviews  with  broadcast  network  executives  and  company  sources.
 377  Bear  Stearns  Diversified  Entertainment  Equity  Research,  Media,  Diversified  Entertainment,  We  Are
 Family,  May  2002  at  9.  378  Michael  Freeman,  Special  Report:  The  New  Economics  of  TV,  Electronic  Media,  January  28,  2002.
 379  See  Marcelino  Ford-  Livene,  The  Digital  Dilemma,  Federal  Communications  Law  Journal,  Vol.  51,  No.
 3,  May  1999  at  606,  fn.  4.
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 (during  Fin-  Syn)  to  $550,000    $1.2  million  (after  Fin-  Syn).  380  Programs  such  as  NBCs  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.  381
 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.  382  Yet,  from  the  studios
 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.  383  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.  384  However,  for  the  2002-  2003  season,  the  Big  Four  networks  will  produce  49%  67%  of  their  primetime  hours.  385
 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.  386  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.  387  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.  388  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  studios  percentage  is  roughly  the  same.
 380  Id.
 381  Information  based  on  interviews  with  broadcast  network  executives  and  company  sources.
 383  Id.
 384  Figures  from  Bear,  Stearns,  Primetime  Hours  Produced  by  Network  1993-  1994,  1997-  1998,  2002-
 2003  Broadcast  Seasons  Percent  (2002)  385  Id.  (Note  that  for  2002-  2003  season,  CBS  and  UPN  are  combined).
 386  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).  387  Id.
 388  Id.
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 A  large  percentage  of  pilots  ordered  by  sister  networks  are  picked  up.  389  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.  390  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.  391
 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.  392  It  has  nine
 series  in  production  for  the  2002-  2003  season,  including  four  destined  for  The  WBs  primetime  schedule  (See  Figure  3).
 389  Id.
 390  Id.
 391  Id.
 392  Michael  Freeman,  For  Whom  Production  Tolls:  Small  Tollin/  Robbins  Outfit  Becoming  a  Giant  Killer,
 Electronic  Media,  August  12,  2002.
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 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.  393
 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.  394  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  Sonys  Columbia  Tristar  Television  Studio  and  the  Artists  Television  Group  to  either  close  or
 exit  the  new  network  television  series  production  business.  395  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.  396
 Case  Study  #2:  Television  Production  Deals
 While  the  trend  is  for  more  programming  to  be  supplied  by  a  sister  studio,  not  all  of  a  networks  programs  are  supplied  by  the  sister  studio.  Growing  in  their  place  are
 393  Id.
 394  Id.
 395  Michael  Freeman,  Special  Report:  The  New  Economics  of  TV,  Electronic  Media,  January  28,  2002.
 396  Id.
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 situations  where  producers  enter  into  production  deals  directly  with  the  broadcast  networks.  397
 Some  networks  have  opted  for  work-  made-  for-  hire  deals  with  production  companies  that  are  staffed  by  members  of  the  screen  actor  and  writers  guilds.  398
 These  independent  contractor-  type  production  companies  usually  have  an  infrastructure  in  place  and  maintain  autonomy.  399  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.  400  Production  deal  negotiations  take
 into  account  the  track  record  and  leverage  of  the  producer  along  with  the  networks  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.  401  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.  402  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.  403
 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
 397  Michael  Freeman,  TV  in  Transition:  Invasion  of  the  Pod  Deals,  Electronic  Media,  August  19,  2002.
 398  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.
 399  Freeman,  TV  in  Transition:  Invasion  of  the  Pod  Deals.
 400  Id.
 401  Id.
 402  Id.
 403  Id.
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 aggregate  viewers  to  make  up  for  declining  ratings.  404  The  ultimate  goal  of  this  practice,  called  repurposing,  is  to  provide  a  solution  to  escalating  programming  costs.  405
 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  Disneys
 Touchstone)  which  aires  on  the  USA  Network,  is  now  being  licensed  to  ABC  for  a  second  shared  broadcast.  406
 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.  407  Under  the  terms  of  the  deal,  HIP  develops  and  produces  series  programming  funded  by  ABC  and  for  broadcast  on  the  network.  408
 The  summertime  ratings  success  of  cable  programming  has  forced  the  networks  to  develop  new  strategies  for  attracting  summer  audiences.  Before  the  rise  in  cables
 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.  409  That  meant  reruns,  and  with  its  lower  ad  rates,  summer  was  the  natural  destination.  410  However,  in  response  to  cables  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
 404  Freeman,  Special  Report:  The  New  Economics  of  TV.
 405  Id.
 406  Michael  Freeman,  Rethinking  Repurposing,  Electronic  Media,  August  12,  2002.
 407  Id.
 408  Id.
 409  Editorial:  Networks  Need  to  Get  Serious  About  Summer,  Electronic  Media,  July  22,  2002.
 410  Id.
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 far  behind.  411  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.  412
 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.  413  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  sports  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.  414
 411  "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.
 412  Michael  Freeman,  Summer  Strategy  Becomes  Necessity,  Electronic  Media,  July  29,  2002.
 413  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).
 414  Id.
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 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,  childrens  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
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 much  less  original  programming  than  broadcast  television.  Lifetimes  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  Networks  primetime  schedule  indicate  noticeably  lower  levels  of  original  and
 network-  owned  programming.  TNTs  original  programming  is  a  small  share  of  the  total  schedule,  but  it  is  concentrated  in  prime  time.  On  the  premium  network  side,  HBOs  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
 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.  415  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.  416  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.  417
 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
 415  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.  416  See  2000  Video  Competition  Report,  17  FCC  Rcd  at  1354-  1356.
 417  Ameritech  Comments  in  the  1997  Video  Competition  Report;  1998  Video  Competition  Report,  13  FCC
 Rcd  at  24298-  99  and  24380-  81.
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 programming  from  broadcast  to  cable.  418  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.  419  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.  420  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.  421  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.  422  Comcast  Spectacor  has  also  entered  into  a  joint  venture  agreement  with  the  Philadelphia  Phillies  Major  League  Baseball
 ("  MLB")  team  to  create  SportsNet.  423
 News
 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
 418  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).
 419  Bell  Atlantic  Comments  in  the  1997  Video  Competition  Report
 420  NCTA,  Regional  Cable  Networks,  Cable  Developments  2002,  May  2002,  at  171-  194.
 421  Liberty  Media  Press  Release,  Cablevision's  Rainbow  Media  and  Fox/  Liberty  Complete  Transaction  to
 Create  Sports  Partnership,  Dec.  18,  1997,  at  1  422  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.
 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.
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 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.  424  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").  425  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.  426
 Despite  their  local  nature,  twenty-  four  hour  local  news  services  compete  for  ratings  with  national  news  services  like  CNN  and  broadcast  news.  427  Again,  digital
 production  allows  these  local  news  networks  to  be  cost  competitive  in  large  and  small  markets  alike.  428  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.  429  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.  430
 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.  431  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.  432
 424  Deborah  D.  McAdams,  Cable  News  Nets  Go  Small,  Broadcasting  &  Cable,  Sept.  27,  1999,  at  48.
 425  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.  426  NCTA,  Cable  Developments  2002,  at  171-  194
 427  Variety,  News  Derby  Upset  by  Dark  Horse,  John  Dempsy  and  Gary  Levin,  Sept.  22-  28,  1997,  at  71.
 428  Deborah  D.  McAdams,  Cable  News  Nets  Go  Small,  Broadcasting  &  Cable,  Sept.  27,  1999,  at  44.
 429  Variety,  News  Derby  Upset  by  Dark  Horse,  John  Dempsy  and  Gary  Levin,  Sept.  22-  28,  1997,  at  71.
 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  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.
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 Childrens  Programming
 Childrens  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  childrens  programs  ranked  among  the  most  highly  rated  of  all  cable  network  programs.
 Childrens  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
 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.
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 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
 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
 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.  433  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.  434  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.  435  Similarly,  HBO,  affiliated  with  AOL  Time  Warner,  has  launched  several  new  HBO  networks  including  HBO  Plus,  HBO
 433  Multiplexing  is  use  of  programming  related  to  an  original  network.
 434  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).  435  1998  Video  Competition  Report,  13  FCC  Rcd  at  24429-  24453;  2001  Video  Competition  Report,  17
 FCC  Rcd  at  1344-  1364.
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 Signature,  HBO  Comedy,  HBO  Family  and  HBO  Zone.  436  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.  437
 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,  ABCs  Sports  is  a  joint  effort  of  ABC  broadcast  network  and  ESPN
 cable  network.  Other  joint  efforts  include  NBCs  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  weeks  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.  438  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.  GEs  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
 436  2001  Video  Competition  Report,  17  FCC  Rcd  at  1345.
 437  2001  Video  Competition  Report,  17  FCC  Rcd  at  1350.
 438  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).
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 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.  439  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.  440  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.  441
 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.
 439  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.
 440  Mermigas,  Diane  NBC  passes  over  to  Disney  and  AOL,  Electronic  Media,  Jan.  28,  2002.
 441  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  $7.5  billion.  Clearly,  the  predictions  were  over-  optimistic
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 Table  32:  Programming  Expenditures  ($  mil)
 1990  1995  2000  2001  2010  BROADCAST  (1)
 Total  Broadcast  Revenues  25,607  30,704  41,694  n/  a  n/  a  Total  Broadcast  Programming
 Expenditures  11,216  13,386  17,114  n/  a  n/  a  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  Basic
 Network  Revenue  2,976  6,562  15,857  17,867  40,690  Total  Basic/  Expanded  Basic
 Programming  Expenditures  1,437  2,933  6,471  7,206  15,496  Original  Programming
 Expenditures  (incl.  News)  593  1,356  3,548  3,973  9,883
 Original  %  of  Total  41.3%  46.2%  54.8%  55.1%  63.8%
 Programming  Acquisition  Expenditures  (incl.  Sports)  844  1,577  2,923  3,233  5,613
 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
 Revenue  n/  a  2,319  3,609  3,979  5,626  Total  Premium  Network
 Programming  Expenditures  n/  a  1,175  1,846  2,062  2,982  Original  Programming  Spending  n/  a  365  604  701  1,193
 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.  442  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
 442  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.
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 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.  443  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.  444  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.  445
 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.
 443  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.  444  Programming  expenditures  are  taken  as  the  some  of  the  program,  production,  and  news  categories  in
 the  TVFB.  445  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.
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 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.  446  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.  447  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.
 446  Bear,  Stearns  Diversified  Entertainment  Equity  Research,  Media,  Diversified  Entertainment,  We  Are
 Family,  May  2002,  p.  10.  447  Id.
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 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
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 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  Commissions  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  Commissions  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  studios  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.,
 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,
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 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
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 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  Commissions  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  broadcasters  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  viewers  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
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 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.,  childrens,  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
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 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  televisions
 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.
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 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  Unions  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
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