*Pages 1--129 from  C:\Pdf2Text\Ready4Text_in\pdf\44029.pdf*
 CHAIRMAN 
 Federal  Communications  Commission 
 Washington,  D.  C. 

 November  18,2004 

 The  Honorable  Joe  Barton  Chairman 
 Committee  on  Energy  and  Commerce  U.  S.  House  of  Representatives 
 21  25  Rayburn  House  Office  Building  Washington,  D.  C.  205  15 

 Dear  Chairman  Barton: 
 In  response  to  your  May  18,2004  request,  I  am  pleased  to  provide  the  Committee  on  Energy  and  Commerce  the  enclosed  Report  concerning  the  packaging  and  sale  of  video 
 programming  services  by  cable  and  satellite  television  providers.  The  Report  was  prepared  by  the  Commissions  Media  Bureau. 

 To  assist  in  the  preparation  of  the  Report,  the  Bureau  issued  a  Public  Notice  seeking  public  comment  and  information  on  the  technical,  economic  and  legal  issues  identified  in  your 
 request.  The  Bureau  also  conducted  a  symposium  last  summer  to  explore  first-  hand  the  advantages  and  disadvantages  of  an  a  la  carte  marketing  scheme,  including  its  potential 
 implications  for  the  prevalent  economic  model  in  the  pay  television  industry,  as  well  as  its  possible  effects  on  retail  prices  and  new  entrants  in  the  video  programming  market.  The  specific 
 questions  outlined  in  your  letter  are  addressed  in  Appendix  F  to  the  Report. 
 If  you  or  other  Committee  members  have  any  questions  concerning  the  Media  Bureaus  Report,  please  do  not  hesitate  to  contact  me. 

 Sincerely,  *& 

 Michael  K.  Powell 
 Enclosure 
1
 THE  REPORT 
 <  > 

 Report  On  the  Packaging  and  Sale  of 
 Video  Programming  Services  To  the  Public 

 November  18,2004 
2
 THE  REPORT  2 
 TABLE  OF  CONTENTS  Page 
 I  .  INTRODUCTION  AND  SUMMARY  ..........................................................................................  3 
 IT  .  THE  RETAIL  MARKET  FOR  VIDEO  PROGRAMMING  ....................................................  8  A  .  Background  ..............................................................................................................................  8 
 B  .  Historical  Overview  .................................................................................................................  8 
 D  .  Current  Requirements  and  Obligations  ..............................................................................  15  C  .  Current  Cable  Services  and  Program  Options  ...................................................................  12  1 
 .  Tier  Placement  Requirements  ........................................................................................  15  2  .  Tier  Buy  Through  Requirements  ...................................................................................  18  3 

 .  Commercial  Availability  of  Navigation  Devices  and  Equipment  Compatibility  .......  19  E  .  Analysis  of  Current  Packaging  Practices  at  the  Retail  Level  ............................................  20 
 1  .  Benefits  and  Harms  of  Bundling  at  the  Retail  Level  ....................................................  20  F 
 .  Feasibility  of  A  La  Carte  and  Themed  Tiers  .......................................................................  26  1  .  Alleged  Harms  and  Benefits  ...........................................................................................  26  2 

 .  Implementation  ................................................................................................................  27  3  .  Consequences  ...................................................................................................................  38 
 4  .  Experiences  With  A  La  Carte  ........................................................................................  56  G  .  New  Models  ...........................................................................................................................  59 
 H  .  Recommendations  for  the  Retail  Market  ............................................................................  62 
 111  .  THE  WHOLESALE  MARKET  FOR  VIDEO  PROGRAMMING  .......................................  66 
 B  .  Requirements  and  Remedies  ................................................................................................  66  1  .  Broadcast  Signal  Carriage  Requirements  .....................................................................  66 
 2  .  Retransmission  Consent  ..................................................................................................  68  3  .  Network  Nonduplication  and  Syndicated  Exclusivity 
 ..................................................  70  4  .  Antitrust  ...........................................................................................................................  71 

 C  .  Historical  Practices  and  Outcomes  ......................................................................................  72  D  .  Current  Broadcast  Signal  Carriage  Arrangements 
 ...........................................................  74  1  .  Benefits  of  Retransmission  Consent  ...............................................................................  74 

 E  .  Affiliation  Agreements  and  Contractual  Terms  of  Program  Networks  ...........................  77  F 
 .  Recommendations  for  the  Wholesale  Market  .....................................................................  80 

 A  .  Industry  Overview  ................................................................................................................  66 
 2  .  Harms  of  Retransmission  Consent  and  Other  Requirements  .....................................  75 
 Economic  Appendix  I 
 .  IT  .  Analysis  of  Booz  Allen  Hamilton  Economic  Study  The  Economics  of  Bundling  in  the  MWD  and  Video  Programming  Markets 

 General  Appendices  Appendix  A:  Letters  From  Congress 
 Appendix  B:  Media  Bureau  Public  Notices  Appendix  C:  List  of  Leading  Commenters  and  Reply  Commenters 
 Appendix  D:  List  of  Economic  Analyses  Appendix  E:  A  La  Carte  in  Canada 
 Appendix  F:  Summary  of  Responses  to  Congressional  Inquiry 
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 THE  REPORT  3 
 \  , 

 I.  INTRODUCTION  AND  SUMMARY 
 Earlier  this  year,  several  members  of  the  U.  S  House  of  Representatives  Committee  on  Energy  and  Commerce  wrote  to  Federal  Communications  Commission  Chairman  Michael  Powell  asking  for 
 Commission  insight  on  the  efficacy  of  providing  a  la  carte  and  themed-  tier  services  to  cable  and  satellite  subscribers.    Separately,  Senator  John  McCain,  Chairman  of  the  United  States  Senate,  Committee  on 
 Commerce,  Science,  and  Transportation,  asked  Chairman  Powell  to  explore  all  available  options  .  .  .  to  promote  a  la  carte  and  satellite  offerings  as  soon  as  possible  where  such  offerings  would  benefit 
 consumers  .72 
 At  the  heart  of  these  Congressional  requests  for  the  Commission  to  study  a  la  carte  and  themed-  tier  services  for  cable  and  satellite  subscribers  is  our  nations  long-  standing  public  policy  goal  of  making 
 available  communications  and  media  technologies  to  all  Americans  at  affordable  rates.  Although  it  is  undeniable  that  the  last  decade  has  brought  the  public  a  wealth  of  new  benefits  and  value  stemming  both 
 from  the  introduction  and  continued  growth  of  direct  broadcast  satellite  systems  (  DBS  or  satellite  carriers)  as  strong,  nationwide  competitors  to  cable  in  the  multichannel  video  programming  distributor 
 (  MVPD)  marketplace,  and  the  cable  industrys  collective  $85  billion  investment  to  upgrade  its  distribution  platform  and  product  offerings,  it  is  equally  undeniable  that  many  Americans  are  frustrated 
 with  year  over  year  increases  in  their  pay-  television  bills.  In  a  desire  to  empower  consumers  and  to  bring  them  more  choice,  and  in  hopes  of  stemming  the  tide  of  rising  MVPD  retail  rates,  some  have  turned  to  a 
 la  carte  and  themed-  tier  services  as  a  potential  solution. 
 Others  believe  that  a  la  carte  and  themed-  tier  services  may  serve  as  an  effective  means  for  the  public  to  address  another  issue  of  concern  to  millions  of  Americans-  the  growing  coarseness  of 
 programming  on  television.  As  the  explosion  of  channel  capacity  and  new  program  networks  have  brought  some  of  historys  best  television  to  living  rooms  across  the  country-  from  educational  and 
 childrens  programming  to  news,  public  affairs  and  sports  programming-  it  also  has  provided  a  significant  amount  of  coarse  programming.  Many  view  a  la  carte  and/  or  themed-  tier  services  (such  as  a 
 packaged  tier  of  family  programming)  as  a  way  to  give  adults,  especially  parents  of  young  children,  an  ability  to  prevent  objectionable  programming  from  entering  their  homes  or  to  more  easily  find  family- 
 friendly  programming. 
 A  third,  albeit  less  pronounced,  catalyst  behind  the  interest  in  exploring  the  feasibility  and  impact  on  the  public  of  a  la  carte  or  themed-  tier  services  is  the  impact  of  the  tying  of  cablekatellite  program 
 networks  to  the  carriage  of  large  broadcast  network  affiliates  through  retransmission  consent.  Some  argue  that  the  use  of  retransmission  consent  by  some  of  our  nations  largest  broadcast  networks  has 
 hindered  the  development  of  independent  program  networks,  threatening  diversity,  and  view  a  la  carte  and  theme-  tier  services  as  a  potential  vehicle  to  limit  these  perceived  effects  of  retransmission  consent. 

 These  core  communications  policy  goals--  consumer  choice,  universal  and  affordable  access  to  communications  and  media  technologies,  diversity  and  parental  control  over  the  media  that  enter  their 

 The  House  members  asked  the  Commission  to  address  questions  in  seven  general  areas  and  submit  a  Report  to  the  Committee  by  November  18,2004.  Letter  from  the  Hons.  Joe  Barton,  John  D.  Dingell,  Fred  Upton,  Edward  Markey, 
 and  Nathan  Deal,  U.  S.  House  of  Representatives,  to  the  Hon.  Michael  K.  Powell,  Chairman,  Federal  Communications  Commission,  May  18,  2004.  (  House  Letter)  The  letter  is  attached  as  part  of  Appendix  A.  A 
 concise  issue-  response  summary  to  the  House  Letter  is  found  in  Appendix  F. 
 Letter  from  the  Hon.  John  McCain,  Chairman,  United  States  Senate,  Committee  on  Commerce,  Science,  and  Transportation,  to  the  Hon.  Michael  K.  Powell,  Chairman,  Federal  Communications  Commission,  May  19,  2004. 

 (  McCain  Letter)  The  Letter  is  attached  as  part  of  Appendix  A. 

 I 
 2 
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 THE  REPORT  4 
 homes-  have  been  guideposts  for  Congress  and  the  Commission  since  the  advent  of  broadcast  radio  and  throughout  the  development  and  growth  of  broadcast  television,  cable  television,  DBS  and  other 
 electronic  mass  media  platforms.  These  goals  are  shared  by  those  who  advocate  an  a  la  carte  or  themed-  tier  services  regime  for  cable  and  satellite  subscribers. 

 During  these  early  stages  of  the  a  la  carte  discussion  in  Congress,  however,  many  raised  concerns  of  whether  an  a  la  carte  or  themed-  tier  services  regime  would  be  the  most  effective  means  of  achieving 
 our  shared  policy  objectives.  Others  went  further  to  suggest  that  a  government  mandated  a  la  carte  or  themed-  tier  services  regime  would  only  thwart  some  of  these  policy  goals  by  increasing  retail  rates  for  the 
 vast  majority  of  cable  and  satellite  subscribers  and  not  enhancing,  but  diminishing  (and  in  several  cases,  eliminating)  the  progress  made  by  new,  niche  program  networks  and  their  contribution  to  diversity  on 
 television. 
 It  is  with  these  goals,  worries,  and  questions  in  mind  that  several  Members  of  Congress  asked  the  Commission  to  study  the  facts  and  economics  of  a  la  carte  or  themed-  tier  services  on  cable  and  satellite 
 subscribers.  This  Report  is  the  result  of  that  inquiry.  Although  this  Report  should  not  be  viewed  as  providing  definitive  answers  to  all  of  the  questions  surrounding  the  impact  of  a  la  carte,  themed-  tier 
 services  or  retransmission  consent  on  the  public,  it  should  serve  as  a  useful  starting  point  for  discussion  as  Congress,  the  Commission,  the  public  interest  community,  and  the  industry  continue  to  strive  to  bring  the 
 public  the  benefits  of  the  most  diverse  and  competitive  media  marketplace  in  the  world. 
 In  response  to  the  Congressional  inquiries,  the  Media  Bureau  (  Bureau)  issued  a  Public  Notice  (  Phi  or  A  La  Carte  PN)  requesting  comment  on  factual  and  legal  questions  regarding  the  provision  of 
 a  la  carte  and  themed-  tier  services  on  cable  television  and  DBS.  3  The  Bureau  also  sponsored  a 

 See  Public  Notice,  Comment  Requested  on  A  La  Carte  and  Themed  Tier  Programming  and  Pricing  Options  for  Programming  Distribution  on  Cable  Television  and  Direct  Broadcast  Satellite  Systems,  19  FCC  Rcd  9291  (MB, 
 May  25,  2004).  The  Public  Notice  is  attached  in  Appendix  B.  In  the  past  two  years,  a  la  carte  pricing  for  MVPD  service  has  received  considerable  attention  from  Congress,  the  Commission,  and  other  government  agencies.  For 
 example,  On  March  25,  2004,  the  Senate  Committee  on  Commerce,  Science,  and  Transportation,  held  a  hearing  entitled,  Escalating  Cable  Rates:  Causes  and  Solutions  and  on  July  14,  2004,  the  House  of  Representatives 
 Committee  on  Energy  and  Commerce  and  Subcommittee  on  Telecommunications  and  the  Internet  held  a  hearing  entitled,  Competition  and  Consumer  Choice  in  the  MVPD  Marketplace-  Including  an  Examination  of  Proposals  to 
 Expand  Consumer  Choice,  Such  as  A  La  Carte  and  Themed-  Based  Tiers.  See  also  General  Accounting  Office,  Issues  Related  to  Competition  and  Subscriber  Rates  in  the  Cable  Television  Industry,  GAO-  04-  8,  Report  to  the 
 Chairman,  Committee  on  Commerce,  Science,  and  Transportation,  U.  S.  Senate  (October  24,  2003)  at  5-  6,  30-  39  (finding  that,  while  an  a  la  carte  system  might  provide  greater  consumer  choice,  it  would  impose  additional  costs  on 
 subscribers  and  alter  the  current  economic  structure  of  the  cable  industry).  The  Commission  has  also  sought  information  and  received  comment  regarding  the  packaging  and  marketing  of  programming  services.  See  Annual 
 Assessment  of  the  Status  of  Competition  in  the  Market  f  o  r  the  Delivery  of  Video  Programming,  19  FCC  Rcd  1606,  1705-  06  (2004)  (  2003  Video  Competition  Report  or  2003  Report)  (finding  that  bundling  program  networks  into 
 packages  allows  greater  penetration  of  individual  channels,  which  lowers  the  per  subscriber  price  MVPDs  pay  to  programmers,  and  creates  subscriber  awareness  of  new  networks).  See  also  Annual  Assessment  of  the  Status  of 
 Competition  in  the  Market  for  the  Delivery  of  Video  Programming,  Notice  of  Inquiry,  19  FCC  Rcd  10909,  10915  (2004)  (  2004  NOI). 
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 THE  REPORT  5 
 <  >  symposium  to  further  examine  a  la  carte  and  themed-  tier  proposal^.^  The  Bureau  received  nearly  400 

 comments,  reply  comments,  ex  parte  communications,  testimony,  and  letters  in  this  pr~  ceeding.~ 
 This  Report  provides  an  overview  of  the  law  and  economic  theories  relevant  to  the  discussion  concerning  a  la  carte.  The  Report  summarizes  the  comments  and  analysis  submitted  by  interested  parties 
 in  this  proceeding.  It  also  incorporates,  by  reference,  statements  made  by  expert  witnesses  at  the  a  la  carte  symposium  sponsored  by  the  Media  Bureau. 

 First,  the  Report  discusses  the  retail  market  for  video  programming  by  MVPDs,  primarily,  cable  operators  and  DBS  providers.  This  section  provides  a  historical  overview  of  cables  delivery  of 
 programming  services  to  the  public  and  the  current  programming  options  available  to  consumers,  including  premium  networks  and  other  a  la  carte  offerings,  over  cable  and  satellite.  In  addition,  this 
 section  discusses  current  retail  regulatory  requirements,  including  tier  placement  and  tier  buy  through  requirements. 

 This  section  then  analyzes  current  cable  and  satellite  retail  programming  packaging  practices  with  a  focus  on  the  harms  and  benefits  to  the  public  of  bundling  programming  at  the  retail  level.  Included  in 
 the  discussion  of  potential  harms  associated  with  bundling  is  the  fact  that  under  the  current  bundling  regime,  cable  prices  have  increased  by  an  average  of  4.6  YO  per  year  and  in  excess  of  7  YO  per  year  for  the 
 expanded  basic  program  tier  over  the  past  five  years.  Some  commenters  allege  that  as  cable  rates  have  increased  at  nearly  three  times  the  rate  of  inflation,  the  industrys  practice  of  making  most  networks 
 available  as  part  of  a  bundle  or  tier  has  contributed  to  the  rise  in  retail  rates.  In  addition,  some  commenters  suggest  that  the  industrys  current  bundling  practices  effectively  limit  consumer  choice  and 
 force  upon  them  channels  that  they  do  not  watch  or  wish  to  receive,  including  objectionable  content. 
 The  record  reflects  that  along  with  harms,  bundling  also  produces  several  benefits  for  cable  and  satellite  households.  For  example,  commenters  suggest  that  the  bundling  of  distinct  program  networks 
 lowers  transaction  costs,  helps  programmers  reach  economies  of  scale  and  enhances  the  attractiveness  or  convenience  of  the  product  to  consumers.  Indeed,  the  Report  discusses  how  tiering  allows  a  video 
 programmer  to  recover  a  large  percentage  of  its  costs  from  consumers  that  value  its  programming  highly  and  a  smaller  percentage  from  consumers  that  value  its  programming  less  highly.  In  this  way,  consumers 
 of  different  program  networks  are  able  to,  in  a  sense,  cross-  subsidize  each  others  viewing  habits,  allowing  new  and  diverse  programming  to  survive  in  the  marketplace.  Additionally,  bundling  may 
 actually  enhance  consumer  sovereignty  by  creating  a  mechanism  for  consumers  to  have  access  to  a  wide  variety  of  viewing  choices  serving  many  diverse,  niche  viewer  interests. 

 Next,  this  section  discusses  the  feasibility  of  a  la  carte  and  themed  tiers,  including  the  alleged  harms  and  benefits  of  such  a  regime,  the  steps  the  industry  would  need  to  take  to  implement  it,  the  likely 
 consequences  for  the  public,  and  historical  experiences  with  a  la  carte.  Proponents  of  a  la  carte  or  themed-  tier  services  suggest  these  retail  programming  options  (in  addition  to  offerings  in  existing  tiers) 
 would  provide  consumers  with  additional  choice  and  act  as  a  strong  check  on  cable  rate  increases.  They  suggest  that  consumer  response  to  individual  channel  prices  would  instill  competitive  discipline  among 

 See  Public  Notice,  Media  Bureau  Announces  Speakers  for  Symposium  on  a  la  carte  MVPD  Pricing,  2004  WL  1562950,  (MB  July  13,  2004).  The  Public  Notice  is  also  attached  in  Appendix  B.  The  Bureau  received  testimony 
 addressing  the  feasibility  of  a  la  carte  as  well  as  the  economics  of  bundling  and  tiering.  Testimony  was  incorporated  into  the  record  of  this  proceeding. 

 Several  large  and  small  cable  operators,  DBS  providers,  and  dozens  of  program  networks  filed  lengthy  comments.  See  Appendix  C  for  a  list  of  commenters.  Some  pleadings  were  filed  jointly  by  several  groups,  and  the  individual 
 participants  in  those  groups  are  listed  in  Appendix  C. 
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 THE  REPORT  6 
 <  >  program  networks  and  restrain  excessive  growth  in  programming  costs.  Still  others  argue  that  a  la  carte 

 would  provide  a  solution  to  the  growing  public  concern  about  violent  and  objectionable  programming. 
 Despite  these  benefits,  the  majority  of  commenters  contend  that  a  la  carte  or  themed-  tier  services  would  impose  significant  costs  on  consumers.  For  starters,  these  commenters  state  that  consumers  would 
 need  to  pay  more  than  they  do  today  for  far  fewer  channels,  unless  they  selected  a  small  number  of  channels,  far  below  the  national  average  of  channels  currently  watched  by  MVPD  households.  Most 
 program  networks  suggest  that  the  number,  quality  and  diversity  of  program  networks  would  all  be  severely  diminished  under  an  a  la  carte  regime.  Furthermore,  commenters  state  that  there  are  significant 
 structural  impediments,  most  notably  for  cable  operators,  who  would  be  forced  to  offer  a  la  carte  by  using  traps  and  hybrid  set-  top  boxes,  simulcasting  all  basic  and  expanded  basic  channels  in  analog  and  digital 
 format,  or  spending  billions  of  dollars  to  convert  systems  to  all-  digital  distribution.  Finally,  commenters  cite  operational  impediments  (including  marketing,  billing  and  other  operational  expenses  that  would 
 drive  up  retail  rates),  conceptual  impediments  (consumer  confusion  and  difficulty  of  determining  which  networks  qualify  for  any  particular  programming  tier)  and  legal  impediments  (raising  First  and  Fifth 
 Amendment  issues)  to  an  a  la  carte  or  themed-  tier  mandate. 
 Although  the  Commission  shares  the  publics  concern  about  rising  MVPD  rates  and  the  growing  coarseness  of  programming  on  television  and  strongly  believes  in  providing  the  public  with  greater  choice 
 in  how  they  consume  television,  the  Report  finds  that  many  of  the  harms  suggested  by  opponents  of  a  la  carte  or  themed-  tier  services  have  merit,  although  not  necessarily  to  the  degree  advocated  by  its  most 
 vocal  critics.  The  Report  concludes  that  a  la  carte  regulation  will  likely  increase  operational  expenses  for  MVPDs  in  three  main  areas:  (1)  equipment  and  infrastructure;  (2)  customer  service  operations;  and  (3) 
 billing  and  back  office  support.  Unless  constrained  by  regulation,  many  of  these  increased  costs  would  likely  be  passed  on  to  subscribers,  resulting  in  higher  subscriber  fees.  In  addition,  the  MVPD  cost 
 increases  would  be  most  detrimental  to  smaller  cable  operators,  who  often  have  more  limited  and  more  costly  options  when  it  comes  to  obtaining  capital  to  support  investment  in  their  operations.  The  Report 
 discusses  how  this  would  have  an  adverse  impact  on  competition  as  smaller  cable  operators  would  have  a  difficult  time  competing  with  the  industrys  primary  competitors-  the  DBS  providers. 

 The  Report  also  finds  legitimacy  to  programmers  concerns  about  an  a  la  carte  regime.  Existing  networks  sold  on  an  a  la  carte  basis  spend  a  significant  amount  of  their  revenue  marketing  themselves  to 
 consumers.  Under  an  a  la  carte  mandate,  networks  formerly  sold  in  tiers  would  need  to  significantly  increase  their  marketing  expenses  to  induce  consumers  to  affirmatively  select  the  network.  Moreover, 
 any  type  of  a  la  carte  requirement  would  have  a  significant  negative  effect  on  a  program  networks  advertising  revenues  and  license  fee  structure.  The  loss  of  cost  savings,  combined  with  the  loss  in 
 advertising  revenue  and  the  likely  rise  in  license  fees  to  compensate  such  losses,  may  cause  many  program  networks  to  fail,  thus  adversely  affecting  diversity.  The  most  likely  to  feel  the  brunt  of  such  a 
 mandate  would  be  networks  serving  small  niche  interests,  such  as  religious  programming,  programming  aimed  at  minority  interests,  arts  programming  and  independently  owned  networks.  The  impact  on 
 program  networks  seems  likely  under  either  a  mandatory  or  voluntary  a  la  carte  regime. 
 Moreover,  it  is  unclear  that  an  a  la  carte  regime  would  produce  the  desired  result  of  lower  MVPD  prices  for  many  pay-  television  households.  The  Reports  economic  analysis  estimates  that  the  impact  on 
 retail  rates  of  pure  or  mandatory  a  la  carte  sales  indicates  that  only  those  consumers  who  would  purchase  fewer  than  9  program  networks  may  see  a  reduction  in  their  monthly  cable  bill.  Consumers  that  purchase 
 at  least  9  networks  would  likely  face  an  increase  in  their  monthly  bills.  The  average  cable  household  watches  approximately  17  channels,  including  broadcast  stations.  If  the  average  household  purchased 
 each  of  these  channels  under  an  a  la  carte  regime,  it  would  likely  face  an  increase  in  their  monthly  bill  under  a  la  carte  sales  of  between  14%  and  30%. 
7
 THE  REPORT  7 
 <  >  The  Report  also  describes  some  new  a  la  carte  models  that  may  help  mitigate  some  of  the  harms 

 associated  with  a  pure  a  la  carte  or  themed-  tier  services,  including  mixed  bundling  or  voluntary  a  la  carte  where  cable  operators  and  satellite  carriers  offer  programming  on  tiers  and  individual  channels  on 
 an  a  la  carte  basis.  Although  the  impact  of  such  a  regime  is  less  clear  than  a  pure  a  la  carte  system,  many  of  the  increased  operational  expenses  discussed  in  the  Report  would  apply  to  either  pure  or  voluntary  a  la 
 carte. 
 Recognizing  the  need  to  pursue  our  traditional  public  interest  policy  goals  of  enhancing  consumer  choice,  fostering  MVPD  competition  and  programming  diversity,  and  providing  our  citizens  with  the 
 tools  to  prevent  objectionable  programming  from  entering  their  homes,  the  Report  discusses  several  policy  recommendations  for  the  retail  MVPD  market  that  the  Congress  and  Commission  should  pursue 
 irrespective  of  whether  or  not  Congress  pursues  a  la  carte  or  themed-  tier  services  legislation.  First,  the  success  of  DBS  as  a  competitor  to  cable  suggests  that  policymakers  should  provide  incentives  for  more 
 MVPD  competition  in  the  marketplace.  Marketplace  forces  and  technological  advances  are  poised  to  bring  more  competition  and  choices  to  the  public.  For  example,  two  separate  entities  plan  to  use  over- 
 the-  air  broadcast  spectrum  to  provide  subscribers  with  a  low-  cost  alternative  to  cable  and  DBS.  One  of  those  entities,  USDTV  is  already  competing  in  three  markets.  In  addition,  recent  announcements  suggest 
 that  several  telephone  companies  are  planning  large  scale  entry  into  the  residential  video  programming  market.  These  entrants  may  not  only  drive  price  and  innovation  competition,  but  they  also  may  force 
 upon  the  industry  the  need  to  create  new  programming  models,  including  new,  specialized  tiers  that  would  bring  much  of  the  choice  sought  by  a  la  carte  advocates. 

 Second,  policymakers  should  provide  incentives  for  operators  to  offer  more  control  over  programming  choices  to  the  public.  Here,  too,  technological  advances  are  already  putting  the  power  over 
 programming  in  the  hands  of  consumers.  The  continued  roll-  out  of  video-  on-  demand  (  VOD)  and  digital  video  recorders  (  DVRs)  is  presenting  the  public  with  more  control  over  what  they  watch  and 
 when  they  watch  than  at  any  time  in  history. 
 Third,  policymakers  should  continue  to  pursue  aggressive  policies  to  provide  incentives  for  broadband  deployment.  Video  over  internet  protocol  is  in  its  infancy,  yet  is  bringing  a  la  carte  choices 
 over  the  Internet  to  many  Americans.  Programmers  such  as  Major  League  Baseball,  who  offers  individual  baseball  games  on  an  a  la  carte  basis,  are  showing  the  potential  of  using  the  Internet  and  its 
 lower  distribution  costs  to  make  a  la  carte  a  reality.  Fourth,  policymakers  should  continue  to  encourage  blocking  technologies  and  consumer  awareness  of  these  technologies  over  cable  and  satellite  to  ensure 
 that  the  public  can  block  any  unwanted  programming  from  entering  their  homes. 
 The  Report  also  addresses  concerns  about  the  acquisition  of  programming  by  MVPDs  at  the  wholesale  level.  In  negotiations  for  programming,  including  broadcast  programming  that  must  be 
 obtained  through  retransmission  consent  negotiations,  the  acquisition  of  rights  to  an  attractive  popular  program  network  is  sometimes  contractually  tied  to  the  purchase  and  carriage  of  a  less  attractive  or  less 
 desired  network.  The  Report  concludes  that  the  manner  in  which  this  takes  place  raises  questions  as  to  whether  the  carriage  of  less  popular  programming  is  in  the  public  interest  because  it  takes  away  channel 
 capacity  that  MVPDs  could  devote  to  other,  better  uses.  The  Report  suggests,  however,  that  if  this  practice  is  anti-  competitive  and  it  is  causing  consumer  harm  (both  of  which  are  currently  far  from  clear 
 and  would  benefit  from  further  study),  the  antitrust  authorities  are  best  positioned  to  remedy  the  situation. 
8
 THE  REPORT  8 
 <  > 

 11.  THE  RETAIL  MARKET  FOR  VIDEO  PROGRAMMING 
 A.  Background 
 This  section  discusses  how  cable  operators  and  other  multichannel  video  programming  distributors  distribute  and  sell  programming  to  consumers.  Cable  operators  deliver  MVPD  services  to 
 millions  of  U.  S.  households.  Ten  years  ago,  cable  operators  served  almost  100%  of  the  nations  MVPD  subscribers.  Today,  cables  share  has  fallen  to  approximately  75%  of  all  MVPD  subscribers.  DBS, 
 cables  main  competitor,  has  grown  rapidly  in  the  last  five  years  and  now  serves  the  second  largest  share  of  MVPD  subscribers.  6 

 The  PN  asked  whether  cable  operators  and  DBS  may  purchase  program  networks  on  a  stand-  alone  basis  and  offer  programming  to  their  subscribers  on  an  a  la  carte  or  themed-  tier  basis.  The  PN 
 inquired  whether  there  are  any  limitations  on  their  flexibility  to  do  so  and  whether  MVPDs  can  currently  offer  a  la  carte  and  themed-  tier  service  in  addition  to  the  packages  currently  offered  to  subscribers.    The 
 questions  raised  in  the  PN  are,  in  part,  directed  at  the  practice  of  tiering.  Tiering  involves  the  bundling  (packaging)  and  sale  of  channels  of  programming  for  separate  or  incremental  charges.  8  Cable  systems 
 and  virtually  all  other  MVPDs  offer  video  programming  services  in  tiers.  Tiering  permits  subscribers  to  easily  choose  a  bundle  of  video  programming  services  at  different  price  points. 

 B.  Historical  Overview 
 More  than  half  a  century  ago,  cable  television  was  a  simple  technology  for  retransmitting  local  and  distant  broadcast  stations  to  areas  unserved  or  underserved  by  over-  the-  air  signals.    Cable  systems, 
 generally,  were  equipped  to  provide  no  more  than  12  channels  of  programming,  which  were  transmitted  by  coaxial  cable  on  the  same  12  VHF  frequencies  used  by  over-  the-  air  broadcast  stations.  Subscribers 
 simply  attached  the  cable  to  their  sets  in  lieu  of  an  over-  the-  air  antenna  and  tuned  to  the  12  channels  on  their  television  sets  to  receive  all  the  signals  being  delivered  by  the  cable  system.  Even  in  those  days 
 before  the  advent  of  satellite-  delivered  cable  programming,  cable  operators  began  offering  premium  movie  and  sports  programming  on  an  optional  per-  channel  charge  basis. 

 To  accommodate  new  satellite-  delivered  programming  services,  such  as  HBO,  that  began  to  appear  in  1975  and  thereafter,  cable  operators  upgraded  the  channel  capacity  of  their  systems.  While 
 most  of  the  cable  program  networks  added  to  cable  systems  during  this  period  of  expansion  were  included  in  the  basic  service  tier  or  expanded  basic  tier,  a  number  of  new  networks  were  launched  as  a  la  carte, 

 Currently,  four  operators  hold  licenses  to  provide  DBS  service:  EchoStar  (marketed  as  the  DISH  Network),  DirecTV,  Dominion  Video  Satellite,  Inc.  (marketed  as  Sky  Angel),  and  Cablevisions  Rainbow  DBS  (marketed  as 
 Voom). 

 6 

 PN,  19  FCC  Rcd  at  9291-  92. 
 The  Act  does  not  specifically  define  the  term  tiering  but  the  phrase,  service  tier,  is  defined  as  a  category  of  cable  service  or  other  services  provided  by  a  cable  operator  and  for  which  a  separate  rate  is  charged  by  the  cable 
 operator.  See  47  U.  S.  C.  9  522(  17). 

 8 

 At  that  time,  cable  was  known  as  Community  Antenna  Television  Systems  (  CATV).  9 
 In  this  Report,  the  term,  Expanded  Basic  Tier,  is  used  to  describe  that  tier  of  cable  service  above  the  basic  I  O  service  tier.  The  expanded  basic  tier  is  sometimes  referred  to  as  the  cable  programming  service  tier  or  CPST. 
9
 THE  REPORT  9 
 premium  channels.  Some  of  these  premium  channels  primarily  showed  uncut,  recently  released  movies  and  others  offered  regional  sports  programming.  Most  of  these  premium  channels,  such  as  Encore  and 
 Bravo,  carried  no  commercials  and  were  offered  to  consumers  for  approximately  ten  dollars  per  month. 
 In  1984,  Title  VI  of  the  Communications  Act  was  added  by  the  Cable  Communications  Policy 
 Act  of  1984  (  1984  Act).  *  The  1984  Act  was  largely  de-  regulatory  legislation,  whose  purposes  were  to,  inter  alia:  (1)  establish  a  national  policy  concerning  cable  communications,  (2)  assure  that  cable 

 communications  provide  diverse  programming  to  the  public;  and  (3)  promote  competition  in  cable 
 communications  while  minimizing  unnecessary  regulation.  By  establishing  a  clear  regulatory  framework,  the  1984  Act  provided  an  impetus  for  the  cable  industrys  continued  growth  throughout  the 

 198Os.  I3  In  the  period  between  the  1984  Cable  Act  and  1992,  the  cable  industry  grew  larger  and  began  to  exert  its  market  power  as  the  dominant  provider  of  multichannel  video  service.  14  In  1992,  Congress 
 enacted  the  Cable  Television  Consumer  Protection  and  Competition  Act  (  1992  Cable  Act).  15  This  Act  substantially  re-  regulated  the  cable  industry  and  contained  a  host  of  requirements  affecting  nearly  every 
 facet  of  the  cable  business.  Mandatory  access  for  broadcasters  (must  carry  and  retransmission  consent  provisions)  were  codified,  pricing  and  marketing  restrictions  (rate  regulation,  basic  service  tier,  and 
 customer  service  obligations)  were  imposed,  ownership  limits  (both  horizontal  and  vertical  restrictions)  were  established,  and  program  carriage,  program  access,  and  other  requirements  were  included  in  the  Act. 

 The  core  of  Section  623  of  the  Act,  as  amended  by  the  1992  Cable  Act,  is  dedicated  to  cable  television  rate  regulation.  I6  In  1993,  the  Commission  issued  its  First  Rate  Report  and  Order  setting  forth 
 NCTA  Comments  at  19.  I  I 
 I  *  Cable  Communications  Policy  Act  of  1984,  Pub.  Law  98-  549,  98  Stat.  2779  (1984). 
 At  about  the  same  time  the  Commission  began  implementing  the  1984  Act,  the  United  States  Court  of  Appeals  struck  down  the  Commissions  existing  must  carry  requirements  for  cable  operators  on  First  Amendment  grounds. 
 See  Quincy  Cable  TV,  Inc.  v.  FCC,  786  F.  2d  1434  (D.  C.  Cir.  1985)  (striking  down  the  first  Commission  set  of  must  carry  rules);  Century  Communications  Corp.  v.  FCC,  835  F.  2d  292  (D.  C.  Cir.  1987)  (striking  down  the 
 Commissions  second  attempt  at  establishing  must  carry  rules).  For  a  period  of  about  five  years,  the  cable  industry  had  no  mandatory  obligation  to  carry  local  broadcast  stations,  although  most  cable  systems  continued  to  carry 
 stations  on  a  voluntary  basis. 

 13 

 See  47  U.  S.  C.  9  521  nt  (a).  14 
 Cable  Television  Consumer  Protection  and  Competition  Act  of  1992,  Pub.  Law  102-  385,  106  Stat.  1460  (1992). 
 47  U.  S.  C.  0  543(  b)  and  (c).  Basic  service  tiers  rates  are  regulated,  in  the  absence  of  effective  competition,  by  local  franchising  authorities  (  LFAs).  Expanded  basic  rates  were,  at  one  time,  regulated  by  the  Commission. 
 Cable  systems  demonstrating  that  they  face  effective  competition,  under  one  of  the  statutory  tests,  are  not  regulated  under  Section  623.  See  47  U.  S.  C.  0  543(  1)(  1);  47  C.  F.  R.  0  76.905. 

 16 
10
 THE  REPORT  10 
 <  >  methodologies  for  cable  operators  to  calculate  rates  at  regulated  levels.  The  Commission  additionally 

 held,  in  accordance  with  the  relevant  statutory  provisions,  that  channels  offered  on  an  a  la  carte  basis  would  not  be  rate  regulated  if  certain  conditions  were  met.  In  1994,  the  Commission,  inter  alia,  imposed 
 a  7.5  percent  cap  on  the  permissible  mark-  up  of  costs  for  adding  new  program  services.  In  that  same  year,  the  Bureau  also  issued  a  series  of  rulings  and  waivers  to  facilitate  new  program  service  launches. 

 According  to  some  in  the  cable  industry,  the  Commissions  rate  regulations  had  a  number  of  unintended  consequences.  First,  it  reduced  investment  in  cable  system  upgrades  and  had  a  particularly 
 harsh  impact  on  small  operators.  Second,  it  reduced  incentives  for  cable  operators  to  add  new  program  services  and,  consequently,  led  to  a  reduction  in  program  diversity.  Finally,  it  reduced  programming 
 quality  and  led  to  unique  hardships  for  programming  targeted  to  specific  groups,  such  as  minorities.  20  The  Commission  recognized  these  disincentives  and  adopted  the  going  forward  rules  in  late  1994,  to 
 encourage  the  carriage  of  new  program  services.  21  As  an  alternative  to  the  7.5  percent  cap,  the  rules  allowed  cable  operators  to  add  new  channels  to  the  expanded  basic  tier  at  a  price  of  not  more  than  $.  20 
 per  channel  plus  license  fees  (with  a  total  increase  over  two  years  not  to  exceed  $1.50).  The  Commission  also  created  a  new  type  of  program  package,  called  the  New  Product  Tier  (  PT).  Cable  operators  were 
 permitted  to  offer  NPTs  on  an  unregulated  basis.  In  the  Going  Forward  Order,  the  Commission  also  reversed  its  previous  decision  that  channels  sold  on  an  a  la  carte  basis  would  be  unregulated,  and  instead 
 held  that  a  collection  of  program  networks  sold  a  la  carte  were  to  be  regulated  as  cable  programming  service  tiers.  22 

 l7  Implementation  of  Sections  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992:  Rate 
 Regulation,  8  FCC  Rcd  5631,  5644  (1993)  (  First  Rate  Report  and  Order).  The  rate  rules,  when  adopted,  were  primarily  based  on  a  benchmark  and  price  cap  approach  to  setting  rates  for  regulated  cable  service  whereby  existing 

 rates  for  cable  service  were  compared  to  a  benchmark  that  reflected  the  rates  charged  by  cable  systems  subject  to  effective  competition.  Once  initial  rates  were  determined,  rates  were  governed  on  a  going-  forward  basis  by  a  price 
 cap  mechanism  that  permitted  periodic  adjustments  for  inflation,  changes  in  the  number  of  regulated  channels,  and  changes  in  external  costs,  including  programming  costs,  franchise  requirements,  state  and  local  taxes  on  cable 
 service,  and  franchise  fees.  In  addition  to  the  benchmark  approach,  the  Commission  provided  a  cost  of  service  option  for  cable  operators  unable  to  recover  costs  after  calculating  a  maximum  rate  based  on  the  benchmark  process. 

 First  Rate  Report  and  Order,  8  FCC  Rcd  at  5836.  The  Commission  held  that  collective  offerings  of  a  la  carte  channels  would  not  be  regulated  if:  (1)  the  price  for  the  combined  package  did  not  exceed  the  sum  of  the  individual 
 charges  for  each  component  service  and  (2)  the  cable  operator  continued  to  provide  the  component  parts  of  the  package  to  subscriber  separately  in  addition  to  the  collective  offering.  Id.  at  5836-  37.  In  support  of  its  policy,  the 
 Commission  stated  that  Congress  excluded  per  channel  or  per  program  premium  services  from  rate  regulation  on  the  basis  of  a  determination  that  greater  unbundling  of  offerings  leads  to  more  subscriber  choice  and  greater 
 competition  among  program  services.  The  Commission  applied  the  same  rationale  to  non-  premium  channels.  Id.  at  5836,  n.  803.  The  Commission  later  set  out  15  interpretive  guidelines  to  enable  cable  operators  to  better  determine 
 what  collective  offerings  of  a  la  carte  channels  would  be  considered  realistic  service  offerings.  Implementation  of  Sections  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992:  Rate  Regulation,  9  FCC  Rcd 

 18 

 4119,4213-  16  (1994). 
 l  9  Id.,  9  FCC  Rcd  at  4  166,4242. 

 *  See  Comcast  Comments  at  12;  A&  E  Comments  at  28. 
 21  Implementation  of  Sections  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992:  Rate 
 Regulation,  10  FCC  Rcd  1226,1232,1248  (1994)  (  Going  Forward  Order). 

 22  Id.  at  1241-  44. 
11
 THE  REPORT  11 
 <  >  Section  623  of  the  1992  Cable  Act  also  required  the  Commission  to  adopt  standards  and 

 guidelines  to  prevent  evasions,  including  evasions  that  result  from  retie~  ing.~~  In  the  First  Rate  Order,  the  Commission  defined  evasion  as  any  practice  or  action  which  avoids  the  rate  regulation  provisions  of 
 the  Cable  Act  or  Commission  rules  contrary  to  the  intent  of  the  Act  or  its  underlying  policies.  24  In  1994,  the  Bureau  released  several  decisions,  exonerating  many  cable  operators  who  offered  a  la  carte  channels 
 of  evasion  charges,  due  not  only  to  the  small  number  of  channels  offered  on  such  a  basis,  but  also  because  of  the  uncertainty  created  by  the  constant  changes  in  the  Commissions  rate  policy  and  rules  at  that  time. 
 Even  though  the  Bureau  found  there  were  no  rate  evasions  by  these  operators,  it  nonetheless  suggested  that  a  take-  rate  of  a  la  carte  program  networks  by  subscribers  of  less  that  2  percent  proved  that  they  were 
 not  realistic  service  offerings  for  the  purposes  of  the  retierindevasion  analysis.  25 
 After  years  of  regulation  resulting  from  the  1992  Cable  Act,  Congress  enacted  the  Telecommunications  Act  of  1996  (  1996  Act).  26  As  part  of  the  1996  Act,  Congress  repealed  the 
 authority  of  the  Commission  to  regulate  cable  programming  service  tier  rates  after  March  31,  1999.27  The  price  deregulation  measures,  and  other  generally  deregulatory  provisions  affecting  other  parts  of  the 
 Act,  are  credited  with  increasing  investment  in  the  cable  industry.  As  a  result,  cable  operators  embarked  on  major  rebuilds  of  their  cable  systems  to  increase  channel  capacity.  28  The  result  has  been  a  substantial 
 increase  in  the  number  of  program  networks  and  tiers,  as  well  as  the  emergence  of  new  digital  technologies. 

 Comcast  and  Charter  frame  this  period  of  government  action  in  the  following  way.  For  four  years,  the  government  enacted  a  complex  statutory  regulation  scheme,  adopted  implementing  regulations, 
 adopted  new  regulations  to  overcome  the  unintended  consequences  of  the  first  regulations,  and  then  eliminated  the  regulations  in  their  entirety.  The  Commission  issued  over  20  separate  rate  orders  and 
 hundreds  of  regulations,  fact  sheets,  notices  of  inquiry,  and  notices  of  proposed  rulemaking.  And  the  results  of  these  efforts  were:  (1)  severe  cutbacks  in  programming  and  infrastructure  investment;  (2) 
 reduced  program  diversity;  (3)  a  nearly  decade-  long  delay  in  the  digital  transition;  and  (4)  no  improvement  in  consumer  welfare.  Comcast  argues  that  the  government  should  not  go  down  that  road 
 again  with  a  la  carte  or  any  other  restrictions  on  packaging  or  pricing.  29  Charter  submits  that  a  federally- 
 23  47  U.  S.  C.    543(  d). 
 24  First  Rate  Report  and  Order,  8  FCC  Rcd  at  59  15. 
 25  See,  e.  g.,  Comcast  Cablevision  City  of  Tallahassee,  Florida,  Letter  of  Inquiry,  9  FCC  Rcd  7773  (1994)  (offering  a 
 few  channels  on  an  a  la  carte  basis  not  an  evasion  given  the  totality  of  the  circumstances),  u  r  d  ,  11  FCC  Rcd  1246  (1995). 

 26  Pub.  L.  No.  104-  104,  6  301(  b),  110  Stat.  56,  115  (1996). 
 27  47  U.  S.  C.  9  543(  c)(  4).  The  Commission  implemented  Congress  directives  in  later  rulemakings.  See  generally 
 Implementation  of  Cable  Act  Reform  Provisions  of  the  Telecommunications  Act  of  1996,  14  FCC  Rcd  5296  (1999).  The  Commission  is  conducting  a  review  of  its  current  rate  requirements  in  an  effort  to  harmonize  and  modernize  the 

 rules  in  light  of  the  sunset  of  CPST  regulation.  See  Revisions  to  Cable  Television  Rate  Regulations,  17  FCC  Rcd  11550  (2002),  revised,  17  FCC  Rcd  15974  (2002). 

 **  Since  1996,  the  cable  industry  states  it  has  invested  over  $85  billion  in  system  upgrades  --  roughly  $1,200  for  every  cable  customer  --  and  over  $69  billion  in  programming.  National  Cable  &  Telecommunications  Association, 
 2004  Mid  Year  Industry  Overview  3,  12  (2004),  available  at  h~:  llwww.  ncta.  com/  pdf  files/  Overview.  pdf. 
 29  Comcast  Comments  at  15. 
12
 THE  REPORT  12 
 mandated  a  la  carte  regime  today  would  be  even  more  detrimental  to  the  cable  industrys  ongoing  operations  than  the  experience  with  cable  rate  regulation  in  the  1  9  9  0  ~~ 

 Consumers  Union  and  Consumer  Federation  of  America  (  CU/  CFA  or  CU)  believes  that  an  a  la  carte  requirement  is  not  akin  to  rate  regulation  and,  in  any  event,  will  discipline  rates  more  effectively 
 than  past  government  attempts  to  do  so.  CU  asserts  that  the  1992  Cable  Act  gave  regulators  a  weak  set  of  tools  and  the  rules  were  badly  crafted.  CU  states  that  a  la  carte  rests  on  a  much  more  powerful  force, 
 consumer  sovereignty  in  the  marketplace.  CU  suggests  that  a  la  carte  offers  consumers  more  control,  choice,  and  freed~  m.~   

 C.  Current  Cable  Services  and  Program  Options 
 Analog  to  Digital.  Since  their  inception  over  50  years  ago,  cable  systems  have  carried  programming  in  an  analog  format.  Cable  operators  continue  to  distribute  programming  in  this  format 
 because  virtually  all  television  sets  in  U.  S.  households  are  analog.  32  Cable  operators  generally  allocate  two-  thirds  of  their  systems  channel  capacity  to  transmit  80  channels  of  analog  programming  on  analog 
 tiers  of  service.  The  other  one-  third  of  channel  capacity  is  used  for  digital  services,  including  more  channels  of  video  programming.  Cable  operators  control  access  to  services  in  the  analog  tier  through 
 addressable  or  non-  addressable  technologies  and  control  access  to  digital  programming  on  the  digital  tier  by  using  digital  set  top  boxes.  Older  analog  systems  that  have  not  been  upgraded  to  digital  technology, 
 generally  use  passive  traps  (fkequency  selective  non-  addressable  set  top  boxes  (descramblers),  or  analog  addressable  set  top  boxes,  to  block  out  signals.  Analog  subscribers  in  systems  which  use  traps 
 do  not  need  set  top  boxes.  Newer  cable  systems  have  the  capability  to  communicate  electronically  from  their  headends  to  those  subscribers  who  have  addressable  analog  or  digital  set-  top  boxes.  Many  cable 
 systems  employ  a  hybrid  of  addressable  and  non-  addressable  technologies  to  control  subscribers  access  to  different  tiers  of  cable  services. 

 Basic  and  expanded  basic  services  offered  by  cable  operators  typically  consist  entirely  of  analog  channels  offered  in  the  clear.  This  allows  the  entire  package  to  be  received  by  any  subscriber  with  a 
 cable-  ready  set  without  installing  a  set-  top  box.  Because  expanded  basic  channels  are  typically  offered  in 
 Charter  Comments  at  2-  3  30 
 CU\  CFA  Reply  Comments  at  32-  33.  31 
 Analog  video  signals  transmit  video  information  using  analog  waveforms.  In  North  America,  the  National  Television  Systems  Committee  (  NTSC)  signals  are  an  example.  The  NTSC  signal  primarily  contains 
 synchronization,  picture,  and  sound  information  in  channels  spaced  6  MHz  apart.  There  are  different  digital  formats  currently  used  by  the  electronic  media.  For  example,  broadcast  stations  use  vestigial  sideband  (  VSB)  while  cable 
 systems  use  quadrature  amplitude  modulation  (  QAM). 

 32 

 A  trap  is  an  inexpensive  filter,  generally  located  in  or  near  a  subscribers  home,  designed  to  remove  one  or  more  signals  (frequencies)  and  is  used  to  control  the  delivery  of  cable  services.  The  cable  industry  has  generally 
 employed  three  kinds  of  traps:  positive  traps,  negative  traps,  and  band  pass  or  band  stop  filters.  Positive  traps  are  designed  to  remove  interfering  (scrambling)  signals  inserted  at  the  cable  headend  that  secure  the  channel.  Installing 
 a  positive  trap  enables  the  subscriber  to  view  the  channel.  In  systems  that  do  not  scramble  their  signals,  negative  traps  are  used  to  remove  the  actual  signals  of  one  or  more  television  channels.  Removing  the  negative  trap--  or  not 
 installing  it--  enables  the  subscriber  to  view  the  channel.  Band  pass  or  band  stop  filters  are  designed  either  to  pass  or  block  a  specific  band  of  frequencies  (signals),  thus  controlling  the  delivery  of  an  entire  block  of  video  channels  to 
 the  subscriber.  Traps  can  have  a  degrading  effect  on  signal  quality,  limiting  their  use.  See  Cable  Television  Technical  and  Operational  RequirementdReview  of  the  Technical  and  Operational  Requirements  of  Part  76,  7  FCC 
 Rcd  202  1,2027  (1992),  clarzjied,  7  FCC  Rcd  8676,8681  (1992). 

 33 
13
 THE  REPORT  13 
 <  >  a  contiguous  frequency  block,  they  can  be  secured  from  delivery  to  basic-  only  subscribers  using  a  band 

 stop  filter.  Existing  technology  does  not  allow  each  individual  channel  on  the  expanded  basic  tier  to  be  offered  on  an  a  la  carte  basis. 

 Several  cable  operators  began  to  provide  digital  tiers,  in  addition  to  existing  analog  tiers,  over  their  cable  systems  starting  in  1997.  Today,  all  major  cable  operators  offer  digitally-  compressed  video 
 channels  to  cable  subscribers  on  digital  tiers.  The  digital  cable  services  may  be  viewed  on  analog  television  receivers  through  use  of  a  digital  cable  set-  top  box.  Digital  compression  technologies  allow 
 anywhere  from  four  to  12  video  channels  to  be  compressed  into  the  capacity  previously  used  to  provide  just  one  standard  six  MHz  analog  channel.  34  The  programming  available  on  digital  tiers  includes  a 
 variety  of  genres,  such  as  sports,  movies,  childrens,  and  foreign-  language  programming.  At  the  end  of  June  2003,  digital  cable  service  was  available  to  approximately  90  percent  of  all  cable  subscribers  and  the 
 number  of  subscribers  to  digital  video  service  grew  to  20.6  million.  35 
 The  migration  to  digital  transmission  has  enabled  cable  operators  to  transmit  high-  quality  video  signals  to  their  customers  and  to  offer  such  additional  enhancements  as  high  definition  television 
 (  HDTV).  Digital  technology  also  has  furthered  the  ability  of  cable  operators  to  offer  more  service  options,  including  advanced  two-  way  services  such  as  high-  speed  Internet  access,  cable  telephony,  and 
 video-  on-  demand. 
 Current  A  La  Carte  Offerings.  Premium  networks,  such  as  HBO,  Showtime,  Cinemax,  STARZ!  and  The  Movie  Channel,  have  been  available  for  over  30  years  on  analog  systems.  Premium  networks 
 generally  derive  revenue  from  a  single  source  -  subscription  fees  paid  by  subscribers.  These  networks  are  distributed  a  la  carte  by  MVPDS.~~  Premium  networks  charge  subscription  rates  generally  in  the  range  of 
 $10  -  $15  per  month.  High  subscription  charges  are  necessary  to  support  a  premium  networks  expenditures  for  high-  value  content,  which  is  costly  to  produce  or  acquire,  and  to  allow  the  network  to 
 operate  on  a  single  revenue  stream.  The  high  subscription  charges  also  are  necessary  because  a  la  carte  networks  historically  have  had  low  subscribership  levels.  For  instance,  STARZ!  has  only  12  million 
 subscribers,  and  even  HBO,  the  largest  premium  service  provider,  has  just  39  million  subscribers,  or  less  than  half  the  subscribers  of  the  largest  niche  networks3 

 Premium  networks  display  a  distinct  programming  format.  They  deliver  general-  interest  high-  value  content  (i.  e.,  either  original  content  or  recent-  release  movies),  presented  advertising-  free.  This 
 programming  is  designed  to  have  broad  appeal  among  viewers,  rather  than  target  a  niche  audience.  A  sub- 
 The  digital  tier  offers  programming  that  is  digitally  compressed  for  efficient  delivery.  The  programming  is  then  demodulated  from  digital  to  analog  format  for  display  on  subscribers  analog  television  sets.  34 

 See  2003  Competition  Report,  19  FCC  Rcd  at  1637.  According  to  newer  data  from  the  NCTA,  there  were  22.9  35  million  digital  subscribers  as  of  March  2004.  See  http://  www.  ncta.  com/  Docs/  PageContent.  cfm?  pageID=  86. 
 36  The  typical  distribution  agreement  between  an  MVPD  and  a  premium  network  will  specify  a  narrow  range  of 
 distribution  options  available  to  the  MVPD  because  these  networks  are  designed  expressly  for  a  la  carte  distribution.  A  typical  distribution  agreement  between  an  MVPD  and  a  premium  network  entails  a  revenue  split,  with  each 

 party  receiving  a  negotiated  percentage  of  the  subscription  fees  paid  by  subscribers  for  the  network,  which  are  channeled  through  the  MVPD.  This  is  in  contrast  to  the  generally  fixed-  rate  per  subscriber  license  fee 
 arrangement  between  MVPDs  and  niche  networks,  discussed  below.  Thus,  while  premium  networks  commonly  are  marketed  as  purely  a  la  carte  or  as  mini-  tiers  of  premium  networks,  they  almost  never  are  distributed  in  a  tier  with 
 numerous  advertiser-  supported  program  networks. 
 See  Joint  Programmers  Comments  at  15.  37 
14
 THE  REPORT  14 
 category  of  premium  networks  consists  of  those  that  serve  a  micro-  niche  ethnic  group  or  foreign-  language  speakers.  Pricing  for  these  networks  is  similar  to,  or  even  higher  than,  other  premium  networks.  Indeed, 
 for  many  viewers  of  these  networks,  particularly  those  with  limited  English-  language  skills,  the  network  may  be  their  only  practical  television  programming  option.  38  Cable  operators  are  slowly  migrating 
 premium  services  from  analog  service  to  digital  service,  mainly  because  the  digital  environment  is  more  secure  rendering  theft  of  service  more  difficult.  In  addition,  a  number  of  premium  networks  are  now 
 available  in  a  high  definition  format. 
 Pay-  per-  view  programming  is  another  type  of  video  service  that  is  offered  by  MVPDs  on  an  a  la  carte  basis.  Rather  than  paying  for  a  channel  of  programming,  like  HBO,  a  subscriber  pays  for  a  specific 
 program.  With  pay-  per-  view,  cable  and  DBS  subscribers  can  order  hundreds  of  recently  released  movies  or  current  sport  events  on  a  per-  program  basis.  However,  pay-  per-  view  is  not  instantaneous,  as 
 subscribers  must  wait  to  view  a  selected  program  at  a  prescribed  time. 
 Many  new  digital  services  offered  by  cable  operators  enable  subscribers  to  maintain  more  control  over  what,  when,  and  how  they  receive  information,  but  the  most  important  service  for  this  discussion  is 
 video-  on-  demand.  This  service  permits  subscribers  to  instantaneously  access  video  programming  content  on  a  program-  by-  program  basis.  VOD  subscribers  are  able  to  pause,  fast-  forward,  or  rewind 
 programming  in  the  same  manner  as  permitted  by  a  VCR  or  by  a  digital  video  recorder.  39  Cable  operators  offer  a  mix  of  free  and  pay  VOD.  With  regard  to  the  latter,  certain  operators  are  offering  subscription 
 video-  on-  demand  (  SVOD)  which  functions  like  VOD,  but  has  a  different  marketing  structure.  Rather  than  paying  for  each  event  viewed,  the  subscriber  pays  a  monthly  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  a  catalog  of  programming  for  instantaneous  viewing.  The  VOD  choices 
 provided  by  cable  operators  continue  to  grow  as  they  further  upgrade  their  systems  and  offer  digital  services.  With  the  tier  buy  through  rule4  and  VOD,  cable  subscribers  are  able  to  access  hundreds  of 
 programming  options  without  having  to  purchase  a  tier  of  service  other  than  the  basic  service  tier. 
 Picking  programming.  Television  viewers  find  programming  to  watch  on  cable  systems  and  DBS  in  many  different  ways.  They  can  purchase  print  guides,  such  as  TV  Guide,  or  read  the  local  television 
 listings  in  the  daily  newspaper  to  find  out  what  programming  is  available.  Another  way  MVPD  subscribers  find  programming  is  through  an  electronic  program  guide  (  EPG).  EPGs  are  on-  screen 
 directories  of  programming  delivered  through  various  means,  including  cable,  satellite,  and  over-  the-  air  broadcast  signals.  EPGs  come  in  two  types:  Original-  generation  and  Interactive.  Original-  generation 
 EPGs  continually  scroll  programming  listings.  These  EPGs  are  generally  delivered  as  discrete  video  programming  channels.  Interactive  EPGs,  (  IPGs)  allow  users  to  sort  and  search  programming,  give 
 program  descriptions,  provide  reminders  of  upcoming  programming,  and  take  users  to  programming  they  select.  Cable  operators  and  satellite  carriers  currently  provide  EPGs  to  their  subscribers. 

 Viewers  who  do  not  have  access  to  a  print  guide  or  an  EPG  often  rely  on  their  remote  controls  to  select  programs  to  watch.  Cable  operators  and  satellite  carriers  offer  service  that  corresponds  to  the  way 
 in  which  most  viewers  watch  television.  When,  as  is  often  the  case,  a  viewer  has  not  selected  a  specific  program  in  advance,  he  or  she  is  likely  to  browse  or  surf  the  channels  until  something  interesting 

 j8  Id. 
 To  offer  VOD,  a  cable  operator  must  install  high-  capacity  video  servers  at  its  headend,  and  possibly  in  its  hubs,  as  39  well  as  a  digital  set  top  box  in  the  subscribers  home. 

 See  infra.  40 
15
 THE  REPORT  15 
 I  <  >  turns  up.  41  Many  viewers  may  not  even  be  aware  of  the  name  of  the  channel  on  which  they  stop  to  take  a  closer  look.  The  phenomenon  known  as  channel  surfing  is  now  an  integral  part  of  the  modern  viewing 

 experience,  something  that  subscribers  find  to  be  very  valuable.  42 
 The  practice  of  channel  surfing  is  supported  by  market  research  showing  that  consumers  often  will  not  be  aware  of  the  name  of  a  channel  unless  it  appears  before  them,  yet  a  substantial  proportion  of 
 viewers  will  describe  particular  programs  on  the  channel  as  being  important  to  their  overall  enjoyment  of  cable  as  a  service.  According  to  a  study  from  Knowledge  Networks  Statistical  Research,  of  2000  survey 
 respondents,  only  9  percent  knew  what  was  on  television  when  they  turned  on  their  sets.  43  In  contrast,  33  percent  used  an  electronic  programming  guide  to  find  out  what  was  on  television,  while  23  percent  just 
 flipped  channels.  These  results  are  buttressed  by  a  recent  study  commissioned  by  the  Cable  and  Telecommunications  Association  for  Marketing  (  CTAM),  which  found  that  viewers  who  start  watching 
 a  new  channel  are  most  likely  to  find  it  by  just  flipping  through  the  channels.  44  Overall,  45  percent  of  the  studys  respondents  indicated  that  they  found  new  channels  in  this  manner,  and  the  percentage  rises  to 
 49  percent  in  digital  cable  homes.  45 
 D.  Current  Requirements  and  Obligations 
 There  are  several  statutory  provisions  and  Commission  rules  that  dictate  the  carriage  and  placement  of  certain  types  of  video  programming,  including  the  basic  service  tier  provisions  and  the  channel  availability 
 provisions.  Federal  law  also  dictates,  to  a  certain  extent,  a  cable  operators  technical  obligations  and  its  relationship  with  subscribers.  These  statutory  provisions  and  Commission  rules  sometimes  limit  a  cable 
 operators  ability  to  freely  offer  a  wide  array  of  program  packages. 
 1.  Tier  Placement  Requirements 
 Under  Section  614  of  the  Act,  local  commercial  television  station  signals  must  be  provided  to  every  subscriber  of  a  cable  system.  46  These  signals  must  be  viewable  via  cable  on  all  television  receivers 
 of  a  subscriber  which  are  connected  to  a  cable  system  by  a  cable  operator  or  for  which  a  cable  operator  provides  a  connection.  If  a  cable  operator  authorizes  subscribers  to  install  additional  receiver  connections, 
 but  does  not  provide  the  subscriber  with  such  connections,  or  with  the  equipment  and  materials  for  such 
 One  recent  study  found  that  about  half  of  all  cable  and  satellite  TV  viewers  frequently  flip  through  channels  until  they  find  something  to  watch.  Research  Alert,  How  TV  Viewers  View  TV,  Cable  and  Telecommunications 
 Association  for  Marketing  (Dec.  6,  2002). 
 42  For  example,  63  percent  of  analog  tier  subscribers  and  65  percent  of  digital  tier  subscribers  use  channel  surfing  as 
 the  most  used  source  to  find  out  what  is  on  television.  Moreover,  nearly  50  percent  of  cable  customers  rely  on  channel  surfing  to  decide  what  to  watch.  See  Cable  Television  Administration  &  Marketing  Society,  Video 

 Consumer  Research  Study,  September  2002.  See  Scripps  Comments  at  20. 

 41 

 Knowledge  Networks  Statistical  Research,  How  People  Use  Television,  2004,  available  at  43  ht~://  www.  onetvworld.  org/?  module=  dis~  la~  sto~&  stor~  id=  968&  format=  html. 
 44  Lieberman  Research  Worldwide,  Tracking  the  Evolving  Use  of  Television  and  Its  Content,  March  2004,  at  15. 
 45  While  channel  surfing  was  the  most  common  method  for  finding  new  channels  by  a  significant  margin,  the  next 
 three  most  common  methods  were:  (1)  starting  to  watch  a  specific  show  on  the  channel  (cited  by  30  percent  of  respondents);  (2)  advertising  on  another  channel  (cited  by  27  percent  of  respondents);  (3)  and  word-  of-  mouth  from 

 friends  or  relatives  (cited  by  26  percent  of  respondents).  Id.  See  Viacom  Comments  at  9. 
 46  47  U.  S.  C.  8  534(  b)(  7);  47  C.  F.  R.  9  76.56(  d). 
16
 THE  REPORT  16 
 <  >  connections,  the  operator  must  notify  such  subscribers  of  all  broadcast  stations  carried  on  the  cable 

 system  which  cannot  be  viewed  via  cable  without  a  set  top  box  and  must  offer  to  sell  or  lease  such  a  set  top  box  to  its  subscribers  at  regulated  rates.  The  signals  of  noncommercial  television  stations  must  be 
 available  to  every  subscriber  as  part  of  the  cable  systems  lowest  priced  service  tier  that  includes  the  retransmission  of  local  commercial  television  broadcast  signal^.^  ' 

 Under  Section  623  of  the  Act,  a  cable  operator  must  also  provide  its  subscribers  a  separately  available  basic  service  tier  to  which  subscription  is  required  for  access  to  any  other  tier  of  service.  48  The 
 basic  service  tier  must,  at  a  minimum,  consist  of  the  following:  (1)  all  signals  carried  in  fulfillment  of  the  must  carry  requirements  of  Sections  614  and  615;  (2)  any  public,  educational,  and  governmental  access 
 programming  required  by  the  franchise  of  the  cable  system  to  be  provided  to  s~  bscribers~~;  and  (3)  any  signal  of  any  television  broadcast  station  that  is  provided  by  the  cable  operator  to  any  subscriber,  except  a 
 signal  which  is  secondarily  transmitted  by  a  satellite  carrier  beyond  the  local  service  area  of  such  ~tation.~    A  cable  operator  may  add  additional  video  programming  signals  or  services  to  the  basic  service 
 tier.  5  Satellite  carriers  are  not  required  to  have  a  basic  service  tier. 

 47  47  U.  S.  C.  9  535(  h);  47  C.  F.  R.  0  76.56(  d)(  2). 
   47  U.  S.  C.  9  543(  b)(  7). 
 49  Pursuant  to  Section  61  1  of  the  Act,  local  franchising  authorities  may  require  cable  operators  to  set  aside  channels 
 for  public  (  P),  educational  (  E),  or  governmental  (  G)  use  (  PEG).  47  U.  S.  C.  5  531.  Public  access  channels  are  available  for  use  by  the  general  public.  Educational  access  channels  are  used  by  educational  institutions  for 

 educational  programming.  Governmental  access  channels  are  used  for  programming  by  organs  of  local  government.  PEG  channels  are  not  mandated  by  federal  law,  and  the  Commission  has  no  jurisdiction  over  them,  rather  they  are  a 
 right  given  to  the  local  franchising  authority,  which  it  may  choose  to  exercise.  PEG  channels  provide  an  important  source  of  local  and  diverse  information  for  cable  subscribers.  See  H.  R.  Rep.  No.  98-  934,  98*  Cong.,  2d  Sess.,  at  30 
 (1984)  (  Public  access  channels  are  often  the  video  equivalent  of  the  speakers  soap  box  or  the  electronic  parallel  to  the  printed  leaflet.).  Satellite  carriers  do  not  have  any  PEG  obligations  because  they  are  not  franchlsed  like  cable 
 operators,  but  they  are  required  by  the  Act  and  the  Commissions  rules  to  reserve  four  percent  of  their  channel  capacity  for  access  by  qualified  programmers  for  noncommercial  programming  of  an  educational  or  informational 
 nature.  47  U.  S.  C.  4  335.  Access  to  the  reserved  capacity  on  each  DBS  system  must  be  offered  at  reduced  rates  and  is  limited  to  one  channel  per  qualified  program  supplier.  47  C.  F.  R.  0  25.701. 

 Cable  systems  retransmit  broadcast  signals  pursuant  to  the  statutory  copyright  license,  under  which  the  cable  industry  carries  thousands  of  broadcast  stations  and  currently  pays  approximately  $120  million  in  royalties  to 
 copyright  owners  each  year.  The  statutory  license  requires  cable  systems  to  pay  royalties  based  on  a  percentage  of  revenues  associated  with  the  tiers  of  service  they  offer  that  include  broadcast  station  retransmissions.  See  17  U.  S.  C. 
 0  11  l(  d);  37  C.  F.  R.  4  201.17(  b)(  1).  The  cable  statutory  license  and  the  specific  royalty  rates  mandated  by  the  license  were  enacted  under  the  assumption  that  broadcast  stations  and  program  networks  would  be  bundled  in  service  tiers. 
 A  la  carte  regulation,  in  the  context  of  the  basic  service  tier,  may  raise  several  substantial  questions  about  the  manner  in  which  cable  systems  would  compensate  copyright  owners  for  the  use  of  their  copyrighted  works.  See 
 Sports  Leagues  Comments  at  1  1. 
 5  Id.  The  Commission  generally  prohibits  cable  operators  from  scrambling  the  basic  service  tier.  47  C.  F.  R.  3 
 76.630(  a).  This  requirement  ensures  that  all  subscribers  are  able  to  receive  basic  service  tier  channels  in  the  clear  and  that  basic-  only  subscribers  with  cable-  ready  television  sets  will  not  need  set-  top  boxes. 

 50 
17
 THE  REPORT  17 
 <  >  Digital  Basic  Service  Tiers.  It  has  been  the  Commissions  view  that  the  Act  contemplates  a  single 

 basic  service  tier.  52  When  analyzing  the  basic  service  tier  requirement  in  the  context  of  a  cable  operators 
 digital  broadcast  signal  carriage  obligations,  the  Commission  held  that  it  is  consistent  with  the  statutory  language  to  require  that  a  broadcasters  digital  signal  must  be  available  on  a  basic  tier  such  that  all 

 broadcast  signals  are  available  to  all  cable  subscribers  at  the  lowest  priced  tier  of  service.  The  Commission  opined  that  the  basic  service  tier,  including  any  broadcast  signals  carried,  will  continue  to  be 
 under  the  jurisdiction  of  the  local  franchising  authority,  and  as  such,  will  be  rate  regulated  if  the  local 
 franchising  authority  has  been  certified  under  Section  623  of  the  The  Commission  noted,  however,  that  if  a  cable  system  faces  effective  competition  under  one  of  the  four  statutory  tests,  54  and  is  deregulated 

 pursuant  to  a  Commission  order,  the  cable  operator  is  free  to  place  a  broadcasters  digital  signal  on  upper  tiers  of  service  or  on  a  separate  digital  service  tier. 

 Commercial  Leased  Access.  Section  612  of  the  Act  requires  cable  operators  to  reserve  channel  capacity  for  non-  affiliated  video  program  networks  under  a  leased  channel  ~aradigm.~    The  Commission 
 has  adopted  rules,  pursuant  to  Section  612,  for  leased  access  channels  addressing  maximum  reasonable  rates,  reasonable  terms  and  conditions  of  use,  minority  and  educational  programming,  and  procedures  for 
 resolution  of  disputes.  6  The  Commissions  rules  require  cable  operators  to  place  leased  access  program  networks  on  any  tier  that  has  a  subscriber  penetration  of  more  than  50  percent,  unless  there  are  technical 
 or  other  compelling  reasons  for  denying  access  to  such  tier^.^  '  Cable  operators  are  permitted  to  make  reasonable  selections  when  placing  leased  access  channels  at  specific  channel  locations.  Cable  operators 
 may  use  the  highest  implicit  fee  formula,  as  set  forth  in  the  Commissions  rules,  to  set  maximum 
 See  Carriage  of  Digital  Television  Broadcast  Signals,  16  FCC  Rcd  2598,  2643  (2001)  (  DTV  Must  Carry  Order).  In  its  First  Rate  Report  and  Order,  the  Commission,  citing  provisions  in  the  1992  Cable  Act  that 
 consistently  refer  to  basic  tier  in  the  singular,  concluded  that  the  Act  contemplates  that  each  cable  operator  must  offer  only  one  basic  tier.  See  First  Rate  Report  and  Order,  8  FCC  Rcd  at  5744.  The  U.  S.  Court  of  Appeals  for  the 
 District  of  Columbia  Circuit  found  that  the  Commissions  single  basic  tier  requirement  constituted  a  permissible  interpretation  of  Section  623(  b)(  7).  See  Time  Warner  v.  FCC,  56  F.  3d  151,  199  (D.  C.  Cir.  1995). 

 5  3  ~e  e  47  U.  S.  C.  Q  543(  a)(  3). 
 54See  47  U.  S.  C.  5  543(  1)(  1). 
 55  47  U.  S.  C.  Q  532.  Commercial  leased  access  set-  aside  requirements  were  established  by  Congress  in  proportion  to 
 a  systems  total  activated  channel  capacity.  Cable  systems  with  36  or  more  activated  channels  are  required  to  comply  with  these  set-  aside  requirements.  See  47  U.  S.  C.  0  532(  b)(  l).  Section  612  permits  cable  operators  to  use 

 any  unused  leased  access  channel  capacity  for  their  own  purposes  until  a  written  agreement  for  the  use  of  such  leased  access  capacity  is  obtained.  Each  system  operator  subject  to  this  requirement  must  establish,  consistent  with 
 the  rules  prescribed  by  the  Commission,  the  price,  terms,  and  conditions  of  such  use  which  are  at  least  sufficient  that  such  use  will  not  adversely  affect  the  operation,  financial  condition,  or  market  development  of  the  cable 
 system.  47  U.  S.  C.  5  532(  c)(  1).  The  1992  Cable  Act  amended  Section  612  and  broadened  the  statutory  purpose  to  include  the  promotion  of  competition  in  the  delivery  of  diverse  sources  of  video  programming,  and  expanded  the 
 Commissions  authority  over  leased  access.  47  U.  S.  C.  5  532(  a). 
 56  See  47  C.  F.  R.  $9  76.701,  76.970,  76.971,  76.975  and  76.977. 

 52 

   47  C.  F.  R.  Q  76.971(  a)(  l).  According  to  the  legislative  history  of  the  1992  Cable  Act  amendments  to  the  leased 
 access  requirements  in  Section  612,  If  programmers  using  these  channels  are  placed  on  tiers  that  few  subscribers  access,  the  purpose  of  this  provision  [to  promote  competition  in  the  delivery  of  diverse  sources  of  video 

 programming  and  to  assure  the  widest  possible  diversity  of  information  sources  are  made  available  to  the  public  from  cable  systems]  is  defeated.  The  FCC  should  ensure  that  these  programmers  are  carried  on  channel  locations 
 that  most  subscribers  actually  use  ...  to  ensure  that  these  channels  are  a  genuine  outlet  for  programmers.  See  S.  Rep.  No.  102-  92,  at  79  (1991). 
18
 THE  REPORT  18 
 <  >  reasonable  rates  for  leased  access  programming  that  is  carried  as  an  a  la  carte  service.  58  The  Commission 

 evaluates  disputes  involving  channel  placement  on  a  case-  by-  case  basis  and  will  consider  any  evidence  that  an  operator  has  acted  unreasonably  in  this  regard.  59 

 DBS.  The  broadcast  station  availability  requirements  for  satellite  carriers,  pursuant  to  the  carry-  one-  carry-  all  requirement  of  the  Satellite  Home  Viewer  Improvement  Act  of  1999  (  SHVIA)  60  and 
 under  Section  338  of  the  Act,  61  differ  from  those  of  cable  operators.  The  Commission  held  that  satellite  carriers  do  not  need  to  sell  all  local  television  stations  as  one  package  to  subscribers,  as  is  required  of 
 cable  operators.  Specifically,  the  Commission  noted  that  Congress  did  not  intend  to  establish  a  basic  service  tier-  type  requirement  for  satellite  carriers  when  it  implemented  Section  338.  Nor  did  Congress 
 explicitly  prohibit  the  sale  of  local  television  station  signals  on  an  a  la  carte  basis.  Rather,  the  Commission  stated  that  Section  33  8s  anti-  discrimination  language  prohibits  satellite  carriers  from 
 implementing  pricing  schemes  that  effectively  deter  subscribers  from  purchasing  some,  but  not  all,  local  television  station  signals.  The  Commission  therefore  found  that  a  satellite  carrier  must  offer  local 
 television  signals,  as  a  package  or  a  la  carte,  at  comparable  rates.  62  The  broadcast  industry  specifically  sought  review  of  the  Commissions  a  la  carte  rule.  The  United  States  Court  of  Appeals  for  the  Fourth 
 Circuit,  in  SBCA  v.  FCC,  held  inter  alia,  that  the  satellite  carriage  a  la  carte  policy  was  not  arbitrary,  capricious,  or  contrary  to 

 2.  Tier  Buy-  Through  Requirements 
 Section  623(  b)(  8)  of  the  Act  provides  that  a  cable  operator  may  not  require  the  subscription  to  any  tier  other  than  the  basic  service  tier  as  a  condition  of  access  to  video  programming  offered  on  a  per 
 channel  or  per  program  basis.  64  Under  the  tier  buy  through  requirement,  a  cable  operator  may  not 
 58  47  C.  F.  R.  9  76.970. 
 National  Religious  Broadcasters  (  NRB)  state  that  a  significant  number  of  religious  program  networks  secure  NRB  believes  that  leased  access  should  be  59  carriage  on  cable  television  through  commercial  leased  access. 
 maintained  in  its  current  state  and  not  be  subject  to  any  type  of  a  la  carte  requirement.  See  NRB  Comments  at  3. 
 Pub.  L.  No.  106-  113,  113  Stat.  1501,  1501A-  526  to  1501A-  545  (1999).  The  provisions  contained  in  the  Satellite  60  Home  Viewer  Improvement  Act  expire  at  the  end  of  2004. 

 Seegenerally,  47  U.  S.  C.  0  338;  47  C.  F.  R.  9  76.66.  61 
 See  Implementation  of  the  Satellite  Home  Viewer  Improvement  Act  of  1999:  Broadcast  Signal  Carriage  Issues;  62  Retransmission  Consent  Issues,  16  FCC  Rcd  191  8,  1960  (2000)  (  DBS  Broadcast  Carriage  Report  &  Order). 

 SBCA  v.  FCC,  275  F.  3d  337  (4h  Cir.  2002).  Based  on  this  precedent,  Echostar  notes  that  the  Commissions  rules  do  not  appear  to  stand  as  an  obstacle  to  carriage  of  local  channels  on  an  a  la  carte  basis,  at  least  for  satellite  carriers. 
 Echostar  Comments  at  10. 

 63 

 47  U.  S.  C.  0  543(  b)(  8).  See  Implementation  of  Section  3  of  the  Cable  Television  Consumer  Protection  and  Competition  Act  of  1992:  Buy-  through  Prohibition  (  Tier  Buy-  through  Order),  8  FCC  Rcd  2274  (1993);  47  C.  F.  R. 
 76.921.  In  response  to  the  U.  S.  Court  of  Appeals  for  the  District  of  Columbia  Circuits  1995  decision,  Time  Warner  v.  FCC,  56  F.  3d  at  199,  the  Commission  modified  its  rules  to  state  that  the  tier  buy-  through  requirement,  like  other 
 requirements  under  Section  623,  does  not  apply  to  cable  systems  subject  to  effective  competition.  Zd.  There  is  no  Federal  requirement  that  cable  operators  inform  their  customers  about  the  tier  buy  through  rule.  However,  certain 
 states  are  attempting  to  impose  tier  buy  through  notification  requirements.  See  TRs  State  Newswire,  Bill  Requires  Cable  Companies  to  Notif)  Customers  About  Plans,  October  1,  2004  (Legislation  is  pending  in  New  Jersey  that 
 would  require  operators  to  notify  subscribers  of  their  buy-  through  rights). 

 64 
19
 THE  REPORT  19  - 
 / 
 discriminate  between  subscribers  to  the  basic  service  tier  and  other  subscribers  with  regard  to  the  rates  charged  for  video  programming  offered  on  a  per  channel  or  per  program  basis.  65  In  adopting  rules  to 

 implement  the  tier  buy-  through  prohibition,  the  Commission  determined  that  multiplexed  services  (i.  e.,  multiple  screens  of  a  single  premium  service  such  as  HBO  East,  HBO  West,  HBO  Signature,  etc.)  are  to 
 be  treated  as  per  channel  services.  66  Thus,  a  subscriber  is  not  required  to  purchase  any  intervening  tier  or  tiers  of  programming  in  order  to  subscribe  to  a  multiplexed  programming  service.  Moreover,  a  cable 
 operator  may  require  the  subscription  to  one  or  more  tiers  of  cable  programming  services  as  a  condition  of  access  to  one  or  more  tiers  of  cable  programming  services.  The  tier  buy-  through  provision  does  not 
 prohibit  the  use  of  a  set-  top  box  in  order  to  receive  per  program  or  per  channel  services  on  an  a  la  carte  basis.  The  tier  buy  through  rules  do  not  apply  to  DBS. 

 3.  Commercial  Availability  of  Navigation  Devices  and  Equipment  Compatibility 
 Section  629  of  the  Act  directs  the  Commission  to  adopt  rules  that  would  allow  consumers  the  opportunity  to  obtain  navigation  devices,  such  as  cable  set-  top  boxes  and  other  equipment,  from 
 commercial  sources  other  than  their  MVPD  service  provider^.^^  Pursuant  to  Section  629,  the  Commission  required  MVPDs  to  unbundle  security  from  other  functions  of  the  navigation  device  and  to  make  available 
 modular  security  components,  called  point-  of-  deployment  modules  (  PODS  or  Cablecards),  to  separately  perform  the  conditional  access  function.  68  Thus,  an  MVPD  subscriber  would  be  able  to  obtain  a 
 set-  top  box  or  other  navigation  device  without  the  security  features  from  a  retailer,  and  the  MVPD  would  provide  a  card-  sized  POD  module  for  security  functions. 

 Section  624A  of  the  Act  directs  the  Commission  to  issue  such  regulations  as  are  necessary  to  assure  the  compatibility  between  cable  systems  and  consumer  electronics  equipment  such  as  television 
 receivers  and  video  cassette  recorder^.^^  Section  624A(  d)  further  directs  the  Commission  to  review  and  modify  its  compatibility  regulations  to  reflect  improvements  and  changes  in  cable  systems,  television 
 receivers,  video  cassette  recorders,  and  similar  techn~  logy.~~  The  1996  Act  amended  Section  624A  to  include  the  finding  that  compatibility  among  television  sets,  video  cassette  recorders,  and  cable  systems 
 can  be  assured  with  narrow  technical  standards  that  mandate  a  minimum  degree  of  common  design  and 
 47  U.  S.  C.  5  543(  b)(  8)(  A).  If,  in  a  proceeding  initiated  at  the  request  of  a  cable  operator,  the  Commission  determines  that  compliance  with  the  tier  buy-  through  requirements  would  require  the  cable  operator  to  increase  its 
 rates,  the  Commission  may,  to  the  extent  consistent  with  the  public  interest,  grant  such  cable  operator  a  waiver  from  the  requirements  for  a  specified  period  as  the  Commission  determines  to  be  reasonable.  Id.  Q  543(  b)(  8)(  C). 

 65 

 Tier  Buy-  through  Order,  8  FCC  Rcd  at  2275  n.  9.  66 
 47  U.  S.  C.  Q  549.  The  Commission  defines  navigation  devices  as  converter  boxes,  interactive  equipment,  and  other  equipment  used  by  consumers  within  their  premises  to  receive  multichannel  video  programming  and  other 
 services  offered  over  multichannel  video  programming  systems.  47  C.  F.  R.  5  76.1201(  c). 

 67 

 Implementation  of  Section  304  of  the  Telecommunications  Act  of  1996:  Commercial  Availability  of  Navigation  68  Devices,  13  FCC  Rcd  14775,14776  (1998);  47  C.  F.  R.  5  76.1204. 
 47  U.  S.  C.  9  544A.  The  analog  equipment  compatibility  rules  were  developed  ten  years  ago.  See  Compatibility  Between  Cable  Systems  and  Consumer  Electronics  Equipment,  9  FCC  Rcd  1981  (1994)  (  Compatibility  Report  and 
 Order). 

 69 

 O  47  U.  S.  C.  Q  544A(  d). 
20
 THE  REPORT  20 
 <  >  operations,  leaving  all  features,  functions  and  protocols,  and  other  product  and  service  options  for 

 selection  through  open  competition  in  the  market.  l 
 Pursuant  to  its  authority  under  Section  629,  the  Commission  has  adopted  rules  to  require  television  sets  to  be  built  with  plug-  and-  play  functionality,  i.  e.,  the  ability  for  a  consumer  to  attach  a  digital  cable 
 ready  digital  television  receiver  directly  to  the  cable  system  using  a  POD  and  receive  one-  way  cable  television  services,  without  the  need  for  a  set-  top  Since  July  1,  2004,  cable  operators  have  been 
 required  to  support  unidirectional  digital  cable  products  (  UDCPs)  by  providing  a  Cablecard  to  any  subscriber  who  purchases  a  digital  cable  ready  product  and  requests  connection  to  the  cable  system 
 without  a  set-  top  At  this  time,  consumers  will  still  need  a  set-  top  box  to  receive  two-  way  (ie.,  interactive)  services,  such  as  video  on  demand,  pay-  per-  view,  and  cable  operator-  enhanced  electronic 
 programming  guides.  The  cable  and  consumer  electronics  industries  continue  to  work  on  the  development  of  an  agreement  for  two-  way  plug-  and-  play  receiver^.  '^  Charter  comments  that  an  a  la  carte  mandate 
 would  likely  require  more  set-  top  boxes  in  subscribers  homes,  a  move  which  it  believes  would  contradict  all  plug  and  play  efforts  that  permit  subscribers  to  access  digital  cable  service  without  additional 
 equipment.  75 

 E.  Analysis  of  Current  Packaging  Practices  at  the  Retail  Level 
 The  attraction  of  introducing  price  discipline  and  additional  choice  into  the  retail  market  for  video  programming  is  obvious.  Over  the  past  five  years,  cable  prices  have  increased  by  an  average  of  4.6%  per 
 year  according  to  the  Bureau  of  Labor  Statistics.  The  FCCs  Report  on  Cable  Industry  Prices  shows  dramatic  annual  increases,  in  excess  of  7%,  for  the  expanded  basic  program  tier  over  the  past  five  years. 
 Accompanying  these  rate  increases  have  been  increases  in  the  number  of  channels  contained  within  the  expanded  basic  package,  though  the  size  of  the  package  has  not  kept  pace  with  the  rate  increases.  As  the 
 price  and  size  of  the  expanded  basic  tier  rises,  consumers  have  begun  to  ask  themselves  if  the  additional  channels  are  actually  worth  the  additional  costs.  Consumers  have  reason  to  question  whether  current 
 packaging  practices  contribute  to  the  problem.  This  section  will  examine  whether  there  are  any  benefits  to  the  current  method  of  selling  video  programming  and  the  extent  to  which  current  practices  are  the  root 
 cause  of  many  of  the  problems  in  the  retail  market.  In  the  sections  that  follow,  a  la  carte  and  themed  tiers  are  examined  to  determine  if  they  can  provide  a  check  on  rate  increases,  provide  additional  choice  to 
 consumers,  and  give  them  more  control  over  the  content  that  enters  their  homes. 
 1.  Benefits  and  Harms  of  Bundling  at  the  Retail  Level 
 a.  Consumer  Choice  and  Rates 
   47  U.  S.  C.  0  544A(  a)(  4). 
 72  Compatibility  Between  Cable  Systems  and  Consumer  Electronics  Equipment,  15  FCC  Rcd  17568  (2000)  (  Digital 
 Compatibility  Report  and  Order);  compatibility  Between  Cable  Systems  and  Consumer  Electronics  Equipment,  18  FCC  Rcd  20885  (2003)  (  Digital  Compatibility  Second  Report  and  Order);  47  C.  F.  R. 
 80  15.123,  76.640,76.190  et.  seq. 

 73  47  C.  F.  R.  6  76.640(  b). 
 The  PN  specifically  sought  comment  on  the  impact  an  a  la  carte  and  themed-  tier  requirement  would  have  on  the  uni-  directional  plug-  and-  play  regulations,  and  on  the  ongoing  discussions  regarding  potential  bi-  directional  plug- 
 and-  play  regulations.  PN,  19  FCC  Rcd  at  9293.  Very  few  parties  mentioned  this  topic  in  their  pleadings. 
 75  See  Charter  Comments  at  1  1. 

 74 
21
 THE  REPORT  21 
 Consumers  Union  and  the  Consumer  Federation  of  America,  among  others,  state  that  cable  rates  have  increased  at  nearly  three  times  the  rate  of  inflation.  They  argue  that  the  industrys  practice  of 
 making  most  networks  available  only  as  part  of  a  bundle  or  tier  has  contributed  to  the  rise  in  rates.  They  argue  that  the  size  of  these  bundles  far  exceed  the  number  of  channels  that  the  average  household 
 regularly  watches.  This  has  resulted  in  consumers  paying  for  channels  that  they  do  not  watch.  By  exposing  the  underlying  demand  for  an  individual  channel,  rather  than  hiding  it  in  the  bundle,  they 
 contend  that  cable  operators  will  be  forced  to  offer  programming  that  consumers  are  willing  to  purchase.  They  maintain  that  offering  channels  on  an  individual  basis,  as  well  as  in  existing  tiers,  will  provide 

 consumers  with  additional  choice  and  act  as  a  strong  check  on  cable  rate  increases.  76  Some  individual  consumers  also  filed  comments  supporting  the  argument  that  they  are  paying  for  channels  they  do  not 
 watch  and  that  their  rates  would  be  lower  if  they  were  able  to  purchase  channels  on  an  individual  basis.  77 
 Rural  Telephone  Companies  (  RTCs)  state  that  a  la  carte  and  tiering  can  exist  side-  by-  side  and  actually  increase  consumer  choice  and  reduce  programming  costs  at  the  same  time.  They  use  the  current 
 premium  services  business  model  to  explain  their  position.  Twenty-  five  years  ago,  premium  services  were  single  channel  services  offered  strictly  on  an  a  la  carte  basis.  Today,  those  same  services  are  offered  in 
 multiplex  packages  as  well  as  in  packages  with  additional  premium  services  (i.  e.,  themed-  tiers)  at  rates  equal  to  or  less  than  what  the  individual  services  cost  when  they  were  offered  alone.  RTCs  state  that,  in 
 real  dollars,  the  rate  for  each  premium  service  has  gone  down  while  the  diversity  of  services  has  gone  up.  Yet,  those  same  premium  services  are  still  available  on  an  a  la  carte  basis  should  a  subscriber  wish  to 
 purchase  them  that  way.  RTCs  conclude  that  while  subscriber  choice  and  diversity  has  increased,  programming  costs  to  the  consumer  have  decreased.  78 

 Cable  operators  and  program  networks  disagree  that  bundling  practices  in  the  MVPD  market  have  limited  consumer  choice.  Furthermore,  many  argue  that  any  move  away  from  the  current  system 
 will  not  lower  rates,  but  will  increase  them.  79  The  impact  of  a  shift  to  a  la  carte  or  themed-  tiers  on  rates  is  extensively  examined  below  and  illustrates  many  of  the  benefits  of  bundling  that  would  be  lost.  Among 
 these  benefits  are  the  cost  savings  that  bundling  engenders. 
 Joint  Programmers  state  that  some  groups  appear  to  believe  that  subscribers  would  be  able  to  purchase  a  limited  number  of  networks  a  la  carte  from  a  broad  bundle  of  networks,  and  that  those 
 networks  could  be  purchased  at  a  price  per  network  that  is  roughly  proportionate  to  each  networks 
 CU/  CFA  Comments  and  Reply  Comments,  passim.  76 
 One  individual  claims  that  [  iln  an  a  la  carte  world,  we  would  actually  see  some  value  for  the  money  we  spend  on  cable.  As  it  is  now,  we  do  not.  Cable  companies  argue  there  will  be  less  choice.  I  disagree  strongly.  A  choice 
 between  options  you  dont  want  is  no  choice  at  all!  See  Comment  of  Margot  Durrett,  Cloverdale,  CA. 

 77 

 RTC  Comments  at  14.  78 
 Several  individual  commenters  opposing  a  la  carte  focus  on  the  potential  problem  of  increased  rates.  One  commenter  asserts  that  options  for  a  la  carte  channels  .  .  .  would  needlessly  raise  rates  for  programming  which  .  .  . 
 are  outrageous  to  begin  with.  See  Comment  of  Wanda  McDaniel,  Powder  Springs,  GA.  Another  commenter  states  that  we  would  pay  the  same  amount  for  a  few  channels  that  we  pay  for  a  lot  -  we  [would]  lose  the  volume 
 discount.  See  Comment  of  Shandle  Green,  Pasadena,  CA.  Several  individuals  conclude  that  [  tlo  require  cable  programmers  to  tailor  their  product  to  every  last  subscriber  would  raise  prices  through  the  roof,  and  limit  channel 
 selections  to  only  the  lowest  common  denominator  of  broadly  popular  channels.  See  Comments  of  Karen  Gonzales,  Fallon,  NV.  See  also  Comments  of  Charles  Cooper,  Chesterhill,  OH,  Gerald  Zellar,  Lakefield,  MN,  Frances  Turner, 
 Galena,  OH,  Randy  Gordon,  Gastonia,  NC,  J.  J.  Harmon,  Jr.,  Bluefield,  VA. 

 79 
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 THE  REPORT  22 
 \  / 
 share  of  the  overall  price  of  the  bundle.  80  Under  this  theory,  if  consumers  currently  subscribe  to  a  tiered  offering  of  40  networks  for  $30,  they  instead  should  be  able  to  subscribe  to  only  their  favorite  networks 

 for  75$  each.  Joint  Programmers  state  that  this  perception  ignores  the  fundamental  nature  of  video  programming,  but  it  does  much  to  explain  the  appeal  of  a  la  carte  distribution  among  a  part  of  the 
 public  . 
 Potentially  distinct  products  are  often  bundled  in  order  to  lower  transaction  costs,  realize  economies  of  scale,  and  enhance  the  attractiveness  or  convenience  of  the  product  to  consumers.  Many 
 commenters,  including  Charter  and  Courtroom  Television,  state  that  the  benefits  of  bundling  are  perhaps  best  illustrated  by  considering  the  daily  newspaper.  In  the  sale  of  newspapers,  for  example,  the  various 
 sections  and  columns  are  bundled  into  a  single  product,  even  though  few  people  read  all  parts  of  the  paper.  But  a  newspaper  is  sold  as  a  bundled  product  because:  (1)  of  the  economies  of  having  all  sections 
 delivered  at  once  rather  than  having  separate  distribution  mechanisms  for  each  section;  (2)  of  the  value  to  subscribers  of  having  the  option  to  look  at  all  of  the  sections,  even  if  they  do  not  read  all  sections  every 
 day;  and  (3)  of  the  efficiencies  for  advertisers  who  prefer  paying  a  single  price  to  reach  all  of  the  newspapers  readers  with  a  single  advertisement.** 

 Bundling  also  simplifies  consumer  decision-  making.  Comcast  states  that  a  la  carte,  the  opposite  of  bundling,  likely  would  provide  tens  of  thousands  of  possible  program  combinations  that  would  not  be 
 attractive  to  consumers.  83  Comcast  states,  for  example,  that  a  restaurant  with  a  menu  of  over  10,000  items  would  be  so  extensive  and  complex  that  it  would  leave  consumers  confused  and  frustrated.  The  same  is 
 true  of  a  la  carte.  84  According  to  the  Progress  and  Freedom  Foundation  (  P&  FF>,  tiering  accomplishes  a  number  of  purposes,  one  of  which  is  to  provide  viewers  with  option  value.  When  viewers  purchase  a 
 bundle  of  programs,  they  have  the  option  of  watching  programming  that  they  might  not  have  purchased  separately. 

 According  to  Comcast,  the  benefits  of  retail  bundling  are  readily  apparent  in  the  cable  industry.  Tiers  lower  distribution  costs  because  the  distribution  cost  entailed  in  serving  a  subscriber  is  the  same 
 regardless  of  the  number  of  channels  delivered,  so  the  more  channels  subscribed  to,  the  lower  the  average  cost  of  distributing  a  channel.  86  In  a  similar  fashion,  Charter  asserts  that  if  relatively  few  customers 
 subscribe  to  relatively  few  cable  services,  the  delivery  plant  is  under-  utilized.  As  a  result,  the  average  fixed  cost  per  unit  of  channel  delivery  is  relatively  high.  In  contrast,  if  many  customers  subscribe  to  large 
 numbers  of  cable  services,  the  average  fixed  costs  per  unit  of  channel  delivery  is  relatively  low.  As  the 
 Joint  Programmers  Comments  at  36.  80 
 8  Id. 

 82  See  Courtroom  Television  Comments  at  14:  Charter  Comments  at  6. 
 Comcast  Comments  at  11.  83 
 84  Research  suggests  that  most  consumers  prefer  simplified  choices  when  there  are  a  large  number  of  alternatives  to 
 consider.  See  Ravi  Dhar,  Consumer  Preference  for  a  No-  Choice  Option,  Journal  of  Consumer  Research,  September  1997,  Vol.  24,  No.  2,  at  215. 

 P&  FF  Comments  at  9.  85 
 86  Comcast  Comments  at  7. 
23
 THE  REPORT  23 
 <  >  price  per  unit  of  channel  delivery  declines,  the  customer  benefits,  because  a  greater  percentage  of  the 

 customers  subscription  fees  is  available  for  pr~  gramming.~   
 Turner  states  that  households  effectively  cross-  subsidize  each  other  so  that  the  price  for  the  networks  they  want  is  less  than  the  price  they  would  have  to  pay  if  they  were  only  buying  the  program 
 networks  they  valued  most  highly.  Turner  states  that  the  correct  way  of  looking  at  this  market  is  that  network  users  collectively  support  the  joint  costs  of  creating  video  services.  Different  users  pay  for 
 different  uses  of  the  network,  but  no  consumer  pays  more  for  the  expanded  basic  tier  than  the  value  of  the  service  they  receive. 

 It  is  this  explanation  which  has  motivated  much  of  the  economic  research  on  the  benefits  of  bundling  in  the  video  programming  ind~  stry.  ~  Research  suggests  that  video  programming  has  one 
 characteristic  that  leads  to  the  unusual  results  with  respect  to  bundling.  Regardless  of  how  many  persons  view,  or  consume,  such  programming  the  costs  of  production  do  not  change.  Because  of  this 
 characteristic,  social  welfare  is  maximized  when  distribution  of  programming  is  maximized.  However,  a  product  with  this  characteristic  that  is  sold  on  an  individual  basis  with  a  uniform  price  may  not  be  able  to 
 recover  its  fixed  production  costs,  even  though  the  total  value  consumers  place  on  the  good  is  greater  than  those  production  costs.  In  short,  bundling  by  MVPDs  allows  program  networks  to  recover  a  large  share 
 of  the  production  costs  from  consumers  who  value  the  programming  the  most,  while  obtaining  a  smaller  contribution  from  consumers  that  do  not  value  the  programming  as  highly.  Bundling  does  not  force 
 consumers  to  pay  for  programming  they  do  not  want,  but  it  does  force  them  to  pay  more  for  programming  that  they  value  highly  than  the  amount  another  consumer  who  values  that  programming  less  highly  pays. 
 In  the  end,  this  result  ensures  the  production  of  programming  that  consumers  value  by  spreading  those  costs  over  a  broad  segment  of  society.  In  addition  to  the  benefit  bundling  confers  on  the  diversity  of 
 programming,  it  also  appears  to  promote  fiercer  competition  between  MVPDs.  Economic  research  indicates  that  two  firms  that  compete  with  each  other  by  selling  bundles  have  lower  prices  than  firms  that 
 compete  through  a  la  carte  sales. 
 b.  Objectionable  Content 
 CU  states  that  giving  consumers  the  choice  to  select  only  those  program  networks  they  want,  on  an  a  la  carte  basis,  provides  a  solution  to  the  growing  public  concern  about  violent  and  indecent 
 programming.  It  states  that  rather  than  putting  the  government  in  the  untenable  position  of  trying  to  curtail  objectionable  content,  a  la  carte  consumers  could  select  desired  programming  and  reject  offensive 
 programming  .9 
 The  Commission  does  not  have  specific  statutory  authority  to  regulate  the  content  of  non-  broadcast  program  networks.  The  cable  and  DBS  subscription  business  model,  and  its  ability  to  provide 
 tools  to  block  unwanted  programming,  differentiate  these  distributors  from  traditional  television 

 Charter  Comments  at  9.  87 
 Turner  Reply  Comments  at  4,  9. 
 Section  I  of  the  Economic  Appendix  discusses  economic  research  in  this  field. 
 Yannis  Bakos  and  Erik  Brynjolfsson,  Bundling  and  Competition  on  the  Internet,  Marketing  Science,  19(  l), 

 88 
 89 
 90 
 Winter  2000,  at  63-  82. 

 CU  Comments  at  4.  91 
24
 THE  REPORT  24 
 .  7  br~  adcasting.~~  The  Act  provides  cable  subscribers  with  a  variety  of  measures  to  block  unwanted  programming.  First,  under  Section  624,  cable  operators  must  provide  lockbox  technology  to  cable 

 subscribers  upon  request  to  prevent  the  viewing  of  any  channel  on  which  objectionable  programming  may 
 appear.  Cable  operators  are  required  to  make  lockboxes  available  for  sale  or  lease  to  customers  who  request  them.  93  Second,  under  Section  640,  a  cable  operator  is  required  to  fully  scramble  or  block  the 

 audio  and  video  portions  of  programming  services  not  specifically  subscribed  to  by  a  household.  The 
 cable  operator  must  fully  scramble  or  block  the  programming  in  question  upon  the  request  of  the 
 subscriber  and  at  no  charge  to  the  ~u  b  s  c  r  i  b  e  r  .~~  Finally,  subscribers  may  purchase  television  sets  equipped  with  V-  Chips  that  enable  individuals  to  block  television  programs  assigned  a  particular  rating 

 by  the  video  p  r  ~g  r  a  m  m  e  r  .~~  While  the  latter  mandate  applies  to  all  MVPD  homes  with  television  sets,  the  first  two  subscriber  protections  do  not  apply  to  DBS  because  they  are  not  subject  to  the  provisions  of  Title 
 VI,  although  as  discussed  below,  DBS  has  created  its  own  subscriber  protection  tools. 
 Earlier  this  year,  a  group  of  cable  operators,  representing  about  eighty-  five  percent  of  all  cable 
 subscribers,  launched  a  campaign  to  educate  cable  subscribers  on  parental  tools  and  consumer  rights,  including  explanations  of  the  TV  ratings  system,  V-  chip,  and  program  blocking  t  e  ~h  n  o  l  o  g  y  .~~  This 

 campaign  includes  public  service  announcements,  media  literacy  workshops,  technical  assistance  with  program  blockers,  and  a  ~e  b  s  i  t  e  .~ 

 See,  e.  g.,  Cruz  v.  Ferre,  755  F.  2d  1415,  1419  (1  lth  Cir.  1985)  (  Unlike  broadcast  television,  which  send  over-  the-  air  signals,  cable  television  operates  by  transmitting  programs  to  subscribers  through  coaxial  cables  or  wires.); 
 Applications  for  Consent  to  the  Transfer  of  Control  of  Licenses  from  Comcast  Corporation  and  AT&  T  Corp.,  Transferors,  to  AT&  T  Comcast  Corporation,  Transferee,  17  FCC  Rcd  23246,  23328  (2002)  (cable  services  are  not 
 broadcast  services,  but  are  subscription-  based  services,  which  do  not  call  into  play  the  issue  of  indecency).  See  also,  Litigation  Recovery  Trust,  17  FCC  Rcd  21852,  21856  (2002)  (broadcast  indecency  restrictions  not  applicable 
 to  satellite  programming  provided  to  hotels);  Harriscope  of  Chicago,  Inc.,  3  FCC  Rcd  757,  760  (1988)  (  Consistent  with  existing  case  law,  the  Commission  does  not  impose  regulations  regarding  indecency  on  services  lacking  the 
 indiscriminate  access  to  children  that  characterizes  broadcasting.).  However,  Sections  639  of  the  Act  and  18  U.  S.  C.  Q1468(  a)  respectively  prohibit  the  transmission  of  obscene  material  over  a  cable  system  and  the  knowing 
 utterance  or  distribution  of  obscene  matter  by  means  of  a  cable  television  system  or  subscription  service.  47  U.  S.  C.  5  559;  18  U.  S.  C.  Q  1468.  Only  the  latter  provision  applies  to  DBS. 

 93  47  U.  S.  C.    544(  d)(  2). 
 94  47  U.  S.  C.  Q  560. 

 92 

 See  1996  Act,  Section  551-  Parental  Choice  in  Television  Programming.  See  also  47  U.  S.  C.  Q  544(  d)(  3)  (when  a  cable  operator  provides  access  to  premium  channels  without  charge  to  subscribers  (as  a  free  preview  or  promotion) 
 the  operator  must  (1)  give  notification  to  subscribers  of  the  impending  free  access,  (2)  inform  subscribers  that  they  have  the  right  to  request  that  the  premium  channels  be  blocked,  and  (3)  block  the  premium  channel  upon  request.) 

 9s 

 NCTA  White  Paper,  Cable  Industv  Efforts  to  Empower  Television  Viewers:  Choice,  Control,  and  Education,  February  2004;  NCTA  Press  Release,  Cable  Puts  You  in  Control:  Cable  Industry  Launches  Consumer  Education 
 Initiative,  March  2,2004;  NCTA  Press  Release,  ControlYourTV.  Org  Website  Launched  as  Cable  Operators  Commit  to  Offering  Blocking  Technology  at  no  Additional  Charge;  Networks  Reaffirm  Use  of  TV  Ratings,  March  23,  2004; 
 NCTA  Press  Release,  Families  Should  Develop  Media  Plan  to  Take  Control  of  Media  Usage,  April  2,2004. 

 96 

 See  Steve  Donohue,  Cox  Wants  to  Help  Parents  Take  Charge!,  Multichannel  News  Online,  August  26,  2004,  available  at  littr,:~/  w~~.  multichannel.  comiarticleiCA447950.  html?  displav+  Breakin~+  News&  refe~  al+  su~~  (  Cox 
 Communications,  Inc.  launched  a  new  public-  affairs  program  designed  to  help  parents  control  the  content  their  kids  see  on  television  and  the  Internet.). 

 91 
25
 THE  REPORT  25 
 \  , 
 Commenters  generally  state  that  an  a  la  carte  requirement,  for  the  purposes  of  blocking  objectionable  content,  is  unjustified  and  unnecessary  in  light  of  the  Acts  consumer  protection  provisions 

 and  the  advanced  technical  tools  provided  by  MVPDs.  For  example,  Joint  Programmers  argue  that  it  is  unfair  and  inappropriate  to  burden  the  majority  of  program  networks  who  do  not  present  indecent 
 programming,  with  an  overkill  solution  apparently  targeted  at  only  a  handful  of  networks,  especially  when  parents  already  have  the  complete  ability  to  block  any  objectionable  programming  or  networks  at 
 no  cost.  98  Religious  Voices  in  Broadcasting  (  RVB)  states  that  the  flexibility  of  having  access  to  all  cable  channels,  combined  with  the  control  to  limit  access  to  specific  channels  deemed  inappropriate  for 
 certain  household  viewers,  gives  subscribers  the  power  to  regulate  the  indecent  programming  entering  their  homes  without  sacrificing  the  diversity  of  available  pr~  gramming.~~  LeSEA  and  Christian  Television 
 Network  (  CTN)  advocate  content  blocking  technology,  or  simple  refusal  to  watch  television,  as  a  more  effective  means  of  avoiding  undesired  programming  than  a  la  carte.   

 Comcast  states  that  far  more  powerful  and  flexible  tools  are  available  to  customers  who  choose  to  purchase  digital  cable  service.  Comcasts  Parental  Control  feature  on  digital  cable  boxes,  accessed  by 
 remote  control  through  the  menu  of  the  electronic  program  guide,  allows  parents  to  block  what  their  children  can  watch  based  on  various  criteria:  by  channel,  program  title,  TV  or  MPAA  rating,  or  time  of 
 day.  Comcast  asserts  that  parents  can  effectively  create  a  family  tier  by  using  the  favorites  feature  to  select  the  channels  they  want  their  families  to  watch  and  by  using  parental  controls  to  block  the  channels 
 and  programs  they  do  not  want  their  families  to  watch.    Comcast  further  states  that,  starting  in  June  of  this  year,  it  has  made  it  a  condition  of  any  new  carriage  agreement  with  any  program  network  that  the 
 network  provide  ratings  for  all  of  its  programming.  Also  in  June,  Comcast  began  requiring  any  program  network  over  which  it  exercises  management  control  to  either  confirm  that  it  currently  provides  television 
 ratings  information  for  its  programming  or  start  providing  ratings  information.  Io2  DirecTV  states  that  since  it  launched  service  10  years  ago,  it  has  offered  a  free  parental  viewing  locks  and  limits  control 
 feature  on  all  DirecTV  receivers,  enabling  parents  to  restrict  access  to  channels.  This  feature  is  available  on  every  DirecTV  system  receiver  and  is  easily  accessed  via  the  DirecTV  system  remote  control. 
 According  to  DirecTV,  all  of  its  customers  can  avoid  unwanted  networks  quite  easily.  03 
 The  Parents  Television  Council  (  PTC)  complains  that  parents  have  to  pay  for  program  networks  that  they  do  not  want  their  children  to  view  in  order  to  access  program  networks  for  ~hi1dren.  I~ 
 In  response,  Comcast  states  that  neither  economic  logic  nor  market  facts  support  the  view  that  tiers  force  consumers  to  pay  for  programming  they  do  not  want.  lo5  Comcast,  as  well  as  Time  Warner,  assert 
 that  a  la  carte  will  lead  to  higher  prices  for  fewer  program  networks;  thus,  there  are  no  cost  savings  in 
 Joint  Programmers  at  70-  7  1.  98 
 RVB  Comments  at  7.  99 

 loo  LeSEA  and  CTN  Comments  at  8. 
 Comcast  Reply  Comments  at  14.  101 
 IO2  Id.  at  15. 

 DirecTV  Comments  at  2-  3.  103 
 PTC  Comments  at  1.  I04 
 Comcast  Reply  Comments  at  16.  I05 
26
 THE  REPORT  26 
 <  >  return.  06  A&  E  states  that  The  fact  that  the  very  bundling  that  a  la  carte  advocates  rail  against  is  what 

 keeps  per-  channel  prices  low  means  that  unbundling  MVPD  programming  will  require  consumers  to  pay  a  premium  for  avoiding  unwanted  content  that  they  can  block  now  for  fiee.  07  As  a  tool  to  allow 
 subscribers  to  block  objectionable  content  from  reaching  their  homes,  an  a  la  carte  requirement  seems  to  be  a  particularly  blunt  instrument.  Technical  solutions  that  block  unwanted  content  exist  today  at  a  lesser 
 cost  than  a  mandated  a  la  carte  requirement. 
 F.  Feasibility  of  A  La  Carte  and  Themed-  Tiers 
 In  this  section,  the  focus  is  on  the  impediments  to  mandatory  a  la  carte,  as  well  as  the  harms  such  a  requirement  would  likely  impose  on  MVPDs,  as  well  as  program  networks. 

 1.  Alleged  Harms  and  Benefits 
 Studies  and  analyses.  Several  commenters  submitted  economic  analyses  noting  the  harms  and  costs  associated  with  a  la  carte  regulation.  One  such  study  is  provided  by  Booz  Allen  and  Hamilton  on 
 behalf  of  NCTA.    The  highlights  of  the  Booz  Allen  study  are  summarized  below.  The  Bureau  performed  an  independent  analysis  and  critique  of  the  Booz  Allen  study,  the  results  of  which  are  found  in 
 Part  I1  of  the  Economic  Appendix. 
 Booz  Allen  Hamilton  examined  three  prototypical  scenarios:  (1)  a  pure  a  la  carte  approach  under  which  all  networks  currently  available  on  basic  and  expanded  basic  tiers  were  available  only  on  a 
 per-  channel,  a  la  carte  basis;  (2)  an  optional  (  voluntary)  a  la  carte  approach,  under  which  networks  could  continue  to  be  packaged  and  offered  on  their  current  tiered  basis,  but  would  also  be  available  on  an 
 a  la  carte  basis  to  those  customers  who  wanted  to  purchase  fewer  than  all  tiered  networks;  and  (3)  a  themed  tier  approach  under  which  cable  operators  were  required  to  offer  one  or  more  smaller  packages  of 
 programming  based  on  content,  in  addition  to  the  more  inclusive  currently  available  basic  and  expanded  basic  tiers. 

 According  to  NCTA,  Booz  Allen  confirmed  that  [  ulnder  each  of  the  scenarios  evaluated,  consumers  would  be  worse  off  than  today.  Consumers  would  either  pay  more  than  today  for  far  fewer 
 channels,  or  would  need  to  select  as  few  as  six  channels  to  reduce  their  monthly  bill  below  current  levels.  NCTA  states  that  the  Booz  Allen  study  also  shows  that  because  of  the  costs  associated  with 
 offering  an  a  la  carte  or  themed  tier  option,  even  those  cable  customers  who  chose  to  continue  to  purchase  the  existing  tiers  would  have  to  pay  significantly  more  than  they  do  today.  Io9 

 NCTA  also  states  that  the  Booz  Allen  study  projects  that  the  number,  quality  and  diversity  of  program  networks  would  all  be  severely  diminished  under  a  la  carte.  According  to  NCTA,  Booz  Allen 
 concludes  that  [  als  many  as  half  to  three-  quarters  of  emerging  networks  could  fail  under  each  of  the  scenarios,  including  a  growing  number  of  targeted  niche  and  ethnic  programming  networks,  and  new 
 network  launches  would  become  extremely  unlikely.  Furthermore,  even  the  most  established  networks  would  likely  have  to  reduce  their  expenditures  on  programming,  leading  to  lower  viewing  and  lost 

 Id.  at  17;  Time  Warner  Reply  Comments  at  6  .  I06 
 lo  A&  E  Reply  Comments  at  20. 

 IO8  NCTA  Comments,  passim.  See  Appendix  D,  for  a  complete  list  of  studies  submitted  by  commenters. 
 NCTA  Comments  at  1  1.  I09 
27
 THE  REPORT  27 
 advertising."  In  the  end,  this  would  not  only  diminish  the  number  of  available  program  networks  but  also  "would  likely  lead  to  further  industry  consolidation  into  fewer  network  group^.""^ 
 Disney  asserts  that  because  a  la  carte  would  decrease  revenues  and  add  increased  costs,  the  retail  price  for  individual  a  la  carte  channels  would  be  very  high.  The  reality  that  even  a  few  a  la  carte  channels 
 would  cost  the  customer  as  much  or  more  than  the  expanded  basic  bundle,  would  create  a  backlash  against  programmers,  MVPDs,  and  the  government.  According  to  Disney,  the  result  would  be  inevitable 
 pressure  on  the  government  to  intervene  even  further  in  the  form  of  attempted  price  controls."  ' 
 2.  Implementation 
 a.  Structural  Impediments 
 Technical.  The  PN  asked  whether  an  addressable  set  top  box  would  be  required  for  every  television  set  on  which  a  subscriber  views  programming  offered  on  an  a  la  carte  or  themed-  tier  basis.  The 
 PN  specifically  inquired  whether  an  addressable  set  top  box  would  be  required  for  every  television  set  on  which  a  consumer  might  wish  to  view  digital  programming.  The  PN  sought  comment  on  whether  a  la 
 carte  or  themed-  tier  services  can  only  be  offered  on  a  digital  basis.  It  also  sought  comment  on  the  number  of  television  sets  that  are  not  currently  connected  to  addressable  set  top  boxes  and  the  costs  to  consumers 
 of  buying  or  leasing  these  boxes.  The  PN  sought  comment  on  the  percentage  of  cable  and  satellite  distributors  that  offer  digital  programming  to  their  subscribers  as  well  as  how  many  consumers  currently 
 subscribe  to  digital  programming  packages."*  There  appear  to  be  several  technical  obstacles  preventing  cable  operators  from  offering  all  programming  on  an  a  la  carte  basis,  especially  since  virtually  all 
 operators  still  offer  program  networks  in  an  analog  format. 
 According  to  Insight,  a  mandatory  a  la  carte  requirement  that  affects  the  expanded  basic  tier  would  force  it  to  select  one  of  the  following  four  costly  options  to  enable  the  delivery  of  a  customized 
 mix  of  program  networks  to  each  subscriber:  (1)  use  a  series  of  customized  traps  capable  of  blocking  each  of  the  channels  on  the  analog  expanded  basic  tier;  (2)  deploy  hybrid  set-  top  boxes  to  each  subscriber  that 
 can  descramble  both  analog  and  digital  channels;  (3)  simulcast  all  of  the  basic  and  expanded  basic  channels  in  analog  and  digital  format;  or  (4)  convert  to  an  all-  digital  ~latform."~ 

 As  for  the  first  option,  Insight  states  that  traps  have  significant  technical  limitations.  For  example,  it  is  difficult  to  restrict  the  impact  of  traps  to  just  one  channel  because  of  the  rudimentary  nature 
 of  the  technology.  According  to  Insight,  it  is  not  uncommon,  particularly  as  traps  age,  for  the  lower  adjacent  channel's  audio  signal  to  be  attenuated,  causing  problems  with  stereo  reception,  or  in  more 
 severe  cases,  monaural  audio  reception.  Depending  on  where  particular  channels  are  located  and  which  particular  channels  are  selected  by  an  a  la  carte  customer,  Insight  asserts  that  it  may  be  impossible  to 
 adequately  deliver  selective  individual  channels  when  those  channels  are  interlaced  with  unwanted  channels  on  the  system's  channel  line~  p."~  Second,  there  is  a  physical  and  technological  limit  on  the 
 number  of  traps  that  can  be  used  in  any  given  situation.  Insight  states,  for  example,  that  attaching  more 
 Id. 
 Disney  Comments  at  27  I  l  l 
 PN,  19  FCC  Rcd  at  9293. 
 Insight  Comments  at  5  .  I  I3 
 Id.  at  6.  1  I4 
28
 THE  REPORT  28 
 <  >  than  four  or  five  traps  on  a  single  aerial  installation  can  cause  safety,  mechanical  and  electrical  problems, 

 including  signal  leakage  issues.  Third,  the  use  of  traps  raises  unacceptable  signal  quality  issues.  Fourth,  the  customer  service  and  installation  costs  involved  with  the  trap  approach  would  be  enormous.  Finally, 
 the  widespread  use  of  traps  is  unacceptable  because  it  is  perhaps  the  least  effective  signal  security  te~  hnique.~  Moreover,  trapping  cannot  be  done  from  the  headend,  but  rather  requires  a  visit  by  a 
 technician  to  the  customers  premises.  According  to  Smaller  Operators,  implementation  of  changes  in  a  subscribers  selection  of  a  la  carte  programming  through  traps  would  require  technicians  to  make  repeated 
 truck  rolls  to  the  customer 
 Blonder  Tongue  suggests  that  traps  are  not  necessary  to  provide  subscribers  access  to  channels  on  an  individualized  basis;  rather,  cable  operators  may  use  an  interdiction  device  (  addressable  tap)  that  is 
 placed  on  the  cable  plant  outside  a  customers  home.  Here,  a  signal  is  sent  over  the  cable  system  with  instructions  to  block  a  particular  program  service  so  that  it  does  not  enter  the  customers  home.   
 Recognizing  that  most  addressable  taps  are  only  capable  of  controlling  access  to  a  limited  group  of  channels  at  a  time,  Blonder  Tongue  states  that  it  has  a  product,  known  as  the  TV  Channel  Blocker 
 (  TVCB),  which  can  control  up  to  80  individual  channels  without  adjacent  channel  degradation.    Comcast  asserts  that  these  types  of  interdiction  devices  are  expensive,  require  cable  operators  to  send  a 
 cable  technician  to  every  home  for  installation,  can  create  a  theft  of  service  risk,  and  may  not  have  the  capacity  to  handle  the  dozens  of  analog  channels  delivered  by  cable  systems  today.   

 The  second  alternative  to  offer  expanded  basic  channels  on  an  a  la  carte  basis  would  be  to  deploy  hybrid  analog  and  digital  addressable  set-  top  boxes  that  allow  a  la  carte  customers  the  ability  to  receive 
 only  those  specific  analog  expanded  basic  channels  they  have  selected,  while  at  the  same  time  allowing  them  to  continue  to  have  the  ability  to  receive  digital  services.  This  would  require  all  expanded  basic 
 channels  to  be  encrypted,  and  the  use  of  set-  top  boxes  with  analog  descrambling  technology  to  deliver  only  those  specific  analog  channels  requested  by  a  particular  subscriber.  Insight  comments,  however,  that 

 Id.  at  7-  10.  Traps  can  easily  be  tampered  with  by  those  trying  to  steal  cable  services.  Widespread  deployment  of  traps  would  exacerbate  existing  theft  of  service  incidences  and  make  it  even  more  challenging  for  cable  operators  to 
 prevent  such  activity. 

 1  I5 

 Smaller  Operators  Comments  at  6. 
 Interdiction  is  a  technique  cable  operators  use  to  block  access  to  a  channel  by  altering  the  horizontal  sync  pulses  in  the  video  signal  to  make  the  picture  unwatchable.  In  order  to  view  the  picture,  instructions  are  needed  on  how 
 to  reverse  the  alteration  of  the  sync  pulses.  Systems  using  addressable  taps  typically  send  their  signals  in  the  clear;  the  signals  that  are  not  paid  for  are  scrambled  as  they  pass  through  the  tap  (the  electronic  circuitry  in  the  tap 
 performs  interdiction  on  those  signals),  while  the  signals  that  are  paid  for  are  allowed  to  pass  through  the  tap.  These  taps  are  addressable  and  can  be  controlled  at  the  headend,  thus  eliminating  the  need  to  dispatch  a  technician  for  any 
 programming  changes.  Like  traps,  interdiction  devices  eliminate  the  need  for  set-  top  boxes  as  the  signals  are  controlled  before  entering  the  house.  However,  each  TV,  VCR,  and  similar  device  in  the  home  will  receive  the 
 same  channel  line-  up. 

 I  I6 
 1  I7 

 The  TVCB,  like  other  addressable  taps,  must  be  installed  throughout  the  cable  plant  and  at  the  customers  premises.  A  control  system  and  software  must  be  installed  to  allow  the  operator  to  remotely  control  the  functions  of 
 all  the  addressable  taps  in  the  system.  There  must  be  an  interface  to  link  the  billing  system  with  the  control  system.  The  addressable  taps  are  active  devices,  meaning  that  they  need  power  to  operate,  so  additional  power  would  need  to 
 be  supplied  on  the  coaxial  cable  for  the  taps  to  function.  Interdiction  devices  are  only  viable  for  analog  deployments  as  they  take  advantage  of  the  analog  components  of  a  video  signal  (the  alteration  of  the  sync  pulse).  The  TVCB  can 
 only  block  6  MHz  analog  channels;  it  is  not  capable  of  blocking  out  an  individual  digital  stream. 

 118 

 Comcast  Reply  Comments  at  25.  I  I9 
29
 29  THE  REPORT 
 <  >  because  analog  descrambling  technology  is  becoming  obsolete  and  security  is  readily  compromised,  set- 

 top  boxes  with  analog  descrambling  technology  of  any  sort  are  no  longer  manufactured  by,  or  available  from,  major  set-  top  box  manufacturers.  According  to  Insight,  the  most  important  component,  the 
 integrated  circuit  devices  used  to  segregate  and  descramble  analog  signals,  have  been  discontinued  by  all  major  suppliers.  Thus,  the  deployment  of  this  approach  would  require  further  design,  investment  and 
 manufacturing  commitments  in  an  obsolete  technology.  Insight  states  that  even  if  such  boxes  were  readily  available,  the  cost  to  install  them  would  also  be  prohibitive  as  each  customer  ordering  a  la  carte 
 service  would  require  both  a  box  on  each  television  set  within  its  residence  and  an  installation  truck  roll  by  a  service  technician  each  time  a  television  set  and  set-  top  box  is  connected  to  the  system.  '*  '  Smaller 
 Operators  state  that  hybrid  addressable  boxes  similarly  would  not  work  as  a  means  of  implementing  a  la  carte  or  themed  tier  service  offerings  because  cable  operators  would  need  to  scramble  all  networks  in 
 order  to  implement  such  programming  options.  I2' 
 The  third  approach  described  by  Insight  would  be  to  allow  non-  a  la  carte  Customers  the  option  to  continue  to  receive  analog  only  basic  and  expanded  basic  service  tiers,  while  at  the  same  time 
 implementing  a  digital  simulcast  of  those  same  signals,  allowing  customers  to  elect  to  receive  expanded  basic  program  services  digitally  on  an  a  la  carte  basis  so  that  those  customers  who  choose  a  la  carte  would 
 have  to  subscribe  to  the  digital  tier.  Every  customer  electing  a  la  carte  would  then  need  a  digital  addressable  set-  top  box  for  every  television  in  his  or  her  home.  The  set-  top  box  costs  associated  with 
 such  a  solution  would  ultimately  depend  on  the  number  of  customers  electing  to  receive  their  services  a  la  carte,  but  would  cost  Insight  a  minimum  of  $200  per  box,  and  would  result  in  an  increase  in  the 
 subscriber's  bill  of  approximately  $8  per  month,  per  box  --  and  about  $13  per  month  for  boxes  with  high  definition  and  digital  video  recorder  capabilities.  Additionally,  Insight  states  that  band  pass  traps  would 
 need  to  be  installed  to  block  out  the  analog  expanded  basic  tier  channels  for  customers  subscribing  to  a  la  carte  services.  122 

 Insight  asserts  that  a  simulcast  approach  would  also  constitute  a  massive  waste  of  bandwidth,  limiting  a  cable  operator's  ability  to  offer  innovative  non-  basic  services.  In  order  to  duplicate  the  analog 
 basic  tier  on  a  digital  tier,  it  would  have  to  allocate  additional  spectrum  on  each  of  its  systems.  Insight  generally  uses  this  spectrum  for  other  services  including  digital  programming,  HDTV,  video-  on-  demand, 
 high-  speed  cable  Internet,  circuit-  switched  telephony,  and  is  actively  exploring  future  uses,  such  as 
 I2O  Insight  Comments  at  1  1  . 
 12'  Smaller  Operators  Comments  at  6. 

 "*  Insight  Comments  at  14.  Notwithstanding  its  investment  of  approximately  $420  million  to  upgrade  its  network  to  enable  its  cable  systems  to  offer  a  wide  range  of  digital  services,  Insight  states  that  all  of  its  systems  still  currently 
 deliver  the  basic  and  expanded  basic  tier  channels  via  analog  transmission.  For  many  reasons,  including  the  desire  not  to  have  to  use  any  set-  top  equipment  or  buy  a  digital  cable-  ready  TV  set,  the  remainder  of  Insight's  subscribers 
 continue  to  choose  to  take  only  analog  basic  and/  or  enhanced  basic  service.  Only  about  33.5  percent  of  Insight's  customers  have  chosen  to  take  digital  services  at  this  time  and  Insight's  marketing  research  indicates  that  a  sizable 
 proportion  of  its  customers  will  continue  to  choose  the  analog  lower  cost  option.  Insight  remarks  that  the  upside  of  this  approach  is  that  it  best  respects  the  interests  of  these  subscribers,  as  analog  basic  tier  channels  would  remain 
 unchanged  on  the  system  in  order  to  continue  to  serve  those  non-  a  la  carte  customers  who  do  not  want  a  set-  top  box.  Id.  at  16. 
30
 THE  REPORT  30 
 VOIF.  *~  Insight  believes  it  would  be  an  enormous  waste  to  delay  or  reverse  deployment  of  such  services  in  order  to  duplicate  analog  programming  that  consumers  can  already  receive.  24 

 The  fourth  technical  approach  would  involve  the  conversion  of  all  analog  services  carried  on  the  basic  and  expanded  basic  tiers  to  digital  for  transmission  to  all  customers.  This  would  require  all 
 customers  to  obtain  and  install  new  addressable  digital  set-  top  boxes  on  every  set  connected  to  cable  in  each  subscribers  home.  Insight  comments  that  those  customers  who  receive  the  entire  expanded  basic 
 package  in  analog  today,  without  a  set-  top  box,  would  require  a  digital  set-  top  box  on  each  set  in  their  homes  just  to  continue  receiving  the  same  services,  even  if  they  have  no  desire  to  order  any  such  channels 
 on  an  a  la  carte  basis.  *    Disney  argues  that  all  of  the  harms  associated  with  mandatory  a  la  carte,  such  as  the  need  for  set  top  boxes,  would  be  the  same  for  mandatory  themed  tiers.  26 

 Charter  admits  that  a  digital-  only  operation  would  provide  potential  benefits  other  than  simply  accommodating  an  a  la  carte  regime.  Nevertheless,  Charter  notes  that  it  is  in  the  early  stages  of  an  all- 
 digital  roll-  out  in  one  of  its  systems  (Long  Beach,  CA),  and  expresses  concern  that  federal  intervention  might  complicate,  rather  than  facilitate,  the  migration  to  digital.  Even  in  Long  Beach,  where  Charter  is 
 now  digitally  simulcasting  its  analog  services,  it  is  not  yet  prepared  to  terminate  analog  service  and  require  universal  set-  top  box  deployment.]*   

 With  regard  to  competition  from  satellite  carriers,  Charter  states  that  DBS,  which  already  relies  on  a  digital  platform  and  set-  top  boxes,  could  technically  accommodate  an  a  la  carte  mandate  much  more 
 easily  than  could  the  cable  industry.  Charter  and  others  urge  that  the  government  not  unilaterally  favor  one  MVPD  over  another.  *   

 In  order  to  accommodate  a  la  carte  using  any  method  requiring  addressable  set-  top  boxes,  Comcast  states  that  cable  systems  would  also  need  to  upgrade  the  processing  power  of  the  Digital  Access 
 Control  (  DAC)  in  their  headend.  The  DAC  is  a  cable  systems  main  processor  that  handles  the  communications  between  the  order-  taking  system,  the  billing  system,  and  a  customers  set-  top  box. 
 Because  a  la  carte  would  present  exponentially  more  purchase  options  and  require  a  three-  to  four-  fold  increase  in  the  number  of  set-  top  boxes  deployed  in  customers  homes  than  in  todays  tiered  environment, 
 the  processing  power  of  the  DAC  would  need  to  be  much  greater  than  is  typical  of  DACs  in  most  cable  systems  today.  29  Not  only  would  the  DAC  need  to  be  upgraded  to  accommodate  the  expanded  purchase 
 options  available  under  a  la  carte,  and  the  additional  set-  top  boxes  deployed,  but  Comcast  asserts  that  its  system  architecture  would  have  to  be  expanded  to  allow  VOD  service  to  be  provided  to  the  additional 

 According  to  Insight,  in  a  typical  system  with  45  analog  expanded  basic  channels,  using  12:  l  digital  compression,  at  least  an  additional  24  MHz  would  have  to  be  reallocated  for  digital  duplication  of  analog  signals, 
 and  thus  would  become  unavailable  for  advanced  broadband  services.  Id. 

 I23 

 Id. 
 Id.  at  12;  NCTA  Reply  Comments  at  18. 
 Disney  Comments  at  25-  26. 
 See  Charter  Comments  at  11  (The  results  of  the  Long  Beach  trial,  which  is  only  one  of  more  than  700  systems, 

 I26 
 127 
 will  not  be  known  for  some  time). 

 I*    Id.  at  16;  Smaller  Operators  Comments  at  3. 

 29  Comcast  Comments  at  38. 
31
 THE  REPORT  31 
 boxes.  Changes  to  the  cable  plant  would  include  substantial  increases  to  the  server  capacity,  headend  processing  equipment,  data  transport,  and  node  deployment  to  ensure  that  the  VOD  service  would 
 continue  to  operate.  Comcast  estimates  that  the  cost  of  upgrading  the  DAC  for  a  la  carte  and  protecting  the  integrity  of  its  VOD  offerings  could  be  approximately  $7-$  8  million  in  its  D.  C.,  Northern  Virginia, 
 and  Maryland  region  systems  a10ne.  I~   
 Past  Practices.  The  National  Association  of  Telecommunications  Officers  and  Advisors  (  NATOA)  suggests  that  the  cable  industry  claims  that  a  la  carte  is  not  practical,  is  at  odds  with  the 
 previous  history  of  cable  operators  attempts  to  use  a  la  carte  to  avoid  rate  regulation  in  the  early  1990~.  ~    NATOA  adds  that  since  the  deregulation  of  the  CPST  in  1999,  there  have  also  been  no  regulatory  barriers 
 to  a  cable  operators  ability  to  offer  such  choices  to  subscribers.  NCTA  disputes  NATOAs  argument,  explaining  that  most  of  these  systems  made  only  a  small  number  of  their  expanded  basic  tiered  services 
 available  on  a  per-  channel  basis,  so  that  they  were  able  to  use  physical  traps  to  make  them  available  in  the  same  a  la  carte  manner  as  premium  movie  ~hanne1s.  l~~  Those  systems  that  offered  most  or  all  of  their 
 tiered  services  available  on  an  a  la  carte  basis  typically  used  interdiction.  The  alternative  to  interdiction  was  to  use  addressable  analog  set-  top  boxes.  But  that  approach,  unlike  interdiction,  would  have  required 
 that  all  analog  channels  be  scrambled,  and  that  all  cable  customers,  even  those  with  cable-  ready  sets  who  purchased  no  premium  movie  channels,  use  a  set-  top  box  to  unscramble  and  receive  their 
 programming.  According  to  NCTA,  neither  approach  was  particularly  widespread  because  it  made  little  economic  sense  for  anyone  to  purchase  services  at  the  a  la  carte  prices  at  which  they  were  available. 
 NCTA  states  that  tiered  and  packaged  services  were  offered  a  la  carte  because  this  exempted  the  packages  and  tiers  from  the  Commissions  rate  regulation  rules,  not  because  a  la  carte  was  viewed  as  an  optimal  or 
 desirable  way  to  meet  the  marketplace  demands  of  cable  cu~  tomers.  ~~ 
 b.  Operational  Impediments 
 Cable  operators  and  satellite  carriers  indicate  that  an  a  la  carte  requirement  would  not  only  be  technically  challenging,  but  would  also  entail  substantial  marketing,  billing,  and  other  operational 
 expenses  that  would  drive  up  consumer  Comcast  states  that  the  conversion  to  a  la  carte  would  be  so  massive  and  complex  that  it  would  effectively  occupy  the  full  attention  of  virtually  all  of  a  cable 
 systems  management,  technical,  and  customer  service  personnel  for  an  extended  period  of  time.  As  a  result,  the  roll  out  of  advanced  new  services  that  consumers  highly  value  would  be  delayed,  and  the 
 length  of  the  delay  could  be  ~ignificant.  ~~  By  way  of  comparison,  the  conversion  from  analog  to  digital  took  18-  36  months  in  Comcasts  cable  systems.  A  similar  delay  could  be  expected  with  a  conversion 
 from  the  current  tiered  model  to  an  a  la  carte  model.  Comcast  states  that  such  a  delay  is  plainly  at  odds 
 I3O  Id.  at  39. 
 NATOA  Comments  at  3.  See  supra. 
 NCTA  Reply  Comments  at  19-  20. 
 Id. 

 131 
 132 

 See,  e.  g.,  DirecTV  Comments  at  5-  8;  Smaller  Operators  Comments  at  5-  10;  Insight  Comments  at  4-  22;  NCTA  I34  Comments  at  27-  28;  and  Time  Warner  Comments  at  8-  9. 
 Comcast  Comments  at  40. 
32
 THE  REPORT  32 
 with  the  Commissions  policy  of  promoting  the  digital  transition  and  the  deployment  of  advanced  new  services.  136 

 Insight  asserts  that  an  a  la  carte  approach  would  also  create  insurmountable  impediments  to  the  establishment  of  convenient  and  readily  marketable  price  points.  According  to  Insight,  DBS  enjoys  a 
 significant  marketing  advantage  over  cable  operators  in  that  DBS  can  establish  uniform,  nationwide  package  prices,  thereby  enabling  ubiquitous  marketing  through  a  variety  of  broadcast,  print  and  other 
 media  with  national  distribution.  Insight  states  that  an  a  la  carte  approach  could  conceivably  require  separate  retail  prices  for  each  channel  offered,  thereby  thwarting  any  nationwide  advertising  campaign 
 featuring  prices.  According  to  Insight,  local  marketing  efforts  would  be  similarly  constrained,  given  the  inherent  difficulties  in  effectively  establishing  a  public  awareness  of  the  hundreds  of  separate  price  points 
 that  might  be  necessitated  by  a  la  carte  offering^.  '^  ' 
 Before  actually  offering  an  a  la  carte  service,  DirecTV  states  it  would  have  to  develop  a  potentially  complicated  and  confusing  set  of  rules  for  administering  the  service.  DirecTV  states  that  it 
 currently  subsidizes  set-  top  boxes  in  order  to  attract  new  subscribers,  and  recoups  some  of  that  revenue  through  the  sale  of  programming.  It  states  it  would  need  to  calibrate  equipment  subsidies  with  the  choice 
 of  programming  by,  for  example,  offering  different  levels  of  subsidies  depending  on  the  value  of  programming  chosen  by  an  a  la  carte  subscriber.  This  would  greatly  complicate,  if  not  preclude,  national 
 advertising  of  rates  and  special  offers  for  DirecTVs  services.  38 
 Charter  asserts  that  an  a  la  carte  regime  ultimately  would  disappoint  cons~  mers.  ~~  It  states  that  the  typical  cable  customer  likely  would  see  an  overall  rate  increase,  and  the  potential  for  savings  is  quite 
 small.  Confronted  with  that  disappointing  result,  Charter  believes  these  consumers  will  call  for  new  regulatory  restrictions  on  package  discounting,  so  as  to  make  the  a  la  carte  exercise  more  meaningful.  It 
 states  that  consumers  interested  in  aggressively  pursuing  an  a  la  carte  option  are  likely  to  protest  against  any  restraints  on  its  exercise.  According  to  Charter,  the  Commissions  rate  regulation  rules,  for  example, 
 allow  cable  operators  to  establish  a  higher  charge  for  [subscription]  changes  .  .  .for  a  subscriber  changing  service  tiers  more  than  two  times  in  a  twelve  month  period  ...  I4  Although  this  regulation  has  sparked 
 little  controversy  to  date,  Charter  believes  that  it  surely  would  aggravate  consumers  otherwise  being  encouraged  to  exercise  the  a  la  carte  option.  They  are  likely  to  call  for  a  prohibition  on  penalty  charges 
 for  frequent  service  changes.  In  the  end,  a  host  of  new  regulations  might  be  crafted,  yet  they  probably  would  leave  most  consumers  less  satisfied  than  they  are  today. 

 C.  Conceptual  Impediments 
 The  issue  of  mandatory  themed  tiers  was  raised  for  comment  throughout  the  PN.  I4l  Under  this  scenario,  similar  services  would  be  required  to  be  sold  together  for  the  subscribers  convenience.  Some 
 examples  of  this  approach  include  family  tiers,  sports  tiers,  and  foreign  language  tiers.  The  Sports 
 36  Id 
 13  Insight  Comments  at  19. 
 DirecTV  Comments  at  8.  138 
 Charter  Comments  at  14-  15.  139 
 14  47  C.  F.  R.  9  76.980(  d). 
 1  4    See  19  FCC  Rcd  at  9291-  9294. 
33
 THE  REPORT  33 
 .  /  Leagues'  comments  exemplify  the  difficulties  in  establishing  themed  tiers.  They  state  that  sports  programming  is  programming  that  can  be  viewed  by  the  entire  family,  and  would  fit  well  within  a  "family 

 tier."  The  inclusion  or  exclusion  of  sports  programming  networks  from  a  "family  tier"  would  raise  important  questions  about  exactly  how  a  "family  tier''  should  be  defined.  Similarly,  there  is  a  substantial 
 question  over  what  would  be  included  in  a  "sports  tier."  Many  of  the  Professional  and  Collegiate  Sports  make  their  programming  available  on  general  entertainment  networks  such  as  TBS,  TNT  and  FX.  In  fact, 
 as  many  or  more  Major  League  Baseball  game  telecasts  are  available  to  consumers  on  general  entertainment  services  such  as  Superstation  WGN  and  TBS  than  are  typically  available  on  a  regional 
 sports  network.  Indeed,  an  even  more  fundamental  question  is  raised  about  who  would  define  such  tiers  -  either  Congress  by  law,  the  Commission  by  regulation,  or  the  MVPDs  them~  elves.  '~~ 

 d.  Legal  Impediments 
 This  section  examines  constitutional  precedent  and  statutory  prohibitions  that  may  prevent  the  implementation  of  an  a  la  carte  requirement. 

 First  Amendment.  The  Supreme  Court  has  held  that  cable  operators  are  speakers  protected  by  the  free  speech  and  press  provisions  of  the  First  Amendment  to  the  Con~  titution.  '~~  Cable  operators  invoke 
 their  First  Amendment  rights  by  exercising  editorial  discretion  over  their  programming  choices  for  their  cable  systems.  '44  In  determining  the  appropriate  level  of  First  Amendment  scrutiny  that  a  court  would  use 
 in  reviewing  any  regulation,  the  first  determination  is  whether  the  restriction  on  speech  is  content-  based  or  content-  neutral.  Content-  based  regulations  are  subject  to  strict  scrutiny  and  are  presumptively  invalid. 
 A  content-  based  regulation  can  survive  First  Amendment  scrutiny  only  if  it:  (1)  promotes  a  compelling  government  interest  and  (2)  employs  the  least  restrictive  means  to  further  that  interest.  145 

 Content-  neutral  regulations  that  impose  an  incidental  burden  on  speech  are  subject  to  intermediate  scrutiny  and  can  survive  a  First  Amendment  challenge  only  if:  (1  )  the  regulation  serves  an 
 important  or  substantial  government  interest,  (2)  the  interest  is  not  related  to  the  suppression  of  free  expression,  and  (3)  the  regulation  does  not  substantially  burden  more  speech  than  is  necessary  to  further 
 the  government's  legitimate  interest.  '46  A  regulation  affecting  speech  is  considered  content-  neutral  if  it  does  not  favor  any  one  idea,  viewpoint,  or  message.  14'  Content  neutral  regulations  need  not  be  the  least 
 restrictive  means  to  advance  the  government's  interest.  In  other  words,  a  content-  neutral  regulation  is  not  invalid  under  the  First  Amendment  simply  because  there  is  some  imaginable  alternative  that  might  be  less 
 burdensome  on  speech.  For  purposes  of  intermediate  scrutiny,  the  government  must  do  more  than  simply 
 14'  Sports  Leagues  Comments  at  12-  13. 
 '43  "Congress  shall  make  no  law  respecting  an  establishment  of  religion,  or  prohibiting  the  free  exercise  thereof;  or 
 abridging  the  freedom  of  speech,  or  of  the  press;  or  the  right  of  the  people  peaceably  to  assemble,  and  to  petition  the  Government  for  a  redress  of  grievances."  U.  S.  C.  A.  Const.  Amend.  1. 

 See  Turner  I  ,  512  US.  622,  636  (1994),  citing,  Leather  v.  Medlock,  499  U.  S.  439,  444  (1991);  Los  Angeles  v.  I44  Preferred  Communications,  Inc.,  476  U.  S.  488,494  (1986). 
 See,  e.  g.,  Sable  Communications  v.  FCC,  492  U.  S.  115,  126  (1989). 
 See  United  States  v.  O'Brien,  391  U.  S.  367,  377  (1968). 

 145 
 I46 

 14'  See  Wardv.  Rock  Against  Racism,  491  U.  S.  781,  791  (1989);  R.  A.  V.  v.  St.  Paul,  505  U.  S.  377,  382-  83  (1992). 
34
 THE  REPORT  34 
 <  >  posit  existence  of  the  disease  sought  to  be  cured,  it  must  demonstrate  that  recited  harms  are  real,  not 

 merely  conjectural,  and  that  regulation  will  in  fact  alleviate  these  harms  in  a  direct  and  material  way.  48 
 A  less  heightened  level  of  scrutiny,  rational  basis,  may  apply  if:  (1)  the  law  or  regulation  is  of  general  applicability,  such  as  an  antitrust  law;  49  or  (2)  the  underlying  medium  used  to  transmit  the  speech 
 that  is  affected  by  the  law  or  regulation  is  subject  to  certain  physical  limitations  similar  to  the  broadcasting  spectrum,  and  the  regulation  serves  to  enhance  or  promote  and  not  restrict  the  freedom  of 
 speech.  50  Rational  basis  scrutiny  requires  that  the  law  or  regulation  be  reasonably  related  to  the  goal  or  purpose  that  it  is  designed  to  further  or  achieve.   

 Turner  argues  that  a  government-  imposed  a  la  carte  requirement  would  infringe  upon  its  First  Amendment  rights.  It  states  that  such  a  requirement  would  interfere  with  its  right  to  reach  its  audience  in 
 the  manner  in  which  it  would  choose  to  do  so.  Turner  also  argues  that  a  government-  mandated  a  la  carte  directive  would  impinge  upon  cable  operators  and  other  MVPDs  editorial  discretion  in  packaging 
 programming;  and  it  would  be  akin  to  a  government  directive  that  USA  Today  must  sell  its  News,  Sports,  Life,  and  Business  sections  ~eparate1y.  l~  Courtroom  Television  argues  that  mandatory  a  la  carte 
 inherently  implicates  First  Amendment  issues  because  liberty  of  circulation  is  constitutionally  pr0te~  ted.  I~~  Regulatory  measures  that  would  undermine  programmers  contractual  guarantees  to  reach 
 as  many  subscribers  as  possible  would  be  particularly  problematic  because  without  the  circulation,  the  publication  would  be  of  little  value.  54  It  states  that  such  constitutional  concerns  are  not  lessened  by  the 
 fact  that  the  restrictions  primarily  affect  the  profitability  of  network  di~  tribution.  ~~ 
 Several  commenters  believe  that  a  la  carte  regulation  is  akin  to  content-  based  regulation  and,  therefore,  subject  to  strict  scrutiny.  Joint  Programmers  argue  that  laws  or  regulations  that  attempt  to  re- 
 shape  the  distribution  of  niche  programming  would  have  an  enormous  impact  on  the  content  and  format  of  the  programming  itself.  They  state  that  the  issues  raised  by  Congress  and  the  Commission  entail  far 
 more  than  advertising  revenue  and  license  fees  because  the  economic  and  creative  elements  of  television 
 Turner  I  ,  512  U.  S.  at  664,  citing  Quincy,  768  F.  2d  at  1455;  Edenfield  v.  Fane,  507  U.  S.  761,770-  71  (1993).  I48 
 149  See  Turnerl,  512  U.  S.  at  640-  41,  citing  Cohen  v.  Cowles  Media  Co.,  501  U.  S.  663,  670  (1991). 

 See  id.,  512  U.  S.  at  637-  40,  citing  Red  Lion  Broadcasting  Co.  v.  FCC,  395  U.  S.  367,  388  (1969)  (subjecting  regulation  imposed  on  broadcasters  to  rational  basis  scrutiny  in  order  to  allow  competing  speakers  to  be  heard 
 (signal  interference)  and  because  of  the  limited  amount  of  spectrum  available  for  broadcasting  (spectrum  scarcity)).  One  court  has  extended  the  Red  Lion  rationale  to  DBS,  while  another  has  declined  to  extend  this  lower  level  of  First 
 Amendment  scrutiny  to  the  satellite  industry.  Compare  Time  Warner  Entertainment  Co,  L.  P.  v.  FCC,  93  F.  3d  957,  973-  977  (D.  C.  Cir.  1996)  (concluding  that  DBS  technology  is  subject  to  similar  physical  limitations  as  broadcast 
 technology  and  therefore  should  be  subject  to  the  same  rational  basis  level  of  scrutiny  as  has  been  applied  to  the  traditional  broadcast  media);  with  SBCA,  275  F.  3d  at  357  (concluding  that  intermediate  scrutiny  should  apply  in  the 
 context  of  determining  the  constitutionality  of  Section  338  of  the  Act). 

 IS0 

 See,  e.  g.,  Glickman  v.  Wileman  Brothers  &  Elliott,  Inc.,  521  U.  S.  457,  496  (1997);  Williamson  v.  Lee  Optical  IS1  Co.,  348  U.  S.  483  (1955);  Railway  Express  Agency,  Inc.  v.  New  York,  336  U.  S.  106  (1949). 
 15  Turner  Comments  at  9-  10. 
 Courtroom  Television  Comments  at  35-  36,  citing  Rossignol  v.  Voorhaar,  316  F.  3d  516,  522  (4  ~  Cir.  2003).  153 
 I  s  4  Id.,  citing  Love11  v.  Grfin,  303  U.  S.  444,  452  (1938). 

 Id.,  citing  City  of  Lakewood  v.  Plain  Dealer  Publishing  Co.,  486  U.  S.  750,  756  n.  5  (1986).  I55 
35
 THE  REPORT  35 
 .  /  programming  cannot  be  separated.  Is6  Courtroom  Television  asserts  that  advocacy  groups  interested  in  restricting  programming  they  find  objectionable,  like  Parents  Television  Council,  have  lobbied  the 

 Commission  and  Congress  for  measures  to  promote  consumer  purchases  of  video  programming  on  an  a  la  carte  basis,  mainly  to  control  content.   

 In  particular,  commenters  have  directed  their  strict  scrutiny  attack  on  mandatory  themed  tiers.  Viacom  argues  that  government  action  that  would  require  programming  to  be  packaged  to  consumers 
 based  on  its  program  content  and  themes  would  be  manifestly  content-  based.    Such  regulations  either  would  impose  upon  MVPDs  and  programmers  governmentally-  predetermined  conclusions  about  what 
 programming  does  or  does  not  fit  under  specific,  and  potentially  highly  subjective,  content-  based  categories-  such  as  family  friendly--  or  would  force  private  entities  to  make  such  judgments.  Viacom 
 states  that  in  either  case,  the  restrictions  automatically  would  be  defined  by  the  content  of  the  speech  in  q~  estion.~ 

 Courtroom  Television  argues  that  an  a  la  carte  mandate  would  not  be  the  least  restrictive  means  of  achieving  any  of  the  interests  the  government  might  proffer.  With  respect  to  economic  motivations, 
 i.  e.,  keeping  MVPD  rates  or  the  levels  at  which  they  rise  within  a  range  that  consumers  would  find  acceptable,  the  government  could  take  additional  steps  to  foster  competition  among  cable  operators  either 
 by  overbuilders  or  other  facilities-  based  competitors,  in  addition  to  DBS  providers.  According  to  Courtroom  Television,  the  fact  that  Congress  and  the  Commission  have  been  allowed  to  regulate  cable 
 rates  in  the  past  does  not  support  the  conclusion  that  the  government  has  an  interest  sufficient  to  dictate  the  way  in  which  programming  must  be  delivered  to  subscribers  in  order  to  lower  costs  or  create  more 
 choice.  Nor  would  an  interest  in  combating  indecency  necessarily  justify  a  la  carte  rules.  According  to  Courtroom  Television,  an  abstract  interest  in  lowering  individual  cable  bills  or  creating  more  choice, 
 without  more,  does  not  establish  the  required  governmental  interest.  Is9 
 Commenters  further  argue  that  a  la  carte  regulation,  of  any  type,  would  fail  under  intermediate  scrutiny.  According  to  Turner,  in  upholding  the  Acts  mandatory  carriage  provisions  in  Turner,  a  divided 
 Supreme  Court  permitted  the  limited  infringement  of  MVPDs  First  Amendment  rights  to  advance  a  significant,  Congressionally-  documented  governmental  interesti6  But  in  connection  with  a  la  carte,  no 
 government  interest  can  be  articulated  and  no  factual  record  marshaled  to  satisfy  First  Amendment  standards.  Turner  states  that  the  governments  burden  cannot  be  satisfied  by  mere  speculation  and 
 conjecture,  nor  by  anecdotal  evidence  and  educated  guesses.  61  Here,  core  First  Amendment  values  of  diversity  of  speech  will  be  harmed,  while  no  offsetting  benefit  to  consumers  will  be  advanced.  I6* 

 NCTA  argues  that  even  if  the  government  did  have  an  important  interest  in  enabling  customers  to  lower  their  bills  and  keep  out  unwanted  programming  by  purchasing  only  those  program  networks  that 
 Joint  Programmers  Comments  at  10.  I56 
 A&  E  Comments  at  38-  39. 
 Viacom  Comments  at  3  1-  32. 
 Courtroom  Television  Comments  at  4  1,  43-  44. 
 Turner  Comments  at  9,  citing  Turner  ZZ,  520  U.  S.  at  193. 
 Id.,  citing  Enenfield,  507  US.  at  770;  Rubin  v.  Coors  Brewing  Co.,  514  U.  S.  476,490  (1995). 
 Turner  Comments  at  9. 

 157 
 158 

 I60 
 161 
 I62 
36
 THE  REPORT  36 
 \  / 
 they  wanted,  an  a  la  carte  requirement  would  still  be  unconstitutional.  An  a  la  carte  requirement  would  not  enable  consumers  to  watch  only  what  they  want  at  lower  prices.  It  would  give  consumers  the 

 option  of  paying  more  than  they  pay  today  to  purchase  fewer  networks  than  they  watch  regularly  today.  And  even  if  consumers  were  willing  to  pay  more  than  they  pay  today  in  order  to  keep  certain  unwanted 
 programming  from  reaching  their  homes,  there  are  already  technical  alternatives  to  achieve  this  result  with  less  intrusion  on  editorial  discretion  and  protected  speech.  63  Viacom  adds  that  mandating  the 
 unbundling  of  program  services  to  subscribers  would  greatly  disrupt  the  current  marketplace  and  jeopardize  many  of  the  efficiencies  and  public  interest  benefits  promoted  by  the  current  system. 
 According  to  Viacom,  this  disruption  would  not  be  counterbalanced  by  advancing  any  important  government  interest,  and  certainly  would  not  alleviate  any  public  interest  hams  in  a  direct  and  material 
 way.  164 

 Fifth  Amendment.  The  Fifth  Amendment  prohibits  the  federal  government  from  depriving  any  person  of  liberty..  .without  due  process  of  law.  The  Due  Process  Clause  requires  the  government  to 
 provide  equal  protection  of  the  laws  to  people  similarly  situated.  65  A  law  is  subject  to  strict  scrutiny  if  it  infringes  on  a  fundamental  right,  such  as  free  speech,  disparately  among  certain  classes  of  citizens.  166  In 
 order  to  pass  constitutional  muster,  the  discriminatory  law  must  serve  a  compelling  governmental  interest  and  be  necessary  to  achieve  that  intere~  t.  ~   

 According  to  Joint  Programmers,  an  a  la  carte  mandate  presumably  would  apply  to  a  distinct  class,  niche  networks,  and  not  to  broadcast  and  premium  networks,  despite  the  fact  that  all  provide 
 television  programming  to  the  public  primarily  over  MVPD  platforms.  Joint  programmers  argue  that  a  law  that  creates  a  distinct  class  of  persons  and  regulates  those  persons  fundamental  (e.  g.,  First 
 Amendment)  rights,  will  be  upheld  only  if  it  is  necessary  to  promote  a  compelling  governmental  interest.  They  state  that  an  a  la  carte  mandate  would  not  survive  this  analysis.  Joint  Programmers  question  how 
 Congress  could  conceivably  justify  expressly  granting  broadcast  networks  the  right  to  dictate  their  manner  of  distribution  on  MVPDs  platforms  (i.  e.,  through  must  carry  or  retransmission  consent),  while 
 expressly  denying  that  same  right  to  niche  networks.  68 
 Joint  Programmers  argue  that  the  Takings  Clause  of  the  Fifth  Amendment  is  also  implicated  in  the  debate  on  a  la  carte.  The  relevant  portion  of  the  Fifth  Amendment  provides:  .  .  .  nor  shall  private 
 property  be  taken  for  public  use,  without  just  cornpensati~  n.  ~~  A  physical  occupation  of  property  by  the  government  is  referred  to  as  a  >  er  se  taking.  I7  If  the  occupation  falls  short  of  actual  physical 
 occupation,  it  is  considered  a  non-  possessory  or  regulatory  taking  under  a  balancing  test  established  by 
 NCTA  Comments  at  14-  15. 
 Viacom  Comments  at  33. 
 City  of  Cleburne  v.  Cleburne  Living  Center,  Inc.,  473  U.  S.  432,439  (1985). 

 163 
 I64 

 166  Shupiro  v.  Thompson,  394  U.  S.  618,634  (1969). 
 167  Id.  at  637. 
 Joint  Programmers  Comments  at  75-  76. 
 U.  S.  C.  A.  Const.  Amend.  5  . 
 See,  e.  g.,  Loretto  v.  Teleprompter  Manhattan  CATV  Corp.,  458  U.  S.  419,442-  43  (1982). 

 168 
 I69 
 170 
37
 THE  REPORT  37 
 \  / 
 the  Supreme  Court  in  its  Penn  Central  de~  isi0n.  l~    The  Penn  Central  decision  enumerated  several  factors  to  be  considered  when  determining  whether  a  government  action  is  a  regulatory  taking:  (1)  the  economic 

 impact  of  the  regulatory  requirement  on  the  claimant;  (2)  the  extent  of  interference  with  the  claimants  investment-  backed  expectations;  and  (3)  the  character  of  the  government  action.  I7* 

 Joint  Programmers  state  that  the  Supreme  Court  has  consistently  recognized  that,  while  property  may  be  regulated  to  a  certain  extent,  if  regulation  goes  too  far  it  will  be  recognized  as  a  taking.  73  In  the 
 context  of  an  a  la  carte  mandate,  Joint  Programmers  argue  that  this  analysis  is  straight-  forward:  many  niche  networks  cannot,  and  will  not,  exist  if  they  are  forced  to  be  distributed  a  la  carte.  Even  those 
 networks  that  manage  to  survive  would  suffer  a  fundamental  change  to  their  current  business  plans  which  will  have  a  devastating  economic  impact.  Joint  Programmers  conclude  that  an  a  la  carte  mandate  would 
 impair  the  niche  networks  reasonable  investment  backed  expectations,  in  violation  of  the  Fifth  Amendments  Takings  C  1  a  ~s  e  .l  ~~ 

 Statutory  Issues.  Federal  and  local  regulation  of  cable  operators  carriage  and  service  obligations  are  limited  by  certain  provisions  of  the  Act.  For  example,  under  Section  621,  a  cable  system  cannot  be 
 subject  to  regulation  as  a  common  carrier  or  utility  by  reason  of  providing  any  cable  service.  17s  Moreover,  any  franchising  authority  may  not  regulate  the  services,  facilities,  and  equipment  provided  by  a  cable 
 operator  except  to  the  extent  consistent  with  Title  VI.  76  Furthermore,  under  Section  624,  any  Federal  agency,  State,  or  franchising  authority  may  not  impose  requirements  regarding  the  provision  or  content  of 
 cable  services,  except  as  expressly  provided  in  Title  VI.  77 
 The  Commission  may,  at  times,  assert  its  general  jurisdictional  grant  if  the  subject  of  the  regulation  and  the  assertion  of  jurisdiction  is  reasonably  ancillary  to  the  effective  performance  of  [the 
 FCCs]  various  responsibilities  under  Title  I.  178  In  order  to  satisfy  this  ancillary  jurisdiction  burden,  the  Commission  must  rely  upon  Section  1  of  the  Act,  which  states  that  the  Commissions  basic  purpose  is  to 
 make  available,  so  far  as  possible,  to  all  the  people  of  the  United  States  .  .  .  a  rapid,  efficient,  Nation-  wide,  and  world-  wide  wire  and  radio  communication  service  with  adequate  facilities  at  reasonable 

 I  7  I  Penn  Central  Transportation  Company  v.  City  of  New  York,  438  U.  S.  104,  124  (1978)  (  Penn  Central). 
 172  Id. 
 See  Bernier  v.  Bernier,  176  B.  R.  976,  989  (D.  Ct.  1995)  (quoting  Pennsylvania  Coal  Co.  v.  Mahon,  260  U.  S.  393,  I73  415  (1922)). 

 Joint  Programmers  Comments  at  75-  76,  citing  Penn  Central,  438  U.  S.  105  (  a  state  statute  that  substantially  furthers  important  public  policies  may  so  frustrate  distinct  investment-  backed  expectations  as  to  constitute  a 
 taking  ). 

 174 

 47  U.  S.  C.  5  541(  c).  175 
 177  47  U.  S.  C.  9  544(  f)(  1). 
 See  Unitedstates  v.  Southwestern  Cable  Co.,  392  U.  S.  157,  177-  78  (1968).  I78 

 See  47  U.  S.  C.  5  151;  47  U.  S.  C.  4  152  I79 
38
 THE  REPORT  38 
 1  , 
 The  Supreme  Courts  decision  in  U.  S.  v.  Southwestern  Cable    is  often  cited  as  authority  for  the  Commission  to  exercise  ancillary  jurisdiction  over  cable  operators,  apart  from  explicit  statutory  mandates. 

 In  that  case,  the  Court  found  that  the  Commission  had  the  authority  to  restrict  the  expansion  of  cable  television  systems  because,  under  the  Act,  the  Commission  has  jurisdiction  over  all  interstate 
 communication  by  wire  or  radio  under  Title  I  of  the  Act.  The  Court  found  that  the  Act  restricted  the  Commissions  authority  to  that  reasonably  ancillary  to  the  effective  performance  of  its  various 
 responsibilities  for  regulation  of  television  br~  adcasting.  ~~ 
 Disney  was  the  only  commenter  to  provide  an  in-  depth  statutory  authority  analysis  in  this  proceeding.  Disney  argues  that  when  Congress  intended  to  give  the  Commission  authority  over  a  cable- 
 related  issue,  such  as  the  mandatory  carriage  of  local  television  broadcast  stations,  it  did  so  expressly.  Thus,  if  Congress  wanted  to  grant  the  Commission  authority  to  require  a  la  carte,  it  would  have  done  so 
 expressly.  Absent  express  jurisdiction,  Disney  argues  that  the  exercise  of  ancillary  jurisdiction  with  respect  to  cable  matters  is  a  particularly  tenuous  proposition  given  the  express  reservation  of  jurisdiction 
 contained  in  Section  624(  f)  of  the  Act.  It  argues  that  to  require  a  cable  operator  to  offer  certain  cable  channels  on  an  a  la  carte  basis  is  a  requirement  regarding  the  provision  or  content  of  cable  services  in 
 violation  of  Section  624(  f).  Is2 
 Disney  further  argues  that  reliance  upon  Section  1  for  ancillary  jurisdiction  to  regulate  a  la  carte  would  be  misplaced  because  Section  1  merely  authorizes  the  agency  to  ensure  that  all  people  of  the 
 United  States,  without  discrimination,  have  access  to  wire  and  radio  communication  transmissions.  According  to  Disney,  any  potential  a  la  carte  regulations  would  govern  the  manner  in  which  cable 
 operators  provide  programming  and  the  rates  they  charge  for  such  programming;  a  la  carte  regulations  would  not  expand  the  reach  of  cable  service  to  more  Americans.  Disney  adds  that  ancillary  jurisdiction 
 over  a  la  carte  also  would  not  be  reasonably  ancillary  because  any  a  la  carte  regulations  would  impact  content  and  the  Commission  must  have  express  jurisdiction  to  regulate  ~0ntent.  I~ 

 3.  Consequences 
 This  section  discusses  the  likely  impact  an  a  la  carte  requirement  would  have  on  MVPDs  and  program  networks. 

 a.  Retail  Rates 
 A  la  carte  regulation  will  likely  increase  operational  expenses  for  MVPDs  in  three  main  areas:  (1)  equipment  and  infrastructure;  (2)  customer  service  operations;  and  (3)  billing  and  back  office  support.  A 
 large  percentage  of  these  increased  costs  are  likely  to  be  passed  on  to  subscribers  causing  an  increase  in  residential  retail  MVPD  rates. 

 Is  392  U.  S.  157  (1968). 
 1  8    Id.  at  177.  While  this  case  has  not  been  explicitly  overturned  by  the  Court,  the  enactment  of  Title  VI  by 
 Congress  in  1984,  which  included  Section  621(  c)  as  well  as  624(  f),  post-  dates  this  decision  and  could  be  interpreted  as  legislatively  vacating  the  Courts  findings  and  conclusions  in  Southwestern  Cable.  The  Commissions  Title  I 

 authority  was  recent  subject  of  litigation.  Specifically,  the  Commissions  video  description  rules  were  vacated  on  the  ground  that  they  constituted  a  direct  regulation  of  program  content  and  Section  1  does  not  authorize  the  FCC  to 
 regulate  program  content.  See  Motion  Picture  Assn  of  America  v.  FCC,  309  F.  3d  796,803-  05  (D.  C.  Cir.  2002)  (  MPAA). 

 Disney  Comments  at  8-  12.  I82 
 Id.  at  11,  citing  MPAA,  309  F.  3d  at  805.  I83 
39
 THE  REPORT  39 
 Equipment  Costs.  NCTA  states  that  under  mandatory  a  la  carte,  all  customers  that  purchase  services  on  that  basis  must  become  digital  customers  with  digital  boxes  on  all  television  sets.  Under  that 
 scenario,  if  customers  purchased  only  those  services  that  they  regularly  watch,  NCTA  estimates  that  the  average  cable  subscribers  bill  would  increase  by  22  percent.  To  pay  no  more  than  they  pay  today,  a  la 
 carte  subscribers  would  have  to  limit  their  selection  to  no  more  than  six  cable  networks.  84 
 NCTA  estimates  that  the  average  monthly  lease  cost  for  addressable  set  top  boxes  is  $4.87.  Today,  more  than  half  of  all  consumer  television  sets  connected  to  cable  do  not  have  set  top  boxes.  The 
 average  American  home  has  2.5  television  sets.  Thus,  moving  to  an  a  la  carte  or  tiered  system  would  immediately  add  an  average  of  $12.00  per  month  in  cost  for  each  home  without  set  top  boxes  before 
 subscribers  even  begin  to  make  program  selections.  Indeed,  Insight  does  not  foresee  any  scenario,  whether  by  company  marketing  or  due  to  a  shift  in  regulation  or  law,  that  would  rapidly  change  these 
 customers  preferences  in  this  regard.  As  such,  any  a  la  carte  requirement  that  forces  subscribers  to  install  (and  pay  for)  unwanted  set-  top  boxes  is  likely  to  cause  considerable  frustration,  dissatisfaction  and  even 
 termination  of  cable  service  by  existing  customers.  185 
 Smaller  Operators  and  RTCs  state  that  the  technical  solution  of  digitizing  all  channels  would  come  at  tremendous  expense  to  cable  operators  and  their  customers.  Indeed,  for  smaller  operators,  the 
 impact  on  costs  would  be  particularly  daunting,  given  the  smaller  base  of  customers  over  which  this  expense  can  be  spread.  For  example,  at  the  system  level,  cable  operators  would  need  to  digitize  the 
 analog  channels  that  had  been  previously  trapped  or  carried  in  the  clear,  costing  thousands  of  dollars  per  channel.  186  Moreover,  this  cost  does  not  include  any  additional  equipment  needed  for  distnbuting  the 
 signals  over  the  cable  system,  as  well  as  the  additional  space,  electric  power  and  heating  and  air  conditioning  that  might  be  needed  to  accommodate  this  equipment.  87  ACA  states  that  the  technology 
 cost  alone  for  any  cable  system  to  convert  an  analog  line  up  to  digital  and  offer  a  la  carte  exceeds  $285,000.  This  includes  costs  from  set  top  boxes,  billing  system  changes,  and  other  sources.  188  RTCs 
 argue  that  such  costs  would  exert  substantial  upward  pressure  on  consumer  rates,  a  result  that  is  directly  contrary  to  one  of  the  goals  of  a  la  carte  proponent^.  '^^ 

 NCTA  Comments  at  30.  I84 
 See  Insight  Comments  at  11-  12;  Charter  Comments  at  10.  Insight  states  that  approximately  66.5  percent  of  its  1.4  million  customers,  or  a  total  of  931,000  do  not  have  digital  set-  top  boxes  today.  Using  NCTAs  estimate  of 
 approximately  2.5  television  sets  per  household,  Insight  states  that  these  customers  would  require  approximately  2,327,500  set-  top  boxes.  And  even  the  469,000  Insight  customers  currently  equipped  with  digital  boxes  probably 
 have  at  least  one  set  in  their  home  used  to  receive  analog  expanded  basic  without  a  set-  top  box,  bringing  the  total  number  of  boxes  required  to  2,796,500.  Given  Insights  cost  of  approximately  $200  per  set-  top  box,  conversion  to 
 all  digital  would  require  a  capital  expenditure  by  Insight  of  approximately  $560  million  for  set-  top  boxes  alone.  NCTA  estimates  that  the  industry-  wide  set-  top  box  costs  under  this  scenario  would  reach  $33.8  billion.  Conversion 
 of  all  expanded  basic  services  from  analog  to  digital  would  also  necessitate  significant  equipment  upgrades  at  each  cable  headends.  Insight  Comments  at  13. 

 RTC  Comments  at  11-  12.  I86 
 18  Smaller  Operator  Comments  at  6-  7. 

 ACA  Comments  at  48-  49.  188 

 RTC  Comments  at  11-  12.  189 
40
 THE  REPORT  40 
 .  1  Insight  asserts  that  encrypted  digital  transmission  of  all  expanded  basic  channels  would  also  exacerbate  consumer  electronics  compatibility  problems.  The  Commissions  equipment  capability  rules 

 are  designed  to  ensure  that  the  features  of  a  cable  customers  analog  reception  equipment  and  TV  sets  work  with  cable 
 system^."^  Moreover,  for  a  small  number  of  operators  that  scramble  the  expanded  basic  tier,  the  navigation  devices  rules  have  prompted  them  to  duplicate  the  analog  tier  channels  in  the  digital 

 tier.  If  a  la  carte  becomes  an  option  for  subscribers,  cable  operators  would  need  to  retrofit  set-  top  boxes  with  an  analog  scrambling  function  that  enables  authorizations  for  each  requested  analog  channel. 

 CU  recognizes  the  large  technical  costs  associated  with  an  a  la  carte  requirement.  It  states  that  the  government  must  prevent  the  growth  of  a  digital  divide,  where  low-  income  consumers  cannot  afford  the 
 digital  entry  price  to  receive  a  la  carte  options.  To  achieve  this,  CU  appears  to  advocate  digital  set-  top  box  price  regulation  to  make  equipment  affordable  to  all  consumers  in  an  a  la  carte  environment.   
 With  regard  to  the  costs  of  supplying  set  top  boxes  to  multiple  sets  within  a  household  connected  to  MVPD  service,  CU  advocates  that  a  single  set  top  box,  with  a  router,  will  provide  an  inexpensive 
 consumer  solution  complementing  a  la  carte.  I9*  CUKFA  provides  scant  evidence  of  the  commercial  feasibility  of  this  solution.  To  date,  there  is  no  widespread  commercial  deployment  of  such  technology. 
 In  particular,  DBS  operators  have  not  deployed  this  technology  even  though  they  must  provide  set-  top  boxes  for  each  television  set  on  which  their  subscribers  wish  to  view  programming.  Rather  than  deploy 
 this  technology,  they  have  chosen  to  subsidize  multiple  digital  set-  top  boxes  for  their  customers. 
 Customer  Service  Costs.  At  a  typical  cable  company,  customer  calls  to  order  service,  to  report  a  service  problem,  or  to  make  a  billing  inquiry  are  handled  by  customer  service  representatives.  (  CSRs). 
 With  a  relatively  fixed  and  stable  menu  of  service  options,  a  CSR  is  typically  able  to  process  a  subscribers  order  (including  upgrades  or  downgrades)  by  touching  a  computer  screen  that  displays  the 
 available  packages. 
 Many  commenters  argue  that  an  a  la  carte  mandate,  in  tandem  with  the  Commissions  customer  service  standards,  will  likely  create  havoc  at  a  cable  system.  93  Cable  operators  state  that  a  la  carte  would 
 exponentially  expand  the  number  of  service  options  available  to  consumers  and  this,  in  turn,  would 
 Insight  Comments  at  14. 
 CU  Comments  at  1  1. 

 I90 
 191 

 CU/  CFA  Reply  Comments  at  27.  192 
 93  Section  632  of  the  Act  requires  the  Commission  to  establish  standards  by  which  cable  operators  may  fulfill  their 
 customer  service  requirements  and  provides  that  a  franchise  authority  may  establish  and  enforce  cable  operator  customer  service  requirements.  47  U.  S.  C.    552.  It  further  states  that  such  standards  shall  include,  at  a  minimum, 

 requirements  governing:  (1)  cable  system  office  hours  and  telephone  availability;  (2)  installations,  outages,  and  service  calls;  and  (3)  communications  between  the  cable  operator  and  the  subscriber.  47  U.  S.  C.  5  552(  b).  With 
 regard  to  communications  between  the  cable  operator  and  the  subscriber,  the  standards  adopted  by  the  Commission  state,  in  pertinent  part,  that  the  cable  operator  must  provide  written  information  on  each  of  the 
 following  areas  at  the  time  of  installation  of  service,  at  least  annually  to  all  subscribers,  and  at  any  time  upon  request:  (1)  products  and  services  offered  and  (2)  prices  and  options  for  programming  services  and  conditions  of 
 subscription  to  programming  and  other  services.  47  C.  F.  R.  $9  76.309;  76.1602.  The  standards  also  provide  that  customers  will  be  notified  of  any  changes  in  rates  .  .  .  as  soon  as  possible  in  writing.  Notice  must  be  given  to 
 subscribers  a  minimum  of  thirty  (30)  days  in  advance  of  such  changes  if  the  change  is  within  the  control  of  the  cable  operator.  47  C.  F.  R.  76.1603(  b). 
41
 THE  REPORT  41 
 \  / 
 increase  the  complexity  and  volume  of  calls  handled  by  CSRS.  ~~  Moreover,  existing  CSRs  would  have  to  be  retrained  to  handle  the  increased  complexity  of  a  la  carte.  9s  Customers  likely  would  become 

 frustrated  by  the  length  and  complexity  of  an  a  la  carte  subscription  process.  Charter  states  that  it  has  already  witnessed  an  increase  in  the  average  length  of  its  sales  calls,  as  the  breadth  of  its  offerings 
 expands.  Whereas  the  average  handle  time  for  its  sales  calls  during  the  first  five  months  of  2002  was  just  under  5.5  minutes,  the  average  handle  time  for  the  first  five  months  of  2004  was  just  over  6.1  minutes  - 
 an  11  percent  increase.  This  trend  would  accelerate  rapidly  with  the  introduction  of  an  a  la  carte  regime.  96  Smaller  Operators  will  face  the  prospect  of  having  to  greatly  increase  the  size  of  their 
 customer  service  departments.  According  to  Smaller  Operators,  these  costs  are  ~naffordab1e.  l~   
 Billing  Costs.  In  order  to  implement  a  la  carte,  most,  if  not  all,  cable  operators  would  also  need  to  make  substantial  changes,  at  considerable  expense,  in  their  ordering  and  billing  systems.  98  Smaller 
 operators  state  that  even  if  a  cable  operator  allowed  subscribers  to  select  a  set  number  of  channels  from  a  menu  of  options  at  a  flat  rate  -  a  highly  unlikely  scenario  considering  the  programming  cost  differences 
 among  various  channels  -  the  operator  still  would  need  to  adapt  its  billing  mechanisms  to  track  each  customers  particular  selections  so  as  to  be  able  to  report  subscriber  totals  to  the  programmers  on  a  per 
 channel  basis.  199 
 Commenters  assert  that  an  a  la  carte  mandate,  in  tandem  with  the  Commissions  billing  requirements,  would  likely  create  severe  problems  for  both  cable  operators  and  their  customers.*  Insight 
 asserts  that  imposition  of  mandatory  a  la  carte  would  make  it  virtually  impossible  to  satisfy  the  Commissions  billing  requirements.  For  an  a  la  carte  customer,  the  typical  bill  could  balloon  to  several 
 pages  with  itemized  listings  of  each  channel  received  and  the  associated  fees.  According  to  Insight,  cable  bills  would  no  longer  be  clear,  concise  and  understandable,  but  rather  would  become  confusing  and 

 Comcast,  for  example,  states  that  a  typical  customer  call  today  lasts  about  five  minutes  and  costs  the  company  $5  194  to  $7.00.  With  a  la  carte,  Comcast  estimates  that  the  length  and  cost  could  double.  Comcast  Comments  at  34-  35. 
 Insight  Comments  at  20;  DirecTV  Comments  at  6-  7.  195 
 Charter  Comments  at  12  196 
 Smaller  Operators  Comments  at  9. 
 Comcast  Comments  at  36-  37  (billing  system  would  have  to  be  completely  overhauled  to  handle  increased 

 I97 
 I98 
 complexity). 

 Smaller  Operators  Comments  at  8.  One  smaller  cable  operator,  which  serves  fewer  than  9,000  total  customers,  estimates  that  the  billing  software  changes  needed  to  accommodate  a  la  carte  would  cost  approximately  $1,200  more 
 per  month.  Id.  at  9. 

 199 

 The  Commissions  customer  service  guidelines  require  cable  billing  statements  to  be  clear,  concise  and  understandable,  with  full  itemization  of  services  and  charges.  47  C.  F.  R.  Q  76.1619.  The  rules  require  that  bills 
 should  indicate  charges  for  basic  and  premium  service,  any  equipment  charges,  and  a  summary  of  all  activity  during  the  billing  period,  including  optional  charges,  rebates  and  credits.  Cable  operators  should  respond  to  written 
 complaints  about  billing  matters  within  30  days.  Id.  at  Q  76.1619(  b).  Refunds  must  be  issued  no  later  than  either  the  customers  next  billing  cycle  or  30  days  following  resolution  of  the  request,  whichever  is  earlier,  or  upon  the  return 
 of  equipment  when  service  is  terminated.  Credits  must  be  issued  no  later  than  the  billing  cycle  following  the  determination  that  a  credit  is  warranted. 

 200 
42
 THE  REPORT  42 
 .  /  unwieldy.  Paper  and  postage  costs  would  skyrocket.  Moreover,  billing  systems  and  software  would  require  substantial  overhaul,  if  not  total  replacement,  to  handle  a  la  carte.   

 Insight  further  states  that  an  a  la  carte  mandate  would  inevitably  lead  to  a  dramatic  increase  in  billing  disputes.  Currently,  there  are  billing  issues  associated  with  service  level  upgrades  and 
 downgrades.  Cable  subscribers  are  billed  in  advance,  so  when  the  customer  elects  to  downgrade  service,  it  is  relatively  simple  to  provide  a  pro  rata  refund  covering  the  portion  of  the  month  after  the  downgrade. 
 Insight  asserts  that  an  a  la  carte  approach  would  likely  require  wholesale  changes  in  this  process.  Insight  and  DirecTV  also  believe  that  some  subscribers  might  seek  to  game  an  a  la  carte  system  by 
 subscribing  to  a  service  only  when  a  particular  program  is  scheduled,  such  as  a  live  sporting  event,  and  then  cancel  the  service  the  next  day.  202  Commenters  note  that  MVPDs  might  be  forced  to  impose  30-  day 
 minimum  charges  or  downgrade  fees  in  response  to  such  practices.  According  to  Insight,  the  disputes  engendered  by  the  complexity  of  a  la  carte  billing  statements  are  also  likely  to  increase  the  incidence  of 
 uncollectible  charges  or  outright  cancellation  of  service,  which  again  diminishes  the  cable  operators  revenue  and  results  in  higher  costs  for  all  remaining  customers. 

 Competition.  As  a  general  matter,  the  costs  associated  with  implementing  an  a  la  carte  requirement  would  present  logistical  and  financial  obstacles  for  smaller  cable  operators.  While  some  of 
 these  problems  also  will  confront  larger  cable  operators,  Smaller  Operators  state  that  they  operate  smaller  systems  in  less  densely  populated  areas  that  require  construction  and  maintenance  of  more  widespread 
 and  expensive  facilities  on  a  per-  customer  basis.  Smaller  operators  state  that  they  commonly  have  more  limited  (and  more  costly)  options  when  it  comes  to  obtaining  capital  to  support  investment  in  their 
 operations  and  are  at  a  greater  disadvantage  than  larger  operators  when  it  comes  to  competing  against  the  cable  industrys  primary  competitors,  DirecTV  and  E~  hoStar.~  ~  If  some  operators  exit  the  market, 
 consumers  may  have  less  choice  between  competing  MVPD  services. 
 b.  Program  Network  Rates 
 This  section  discusses  a  la  cartes  impact  on  the  existing  program  network  business  model.  The  section  examines  three  key  areas  of  program  network  revenue  and  expenses:  (1)  advertising  income;  (2) 
 program  license  fees;  and  (3)  marketing  costs. 
 Advertising  Revenues.  The  business  model  of  virtually  every  program  network,  barring  certain  premium  services  as  discussed  above,  is  a  dual  revenue  stream:  advertising  revenues  and  license  fees 
 paid  by  MVPDs  for  the  right  to  carry  the  networks  programming.  On  average,  a  networks  revenues  are  split  roughly  50-  50  between  advertising  and  license  fees.  Both  streams  of  revenue  are  essential  to  the 
 survival  of  new  and  specialized  networks  because  neither  is  sufficient  standing  alone,  and  both  revenue  streams  are  tied  directly  to  the  networks  distribution  level  -  i.  e.,  the  total  number  of  subscribers  who  can 
 view  the 
 There  are  generally  two  types  of  advertising  time  sold  on  cable  program  services:  network  advertising  and  spot  advertising.  According  to  Comcast,  network  advertising  is  sold  by  the  program 

 Insight  Comments  at  21-  22.  20  I 
 202  Id.  at  22;  DirecTV  Comments  at  8. 

 203  Smaller  Operators  Comments  at  5  . 
 Joint  Programmers  Comments  at  2  1.  204 
43
 THE  REPORT  43 
 <  >  network  to  national  advertisers  and  generally  represents  about  50  percent  of  a  services  total  revenue.  205 

 Program  networkks  typically  have  12-  14  minutes  of  advertising  time  to  sell  per  hour.  Spot  advertising  is  sold  by  cable  operators  to  local  and  regional  advertisers  and  represents  a  relatively  small  part  of  an 
 operators  total  revenue.  As  part  of  their  agreement  to  carry  a  service,  operators  generally  negotiate  for  two  minutes  of  spot  advertising  time  per  hour  (referred  to  as  ad  avails).  The  revenue  generated  by  the 
 sale  of  spot  advertising  goes  to  the  cable  operator,  so  it  does  not  directly  affect  a  program  networks  revenues. 

 The  revenue  a  program  network  can  derive  fkom  network  advertising  is  based  on  the  rate  the  service  can  charge  advertisers,  which,  in  turn,  depends  on  several  variables,  including  actual  viewers  of 
 the  service  (referred  to  as  reach),  potential  viewers  of  the  service  (Le.,  subscribers),  the  number  (or  frequency)  of  impressions  an  ad  makes,  the  volume  of  ad  time  purchased,  and  the  duration  of  the  ad. 
 The  most  important  of  these  variables  are  actual  viewers  and  potential  viewers.  206 
 Actual  viewers  are  measured  by  Nielsen  Media  Research  (  Nielsen)  and  are  reported  according  to  a  share  of  viewers  in  the  aggregate  of  all  DMAs.  Nielsen  ratings  are  a  critical  variable  in  determining 
 how  much  an  ad  is  worth,  and  therefore,  how  much  revenue  a  program  network  derives  fi-  om  selling  ad  time.  However,  Nielsen  only  provides  ratings  for  59  of  the  over  300  national  program  network^.^"  Thus, 
 many  program  networks,  especially  niche,  new,  or  digital  networks,  must  rely  almost  exclusively  on  potential  viewers  as  the  primary  variable  for  determining  the  price  they  can  charge  for  advertising. 

 Potential  viewers  are  based  on  the  number  of  households  to  which  a  program  network  is  distributed.  Many  advertisers  seek  rotation  and  value  new  impressions  more  highly  than  repetitive 
 impressions  --  they  prefer  their  ad  to  be  seen  fewer  times  by  more  potential  purchasers  of  their  products  than  repeatedly  by  a  smaller  number  of  potential  purchasers.  According  to  Comcast,  advertising  time  on 
 a  network  offered  on  a  tier  is  generally  worth  more  than  the  same  advertising  time  on  a  network  offered  a  la  carte.  Moreover,  even  if  all  the  regular  viewers  of  a  network  offered  in  a  tier  were  to  subscribe  to  the 
 network  if  it  was  offered  a  la  carte,  the  network  would  still  suffer  a  reduction  in  advertising  revenues  because  it  would  lose  rotation,  that  is,  the  ability  to  reach  more  potential  viewers.  208 

 As  a  matter  of  general  industry  practice,  program  networks  forecast  advertising  revenue  under  a  rather  uncomplicated  mathematical  formula:  the  product  of  the  number  of  households  in  which  a  program 
 is  distributed  multiplied  by  a  programs  rating  equals  the  number  of  viewer  impressions.  Then,  these  impressions  are  multiplied  on  a  cost  per  thousand  basis  to  arrive  at  a  unit  cost  for  a  30-  second  spot. 
 Obviously,  the  greater  the  distribution,  the  higher  the  expected  advertising  revenue  a  program  network  can  achieve.  209  To  put  it  more  simply,  the  rates  that  advertisers  pay  to  be  seen  on  program  networks  vary 
 based  on  the  size  of  a  programs  audience.  The  greater  the  number  of  homes  in  which  a  channel  is 
 Comcast  Comments  at  20.  205 
 06zd.  at  21. 
 207Cabletelevision  Advertising  Bureau,  CAB  Research,  National  Market  Facts,  Cable  Penetration,  at  http://  www.  onetvworld.  org/. 

 Comcast  Comments  at  22-  23 
 Scripps  Comments  at  13. 

 208 
 209 
44
 THE  REPORT  44 
 .  carried,  the  more  likely  that  any  given  program  can  attract  a  substantial  number  of  viewers,  which  in  turn  generates  increased  advertising  revenue.  210 

 It  is  commonly-  accepted  that  channels  that  enjoy  wider  coverage  are  deemed  most  desirable  by  advertisers.  As  reach  increases,  advertising  revenues  increase  at  roughly  the  same  pace  but  only  for 
 networks  that  reach  fewer  than  50-  60  million  subscribers.  However,  once  a  cable  networks  circulation  reaches  approximately  70-  80  million  subscribers,  this  proportionate  relationship  breaks  down  and  there  is 
 a  major  jump  in  advertising  revenues.  This  jump  is  attributed  to  a  number  of  factors.  The  first  factor  is  that  as  reach  increases,  the  statistical  reliability  of  ratings  information  (on  which  advertising  purchases  are 
 based)  increases  significantly  and  therefore  the  advertising  on  these  networks  becomes  more  reliable  and  more  valuable.  Secondly,  advertisers  prefer  (and  will  pay  a  premium  for)  broad  reach  and  will  pay  more 
 for  an  advertisement  that  will  reach  1  million  viewers  at  once  than  one  that  will  reach  500,000  viewers  at  two  different  times.  211 

 Program  ratings,  as  provided  by  Nielsen,  are  a  critical  measure  of  the  viability  of  a  program  network.  Ratings  information  is  critical  to  advertising  sales  in  the  Upfront  Market,  which  typically 
 accounts  for  the  sale  of  the  majority  of  a  program  networks  advertising  inventory.  Advertising  sales  in  the  Upfront  Market  are  built  on  subscriber  and  ratings  projections  12  to  15  months  into  the  future. 
 Consistent  subscriber  levels  and  rating  trends  enable  a  program  network  to  provide  the  estimates  necessary  to  sell  advertising  time  in  the  upfront  market.  If  actual  viewership  is  less  than  the  guarantee, 
 upfront  agreements  call  for  adjustments  in  the  form  of  more  inventory  (referred  to  as  Audience  Deficiency  Units  or  ADUs)  on  the  back-  end.  The  inability  to  predict  distribution  levels  over  time 
 would  adversely  affect  a  program  networks  ability  to  sell  advertising.  Reliable  estimates  of  distribution  and  network  ratings  months  into  the  future  are  critical  to  the  sale  of  national  advertising  time.  Thus, 
 distribution  on  broad,  popular  service  tiers  provides  the  necessary  subscriber  counts  to  predict  ratings  more  accurately,  which  helps  a  network  participate  in  successful  upfront  sales.  Oxygen,  and  other 
 program  networks,  assert  that  a  la  carte  carriage  is  likely  to  lead  to  significantly  greater  monthly  churn  in  subscribers  making  it  almost  impossible  to  estimate  audience  size  far  enough  in  advance  to  be  able  to  take 
 part  in  a  successful  upfront.  212 
 How  many  subscribers  a  program  network  needs  to  become  viable  and  remain  viable  for  ratings  and  advertising  purposes  is  the  subject  of  some  discussion  in  this  proceeding.  For  example,  CU  notes  that 
 program  services  can  be,  and  are,  viable  even  if  they  reach  fewer  than  15  million  United  States  MVPD  Hallmark  states  that  Nielsen  may  rate  a  program  network  with  20  million  subscribers,  but 
 notes  that  few  advertisers  will  buy  advertising  at  that  level  and  the  cost  per  thousands  generally  are  not  competitive.  It  remarks  that  advertisers  are  interested  in  such  networks  only  if  they  are  emerging,  i.  e. 
 their  distribution  is  steadily  and  rapidly  increasing.*  I4  GSN  states  that  a  network  needs  at  least  25  million  subscribers  just  to  be  included  in  the  Nielsen  ratings,  and,  at  that  level,  any  ratings  data  are  likely  to  be 

 210  Fox  Cable  Comments  at  6. 
 Disney  Comments  at  13-  14. 
 Oxygen  Comments  at  5  ;  MBC  Comments  at  7-  8. 
 CU\  CFA  Reply  Comments  at  22-  23.  The  Commission  has  estimated  that  a  program  network  is  viable  with  between  15-  20  million  subscribers.  See  Implementation  of  Section  I  I  (e)  of  the  Cable  Television  Consumer 
 Protection  and  Competition  Act  of  1992,  14  FCC  Rcd  19098,  19115  (1999). 
 24  Hallmark  Comments  at  6. 

 21  I 
 212 
 213 
45
 THE  REPORT  45 
 <  >  subsumed  within  Nielsens  margin  of  error;  while  a  few  advertisers  might  be  willing  to  take  a  chance  on  a 

 new  program  network,  it  is  all  but  impossible  to  sell  meaningful  national  advertising  at  that  subscribership 

 Joint  Programmers  state  that  a  national  niche  network  needs  to  achieve  a  threshold  level  of  at  least  30  million  to  40  million  subscribers  in  order  to  be  considered  as  a  possible  advertising  vehicle  for 
 national  advertising.  A&  E  states  that  to  attract  sufficient  advertising  revenue  to  afford  to  pay  for  and  provide  a  meaningful  quantity  of  original  programming,  a  network  must  reach  approximately  sixty 
 million  subscribers.  216  Viacom,  however,  states  that  a  network  usually  needs  a  subscriber  base  of  approximately  50  million,  which  represents  about  half  of  the  countrys  households,  to  serve  as  effective 
 advertising  vehicles.*  I7 
 Joint  programmers  note  that  some  niche  networks,  depending  on  their  business  plan,  programming  model  and  investment,  may  require  more  or  less  distribution.  Furthermore,  regional  sports 
 networks  do  not  need  to  reach  tens  of  millions  of  subscribers  to  be  successful.  Rather,  their  benchmark  is  based  on  the  size  of  the  regional  market  they  serve.  Nevertheless,  even  within  a  much  smaller  regional 
 base  of  households,  the  regional  networks  still  require  widespread  distribution  across  the  region.  218 
 Advertising  revenue.  The  majority  of  commenters  stated  that  an  a  la  carte  regime  would  undermine  the  ability  of  program  networks  to  gamer  the  advertising  revenue  needed  to  remain  viable.  219 
 Most  program  networks,  especially  newer,  smaller,  and  independent  entities,  agree  that  the  loss  of  advertising  revenues  resulting  from  a  la  carte  carriage  would  be  real,  immediate,  and  very  substantial. 
 They  argue  that  the  proposition  is  simple:  a  la  carte  would  decrease  viewership,  which,  in  turn,  would  decrease  advertising  revenues,  which  would  lead  to  higher  license  fees  to  recoup  the  loss  in  revenue, 
 which  would  likely  result  in  less  carriage  on  cable  and  satellite,  thus  resulting  in  the  demise  of  certain  program  networks. 

 Commenters  submitted  too  many  examples  of  harm  to  report  in  detail,  but  Hallmarks  assessment  is  typical  of  the  comments  received.  Hallmark  states  that  a  20  percent  increase  in  its  subscribership  and 
 improved  ratings  is  likely  to  yield  more  than  a  70  percent  increase  in  advertising  revenues.  It  asserts  that  subscriber  losses  would  be  very  substantial  under  a  la  carte  as  even  a  modest  decrease  in  subscribers 
 would  cause  a  much  larger  percentage  decrease  in  advertising  revenues.  Hallmark  states  that,  typically,  annual  advertising  revenues  range  from  $1  .OO  to  $6.00  per  subscriber  for  program  networks,  depending 
 upon  programming  genre,  target  audience,  and  brand  identity.  If  a  program  network  with  70  million 
 GSN  Comments  at  4.  215 
 26  A&  E  Comments  at  13-  14. 

 Viacom  Comments  at  8-  9.  217 
 Joint  Programmers  Comments  at  21-  22  11.54. 
 See  A&  E  Comments  at  iii-  v;  Bloomberg  Comments  at  2-  3;  Courtroom  Television  Comments  at  iii-  v;  C-  SPAN  Comments  at  1-  5;  Discovery  Comments  at  iii-  v;  Eternal  Word  Television  Networks  Comments  at  2-  6;  Fox  Cable 
 Comments  at  i-  iv;  GSN  Comments  at  2-  8;  Hallmark  Comments  at  2-  12;  International  Channel  Comments  at  1;  Joint  Programmers  Comments  at  i-  v  ;  LAtv  Holdings  Comments  at  1-  2  ;  LeSEA  Comments  at  4-  7;  Lifetime  Comments  at 
 3-  8;  MBC  Comments  at  1-  9;  NBC  Universal,  Inc.  Comments  at  1-  8;  Oxygen  Comments  at  2-  8;  Scripps  Comments  at  1-  5;  Starz  Encore  Comments  at  2-  6;  TelAlaska,  Inc.  Comments  at  2-  3;  Turner  Comments  at  1-  2;  TV  One 
 Comments  at  1-  3;  Univision  Comments  at  i  ;  Viacom  Comments  at  1-  3;  Disney  Comments  at  2-  3;  and  Weather 
 Channel  Comments  at  1-  2. 

 218 
 219 
46
 THE  REPORT  46 
 subscribers  and  $3.00  per  subscriber  in  advertising  revenues  lost  only  20  percent  of  its  subscriber  base  due  to  a  la  carte,  it  would  lose  $42  million  in  advertising  revenues  in  the  first  year  alone.  A  greater  initial 
 subscriber  loss  or  subsequent  erosion  of  subscribers  would  only  make  the  revenue  picture  bleaker.  Hallmark  states  that  lost  advertising  revenues  are  only  part  of  the  equation  as  there  also  would  be  lost 
 subscriber  revenues  unless  license  fees  were  increased.  220 
 The  sentiments  expressed  by  the  program  networks  are  reflected  in  the  expert  testimony  of  witnesses  that  attended  the  Commissions  a  la  carte  symposium  in  July  2004.  The  Commission  invited 
 four  independent  economists  to  discuss  a  la  carte  issues.  All  four  appeared  to  agree  that  mandatory  la  carte  would  negatively  impact  advertising  revenue.  For  example,  Professor  David  Waterman  asserted 
 that  a  la  carte  would  have  an  adverse  effect  on  the  non-  broadcast  advertising  market  and,  consequently,  the  program  network  license  fee  structure.  221  Specifically,  advertisers  would  be  inclined  to  purchase  time 
 on  broadcast  stations  rather  than  program  networks  sold  a  la  carte  because  the  former  outlet  can  guarantee  a  much  broader  audience.  222 

 Joint  Programmers  state  that  media  buyers  and  advertising  agencies  seeking  to  purchase  time  on  behalf  of  their  advertising  clients  would  find  buying  ads  on  a  la  carte  niche  networks  to  be  too 
 cumbersome  and  costly.  This  is  because  media  buyers  would  have  to  purchase  time  on  multiple  a  la  carte  networks  to  achieve  the  same  level  of  viewership  as  on  other,  more  widely  distributed  media.  As  a  result, 
 ad  agencies  and  media  buyers  likely  would  simply  seek  out  other  media  that  could,  with  one  stop,  provide  the  desired  audience  reach  and  impression^."^^^ 

 At  the  symposium,  Jon  Mandel,  Co-  CEO  of  Mediacom  Worldwide,  a  firm  that  purchases  advertising  time  on  program  networks  for  large  corporations,  explained  that  advertisers  look  beyond  a 
 networks  Nielsen  ratings,  and  also  consider  the  number  of  unique  viewers,  the  measure  of  which  is  its  average  weekly  cumulative  audience.  Mr.  Mandel  explained  that  a  networks  cume  directly  correlates  to 
 its  distribution,  and  concluded  that  a  la  carte  would  reduce  a  networks  distribution,  cume  and,  ultimately,  its  ad  revenues.  Advertisers  would  seek  to  purchase  advertising  time  on  broadcast  stations  or  other  media 
 with  a  bigger  audience  and  would  neglect  smaller  niche  programming  networks. 
 Similarly,  GSN  explains  that  broadcast  stations  are  guaranteed  carriage  and  viewership  through  government  regulation.  As  a  result,  while  independent  programmers  like  GSN  would  lose  distribution 
 through  mandatory  a  la  carte  carriage,  broadcasters  would  be  able  to  assure  advertisers  that  every  cable  subscriber  would  have  access  to  their  advertisements.  The  advertising  market  would  be  skewed  again  in 
 favor  of  broadcasters  and  their  affiliated  program  networks,  just  as  many  program  networks  are  beginning  to  compete  with  them  for  national  advertising  revenues.  224  International  Channel  states  that  there  is  no 
 question  that  the  advertising  dollars  lost  by  smaller  program  networks  as  a  result  of  their  movement  to  mini-  tier  or  a  la  carte  carriage  will  flow  to  the  large  media  conglomerates  and  broadcast-  affiliated 
 programmers.  225 
 Hallmark  Comments  at  9.  220 
 Transcript  at  197.  22  I 
 222  Id.  at  187. 

 223  Joint  Programmers  at  4  1 
 GSN  Comments  at  6-  7.  224 
 International  Channel  Comments  at  8.  225 
47
 THE  REPORT  47 
 <  > 

 Echostar  asserts  that  an  examination  of  the  most  current  trends  in  the  advertising  market  calls  into  question  one  of  the  fundamental  premises  of  the  opponents  argument  --  that  advertisers  absolutely 
 demand  the  widest  possible  distribution  for  their  ads.  According  to  Echostar,  industry  observers  have  characterized  the  mass  marketing  model  via  media  such  as  television  as  fading  and  giving  way  to  a 
 dawning  era  of  micromarketing.  Echostar  states  that  the  nations  largest  product  marketers,  such  as  Procter  &  Gamble  Co.,  Coca-  Cola,  McDonalds,  Unilever  Group  and  Pfizer  report  a  shift  in  their 
 advertising  focus  from  the  vast  anonymous  crowd  to  millions  of  particular  consumers.  Echostar  further  states  that  these  advertisers  are  increasingly  seeking  to  focus  their  ad  expenditures  on  reaching 
 what  they  regard  as  their  prime  target  audience  in  an  effort  to  spend[]  smarter  on  advertising.  226 
 License  Fees.  License  fees  paid  by  MVPDs  also  are  an  essential  revenue  stream  for  most  program  networks.  License  fees  usually  are  established  on  a  fixed-  rate  per  subscriber  basis  that  is  negotiated  as 
 part  of  the  affiliation  agreement  between  the  MVPD  and  the  network.  As  such,  this  revenue  stream  is  directly  contingent  upon  the  number  of  subscribers  to  which  the  programming  is  distributed. 
 Accordingly,  program  networks  seek  distribution  on  MVPD  platforms  as  part  of  the  most  widely-  penetrated  service  tier  possible. 

 Cable  operators  and  program  networks  agree  that  a  la  carte  would  have  a  negative  effect  on  license  fees.  To  make  up  the  loss  in  advertising  revenue,  a  program  network  will  have  to  increase  its 
 license  fee,  which  will,  in  turn,  increase  the  cost  of  programming  to  cable  and  DBS  subscribers.  Moreover,  not  only  will  the  license  fee  be  higher;  it  will  have  to  be  recovered  from  a  smaller  number  of 
 subscribers,  further  increasing  the  cost  of  the  network  to  those  who  choose  to  purchase  it.  But  increasing  the  per-  subscriber  cost  of  a  service  will,  in  turn,  further  reduce  the  number  of  subscribers.  Whether  this 
 trend  will  lead  to  an  equilibrium  price  at  which  there  are  a  sufficient  number  of  buyers  to  continue  to  sustain  the  network  or  will  instead  become  a  downward  spiral  that  destroys  the  networks  viability,  will 
 depend  on  the  nature  of  the  demand  for  each  particular  network.  According  to  NCTA,  it  may  be  that  the  network  will  have  no  choice  but  to  respond  to  lower  advertising  revenue  and  fewer  subscribers  by 
 reducing  the  cost,  and  quality,  of  its  programming.  But  this  reduction  in  quality  is  only  likely  to  further  diminish  the  attractiveness  of  the  network  and  further  reduce  the  number  of  customers  who  choose  to 
 purchase  the  network.  227 
 Oxygen  asserts  that  in  order  to  compensate  for  lost  ad  revenues,  it  would  have  to  increase  its  subscriber  fees  significantly  and  somehow  reduce  its  costs  to  survive.  Oxygen  explains  that  its  largest 
 category  of  expense  is  programming  costs  and,  unlike  networks  affiliated  with  large  media  firms,  it  is  not  in  a  position  to  draw  on  programming  fi-  om  any  affiliates.  As  a  result,  cost  reductions  inevitably  would 
 reduce  programming  expenditures.  Oxygen  asserts  that  original  programming,  which  is  unfamiliar  to  consumers,  and  thus  less  effective  at  attracting  new  viewers  in  an  a  la  carte  environment,  would  bear  the 
 brunt  of  the  expense  reduction.  228  Courtroom  Television  estimates  that  in  a  pure  a  la  carte  environment  it  would  have  to  charge  customers  at  least  $5.00  per  month  and  maintain  at  least  85  percent  of  its  current 
 expanded  basic  carriage  in  order  to  remain  profitable.  Courtroom  Television  states  that  such  a  price  is  wholly  unrealistic,  however,  since  it  is  expected  that  only  about  0.3  percent  of  cable  subscribers  would 

 Echostar  Reply  Comments  at  3,  5. 
 NCTA  Comments  at  8-  9. 
 Oxygen  Comments  at  7. 

 226 
 227 
 228 
48
 THE  REPORT  48 
 \  / 
 purchase  the  network  at  this  price.  229  Bright  House  Networks  (  BHN)  states  that  because  each  affected  network  would  most  likely  be  required  to  increase  its  license  fee  to  maintain  license  fee  revenue  on  a 

 neutral  basis  to  offset  lower  distribution,  retail  per-  channel  rates  paid  by  subscribers  would  almost  certainly  rise.  A  cable  subscriber  opting  to  maintain  the  same  level  of  service  presently  offered  on  a 
 bundled  basis  likely  would  pay  a  higher  retail  rate  if  some  or  all  of  those  services  were  offered  on  an  a  la  carte  basis.  A  consumer  choosing  to  pay  the  same  monthly  rate  presently  being  incurred  would  likely 
 receive  fewer  services  for  that  same  retail  rate.  BHN  asserts  that  a  subscriber  choosing  to  reduce  his  or  her  monthly  fee  would  pay  more  per  channel  and  receive  significantly  less  pr~  grarnrning.~~   

 To  the  extent  that  a  la  carte  service  is  being  considered  as  a  means  of  reducing  consumers  costs  by  reducing  the  programming  costs  that  cable  system  operators  face,  Univision  remarks  that  offering  local 
 broadcast  stations  on  an  a  la  carte  basis  will  not  affect  the  license  fees  paid  by  cable  providers.  It  states  that,  by  law,  must  carry  stations  receive  no  payment  for  cable  carriage,  and  even  among  stations  carried 
 pursuant  to  retransmission  consent  agreements,  few  stations  receive  cash  compensation  for  permitting  carriage.  As  a  result,  the  cable  operator  would  have  no  monetary  savings  to  pass  on  to  subscribers  who 
 decline  some  or  all  of  their  local  stations.  Application  of  a  la  carte  to  local  broadcast  stations  would  therefore  accomplish  nothing  in  terms  of  subscriber  savings,  but  would  instead  threaten  those  subscribers 
 access  to  local  emergency  information  and  limit  local  program  diver~  ity.~~   
 Marketing.  Most  commenters  maintain  that  a  la  carte  would  also  have  a  significant  negative  impact  on  the  marketing  practices  of  program  networks.  These  commenters  agree  that  marketing  expenses 
 would  substantially  increase  under  a  la  NCTA  states  that  research  suggests  the  average  household  regularly  watches  17  channels  among  the  total  they  receive  (including  broadcast  networks). 
 According  to  NCTA,  only  20-  30  percent  of  current  subscribers  account  for  up  to  60-  80  percent  of  total  viewing  for  most  program  networks.  233  Absent  major  program  network  expenditures  on  branding  and 
 promotion,  whch  do  not  currently  occur,  subscribers  are  unlikely  to  choose  to  purchase  particular  networks  that  they  do  not  currently  watch  regularly. 

 Under  the  existing  tiered  model,  the  first  objective  for  any  program  network  is  to  obtain  distribution  from  MVPDs.  Most  advertiser  supported  program  networks  employ  an  affiliate  marketing 
 group  whose  efforts  are  targeted  at  their  distributors,  (i.  e.  cable  operators,  DBS,  and  other  MVPDs).  They  also  typically  employ  a  limited  number  of  trainers,  whose  function  is  to  educate  CSRs  at  the  cable  system 

 level  or  DBS  call  centers  about  the  programming  service,  so  that  when  questions  concerning  the  service  arise,  the  CSRs  will  be  able  to  provide  informed  responses  to  consumers  and  effectively  sell  the 
 programming  service.  When  a  programming  service  is  launched  on  the  basic  or  expanded  basic  tier,  trainers  often  will  work  with  the  CSRs  immediately  before  and  coincident  with  the  launch  of  the  service. 
 Because  most  carriage  agreements  are  for  multi-  year  terms,  there  often  is  little  need  for  a  program  network  to  devote  substantial  marketing  or  training  resources  to  follow  up  with  the  cable  system  once  its 
 service  is  launched  on  a  particular  tier,  unless  the  system  is  rebuilding  or  re-  tiering  or  the  affiliation 
 Courtroom  Television  Comments  at  29-  30.  229 
 230  BHN  Comments  at  1  1  . 

 231  Univision  Comments  at  8. 
 See,  e.  g.,  Bloomberg  Comments  at  10-  11;  C-  SPAN  Comments  at  4-  5;  GSN  Comments  at  7-  8;  Hallmark  Comments  at  7-  8;  Joint  Programmers  Comments  at  56-  58;  Oxygen  Comments  at  6;  Starz  Comments  at  2-  6;  TV  One 
 Comments  at  2;  and  Disney  Comments  at  2,  18. 

 232 

 233  NCTA  Comments  at  24. 
49
 THE  REPORT  49 
 agreement  is  coming  up  for  renewal.  Instead,  as  the  program  network  gains  more  distribution,  it  typically  begins  to  focus  more  efforts  on  advertising  sales.  234 
 In  Starz  Encores  experience,  the  marketing  work  for  a  program  network  begins  when  it  obtains  a  la  carte  carriage  from  an  MVPD  rather  than  a  commitment  to  carry  the  service  on  a  broad  service  tier. 
 Rather  than  spreading  the  cost  of  adding  a  new  service  over  the  entire  package  to  which  the  service  would  be  added,  Starz  explains  that  the  MVPD  must  be  able  to  recoup  the  cost  of  adding  an  a  la  carte  service 
 from  that  service  alone,  or  from  the  addition  of  new  subscribers  to  the  system  attracted  by  the  new  service.  Otherwise,  there  is  no  economic  reason  for  the  MVPD  to  add  the  service  in  the  first  place.  An  a 
 la  carte  program  network  must  be  able  to  demonstrate  that  it  would  be  a  separate  profit  center  for  the  MVPD  rather  than  filling  out  an  existing  service  package.  Consequently,  an  a  la  carte  program  network 
 must  devote  enormous  resources  to  marketing  its  service  to  distributors  and  to  consumers  in  order  to  gain  and  maintain  brand  recognition  and  customer  demand  for  the  service  and  cannot  rely  on  the  popularity  of 
 other  services  in  a  tier  to  drive  penetration.  235  Starz  asserts  that  if  each  and  every  program  network  is  required  to  market  its  service  on  an  a  la  carte  basis,  it  would  be  extremely  difficult  for  even  established 
 programmers  to  educate  the  MVPDs  CSRs  about  their  respective  programming  services.  236 
 Courtroom  Television  states  that  the  marketing  strategies  and  attendant  costs  for  a  stand-  alone  network  are  substantially  different  from  the  approaches  it  has  followed.  For  example,  an  a  la  carte 
 channel,  such  as  HBO,  uses  advertising  and  marketing  strategies  focusing  on  consumer  awareness  so  that  subscribers  know  enough  about  a  network  to  make  the  affirmative  purchasing  decision  to  select  and  pay 
 for  it  on  a  monthly  basis.  It  must  then  heavily  advertise  its  individual  program  offerings  (  tune-  in  advertising)  to  retain  its  subscriber  base  and  gamer  ratings.  The  monthly  chum  in  the  premium 
 business  is  significant  and  premium  services  experience  high  transaction  costs  of  retaining,  terminating,  and  replacing  customers  each  month.  As  a  consequence,  stand-  alone  channels  generally  have  far  lower 
 penetration  among  subscribers  than  do  tiered  networks.  237  MBC  adds  that  a  la  carte  networks,  like  HBO,  also  must  devote  substantial  resources  to  win-  back  marketing  aimed  at  convincing  subscribers  who 
 have  cancelled  the  service  to  re-  subs~  ribe.~~~ 
 Turner  states  that  an  important  marketing  component  of  its  networks  is  cross-  promotion  using  air  time  on  the  networks  themselves.  Tumer  asserts  that  in  an  a  la  carte  environment,  cross-  promotion  would 
 be  less  effective  and  would  result  in  increased  promotional  and  marketing  expenses.  239  In  contrast,  Oxygen  states  that  unlike  new  program  networks  spawned  by  programming  conglomerates, 
 independent  program  networks  have  no  means  to  subsidize  or  cross-  promote  their  service,  or  to  offer  consumers  the  opportunity  to  view  the  service  (or  any  if  its  specific  programs)  on  a  sample  or  trial  basis. 
 An  independent  programmer  has  no  comparable  way  to  subsidize  its  programming  and  marketing  costs,  to  make  consumers  aware  of  its  service,  or  to  drive  name  recognition.  It  must  rely  on  its  own  promotions 
 and  drive-  by  viewing  or  channel  surfing.  MBC  also  asserts  that  it  would  have  a  significant  disadvantage  vis-  a-  vis  programmers  affiliated  with  broadcast  networks  or  large  program  networks.  It 
 states  that  those  networks  can  use  their  widely  distributed  affiliated  programming  services  to  let  the 
 Starz  Comments  at  3.  234 
 235  ~ci.  at  3-  4. 

 Id.  at  6.  236 
 237  Courtroom  Television  Comments  at  24. 

 MBC  Comments  at  4.  238 
 Turner  Comments  at  9.  239 
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 THE  REPORT  50 
 \  1 
 consumer  sample  their  programming  and  that  many  such  program  networks  have  generated  interest  in  their  developing  networks  by  running  particular  shows  on  their  more  popular,  established  networks.  240 

 Oxygen  and  MBC  both  agree  that  carriage  on  a  popular  tier  gives  an  independent  program  network  the  benefits  of  the  distributors  marketing  of  the  tier  and  offers  it  the  opportunity  to  promote  the  service 
 through  ads  on  the  other  program  networks.  Absent  tiered  carriage,  an  independent  program  network  would  have  no  reasonable  means  to  induce  consumers  to  make  the  initial  purchase  decision  for  the  service 
 a  la  carte  or  on  a  themed-  tier,  sight  unseen.  241 
 In  order  to  reach  the  entire  potential  audience  and  drive  subscription  to  an  a  la  carte  service,  MBC  asserts  that  it  would  have  to  market  nationally,  even  though  its  service  could  not  be  received  in  markets 

 where  it  is  not  carried  by  the  cable  operator  serving  those  markets  or  by  any  DBS  provider.  Even  in  markets  with  substantial  African-  American  populations,  a  significant  portion  of  any  money  spent  on  mass 
 media  advertising  would  be  wasted  because  some  portion  of  the  audience  reached  by  that  advertising  inevitably  would  be  served  by  a  distributor  who  has  refused  to  carry  MBC.  Thus,  even  if  MBC  had  the 
 resources,  it  would  get  less  bang  for  each  buck  spent  on  consumer  advertising.  242  Joint  programmers  assert  that  since  channel  surfing  no  longer  would  be  possible,  networks  would  be  forced  to  market  their 
 services  through  magazines,  newspapers,  radio,  billboards,  television,  bill-  stuffers,  telemarketing,  direct  mail,  commissioned  sales,  and  local  grass  roots  promotions,  all  of  which  are  more  expensive  compared  to 
 what  niche  networks  presently  need  to  do  to  reach  potential  subscribers.  243 
 According  to  NCTA,  most  program  networks  currently  spend  only  2-  6  percent  of  total  net  revenues  on  marketing.  NCTA  estimates  that  these  expenditures  would  increase  to  as  much  as  20  percent 
 to  30  percent  of  revenues  in  an  a  la  carte  environment,  based  on  benchmarks  of  premium  networks  and  consumer  packaged  goods  companies.  244  Program  networks  provide  actual  and  individualized  data  on  the 
 marketing  costs  associated  with  promoting  networks  to  subscribers.  For  example,  Viacom  demonstrates,  through  information  obtained  from  Showtime  Networks,  which  has  operated  as  an  a  la  carte  service  since 
 its  launch  in  the  1970s,  marketing  efforts  could  entail  expenditures  in  the  hundreds  of  millions  of  dollars  per  network,  per  year.  With  per  subscriber  marketing  costs  estimated  at  $16.90,  a  network  with  25 
 million  subs  would  incur  $300  million  in  costs  each  year  just  to  retain  the  same  number  of  subscriber^.^^  ' 
 In  addition  to  increased  marketing  costs,  Starz  asserts  that  program  networks  also  would  incur  increased  costs  to  monitor  subscribership  and  churn  in  each  system.  To  a  large  degree,  program  networks 
 carried  on  the  basic  or  expanded  basic  tier  currently  depend  on  cable  operators  to  provide  accurate  subscribership  information  to  support  their  license  fee  payments,  with  limited  audit  rights  that  may  be 
 available  under  their  affiliation  agreements.  According  to  Starz,  a  la  carte  would  require  the  programmer 
 MBC  Comments  at  5.  240 
 241  Oxygen  Comments  at  3-  4. 

 MBC  Comments  at  5.  242 
 Joint  Programmers  Comments  at  57.  243 
 NCTA  Comments  at  26.  244 
 Viacom  Comments  at  15.  See  a2so  A&  E  Comments  at  18  (Under  a  mandatory  a  la  carte  system,  A&  Es  promotion  costs  would  be  250  percent  of  its  current  costs  -  a  150  percent  increase);  Discovery  Comments  at  10 
 (Discovery  would  incur  $66.4  million  in  additional  marketing  costs  under  an  a  la  carte  mandate). 

 245 
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 THE  REPORT  51 
 to  monitor  fluctuations  in  its  subscriber  base  to  ensure  accurate  payment  of  license  fees  by  the  cable  operator  .246 

 Financing.  As  demonstrated  above,  mandatory  a  la  carte  would  alter  the  advertising  revenue/  license  fee  business  model  upon  which  all  networks  are  based  and  could  have  significant  effects 
 on  prices  and/  or  quality  of  all  program  networks.  247  According  to  Hallmark,  its  enterprise  was  based  upon  a  business  plan  of  widespread  distribution  by  cable  and  DBS  operators  on  highly-  penetrated 
 packages  of  popular  programming  services.  Shifting  advertiser-  supported  programming  services  from  such  tiers  or  requiring  a  la  carte  carriage  would  effectively  nullify  its  efforts.  248 

 Joint  Programmers  state  that  a  niche  network  requires  a  tremendous  level  of  initial  capital  investment,  and  a  substantial  continuous  revenue  stream  to  sustain  its  operations  and  provide  funds  for 
 investment  in  programming.  They  assert  that  an  a  la  carte  mandate  would  negatively  affect  the  ability  of  program  networks  to  obtain  capital  and  force  many  niche  networks  into  bankruptcy.  According  to  Joint 
 Programmers,  the  implosion  of  the  competitive  local  exchange  carrier  (  CLEC)  industry  during  2000-  2002  provides  a  recent  and  vivid  image  of  what  can  happen  to  a  nascent  industry  when  it  no  longer  has 
 access  to 
 MBC  states  that  developing  networks  are  always  in  need  of  financing.  Commitments  by  cable  operators  and  other  MVPDs  to  carry  a  particular  program  network  on  a  popular  service  tier  are  invaluable 
 in  obtaining  the  financing  needed  to  develop  and  sustain  a  program  network  because  they  enable  the  programmer  to  provide  a  reasonably  accurate  estimate  of  the  number  of  homes  that  will  be  reached  by  the 
 network  and  to  develop  budgets  and  financial  projections.  Many  networks,  particularly  those  affiliated  with  broadcast  networks  and  cable  or  DBS  operators,  obtain  pre-  launch  commitments  for  carriage  on 
 widely  distributed  tiers,  which  helps  to  facilitate  investment  in  the  network.  In  an  a  la  carte  environment,  it  would  be  impossible  for  even  these  networks  to  obtain  reliable  distribution  estimates  in  advance  of 
 launch,  adversely  affecting  financing  opportunities  for  the  network.  250 

 Oxygen  also  believes  that  financing  is  essential  to  the  development  of  any  new  independent  programming  service,  and  carriage  commitments  are  prerequisites  to  obtaining  it.  Oxygen  states  it  was 
 able  to  obtain  a  pre-  launch  commitment  from  Tele-  Communications,  Inc.  (later  AT&  T  Broadband)  to  carry  Oxygen  on  cable  systems  serving  seven  million  homes  in  the  first  two  years  of  service  after  launch. 
 The  TCI  commitment  enabled  Oxygen  to  obtain  the  first  round  of  financing  it  needed  to  launch.  It  also  helped  Oxygen  to  obtain  carriage  commitments  from  other  MVPDs,  so  that  within  the  first  year  of  its 
 launch,  Oxygen  had  commitments  for  carriage  to  more  than  20  million  homes,  which  commitments  in  turn  enabled  Oxygen  to  secure  additional  rounds  of  financing.  According  to  Oxygen,  its  experience 
 demonstrates  that  carriage  on  a  popular  service  tier,  providing  assurance  of  distribution  to  millions  of  homes,  is  essential  to  obtain  the  financing  necessary  to  develop  and  launch  an  independent  program 

 Starz  Comments  at  6. 
 Turner  Comments  at  6. 
 Hallmark  Channel  at  7. 
 See  Joint  Programmers  Comments  at  25,42. 
 MBC  Comments  at  7. 

 246 
 247 
 248 
 249 
 250 
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 THE  REPORT  52 
 network.  It  states  that  a  la  carte  carriage  commitments  fkom  the  same  MVPDs  would  not  have  provided  meaningful  committed  distribution,  and  financing  would  have  been  ~navailable.~~   

 The  advocates  on  behalf  of  small  businesses  (  ASB)  state  that  programmers  will  suffer  a  death  spiral..  .from  the  diminished  base  of  subscribers  from  the  current  business  model  and  the  resulting  loss  of 
 advertisers..  .7252  ASB  states  that  current  cable  offerings  represent  a  thriving  industry  that  employs  thousands  of  Americans  and  provides  millions  of  consumers  the  variety  and  choice  they  want.  It 
 concludes  that  mandatory  a  la  carte  distribution  of  program  networks  would  silence  these  voices  and  reduce  the  new  opportunities  for  developing  thriving  networks  and 

 Competition.  According  to  Fox  Cable,  a  reduction  in  the  number  of  programmers  because  of  a  la  carte  would  reduce  economic  competition  among  networks.  It  states,  for  example,  that  National 
 Geographic  competes  for  audience  and  advertising  share  with  other  family-  oriented  entertainment  networks.  National  Geographic  bargains  with  MVPDs  to  be  placed  in  the  same  neighborhood  of  the 
 systems  programming  lineup  as  the  channels  with  which  it  competes.  If  National  Geographic  were  forced  off  tiers  because  of  a  la  carte,  its  competitors  would  face  less  competition,  which  in  turn  could 
 enable  them  to  raise  their  own  license  fees  or  reduce  the  quality  of  their  program  offerings.  Fox  Cable  states  that  either  way  consumers  would  suffer  the  consequences.  Similarly,  networks  that  now  are  willing 
 to  take  on  the  financial  risk  of  producing  content  more  narrowly  targeted  at  a  niche  audience  may  feel  compelled  to  revert  to  more  generic  programming  in  an  effort  to  appeal  to  a  mainstream  audience. 
 Alternatively,  other  networks  may  pursue  an  audience  willing  to  pay  higher  a  la  carte  rates  by  offering  adult-  themed  content  -  perhaps  even  content  that  some  would  consider  indecent.  In  short,  competition 
 would  be  the  unwitting  victim  of  any  a  la  carte  policy.  254 
 Contracts.  An  a  la  carte  requirement  would  likely  force  the  re-  negotiation  of  thousands  of  affiliation  contracts.  Courtroom  Television  asserts  that  any  regulatory  intervention  requiring  a  la  carte 
 carriage  would  effectively  abrogate  long-  standing  contractual  arrangements  and  override  carefully  negotiated  tier  placement  provisions,  thus  depriving  those  networks  of  contractual  benefits  they  bargained 
 for  and  reasonably  expected  to  receive.  255 
 Copyright.  Joint  Programmers  assert  that  a  la  carte  will  negatively  affect  copyright  holders.  They  state  that  the  right  of  a  content  creator  to  specify  the  manner  in  which  its  work  is  distributed  to  the  public 
 and  to  profit  from  its  efforts  is  a  fundamental  principle  of  copynght  law.  It  notes  that  the  Supreme  Court  has  found,  [  tlhe  rights  conferred  by  copyright  are  designed  to  assure  contributors  to  the  store  of 
 knowledge  a  fair  return  for  their  labors  256  and  Federal  copyright  law  specifies  that  owners  of  copyrighted  audiovisual  works  have  the  exclusive  right  to  do  and  to  authorize  others  to  display  the 
 copyrighted  work  publicly.  2s7  Joint  programmers  state  that  a  la  carte  mandate  would  deprive  niche 
 Oxygen  Comments  at  2-  3.  25  I 
 252  ASB  Comments  at  2. 
 253  Id. 
 Fox  Cable  Comments  at  9.  254 
 255  Courtroom  Television  Comments  at  22. 
 Harper  &  Row  v.  Nation  Enterprises,  105  S.  Ct.  2218  (1985).  256 
 257  17  U.  S.  C.  4  106. 
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 THE  REPORT  53 
 \  / 
 networks,  who  are  copyright  owners  or  licensees,  of  the  right  to  decide  how  their  content  is  distributed  and  displayed  to  the  public,  and  as  such,  is  at  odds  with  fundamental  principles  of  copyright 

 C.  Diversity  and  Program  Quality 
 It  has  long  been  a  basic  tenet  of  national  communications  policy  that  the  widest  possible  dissemination  of  information  from  diverse  and  antagonistic  sources  is  essential  to  the  welfare  of  the 
 public.  2s9  The  Congress,  the  Commission,  and  the  Courts  have  all  stated  that  diversity  is  one  of  the  paramount  goals  in  Federal  communications  policy. 

 There  was  a  near  universal  response  from  program  networks,  cable  operators,  and  others,  that  a  la  carte  regulation,  of  any  type,  would  harm  consumers  because  the  publics  interest  in  program  diversity 
 would  be  threatened.  Viacom,  for  example,  states  that  the  imposition  of  a  la  carte  would  result  in  fewer  choices  and  diminished  diversity.  260  EWTN  asserts  that  the  movement  to  an  a  la  carte  model  will  result  in 
 the  reshaping  of  MVPD  lineups  from  a  model  that  does  an  extremely  good  job  of  broadly  serving  community  needs  and  interests  into  one  that  will  be  merely  a  contest  between  channels  as  to  which  one 
 can  generate  the  most  a  la  carte  revenue.  261  Indeed,  a  diverse  array  of  interest  groups  and  public  officials  across  America  have  urged  the  government  to  reject  a  la  carte  because  of  its  severe  impact  on  diversity.  262 

 Consolidation  of  New  and  Established  Services.  Hallmark  asserts,  inter  alia,  that  a  la  carte  would  lead  to  a  reduction  of  diverse  independent  content  providers  because  the  economic  burdens  would  be  so 
 great  that  only  the  large  media  companies  with  substantial  operating  economies  would  be  left  to  compete.  263  GSN  agrees  and  asserts  that  the  resulting  financial  pressures  would  likely  yield  further 
 consolidation,  with  the  broadcast  network  conglomerates  using  their  established  brands,  cross-  promotional  opportunities,  and  financial  wherewithal  to  acquire  other  program  networks  struggling  as  a 
 result  of  conversion  to  a  la  carte  carriage.  264 

 Joint  Programmers  Comments  at  66.  258 
 259  Turner  I  ,  512  U.  S.  at  663-  64  citing  United  States  v.  Midwest  Video  Corp.,  406  U.  S.  649,  668  n.  27  (1972) 
 (plurality  opinion)  (quoting  Associated  Press  v.  United  States,  326  U.  S.  1,  20  (1945)). 

 26a  Viacom  Comments  at  27. 

 261  EWTN  Comments  at  6. 
 See  e.  g.,  Womens  Alliance  Comments  at  1;  Woodhull  Institute  Comments  at  1;  Step  Up  Comments  at  1,  Rainbow  Push  Coalition  Comments  at  1;  National  Urban  League  Comments  at  1;  Hispanic  Federation  Comments  at 
 1;  National  Asian  Pacific  American  Legal  Consortium  Comments  at  1;  FFBC  Comments  at  11;  and  NCTA  Reply  Comments  at  5.  Dozens  of  elected  officials  have  also  written  letters  to  Congress  and  the  Commission  detailing  the 
 adverse  consequences  that  an  a  la  carte  mandate  would  have  on  diversity  and  consumers,  generally  concluding  that  such  obligations  would  be  a  classic  case  of  a  solution  that  is  far  worse  than  any  perceived  problem.  See,  e.  g., 
 Letter  from  Harvey  C.  Johnson,  Mayor,  Jackson,  Mississippi,  to  Reps.  Joe  Barton  and  John  Dingell,  U.  S.  House  of  Representatives  (July  12,  2004);  Letter  from  Roosevelt  F.  Dom,  Mayor,  Inglewood,  California,  to  Reps.  Joe  Barton 
 and  John  Dingell,  US.  House  of  Representatives  (July  12,  2004);  Letter  from  Irene  H.  Brodie,  Mayor,  Robbins,  Illinois,  to  Reps.  Joe  Barton  and  John  Dingell,  U.  S.  House  of  Representatives  (July  12,  2004). 

 262 

 Hallmark  Comments  at  11-  12.  263 
 GSN  Comments  at  8.  264 
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 THE  REPORT  54 
 There  is  broad  agreement  that  new  program  networks  would  suffer  the  most  from  a  la  carte.  DirecTV  states  that  because  viewers  are  likely  to  choose  only  those  channels  with  which  they  are  already 
 familiar,  an  a  la  carte  regime  would  threaten  smaller,  nascent  channels  and  stymie  the  development  of  innovative  new  channels.  The  result  would  be  a  diminution  in  programming  diversity,  as  the  available 
 choices  converge  to  the  formats  with  the  widest  general  appeal  at  the  expense  of  niche  and  specialty  programming  and  their  audiences.  According  to  DirecTV,  reducing  the  current  depth  and  breadth  of 
 programming  to  a  much  more  limited  and  homogenized  slate  of  offerings  would  be  a  significant  loss  to  all  viewers.  265 

 Joint  Programmers  and  Scripps  state  that  an  a  la  carte  mandate  likely  would  delay  the  development  of  VOD  and  other  new  services,  some  in  foreign  languages,  by  depriving  niche  networks  of 
 the  resources  needed  to  fund  these  new  opportunities.  266  Bloomberg  states  that  it  has  been  working  to  introduce  interactive  television  services,  such  as  the  Bloomberg  Virtual  Channel,  that  allows  viewers  to 
 access  breaking  financial  information  on  demand  while  watching  Bloomberg  Television  or  the  programming  of  their  choice.  It  states  that  this,  and  other  similar  products,  could  not  have  been 
 developed  and  introduced  under  an  a  la  carte  regulatory 
 Broadcast  Stations  and  the  Basic  Sewice  Tier.  A  broadcast  station  is  a  unique  kind  of  program  network  for  purposes  of  this  analysis.  Broadcast  stations  are  suppliers  of  content  for  distribution  by 
 MVPDs,  but  they  also  supply  video  programming  directly  to  those  television  households  that  are  not  MVPD  subscribers  and  to  television  sets  in  MVPD  households  that  are  not  connected  to  such  service. 
 Broadcast  stations  and  networks,  like  MVPDs  and  non-  broadcast  program  networks,  derive  revenue  from  advertising. 

 Broadcast  stations  assert  that  an  a  la  carte  requirement  would  cripple  their  business,  even  though  all  broadcasters  are  available  over-  the-  air  and  are  receivable  by  households  with  antennas.  For  example, 
 Univision  states  that  local  broadcast  stations  face  a  number  of  economic  burdens  that  competing  program  networks  do  not  share.  Univision  explains  that,  unlike  other  non-  broadcast  networks,  local  broadcast 
 stations  have  significant  distribution  costs  associated  with  continuously  operating  a  high-  powered  transmitter.  It  states  that  these  distribution  costs  are  doubled  during  the  digital  television  transition  as 
 local  stations  must  pay  for  tower  space  and  electricity  for  two  duplicative  facilities.  Univision  states  that  local  broadcast  stations  can  only  serve  a  limited  geographic  area,  unlike  the  nationwide  footprint  of  a 
 program  network.  Univision  also  states  that  a  local  broadcast  station  has  to  survive  purely  on  advertising  revenues,  whereas  a  program  network  has  two  revenue  streams.  Univision  argues  that  an  a  la  carte 
 approach  would  further  erode  the  economic  base  on  which  every  free,  over-  the-  air  broadcast  station 
 DirecTV  Comments  at  5.  265 
 266  Joint  Programmers  Comments  at  74;  Scripps  Comments  at  4 

 Bloomberg  Comments  at  7.  See  also  Allbritton  Reply  Comments  at  8-  9  (stating  that  Newschannel  8,  a  local  267  non-  broadcast  news  network  it  owns  in  Washington,  D.  C.,  would  not  be  able  to  survive  on  an  a  la  carte  basis). 
55
 THE  REPORT  55 
 .  /  depends  in  order  to  survive,  as  local  stations  could  no  longer  offer  potential  advertisers  access  to  all  local  viewers.  268 

 CU  states  that  local  broadcast  stations  that  serve  community  needs  and  interests  should  be  made  available  to  all  subscribers,  along  with  national  broadcast  networks  that  meet  a  public  interest  test  by 
 providing  diverse  viewpoints  on  matters  of  national  and  global  importance.  It  adds  that  locally  oriented  public,  educational  and  government  programming  would  be  adequately  funded  if  the  basic  service  tier  is 
 preserved.  269  The  Alliance  for  Community  Media  (  ACM),  representing  PEG  providers,  asserts  that  any  attempts  to  break  up  the  basic  service  tier  could  seriously  jeopardize  the  existence  of  public  access 
 channel^.^"  ACM  further  asserts  that  the  relegation  of  local  access  channels  to  a  themed  tier  would  destroy  the  ability  for  every  subscriber  in  the  community  to  receive  such  channel^.^" 

 Cablevision  is  critical  of  the  broadcast  signal  carriage  and  the  basic  service  tier  requirements,  the  latter  of  which  it  terms  the  must  buy  provision  of  Title  VI.  It  argues  that  these  requirements  restrict 
 consumer  choice,  artificially  raise  consumer  costs,  and  deny  cable  operators  the  ability  to  tailor  service  packages  based  on  competitive  pressures  and  customer  needs2  Cablevision  states  that  the  basic  service 
 tier  requirement,  along  with  the  broadcast  signal  carriage  regulations,  cost  each  subscriber  about  $1  3.00  per  month.  If  they  wish  to  receive  any  non-  broadcast  program  networks,  they  must  purchase  the  entire 
 tier  of  broadcast  channels  as  a  condition  of  access  to  the  cable  service  they  want.  Cablevision  states  that  there  is  no  justification  for  giving  broadcast  channels  a  mandatory  pride  of  place  in  a  cable  operators 
 line-  up  through  must  buy.  Cablevision  posits  that  as  cable  service  has  become  less  a  vehicle  for  improved  reception  of  broadcast  signals  and  more  a  home  to  creative  and  popular  programming  services, 
 the  related  requirement  that  customers  purchase  broadcast  programming  as  a  condition  of  access  to  other  cable  programming  services  has  become  an  increasing  cause  of  customer  dissatisfaction.  Moreover, 
 unlike  cable,  satellite  subscribers  are  not  forced  to  buy  broadcast  programming  as  part  of  their  service  offering.  Rather,  they  can  choose  to  receive  it  for  a  separate  fee.  Cablevision  asserts  that  this  gives 
 satellite  an  unfair  competitive  advantage  over  cable  in  competing  for  certain  customers.  273 
 Positive  Effects.  Not  all  parties  find  that  an  a  la  carte  mandate  would  harm  diversity.  Some  believe  that  a  la  carte  will  correct  a  marketplace  infirmity  by  permitting  economic  forces  to  dictate 
 program  options.  Pioneer,  for  example,  states  that  many  program  networks  may  not  be  able  to  stand  on  their  own  in  the  media  marketplace.  However,  this  would  be  the  result  of  a  dynamic  market  where  all 
 programming  vendors  are  allowed  to  introduce  their  product  and  where  consumer  choice  ultimately 
 Univision  Comments  at  7.  National  Religious  Broadcasters  states  that  without  the  presence  of  some  basic  tier,  religious  broadcast  stations  would  be  irreparably  harmed.  It  posits  that  while  a  la  carte  would  ostensibly  offer 
 consumers  freedom  to  choose,  in  the  end,  their  choices  could  be  reduced  if  the  economic  model  that  supports  many  broadcasters  is  damaged  or  destroyed.  NRJ3  Comments  at  2  .  Religious  Voices  in  Broadcasting  (  RVB)  asserts  that 
 to  exclude  broadcast  stations  from  the  basic  service  tier,  or  to  redefine  the  basic  service  tier  in  a  manner  inconsistent  with  Section  623,  would  undercut  the  broadcast  choices  necessary  to  preserve  balanced  and  diverse  perspectives. 
 RVB  Comments  at  5. 

 268 

 CUiCFA  Reply  Comments  at  18.  269 
 270  ACM  Comments  at  2  . 

 Jd.  at  3.  271 
 Cablevision  Reply  Comments  at  2  .  272 
56
 THE  REPORT  56 
 <  >  determines  the  kind  of  programming  the  public  would  like  to  see.  274  The  Urban  Broadcasting  Company 

 (  UBC)  states  that  it  has  faced  difficulty  obtaining  carriage  deals  with  MVPDs.  It  predicts  that  if  consumers  are  able  to  purchase  minority  cable  television  networks  on  an  a  la  carte  basis,  then  cable 
 operators  could  not  refuse  carriage  based  on  the  argument  that  consumers  are  not  willing  to  pay  for  minority  cable  networks.  It  alleges  that  cable  operators  state  that  they  cannot  provide  carriage  because 
 there  is  already  enough  programming  that  targets  people  of  color..  .[  and]  too  many  consumers  are  not  willing  to  pay  for  minority  cable  networks  to  be  added  to  their..  .cable  television  package^."*^^  UBC 
 believes  that  a  la  carte  could  open  up  the  cable  industry  to  minority  cable  television  networks. 
 d.  Choice 

 A  la  carte  would  likely  have  a  significant  negative  impact  on  consumer  choice.  Cable  and  satellite  subscribers  would  lose  the  ability  to  pick  and  choose  program  networks  by  randomly  scrolling  through 
 channel  options  now  available  on  a  tier.  On  this  point,  Comcast  states  that  services  offered  a  la  carte  would  make  channel  surfing  nearly  impossible.  276  Themed  tiers  would  also  make  it  equally  difficult  to 
 channel  surf  for  desired  programming.  Moreover,  a  themed  tier  requirement  would  result  in  the  arbitrary  assignment  of  program  networks  and  would  fi-  ustrate  subscribers  ability  to  easily  select  certain 
 programming.  Disney  asserts  that  the  practical  difficulty  of  the  government  sorting  through  program  networks  to  determine  which  tier  on  which  they  should  be  placed  would  be  imprudent  and 
 impossible.  277  Viacom  states  that  while  some  individuals  may  have  relatively  narrow  programming  tastes,  most  watch  a  broad  range  of  program  genres  and,  thus,  likely  would  need  to  purchase  multiple 
 themed  tiers  in  order  to  satisfy  their  interests.  According  to  Viacom,  this  problem  would  become  magnified  in  multi-  resident 

 4.  Experiences  With  A  La  Carte 
 a.  International 
 A  la  carte  sales  of  programming  to  consumers  have  been  introduced  by  MVPDs  in  several  other  countries.  The  system  used  in  Canada  has  drawn  the  most  interest  from  commenters  both  as  a  model  of 
 how  a  la  carte  could  be  successfully  implemented  in  the  U.  S.,  as  well  as  an  example  of  the  difficulties  associated  with  a  la  carte.  A  la  carte  has  also  been  implemented  or  tested  in  Japan,  Hong  Kong,  and 
 France.  Commenters  argue  that  the  experiences  in  these  countries  illustrate  the  illusory  nature  of  the  benefits  of  a  la  carte.  For  example,  Disney  posits  that  international  a  la  carte  offerings  provide  no  basis  to 
 support  imposition  of  a  la  carte  requirements  in  the  U.  S.  and  it  would  be  misguided  for  the  Commission  to  consider  potential  a  la  carte  regulations  in  the  United  States  based  on  any  international  experiences.  279 

 Pioneer  Comments  at  7-  8;  RTC  Comments  at  16  (asserting  that  although  some  program  networks  may  not  274  survive,  this  is  not  necessarily  a  negative  result). 
 *  UBC  Comments  at  2.  Comcast  Comments  at  19-  20.  276 

 277  Disney  Comments  at  25. 
 278  Viacom  Comments  at  28-  29. 
 29  Disney  Comments  at  33-  34. 
57
 THE  REPORT  57 
 Canada.  CU  states  that  nearly  all  the  major  Canadian  cable  operators  are  offering  programming  on  an  a  la  carte  basis,  as  well  as  in  tiers.  It  argues  that  this  demonstrates  the  feasibility  of  offering  a  la 
 carte  selection  to  consumers.  28o  Opponents  of  a  la  carte  counter  that  the  cultural  and  regulatory  institutions  of  Canada  are  significantly  different  from  those  in  the  U.  S.  and  the  Canadian  system  is 
 unlikely  to  be  successful  if  imported  to  the  U.  S.  Furthermore,  they  argue  that  few  Canadians  take  advantage  of  the  choice  offered  by  a  la  carte  sales.  Since  Canada  has  been  discussed  as  a  potential  model 
 of  the  benefits  and  pitfalls  of  a  la  carte  sales,  the  Canadian  system  is  examined  in  detail  in  Appendix  E  of  this  Report.  This  examination  leads  to  the  conclusion  that  the  Canadian  model  is  not  particularly 
 successful  and  is  unlikely  to  transfer  successfully  to  the  United  States. 
 Japan.  Skyperfect,  a  direct  to  home  (  DTH)  satellite  provider  in  Japan,  was  launched  in  1996;  the  same  year  as  Echostar  was  launched  in  the  United  States.  SkyPerfect  offers  a  la  carte  channels  in 
 addition  to  channel  packages.  Disney  asserts  that  SkyPerfect  uses  this  model  because  the  Japanese  government  requires  it.  Seven  years  after  launch,  at  the  end  of  2003,  six  percent  of  television  households 
 in  Japan  subscribed  to  Skyperfect.  By  comparison,  at  the  end  of  2003,  nearly  nine  percent  of  U.  S.  television  households  subscribed  to  Echostar,  and  even  greater  number  were  subscribers  to  DirecTV. 
 Accordingly,  DTH  penetration  in  Japan  appears  to  have  grown  at  a  significantly  slower  rate  than  in  the  U.  S.  Disney  argues  that  this  is  due  in  part  to  the  mandatory  a  la  carte  requirement.  Furthermore,  as  a 
 result  of  the  mandatory  a  la  carte  offering  and  lack  of  a  consistent  basic  package,  most  individual  channels  continue  to  achieve  less  than  35  percent  penetration  of  Skyperfects  total  subscriber  base. 
 Disney  asserts  that  Japanese  consumers  do  not  appear  to  be  embracing  the  a  la  carte  option  as  is  evidenced  by  the  fact  that  a  la  carte  subscriptions  comprise,  on  average,  less  than  10  percent  of  a 
 channels  total  DTH  subscriber  base.  281 
 Other  Countries.  PCCW,  Hong  Kongs  largest  utility,  launched  a  digital  subscriber  line  (  DSL)  programming  service  in  2003,  through  which  it  offers  approximately  twenty-  five  channels  on  an  a  la  carte 
 basis.  Disney  reports  that  PCCWs  choice  to  offer  channels  a  la  carte  was  based  on  PCCWs  initial  research,  which  indicated  that  the  a  la  carte  model  was  preferred  over  a  basic  bundling  model.  Although 
 in  business  only  a  short  time,  PCCW  already  is  exploring  potential  packaging  strategies.  282  According  to  Disney,  the  distribution  business  models  in  France  are  similar  to  those  in  the  United  States.  However, 
 several  years  ago,  French  cable  operator  Noos  experimented  briefly  and  unsuccessfully  with  offering  consumers  a  pure  a  la  carte  service. 

 b.  Domestic 
 Premium  networks  have  been  available  on  an  a  la  carte  basis  for  many  years.  Despite  this  fact,  several  program  networks  commented  that  past  efforts  to  launch  program  newtorks  on  an  a  la  carte  basis 
 in  the  United  States  were  fraught  with  difficulties  and  were  generally  unsuccessful.  Satellite  carriers,  such  as  DirecTV,  also  have  attempted  to  offer  program  services  on  an  a  la  carte  basis  with  little  success. 
 However,  C-  Band  satellite  carriers  continue  to  offer  many  services  on  an  a  la  carte  basis. 
 Comcast  explains  that  Home  Team  Sports,  now  SportsNet,  was  originally  offered  only  as  an  a  la  carte  service.  Accordingly,  it  was  unable  to  generate  revenues  consistent  with  management  expectations 
 or  sufficient  to  justify  the  quality  improvements  management  envisioned  for  the  service.  In  the  late  1980s, 
 280  CU  Comments  at  7-  8. 
 28  Disney  Comments  at  33-  34. 

 *  ~d  .  at  34. 
58
 THE  REPORT  58 
 it  began  migrating  from  a  la  carte  to  the  expanded  basic  tier.  According  to  Comcast,  the  move  had  a  dramatic  impact.  For  example,  when  the  Baltimore  County  cable  system  moved  it  to  the  tier  in  1995, 
 there  was  a  significant  price  reduction  for  subscribers.  When  offered  a  la  carte,  Baltimore  County  subscribers  paid  $15.99,  but  when  the  channel  was  moved  to  a  tier,  the  effective  price  dropped  to  about 
 $1.  Comcast  also  states  that  subscribers  had  greater  access  to  the  service.  As  an  a  la  carte  service,  Sportsnet  had  approximately  10,000  subscribers  in  Baltimore  County,  but  when  it  was  moved  to  the  tier, 
 the  subscribership  jumped  to  over  170,000.  One  additional  result  of  the  move  to  the  tier  is  that  Sportsnet  has  been  able  to  substantially  increase  the  quality  of  its  service.  Comcast  states  that  the  quality  increases 
 came  in  many  forms:  (1)  acquisition  of  additional  sports  rights  (e.  g.,  more  professional  and  collegiate  games),  (2)  more  original  programming  (e.  g.,  pre-  and  post-  game  live  programming,  sports  news 
 programming),  (3  )  more  experienced  on-  air  talent  (e.  g.,  nationally-  recognized  game  announcers),  and  (4)  equipment  and  service  upgrades  (e.  g.,  introduction  of  HDTV).  283 

 The  Golf  Channel  launched  as  an  a  la  carte  service  in  1995.  According  to  Scripps,  by  1996,  it  was  teetering  on  the  edge  of  bankruptcy  because  its  subscription  revenues  at  low  take-  rates  could  not 
 cover  its  costs.  The  network  then  abandoned  its  a  la  carte  model,  migrated  to  expanded  basic  tiers,  obtained  wider  distribution,  and  ultimately  has  become  a  successful  tiered  programming  service  with 
 about  60  million  subscribers.  284 
 Disney  Channel  originally  launched  in  1983  as  a  premium  a  la  carte  service.  Disney  states  that,  as  such,  it  was  necessary  for  Disney  Channel  to  constantly  attract  and  retain  new  subscribers,  requiring  it 
 to  allocate  a  significant  portion  of  its  sales  revenues  toward  marketing  and  promotion.  In  the  mid  to  late  1990s,  Disney  Channel  transitioned  from  a  pay  a  la  carte  channel  to  a  service  that  was  offered  as  part  of  a 
 widely-  distributed  Basic  or  Expanded  Basic  package.  According  to  Disney,  this  enabled  Disney  Channel  to  expand  rapidly  and  to  reach  a  significantly  larger  and  more  diverse  audience  that  was  not  required  to 
 pay  a  premium  fee.  With  this  greater  subscriber  penetration,  Disney  Channel  was  able  to  redirect  funds  previously  committed  to  marketing  and  subscriber  retention  and  spend  them  instead  on  high  quality 
 family  programming.  Disney  posits  that  had  Disney  Channel  remained  a  premium  a  la  carte  service,  it  is  unlikely  that  it  would  contain  as  much  original  family-  friendly  programming  that  it  does  today.  285 

 When  it  first  launched  service  in  1994,  DirecTV  explored  the  possibility  of  offering  an  a  la  carte-  like  service  called  Personal  Choice.  DirecTV  states  that  it  discovered,  however,  that  subscribers  found 
 the  process  of  choosing  a  la  carte  offerings  too  complex.  According  to  the  satellite  carrier,  one  DirecTV  executive  involved  in  the  research  on  Personal  Choice  observed  that,  while  viewers  supported  a  la  carte  in 
 the  abstract,  they  found  choosing  programming  on  an  a  la  carte  basis  to  be  paralyz[  ing].  DirecTV  states  that  its  research  regarding  Personal  Choice  showed  that  customers  overwhelmingly  would  limit  their 
 choices  to  the  most  well  known  channels  (ESPN  and  the  like),  giving  credence  to  program  networks  claims  that  newer  networks  would  struggle  or  fail  in  an  a  la  carte  environment.  2x6 

 Commenters  assert  that  there  is  evidence  of  actual  harm  to  program  networks  resulting  from  themed  tiers.  Commenters  note  that  DirecTV  once  offered  a  family  pack  option  to  its  subscribers. 
 2x3  Comcast  Comments  at  26-  27.  See  also  Tennis  Reply  at  4  (asserting  that  efforts  to  offer  niche  sports  networks  on 
 an  a  la  carte  basis  have  failed  in  the  past  and  that  relegating  niche  sports  networks  to  themed  tiers  is  unworkable). 

 Scripps  Comments  at  20.  284 
 Disney  Comments  at  18-  19,  285 
 DirecTV  Comments  at  7-  8.  286 
59
 THE  REPORT  59 
 7-  / 
 Hallmark  states  that  its  service  was  offered  on  this  themed  tier,  but  negotiated  with  DirecTV  to  be  moved  to  a  more  popular  tier  of  service  because  viewership  was  low  and  distribution  of  the  Family  package 

 remained  limited.  2x7  A&  E  surmises  that  DirecTV  discontinued  this  tier  of  service  because  there  was  insufficient  interest  to  sustain  it.  28x 

 Home  satellite  dishes  (  C-  Band  or  HSD)  provide  television  signals  to  subscribers  via  satellites  operating  generally  in  the  C-  Band  frequency.  289  Unlike  DBS,  which  uses  small  dishes,  HSD  antennas  are 
 between  four  and  eight  feet  in  diameter  and  can  receive  a  wide  range  of  unscrambled  (free)  programming  and  scrambled  programming  purchased  from  program  packagers  that  are  licensed  to  facilitate  subscribers 
 receipt  of  video  pr~  gramrning.~~    There  are  approximately  30  satellites  operating  in  the  C-  band,  which  carry  over  500  channels  of  programming  combined;  approximately  350  channels  are  available  free  of 
 charge  and  150  are  scrambled  and  require  a  s~  bscription.~~    A  number  of  these  program  services  are  offered  on  an  a  la  carte  basis,  including  most  of  the  program  networks  that  oppose  the  imposition  of  a 
 mandatory  a  la  carte  requirement.  292 
 The  record  was  largely  silent  on  the  issue  of  C-  Bands  successful  provision  of  a  la  carte  programming.  Turner,  however,  argues  that  C-  Band  provides  empirical  data  that  belies  the  expectation 
 that  a  la  carte  reduces  prices  or  is  valued  by  consumers.  The  SuperstarhVetlink  Group  (Superstar),  the  most  popular  provider  of  C-  Band  programming,  offers  channel-  by-  channel  sales.  However,  Turner  states, 
 a  la  carte  prices  are  substantially  higher  than  the  average  channel  prices  when  networks  are  purchased  in  bundles  through  this  service.  Subscribing  to  just  four  leading  cable  networks  ESPN,  CNN,  TNT,  and 
 Lifetime  costs  $17.46  per  month  -  an  average  of  $4.37  per  channel  per  month  and  adding  Discovery  qualifies  a  subscriber  for  the  five  channel  discount  and  drops  the  monthly  fee  to  $14.95,  an  average  of 
 $2.99  per  channel  per  month.  According  to  Turner,  by  subscribing  to  the  SuperPak  Basic  package  a  subscriber  could  add  another  29  popular  channels  for  $25.99  per  month-  an  average  of  76$  per  channel 
 per  month.  2y3 
 G.  NewModels 
 As  reflected  above,  the  harms  of  mandatory  a  la  carte  and  themed  tiers  were  the  significant  focus  of  attention  by  the  majority  of  commenters.  The  Report  now  examines  a  different  type  of  a  la  carte 

 Hallmark  Comments  at  4.  287 
 288  A&  E  Comments  at  34-  35. 

 28y  To  receive  one  or  more  scrambled  channels,  an  HSD  owner  must  purchase  an  integrated  receiver-  decoder  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. 

 290  Subscribership  is  measured  by  the  number  of  authorized  Videocipher  modules,  which  provide  subscribers  with 
 access  to  scrambled  programming. 

 Over  the  past  eight  years,  HSD  has  experienced  a  continued  decline,  with  502,191  households  receiving  C-  band  29  I  service  as  of  June  30,2003. 

 See  http://  www.  amersatt.  com/  Pick-  a-  Pak.  htni  (American  Satellite  Technology);  292  httw//  skvvision.  comlprogramming/  alacarte.  html  (Skyvision);  httr,://  www.  satelliteprogramming.  coiidnew/  cgi- 
 biidsps  honie.  asp  (Satellite  Programming  Services,  Inc.) 
 293  Turner  Reply  Comments  at  12. 
60
 THE  REPORT  60 
 regulation,  one  where  program  networks  may  remain  bundled,  but  also  are  offered  on  an  a  la  carte  basis.  Certain  parties  propose  that  the  government  act  to  mandate  more  channel  selection  alternatives. 
 Consumers  Union  (  CU),  for  example,  envisions  a  quasi-  Canadian  paradigm,  it  calls  mixed  bundling,  where  cable  operators  and  satellite  carriers  offer  programming  on  tiers  and  individual  channels  on  an  a  la 
 carte  basis.  CU  states  that  consumers  should  have  the  option  of  picking  and  choosing  programming,  grouping  together  those  they  want,  instead  of  paying  for  programming  they  do  not  watch  or 
 find  offensive.  In  effect,  CU  believes  that  all  programming  beyond  the  basic  tier  should  be  unbundled,  but 

 cable  operators  should  be  able  to  retain  the  option  of  tiering,  in  addition  to  offering  programming  on  an  a  la  carte  basis.  294  CU  states  that,  under  its  proposal,  independently-  owned  and  public  interest  channels 
 would  be  promoted  alongside  those  owned  by  large  media  companies  and  new  and  diverse  content  providers  would  find  it  easier  to  obtain  carriage.  295 

 The  Broadband  Service  Providers  Association  (  BSPA)  supports  a  paradigm  similar  to  CUs  proposal,  but  calls  its  suggestion,  voluntary  a  la  carte.  According  to  BSPA,  this  approach  is  created 
 when  MVPDs  are  given  the  option  of  offering  programming  in  a  variety  of  packages  or  tiers  that  are  different  than  the  content  bundles  driven  by  the  constraints  of  most  widely  distributed  tier  requirements 
 found  in  current  affiliation  contracts.  Like  CUs  suggestion,  tiering  would  not  be  prohibited,  but  MVPDs  could  offer  content  in  additional  alternative  packages  that  can  address  expressed  consumer  desire  for 
 more  choice,  control  and  flexibility.  These  new  offerings  could  include  new  mini-  tiers  of  content  or  individual  channels.  According  to  BSPA,  this  structure  would  enhance  competition  among  MVPDs  by 
 allowing  competing  distributors  the  opportunity  to  define  and  offer  their  own  solutions  to  consumer  requests  for  either  choice  or  diversity.  It  would  also  provide  greater  opportunities  for  consumers  to 
 validate  the  content  they  want  and  pay  for  with  a  better  understanding  of  the  relative  costs  of  different  content.  296  RCN,  a  member  of  BSPA,  states  that  voluntary  a  la  carte  would  allow  cable  operators  to  offer 
 consumers  smaller  programming  tiers,  limited  to  the  kind  or  categories  of  programming  consumers  most  value,  while  still  supporting  programming  diversity,  because  less-  widely  viewed  niche  programming 
 could  continue  to  be  bundled  with  similar,  but  more  widely-  viewed  channels.  297 

 294  cu  Comments  at  10. 
 295  Id.  at  6-  7 
 296  BSPA  Comments  at  11.  BSPA  asserts  that  voluntary  a  la  carte  is  a  solution  that  should  receive  further  evaluation. 
 It  states  that  such  an  approach  has  significant  potential  that  could  be  fully  realized  as  the  industry  continues  to  deploy  digital  systems  that  do  not  have  the  technical  limitations  of  current  analog  networks.  BSPA  states  that  this 

 option  cannot  be  fully  understood,  evaluated,  or  appreciated  unless  it  is  subjected  to  a  multi-  year  market  test.  Several  BSPA  members  are  willing  to  bear  the  cost  of  implementing  a  multi-  year  test  of  voluntary  a  la  carte  to  more 
 fully  determine  its  benefits  and  potential  issues.  Zd.  at  3-  4.  In  order  to  conduct  such  test,  BSPA  suggests  that  the  government  remove  certain  contractual  and  regulatory  barriers.  These  include,  but  are  not  limited  to:  (1)  must  carry; 
 (2)  retransmission  consent;  (3)  tying  arrangements;  (4)  most  widely  distributed  tier  requirements;  (5)  channel  placement  requirements;  and  (6)  potential  interim  dual  carriage  requirements.  Zd.  at  15-  16.  Contracts  also  would 
 need  to  allow  for  the  unbundling  and  repackaging  of  content  at  reasonable  rates  where  the  content  producer  and  the  distributor  can  share  in  margins  produced  by  any  higher  prices  for  a  la  carte  options.  BSPA  states  that  there  are  a 
 number  of  pricing  issues  that  may  need  to  be  re-  evaluated  or  renegotiated  to  implement  the  test,  such  as:  (1)  channel  placement  discounts;  (2)  multi-  service  discounts  or  tying  discounts;  and  (3)  premiums  charged  for  a  la  carte 
 placement  versus  most  widely  distributed  tier  placement.  Zd.  at  16. 
 297  RCN  Reply  Comments  at  5. 
61
 THE  REPORT  61 
 <  >  Several  program  networks  oppose  such  proposals.  298  Turner  asserts  that  voluntary  a  la  carte 

 would  not  be  voluntary  for  program  networks.  Under  such  a  regime,  program  networks  would  be  legally  prevented  from  following  a  business  plan  for  a  widely  distributed  channel  and  for  negotiating  in 
 the  marketplace  for  such  distribution.  Absent  some  clear  market  failure  (which  does  not  exist  here),  the  government  should  not  limit  the  contracting  options  of  free  market  participants.  Turner  remarks  that  for 
 the  government  to  deprive  program  networks  of  the  ability  to  negotiate  for  such  a  term  is  not  voluntary  -  it  is 

 Joint  Programmers  state  that  even  a  relatively  modest  a  la  carte  mandate,  like  those  proposed,  would  drive  capital  away  from  niche  networks  because:  (1)  a  la  carte  distribution  would  lack  the 
 guarantee  of  revenues  provided  by  a  networks  current  distribution  contracts  (with  tier  and  penetration  requirements  and/  or  incentives);  (2)  without  such  a  guarantee,  investors  could  not  be  assured  of  any  level 
 of  future  performance  of  the  network,  or  even  whether  an  asset  would  continue  to  exist  for  the  predictable  future;  (3)  at  the  very  least,  the  projected  return  on  investment  would  be  reduced;  and  (4)  the  investment 
 would  become  significantly  more  unpredictable  and  risky,  causing  institutions  to  flee  niche  networks  for  safer  havens.  300 

 Disney  illustrates  the  costs  of  having  a  program  network  offered  on  an  a  la  carte  basis  as  well  as  part  of  a  tier.  Through  1998,  Disney  Channel  was  offered  in  a  hybrid  fashion.  Disney  states  that  on  some 
 cable  systems  it  was  a  premium  service,  on  others  it  was  part  of  a  premium  package  or  part  of  tiers,  and  on  others  it  was  on  expanded  basic.  Disney  comments  that  aggressive  marketing  of  Disney  Channel  as 
 part  of  a  package  of  premium  services  with  HBO  and  Showtime  showed  some  gains;  however,  these  proved  to  be  short-  lived.  When  Disney  Channel  was  offered  either  as  part  of  a  new  product  tier  or  third 
 tier  with  three  to  four  newer  cable  networks  (like  Court  TV  and  Sci-  Fi)  for  between  $3.95  and  $5.95  per  month,  there  was  initial  success.  However,  after  the  initial  lift,  penetration  began  to  drop.  Even  at  their 
 peak,  these  tiers  reached  only  40  percent  penetration  and  then  only  for  a  brief  period.  These  strategies  continued  to  require  heavy  investment  in  transactional  costs  associated  with  marketing  and  retention 
 programs  for  the  various  methods  of  distribution,  which,  in  turn,  unavoidably  diverted  funds  from  programming.  From  1990  through  1997,  Disney  Channel  annually  invested  on  average  approximately  10 
 percent  of  its  total  revenue  from  a  la  carte  sales  on  telemarketing,  subscriber  acquisition  programs,  and  retention  programs.  In  the  late  1  9  9  0  ~~  it  became  clear  that  the  hybrid  approach  was  inefficient  and  too 
 costly  to  sustain  long-  term.  After  Disney  Channels  transition  from  a  la  carte  to  expanded  basic,  telemarketing,  subscriber  acquisition,  and  retention  costs  were  de  minimis,  and  Disney  Channel  could  thus 
 spend  more  of  its  total  revenues  on  diverse,  quality  pr~  gramming.~ 
 Hallmark  states  that  voluntary  a  la  carte  represents  a  dangerous  intrusion  into  the  marketplace.  Any  regulatory  program  to  promote,  voluntary  a  la  carte  service  offerings  to  control  cable  rates  would 
 likely  be  accompanied  by  government  involvement  in  pricing  that  adversely  affected  programmers  and  diversity  in  the  past.  302  Cable  operators  agree  that  regulation  of  wholesale  packaging  and  pricing 
 arrangements  could  lead  to  regulation  of  a  cable  operators  retail  operations  and  to  a  host  of  unintended 
 298  See  Disney  Reply  Comments  at  8;  Discovery  Comments  at  19;  A&  E  Reply  Comments  at  3  . 
 Turner  Reply  Comments  at  10.  299 
 Joint  Programmer  Comments  at  42-  3. 
 Disney  Comments  at  20-  2  1. 
 Hallmark  Comments  at  13. 

 300 
 30  I 
 302 
62
 THE  REPORT  62 
 consequences  such  as  higher  administrative  costs,  reduced  investment,  and  diminished  consumer  choice.  303 
 Echostar  agrees  that  the  implementation  of  a  voluntary  a  la  carte  system  could  be  costly  for  both  program  networks  and  distributors,  but  such  costs  should  not  be  an  insuperable  obstacle.  Echostar  also 
 suggests  that  such  costs  should  not  deter  the  Commission  from  encouraging  voluntary  a  la  carte  offerings.  It  remarks  that  NCTA  estimates  that  30  percent  of  cable  households  subscribe  to  the  digital  tier  and  thus 
 have  the  necessary  hardware  to  make  a  la  carte  work.  According  to  Echostar,  coupling  these  digital  cable  households  with  the  20  percent  of  MVPD  households  that  subscribe  to  DBS  yields  a  sizeable  portion  of 
 MVPD  households  that  have  the  ability  to  receive  programming  on  a  per  channel  basis.  As  such,  a  voluntary  approach  will  permit  each  entity  to  decide  for  itself  what  type  of  offerings  best  suits  its  business 
 model  .304 
 H.  Recommendations  for  the  Retail  Market 
 The  bundling  of  channels  into  tiers  of  service  is,  generally,  an  economically  efficient  way  of  providing  MVPD  subscribers  with  video  programming.  Although  the  current  MVPD  business  model 
 may  result  in  some  consumer  dissatisfaction,  government  intervention  through  a  la  carte  regulation  likely  will  harm  MVPDs,  program  networks,  and  especially  MVPD  subscribers.  Further,  although  increases  in 
 MVPD  rates  continue  to  concern  Congress,  the  Commission,  and  consumers,  competition,  as  a  remedy,  is  preferred  to  government  intervention  and  all  of  its  unintended  negative  consequences.  A  la  carte,  as  a 
 means  to  control  rates,  should  be  viewed  through  this  same  prism:  competition,  not  regulation,  is  the  answer.  J 

 The  success  of  the  marketplace  is  evident  with  DBS,  which  offers  many  tiers  of  service  often  at  prices  lower  than  those  offered  by  cable  operators.  Dish  Network  offers  the  Americas  Top  60  package 
 for  only  $25  per  month,  other  packages  at  incrementally  higher  prices,  as  well  as  several  separate  tiers  devoted  to  foreign  language  programming.  At  $39  per  month,  DirecTV  provides  its  Total  Choice 
 package  of  90  video  channels,  which  also  includes  local  television  stations.  In  addition,  new  satellite  entrant  VOOM  has  a  package  of  120  channels  (35  in  high  definition)  for  $39.90.305 

 Indeed,  there  is  a  growing  consensus  that  more  choices  in  program  selection  will  appear  through  marketplace  forces  and  technological  advances,  even  absent  a  legal  mandate.  Smaller  Operators  assert 
 that  the  development  of  a  highly  competitive  video  marketplace  obviates  the  need  for  government  intrusion  into  program  packaging  and  SBC  Communications,  one  of  the  largest 
 telecommunications  companies  in  the  world,  recently  announced  its  intention  to  provide  video  services 
 See  Smaller  Operators  Comments  at  12.  303 
 304  Echostar  Reply  Comments  at  19. 

 It  was  recently  reported  that  Dominion  Video,  which  operates  the  Christian-  oriented  Sky  Angel  satellite  television  service,  will  soon  provide  a  la  carte  channels  to  its  customers.  See  Dominion/  Sky  Angel  Gives  Support  to 
 A  La  Carte,  SkyREPORT,  November  18,  2004,  at  2  (  DBS  company  is  working  on  a  package  of  about  15  family-  oriented  channels  that  will  be  added  to  its  core  slate  of  programming  if  the  subscriber  wants  to  pick  up  the 
 channels  .  ) 

 305 

 Smaller  Operators  Comments  at  13.  306 
63
 THE  REPORT  63 
 <  >  with  a  fiber-  based,  IP-  driven  network  that  would  allow  for  customizable  channel  lineups.  307  Verizon  is 

 also  planning  a  large  scale  entry  into  the  residential  video  programming  market.  308  Whether  these  entries  succeed,  and  whether  they  drive  the  development  of  new  packaging  and  pricing  models,  should  be  left  to 
 the  marketplace  without  the  needless  cost  and  distorting  impact  of  unnecessary  or  excessive  government  regulation. 

 Television  broadcast  stations  have  recently  begun  using  their  excess  digital  spectrum  to  provide  subscribers  a  limited  offering  of  the  most  popular  cable  programming  services  at  a  low  price.  For 
 example,  U.  S.  Digital  Television,  Inc.  (  USDTV)  is  leasing  spectrum  from  broadcast  television  stations  to  provide  an  over-  the-  air  20  to  30  channel  package  for  a  price  of  $19.95  a  month,  less  expensive  than 
 most  expanded  basic  service  tiers  offered  by  cable  operators.  USDTV  provides  35  channels  in  Salt  Lake  City  and  24  channels  in  Las  Vegas  and  Albuquerque  of  non-  broadcast  and  broadcast  programming.  309  It 
 is  planning  to  expand  to  30  markets  by  the  end  of  this  year,  and  aims  to  serve  all  major  markets.  USDTV  competitor,  Digital  Antenna  Systems  (DAS),  an  entity  controlled  by  Emmis  Broadcasting,  is  planning  to 
 distribute  a  similar  package  of  local  broadcast  stations  plus  20-  30  cable  networks  to  special  receivers  for  $25  per  month.  Reportedly,  it  has  35  broadcast  companies,  representing  370  broadcast  stations,  signed  on 
 to  date.  310 
 Program  choice,  through  marketplace  forces,  is  growing.  Many  cable  operators  see  a  bright  future  for  video-  on-  demand  programming.  In  fact,  Cox  Communications  CEO,  Jim  Robbins,  has  stated  that  the 
 cable  industry  will  eventually  adopt  video-  on-  demand  as  its  business  model.  31  Cable  operators  have  offered  VOD  carriage  to  new  program  networks  as  an  alternative  to  carriage  on  linear  24/  7 
 As  such,  video-  on-  demand  has  increased  program  diversity  on  cable  and  has  been  the  proving  ground  for 
 307  See  Press  Release,  SBC  Communications  Announces  Advances  in  Initiative  to  Develop  IP-  Based  Residential 
 Network  for  Integrated  Video,  Internet  VoIP  Services  (June  22,  2004).  See  also,  Jen  Belson  and  Matt  Richtel,  SBC  to  Start  Project  to  Send  TV  Over  Lines,  New  York  Times,  November  17,  2004,  at  C1.  (  SBC  Communications,  as 

 part  of  its  effort  to  compete  head-  on  with  the  cable  industry  for  television  subscribers,  plans  to  announce  today  that  it  will  pay  $400  million  to  Microsoft  for  software  used  to  deliver  TV  programming  over  high-  speed  data  lines.) 

 See  Almar  Latour,  Verizon,  SBC  Saddle  Up  to  Compete  Head  to  Head  With  Cable  in  TV  Service,  Wall  Street  308  Journal,  November  8,2004,  at  B  1. 
 See  U.  S.  Digital  Television,  Inc.,  About  USDTV!,  at  htip:  l/  www.  usdtv.  com/  why-  usdtv.  php;  see  also,  USDTV  309  Press  Release,  USDTV  Surpasses  10,000  Subscriber  Milestone,  September  22,2004. 
 Emmis  Press  Release,  Television  Broadcasters  Initiative  Unveiled:  Strategy  Would  Re-  establish  Relationship  With  Audience  and  Monetize  the  Digital  Spectrum  for  Broadcasters,  April  20,  2004;  Amy  Maclean,  Eye  Spy: 
 Spotlight  on  Competition-  Not  Hot  Air,  CableFAX  Daily,  October  6,  2004,  at  5. 

 310 

 311  See  Frank  Ahrens,  Sorry-  No  A  la  Carte  Cable,  Washington  Post,  March  26,  2004,  at  El.  VOD  also  has  the 
 potential  to  change  the  current  program  network  advertising  model.  See  Kevin  Corcoran,  Building  VODs  New  Ad  Model,  Multichannel  News,  September  27,  2004,  at  63  (unlike  traditional  linear  program  networks,  VOD  offers 

 advertisers  direct  access  to  highly  targeted  demographic  groups  and  the  cost  of  reaching  a  specific  audience  segment  through  VOD  can  be  extremely  cost-  effective). 

 32  Shirley  Brady,  Heres  How  to  Get  Comcast  Carriage,  CableWORLD,  June  21-  July  4,  2004,  at  21-  26. 
64
 THE  REPORT  64 
 \  , 
 new  networks.  313  VOD  is  also  spurring  the  development  of  new  applications  that  provide  consumers  more  control  over  pr~  gramming.~  ~ 

 Other  products,  such  as  digital  video  recorders  (  DVRs),  are  now  available.  A  DVR  is  a  device  connected  to  a  television  set,  either  embedded  in  a  set-  top  box  or  as  a  stand-  alone  device,  which  uses  a 
 hard  disk  drive,  software,  and  other  technology  to  digitally  process  and  record  programming.  DVR  technology  allows  a  consumer  to  pause,  replay,  rewind,  and  fast-  forward  television  programs  as  well  as 
 skip  past  commercials.  DVRs  do  not  play  prerecorded  videocassettes  or  DVDs,  but  can  record  pay-  per- 
 view  signals,  television  series  or  any  other  content  for  playback  at  the  subscribers  discretion.  Enabled  by  this  and  other  technologies,  such  as  EPGs,  it  is  anticipated  that  programming  services  will  increasingly  be 

 offered  in  small  tiers  or  on  a  pure  a  la  carte  on-  demand  basis,  giving  subscribers  significant  control  over  what  they  watch  and  pay  for.  315 

 Broadband,  and  video  over  internet  protocol  in  particular,  will  eventually  bring  consumers  more  programming  on  an  a  la  carte  basis.  Video  streaming  over  the  Internet,  with  its  lower  distribution  costs,  is 
 becoming  commonplace  and  may  ultimately  supplant  existing  non-  Internet  based  platforms  for  the  distribution  of  certain  types  of  video  content.  316  Bandwidth  intensive  video  product  will  help  spur 
 broadband  penetration.  Increased  broadband  penetration  would  likely  serve  to  initiate  the  creation  of  still  more  video  streaming  p  r  ~d  u  c  t  .~ 
 As  digital  technology  advances,  video  streaming  over  the  Internet  and 

 See  Ken  Belson,  To  Watch  These  Programs  on  Cable,  You  Have  to  Find  Them  First,  New  York  Times,  June  7,  2004,  at  C1.  (Matt  Bond,  Executive  Vice  President  for  Programming  at  Comcast  states:  With  video  on  demand, 
 you  can  put  niche  programming  on  air  that  might  not  otherwise  be  available.  Comcast  has  three  exclusive  on-  demand  channels:  (1)  Wisdom  TV;  (2)  Anime  Network;  and  (3)  Atom  TV.).  Matt  Stump,  Anime  Finds  VOD 
 Success,  Multichannel  News,  September  6,  2004,  at  3  1  (Anime  Network  has  become  so  successful  under  the  VOD  model  that  it  has  been  able  to  launch  as  a  linear  network).  See  also,  Linda  Moss,  Comcast  Readies  Hispanic  VOD, 
 Multichannel  News,  September  27,  2004,  at  24  (Comcast  is  assembling  up  to  200  hours  of  Spanish  language  on-  demand  programming  for  the  end  of  2004);  R.  Thomas  Umstead,  Banse:  New  Nets  Could  be  VOD-  Based, 
 Multichannel  News,  September  27,  2004,  at  22  (Comcast  is  hoping  to  cultivate  three  on-  demand  channels  as  part  of  its  new  joint  venture  with  Sony  Pictures  Entertainment,  as  part  of  the  MGM  purchase). 

 313 

 For  example,  new  forms  of  EPGs  are  now  being  introduced  by  cable  operators  to  work  in  conjunction  with  VOD.  See  Steve  Donohue,  I-  Guide  Starts  to  Roll  Out,  Multichannel  News,  September  20,  2004,  at  6.  (Gemstar  and 
 Comcasts  new  high  resolution  I-  Guide  pennits  subscribers  to  easily  navigate  on-  demand  programming,  among  other  features.).  See  also,  Mavis  Scanlon,  Coming  Soon  to  Programming  Guides:  Can  t  Miss  VOD,  Cableworld, 
 July  5-  18,2004  at  18. 

 3  I4 

 See  Cablevision  Reply  Comments  at  3. 
 See  Matt  Stump,  Dutch  Treatfor  IPTV  Multichannel  News,  September  20,  2004,  at  54.  (Pace  Micro  Technology  recently  debuted  a  new,  below-$  100  IPTV  set  top  box,  permitting  video-  on-  demand  over  the  Internet,  at  the  same 
 time  Microsoft  announced  a  major  IPTV  trial  with  Telecom  Italia);  Mike  Langberg,  Forget  A  La  Carte  Cable  Idea;  The  Future  is  in  Internet  TV,  The  Mercury  News,  July  23,  2004;  Phone  Lines  Delivers  Next-  Gen  TV,  Wired 
 News,  September  27,  2004,  available  at  htt~:  llwww.  wired.  co~  news/~  rint/  O.  1294,65  105,  OO.  html.  (television  delivered  over  Internet  protocol  is  poised  for  a  breakthrough  in  Europe  and  the  United  States.). 

 315 
 316 

 See,  e.  g.,  Paul  Bond,  VOD  Service  Boxes  Up  VC  Money,  Hollywood  Reporter  East,  July,  12,  2004,  at  5.  (Akimbo  plans  to  sell  a  set  top  box  that  downloads  on-  demand  content  from  the  Internet  over  a  broadband 
 connection);  Mark  Seavy,  Akimbo  Working  With  CE  Makers  on  Internet-  Based  TV  Service,  Communications  Daily,  October  25,  2004,  at  2. 

 317 
65
 THE  REPORT  65 
 <  >  other  distribution  alternatives  will  become  more  competitive.  318  New  products  offered  on  an  a  la  carte 

 basis  via  broadband  are  now  available.  For  example,  Starz  Encore  recently  launched  STARZ!  Ticket  on  Real  Movies,  an  Internet-  based  subscription  movie  service  enabling  consumers  to  select  from  among  at 
 least  one  hundred  movies  available  for  downloading  over  broadband  connections.  The  service  will  allow  subscribers  to  access  and  view  premium  movies  without  subscribing  to  either  cable  or  direct  broadcast 
 satellite  service. 
 In  response  to  these  competitive  pressures  and  technological  options,  cable  operators  now  offer  a  variety  of  channels  and  packages.  Comcast,  for  example,  offers  over  1,000  program  and  price 
 combinations  and  allows  its  subscribers  to  create  a  mix  of  services  to  meet  varied  program  interests  or  financial  constraint^.^  '^  Comcast  states  that  pay-  per-  view  and  VOD  programming  provide  countless 
 additional  programming  options  for  its  subscribers.  320  Charter  offers  a  limited  basic  tier,  an  expanded  basic  tier,  and  many  additional  channels  on  four  separate  digital  tiers  (the  Family  and  Information  Tier, 
 the  Movie  Tier,  the  Sports  Tier,  and  the  Latino  Tier).  321  BHN  has  focused  on  growing  its  digital  offerings,  which  include  a  digital  tier,  a  wide  array  of  on-  demand  programming,  a  new  digital  sports 
 cluster,  and  a  digital  video  recorder  option.  322  Additionally,  all  MVPDs  offer  subscribers  dozens  of  premium  and  pay-  per-  view  channels. 

 There  is  agreement  that  more  consumer  choices  will  appear  as  technology  progresses  and  video  competition  flourishes.  Considering  all  trends,  the  government  should  implement  policies  that  unleash 
 competition  and  motivate  MVPDs  to  innovate,  rather  than  to  force  providers  to  offer  programming  on  a  per  channel  or  themed-  tier  basis.  The  government  should  not  displace  the  current  economic  model,  which 
 is  working  to  the  benefit  of  MVPDs  and  their  customers,  with  regulations  which  will  likely  distort  the  marketplace  and  slow  down  advances  in  technology  that  will  eventually  be  the  answer  to  the  questions 
 posed  in  this  proceeding. 
 See  Testimony  of  Thomas  G.  Baxter,  President,  Time  Warner  Cable,  On  A  La  Carte  and  Theme  Tier  Regulation,  Before  the  House  Committee  on  Energy  and  Commerce,  Subcommittee  on  Telecommunications  and  the  Internet, 
 July  14,  2004  (the  Internet  is  poised  to  affect  video  distribution  in  unimaginable  ways). 

 318 

 319  For  example,  in  Arlington,  Virginia,  Comcast  customers  can  choose  from  11  different  tiering  options  ranging 
 from  the  basic  service  tier  to  a  tier  of  high  definition  programming.  Comcast  does  not  charge  separately  for  the  latter  programming,  but  only  for  the  HD-  capable  set-  top  box  needed  to  receive  it. 

 Comcast  Comments  at  9-  10.  320 
 321  Charter  Comments  at  3. 

 322  BHN  Comments  at  8-  9. 
66
 THE  REPORT  66 
 111.  THE  WHOLESALE  MARKET  FOR  VIDEO  PROGRAMMING 
 The  second  issue  addressed  in  the  Report  concerns  the  acquisition  of  programming  by  MVPDs  at  the  wholesale  level.  In  negotiations  for  programming,  MVPDs  seeking  to  acquire  the  rights  to  an 
 individual  program  network  are  sometimes  presented  with  the  option  or  obligation  to  contract  for  one  or  more  other  networks  which  might  not  be  desired  individually.  The  process  and  economics  of  this 
 contracting  have  raised  questions  as  to  whether  it  results  in  the  carriage  of  less  desired  or  less  popular  programming,  raising  the  cost  of  service  to  the  public  or  taking  away  channel  capacity  that  MVPDs  could 
 devote  to  other  better  uses.  Among  the  elements  of  the  relationship  examined  here  are  the  statutory  provisions  and  regulatory  requirements  governing  the  parties,  such  as  retransmission  consent  for 
 broadcast  stations.  The  Report  also  examines  some  of  the  rates,  terms,  and  conditions  governing  the  contractual  relationship  between  the  parties. 

 A.  Industry  Overview 
 The  number  of  program  networks  has  increased  significantly  over  the  last  ten  years.  As  of  year-  end  1994,  there  were  approximately  106  non-  broadcast  program  networks  available  for  carriage  by 
 MVPDs.  As  of  June  2003,  there  were  more  than  339  national  non-  broadcast  program  networks  carrying  a  wide  array  of  diverse  news,  sports,  and  entertainment  programming.  323  Nine  of  the  top  20  non-  broadcast 
 program  networks  (ranked  by  subscribership)  are  vertically  integrated  with  a  cable  operator.  324  Sports  programming  warrants  special  attention  because  of  its  widespread  appeal  and  strategic  significance  for 
 MVPDs.  There  are  at  least  84  regional  networks,  28  of  which  are  sports  channels,  many  owned  at  least  in  part  by  large  cable  companies.  There  are  also  37  regional  and  local  news  networks  that  compete  with 
 local  broadcast  stations  and  national  cable  news  networks.  Program  networks  on  digital  tiers,  especially  sports,  childrens,  and  female-  oriented  genres,  have  grown  in  popularity  as  digital  penetration  levels  have 
 increa~  ed.~~  '  In  2003,  there  were  61  programming  services  that  were  planned,  but  not  yet  operational.  326 
 B.  Requirements  and  Remedies 
 1.  Broadcast  Signal  Carriage  Requirements 

 See  2003  Video  Competition  Report,  19  FCC  Rcd  at  16  17.  323 
 324  Id..  19  FCC  Rcd  at  1691. 

 325  The  Beta  Research  Group  recently  released  results  from  its  2004  Beta  Research  Digital  Cable  Subscriber  Study. 
 Beta  conducted  a  total  of  801  telephone  interviews  in  July  and  August  with  a  national  sample  of  digital  cable  subscribers  from  32  cable  systems.  When  digital  cable  subscribers  were  asked  the  perceived  value  (in  dollar  terms) 

 of  digital  basic  cable  networks  per  month,  the  following  digital  networks  were  assigned  the  following  values:  (1)  Soapnet--$  2.18  per  month;  (2)  Fox  Sports  Digital  Nets--$  2.16  per  month;  (3)  MTV  Jams--$  l.  97;  (4)  Nicktoom-- 
 $1.93;  (5)  Noggin--$  1.91;  (6)  Nick  Games  and  Sports--$  1.90;  (7)  Toon  Disney--$  1.88;  (8  )  Discovery  Kids  Channel-  41.85;  (9)  Lifetime  Movie  Network--$  1.84;  and  (10)  MTV  Hits--$  1.83.  See  Beta  releases  Digital-  Sub  Study, 
 Multichannel  News,  October  20,2004. 
 See  2003  Competition  Report,  19  FCC  Rcd  at  1693.  326 

 .  -  .".  .  .  -  ... 
67
 THE  REPORT  67 
 .  Under  Section  614  of  the  Act,  a  commercial  television  broadcast  station  is  entitled  to  request  mandatory  carriage  on  cable  systems  located  within  the  stations  market.  327  Commercial  broadcast  stations 

 that  do  not  request  mandatory  carriage  may  elect  to  negotiate  for  camage  with  MVPDs.  This  retransmission  consent  negotiation  process  is  discussed  below.  The 
 Act  and  the  Commissions  rules  state  that  systems  with  more  than  12  usable  activated  channels  must  carry  local  commercial  television  stations,  up  to  one-  third  of 

 the  aggregate  number  of  usable  activated  channels  of  such  sy~  tem[  s].~~*  Beyond  this  requirement,  the  carriage  of  additional  television  stations  is  at  the  discretion  of  the  cable  operator.  With  regard  to  the 
 placement  of  local  commercial  television  stations,  commercial  broadcast  stations  may  choose  among  several  channel  positions  on  which  to  be  carried3*    and  the  signals  must  be  made  available  to  every 
 subscriber  of  the  cable  system.  330  Under  Section  615  of  the  Act,  and  in  addition  to  commercial  television  stations,  cable  systems  are  obliged  to  carry  local  noncommercial  educational  television  stations  (  NCE 
 stations)  according  to  a  different  formula  and  based  upon  a  cable  systems  number  of  usable  activated  channels.  33  NCE  stations  have  channel  positioning  rights  similar  to  their  commercial  counterparts.  332 

 The  terrestrial  broadcast  television  industry  is  currently  transitioning  from  an  analog  format  of  broadcasting  to  a  digital  form  of  broadcasting.  Broadcast  stations  are  required  by  statute  to  transition  to 
 digital  by  January  1,  2007,  if  certain  conditions  are  met.  333  Digital  television  allows  broadcasters  to  transmit  a  high  definition  signal,  several  standard  definition  television  signals  (  multicasting),  or 
 ancillary  services  in  addition  to  video  programming.  In  2001,  the  Commission  adopted  rules  related  to  the  cable  carriage  of  digital  broadcast  television  signals.  334  The  Commission  held  that  a  digital-  only 
 television  station  can  immediately  assert  its  right  to  carriage  on  a  local  cable  system.  335  The  Commission  also  ruled  that  a  television  station  that  returns  its  analog  spectrum  and  converts  to  digital  operations  must 
 be  carried  by  local  cable  systems. 
 Section  338  of  the  Act  requires  satellite  carriers  to  carry  upon  request  all  local  television  broadcast  stations  signals  in  local  markets  in  which  the  satellite  carrier  carries  at  least  one  local  television 
 broadcast  signal  pursuant  to  the  statutory  copyright  license  (ie.  the  carry-  one,  carry-  all  requirement).  336  Satellite  carriers  are  not  required  to  provide  the  signal  of  a  local  television  broadcast  station  to  subscribers 

 327  47  U.  S.  C.  9  534;  47  C.  F.  R.  $76.56.  See  Broadcast  Signal  Carriage  Issues,  8  FCC  Rcd  2965  (1993)  (  Must 
 Carry  Order);  Broadcast  Signal  Carriage  Issues,  9  FCC  Rcd  6723  (1994)  (  LMust  Carry  Reconsideration).  A  stations  market  for  carriage  purposes  is  its  designated  market  area,  or  DMA,  as  defined  by  Nielsen  Media  Research. 

 328  47  U.  S.  C.  9  534(  b)(  1)(  B);  47  C.  F.  R.  9  76.56(  b)(  2). 
 329  47  U.  S.  C.  5  534(  b)(  6);  47  C.  F.  R.  576.57. 

 330  47  U.  S.  C.  9  534(  b)(  7);  47  C.  F.  R.  5  76.56(  d). 
 33  47  U.  S.  C.  9  535(  a)  and  (b);  47  C.  F.  R.  Q  76.56(  a). 
 332  47  U.  S.  C.  5  535(  g)(  5);  47  C.  F.  R.  9  76.57(  b). 
 333  47  U.  S.  C.  5  309Cj)(  14). 
 See  generally,  Carriage  of  Digital  Television  Broadcast  Signals,  16  FCC  Rcd  2598  (2001).  334 
 335  Z  ,  16  FCC  Rcd  at  2606. 

 See  47  U.  S.  C.  0  338.  See  DBS  Broadcast  Carriage  Report  and  Order,  16  FCC  Rcd  at  1934,  clarified,  Implementation  of  the  Satellite  Home  Viewer  Improvement  Act  of  1999;  Broadcast  Signal  Carriage  Issues,  16  FCC 
 Rcd  16544  (2001). 

 336 

 .  ..  .  , 
68
 THE  REPORT  68 
 f  > 
 in  that  stations  local  market  on  any  particular  channel  number  or  to  provide  the  signals  in  any  particular  order,  except  that  the  satellite  carrier  must  retransmit  the  signal  of  the  local  television  broadcast  stations 

 to  subscribers  in  the  stations  local  market  on  contiguous  channels.  Congress  did  not  specifically  enact  DTV  carriage  requirements  for  satellite  carriers.  The  Commission,  however,  is  considering  how  the 
 local-  into-  local  SHVIA  requirements  apply  to  DBS  in  the  digital  carriage  context.  337 
 2.  Retransmission  Consent 
 Under  Section  325  of  the  Act,  cable  operators,  satellite  carriers,  and  other  MVPDs  are  prohibited  from  retransmitting  the  signal  of  a  commercial  television  station,  unless  the  station  whose  signal  is  being 
 transmitted  consents  or  chooses  mandatory  carriage.  338  Congress  enacted  the  retransmission  consent  provisions  to  allow  a  broadcast  station  to  negotiate  carriage  of  its  broadcast  signal  for  the  mutual  benefit 
 of  the  parties  involved.  Every  three  years,  a  commercial  television  station  must  elect  to  either  grant  retransmission  consent  or  pursue  its  statutory  carriage  rights.  339  Under  the  Act  and  the  Commissions 
 rules,  television  stations  are  prohibited  from  entering  into  exclusive  retransmission  agreements.  340 
 Section  325(  b)(  3)(  A)  expressly  directs  the  Commission  to  consider  the  impact  of  its  retransmission  consent  regulations  on  basic  service  tier  rates.  34  Section  325  reflects  Congress  concern 
 over  the  interplay  between  retransmission  consent  and  basic  rates.  In  1993,  when  the  Commission  first  considered  this  question,  it  found  little  evidence  of  rate  impact  and  declined  to  regulate  retransmission 
 consent  rates  at  that  time.  342 
 The  Commission  has  established  certain  retransmission  consent  policies  for  digital  broadcast  stations.  343  A  commercial  television  station,  broadcasting  in  both  formats  during  the  digital  transition 
 period,  may  choose  must  carry  or  retransmission  consent  for  its  analog  signal  and  retransmission  consent  for  its  digital  signal.  A  DTV-  only  commercial  television  station  may  elect  either  retransmission  consent 
 or  must  carry.  A  DTV-  only  noncommercial  station  is  entitled  to  must  carry.  While  a  noncommercial  television  station  does  not  have  retransmission  consent  rights  under  Section  325  of  the  Act,  it  may  enter 
 into  digital  carriage  agreements  with  MVPDs.  A  television  station  electing  retransmission  consent  may  negotiate  with  a  cable  operator  for  partial  carriage  of  its  digital  television  signal.  The  current  prohibition 

 337  Carriage  of  Digital  Television  Broadcast  Signals,  16  FCC  Rcd  at  2658. 
 338See  47  U.  S.  C.  0  325(  b)(  l)(  A),  (B);  47  C.  F.  R.  9  76.64 
 339  See  47  C.  F.  R.  9  76.64(  f).  In  the  last  retransmission  consent  election  in  October  2002,  nearly  all  broadcast  stations 
 elected  retransmission  consent.  See,  e.  g.,  Brigitte  Greenberg,  Most  TV  Stations  Go  For  Retrans  Consent  Over  Must  Carry,  Communications  Daily,  October  3,2004,  at  4-  5.  (The  majority  of  broadcast  stations  opted  for  retransmission 

 consent  with  only  stations  in  smaller  markets  choosing  must  carry).  This  report  does  not  reflect  the  fact  that  noncommercial  television  stations  cannot  elect  retransmission  consent  and  have  must  carry  as  their  only  option. 

 340See  47  U.  S.  C.  0  325(  b)(  3)(  C);  47  C.  F.  R.  6  76.65;  Implementation  of  Satellite  Home  Viewer  Improvement  Act  of  1999,  Retransmission  Consent  Issues:  Good  Faith  Negotiation  and  Exclusivity  15  FCC  Rcd  5445,  5463  (  Good  Faith 
 Order).  Under  the  Act,  the  exclusivity  requirements  are  effective  until  January  1,  2006.  See  47  U.  S.  C.  9 
 325(  b)(  3)(  C). 

 34  47  U.  S.  C.  0  325(  b)(  3)(  A). 

 342  Broadcast  Signal  Carriage  Issues,  8  FCC  Rcd  at  3005-  06. 
 343  See  generally,  Carriage  of  Digital  Television  Broadcast  Signals,  16  FCC  Rcd  at  2609-  2613 
69
 THE  REPORT  69 
 on  exclusive  retransmission  consent  agreements  encompasses  a  television  station's  analog  and  digital 

 Section  325(  b)(  3)(  C)  of  the  Act  requires  broadcasters  to  negotiate  in  good  faith  with  cable  operators  and  other  MVPDs  with  respect  to  carriage  of  their  signals.  345  In  implementing  this  provision, 
 the  Commission  determined  that  the  statute  did  not  intend  to  subject  retransmission  consent  negotiations  to  detailed  substantive  oversight  by  the  Commission.  346  In  promulgating  the  good  faith  provision, 
 Congress  specified  that  negotiating  different  terms  and  conditions  among  different  MVPDs,  based  on  competitive  marketplace  considerations,  is  not  a  failure  to  negotiate  in  good  faith.  347  The  Commission 
 found  that,  inter  alia,  proposals  for  carriage  conditioned  on  carriage  of  any  other  programming,  such  as  a  broadcaster's  digital  signals,  an  affiliated  cable  programming  service,  or  another  broadcast  station  either 
 in  the  same  or  a  different  market  is  presumptively  consistent  with  competitive  marketplace  considerations  and  the  good  faith  negotiation  requirement.  348  Nevertheless,  a  MVPD  may  demonstrate,  based  on  the 
 totality  of  the  circumstances  of  a  particular  retransmission  consent  negotiation,  that  a  television  broadcast  station  breached  its  duty  to  negotiate  in  good  faith.  The  Commission  entertains  specific  good  faith 
 disputes,  and  determines  whether  a  particular  party  has  provided  evidence  to  overcome  the  stated  presumptions,  in  an  adjudicatory  The  good  faith  negotiation  requirements  are  effective 
 until  January  1,  2006.350 
 In  the  Digital  Must  C  a  r  y  NPRA4,  the  Commission  asked  whether  it  should  prohibit  "tying"  arrangements,  in  which  the  television  station  requires  a  cable  operator  to  carry  the  station's  digital  signal 
 as  a  precondition  for  permission  to  carry  the  analog  signal.  351  ACA  urged  the  Commission  to  prohibit  broadcasters  from  tying  analog  carriage  to  digital  carriage  to  prevent  small  cable  operators  from  suffering 
 financial  distress.  352  While  acknowledging  the  important  concerns  raised  by  ACA,  the  Commission  did  not  adopt  rules  specifically  prohibiting  tying  arrangements  in  the  Digital  Must  Carry  First  Report  and 
 Order.  353  The  Commission  did,  however,  commit  to  monitor  potential  anti-  competitive  conduct  by  broadcasters.  The  Commission  sought  further  comment  on  issues  relevant  to  the  carriage  of  digital 
 signals  by  small  operators  in  the  Digital  Must  Carry  Further  Notice  because  the  record  did  not  contain 
 344  Id. 
 345  47  U.  S.  C.  Q  325(  b)(  3)(  C);  47  C.  F.  R.  Q  76.65. 
 346  See  Good  Faith  Order,  15  FCC  Rcd  5445. 

 347  47  U.  S.  C.  Q  325(  b)(  3)(  C)(  ii). 
 348Good  Faith  Order,  15  FCC  Rcd  at  5469.  In  2001,  the  Commission  applied  this  principle  in  rejecting  a  complaint  brought  by  Echostar.  The  Commission  stated  that  "offering  retransmission  consent  in  exchange  for  the  carriage  of 
 other  programming  such  as  a  cable  channel"  is  "consistent  with  competitive  marketplace  considerations."  See  EchoStar  Satellite  Corporation  v.  Young  Broadcasting,  Inc,  16  FCC  Rcd  15070,  15079  (CSB  2001)  (stating  that 
 "[  glood  faith  negotiation  requires  only  that  the  broadcaster  at  least  consider  some  other  form  of  consideration  if  the  MVPD  cannot  accommodate  such  carriage.") 

 34gSee  47  C.  F.  R.  9  76.65(  c). 
 See  also,  47  C.  F.  R.  0  -76.65(  f)  (good  faith  negotiation  requirement  sunsets  at  midnight  on  Dec.  31,2005).  350 
 3s'See  13  FCC  Rcd.  at  15118. 

 See  Small  Cable  Business  Association  (now  ACA)  NPRM  Comments  at  24-  27.  352 
 353  See  Carriage  of  Digital  Television  Broadcast  Signals,  16  FCC  Rcd  at  2613. 
70
 THE  REPORT  70 
 <  >  adequate  evidence  on  this  issue.  In  response  to  the  Commissions  questions,  small  cable  operators 

 alleged,  as  they  do  in  this  proceeding,  that  television  broadcast  networks  engage  in  unfair  retransmission  consent  tying  arrangements  which  harm  independent  cable  operators  and  their  customers.  354  The 
 Commission  will  address  these  concerns  again  in  the  forthcoming  DTVMust  Carry  Second  Report  and  Order. 

 A  controlling  stake  in  DirecTV  was  recently  purchased  by  News  Corp.,  which  owns  the  Fox  Broadcasting  Network,  interests  in  several  program  networks,  and  several  Fox  television  stations.  In 
 granting  the  license  transfer  from  Hughes  to  News  Corp.,  the  Commission  recognized  the  potential  harms  to  non-  affiliated  MVPDs  arising  from  the  combination  of  a  broadcaster  and  an  MVPD.  3SS  The 
 Commission  attached  conditions  to  the  merger  and  extended  the  commitments  News  Corp.  proposed  regarding  non-  discriminatory  access  to  program  networks  to  encompass  access  to  any  broadcast  station 
 that  News  Corp.  owns  and  operates,  or  on  whose  behalf  it  negotiates  retransmission  consent. 
 Certain  parties  have  argued  that  the  Commissions  analysis  of  the  transaction  bears  some  relevance  on  the  present  discussion.  356  This  represents  a  misunderstanding  of  the  nature  of  the 

 Commissions  transaction  review  process  as  well  as  the  specifics  of  the  transaction  between  News  Corp.  and  Hughes  Electronics.  The  transaction  review  process  at  the  Commission  is  directed  at  examining 
 changes  in  the  competitive  landscape  that  are  a  direct  result  of  the  transaction  at  issue.  To  the  extent  the  Commission  discussed  the  market  power  that  might  reside  in  the  combined  entity,  it  was  not  passing 
 upon  the  competitive  balance  of  negotiating  power  that  normally  exists  between  broadcasters/  programmers  and  MVPDs.  All  differentiated  products,  such  as  video  programming,  possess 
 some  degree  of  market  power  in  the  sense  that  there  are  no  perfect  substitutes.  The  critical  question  in  any  analysis  involving  differentiated  products  is  whether  the  existing  degree  of  market  power  is  sufficient 
 to  allow  the  firm  to  profitably  engage  in  the  hypothesized  anticompetitive  activity.  In  the  News  Corp.  transaction,  the  potential  refusal  to  sell  to  competing  MVPDs,  or  vertical  foreclosure,  was  the  activity  of 
 concern.  Commission  staff  rigorously  measured  News  Corporations  incentive  and  ability  post-  transaction  to  engage  in  the  hypothesized  activity  and  determined  that,  while  permanent  foreclosure  was 
 unlikely,  temporary  foreclosure  was  a  real  public  interest  Thus,  nothing  in  the  analysis  of  the  News  CorpJDirecTV  transaction  should  be  read  to  suggest  that  the  Commission  has  concluded  that  the 
 market  power  of  broadcasters  is  sufficient  to  lead  to  competitive  harms  in  the  absence  of  vertical  integration. 

 3.  Network  Nonduplication  and  Syndicated  Exclusivity 
 The  Commission  has  before  it  a  Petition  for  Inquiry  into  Retransmission  Consent  Practices  (  Petition),  filed  by  ACA  on  October  1,  2002.  In  its  Petition,  the  ACA  requested  that  the  Commission  initiate  a  formal  inquiry,  under 
 Section  403  of  the  Act,  to  investigate  the  retransmission  consent  practices  of  certain  television  broadcast  station  groups.  In  its  Petition,  ACA  asserts  that  broadcast  networks  and  station  groups  engage  in  unfair  retransmission 
 consent  tying  arrangements  that  result  in  harm  to  small  cable  operators  and  their  customers.  This  Petition  has  not  been  released  for  public  comment  and  remains  pending  before  the  Commission. 

 354 

 See  General  Motors  Corporation  and  Hughes  Electronics  Corporation-  News  Corporation  Limited,  19  FCC  Rcd  355  473,  565-  68,572-  75  (2004)  (  News-  Hughes  Merger  Order). 
 See,  e.  g.,  ACA  Comments  at  3  1;  RTC  Comments  at  1  1. 
 See  News-  Hughes  Merger  Order  (Appendix  D). 

 356 
 351 
71
 THE  REPORT  71 
 The  network  non-  d~  plication~~~  and  syndicated  exclusivity359  rules  entitle  a  broadcaster  to  prevent  a  cable  operator  from  carrying  a  competing  broadcast  signal.  Specifically,  these  rules  permit  a  local 
 television  broadcast  station  to  require  a  local  cable  operator  to  black-  out  programming,  to  which  it  owns  the  exclusive  in-  market  broadcast  rights,  that  is  also  broadcast  by  a  distant  television  station  carried  on  the 
 cable  system.  Network  non-  duplication  and  syndicated  exclusivity  are  aimed  at  protecting  the  economic  interests  of  local  television  stations  vis-  a-  vis  distant  market  stations  as  well  as  protecting  the  copyright 
 interests  of  the  programming  itself.  The  Commission  first  promulgated  these  regulations  more  than  20  years  ago  to  protect  the  advertising  revenue  of  local  broadcasters.  The  legislative  history  of  the  1992 
 Cable  Act  specifically  addressed  the  interplay  of  network  non-  duplication  with  retransmission  consent:  [  Tlhe  Committee  has  relied  on  the  protections  which  are  afforded  local  stations  by  the  FCCs  network 
 non-  duplication  and  syndicated  exclusivity  rules.  Amendments  or  deletions  of  those  rules  in  a  manner  which  would  allow  distant  stations  to  be  substituted  on  cable  systems  for  carriage  [flor  local  stations 
 carrying  the  same  programming  would,  in  the  Committees  view,  be  inconsistent  with  the  regulatory  structure  created  in  [the  Act].  360 

 4.  Antitrust 
 The  Clayton  Act  and  the  Robinson-  Patman  Act  are  designed  to  restrict  a  range  of  anticompetitive  The  Supreme  Courts  decision  in  Jefferson  Parish  Hospital  District.  No.  2  v.  Hyde  (  Jefferson 
 Parish)  is  the  seminal  case  for  analyzing  tying  and  bundling  arrangements  under  these  antitrust  In  Jefferson  Parish,  the  Court  stated  that  a  tie  has  been  illegal  only  if  the  seller  is  shown  to  have 
 sufficient  economic  power  with  respect  to  the  tying  product  to  appreciably  restrain  free  competition  in  the  market  for  the  tied  product..  ..  363  The  Court  found  that  there  is  nothing  inherently  anticompetitive  about 
 tying  or  bundling.  On  this  point,  the  Court  stated  that,  [  bluyers  often  find  package  sales  attractive;  a  sellers  decision  to  offer  such  packages  can  merely  be  an  attempt  to  compete  effectively-  conduct  that  is 
 entirely  consistent  with  the  Sherman  Just  this  term,  the  Court  warned  the  lower  courts  to  be  mindful  of  false  positives  (ie.,  mistaken  condemnation  of  pro-  competitive  conduct)  in  applying  the 
 antitrust  laws.  36s  Specifically,  the  Court  admonished  that  [  mlistaken  inferences  and  the  resulting  false  condemnations  are  especially  costly,  because  they  chill  the  very  [types  of  competitive]  conduct  the 
 antitrust  laws  are  designed  to 

 358  47  C.  F.  R.  $0  76.92-  76.95. 
 359  47  C.  F.  R.  $9  76.101-  76.110. 
 S.  Rep.  No.  102-  92,  at  38.  360 
 36  15  U.  S.  C.  $  13;  15  U.  S.  C.  $  14.  The  Clayton  Act  provides  civil  penalties  for  specific  types  of  restraints  on  trade, 
 such  as  exclusive  dealing  arrangements  and  tying.  The  Robinson-  Patman  Act  governs  price  discrimination  in  interstate  commerce  between  buyers  of  commodities  of  similar  grade  and  quality. 

 466  U.  S.  2  (1984)  (Justice  OConnors  Concurring  Opinion  is  important  in  the  analysis)  362 
 363  Id.  at  34  (internal  citation  omitted). 

 364  ~d  .  at  12. 

 Verizon  Comm.  Inc.  v.  Law  Offices  of  Curtis  V.  Trinko,  124  S.  Ct.  872,882  (2004). 
 Id.,  citing  Matsushita  Elec.  Industrial  t  o  .  v.  Zenith  Radio  Corp.,  475  U.  S.  574,  594  (1986))  (internal  quotations 

 365 
 366 
 omitted). 
72
 THE  REPORT  72 
 Commenters  claim  that  large  media  companies  have  power  in  the  programming  market  and  have  used  such  power  to  the  detriment  of  competition  and  consumer  welfare  by  conditioning  carriage  of  must- 
 have  programming  with  the  carriage  of  non-  essential  programming.  367  To  the  extent  that  any  network  could  achieve  market  power  and  engage  in  anticompetitive  conduct,  Joint  Programmers  suggest  that 
 cable  operators  have  ample  remedies  under  existing  antitrust  laws.  368  Viacom  agrees  and  argues  that  in  the  absence  of  MVPD/  programmer  vertical  integration,  an  individual  broadcast  network  does  not  have 
 sufficient  economic  power  in  the  tying  market  to  coerce  purchaser  acceptance  of  the  tied  It  states  that  it  is  not  sufficient  for  a  complainant  to  demonstrate  that  a  network  owned  station  merely 
 possesses  some  degree  of  market  power;  it  must  show  that  such  power  is  sufficient  to  coerce  acceptance  of  the  tied  product.  Viacom  believes  that  a  reviewing  court  almost  certainly  would  reject  any  claim  that  a 
 single  network  station  has  coercive  market  power.  370 
 C.  Historical  Practices  and  Outcomes 
 While  most  MVPDs  believe  that  bundling  at  the  retail  level  conveys  benefits,  some  operators  believe  that  they  are  harmed  when  program  networks  are  able  to  dictate  the  composition  of  the  retail 
 bundle.  The  RTCs  offer  a  historical  timeline  of  programmers  bundling  practices  over  the  last  30  years  to  demonstrate  the  increasing  negative  effects  the  practices  has  had  on  small  operators.  They  state  that 
 contractual  provisions  mandating  carriage  on  the  basic  tier  were  not  historically  ubiquitous.  In  the  early  1980s,  it  was  not  uncommon  for  contracts  for  even  the  most  popular  program  networks  to  allow  cable 
 operators  to  decide  tier  placement  and  packaging  of  such  services.  Rather  than  a  requirement  that  a  service  be  made  available  on  a  specific  tier  these  contracts  would  contain  sliding  scale  rates,  measured  on 
 a  per  subscriber  basis,  which  were  inversely  proportional  to  subscriber  penetration  for  the  service  on  that  operators  system.  In  other  words,  the  operators  per  subscriber  cost  for  the  service  increased  as  the 
 penetration  for  the  tier  on  which  the  service  was  offered  decreased.  371 
 RTCs  state  that  in  the  mid-  l980s,  a  series  of  judicial  decisions  that  eliminated  the  Commissions  first  two  sets  of  must  carry  rules,  as  well  as  enactment  of  the  1984  Cable  Act  that  eliminated  local  rate 
 regulation,  created  incentives  for  cable  operators  to  begin  experimenting  with  reducing  or  eliminating  multiple  service  tiers  and  replacing  skinny  basic  tiers  with  fat  basic  tiers.  As  space  on  the  basic  tier 
 became  available  for  cable  programming  services,  the  stronger,  more  popular  programming  services  ~~~  ~  ~  ~ 
 367  ACA  Comments  at  3.  Commenters,  such  as  ACA,  also  recommend  that  the  antitrust  laws,  and  the  Commissions 
 application  of  similar  regulatory  requirements,  be  updated  to  reflect  the  current  media  marketplace.  ACA  suggests  that  Congress  should  amend  the  Clayton  Act  and  the  Robinson-  Patman  Act  to  bring  satellite  and  broadcast 

 programming  expressly  within  the  scope  of  those  statutes.  This,  it  argues,  will  provide  private  parties  and  the  federal  government  with  clear  antitrust  authority  to  challenge  current  programming  practices.  Id.  at  19. 

 368  Joint  Programmers  Comments  at  69. 
 369  Viacom  Reply  Comments  at  13,  citing  Hack  v.  President  and  Fellows  of  Yale  College,  237  F.  3d  81,  86  (2d  Cir. 
 2000). 

 370  Id.  Television  networks,  such  as  Fox,  and  television  group  owners,  such  as  Hearst-  Argyle,  want  an  antitrust 
 exemption  from  the  Justice  Department  to  permit  all  television  stations  in  one  market  to  negotiate  jointly  with  cable  systems  on  retransmission  consent  rights.  They  argue  that  relief  is  needed  because  of  cables  monopoly  status  is 

 many  markets.  See  Tack  Nail,  Fox  Wants  Antitrust  Waiver  for  Stations  to  Negotiate  With  Cable,  Communications  Daily,  January  25,  2002,  at  4;  Doug  Halonen,  Broadcast  Factions  Banding  Together,  Electronic  Media,  January  14, 
 2002. 

 RTC  Comments  at  4-  5.  371 
73
 THE  REPORT  73 
 <  >  began  to  replace  their  sliding  scale  rate  structures  with  so-  called  neighborhood  provisions  that  would 

 require  the  MVPD  to  carry  the  service  on  a  tier  that  contained,  for  example,  at  least  10  of  the  top  14  most  widely-  viewed  cable  programming  services.  According  to  RTCs,  such  provisions  were  common  in  the 
 contracts  tendered  by  the  larger,  well-  established  program  networks  or  their  affiliated  services.  372 
 RTCs  note  that  in  1992,  Congress  re-  imposed  both  rate  regulation  and  broadcast  signal  carriage  requirements  on  the  cable  industry.  The  result  was  that,  in  many  cases,  program  networks  were  forced  off 
 the  basic  tier  as  cable  operators  sought  to  limit  the  effects  of  local  rate  regulation  by  creating  skinny  basic  tiers  meeting  the  statutory  basic  service  tier  requirements.  In  response,  popular  program  networks 
 modified  their  contracts  to  allow  cable  operators  to  offer  broadcast  basic  tiers  as  long  as  their  programming  services  remained  available  to  virtually  all  (typically  at  least  95  percent)  of  the  cable 
 operators  customers.  373 
 When  amending  Section  325  in  the  1992  Cable  Act,  Congress  stated  that:  [  clable  operators  pay  for  the  cable  programming  services  they  offer  to  their  customers;  the  Committee  believes  that 
 programming  services  which  originate  on  a  broadcast  channel  should  not  be  treated  differently.  374  Congress  concluded  that  a  very  substantial  portion  of  the  fees  which  consumers  pay  to  cable  systems  is 
 attributable  to  the  value  they  receive  from  watching  broadcast  signals  and  public  policy  should  not  support  a  system  under  which  broadcasters  in  effect  subsidize  the  establishment  of  their  chief 
 competitors.  375 
 Congress  specifically  recognized  that,  in  the  exercise  of  their  retransmission  consent  rights,  broadcasters  may  seek  alternative  forms  of  c~  rnpensation.~  ~  It  stated  that  [  Some]  broadcasters  may  not 
 seek  monetary  compensation,  but  instead  negotiate  other  issues  with  cable  systems,  such  as  joint  marketing  efforts,  the  opportunity  to  provide  news  inserts  on  cable  channels,  or  the  right  to  program  an 
 additional  channel  on  a  cable 
 In  1993,  retransmission  consent  disputes  between  cable  operators  and  television  stations  threatened  the  continued  cable  carriage  of  many  local  broadcast  stations  in  Connecticut  and  el~  ewhere.~ 
 This  and  other  disputes  were  resolved  when  three  of  the  then  four  major  broadcast  networks  agreed  to  proposals  to  grant  retransmission  consent  for  network-  owned  stations  in  return  for  cable  carriage  of,  and 
 payment  for,  new  network-  owned  cable  channels.  In  the  years  to  follow,  in  return  for  granting  retransmission  consent,  many  networks  were  able  to  successfully  launch  new  cable  networks  through 
 retransmission  consent  negotiations. 

 372  ~d  .  at  5. 
 Id.  at  6.  373 
 374  S.  Rep.  102-  92,  at  35. 
 375  Id. 
 376  Id 
 377  Id. 

 See,  e.  g.,  Jeannine  Aversa,  Rachel  W.  Thompson  &  Rod  Granger,  Storm  Still  Brews  in  Conn.  as  FCC  Readies  Find  Must-  Curry  Rules,  Multichannel  News,  Mar.  8,  1993  (noting  Cablevisions  threat  to  drop  several  broadcast 
 stations,  including  those  in  Boston  and  Hartford  New  Haven  if  they  dont  forgo  payment  for  carriage.). 

 378 
74
 THE  REPORT  74 
 .  ,  Currently,  owners  of  local  television  broadcast  stations  that  elect  retransmission  consent  are  generally  compensated  by  one  or  more  of  the  following:  (1)  retransmission  consent  fees;  (2)  cable 

 advertising  availabilities;  and/  or  (3)  where  the  station  owner  also  owns  non-  broadcast  program  networks,  it  may  grant  retransmission  consent  rights  in  exchange  for  carriage  of  its  program  networks  by  the 
 MVPD.  At  least  one  study  finds  that  historically,  most  broadcasters  have  opted  for  (or  settled  for)  in-  kind  compensation  from  cable  operators  in  exchange  for  retransmission  consent.  379 

 During  the  initial  retransmission  consent  negotiations  eleven  years  ago,  the  cable  industry  made  clear  that  it  would  not  pay  cash  for  the  carriage  of  broadcast  signals.  380  Disney  states  that,  as  a 
 consequence  of  the  cable  industrys  position,  many  broadcasters  negotiated  instead  for  cable  operators  to  carry  the  broadcasters  affiliated  programming  channels.  38  Disney  states  that  it  offers  compensation 
 alternatives  for  operators  when  negotiating  retransmission  consent  agreements.  It  remarks  that  some  small  cable  operators  wish  to  retransmit  an  ABC  owned  station,  but  do  not  want  to  pay  cash  for  the 
 carriage,  and  yet  they  lack  sufficient  capacity  on  the  same  cable  system  to  carry  commonly-  owned  cable  channels.  In  these  instances,  it  states  that  ABC  has  agreed  to  allow  camage  of  its  station  in  market  A  in 
 return  for  cable  carriage  of  an  affiliated  channel  in  market  B  where  the  cable  operator  does  have  sufficient  channel  capacity.  Disney  states  that  ABC  will  continue  to  work  in  good  faith  to  accommodate  the  needs 
 of  smaller  cable  system  operators.  It  asserts  that  these  practices  are  accommodations,  not  abuses,  and  in  no  way  argue  in  favor  of  changes  in  retransmission  consent.  382 

 Fox  Cable  comments  that  current  retransmission  consent  arrangements  are  consistent  with  the  Commissions  good  faith  policy  and  rules.  It  asserts  that  the  Commission  expressly  permits  offering 
 retransmission  consent  on  a  barter  basis.  383  Viacom  adds  that,  to  the  extent  an  MVPD  believes  that  an  individual  broadcaster  has  acted  in  bad  faith  in  the  context  of  retransmission  consent  negotiations,  the 
 aggrieved  party  may  file  a  good  faith  complaint  with  the  Commission.  Viacom  asserts  that  no  commenter  in  this  proceeding  has  suggested  that  this  complaint  process  is  in  any  way  insufficient  to  deal  with 
 specific  instances  of  bad  faith  negotiation.  384 
 D.  Current  Broadcast  Signal  Carriage  Arrangements 
 1.  Benefits  of  Retransmission  Consent 
 Fox  Cable  argues  that  retransmission  consent  arrangements  have  led  to  tangible  public  interest  It  states  that  when  a  benefits  by  contributing  additional  content  to  the  marketplace  of  ideas.  385 

 379  See  Federal  Communications  Commission,  OPP  Working  Paper  #37,  Broadcast  Television:  Survivor  in  a  Sea  of 
 Competition,  at  29. 

 See,  e.  g.,  Rachel  W.  Thompson,  TCI  Cuts  14  Zero  Pay  Carriage  Agreements,  Multichannel  News,  June  21,  380  1993. 

 Disney  Comments  at  42-  43. 
 Id.  at  45. 

 38  1 
 382 

 Fox  Cable  Comments  at  22-  23.  383 
 Viacom  Reply  Comments  at  18. 
 See  Linda  Moss,  The  Upside  of  Retrans,  Multichannel  News,  January  27,  1997,  at  34A  (  Many  local  channels 

 384 
 385 
 born  out  of  contentious  retransmission  consent  negotiations  have  proved  a  plus  for  cable  operators.). 

 . 
75
 THE  REPORT  75 
 broadcaster  negotiates  for  carriage,  it  is  essentially  asking  the  cable  system  to  purchase  a  bundle  of  services  together  -  the  broadcast  channel  for  which  retransmission  consent  is  required  and  the  affiliated 
 cable  channel.  According  to  Fox  Cable,  by  refraining  from  interfering  in  this  negotiation,  the  government 
 has  chosen  to  permit  the  retransmission  consent  process  to  benefit  from  the  economic  efficiencies  generated  by  bundling.  Fox  Cable  states  that  this  approach  has  fostered  an  environment  in  which  new 

 channels  and  new  content  can  emerge  and  thrive.  386 
 Disney  argues  that  broadcasters,  like  any  business,  should  be  compensated  for  their  product  if  distributed  and  sold  by  another  entity.  Disney  asserts  that  broadcasters  invest  billions  of  dollars  annually 

 to  create  the  most  valuable  and  most  desired  television  channels  in  the  industry  and  should  have  the  right  to  be  compensated  for  that  Disney  negotiates  retransmission  consent  only  for  the  ten 
 ABC  owned  television  stations.  Disney  states  that  it  offers  cable  and  satellite  operators  a  stand-  alone  cash  retransmission  consent  deal,  in  addition  to  an  offer  to  secure  retransmission  consent  for  one  or  more 
 of  the  ABC  owned  television  stations  in  return  for  carriage  of  Disney-  ABC  cable  program  services.  Disney  states  that  its  cash  retransmission  offer  is  completely  reasonable  and  economically  supportable. 
 It  states  that  the  average  value  for  the  ABC  Owned  Television  stations  falls  within  the  range  of  $2.00  to  $2.09  per  subscriber,  well  in  excess  of  the  cash  price  of  .70-.  80  cents  currently  offered  by  ABC  to 
 MVPDS.~~~ 
 2.  Harms  of  Retransmission  Consent  and  Other  Requirements 
 Large  and  small  cable  operators,  programming  networks  and  satellite  carriers  have  uniformly  disparaged  retransmission  consent.  According  to  Cablevision,  broadcasters  have  withheld  retransmission 
 consent  even  though  they  are  supposed  to  be  the  trustee  of  the  public  airwaves  on  behalf  of  consumers,  unless  cable  operators  agree  to  carry  one  or  more  of  the  broadcast  networks  affiliated  program  networks, 
 often  at  above-  market  prices.  Cablevision  asserts  that  broadcasters  further  require  that  their  affiliated  programming  be  placed  on  the  most  popular  programming  tiers,  regardless  of  whether  cable  subscribers 
 want  to  watch  it,  and  sometimes  before  the  affiliated  network  has  even  been  launched.  389 
 Turner  states  that  if  the  Commission  (or  Congress)  is  concerned  about  the  size  and  cost  of  the  expanded  basic  tier,  it  cannot  ignore  the  question  of  whether  the  retransmission  consent  regime  remains  in 
 the  public  interest.  390  Cablevision  agrees.  It  notes  that  in  2004,  56  national  cable  networks  are  held  by  a  broadcast  affiliate,  an  increase  from  eight  in  1993,  just  after  retransmission  consent  was  enacted,  and  an 
 increase  from  19  in  1996.39  The  forced  carriage  of  many  of  these  networks  may  even  displace  services  more  desired  by  subscriber^.^  '^  Time  Warner  states  that  almost  all  stations  affiliated  with  the  top  six 
 ~  ~ 
 386  Fox  Cable  Comments  at  23. 

 Disney  Comments  at  38-  39.  387 
 388  ~d  .  at  43. 

 Cablevision  Reply  Comments  at  7-  8.  Several  other  commenters  have  similarly  argued  that  retransmission  consent  389  is  harmful.  See,  e.  g.,  ACA  Comments  at  30-  38;  Echostar  Comments  at  2-  7;  and  BHN  Comments  at  7. 

 Turner  Reply  Comments  at  17. 
 Cablevision  Reply  Comments  at  8. 
 See  Discovery  Networks  Ex  Parte,  October  18,  2004  (The  expanded  basic  tiers  of  New  York  DMA  cable 

 390 
 39  1 
 392 
 operators  are  taken  up  by  broadcast-  affiliated  program  networks  to  the  detriment  of  unaffiliated  networks). 
76
 THE  REPORT  76 
 \  , 
 networks  choose  retransmission  consent  (rather  than  must  carry)  and  that  to  remain  competitive  with  DBS,  it  has  no  choice  but  to  carry  local  broadcast  signals.  393 

 ACA  and  similar  groups394  state  that  retransmission  consent  and  other  signal  carriage  requirements  enable  network  owners  and  major  affiliate  groups  to  restrict  how  smaller  cable  operators 
 package  programming  and  how  consumers  can  choose  programming  in  local  markets.  395  Under  current  law,  ACA  asserts  that  broadcasters,  inter  alia:  (1)  have  the  ability  to  withdraw  a  broadcast  signal  during 
 retransmission  consent  negotiations  thus  giving  broadcasters  powerful  leverage  over  local  cable  systems;  (2)  have  the  ability  to  condition  retransmission  consent  on  carriage  of  affiliated  programming  resulting  in 
 carriage  of,  and  payment  for,  unwanted  programming;  and  (3)  use  affiliate  contracts  to  restrict  consumer  access  to  broadcast  signals.  396  ACA  also  asserts  that  retransmission  consent  tying  arrangements,  or  cash- 
 for  carriage  arrangements,  have  directly  led  to  rate  increases  for  basic  or  expanded  basic  service  and  decreased  operating  margins  for  basic  or  expanded  basic  service.  397  RTCs  comment  that  some 
 retransmission  consent  agreements  contain  nondisclosure  provisions  prohibiting  cable  operators  from  informing  their  customers  that  rate  increase  may  be  attributable  to  increased  retransmission  consent 
 fees.  398 
 Smaller  cable  operators  specifically  complain  about  the  Commissions  network  nonduplication  and  syndicated  exclusivity  requirements.  ACA  states  that  the  exclusivity  rules,  combined  with 
 retransmission  consent,  entitle  a  broadcast  group  to  withhold,  or  threaten  to  withhold,  a  local  network  signal  from  a  cable  operator  and  prevent  that  cable  operator  from  bringing  in  a  substitute  network  signal. 
 According  to  ACA,  when  a  broadcast  group  demands  a  price  for  retransmission  consent,  the  same  company  can  foreclose  access  to  lower  cost  alternative  sources  of  the  same  programming.  ACA  argues 
 that  these  regulations  hurt  competition  and  consumers  where  a  media  firm  seeks  carriage  of  affiliated  satellite  programming,  cash,  or  other  substantial  consideration  for  retransmission  consent.  399  ACA  states 

 Time  Warner  Cable  Comments  at  10-  1  1,  citing  NCTA  Comments  in  MB  Docket  No.  03-  172,  p.  63-  64  (Sept.  11,  393  2003). 
 NTCA  Comments  at  2;  OPATSCO  Comments  at  3;  and  Rural  Independent  Competitive  Alliance  2. 
 See,  e.  g.,  Linda  Moss,  Disneys  Retrans  Clout  Comes  to  SoapNets  Aid,  Multichannel  News,  November  1,  1999  (  The  Walt  Disney  Company  is  playing  hardball  with  some  cable  operators  over  its  new  SoapNet  channel,  telling 
 two  small  systems  in  Illinois  that  they  cant  continue  carrying  the  signal  for  ABCs  Chicago  TV  station  unless  they  add  the  soap  opera  network  to  their  line-  ups.). 

 396  ACA  Comments  at  34-  36;  RTC  Comments  at  1.  See  also  Pioneer  Comments  at  6  (noting  that  broadcasters  have 
 demanded  reservation  of  considerable  blocks  of  local  cable  advertising  avails  from  the  cable  operator  for  cross-  channel  promotion  of  the  broadcasters  service,  or  services,  to  be  delivered  at  no  charge,  in  exchange  for 

 retransmission  consent  of  the  broadcast  network). 

 394 
 395 

 ACA  Comments  at  34.  See  Echostar  Comments  at  2-  3  (stating  that  while,  at  times,  a  firm  may  offer  retransmission  consent  for  its  local  network  channels  on  an  ostensibly  stand-  alone  basis,  retransmission  consent  may 
 be  offered  at  a  price  that  is  much  higher  than  the  rate  for  comparable  local  network  stations.  In  such  circumstance,  accepting  the  bundle  is  the  only  real  economically  feasible  alternative  if  the  distributor  is  to  be  able  to  provide  the 
 local  network  station  to  its  subscribers  at  a  reasonable  price). 

 397 

 RTC  Comments  at  10-  1  1.  398 
 399  ACA  Comments  at  2  1-  22.  See  also  Pioneer  Comments  at  6-  7  (asserting  that  network  affiliated  television  stations 
 in  the  Wichita-  Hutchinson-  Plus  DMA  have  used  their  non-  duplication  rights  to  block  the  carriage  of  adjacent  Denver  market  stations,  even  though  its  subscribers  want  those  stations  to  be  carried). 
77
 THE  REPORT  77 
 that  the  Commission  should  initiate  a  rulemaking  to  revise  the  market  protection  regulations  so  that  when  broadcasters  impose  a  price  on  retransmission  consent,  cable  operators  and  subscribers  are  free  to 
 obtain  lower  cost  alternatives.  Discovery  echoes  ACAs  sentiments  and  states  that  the  network  non-  duplication  and  syndicated  exclusivity  rules  improperly  enhance  broadcasters  negotiating  p~  sition.~ 
 The  National  Association  of  Broadcasters  (  NAB)  asserts  that  Congress  contemplated  the  precise  situation  about  which  the  parties  complain,  and  such  complaints  should  be  regarded  as  one  seeking  to 
 overturn  Congress  considered  judgment  in  the  1992  Cable 
 E.  Affiliation  Agreements  and  Contractual  Terms  of  Program  Networks 
 Nondisclosure  Clauses.  Nondisclosure  provisions  preclude  the  parties  subject  to  the  agreement  from  disclosing  market-  sensitive  rates,  terms,  and  conditions.  Many  small  cable  operators  state  that  the 
 Commission  should  scrutinize  nondisclosure  requirements  found  in  programming  affiliation  agreements  in  order  to  understand  the  harms  associated  with  contractual  bundling.  According  to  Pioneer,  non- 
 disclosure  provisions  are  used  by  programmers  to  shield  vital  rate  information.  Pioneer  asserts  that  small  operators  are  prohibited  from  informing  their  subscribers  the  actual  reasons  why  rates  have  increased.  402 

 ACA  states  that  nondisclosure  provisions  are  always  a  requirement  of  the  programmer,  not  the  cable  operator.  ACA  explains  that  in  recent  negotiations,  certain  small  operators  requested  removal  of 
 nondisclosure  provisions.  In  each  case,  negotiators  for  the  program  networks  rejected  the  request  as  nonnegotiable.  According  to  ACA,  specific  information  necessary  for  an  informed  opinion  on  bundling 
 is  contained  within  specific  programming  contracts.  ACA  suggests  that  the  Commission  may  obtain  such  information  if  program  networks  agree  to  waive  nondisclosure  provisions  for  the  purposes  of  this  inquiry. 
 If  there  are  any  takers  among  the  programmers,  and  to  the  extent  any  of  the  nondisclosure  provisions  are  mutual,  ACA  will  work  to  facilitate  obtaining  consents  from  the  small  cable  sector  as  necessary  to 
 open  those  agreements  for  Commission  and  Congressional  scrutiny.  Even  if  certain  programmers  resist  disclosure,  ACA  asserts  that  the  Commission  may  exercise  its  authority  under  Section  403  to  investigate 
 specific  terms,  conditions  and  prices  contained  in  programming  contracts.  403  Consumers  Union  and  local  franchising  authorities  agree  with  the  small  cable  operator  groups  that  nondisclosure  provisions  prevent 
 the  government  and  the  public  from  fully  understanding  the  means  by  which  program  networks  contractually  force  carriage  of  content  on  distributors.  404 

 The  Tennis  Channel  and  other  program  networks  assert  that  MVPDs  also  want  to  include  confidentiality  provisions  in  distribution  agreements  in  order  to  protect  their  sensitive  business 
 information.  These  provisions  are  mutually  beneficial  for,  and  binding  on,  MVPDs  and  program  networks  alike.  The  confidentiality  of  the  terms  of  business  relationships  between  private  parties  has  long 
 been  recognized  to  have  pro-  competitive  benefit^.^"  Tennis  states  that  the  stance  taken  by  ACA  and  others  would  turn  this  principle  on  its  head  by  requiring  affirmative  public  disclosure  of  confidential 
 information  that  normally  is  protected  from  disclosure.  Tennis  concludes  that  no  one  has  presented 
 Discovery  Comments  at  23. 
 NAB  Reply  Comments  at  7-  8. 

 400 
 40  1 

 402  Pioneer  Comments  at  5. 
 ACA  Comments  at  8-  9,  citing  47  U.  S.  C.  0  403. 
 CU  Comments  at  9-  10;  NATOA  Comments  at  5. 
 Tennis  Reply  Comments  at  11-  12,  citing  Carpenter  v.  UnitedStutes,  484  U.  S.  19,  26  (1987) 

 403 
 404 
 405 

 ..  ..  ...  .  .  .  .  .  .  -  -  ....  .  .  ....  .    .. 
78
 THE  REPORT  78 
 evidence  that  would  warrant  such  a  radical  departure  from  established  principles  of  law  and  business  practice.  406 

 Volume  Discounts.  Program  networks,  like  many  other  producers  of  goods  and  services,  provide  price  discounts  for  large  volume  distributors  in  their  contracts.  Some  MVPDs  assert  that  program 
 networks  impose  arbitrary  volume-  based  discounts  that  serve  to  discriminate  against  smaller  operators  and  new  entrants  in  the  MVPD  marketplace.  Pioneer,  for  example,  states  that  volume  discount  clauses  are 
 designed  in  the  favor  of  large  operators,  and  of  little  or  no  benefit  to  small  operators.  According  to  Pioneer,  many  volume  discounts  do  not  begin  to  take  effect  until  an  operator  has  reached  a  distribution  of 
 as  much  as  100,000,  or  250,000,  or  more.  In  the  case  of  most  small  and  independent  operators,  including  Pioneer  which  serves  less  than  10,000  cable  subscribers,  the  majority  of  these  volume  discounts  are 
 almost  entirely  unattainable  on  an  individual  basis.  407 
 As  an  accommodation  to  smaller  cable  operators,  Disney  states  that  it  has  entered  into  carriage  agreements  for  each  of  its  programming  services  with  the  National  Cable  Television  Cooperative 
 (  NCTC).  Disney  asserts  that  the  NCTC  deals  allow  small  cable  operators  to  earn  volume  discounts  to  which  they  would  not  be  entitled  on  their  own.  Just  recently,  ESPN  entered  into  a  new  carriage  deal  with 
 the  NCTC.  According  to  Disney,  more  than  95%  of  the  NCTCs  members  opted  to  participate  in  this  deal  (including  Cable  One  Inc.,  Cebridge  Connections,  Buckeye  Cablesystem,  and  Massillon  Cable  TV). 
 This  comprehensive  deal  is  similar  to  affiliation  deals  that  ESPN  struck  earlier  with  larger  operators  such  as  Cox,  Charter,  and  Cablevision.   

 Pioneer  notes  that  it  often  obtains  programming  at  a  better  price  through  affiliation  with  the  NCTC.  However,  it  states  that  the  membership  and  associated  leverage  of  the  NCTC  in  negotiating 
 preferred  rates  and  obtaining  volume  discounts  is  still  appreciably  less  than  that  of  the  larger  cable  operators.  Pioneer  further  states  that  there  are  a  number  of  networks  that  have  yet  to  make  their 
 programming  available  to  the  membership  of  the  cooperative  through  master  affiliation  agreements  with  the  NCTC.  409 

 ACA  states  that  programming  costs  for  certain  of  its  members  increased  up  to  30%,  solely  because  a  smaller  company  acquired  ownership.  ACA  remarks  that  while  programming  costs  increased 
 when  cable  systems  transferred  ownership  from  a  large  cable  operator  to  a  small  cable  operator,  delivery  costs  did  not  change  (the  same  headends  received  the  same  satellite  signals  as  before)  and  administration 
 costs  did  not  change  (the  smaller  operator  continued  to  pay  monthly  programming  fees  through  the  NCTC  and  programmers  were  paid  directly,  and  on  time).  ACA  submits  that  the  only  discernable  change  was 
 the  lack  of  market  power  of  the  smaller  cable  company  compared  to  its  major  MSO  predece~  sor.~ 

 Tying  Arrangements  and  Placement  Conditions.  Echostar  submits  that  the  current  system  only  promotes  the  carriage  of  groups  of  channels  connected  with  large  programming  and  distribution 
 companies.  Echostar  states  that  of  the  39  new  networks  created  since  1992,  only  six  have  no  affiliation 
 Id.,  citing  Restatement  (Third)  of  Unfair  Competition  5  39  cmt.  A. 
 Pioneer  Comments  at  8 

 406 
 407 

 Disney  Comments  at  36.  408 
 Pioneer  Comments  at  8-  9.  409 
 ACA  Comments  at  39.  410 
79
 THE  REPORT  79 
 .  with  an  MSO  or  network  broadcasting  entity.  4  According  to  Echostar,  this  fact  is  merely  reflective  of  these  programming  companies  dominance  over  cable  programming  generally,  as  the  Commission 

 recently  determined  that  of  the  top  15  prime  time  cable  networks  in  terms  of  ratings,  all  were  affiliated  with  either  an  MSO  or  major  broadcast  network.  412  Pioneer  states  that  because  many  MVPDs  find  their 
 channel  capacity  contractually  dedicated  to  large  blocks  of  programming  bundles  as  mandated  by  the  larger  programmers,  operators  have  less  opportunity  to  open  up  capacity  to  many  of  the  smaller  and 
 independent  programmers.  413 
 According  to  the  RTCs,  most  popular  program  networks  currently  require  MVPDs  to  purchase  their  entire  product  line,  consisting  of  multiple  programming  services  (a  practice  known  as  full  line 
 forcing)  in  order  to  purchase  the  one  or  two  services  that  the  MVPDs  customers  desire.  The  result  is  a  situation  where  MVPDs  must  offer,  and  customers  must  purchase,  increasingly  bloated  service  tiers  at 
 higher  prices  in  order  to  continue  to  receive  the  core  services  they  desire  to  purchase.  In  many  cases,  these  additional  services  (for  which  additional  charges  are  levied  on  the  MVPD)  must  also  be  carried  on 
 the  expanded  basic  service  tier.  414  Cablevision  remarks  that  not  every  service  is  sufficiently  popular  and  broad  in  appeal,  or  sufficiently  cost-  efficient,  to  warrant  carriage  on  the  expanded  basic  tier.  Many  of 
 those  with  more  targeted  appeal,  or  that  add  significant  costs  to  the  tier  rates,  are  better  placed  on  a  smaller  tier  or  on  their 

 Program  networks  argue  that  they  do  not  always  require  MVPDs  to  carry  all  affiliated  programming  as  a  condition  for  carrying  the  most  popular  programming  services.  Disney,  for  example, 
 states  that  it  permits  MVPDs  to  license  its  most  popular  individual  channels  without  being  obligated  to  also  license  any  other  Disney  owned  service.  For  example,  an  MVPD  may  elect  to  license  the  Disney 
 Channel  but  not  license  Toon  Disney.  Cable  and  satellite  distributors  also  may  enter  into  standalone  license  agreements  for  SOAPnet  or  ABC  Family.  A  distribution  license  for  ESPN  does  not  obligate  the 
 cable  or  satellite  operator  to  carry  ESPN2,  ESPN  Classic  or  ESPNEWS.  46  Viacom  also  states  that  it  does  not  force  MVPDs  to  carry  any  of  its  program  services,  such  as  Nickelodeon,  MTV,  or  Spike  TV.  Despite 
 the  handful  of  claims  to  the  contrary,  it  asserts  that  all  MVPDs  are  free  to  buy  none,  one,  several,  or  all  of  its  service^.^" 

 Disney  takes  issue  with  any  suggestion  that  all  of  its  sports  program  networks  must  be  carried  on  the  expanded  basic  tier.  Disney  states  that  ESPN  offers  the  opportunity  for  any  MVPD  to  carry  only  the 
 ESPN  service.  ESPN  does  not  require  carriage  of  its  complementary  ESPN  services  like  ESPN2  or  ESPN  Classic  before  it  will  negotiate  for  carriage  of  ESPN.  ESPN  does  provide  the  complementary  ESPN- 

 Echostar  Reply  Comments  at  1  1.  41  1 
 Id.,  citing  2003  Video  Competition  Report,  19  FCC  Rcd  at  1693 
 Pioneer  Comments  at  8. 

 412 
 413 

 RTC  Comments  at  4.  414 
 415  Cablevision  Reply  Comments  at  10.  Other  distributors  argue  that  the  bundling  of  particular  program  types,  such 
 as  sports,  into  the  expanded  basic  tier  is  harmful  to  both  MVPDs  and  their  subscribers.  See  BSPA  Comments  at  7-  8  (  A  consumer  that  does  not  desire  sports  programming  is  not  only  forced  to  receive  sports  programming,  but  is 

 required  to  absorb  a  major  portion  of  the  increase  in  cable  rates  related  to  sports  programming.) 
 Disney  Comments  at  35-  36.  416 
 Viacom  Reply  Comments  at  16.  417 
80
 THE  REPORT  80 
 <  >  branded  services  only  to  those  distributors  who  have  licensed  ESPN;  however,  no  distributor  who  licenses 

 ESPN  is  required  to  license  any  of  the  other  ESPN-  branded  services!  18 
 Market  Penetration  Requirements.  Echostar  states  that  many  program  vendors  make  market  penetration  requirements  a  condition  of  selling  programming.  For  example,  a  programming  vendor  might 
 offer  a  distributor  a  popular  program  network  on  the  condition  that  the  channel  is  placed  in  one  of  the  MVPDs  high  penetration  packages.  Echostar  asserts  that  this  condition  deprives  the  distributor  of  the 
 flexibility  to  put  the  channel  in  a  program  package  with  a  lower  market  penetration  or  place  the  channel  in  its  lineup  with  out  regard  to  market  penetration.  According  to  Echostar,  these  requirements  make  a  la 
 carte  or  tiered  offerings  impossible  with  respect  to  the  affected  networks.  419 
 Disney,  however,  states  that  it  offers  MVPDs  significant  flexibility  to  choose  the  manner  in  which  they  carry  its  many  programming  services.  For  example,  MVPDs  may  negotiate  for  carriage  of 
 ESPN2  and  ESPN  Classic  on  the  first,  second  or  third  most  widely-  penetrated  tier.  Disney  negotiates  for  carriage  of  ESPN,  Disney  Channel  and  ABC  Family  on  either  the  first  or  second  most  widely-  penetrated 
 tier  of  service.  420  Finally,  ESPNEWS,  Toon  Disney  and  SOAPnet  are  available  to  be  carried  on  any  tier. 
 Delete  Rights.  America  Channel  (  A.  C.)  asserts  that  several  large  cable  operators  are  requiring  independent  networks  to  accept  30-  day  delete  rights  as  part  of  carriage  deals.  Delete  rights  enable  a  cable 
 operator  to  delete  or  drop  the  independent  network  and  terminate  all  distribution  --  at  any  time,  for  any  reason.  America  Channel  avers  that  networks  owned  by  large  media  companies,  and  networks  owned  by 
 cable  operators,  are  not  subject  to  delete  rights,  and  frequently  lock  in  distribution  for  periods  of  up  to  15  years,  even  if  ratings  are  abysmal  or  the  content  inappr~  priate.~ 

 F.  Recommendations  for  the  Wholesale  Market 
 Some  of  the  sales  methods  discussed,  in  combination  with  various  regulatory  and  technological  constraints,  may  cause  harms  in  the  market  for  video  programming.  Further,  some  of  these  harms  may 
 carry  through  to  the  retail  market  and  adversely  affect  consumers.  In  particular,  there  is  some  concern  that  non-  affiliated  program  networks  may  not  be  able  to  gain  widespread  carriage  due  to  the  industry 
 practice  of  tying  carriage  of  popular  program  networks  or  broadcast  stations  with  camage  of  less-  popular  program  networks.  Nonetheless,  the  current  retransmission  consent  process  is  a  function  of  the  statutory 
 framework  adopted  by  Congress  and  we  cannot  conclude  that  it  is  not  working  as  intended.  Further,  to  the  extent  tying  arrangements  for  the  carriage  of  particular  programming  is  being  used  for  anti- 
 competitive  ends,  the  antitrust  laws  provide  an  adequate  remedy. 
 Commenters  have  raised  several  other  issues  regarding  the  contractual  arrangements  between  MVPDs  and  video  programmers  including  tier  placement  requirements,  volume  discounts,  and  non- 
 disclosure  clauses.  These  issues,  however,  are  best  left  to  commercial  negotiations  between  MVPDs  and  program  networks.  They  are  appropriately  situated  to  evaluate  the  trade-  offs  involved  in  negotiating 
 license  fees  and  other  business  arrangements.  And  again,  antitrust  law  remains  an  option  for  parties  harmed  by  anti-  competitive  conduct. 

 48  Disney  Reply  Comments  at  3-  4. 
 419  Echostar  Comments  at  3. 
 420  Disney  Reply  Comments  at  3. 

 42  A.  C.  Reply  Comments  at  3-  4. 
81
 THE  REPORT  81 
 <  >  Economic  Appendix 
82
 THE  REPORT 
 I.  The  Economics  of  Bundling  in  the  MVPD  and  Video  Programming  Markets 
 Parties  submitting  comments  in  this  inquiry  have  provided  testimony  by  a  large  number  of  prominent  economists  and  have  habitually  referred  to  the  alleged  economic  benefits  of  bundling  in  the 
 current  circumstances.  This  analysis  provides  an  overview  of  economic  thought  regarding  bundling  and  applies  it  to  the  MVPD  and  video  programming  markets.  The  economics  profession  has  identified  a  large 
 number  of  reasons  firms  engage  in  bundling.  For  the  present  discussion,  the  most  relevant  reasons  are  cost  savings,  quality  improvement,  price  discrimination,  and  entry  deterrence.  '  The  main  body  of  this 
 Report  as  well  as  the  discussion  of  the  Booz  Allen  financial  model  examines  the  cost  savings  and  quality  improvements  that  are  alleged  to  arise  from  the  bundling  of  video  programming  for  sale  to  consumers. 
 The  present  discussion  will  focus  on  the  price  discrimination  and  entry  deterrent  motives  behind  bundling. 

 A.  Bundling  as  a  Mechanism  for  Price  Discrimination 
 Nobel-  laureate  George  Stigler  was  the  first  to  argue  that  the  traditional  antitrust  view  that  bundling  is  an  attempt  to  extend  market  power  to  related  goods  is  not  the  only  reason  that  firms  may  sell 
 products  in  a  bundle.  In  a  short  essay,  he  showed  that  bundling  can  be  profitable  if  the  individual  values  placed  on  two  goods  vary  between  consumers  and  are  inversely  correlated.*  Under  this  scenario,  bundling 
 is  used  by  firms  to  price  discriminate  and  extract  additional  rents  fiom  consumers. 
 A  simple  example  presented  by  Professor  Steven  Wildman  at  the  Media  Bureau's  A  La  Carte  Symposium  illustrates  the  effect  described  by  Stigler.  3  Wildman  discussed  the  behavior  of  a  firm  offering 
 two  individuals  the  option  of  purchasing  access  to  two  program  networks:  TBS  and  ESPN.  In  the  example,  the  first  individual  values  TBS  at  $5.00  and  the  second  individual  values  TBS  at  $2.00.  The 
 values  of  ESPN  are  then  reversed;  the  first  individual  values  ESPN  at  $2  and  the  second  individual  values  ESPN  at  $5.  The  question  presented  is  what  method  of  sale  will  offer  the  firm  the  most  revenue.  If  the 
 firm  chooses  to  sell  the  products  separately,  it  could  do  so  by  pricing  ESPN  at  $5.00  and  TBS  at  $5.00.  In  this  situation,  the  first  individual,  who  values  ESPN  at  $2.00  and  TBS  at  $5.00,  would  purchase  TBS 
 since  the  value  he  places  on  TBS  is  not  less  than  the  price.  He  would  not  purchase  ESPN  since  the  price  is  greater  than  the  value  he  places  on  the  programming.  The  second  individual  in  this  example  would 
 purchase  ESPN,  since  its  price  of  $5.00  is  not  greater  than  the  value  she  places  on  the  network.  She  would  not  purchase  TBS  since  it  is  priced  at  $5.00  and  she  only  values  it  at  $2.00.  So  under  this  form  of 
 a  la  carte  sales,  the  firm  would  obtain  revenue  of  $10.00.4  Instead  of  pure  a  la  carte  sales,  consider  the  revenue  earned  from  bundling.  Both  individuals  in  the  example  would  be  willing  to  purchase  a  bundle 
 consisting  of  ESPN  and  TBS  at  a  price  of  $7.00,  since  the  sum  of  each  individual's  value  of  the  two 
 See  Barry  Nalebuff,  Bundling,  Tying,  and  Portfolio  Effects:  Part  I  -  Conceptual  Issues,  DTI  Economics  Paper  No.  1,  February  2003  (available  at  http://  www.  dti.  gov.  uk/  economics/  paperl-  nalebuff-  p1  .pdQ  (providing  a 
 comprehensive  survey  of  the  competitive  analysis  of  bundling.). 

 I 

 G.  J.  Stigler,  A  Note  on  Block  Booking,  in  G.  J.  Stigler  (ed.),  The  Organization  of  Industries.  Homewood,  Ill.:  Irwin,  (1968)  at  165-  170. 
 Media  Bureau  Symposium  Transcript  at  174-  175. 
 An  alternative  set  of  a  la  carte  prices  (e.  g.,  $2.00  per  network)  would  generate  even  lower  revenues.  In  that  situation,  each  individual  would  purchase  both  networks  for  $2.00  a  piece  and  generate  total  revenues  of  $8.00.  4 
83
 THE  REPORT  83 
 networks  is  not  less  than  that  amount.  Under  this  bundling  scenario  the  firm  would  earn  revenues  of  $14.00,  which  are  higher  than  the  revenues  earned  from  an  a  la  carte  sales  m  e  t  h  ~d  .~ 

 This  example  illustrates  the  mechanism  by  which  bundling  is  able  to  generate  higher  revenues  than  pure  a  la  carte  sales.  Bundling  works  by  making  individuals  values  more  homogeneous.  In  the 
 example,  individuals  value  for  ESPN  was  not  homogeneous;  one  individual  valued  TBS  at  $5.00  and  the  other  at  $2.00.  Examining  the  value  the  two  consumers  place  on  the  bundle,  which  would  simply  be  the 
 sum  of  the  value  the  consumer  places  on  each  of  the  networks,  indicates  that  the  value  of  the  bundle  for  both  consumers  is  now  $7.00.  This  homogeneity  allows  the  firm  to  raise  price  without  worrying  that 
 consumers  with  low  valuations  of  the  good  will  not  purchase  it. 
 Since  Stiglers  contribution,  there  have  been  a  large  number  of  papers  examining  and  refining  the  conditions  under  which  the  price  discrimination  motive  for  bundling  is  profitable.  Much  of  the  work  has 
 examined  the  impact  of  the  distribution  of  consumer  values  on  the  profitability  of  bundling.  6  In  the  previous  example,  the  values  of  the  two  hypothetical  consumers  were  mirror  images  of  each  other  and  by 
 offering  a  bundle  the  firm  was  able  to  make  the  consumers  value  for  the  bundled  product  perfectly  homogeneous.  These  works  have  shown  that  even  when  consumer  values  are  positively  correlated,  rather 
 than  negatively  correlated  as  in  the  example,  bundling  may  be  profitable,  though  less  so.  One  study  by  McAfee,  McMillan,  and  Whinston  illustrates  an  important  result  (  McAfee  Study).  In  the  McAfee  study, 
 under  very  general  conditions,  mixed  bundling  (where  networks  are  sold  individually  as  well  as  a  bundle)  always  yields  profits  at  least  as  high  as  those  earned  by  either  pure  a  la  carte  or  pure  bundling.    Implicit 
 in  this  result  is  that  consumer  welfare  is  lower  with  mixed  bundling  than  with  either  pure  a  la  carte  or  pure  bundling,  though  total  welfare,  which  includes  both  consumer  welfare  and  firm  profits,  is  not  lower.   

 While  much  of  the  analysis  of  bundling  considers  the  case  of  bundling  two  goods  for  sale,  Bakos  and  Brynjolfsson  consider  the  case  of  bundles  containing  large  numbers  of  goods.    Their  results  confirm 
 many  of  the  results  in  the  two  goods  case  and  demonstrate  the  efficient  way  in  which  a  firm  engaged  in  bundling  can  extract  additional  value  from  consumers  while  at  the  same  time  expanding  sales. 

 B.  Bundling  as  a  Mechanism  to  Deter  or  Limit  Entry 
 Even  higher  revenues  could  be  earned  if  the  firm  could  perfectly  price  discriminate  by  charging  different  prices  to  the  two  individuals.  In  this  Report,  it  is  assumed  that  firms  are  restricted  to  charging  the  same  price  to  all 
 individuals  in  a  market. 
 See,  e.  g.,  W.  J.  Adams  and  Janet  L.  Yellen,  Commodity  Bundling  and  the  Burden  of  Monopoly,  Quarterly  Journal  of  Economics,  90(  3),  August  1976,  at  475-  98;  Richard  Schmalensee,  Gaussian  Demand  and  Commodity  Bundling, 
 Journal  of  Business,  57  January  1984,  at  S211-  S230;  and  Michael  Salinger,  A  Graphical  Analysis  of  Bundling,  Journal  of  Business,  68(  l),  January  1995,  at  85-  98. 

 6 

 R.  Preston  McAfee,  John  McMillan,  and  Michael  Whinston,  Multiproduct  Monopoly,  Commodiity  Bundling,  and  Correlation  of  Values,  Quarterly  Journal  of  Economics,  104(  2)  May  1989,  at  371-  383. 
 *  See,  e.  g.,  Michael  L.  Katz,  Wrong  Diagnosis,  Wrong  Cure:  An  Analysis  of  the  Claims  Made  by  Dr.  Mark  Cooper  in  Time  to  Give  Consumers  Real  Cable  Choices,  at  12  (An  exhibit  attached  to  the  Reply  Comments  filed  by 
 Comcast  Corporation). 
 Yannis  Bakos  and  Erik  Brynjolfsson,  Bundling  Information  Goods:  Pricing,  Projts,  and  Efficiency,  Management  9  Science,  45(  2),  December  1999,  at  1613-  1630. 

 .  .  .  .  .  ..~  ., 
84
 THE  REPORT  84 
 .  ,  The  price  discrimination  motive  behind  bundled  sales,  as  well  as  the  cost  savings  and  quality  improvement  motives,  are  directed  at  improving  economic  efficiency,  though  not  necessarily  consumer 

 welfare.  Firms  may  also  engage  in  bundled  sales  for  strategic  reasons.  The  strategic  reason  considered  here  is  that  of  entry  deterrence.  The  motivation  behind  bundling  in  this  instance  is  strategic  in  the  sense 
 that  the  behavior  is  intended  to  influence  and  react  to  the  behavior  of  competing  firms.  Nalebuff  examines  the  strategic  incentives  to  bundle  based  on  the  ability  to  deter  or  limit  entry  and  finds  that  the 
 incentives,  and  loss  in  welfare,  exceed  those  that  are  likely  to  occur  when  the  motive  for  bundling  is  price  discrimination."  Nalebuff  considers  the  incentives  of  a  firm  that  sells  two  goods  and  possesses  some 
 degree  of  market  power  in  each  of  the  goods.  In  this  situation,  the  incumbent  firm  can  easily  defend  its  market  against  an  entrant  that  can  only  supply  a  close  substitute  for  one  of  the  two  goods.  The  bundling 
 strategy  of  the  incumbent  firm  limits  the  entrant  to  selling  only  to  those  consumers  that  have  low  values  of  the  good  that  is  only  available  in  the  incumbent's  bundle.  Consumers  that  highly  value  that  good 
 would,  of  course,  purchase  the  bundle  from  the  incumbent. 
 There  are  several  interesting  implications  of  Nalebuff  s  framework.  One  implication  is  that  the  incumbent  can  simultaneously  defend  against  entrants  selling  either  of  the  two  goods.  As  long  as  none  of 
 the  entrants  can  sell  a  close  substitute  for  the  entire  bundle,  the  effect  of  limiting  the  impact  of  entry  or  deterring  entry  altogether  will  be  present.  The  second  implication  is  that,  unlike  the  price  discrimination 
 motive,  the  entry  deterrence  motive  is  stronger  when  consumers'  values  for  the  two  goods  are  positively  correlated.  This  effect  occurs  because  consumers  that  value  the  good  that  the  entrant  is  able  to  provide 
 are  also  likely  to  highly  value  the  good  that  only  the  incumbent  can  provide.  These  consumers  would  then  choose  to  purchase  the  bundle  from  the  incumbent  rather  than  the  single  good  from  the  entrant. 
 Similarly,  the  consumer  that  does  not  value  the  good  that  only  the  incumbent  sells  would  also  have  a  low  value  of  the  good  the  entrant  is  able  to  provide,  since  it  is  assumed  that  the  values  are  positively 
 correlated.  This  effect  would  limit  the  earnings  of  the  entrant  and  make  entry  less  likely. 
 C.  Application  to  Video  Programming 
 This  section  examines  the  motivations  for  bundling  discussed  above  and  evaluates  them  in  the  context  of  the  sale  of  video  programming.  There  is  one  critically  important  element  of  video 
 programming  that  must  be  taken  into  account.  Consumption  of  video  programming  is  non-  rivalrous.  Allowing  an  additional  person  to  consume  the  good  (ie.,  view  the  programming),  does  not  reduce  the 
 amount  available  for  other  individuals.  This  can  be  contrasted  with  a  more  traditional  good,  such  as  a  cookie.  If  an  individual  consumes  a  cookie,  there  is  one  less  cookie  for  someone  else  to  consume. 
 Because  of  this  non-  rivalrous  consumption,  there  are  no  additional  costs  associated  with  providing  access  to  more  individuals.  The  cost  structure  of  video  programming  production  is  one  of  high  fixed  costs  and 
 marginal  costs  close  to  zero.  In  other  words,  whether  one  household  or  millions  of  households  view  a  program  network,  the  costs  of  producing  that  program  do  not  change."  Goods  such  as  this  are  sometimes 
 referred  to  as  information  goods  or  public  goods. 
 This  characteristic  of  video  programming  leads  to  an  interesting  divergence  between  economic  efficiency  and  cost  recovery.  Economic  efficiency  is  promoted  when  all  consumers  that  value  a  good 
 more  than  its  marginal  cost  of  production  are  able  to  consume  the  good.  In  the  case  of  video 
 lo  See  Barry  Nalebuff,  Bundling  as  an  Entry  Barrier,  Quarterly  Journal  of  Economics,  119(  l),  February  2004,  at 
 159-  187.  See  also,  Yannis  Bakos  and  Erik  Brynjolfsson,  Bundling  and  Competition  on  the  Internet,"  Marketing  Science,  19(  1),  Winter  2000,  at  63-  82  ("  Bundling  and  Competition  Study")  (discussing  the  impact  of  bundling  on 

 the  ability  of  firms  to  enter  a  new  market). 
 This  should  not  be  confused  with  the  costs  that  may  be  necessary  to  produce  quality  programming  to  lure  viewers.  II  Those  additional  costs  are  fixed  and  are  not  influenced  by  the  number  of  persons  who  view  such  programming. 
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 THE  REPORT  85 
 \  / 
 programming,  this  implies  that  every  consumer  that  values  a  video  program  should  be  allowed  access,  since  marginal  cost  is  zero.  A  price  of  zero  would  be  necessary  to  ensure  that  every  individual  that  values 

 the  programming  consumes  it.  This  introduces  the  tension  between  efficiency  and  cost  recovery.  If  the  price  must  be  zero,  then  no  profit-  maximizing  firm  would  supply  the  product  since  it  would  be  impossible 
 to  recover  the  fixed  costs  of  production.  A  mechanism  is  required  that  can  maximize  the  number  of 
 consumers  with  access  to  the  programming  while  recovering  the  costs  of  production.  One  such  mechanism  is  price  discrimination. 

 The  role  of  price  discrimination  in  ensuring  the  production  of  programming  that  consumers  desire  can  be  illustrated  by  expanding  on  the  simple  example  presented  in  the  previous  section.  In  that  example, 
 there  were  two  consumers  who  had  negatively  correlated  values  for  ESPN  and  TBS.  The  first  individual  valued  ESPN  at  $2.00  and  TBS  at  $5.00.  The  second  individual  valued  ESPN  at  $5.00  and  TBS  at  $2.00. 
 It  was  demonstrated  that  a  firm  would  earn  higher  revenue  by  selling  the  products  in  a  bundle  at  a  price  of  $7.00  rather  than  in  individually  for  $5.00  each.  Now,  production  costs  are  introduced  into  this  example. 
 Imagine  that  the  fixed  cost  of  producing  ESPN  is  $6.00,  as  is  the  cost  of  producing  TBS.  First  consider  the  case  of  pure  a  la  carte  sales.  The  highest  price  that  can  be  charged  for  ESPN  is  $5.00  since  any  price 
 higher  than  that  will  result  in  no  sales.  At  a  price  of  $5.00,  only  one  consumer  will  purchase  ESPN  and  revenue  for  ESPN  will  be  $5.00.  This  level  of  revenue  does  not  cover  ESPN's  production  costs  of  $6.00, 
 and  consequently  ESPN  would  not  be  produced.  Instead  of  offering  ESPN  at  $5.00,  the  firm  could  offer  ESPN  for  $2.00.  In  that  case  both  of  the  individuals  would  purchase  the  product  and  revenues  would  be 
 $4.00.  Again,  ESPN  would  not  fully  recover  its  costs  and  therefore  either  would  not  be  produced  to  begin  with  or  would  exit  the  market.  A  similar  story  holds  for  a  la  carte  sales  of  TBS--  there  is  no  uniform  a  la 
 carte  price  that  would  ensure  production  of  the  programming.  Consideration  of  bundled  sales  leads  to  a  different  result.  If  the  programming  is  sold  in  a  bundle  for  a  price  of  $7.00,  both  individuals  will  purchase 
 the  bundle  and  the  firm  will  take  in  revenue  of  $14.00.  This  revenue  is  adequate  to  recover  the  cost  of  producing  both  programs,  which  is  $12.00.  It  is  also  useful  to  examine  the  value  to  society,  two 
 individuals  in  this  example,  of  the  programming.  The  first  individual  values  ESPN  at  $2.00  and  the  second  individual  values  it  at  $5.00.  So  the  total  value  to  society  of  ESPN  is  $7.00,  which  is  greater  that 
 the  value  of  producing  the  programming  at  $6.00.  A  similar  analysis  holds  for  TBS  and  illustrates  that  society  is  better  off  due  to  the  price  discrimination  offered  by  bundling.  I2  The  ability  of  price 
 discrimination  to  enhance  total  welfare  in  a  market  economy  is  a  common  result  when  production  is  characterized  by  high  fixed  costs  and  low  marginal  costs.  Price  discrimination  based  on  the  class  of 
 customer  is  a  common  element  of  pricing  in  industries  such  as  electricity  and  freight  rai1r0ads.  I~ 
 The  example  also  shows  the  fallacy  behind  the  claim  that  bundling  forces  consumers  to  pay  for  programming  they  do  not  want.  Bundling  forces  a  consumer  who  places  a  high  value  on  a  program 
 network  to  pay  more  for  it  than  someone  who  places  less  value  on  the  network,  but  it  does  not  force  a  consumer  to  pay  more  for  the  bundle  than  the  value  to  consumer  places  on  the  programming  contained  in 
 the  bundle.  In  a  free  society  there  is  no  way  to  force  a  consumer  to  pay  more  for  a  product  than  the  value  they  place  on  it.  Consumers  always  have  the  option  of  declining  to  purchase  a  product.  In  fact,  bundling 
 brings  more  consumers  into  the  market  for  some  types  of  programming  because  it  allows  a  consumer  to 
 See,  e.  g.,  Steven  Wildman  and  Bruce  Owen,  Program  Competition,  Diversity,  and  Multichannel  Bundling  in  the  New  Video  Industry,  in  Video  Media  Competition:  Regulation,  Economics,  and  Technology,  Eli  M.  Noam  (ed.), 
 Columbia  University  Press,  1985,  at  244-  273  (seminal  paper  on  the  benefits  of  price  discrimination  in  the  production  of  video  programming);  See  also  Suchan  Chae,  Bundling  Subscription  TV  Channels:  A  Case  for  Natural 
 Bundling,  International  Journal  of  Industrial  Organization,  10(  2),  June  1992,  at  213-  230. 

 I  ? 

 See  Ronald  R.  Braeutigam,  Optimal  Policies  for  Natural  Monopolies,  in  Handbook  of  Industrial  Organization,  13  Vol.  2,  Richard  L.  Schmalensee  and  Robert  D.  Willig  (eds.),  North-  Holland,  1989,  at  1289-  1346. 
86
 THE  REPORT  86 
 view  programming  for  which  they  have  a  low  value  and  would  not  purchase  if  they  were  required  to  pay  a  so-  called  "fair  share"  of  the  production  costs. 

 Much  of  the  economic  analysis  of  bundling  has  involved  analyzing  the  behavior  of  a  monopolist.  Cable  and  satellite  operators  actively  compete  for  customers.  Bakos  and  Brynjolfsson  have  examined  the 
 nature  of  competition  between  firms  that  engage  in  bundling  of  information  g00ds.  l~  They  find  that  a  firm  that  bundles  its  products  will  dominate  competition  against  a  firm  that  sells  products  a  la  carte.  On  the 
 other  hand,  when  all  competing  firms  offer  bundles,  they  find  that  competition  is  more  intense,  and  consequently  prices  are  lower,  than  when  all  firms  are  selling  on  an  a  la  carte  basis.  Finally,  Bakos  and 
 Brynjolfsson  find  that  firms  that  offer  bundles  have  a  greater  incentive  to  innovate  due  to  the  increased  ability  to  recover  the  costs  of  innovation  through  incorporating  the  innovations  into  existing  bundles. 

 This  analysis  has  discussed  why  the  price  discrimination  engendered  by  bundling  video  programming  for  sale  to  consumers  may  have  welfare-  enhancing  effects.  This  analysis  has  also  discussed 
 one  of  the  strategic  reasons  why  bundling  may  reduce  welfare  by  deterring  entry  of  competitors  or  inhibiting  effective  competition.  This  effect  works  when  competitors  cannot  offer  the  full  bundle  of 
 programming  that  incumbents  can.  In  general,  there  is  scant  evidence  of  this  in  the  MVPD  industry.  Commission  regulations  prohibit  a  number  of  practices  that  could  lead  to  this  problem.  Broadcasters  have 
 an  affirmative  duty  under  the  Communications  Act  to  negotiate  retransmission  consent  in  good  faith  with  MVPDs.]  '  This  obligation  includes  a  number  of  per  se  requirements,  including,  inter  alia,  the  obligation 
 to  negotiate  retransmission  consent  with  all  MVPDs,  the  obligation  to  refrain  from  take-  it-  or-  leave  it  negotiation,  and  the  obligation  to  not  unduly  delay  retransmission  consent  negotiations.  16  MVPDs  are 
 generally  prohibited  from  demanding  exclusive  programming  agreements  from  video  programmers,"  though  there  are  examples  of  MVPDs  that  do  have  exclusive  agreements  for  content.  ''  Video 
 programmers  that  are  integrated  with  MVPDs  are  forbidden  from  unreasonably  discriminating  against  other  MVPDs  when  offering  satellite-  delivered  video  programming  for  sale.  '' 

 Thus,  the  bundling  of  video  programming  for  sale  to  consumers  is  likely  a  welfare-  enhancing  activity,  after  accounting  for  the  cost  savings  and  quality  improvements,  as  well  as  the  positive  impacts  to 
 promote  the  production  of  valuable  programming. 
 Bundling  also  exists  in  the  wholesale  market  for  video  programming.  Some  MVPDs  have  commented  on  how  video  programming  producers  require  MVPDs  to  purchase  program  networks  as  a 
 bundle  rather  than  as  individual  networks.  Price  discrimination  in  the  wholesale  market  would  allow  program  networks  to  cover  their  fixed  production  costs  just  as  in  the  retail  market.  However,  unlike 
 bundling  in  the  retail  market,  bundling  is  not  the  only  price  discrimination  mechanism  feasible  in  the  wholesale  market.  The  wholesale  market  is  characterized  by  one-  on-  one  negotiations  between  video 

 See  Bundling  and  Competition  Study,  at  63-  82.  14 
 l5  See  47  U.  S.  C.  9  325(  b)(  3)(  C)(  ii). 
 l6  See  47  C.  F.  R.  Q  76.65(  b). 
 "See  47  U.  S.  C.  Q  548(  c)(  2)(  D). 
 For  example,  DirecTV  has  an  exclusive  contract  for  NFL  Sunday  Ticket. 
 Some  video  programming  that  is  not  delivered  to  MVPDs  via  satellite  is  not  offered  to  new  entrants.  For  example,  Comcast's  terrestrially  delivered  regional  sports  network,  SportsNet  Philadelphia,  is  not  made  available  to 
 competitors'  DirecTV  and  Echostar. 

 18 
 19 
87
 THE  REPORT  87 
 programmers  and  MVPDs.  In  this  setting  there  are  ample  opportunities  to  tailor  rates  to  the  competitive  market  conditions  and  ensure  that  those  that  place  a  high  value  on  the  programming  pay  a  large  share  of 
 the  production  costs.  20  Unlike  the  retail  market,  the  entry  deterring  effects  of  bundling  or  tying  arrangements  at  the  wholesale  level  are  of  some  concern.  Program  networks,  because  they  are 
 differentiated  products  lacking  perfect  substitutes,  possess  varying  degrees  of  market  power.  Under  these  conditions,  Nalebuff  s  results  indicate  that  entry  by  a  firm  able  to  supply  only  a  portion  of  the  goods  in 
 the  incumbent's  bundle  is  unlikely  to  be  successful,  even  when  the  entrant  is  able  to  produce  a  higher  quality  product. 

 The  Commission's  good  faith  retransmission  consent  rules,  as  well  as  the  program  access  rules,  allow  prices  for  20  programming  in  the  wholesale  market  to  vary  based  on  market  conditions. 
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 THE  REPORT 
 11.  Analysis  of  Booz  Allen  Hamilton  Economic  Study 
 Booz  Allen  Hamilton  (  Booz  Allen)  has  produced  a  study  modeling  the  likely  outcomes  if  a  la  carte  sales  to  consumers  were  introduced  in  some  form.    The  three  methods  of  sale  considered  are:  (1) 
 pure  a  la  carte  where  channels  are  only  sold  on  an  individual  basis;  (2)  mixed  bundling  where  channels  are  offered  in  tiers,  as  they  are  today,  as  well  as  on  an  individual  stand-  alone  basis;  and  (3)  themed-  tiers 
 where  program  packages  with  fewer  channels  in  them  are  offered  to  consumers. 
 A.  An  Overview  of  the  Financial  Model. 
 The  financial  model  begins  by  forecasting  overall  consumer  response  to  the  availability  of  a  la  carte  or  themed  tier  offerings  and  the  consumer  response  to  various  types  of  program  networks.  With 
 these  projections,  the  impact  on  program  networks  and  cable  operators  can  be  estimated.  Much  of  the  impact  on  program  networks  will  vary  depending  on  consumer  responses  since  the  main  revenue 
 generators  for  a  program  network  are  subscription  fees  and  advertising,  both  of  which  depend  on  the  number  of  households  subscribing  to  and  viewing  a  network.  In  addition,  there  will  be  an  impact  on  the 
 expenses  program  networks  incur  to  market  their  programming.  In  response  to  these  changes,  program  networks  are  modeled  to  either  increase  affiliate  fees  or  reduce  programming  expenses  to  maintain 
 operating  margins.  Depending  upon  the  network  characteristics,  consumer  responses,  and  the  regulatory  environment,  per  subscriber  affiliate  fees  are  forecast  to  rise  by  38%  to  2392%.  In  addition  to  the 
 increased  affiliation  fees,  which  are  assumed  to  be  passed  through  to  subscribers,  cable  operators  will  see  a  number  of  areas  where  costs  will  increase,  as  well  as  areas  of  savings  under  some  methods  of  sale. 
 Cable  operators  are  projected  to  see  cost  increases  in  areas  such  as  customer  service  and  equipment  costs.  Advertising  revenues  earned  by  cable  operators  are  also  projected  to  fall,  as  are  revenues  from  ancillary 
 video  and  other  uses  of  bandwidth  in  some  scenarios.  The  impact  on  cable  operator  costs,  net  of  the  increases  in  network  affiliate  fees,  ranges  from  increases  of  17%  to  56%.  Assuming  that  consumers  make 
 up  for  the  increased  costs  and  reduced  advertising  revenues  through  the  rates  they  pay,  the  model  predicts  that  cable  rates  will  rise  between  4.5%  and  30.3%  depending  on  the  tiers  or  channels  chosen  by  the 
 consumer  and  whether  program  networks  increase  affiliate  fees  or  reduce  programming  expenses  in  the  new  environment.  In  the  pure  a  la  carte  environment,  the  average  channel  is  projected  to  cost  between  $4 
 and  $5  per  month. 
 B.  Estimating  Consumer  Responses  to  Alternative  Methods  of  Sale 
 Program  networks  are  highly  differentiated  products  and  consumers  do  not  view  one  network  as  a  perfect  substitute  for  a  different  network.  Consequently,  consumer  responses  to  alternative  methods  of 
 sale  such  as  a  la  carte  will  vary  from  network  to  network.  Booz  Allen  categorized  networks  into  6  segments  based  on  an  analysis  of  their  characteristics;  general  entertainment  and  sports  networks,  news 
 networks,  older-  skewing  networks,  younger-  skewing  networks,  emerging  mass  market  networks,  and  emerging  niche  networks.  2  For  each  of  these  segments,  a  maximum  proportion  of  consumers  that  would 
 take  a  network  in  the  segment  if  the  channel  were  available  on  a  stand-  alone  basis  is  analyzed.  These  values  ranged  from  10%  for  the  emerging  niche  and  mass  market  networks  to  30%  for  the  general 
 entertainment  and  sports  networks3  Forecasting  the  take  rates  of  the  mixed  bundling  and  themed-  tier 
 See  Booz  Allen  Hamilton,  The  A  La  Carte  Paradox:  Higher  Consumer  Costs  and  Reduced  Programming  Diversity  I  (July  2004)  (Attached  as  Attachment  A  to  Comments  filed  by  NCTA)  (  Booz  Allen  Study). 

 See  Booz  Allen  Study,  Figure  10. 
 Id,,  Figure  14. 

 2 
 3 
89
 THE  REPORT  89 
 , 
 environments  involved  estimates  of  the  likelihood  of  consumers  switching  from  their  current  tiers  to  either  a  la  carte  or  themed  tiers.  Booz  Allen  pegged  this  value  at  50%  for  both  sales  methods.  One 

 additional  step  was  required  for  analyzing  the  impact  on  the  individual  network  segments  in  the  themed-  tiers  environment.  Several  illustrative  tiers  such  as  family-  friendly  and  sports  tiers  were  developed.  Each 
 tier  would  contain  a  mixture  of  networks  from  each  of  the  segments.  Based  on  these  illustrative  tiers, 
 emerging  niche  networks  to  42%  for  general  entertainment  and  sports  network^.^  average  take  rates  for  networks  in  the  various  network  segments  are  estimated  to  range  from  14%  for 
 C.  The  Effects  on  Program  Networks 
 Advertising  Revenue.  Advertising  accounts  for  35%  to  52%  of  the  revenues  in  the  network  segments  examined  in  the  studies.    Under  the  alternative  sales  methods  examined  by  Booz  Allen,  the 
 number  for  subscribers  is  forecast  to  drop  and  consequently  viewership  will  drop  as  well.  However,  the  extent  to  which  viewership  will  drop  is  dependent  on  the  viewing  habits  of  those  people  who  continue  to 
 subscribe  to  a  program  network  under  the  alternative  methods  of  sale  and  those  who  do  not.  The  Booz  Allen  study  assumes  that  heavy  viewers  of  a  network  are  somewhat  more  likely  to  continue  purchasing  a 
 network  and  that  those  households  that  do  purchase  a  network  are  likely  to  watch  it  more  than  they  do  currently  since  they  are  likely  to  have  access  to  fewer  channels.  Therefore,  audience  ratings  decrease  less 
 than  subscribership  does.  Under  the  pure  a  la  carte  environment,  the  projected  range  of  viewership  decline  is  from  12%  in  the  news  network  segment  to  56%  in  the  emerging  mass  market  segment.  6  Under 
 the  mixed  bundling  and  themed-  tiers  environment,  the  declines  range  from  8%  in  the  news  network  segment  to  29%  in  the  emerging  mass  market  segment.    The  final  step  in  determining  the  likely  impact 
 on  advertising  revenues  is  to  understand  the  relationship  of  advertising  rates  to  subscribers  and  total  viewers.  Many  commenters  have  suggested  that  reduced  subscribership  and  viewership  reduces  the  price 
 advertising  agencies  are  willing  to  pay  for  advertising  that  reaches  a  given  number  of  viewers,  the  so-  called  cost-  per-  thousand  (  CPM).    Accordingly,  Booz  Allen  assumes  a  10%  decrease  in  the  CPM  for 
 advertising  in  the  general  entertainment  and  sports,  news,  older-  skewing,  and  younger-  skewing  network  segments.  The  emerging  mass  market  and  emerging  niche  network  segments  were  assumed  to  experience 
 a  20%  drop  in  CPMs  due  to  the  more  substantial  drops  in  viewership  experienced  by  those  segments.    Overall,  under  a  pure  a  la  carte  requirement,  the  average  cable  network  will  see  advertising  revenues  fall 
 by  29%.    Under  either  a  mixed  bundling  or  themed-  tiers  framework,  the  average  network  will  see  a  21%  decrease  in  advertising  revenues.  The  news  network  segment  is  projected  to  see  the  smallest  advertising 

 Id.  at  42.  The  news  network  segment  was  not  assumed  to  be  added  to  any  themed-  tiers,  but  remain  as  a  part  of  4  existing  channel  packages. 
 Id.,  Figure  1  1. 
 Id.,  Figure  15. 

   Zd.,  Figure  15. 
 *  See,  e.  g.  (Disney  13-  14);  (Viacom  19-  21);  (A&  E  17-  18);  and  (Discovery  9-  10). 
 At  the  Media  Bureau  Symposium,  Professor  David  Waterman  reported  on  his  research  examining  the  relationship  between  the  audience  of  a  cable  network  and  the  advertising  rates  it  could  charge.  His  findings  were  that  a  10% 

 reduction  in  a  cable  networks  audience  led  to  a  13%  reduction  in  advertising  rates.  Symposium  Transcript  at  187. 

 9 

 Booz  Allen  Study  at  49.  IO 
90
 THE  REPORT  90 
 \  , 
 losses  while  the  emerging  mass  market  network  segment  is  forecast  to  face  the  most  significant  losses  in  advertising.  I2 

 Marketing  Costs.  The  Booz  Allen  study  also  projects  that  the  alternative  methods  of  sale  will  have  an  adverse  impact  on  the  costs  of  program  networks.  The  study  projects  that  in  a  pure  a  la  carte 
 environment,  marketing  expenditures  would  rise  from  2%-  6%  of  revenues  to  30%  of  revenues  for  the  emerging  mass  market  and  niche  network  segments  and  25%  for  the  remaining  segments.  I3  In  the  mixed 
 bundling  and  themed-  tier  environments,  marketing  expenditures  would  be  25%  and  20%,  respectively.  These  increased  marketing  expenses  are  realized  because  networks  that  currently  are  available  on  tiers 
 with  large  numbers  of  channels  expend  very  little  effort  convincing  consumers  to  subscribe  to  the  tier.  Instead,  networks  included  in  large  tiers  concentrate  on  marketing  to  cable  operators  to  gain  carriage  and 
 to  tempt  consumers  to  sample  their  programming.  However,  under  the  alternative  methods  of  sale,  channels  are  projected  to  significantly  raise  their  marketing  efforts  since  they  will  need  to  inform 
 consumers  about  their  product  to  gain  subscriber^.  '^  The  values  that  are  used,  20%-  30%  of  revenues  spent  on  marketing,  are  chosen  based  on  marketing  expenditures  in  other  industries  and  on  cable  networks 
 that  are  currently  sold  on  an  a  la  carte  basis.  Consumers  Union  and  Consumer  Federation  of  America  argue  that  a  more  appropriate  value  in  the  mixed  bundling  scenario  would  be  an  expenditure  of  12%  to 
 16%  of  revenues,  rather  than  the  20%  to  25%  of  revenues  assumed  in  the  Booz  Allen  study.  16  While  marketing  responses  of  programmers  are  likely  to  vary,  reliance  on  the  decisions  of  successful  a  la  carte 
 networks  provides  the  most  reasonable  estimate  of  behavior  under  an  a  la  carte  or  themed-  tier  regime. 
 AfJiZiute  Fees.  As  previously  discussed,  the  number  of  subscribers,  and  consequently  the  affiliate  fees  they  generate  will  fall  under  all  three  alternative  methods  of  sale.  The  percent  of  subscribers  ranged 
 from  10%  for  the  emerging  niche  and  mass  market  networks  to  30%  for  the  general  entertainment  and  sports  networks  in  the  a  la  carte  environment  and  from  14%  for  emerging  niche  networks  to  42%  for 
 general  entertainment  and  sports  networks  in  the  mixed  bundling  and  themed-  tiers  environment.  Given  these  economics,  a  program  network  introduced  into  an  environment  with  these  alternative  methods  of 
 sale  faces  two  choices  to  maintain  its  cash  flow:  (1)  increase  revenue  or  (2)  reduce  expenses.  Booz  Allen  examines  the  likely  impact  when  the  program  network  increases  affiliation  fees  or  reduces 
 programming  expenses.  To  maintain  current  cash  flow  in  a  pure  a  la  carte  environment,  all  of  the  networks  in  the  studys  segments  would  have  to  raise  their  affiliation  fees  by  at  least  400%  and  ranging 

 Id.  at  43-  48.  I2 
 l  3  Id.  at  42. 
 l4  Among  the  marketing  activities  that  an  a  la  carte  channel  must  engage  in  are  combinations  of  corporate  marketing 
 in  conjunction  with  various  MVPDs,  cross-  promotion  on  the  distributors  other  services,  mass  media  advertising,  direct  mail,  telemarketing,  bill-  stuffers,  internet  promotions,  and  incentive  programs  for  the  MVPDs  customer 

 service  representatives.  Starz  Comments  at  4. 
 Booz  Allen  Study  at  27-  28.  However,  Disney  notes  that  when  the  Disney  Channel  was  sold  on  an  a  la  carte  basis,  it  spent  10%  of  its  revenue  on  telemarketing,  subscriber  acquisition  programs,  and  retention  programs.  Disney 
 Comments  at  2  1.  Disney  also  reports  that  it  considers  its  experiment  with  a  la  carte  sales  of  the  Disney  Channel  to  be  a  failure. 

 15 

 CURFA  Reply  Comments  at  32.  16 
 Booz  Allen  Study  at  42  and  Figure  14.  17 
 Cash  flow  in  this  study  is  defined  as  earnings  before  taxes,  interest,  depreciation,  and  amortization  (  EBITDA).  18 
91
 THE  REPORT  91 
 \  , 
 up  to  nearly  2500%.  19  In  the  mixed  bundling  and  themed-  tier  environment,  affiliation  fees  would  need  to  rise  by  a  minimum  of  loo%,  and  as  high  as  300%,  to  maintain  programmers  current  levels  of  cash  flow. 

 The  emerging  mass  market  network  segment  is  projected  to  see  the  most  significant  increase  in  affiliation  fees,  while  the  general  entertainment  and  sports  network  segment  will  experience  the  highest  increases  in 
 absolute  terms.  Depending  on  the  method  of  sale  and  network  category,  increased  marketing  expenses  account  for  between  24%  and  44%  of  the  increase  in  affiliation  fees.  The  remainder  of  the  increase, 
 between  56%  and  76%,  is  due  to  the  reduced  number  of  subscribers  and  the  resulting  impact  on  advertising  and  affiliate  revenues. 

 The  underlying  assumption  of  these  calculations  is  that  program  networks  price  their  product  to  retain  their  cash  flow  margins.  20  Consumers  Union  and  Consumer  Federation  of  America  argue  that  a 
 form  of  a  la  carte  will  force  networks  to  reduce  their  cash  flow  margins  and  accept  lower  levels  of  profits.*    Scant  evidence  is  offered  in  support  of  this  proposition.  In  a  world  where  a  cable  operators 
 savings  in  programming  expense  can  be  directly  converted  into  profits,  it  is  difficult  to  imagine  a  mechanism  that  would  generate  CUs  outcome.  Furthermore,  in  a  market  characterized  by  differentiated 
 products  where  demand  responses  are  muted  due  to  the  absence  of  close  substitutes,  the  Booz  Allen  assumption  may  be  closer  to  the  likely  outcome.  However  it  is  also  instructive  to  examine  outcomes  if 
 demand  were  more  responsive,  thereby  forcing  operating  margins  down  to  more  competitive  levels.  The  Bureau  staff  has  performed  an  analysis  using  the  Booz  Allen  model  whereby  cash  flow  is  limited  to  be 
 10%  of  revenue.  Such  an  analysis  indicates  that  if  cash  flow  margins  were  constrained  by  competition  to  be  lo%,  affiliate  fees  under  a  pure  a  la  carte  scenario  would  still  rise,  by  a  minimum  of  260%.  In  the 
 themed-  tier  and  mixed  bundling  environments,  affiliate  fees  would  rise  by  between  9%  and  223%  depending  on  the  network  segment  and  the  method  of  sale.  With  the  exception  of  the  younger-  skewing 
 network  segment  under  the  mixed  bundling  and  themed-  tiers  environment,  all  network  segments  are  projected  to  have  a  negative  cash  flow  if  they  do  not  reduce  expenditures  or  increase  affiliate  fees. 

 The  alternative  avenue  for  networks  facing  the  reduced  revenues  and  increased  marketing  expenses  of  alternative  methods  of  sale  is  to  reduce  programming  expenses.  Under  the  pure  a  la  carte 
 model,  the  shortfall  in  cash  flow  exceeds  the  programming  expenses  of  all  of  the  network  segments  and  methods  of  sale  with  the  exception  of  general  entertainment  and  sports  network  segment  when  those 
 networks  are  offered  in  a  mixed  bundling  or  themed-  tier  scenarios.  When  program  networks  are  offered  in  a  mixed  bundling  or  themed-  tier  environment,  general  entertainment  and  sports  networks  would  need 
 to  reduce  programming  expenses  by  75%  to  81%  to  maintain  current  levels  of  cash  flow.  Due  to  the  large  size  of  the  reductions  in  cash  flow,  Booz  Allen  uses  a  two-  stage  procedure  to  project  the  likely  reactions 
 of  video  programmers  to  the  reduced  revenues  and  increased  expenses  of  the  alternative  methods  of  sale.  When  the  program  networks  cash  flow  margin  drops  by  more  than  one-  third,  programming  expenses  are 
 reduced  by  15%,  or  the  amount  necessary  to  maintain  a  cash  flow  margin  of 

 Booz  Allen  Study  at  43-  48. 
 The  cash  flow  margin,  sometimes  referred  to  as  the  operating  margin,  is  simply  cash  flow  expressed  as  a  percentage  of  revenues.  In  the  segments  examined  in  the  Booz  Allen  Study,  this  ranges  from  18.1%  to  48.6%.  This 
 is  not  equivalent  to  one  of  the  common  measures  of  market  power  in  economics,  the  price-  cost  margin,  which  measures  the  amount  by  which  price  exceeds  marginal  cost.  As  discussed  in  Section  I  of  this  Appendix,  the 
 marginal  cost  of  video  programming  is  zero. 

 19 
 20 

 CUiCFA  Reply  Comments  at  3  1.  21 
 Booz  Allen  Study,  Figure  22.  22 
92
 THE  REPORT  92 
 -K  / 
 Impact  on  Program  Network  Viability.  Booz  Allen  argues  that  its  model  indicates  that  many  of  the  networks  in  the  emerging  niche  and  mass  market  segments  would  fail.  Failure  would  also  occur  in  the 

 other  network  segments  as  well  as  significant  increases  in  affiliate  fees  and  reductions  in  programming  quality. 
 In  addition,  it  argues  that  additional  consolidation  would  be  required  to  obtain  the  efficiencies  necessary  for  many  of  the  independent  networks  to  remain  going  concerns.  Apparently,  the  proposed 

 alternative  methods  of  sale  are  likely  to  reduce  the  viability  of  many  networks.  The  reactions  of  consumers  to  the  increased  ability  to  choose  channels  is  the  critical  driver  of  many  of  these  results. 
 Unfortunately,  there  is  no  reliable  information  on  the  numbers  of  consumers  that  are  likely  to  purchase  networks  or  themed-  tiers.  Absent  that  information,  it  is  difficult  to  generate  results  with  much 
 confidence.  The  reactions  of  Canadian  cable  subscribers  to  the  forms  of  a  la  carte  available  there  are  unlikely  to  be  helpful.  As  discussed  in  the  Report,  the  Canadian  system  provides  a  large  basic  package 
 that  must  be  purchased  prior  to  having  any  a  la  carte  choices.  Many  of  the  a  la  carte  choices  of  programming  originating  in  the  U.  S.  have  Canadian  produced  alternatives  available  in  the  basic  tier.  One 
 alternative  may  be  to  consider  the  channels  that  consumers  currently  watch  today.  Advertisers  follow  a  measure  known  as  the  cume,  which  measures  the  number  of  unique  viewers  a  network  has  during  a  given 
 period  of  time.  Since  under  current  sales  methods  consumers  incur  no  cost  watching  any  specific  channel  included  in  the  expanded  basic  tier,  this  may  provide  some  information  on  the  number  of  consumers  that 
 place  positive  value  on  receiving  a  network.  23  At  the  Media  Bureau's  Symposium,  Jon  Mandel  of  MediaCom,  a  leading  media  purchasing  firm,  presented  figures  on  the  weekly  cume  for  62  cable 
 networks.  24  The  percent  of  those  households  with  access  to  a  cable  network  that  actually  watch  the  network  in  a  given  week  ranges  from  4%  to  47%,  with  an  average  of  22%.  Networks  that  would  be  likely 
 to  fall  into  the  sports  and  general  entertainment  genre,  such  as  TNT,  USA,  and  TBS,  fall  at  the  upper  range.  This  analysis  seems  to  indicate  that  if  the  most  likely  purchasers  of  a  network  are  those  that  watch 
 it  at  least  once  a  week,  the  Booz  Allen  projections  for  take  rates  are  reasonable  after  factoring  in  that  channels  will  go  from  having  no  cost  to  view  to  some  positive  price  in  the  pure  a  la  carte  environment. 

 D.  The  Effects  on  Cable  Operators 
 The  proposed  alternative  methods  of  sale  will  have  a  number  of  impacts  on  the  costs  and  revenues  of  cable  operators.  While  Booz  Allen  assumes  that  the  number  of  cable  subscribers  will  not 
 change,  the  nature  of  what  they  choose  to  purchase  and  watch  will.  Some  of  these  impacts,  such  as  advertising,  mirror  those  seen  for  program  networks.  Many  are  unique  to  the  cable  operator  or  satellite 
 carrier,  including  increased  customer  care  expenses,  equipment  costs,  and  use  of  the  limited  bandwidth  available  on  cable  plant. 

 Advertising  Sales.  Many  program  networks  make  a  portion  of  their  advertising  time  available  for  sale  by  the  local  cable  operator  to  local  advertisers.  According  to  Booz  Allen,  the  average  cable  operator 
 generates  $5.20  per  subscriber  per  month  from  these  sales,  accounting  for  about  8%  of  the  operator's  revenue.  Under  the  three  alternative  methods  of  sale,  the  total  amount  of  cable  viewing  is  projected  to 
 fall  as  consumer  purchase  fewer  channels  and  shift  some  of  their  viewing  to  broadcast  networks,  on  which  cable  operators  are  unable  to  sell  advertising.  They  project  a  drop  of  23%  under  a  pure  a  la  carte 

 However,  this  analysis  must  be  cautiously  interpreted  since  in  an  expanded  basic  package  the  price  of  all  channels  is  the  same.  This  would  be  unlikely  under  an  a  la  carte  scenario.  Therefore,  some  consumers  may  substitute  less 
 expensive  networks  for  those  that  they  prefer  but  happen  to  be  more  expensive. 

 25 
 23 
 Jon  Mandel  Presentation  at  23.  24 
 25  Booz  Allen  Study  at  52. 
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 THE  REPORT  93 
 \  , 
 environment  and  13%  under  the  mixed  bundling  and  themed-  tier  environments.  26  This  compares  to  decreases  of  29%  and  2  1  %  for  the  average  program  network.  27 

 Customer  Sewice  Costs.  Under  the  alternative  methods  of  sale,  customer  service  costs  are  expected  to  increase  for  a  number  of  reasons  related  to  the  expanded  set  of  options  available  to 
 consumers.  Some  firms  will  require  new  and  expanded  billing  systems  to  accommodate  the  tremendous  expansion  in  possible  number  of  services  that  would  be  purchased  in  a  pure  a  la  carte  or  mixed  bundling 
 environment.  Furthermore,  additional  staff  at  customer  service  centers  would  be  required  to  explain  the  choices  and  handle  what  are  likely  to  be  more  frequent  changes  in  service.  Customer  service  costs  for  the 
 average  cable  operator  are  $3.25  per  subscriber  per  month  according  to  Booz  Allen.  28  They  predict  that  these  costs  will  rise  to  $5.75  under  a  pure  a  la  carte  environment  and  $5.25  under  a  mixed  bundling  and 
 themed  tier  environment."  This  is  contrasted  to  the  customer  care  costs  in  the  wireless  industry  which  currently  stand  at  $5.75.  Consumers  Union  and  Consumer  Federation  of  America  argue  that  the  increase 
 of  customer  service  costs  under  the  mixed  bundling  scenario  is  excessive  when  only  50%  of  subscribers  are  projected  to  purchase  channels  on  an  a  la  carte  basis.  30  Absent  any  information  of  the  mix  of  costs  for 
 the  relevant  customer  service  expenses,  it  is  difficult  to  adequately  examine  this  issue.  Some  customer  service  costs,  such  as  changes  to  service,  are  likely  to  be  largely  proportional  to  the  number  of  customers 
 choosing  to  purchase  channels  on  an  a  la  carte  basis.  Other  customer  service  costs  may  not  be  proportional.  For  example  costs  of  upgrading  and  maintaining  a  billing  system  capable  of  handling  a  la 
 carte  sales  are  likely  to  be  unaffected  by  the  number  of  customers  that  ultimately  choose  to  purchase  channels  on  an  a  la  carte  basis.  Similarly,  the  additional  customer  service  staff  and  training  to  explain  the 
 increasingly  complex  array  of  choices  available  to  customers  would  not  be  wholly  dependent  on  the  number  of  customers  that  ultimately  chose  to  avail  themselves  of  the  additional  product  choice. 

 Equipment  Costs.  To  implement  the  alternative  sales  methods  envisioned,  a  method  of  ensuring  that  customers  receive  the  channels  they  pay  for,  and  do  not  receive  those  for  which  they  do  not  pay,  is 
 necessary.  A  number  of  methods  are  currently  used  in  the  industry  depending  on  whether  the  channels  are  transmitted  in  an  analog  format  or  in  a  digitally  compressed  format.  The  mix  of  these  two  types  of 
 transmission  methods  will  vary  by  cable  operator.  Most  cable  operators  transmit  the  basic  and  expanded  basic  packages  in  analog.  This  allows  consumers  to  forgo  cable  set-  top  boxes  and  instead  use  cable-  ready 
 television  sets  to  view  programming.  Some  channels,  notably  premium  channels  such  as  Starz!,  HBO,  and  Showtime,  are  also  transmitted  in  an  analog  format,  but  are  scrambled,  requiring  a  device  known  as  a 
 trap,  to  be  placed  at  the  consumer's  premise  in  order  to  allow  viewing  over  cable-  ready  television  sets.  Channels  that  are  transmitted  digitally  require  either  a  recently  introduced  Cablecard  for  digital-  cable- 
 ready  television  sets,  a  digital  set-  top  box  in  order  to  view  the  programming,  or  some  other  means  of  converting  the  signal  to  that  used  by  conventional  television  sets.  3'  Under  the  pure  a  la  carte  scenario, 
 Booz  Allen  argues  that  all  a  la  carte  channels  must  be  distributed  in  a  digital  form  so  that  either  a  digital  set-  top  box  or  a  Cablecard  can  be  used  to  limit  access  to  those  channels  for  which  a  consumer  has 
 ~  ~~ 
 Id.  at  51. 

 Id.  at  49. 
 Id.  at  30. 

 26 
 27 
 28 

 29  Id. 
 CU/  CFA  Reply  Comments  at  28. 
 This  category  would  include  interdiction  devices,  as  those  described  in  the  Report. 

 30 
 31 
94
 THE  REPORT  94 
 purchased.  32  In  the  mixed  bundling  and  themed-  tier  environments,  Booz  Allen  proposes  that  the  current  basic  and  expanded  basic  tiers  continue  to  be  available  as  an  analog  feed  for  those  consumers  choosing 
 them.  In  addition,  duplicate  digital  program  streams  would  be  transmitted  to  control  access  for  a  la  carte  and  themed-  tier  consumers.  Subscribers  choosing  to  purchase  individual  channels  or  themed-  tiers,  would 
 require  digital  set-  top  boxes  to  descramble  the  signals.  The  purpose  behind  this  arrangement  is  to  reduce  the  number  of  set-  top  boxes  that  must  be  deployed.  Booz  Allen  allocates  $185  for  each  box.  Of  course, 
 since  cable  operators  typically  charge  a  rental  fee  on  set-  top  boxes,  even  in  household  subscribing  to  digital  service,  only  1.7  of  the  average  of  three  television  sets  are  equipped  with  boxes.  Households  find 
 this  a  valuable  trade-  off  since  as  long  as  the  households  television  sets  are  cable-  ready,  they  can  still  receive  the  expanded  basic  tier  without  a  Under  a  pure  a  la  carte  system,  Booz  Allen  assumes  that 
 all  households  would  receive  a  digital  set-  top  box  for  each  of  the  three  television  sets.  This  would  mean  an  increase  from  providing  digital  set-  top  boxes  for  17%  of  its  customers  television  sets  to  100%  under 
 the  pure  a  la  carte  scenario.  The  number  of  additional  set-  top  boxes  to  be  deployed  under  the  mixed  bundling  and  themed-  tier  environments  will  depend  on  the  number  of  consumers  choosing  those  options. 
 Booz  Allen  has  assumed  that  50%  of  customers  will  choose  one  of  the  options,  requiring  an  increase  of  over  240%  in  the  number  of  boxes  deployed.  Caution  must  be  taken  in  evaluating  the  necessary 
 deployment  of  set-  top  boxes  because  it  is  difficult  to  predict  consumer  reactions  to  the  additional  cost  of  such  equipment.  All  television  sets  may  be  equipped  with  set  top  boxes  if  there  were  no  added  costs 
 involved,  however,  when  charges  are  introduced,  subscribers  may  choose  to  purchase  only  the  basic  service  tier  on  some  sets  and  forgo  the  monthly  cost  of  additional  set-  top  boxes.  Therefore,  it  is  best  to 
 view  these  values  as  an  upper  bound.  Consumers  Union  and  Consumer  Federation  of  America  contends  that  the  equipment  cost  analysis  represents  a  $  500  solution  to  a  $50  problem,  suggesting  instead  that 
 operators  could  use  a  router  to  service  multiple  sets.  34  At  this  time,  a  system  such  as  that  has  not  been  commercially  deployed.  However,  the  situation  that  would  be  faced  by  cable  operators  undergoing  the 
 transition  to  digital  environments  is  similar  to  that  currently  faced  by  DBS  operators.  In  response  to  the  substantial  equipment  costs  involved  in  serving  households  with  multiple  TVs,  EchoStar  has  introduced  a 
 digital  set-  top  box  containing  two  tuners  capable  of  serving  two  televisions  in  separate  rooms  in  the  The  extent  of  the  cost  savings  associated  with  this  equipment  is  unclear,  though  it  is  unlikely  to 
 be  a  $50  solution. 
 Programming  Costs.  The  likely  impact  of  a  la  carte  on  affiliation  fees  that  networks  charge  cable  operators  for  the  right  to  carry  their  programming  has  been  extensively  discussed.  Under  the  scenario  in 
 which  program  networks  increase  their  affiliate  fees  to  maintain  their  current  levels  of  cash  flow,  Booz  Allen  projects  that,  on  average,  a  cable  operators  total  costs  for  programming  would  rise  by  between 
 50%  and  65%  depending  on  the  sales  method  used.  36  This  is  less  than  the  increase  in  affiliate  fees  imposed  by  program  networks  because,  unlike  today,  no  network  will  be  made  available  to  all 

 32  Booz  Allen  assumes  that  broadcast  channels  would  remain  in  analog  and  available  to  all  cable-  ready  television 
 sets  without  the  need  for  a  set-  top  box.  Booz  Allen  Study  at  16-  18. 

 DBS  households  have  79%  of  their  sets  attached  to  set-  top  boxes  versus  58%  of  sets  in  households  with  digital  cable.  The  difference  is  likely  due  to  the  ability  of  digital  cable  households  to  view  some  analog  programming 
 while  all  DBS  programming  requires  a  box.  Communications  Daily,  September  13,2004  at  11  (reporting  on  a  study  by  Horowitz  Associates). 

 33 

 CUICFA  Reply  Comments  at  27. 
 Dish  receiver  Model  322  is  capable  of  offering  two  standard  definition  television  signals 

 34 
 35 
 (httt,://  www.  dishnetwork.  com/  contentlproductslreceiverslstandard/  index.  shtnil). 

 Booz  Allen  Study  at  52.  36 
95
 THE  REPORT  95 
 subscribers,  and  therefore,  the  cable  operator  would  not  be  paying  affiliate  fees  based  on  all  of  its  customers. 

 Spectrum  Costs.  The  limited  bandwidth  available  on  the  cable  plant  has  a  number  of  valuable  uses  among  which  the  operator  must  allocate  the  scarce  resource.  Some  bandwidth  is  devoted  to 
 traditional  linear  cable  channels,  while  bandwidth  is  also  devoted  to  pay-  per-  view  content,  video  on  demand  services,  internet  access,  and  telephony.  Depending  on  the  manner  in  which  a  la  carte  or  themed- 
 tiers  are  implemented,  a  cable  operator  may  require  more  bandwidth  for  linear  cable  channels  or  may  require  less.  Booz  Allen  has  argued  that  under  the  pure  a  la  carte  method  of  sale,  a  cable  operator  would 
 need  to  provide  all  channels  in  a  digital  form  in  order  to  control  access  using  a  digital  set  top  box.  Since  all  customers,  or  at  least  those  choosing  to  purchase  channels  not  available  on  the  basic  service  tier, 
 would  require  a  digital  box,  there  is  no  longer  a  need  for  most  channels  to  be  transmitted  in  analog  form.  This  would  free  up  additional  bandwidth  that  could  be  used  for  other  revenue-  generating  applications. 
 Booz  Allen  estimates  these  savings  to  be  about  $3.75  per  month  per  subscriber.  In  the  case  of  mixed  bundling  and  themed-  tiers,  Booz  Allen  assumes  that  the  existing  basic  and  expanded  basic  tiers  will 
 continue  to  be  provided  in  analog  form.  Consequently,  rather  than  freeing  additional  spectrum  for  other  services,  additional  spectrum  will  be  required  in  order  to  transmit  individual  channels  in  digital  format 
 and  thereby  control  access  to  individual  networks  or  tiers.  Booz  Allen  estimates  that  the  additional  spectrum  requirements  of  this  duplication  are  worth  $1.20  per  subscriber  per  month  in  the  mixed  bundling 
 environment  and  $0.88  in  the  themed-  tier  environment. 
 Impact  on  Cable  Operator  Costs.  Overall,  if  program  networks  respond  to  the  new  sales  environment  by  raising  affiliate  fees,  cable  operators  are  expected  to  see  their  costs  increase  by  between 
 37%  and  57%.  Between  46%  and  53%  of  the  increase  in  cable  operator  costs  is  due  to  the  increase  in  affiliate  fees  projected  by  Booz  Allen.  Set-  top  boxes  contribute  33%  to  43%  of  the  increased  costs 
 depending  on  the  method  of  sale  and  the  remainder  of  the  cost  increase  is  attributed  to  customer  service  costs.  If,  rather  than  increase  affiliate  fees,  program  networks  reduce  programming  expenses,  cable 
 operator  costs  will  increase  by  17%  to  31%  depending  on  the  method  of  sale.  Set-  top  box  expenses  would  account  for  71%  to  80%  of  the  increased  costs  of  cable  operators. 

 E.  Impact  on  Consumers 
 To  evaluate  the  impact  on  consumers,  the  likely  responses  of  cable  operators  when  alternative  methods  of  sale  increase  their  costs  needs  to  be  understood.  Booz  Allen  makes  a  number  of  assumptions 
 regarding  cable  operator  behavior  in  order  to  determine  the  likely  impact  of  alternative  methods  of  sale  on  consumers.  The  global  assumption  is  that  cable  operators  will  price  its  products  in  order  to  maintain  their 
 earnings  per  sub~  criber.~    Under  this  assumption,  average  revenue  per  subscriber,  in  other  words  the  average  consumer  bill,  increases  by  between  11%  and  36%.  38  The  largest  increases  are  seen  in  the  pure  a 
 la  carte  environment  and  the  smallest  increases  in  the  mixed  bundling  and  themed-  tier  environment. 
 F.  Application  to  DBS 
 The  Booz  Allen  study  examined  the  impact  on  cable  operators,  but  much  of  the  information  can  be  used  in  examining  the  likely  impact  on  DBS  operators  as  well.  For  example,  the  impacts  on  customer 
 care  costs  are  likely  to  be  similar  for  both  satellite  and  cable  operators,  as  are  increases  in  programming 
 Booz  Allen  measures  earnings  as  EBITDA.  Operating  margins  (EBITDA  as  a  percent  of  revenues),  however,  will  37  decline  from  the  current  36%  to  between  26%  and  32%.  Booz  Allen  Study  at  52. 

 38  Id. 
96
 THE  REPORT  96 
 \  / 
 costs.  What  is  likely  to  be  different  is  the  equipment  costs.  Programming  transmitted  by  DBS  operators  is  in  a  digitally  compressed  form  and,  therefore,  a  set-  top  box  is  required.  A  reasonable  assumption 

 would  be  that  DBS  operators  would  not  need  to  supply  any  additional  set-  top  boxes.  If  the  absolute  increase  in  per  subscriber  costs  for  programming  and  customer  care  is  the  same  for  DBS  operators  as 
 cable  operators,  DBS  average  revenue  per  subscriber  would  need  to  rise  by  between  15%  and  23%  when  programmers  respond  to  the  alternative  sales  methods  by  increasing  affiliation  fees  and  DBS  operators 
 pass  those  increased  costs  on  to  their  customers.  This  amounts  to  rate  increases  in  the  range  of  $10  to  $13  per  month.  39 

 Average  revenue  per  subscriber  per  month  in  the  second  quarter  of  2004  was  $55.59  and  $65.00  for  EchoStar  and  DirecTV,  respectively.  See  EchoStar  Communications  Corporation  IO-  Q,  (filed  Aug.  9,  2004)  at  23  and  The 
 DirecTV  Group,  Znc.  IO-  Q,  (filed  Aug.  10,  2004)  at  41. 

 39 
97
 THE  REPORT  97 
 <  >  GENERAL  APPENDICES 
98
 THE  REPORT  98 
 i  > 

 APPENDIX  A:  Letters  From  Congress 
99
 ky-  18-  01  01.13~  11  From- 
 JOE  BARTON,  TEXAS  CWAl  RMAN 
 May  18,2004 
 RECEIVED 

 In  the  context  of  our  recent  examination  of  setellite  television  reauthorization  legislation,  the  Comminec  on  Energy  and  Conmace  has  been  engagad  in  discussions  concerning  the 
 eficacy  of  providing  a  la  carte  and  hcmcd-  tier  s  m  c  c  s  to  cable  and  satellite  subscribers.  As  the  manbas  of  the  Committee  have  ~scusscd  these  issues,  some  have  hdicated  that  they  do  not 

 have  sufiicient  information  lo  make  a  z  informed  decision  on  &e  porenlial  ments  and  drawbacks  of  proposals  which  would  allow  miltichannel  video  programming  distributors  (AWDs)  to 
 offer  prvgramming  to  their  consumem  on  an  u  la  carte  or  thwd-  tier  basis. 
 Thenfort,  Committee  member;  desk  insight  from  the  Federal  Communications  Commission  (the  Commission)  rn  asiSt  tlzem  in  forming  their  judgments  about  these  issucs. 
 Accordingly.  we  request  that  the  Commission  submit  a  report  to  this  Committee  by  November  18,  2004  that  answers  questions  relaring  to  the  ability  of  MVPDs  to  voluntarily  provide  their 
 customers  prograrmning  on  an  u  la  cor&  or  thcmcd-  her  basis,  in  addition  to  broadcast  basic  and  expanded  basic  tins  that  may  ahead4  bo  sold.  The  report  should  address,  at  a  minimum,  the 
 following. 
 HISTORICAL 
 Do  MVPDs  currently  h  a  v  t  the  optiofi  10  purchase  channels  from  programmers  on  a  md-  alone  bans,  such  that  they  could,  if  they  CIQSC,  ofTu  programming  to  cousmus  on  an  u  la  carte  QC 
 thacd-  tier  basis?  Whai  am  the  limitadons,  if  any,  on  their  flexibility  to  do  so?  What  statutory  or  regulatory  action  would  be  needed  to  wmovo  any  such  limitations? 

 RATES 
 What  would  rhe  impact  be  on  retail  ;ate  to  consumers  rf  programmers  were  required  to  offer  their  programming  to  MVPDs  exclusively  on  a  stand-  alone  basis.  and  could  not  also  offer 
 p~  gmuruu~  ry;  on  a  bundled  basis  lbr  B  e  c  Of  ar  a  U~  scOmKed  raw? 
100
 May-  18-  04  07.  lJp11  F  r  o  r 
 The  Honorable  Michael  K.  PowcIl  Page  2 
 What  would  thc  impGt  be  on  retatl  rms  to  co~  sumcrs  if  programmen,  in  addition  to  the  currently  offered  packages.  were  rq~  a  to  allow  MVPDs  to  offcr  their  pmgnmming  OII  an  a  la 
 carte  01  thcmcd-  tin  basis  if  the  MVPD  chose  to  do  so? 
 Can  MVPDs  cuneatly  offer  a  la  carte  and  them&-  tier  service  in  addition  to  tbc  packages 
 currently  offered,  such  as  basic  and  expanded  basic?  Can  Lhe  same  mvme  of  channels  be  o  E  u  d  both  on  a  basidexpanded  basic  basis.  as  well  as  an  a  la  carte  or  themed-  her  basis? 

 HOW  would  an  u  la  carte  or  thcsnc-  ticred  approach  &et  a  nework's  ability  to  amct  advertising  revenue?  Would  the  lmpact  change  depending  upon  whether  an  MtrPD  subscriber 
 had  to  purchase  a  basidexpanded  basic  tier  before  purchasing  addIhonal  channels  on  an  u  la  carie  basis?  How  would  an  a  In  carte  or  thcmed-  tier  option,  in  addition  to  packages  cumrrtly 
 offered,  affect  a  nctwork's  abiliry  to  atmct  advutisiry  revenue? 
 What  effect  would  a  la  carre  or  thcmcd-  tia  have  on  a  network's  per-  subscriier  liceme  fees? 
 Arc  there  networks  that  have  migrated  h  m  being  offered  on  a  tiered  basis  to  an  u  la  carte  basis,  or  vice  versa?  What  was  thc  cffst  of  this  d  p  t  i  o  n  on  the  network's  economic  viability  and  cost 
 IO  consumers? 
 RETRANSMISSION  CONSENT 
 How  have  broadcasr  networks  and  affiliate  groups  used  the  retransmission  consent  process  to  ocpand  carnage  of  f  l  i  l  i  a  t  d  progmnmkg?  How  has  this  affected  rates  for  MVPD  offerings  for 

 cons  uni  crs? 
 Do  the  rules  governing  retransmmion  mnsent  and  must-  carry  limit  consumers'  sbility  to  select  their  own  progranuning?  If  so,  how? 

 DIVERSITY  OF  PROGRAMMING 
 What  effect,  if  any,  would  the  voluntary  off'  of  a  fa  carfe  or  thcmed-  tier  service  have  on  the  ability  of  independent,  niche,  religious,  and  ethnic  programmiPg  to  C  O  R  ~~~U  C  to  be  carried  or 

 launch&? 

 Describe  the  programming  cost  differential  for  the  largest  cable  and  satellire  compauics  and  the  smallest  independent  MVPDs  in  smdla  markers  and  mal  areas.  wbat  is  the  "volume  discount' 
 to  the  largex  companies? 
 What  percent  of  total  cxpemes  do  smaller  MVPDs  in  smaller  markets  and  rural  areas  amibute  to  programming,  and  how  does  this  compare  to  the  Iargest  cable  and  satellite  companies? 

 What  would  be  the  impact  on  the  programming  costs  of  smaller  MVPDs  iftbcy  wac  to  purchase  programming  on  a  stand-  Arne  basis  rather  than  in  bundles? 
 Whar  would  be  the  hpact  on  the  progmmiqg  costs  of  small^  MVPDs  if  they  were  allowed  to  offer  a  Za  cme  or  thexned-  tier  s  d  c  e  in  addition  fa  bundled  packa~  n? 
101
 May-  18-  04  0T:  lJpr  Fronr 
 The  Honorable  Michaol  K.  Powell  Page  3 

 SET-  TOP  BOXES 
 Is  an  addresable  converter  box  requrred  for  way  television  set  on  which  a  consurnef  might  wsh  to  view  programming  offered  on  an  Q  la  carfe  or  thcmed-  tier  basis7  What  is  tbe  number  of 

 television  sets  that  are  not  d  y  ;onncctcd  to  addressable  convener  boxes?  What  arc  tht  costs  to  consumes  of  buying  or  leasing  theso  boxes9 

 Is  an  addressable  convertcT  box  required  for  way  tclevlsion  set  on  which  a  c  o  n  ~~e  t  might  wish  to  view  digital  programming?  Is  it  me  that  a  la  carte  or  themod-  tier  s  d  c  e  s  can  only  be 
 offercd  on  a  digital  basis?  Whai  percent  or  cabIe  and  satclhttc  distributors  offer  digital  programming  to  their  subscribers?  What  percent  of  coasumus  currently  subscribe  to  digital 
 programming  packages? 
 What  impact  would  a  la  curze  and  thecoed-  ticr  s  d  c  t  have  on  the  unidirectional  Plug-  and-  Play  regulations,  and  on  the  ongoing  discusSions  regarding  potential  bi-  dirccbonal  Plug-  and-  Play 
 regulations? 
 LEGAL  AND  REGULATORY  QUESTIONS 
 1s  there  any  reason  to  Treat  cable  and  satellite  opcraton  differently  With  regard  to  t  h  ~  u  In  carte  and  tficmtd-  tier  service? 

 Would  MVPDs  be  in  compliance  with  the  must-  carry  d  e  s  so  long  85  they  offcrcd  dl  hcd  broadcast  stabons  on  an  u  In  carte  or  rhemed-  tier  basis,  or  would  the  must-  carry  d  e  s  prohibit 
 MVPDs  from  offering  locd  broadcast  stations  on  an  u  fa  cafe  or  themcd-  tier  basis? 
 What,  if  any,  Constituuonal  or  other  legal  questions  are  raised  by  programmers'  ability  to  b  d  c  s  m  c  e  s  &rough  retransmission  consent,  regioaal  sports  contracts.  and  national  programming 

 muacts  for  marquee  programmmg? 
 What,  if  any,  Constitutional  or  other  legal  questions  would  be  raised  if  Congsess  rcquirbd  progammas  to  offer  their  channels  to  MVPDs  on  a  stand-  alone  basis  and  prohibited  them  ham 
 requiring  carriage  of  their  programming  on  pdcular  tiers? 
 Whai,  if  any,  Constitutional  ar  otber  legal  questions  would  bc  raised  if,  in  additlon  to  currcnrly  offered  packages,  Congress  required  programmers  TO  alIow  MVPDs  to  voluntarily  oEm  their 
 clxumels  on  an  a  la  carte  or  themcd-  tie  basis? 
102
 May-  18-  04  07  14m  Frw- 
 The  Honorable  Michael  K.  Powell  Page  4 

 I 
 -  Fred  upton 
 Chairman  Subcommittee  on  Tclecamm~  cations 

 and  the  Internet 

 Nathan  Deal 
 cc:  Commissioner  Kathleen  Abematby 
 Commissioner  Kevin  Martin  Comnissioner  MichaeI  Copps 

 Commissioner  Jonathan  Adelstein 

 . 

 T-  983  P  OW005  C-  IBO 
 EdwardMarkey  k  Ranking  Member 
 Subcommittee  on  Telecommunications 
 w 

 and  the  Intemet 

 .I  ,  -  .  .  ..  ..  .  .I  ._  ll.  l  ^  _l_  -.  .  , 
103
 DOCKET  FILE  COPY  ORIGINAL 
 May  19,2004 
 RECEIVED  The  Honorable  Michael  Powell 
 Chairman  MAY  2  1  2004  Federal  Communications  Commission 
 445  121hst.,  sw  Washington,  DC  20554  Federal  Communications  Commission  afice  of  the  Secretary 

 Dear  Chairman  Powell: 
 As  you  know,  the  Senate  Committee  on  Commerce,  Science,  and  Transportation  has  cIosely  examined  the  issue  of  escalating  cable  rates  in  recent  hearings.  Cable  rata 
 have  increased  more  than  50%  since  1996  -  almost  three  times  the  rate  of  inflation.  These  hearings  have  reinforced  my  conccm  that  consumers  lack  options  hat  would  help 
 them  control  the  rising  cost  of  cable  and  satellite  television.  When  it  coma  to  purchasing  cable  channels  beyond  the  basic  tier  today,  consumers  have  virtually  no  choice  but  to  pay 
 for  a  large  package  of  expanded  basic  channels  even  if  they  watch  only  a  couple  of  the  channels,  I  am  writing  to  ask  you  to  explore  all  available  options  within  your  authority  to 
 promote  A  la  carte  cable  and  satellite  offerings  as  soon  as  possible  where  such  offerings  would  benefit  consumers. 

 Cable  executives  appeared  before  the  Commercc  Committee  last  year  and  proclaimed  the  merits  of  A  la  carte  pricing  options,  particulady  with  respect  to  ccrtaia 
 expensive  sports  programming.  Charles  Dolan,  the  Chairman  of  Cablevision,  testified  that  new  digital  technology  gives  cable  operators  the  capability  to  off=  consumers  mom 
 nuanced  choices:  'I..  .this  new  technology  gives  our  customers  greater  choice,  the  power  to  creak  the  menu  they  want  on  tbe  television  ~crccns  in  their  homes.  Cablevision,  as  a 
 policy,  wants  its  customers  to  be  able  to  pick  and  choose  among  its  services,  selecting  what  appeals  to  thcni,  rejccting  what  does  not,  determining  for  themselves  how  much 
 they  will  spend,  just  as  they  do  every  day  in  the  supermarket  or  the  shopping  mall.  Unforrunately,  our  customers'  shopping  carts  Eace  a  littered  road  ahead,  debris  left  over 
 from  ow  industry's  long  technological  and  legislative  history.  Unwanted  programming  is  being  forced  into  the  home,  particularly  sports  programming." 

 Likewise.  James  Robbins,  President  and  CEO  of  Cox  Communications,  in  the  same  hearing,  stated  that  "if  operators  had  hc  flexibility  to  sell  these  nchvorks,  sports 
 channels  or  others,  on  an  optional  tier,  consumers  would  gain  a  significant  opportunity  to 
104
 manage  their  cable  expenditures.  Likewise,  pmgra~  nmcrs  would  be  motivated  to  keep  their  prices  reasonable  to  remain  on  expanded  basic  cablo  lineups." 
 la  carte  pricing  for  digital  cable  c~)  nsmcrs  in  Canada.  T  urge  the  Commission  to  probe  the  options  available  to  Canadian  consumers  and  examine  why  such  options  are  not 
 available  to  American  consumers. 

 Moreover,  the  Committea  recently  heard  testimony  regarding  the  availability  of  B 

 A  la  carte  pricing  would  enable  consumers  to  pay  for  only  thosc  channels  they  want  to  watch  It  would  undoubtedly  benefit  those  consumers  who  watch  only  thrcc  or 
 fow  cabIe  channels  or  who  may  be  on  a  limited  budget.  It  may  also  have  the  effect  of  disciplining  cable  rates  overall.  Finally,  it  would  allow  parents  to  reject  channels  that 
 thcy  find  objectionable  without  being  required  to  pay  for  the  very  same  pmgamming. 
 The  cable  industry  rcgularly  touts  the  value  its  expanded  basic  tier  del.  ivcrs  to  consumers  noting  that  it  "costs  less  than  taking  a  family  of  four  to  a  movie  or 
 professional  sporting  event."  I  do  not  believe  that  the  cable  industry  should  be  forced  to  eliminate  their  current  pricing  plans.  lf  the  expanded  basic  package  is  such  a  pat  value, 
 then  few  consumers  will  G~  OOSC  an  B  la  carte  option  when  offered,  and  the  cable  industry's  predictions  about  the  negative  effect  of  such  options  on  some  cable  networks 
 should  prove  baseless.  If,  on  the  other  hand,  consumers  rclect  the  expanded  basic  package  in  sizeable  numbers.  then  it  would  demomtmte  that  today's  one-  size-  fits-  all, 
 take-  it-  or-  leave-  it  packages  are  not  such  a  great  value. 
 Notwithstanding  the  comments  of  the  industry's  own  executives,  the  we  of  B  la  carte  pricing  in  Canada,  and  the  potential  benefits  to  COMU~  UIS,  the  cable  industry 
 continues  to  fight  every  effort  to  provide  choica  to  consumers.  Unfortunately,  wc  will  never  know  the  true  effect  of  an  la  carte  pricing  option  BS  long  as  the  industry  refuses  to 
 allow  it.  That  is  why  I  urge  you  to  use  any  existing  authority  you  have  to  promote,  or  to 
 create  incentives  to  promote,  an  A  la  carte  pricing  option,  in  conjunction  with  whatever  tiers  cable  and  satdlite  companies  ahady  affcr.  I  believe  that  same  cable  and  satellite 

 companies  may  be  willing  to  offer  consumers  more  choice  if  they  had  the  ability  to  do  so.  I  urge  you  to  explore  the  Commission's  options  for  creating  thc  right  tnvirommt  to 

 allow  this  to  happen. 
 Thank  you  for  your  attention  to  this  important  matter. 

 Sincerely, 
 WG-  John  McCain  ChaiIlnaIl 

 _._...  "  _._.,  l__  l_  l  __~_I  I  _  .  ..  .  .  ,  _-  .  .  .-.,  .  .  .  .  .  .  .  .  -  .  ..  . 
105
 THE  REPORT  99 
 .  ,  APPENDIX  B:  Media  Bureau  Public  Notices 
106
 THE  REPORT  100 
 <  > 

 DA  04-  1454  May  25,2004 
 MB  Docket  No.  04-  207 
 COMMENT  REQUESTED  ON  A  LA  CARTE  AND  THEMED  TIER  PROGRAMMING  AND  PRICING  OPTIONS  FOR  PROGRAMMING  DISTRIBUTION  ON  CABLE  TELEVISION  AND 
 DIRECT  BROADCAST  SATELLITE  SYSTEMS 
 Comment  Date:  July  8,2004  Reply  Comment  Date:  July  23,2004 

 Through  this  public  notice,  comment  is  sought  on  factual  questions  regarding  the  provision  of  a  la  carte  and  "themed-  tier"  services  on  cable  television  and  direct  broadcast  satellite  systems.  The  responses  to  the 
 questions  listed  below  will  be  used  in  the  preparation  of  a  Report  that  will  address  questions  relating  to  the  ability  of  multichannel  video  programming  distributors  ("  MVPDs")  to  provide  such  services  to 
 customers  on  a  voluntary  basis. 
 This  request  for  comment  is  intended  to  assist  in  gathering  information  necessary  to  respond  to  specific  requests  from  members  of  Congress  for  a  Report  on  these  issues.  See  May  18,  2004,  letter  from 
 Congressmen  Barton,  Dingell,  Upton,  Markey,  and  Deal  of  the  Committee  on  Energy  and  Commerce  to  Chairman  Powell  and  May  19,  2004,  letter  from  Senator  John  McCain,  Chairman,  Committee  on 
 Commerce,  Science  and  Transportation  to  Chairman  Powell.  [Copies  included  in  the  file  of  this  Docket.] 
 The  Report  will  address,  at  a  minimum,  the  following  topics: 
 I.  HISTORICAL 
 Do  MVPDs  currently  have  the  option  to  purchase  channels  from  programmers  on  a  stand-  alone  basis,  such  that  they  could,  if  they  chose,  offer  programming  to  consumers  on  an  a  la  carte  or  themed-  tier  basis? 
 What  are  the  limitations,  if  any,  on  their  flexibility  to  do  so?  What  statutory  or  regulatory  action  would  be  needed  to  remove  any  such  limitations? 

 11.  RATES 
 What  would  the  impact  be  on  retail  rates  to  consumers  if  programmers  were  required  to  offer  their  programming  to  MVPDs  exclusively  on  a  stand-  alone  basis,  and  could  not  also  offer  programming  on  a 
 bundled  basis  for  free  or  at  a  discounted  rate? 
 What  would  the  impact  be  on  retail  rates  to  consumers  if  programmers,  in  addition  to  the  currently  offered  packages,  were  required  to  allow  MVPDs  to  offer  their  programming  on  an  a  la  carte  or  themed-  tier  basis 
 if  the  MVPD  chose  to  do  so? 
 Can  MVPDs  currently  offer  a  la  carte  and  themed-  tier  service  in  addition  to  the  packages  currently  offered,  such  as  basic  and  expanded  basic?  Can  the  same  universe  of  channels  be  offered  both  on  an 
 expanded  basic  basis,  as  well  as  an  a  la  carte  or  themed-  tier  basis?  How  would  an  a  la  carte  or  theme-  tiered  approach  affect  a  network's  ability  to  attract  advertising  revenue?  Would  the  impact  change 
 depending  upon  whether  an  MVPD  subscriber  had  to  purchase  a  basidexpanded  basic  tier  before 
107
 THE  REPORT  101 
 .  ,  purchasing  additional  channels  on  an  a  la  carte  basis?  How  would  an  a  la  carte  or  themed-  tier  option,  in  addition  to  packages  currently  offered,  affect  a  networks  ability  to  attract  advertising  revenue? 

 What  effect  would  a  la  carte  or  themed-  tier  have  on  a  network  s  per-  subscriber  license  fees? 
 Are  there  networks  that  have  migrated  from  being  offered  on  a  tiered  basis  to  an  a  la  carte  basis,  or  vice  versa?  What  was  the  effect  of  this  migration  on  the  networks  economic  viability  and  cost  to  consumers? 

 111.  RETRANSMlSSION  CONSENT 
 How  have  broadcast  networks  and  affiliate  groups  used  the  retransmission  consent  process  to  expand  carriage  of  affiliated  programming?  How  has  this  affected  rates  for  MVPD  offerings  for  consumers? 

 Do  the  rules  governing  retransmission  consent  and  must-  carry  limit  consumers  ability  to  select  their  own  programming?  If  so,  how? 
 IV.  DIVERSITY  OF  PROGRAMMING 
 What  effect,  if  any,  would  the  voluntary  offering  of  a  la  carte  or  themed-  tier  service  have  on  the  ability  of  independent,  niche,  religious,  and  ethnic  programming  to  continue  to  be  carried  or  launched? 

 V.  RURAL  AND  SMALLER  MARKETS 
 Describe  the  programming  cost  differential  for  the  largest  cable  and  satellite  companies  and  the  smallest  independent  MVPDs  in  smaller  markets  and  rural  areas.  What  is  the  volume  discount  to  the  larger 
 companies? 
 What  percent  of  total  expenses  do  smaller  MVPDs  in  smaller  markets  and  rural  areas  attribute  to  programming,  and  how  does  this  compare  to  the  largest  cable  and  satellite  companies? 

 What  would  be  the  impact  on  the  programming  costs  of  smaller  MVPDs  if  they  were  to  purchase  programming  on  a  stand-  alone  basis  rather  than  in  bundles? 
 What  would  be  the  impact  on  the  programming  costs  of  smaller  MVPDs  if  they  were  allowed  to  offer  a  la  carte  or  themed-  tier  service  in  addition  to  bundled  packages? 
 VI.  SET-  TOP  BOXES 
 Is  an  addressable  converter  box  required  for  every  television  set  on  which  a  consumer  might  wish  to  view  programming  offered  on  an  a  la  carte  or  themed-  tier  basis?  What  is  the  number  of  television  sets  that  are 
 not  currently  connected  to  addressable  converter  boxes?  What  are  the  costs  to  consumers  of  buying  or  leasing  these  boxes? 

 Is  an  addressable  converter  box  required  for  every  television  set:  on  which  a  consumer  might  wish  to  view  digital  programming?  Is  it  true  that  a  la  carte  or  themed-  tier  services  can  only  be  offered  on  a  digital 
 basis?  What  percent  of  cable  and  satellite  distributors  offer  digital  programming  to  their  subscribers?  What  percent  of  consumers  currently  subscribe  to  digital  programming  packages? 

 What  impact  would  an  a  la  carte  and  themed-  tier  service  have  on  the  uni-  directional  plug-  and-  play  regulations,  and  on  the  ongoing  discussions  regarding  potential  bi-  directional  plug-  and-  play  regulations? 
108
 THE  REPORT  102 
 <  >  VII.  LEGAL  AND  REGULATORY  QUESTIONS 

 Is  there  any  reason  to  treat  cable  and  satellite  operators  differently  with  regard  to  the  a  la  carte  and  themed-  tier  service? 
 Would  MVPDs  be  in  compliance  with  the  must  carry  rules  so  long  as  they  offered  all  local  broadcast  stations  on  an  a  la  carte  or  themed-  tier  basis,  or  would  the  must-  carry  rules  prohibit  MVPDs  from 
 offering  local  broadcast  stations  on  an  a  la  carte  or  themed-  tier  basis? 
 What,  if  any,  Constitutional  or  other  legal  questions  are  raised  by  programmers  ability  to  bundle  services  through  retransmission  consent,  regional  sports  contracts,  and  national  programming  contracts  for 
 marquee  programming? 
 What,  if  any,  Constitutional  or  other  legal  questions  would  be  raised  if  Congress  required  programmers  to  offer  their  channels  to  MVPDs  on  a  stand-  alone  basis  and  prohibited  them  from  requiring  carriage  of  their 
 programming  on  particular  tiers? 
 What,  if  any,  Constitutional  or  other  legal  questions  would  be  raised  if,  in  addition  to  currently  offered  packages,  Congress  required  programmers  to  allow  MVPDs  to  voluntarily  offer  their  channels  on  an  a  la 
 carte  or  themed-  tier  basis? 
 We  seek  comment  on  these  issues  and  any  other  issues  that  will  inform  the  Report  on  the  provision  of  a  la  carte  or  themed-  tier  programming  by  MVPDs. 

 VIII.  PROCEDURAL  MATTERS 
 Comments  should  be  filed  on  or  before  July  8,  2004  and  reply  comments  should  be  filed  by  July23,  2004.  Comments  and  reply  comments  may  be  filed  using  the  Commissions  Electronic  Filing  System 
 (  ECFS)  or  by  filing  paper  copies.  See  Electronic  Filing  of  Documents  in  Rulemaking  Proceedings,  63  Fed.  Reg  24121  (1998).  All  comments  should  reference  MB  Docket  No.  04-  207. 

 Comments  filed  through  the  ECFS  can  be  sent  as  an  electronic  file  via  the  Internet  to  <http://  www.  fcc.  gov/  e-  file/  ecfs.  html>.  Generally,  only  one  copy  of  an  electronic  submission  must  be 
 filed.  In  completing  the  transmittal  screen,  commenters  should  include  their  full  name,  U.  S.  Postal  Service  mailing  address,  and  the  applicable  docket  or  rulemaking  number.  Parties  may  also  submit  an 
 electronic  comment  by  Internet  e-  mail.  To  get  filing  instructions  for  e-  mail  comments,  commenters  should  send  an  e-  mail  to  ecfs@  fcc.  gov,  and  should  include  the  following  words  in  the  body  of  the 
 message,  get  form.  Parties  who  choose  to  file  by  paper  must  file  an  original  and  four  copies  of  each  filing.  Filings  can  be  sent  by  hand  or  messenger  delivery,  by  commercial  overnight  courier,  or  by  first- 
 class  or  overnight  U.  S.  Postal  Service  mail.  The  Commissions  contractor,  Natek,  Inc.,  will  receive  hand-  delivered  or  messenger-  delivered  paper  filings  for  the  Commissions  Secretary  at  236  Massachusetts 
 Avenue,  N.  E.,  Suite  110,  Washington,  D.  C.  20002.  The  filing  hours  at  this  location  are  8:  OO  a.  m.  to  7:  OO  p.  m.  All  hand  deliveries  must  be  held  together  with  rubber  bands  or  fasteners.  Any  envelopes  must  be 
 disposed  of  before  entering  the  building.  Commercial  overnight  mail  (other  than  U.  S.  Postal  Service  Express  Mail  and  Priority  Mail)  must  be  sent  to  9300  East  Hampton  Drive,  Capitol  Heights,  MD  20743. 
 U.  S.  Postal  Service  first-  class  mail,  Express  Mail,  and  Priority  Mail  should  be  addressed  to  445  12th  Street,  SW,  Washington,  D.  C.  20554.  All  filings  must  be  addressed  to  the  Commissions  Secretary, 
 Office  of  the  Secretary,  Federal  Communications  Commission.  In  addition  parties  should  serve  a  copy  of  each  filing  via  e-  mail  or  one  paper  copy  to  Ben  Golant,  Suite  4A-  803,  Media  Bureau,  FCC,  445  12th  St., 
 S.  W.,  Washington,  D.  C.  20554. 
109
 THE  REPORT  103 
 \  , 
 Comments,  reply  comments,  and  other  submissions  will  be  available  for  public  inspection  during  regular  business  hours  in  the  FCC  Reference  Center,  Federal  Communications  Commission,  445  12th  Street, 

 S.  W.,  CY-  A257,  Washington,  D.  C.  20554.  These  documents  also  will  be  available  electronically  from  the  Commission's  Electronic  Comment  Filing  System.  Documents  are  available  electronically  in  ASCII 
 text,  Word  97,  and  Adobe  Acrobat.  Copies  of  filings  in  this  proceeding  may  be  obtained  from  Qualex  International,  Portals  11,  445  12th  Street,  S.  W.,  Room,  CY-  B402,  Washington,  D.  C.,  20554,  telephone 
 (202)  863-  2893,  facsimile  (202)  863-  2898,  or  via  e-  mail  at  qualexint@  aol.  com.  To  request  materials  in  accessible  formats  for  people  with  disabilities  (Braille,  large  print,  electronic  files,  audio  format),  send  an 
 e-  mail  to  fcc504@  fcc.  gov  or  call  the  Consumer  and  Governmental  Affairs  Bureau  at  202-  41  8-  053  1  (voice),  202-  41  8-  7365  (TTY). 

 For  further  information  contact  Ben  Golant,  Media  Bureau  at  (202)  41  8-  71  1  1. 
 By  the  Chief,  Media  Bureau 

 -  FCC  - 
110
 THE  REPORT  104 
 FOR  IMMEDIATE  RELEASE:  July  13,2004  NEWS  MEDIA  CONTACT:  Suzon  Cameron  (202)  4  1  8-  19  16 

 MB  Docket  No.  04-  207 
 MEDIA  BUREAU  ANNOUNCES  SPEAKERS  FOR  SYMPOSIUM  ON  A  LA  CARTE  MVPD  PRICING 

 Washington,  D.  C.  -  The  Federal  Communications  Commissions  Media  Bureau  will  sponsor  a  symposium  on  Thursday,  July  29,2004,  to  examine  the  provision  of  a  la  carte  programming 
 services  on  cable  television  and  direct  broadcast  satellite  systems.  The  speakers  will  discuss  legal,  technical,  and  economic  issues  related  to  the  provision  of  programming  on  a  per  channel  basis.  The 
 speakers  will  specifically  explore  the  implications  of  such  offerings  for  consumer  rates,  program  diversity,  rural  and  small  market  concerns,  and  FCC  regulation,  among  other  subjects. 

 The  event  will  be  held  from  9:  OO  a.  m.  to  4:  30  p.  m.  at  the  Federal  Communications  Commission  in  the  Commission  Meeting  Room  at  445  12  h  Street,  S.  W.,  Washington,  D.  C. 
 Written  materials  associated  with  the  symposium  will  be  included  in  MB  Docket  No.  04-  207. 

 Morninp  Session  -  9:  OO  a.  m. 
 John  Freulinghausen,  Vice  President  and  Partner,  Booz  Allen  Hamilton. 
 Bennett  Hooks,  CEO,  Buford  Media  Group. 
 Gene  Kimmelman,  Senior  Director  of  Public  Policy  and  Advocacy,  Consumers  Union. 
 Geraldine  Laybourne,  Chairman  and  CEO,  Oxygen  Media. 

 Philip  Lind,  Vice  Chairman,  Rogers  Communications. 
 Jon  Mandel,  Co-  CEO,  MediaCom  US  and  MediaCom  Latino;  Chief  Global  Buying  Officer  of  MediaCom  Worldwide. 

 Michael  Willner,  President  and  CEO,  Insight  Communications. 
 Afternoon  Session  -  2:  30p.  m. 
 Erik  Brynjolfsson,  Professor  of  Management,  MIT  Sloan  School  of  Management  and  Director  of  the  Center  for  eBusiness  at  MIT,  Cambridge,  MA. 

 Gregory  Crawford,  Assistant  Professor,  Department  of  Economics,  Eller  College  of  Business  and  Public  Administration,  University  of  Arizona,  Tucson,  AZ. 
 David  Waterman,  Professor,  Department  of  Telecommunications,  Indiana  University,  Bloomington,  IN. 
 Steven  Wildman,  Professor  of  Telecommunication  Studies,  Michigan  State  University  and  Director  of  The  James  H.  and  Mary  B.  Quello  Center  for  Telecommunication  Management  &  Law,  Michigan  State 

 University  in  East  Lansing,  MI. 
111
 THE  REPORT  1  os 
 .  \  ~~  Open  captioning  will  be  provided  and  other  reasonable  accommodations  for  people  with  disabilities  are  available  upon  request.  Requests  should  include  a  description  of  the  accommodation 

 needed,  as  well  as  contact  information  should  additional  information  be  required.  All  requests  will  be  accepted  and  every  effort  will  be  made  to  fulfill  them,  although  timing  considerations  may  make  that 
 impossible  in  some  cases.  Send  requests  via  e-  mail  to  fcc5O4($  fcc.  gov,  or  call  the  Consumer  &  Governmental  Affairs  Bureau: 

 For  sign  language  interpreters,  CART,  and  other  reasonable  accommodations:  202-  41  8-  0530  (voice),  202-  41  8-  0432  (TTY). 
 For  accessible  format  materials  (Braille,  large  print,  electronic  files,  and  audio  format):  202-  41  8-  053  1  (voice),  202-  41  8-  7365  (TTY). 
 A  live  audiocast  of  the  symposium  will  be  available  at  the  FCC's  website  at  www.  fcc.  gov  on  a  first-  come,  first-  served  basis. 
 Press  inquiries  should  be  directed  to  Suzon  Cameron  at  202-  4  18-  19  16. 
 --  FCC  -- 
112
 THE  REPORT  106 
 <  > 

 APPENDIX  C:  List  of  Leading  Commenters  and  Reply  Commenters 

 .  .  .  ..  .  .  -  .  .  .x_..._.-_._-__  I.._  ....  .  ..  -  ..,  "_..  .  .  I  .. 
113
 THE  REPORT  107 
 Leading  Comments  in  MB  Docket  No.  04-  207 
 Advance-  Newhouse  (  Bright  House  Networks  or  BHN)  Alliance  for  Community  Media  (  ACM) 
 American  Cable  Association  (  ACA)  Alameda  Power 
 A&  E  Networks  (  A&  E)  America  Channel 
 Blonder-  Tongue  Bloomberg  Television 
 Broadband  Service  Providers  Association  (Astound  Broadband,  Black  Hills  Fibercom,  Everest  Connections,  Gemini  Networks,  Knology,  Prairie  Wave  Communications;  RCN  Cop.  Starpower 
 Communications,  LLC,  Utilicom  Networks  LLC,  and  Surewest)  (  BSPA)  Cat0  Institute 
 Center  for  Creative  Voices  in  Media  (  CCVM)  Charter  Communications,  Inc. 
 Christian  Television  Network  (  CTN)  Comcast  Corporation 
 Consumers  Union  and  Consumers  Federation  of  America  (  CU)  Courtroom  Television 
 Cox  Communications  C-  Span 
 DirecTV  Discovery  Networks 
 Echostar  Satellite  LLC  Eternal  Word  Television  Network  (  EWTN) 
 Faith  &  Family  Broadcasters  Fox  Cable 
 Goodlife  TV  GSN 
 Hallmark  Insight 
 International  Channel  Joint  Programmers  (Altitude  Sports  &  Entertainment,  Casino  &  Gaming  Television,  Comcast  Sportsnet, 
 Comcast  Sportsnet  Mid-  Atlantic,  E!,  Golf  Channel,  GLtTechTV,  Inspirational  Life  Television,  the  Inspirational  Network,  Martial  Arts  Channel,  Outdoor  Life  Network,  SiTV,  Style  Network,  The  Tennis 
 Channel,  and  Wisdom  Television)  LaTV 
 LeSea  Broadcasting  Lifetime 
 MBC  Gospel  Network  Motion  Picture  Association  of  America  (  MPAA) 
 National  Assn  of  Public  Affairs  Networks  National  Association  of  Telecommunications  Officers  and  Advisors  (  NATOA) 
 National  Cable  and  Telecommunications  Association  (  NCTA) 
 National  Telecommunications  Cooperative  Association  (NTCA)  NBC-  Universal 

 New  Jersey  Board  of  Public  Utilities  New  Jersey  Division  of  the  Ratepayer  Advocate 
 Oxygen  Media 
114
 THE  REPORT  108 
 \ 
 Parents  Television  Council  (  PTC)  Paxson  Communications  Corporation 

 Pioneer  Telephone  &  Cable  Progress  and  Freedom  Foundation  (  P&  FF) 
 Public  Cable  Television  Authority 
 Religious  Voices  in  Broadcasting  Rural  Telephone  Companies  (CT  Communications  Network,  Inc.,  Chesnee  Communications,  Inc.,  Cim 

 Tel  Cable,  LLC,  Citizens  Cable  Communications,  Inc.,  Kaplan  Telephone  Company,  Kalona  Cooperative  Telephone  Company,  Inc.,  Lexcom  Cable,  Paul  Bunyan  Rural  Telephone  Company,  Sierra  Telephone 

 Company,  Silver  Star  Telephone  Company,  Warwick  Valley  Telephone  Company,  XIT  Rural  Telephone  Company)  (  RTCs) 
 Seattle,  Washington  Scripps  Networks  (HGTV,  Food) 
 Small  Business  Advocates  Smaller  Operators  (Bend  Cable,  Bresnan  Communications,  Eagle  Communications,  First  Commonwealth 
 Cablevision,  Midcontinent  Communications,  Millenium  Digital  Media  Systems,  LLC,  Sjobergs  Inc.,  and  Susquehanna  Communications) 
 Sports  Leagues  (MLB,  NFL,  NHL,  NBA,  NCAA,  PGA,  WNBA)  Starz 
 Tel  Alaska  Time  Warner  Cable 
 Turner  Broadcasting  System,  Inc.  TV  One 
 Univision  Viacom 
 Walt  Disney  Weather  Channel 
115
 THE  REPORT  109 
 .  Leading  Reply  Comments  in  MB  Docket  No.  04-  207 

 Allbritton  Communications  Altitude  Sports  and  the  Tennis  Channel 
 America  Channel  Americans  For  Tax  Reform,  Media  Freedom  Project,  and  Frontiers  of  Freedom 
 A&  E  Networks  Broadband  Service  Providers  Association 
 Cablevision  Systems  Corp.  Comcast  Corporation 
 Consumers  UniodConsumer  Federation  of  America  Courtroom  Television 
 Echostar  Satellite,  LLC  GSN 
 Hallmark  Channel  MBC  Gospel  Network 
 Morality  in  Media  (  MIM)  NAACP  et.  al. 
 National  Association  of  Broadcasters  (  NAB)  National  Association  of  Telecommunications  Officers  and  Advisors 
 National  Cable  and  Telecommunications  Association  National  Religious  Broadcasters  Association 
 New  Jersey  Division  of  the  Ratepayer  Advocate  Organization  for  the  Promotion  and  Advancement  of  Small  Telecommunications  Companies 
 (  OPASTCO)  Ovation 
 Oxygen  Media  RCN 
 Rural  Independent  Competitive  Alliance  (  RICA)  Time  Warner  Cable 
 Turner  Broadcasting  System,  Inc.  Viacom 
 Walt  Disney 

 .  ..  .  I 
116
 THE  REPORT  110 
 APPENDIX  D:  List  of  Economic  Analyses 

 "  .  ..  .  ..  ^___  ,  ..I 
117
 THE  REPORT  111 
 1. 

 2. 
 3. 
 4. 
 5  . 

 6. 
 7. 
 8. 
 9. 

 10. 
 11. 
 12. 

 The  A  La  Carte  Paradox:  Higher  Consumer  Costs  and  Reduced  Programming  Diversity--  An  Economic  Analysis  of  the  Implication  of  A  La  Carte  Pricing  on  Cable  Customers.  Booz  Allen  & 
 Hamilton  (An  exhibit  attached  to  the  Comments  filed  by  National  Cable  and  Telecommunications  Association). 

 Slicing  and  Dicing:  A  Realistic  Examination  of  Regulating  Cable  Programming  Tier  Structures.  Michael  L.  Katz  (An  exhibit  attached  to  the  Comments  filed  by  Comcast  Corporation). 
 Cable  Program  Tiering:  A  Decision  Best  and  Properly  Made  by  Cable  System  Operators,  Not  Government  Regulators.  William  P.  Rogerson  (Filed  by  Cox  Communications). 
 Regarding  A  La  Carte  Pricing.  Robert  D.  Willig,  Jonathan  M.  Orszag,  and  Jav  Ezrielev  (An  exhibit  attached  to  the  Comments  filed  by  Discovery  Communications,  Inc.). 
 Benefits  of  Bundling  and  Costs  of  Unbundling  Cable  Networks.  Michael  G.  Baumann  and  Kent  W.  Mikkelsen,  Economists,  Inc.  (An  exhibit  attached  to  the  Comments  filed  by  the  Walt  Disney 
 CO.). 
 The  Fair  Market  Value  of  Local  Cable  Retransmission  Rights  for  Selected  ABC  Owned  Stations.  Michael  G.  Baumann  and  Kent  W.  Mikkelsen,  Economists,  Inc.  (An  exhibit  attached  to  the 
 Comments  filed  by  the  Walt  Disney  Co.). 
 Cable  Networks:  Bundling,  Unbundling,  and  the  Costs  of  Intervention.  Bruce  M.  Owen  and  John  M.  Gale.  Economists,  Inc.  (An  exhibit  attached  to  the  Comments  filed  by  Viacom) 

 Statement  of  Gustavo  Bamberger,  Lexecon,  Inc.  (An  exhibit  attached  to  the  Comments  filed  by  Fox  Cable  Networks). 
 Time  To  Give  Consumers  Real  Cable  Choices  (After  Two  Decades  of  Anti-  Consumer  Bundling  and  Anticompetitive  Gate  Keeping).  Mark  Cooper.  (An  exhibit  attached  to  the  Comments  tiled 
 by  Consumers  Union  and  Consumer  Federation  of  America). 
 Wrong  Diagnosis,  Wrong  Cure:  An  Analysis  of  the  Claims  Made  by  Dr.  Mark  Cooper  in  Time  to  Give  Consumers  Real  Cable  Choices.  Michael  L.  Katz.  (An  exhibit  attached  to  the  Reply 
 Comments  filed  by  Comcast  Corporation). 
 The  Economics  of  Cable  TV  Pricing:  A  La  Carte  v.  All-  You-  Can-  Eat.  Thomas  Hazlett.  (An  exhibit  attached  to  the  Reply  Comments  filed  by  Turner  Broadcasting  System) 

 Why  a  Box  of  Crayons  Has  Many  Colors,  and  the  Cable  Tax  is  Not  a  Tax;  Why  Contract  Confidentiality  Promotes  Competition;  and  Why  the  News  Corp  Retransmission  Consent 
 Conditions  Don  t  Apply  to  Other  Broadcast  Networks.  Bruce  M.  Owen  and  John  M.  Gale.  (An  exhibit  attached  to  the  Reply  Comments  filed  by  Viacom) 

 ,  -  ,.  ...~  ..-~I  ..  .  ...    .  .  ....  .,  . 
118
 THE  REPORT 
 , 

 APPENDIX  E:  A  La  Carte  in  Canada 
119
 THE  REPORT  113 
 Canada  has  been  held  out  as  an  example  of  how  a  la  carte  sales  in  the  U.  S.  should  be  organized  by  some  commenters,  such  as  CU/  CFA.  Other  commenters,  such  as  Courtroom  Television,  have  argued 
 that  the  Canadian  system,  in  addition  to  being  a  poor  regulatory  model,  demonstrates  that  few  consumers  actually  take  advantage  of  a  la  carte  when  it  is  offered. 

 Consumers  Union  and  Consumer  Federation  of  America  state  that  while  many  Canadian  cable  operators  offer  programming  on  an  a  la  carte  basis,  VidCotron  offers  consumers  in  Quebec  the  kind  of 
 system  that  they  envision  for  the  United  States.  VidCotron  customers  must  either  purchase  a  digital  set  top  box  for  $45  after  a  rebate,  or  rent  a  set  top  box  for  $9  per  month.  In  addition  customers  must  buy 
 basic  cable  that  includes  about  20  channels  for  a  monthly  fee  of  $8.25.  Once  this  milestone  has  been  reached,  customers  have  a  variety  of  choices.  CU  states  that  VidCotron  offers  three  additional  tiers:  (1)  38 
 channels  for  $20  per  month;  (2)  65  channels  for  $28;  and  (3)  106  channels  for  $40.  Once  one  of  these  tiers  has  been  chosen,  VidCotron  will  sell  most  channels  to  their  customers  individually  for  $1  per  month, 
 a  per-  channel  price  that  drops  if  a  consumer  orders  5,  10  or  20  additional  channels.  VidCotron  offers  93  channels  and  allows  consumers  to  select  20  or  30  of  them  in  that  bundle  according  to  CU.  '  To  offer  this 
 selection,  VidCotron  duplicates  the  transmission  of  its  analog  channels  in  digital  format  as  well.  In  this  way,  it  can  control  access  through  the  set  top  box.  NCTA  notes  that  the  U.  S.  cable  networks  did  not 
 consent  to  carriage  on  VidCotron's  digital  service.  2 
 Philip  Lind,  Vice-  chairman  of  Rogers  Communications  of  Canada,  provided  additional  information  on  the  situation  in  Quebec  at  the  Media  Bureau's  Symposium  on  A  La  Carte  Pri~  ing.~  He 
 argued  that  the  packaging  choices  in  Quebec  are  due  to  the  "English-  French  thing,"  with  many  of  the  popular  English  language  networks  offered  only  on  a  la  carte  and  not  on  tiers  since  there  is  less  appeal  for 
 those  services  in  that  region.  The  manner  in  which  the  unusual  nature  of  Quebec  has  contributed  to  the  development  of  video  programming  offerings  in  the  Province  was  also  mentioned  by  Michael  Hennessy, 
 President  and  CEO  of  the  Canadian  Cable  Television  Association  in  his  remarks  to  the  Washington  Metropolitan  Cable  Club  on  June  29,2004. 

 Cable  operators  in  other  Canadian  provinces  also  offer  forms  of  a  la  carte.  Courtroom  Television  describes  the  options  available  for  Rogers  Cable  subscribers.  It  states  that  Rogers  subscribers  who 
 purchase  a  30  channel  basic  tier  for  $24.00  and  who  also  pay  to  lease  a  digital  converter  box  for  $8.95  can  then  purchase  certain  cable  networks  on  an  a  la  carte  basis  for  $2.49  each.  Alternatively,  Canadian 
 subscribers  can  purchase  a  "theme  pack"  containing  six  to  ten  new  digital  channels  for  $6.95  or  can  create  their  own  new  digital  "5-  pack"  for  $9.95,  "10-  pack"  for  $14.95,  "15-  pack"  for  $18.75  and  so  forth.  The 
 only  channels  available  on  an  a  la  carte  basis  are  the  digital  channels;  none  of  the  popular  analog  services  are  available  on  an  a  la  carte  basis.  While  no  figures  on  the  number  of  customers  choosing  channels  on 
 an  a  la  carte  basis  is  available,  approximately  25%  of  Rogers'  customers  subscribe  to  digital  cable.  In  fact,  the  pricing  system  and  the  availability  of  these  bundled  alternatives  make  a  la  carte  a  very  unpopular 
 option.  According  to  a  Rogers  official,  as  quoted  by  Courtroom  Television,  "although  a  la  carte  is  widely  available,  very  few  actually  buy  one  or  two  channels  a  la  carte  -  so  few,  in  fact,  that  the  company  doesn't 
 even  keep  track  of  the  number."  Courtroom  TV  does  keep  track  of  their  numbers.  They  report  that  of 
 CU  Comments  at  7-  8.  I 
 NCTA  Comments  at  33-  34.  2 
 Symposium  Transcript  at  84-  85.  3 
120
 THE  REPORT  114 
 .  ,  subscribers  who  receive  the  Court  TV  Canada  service,  only  0.74  percent  purchase  the  channel  on  an  a  la  carte  bask4 

 Many  commenters  argue  that  the  Canadian  system  is  different  from  the  U.  S.  in  a  number  of  respects.  The  market  for  video  programming  in  Canada  is  heavily  regulated.  The  Canadian  Radio- 
 television  and  Telecommunications  Commission  (  CRTC)  maintains  an  extensive  set  of  carriage  rules  to  promote  Canadian  culture  and  diversity.  Among  them  are  licensing  requirements  for  new  program 
 networks.  Program  networks  have  been  authorized  in  three  batches;  one  in  the  late  1  9  8  0    ~~  one  in  1995,  and  another  batch  in  1999.  It  is  argued  that  this  sequential  licensing  process  contributed  to  the 
 development  of  multiple  tiers  of  service  in  Canada  as  newly  licensed  networks  were  allocated  to  new  tiers.  According  to  A&  E,  in  addition  to  the  basic  licensing  of  program  networks,  the  CRTC  engages  in 
 basic  rate  regulation,  the  establishment  of  minimum  wholesale  rates  to  be  paid  to  networks,  and  requiring  carriage  of  not  only  broadcast  stations,  but  also  all  Canadian  specialty  and  pay  television  services 
 appropriate  for  their  markets,  such  as  those  in  French.    These  content  restrictions  limit  the  impact  of  the  choice  offered  by  the  Videotron  service  in  Quebec.  Customers  choosing  channels  on  an  a  la  carte  basis 
 must  select  a  mix  of  Canadian  and  foreign-  produced  channels.  They  cannot  choose  to  purchase  only  foreign-  produced  channels  from  VidCotron. 

 The  size  of  the  Canadian  market  and  its  relationship  to  the  U.  S.,  is  also  a  factor  that  explains  the  development  of  a  la  carte  in  Canada.  Courtroom  Television  states  that  cable  service  in  Canada  is  a 
 secondary  market  for  many  program  producers,  and  certain  services  can  be  made  available  only  because  the  larger  U.  S.  market  exists.  The  Canadian  a  la  carte  system  exists  only  due  to  the  relatively  small  size 
 of  the  Canadian  cable  market  (7.2  million  subscribers)  as  compared  with  the  U.  S.  cable  market  (65.9  million  subscribers).  Thus,  a  la  carte  carriage,  even  if  widespread  in  Canada,  would  have  a  minimal  affect 
 on  license  fees  and  advertising  revenues  overall.  Due  to  the  markets  relatively  small  size,  Court  TV  and  other  U.  S.  cable  networks  devote  little  or  no  effort  to  market  their  services  a  la  carte  in  Canada.  6 

 Courtroom  Television  states  that  its  experience  in  Canada  further  shows  the  limitations  of  a  la  carte  options.  Courtroom  Television  provides  programming  in  Canada  through  Court  TV  Canada,  a 
 channel  majority  owned  by  Chum  Television  and  unrelated  to  Courtroom  Television,  but  to  which  Courtroom  Television  licenses  the  right  to  carry  its  daytime  programming.  Since  Court  TV  Canada  is  not 
 included  in  the  mandatory  basic  analog  package,  it  can  only  be  purchased  as  part  of  a  smaller  digital  package  or  as  a  stand-  alone  service  (in  either  case,  through  a  digital  set  top  box).  Of  those  subscribers 
 who  receive  the  Court  TV  Canada  service,  only  0.74  percent  avail  themselves  of  the  opportunity  to  purchase  the  channel  a  la  carte.  At  this  minimal  purchase  rate  for  the  a  la  carte  channel,  Court  TV  Canada 
 has  not  earned  a  profit.  Courtroom  Television  states  that  were  Courtroom  Television  offered  solely  on  a  strictly  mandated  a  la  carte  model,  there  would  be  no  prospect  for  continuation  of  the  service,  let  alone 
 achievement  of  profitability.  These  results  confirm  that  even  where  a  la  carte  is  available,  very  few 
 Courtroom  Television  Comments  at  32.  4 
 A&  E  Comments  at  22-  23.  See  Fact  Sheet,  Canadian  Radio-  Television  and  Telecommunications  Commission,  Distribution  of  Cable  TV  Services  in  Canada,  Oct.  2,2001,  at  http://  www.  crtc.  gc.  ca/  ENG/  INFO  SHTKDBT4.  HTM 
 (  CRTC  Fact  Sheet).  In  addition,  the  CRTC  enforces  linkage  rules  which  are  designed  to  ensure  the  maximum  exposure  of  Canadian  program  networks.  These  rules  limit  the  packaging  and  sale  of  programming  services  from 
 the  United  States,  such  as  by  prohibiting  a  cable  operator  from  offering  a  US.-  based  service  on  basic  cable,  if  a  comparable  Canadian  service  already  exists,  and  requiring  any  tier  that  includes  U.  S.-  based  cable  programming  also 
 to  include  Canadian  cable  programming.  See  CRTC  Fact  Sheet. 

 5 

 Courtroom  Television  Comments  at  34.  6 
121
 THE  REPORT  115 
 <  >  subscribers  are  interested  in  receiving  programming  in  this  manner.  '  A&  E's  experience  in  Canada  echoes 

 this  phenomenon.  '  Ken  Englehart,  Vice  President  of  Regulatory  Affairs  for  Rogers  Communications,  also  confirms  this  analysis.  He  reports  that  programming  services  on  digital  cable  are  either  re-  purposing 
 existing  Canadian  product  or  are  Canadian  versions  of  popular  US.  services  that  get  the  bulk  of  their  programming  fiom  the  U.  S.  and  add  a  bit  of  Canadian  content.  ' 

 In  summary,  the  Canadian  system  of  regulation  has  encouraged  the  development  of  a  la  carte  choice.  Fortunately  for  Canadian  consumers,  the  larger  market  of  the  U.  S.,  and  to  some  extent  France, 
 have  allowed  programmers  to  remain  viable  by  providing  a  source  of  repurposed  content.  Absent  the  ability  of  these  larger  markets  to  cover  the  substantial  fixed  development  costs  of  these  networks,  it  is 
 unlikely  that  they  would  be  able  to  survive.  Even  with  this  assistance,  Philip  Lind  notes  that  "digital  channels  are  experiencing  economic  problems,  regardless  of  how  they  are  packaged."" 

 Id.  at  32. 
 A&  E  Comments  at  25.  8 
 Symposium  Transcript  at  89. 
 l  o  Id.  at  84. 
122
 THE  REPORT  116 
 <  > 

 Appendix  F:  Summary  of  Responses  to  Congressional  Inquiry 
123
 THE  REPORT  117 
 HISTORICAL 
 Do  MVPDs  currently  have  the  option  to  purchase  channels  from  programmers  on  a  stand-  alone  basis,  such  that  they  could,  if  they  chose,  offer  programming  to  consumers  on  an  a  la 
 carte  or  themed-  tier  basis?  What  are  the  limitations,  if  any,  on  their  flexibility  to  do  so?  What  statutory  or  regulatory  action  would  be  needed  to  remove  any  such  limitations? 

 MVPDs,  it  appears,  frequently  do  have  the  theoretical  option  of  purchasing  program  networks  on  a  stand-  alone  basis.  It  is  difficult  to  gauge,  however,  whether  the  prices  offered  are  meaningful. 
 Program  networks  are  typically  licensed  to  MVPDs  with  a  large  number  of  conditions  governing  distribution,  including  the  tier  or  tiers  on  which  the  programming  may  be  carried.  Removal  of 
 these  conditions  would  require  that  certain  terms  of  existing  contracts  be  abrogated  via  regulatory  or  statutory  means.  Furthermore,  government  action  may  be  required  to  force  such  networks  to 
 offer  these  carriage  options  at  rates  consumers  would  view  as  reasonable.  Section  1II.  E  of  the  Report  provides  additional  information  on  the  contractual  terms  contained  in  licensing 
 agreements  between  program  networks  and  MVPDs. 
 RATES 
 What  would  the  impact  be  on  retail  rates  to  consumers  if  programmers  were  required  to  offer  their  programming  to  MVPDs  exclusively  on  a  stand-  alone  basis,  and  could  not  also 
 offer  programming  on  a  bundled  basis  for  free  or  at  a  discounted  rate? 
 Notwithstanding  their  ability  to  do  so  from  a  contractual  perspective,  cable  operators  would  continue  to  have  incentives  to  obtain  the  maximum  possible  return  at  the  retail  level.  Having  a 
 mandatory  stand-  alone  option  could,  however,  provide  some  additional  leverage  in  negotiating  programming  contracts. 

 What  would  the  impact  be  on  retail  rates  to  consumers  if  programmers,  in  addition  to  the  currently  offered  packages,  were  required  to  allow  MVPDs  to  offer  their  programming  on 
 an  a  la  carte  or  themed-  tier  basis  if  the  MVPD  chose  to  do  so? 
 It  is  estimated  that  offering  an  option  to  purchase  program  networks  on  an  a  la  carte  basis  or  in  themed-  tiers  will  lead  to  rate  increases  of  at  least  5'30,  and  as  high  as  15'30,  for  subscribers  that 
 continue  to  purchase  existing  packages.  Sections  II.  F.  2  and  II.  F.  3  of  the  Report  and  Section  I1  of  the  Economic  Appendix  elaborate  on  these  issues. 

 Can  MVPDs  currently  offer  a  la  carte  and  themed-  tier  service  in  addition  to  the  packages  currently  offered,  such  as  basic  and  expanded  basic? 
 MVPDs  are  contractually  obligated  to  offer  most  program  networks  in  their  current  packages  and  would  need  to  renegotiate  existing  contracts  to  carry  the  networks  on  additional  tiers  or  on  an  a  la 
 carte  basis.  From  a  technical  standpoint,  current  cable  infrastructure  is  incapable  of  offering  extensive  a  la  carte  choices,  though  a  limited  number  of  themed  tiers  may  be  feasible.  DBS 
 infrastructure,  due  to  its  all-  digital  nature,  could  offer  a  la  carte  or  themed  tiers  with  limited  additional  expenditures  on  infrastructure  and  equipment.  Any  MVPD  offering  a  la  carte  services, 
 and  to  some  extent  themed  tiers,  would  need  to  make  substantial  upgrades  to  customer  service  training  and  billing  software.  Section  II.  F.  2  of  the  Report  and  Section  I1  of  the  Economic 
 Appendix  elaborate  on  these  issues. 
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 THE  REPORT  118 
 .  ,  .  Can  the  same  universe  of  channels  be  offered  both  on  an  expanded  basic  basis,  as  well  as  an 

 a  la  carte  or  themed-  tier  basis? 
 It  is  unlikely  the  same  universe  of  channels  can  be  offered  both  on  an  expanded  basic  basis  and  an  a  la  carte  or  themed-  tier  basis.  The  financial  impact  of  a  la  carte  sales  or  themed  tiers  on  many 
 program  networks,  especially  smaller  networks,  likely  would  lead  to  the  demise  of  a  substantial  number  of  these  entities,  which  will  reduce  the  overall  universe  of  channels.  This  issue  is 
 addressed  in  Sections  1I.  E  and  II.  F.  3  of  the  Report  and  the  Economic  Appendix. 
 How  would  an  a  la  carte  or  theme-  tiered  approach  affect  a  network's  ability  to  attract  advertising  revenue? 

 It  is  projected  that  a  la  carte  or  themed  tiers  will  reduce  viewership  of  nearly  all  program  networks.  The  effect  will  be  felt  most  heavily  by  niche  networks.  It  is  estimated  that  for  a  10% 
 drop  in  the  audience  of  a  program  network,  advertising  rates  drop  by  13%,  leading  to  an  even  more  substantial  decrease  in  advertising  revenues.  This  issue  is  addressed  in  Section  II.  F.  3.  b  of 
 the  Report  and  Section  1I.  C  of  the  Economic  Appendix. 
 Would  the  impact  change  depending  upon  whether  an  MVPD  subscriber  had  to  purchase  a  basidexpanded  basic  tier  before  purchasing  additional  channels  on  an  a  la  carte  basis? 

 Requiring  consumers  to  purchase  the  expanded  basic  tier  prior  to  purchasing  additional  channels  on  an  a  la  carte  basis  would  lead  to  declines  in  advertising  revenues  for  those  networks  that  are 
 not  included  in  the  mandatory  packages.  There  would  be  little  impact  on  networks  included  in  the  basic  or  expanded  basic  tiers.  Some  Canadian  cable  operators  offer  a  la  carte  selections  in  a 
 similar  fashion.  Experiences  with  the  Canadian  system  are  discussed  in  Appendix  E. 
 How  would  an  a  la  carte  or  themed-  tier  option,  in  addition  to  packages  currently  offered,  affect  a  network's  ability  to  attract  advertising  revenue? 

 It  is  projected  that  a  la  carte  or  themed  tiers  will  reduce  viewers  of  nearly  all  program  networks.  Thus,  continuing  to  offer  existing  packages  will  reduce  the  loss  in  viewers,  but  not  eliminate  it. 
 Therefore,  program  network  advertising  revenues  will  suffer.  This  issue  is  addressed  in  Section  II.  F.  3.  b  of  the  Report  and  Section  1I.  C  of  the  Economic  Appendix. 

 What  effect  would  a  la  carte  or  themed-  tier  have  on  a  network's  per-  subscriber  license  fees? 
 It  is  estimated  that  per  subscriber  license  fees  would  rise  by  at  least  400%  under  a  pure  a  la  carte  scenario,  if  program  networks  price  their  product  to  maintain  current  cash  flow.  When  program 
 networks  are  offered  in  themed  tiers  or  a  la  carte,  in  addition  to  the  existing  packages,  per  subscriber  license  fees  are  projected  to  rise  between  100%  and  300%  to  maintain  current  cash 
 flow.  If  programmers  reduce  their  programming  expenditures,  these  increases  can  be  limited  to  75%  to  80%.  Section  II.  F.  3.  b  of  the  Report  and  Section  1I.  C  of  the  Economic  Appendix  elaborate 
 on  these  issues. 
 Are  there  networks  that  have  migrated  from  being  offered  on  a  tiered  basis  to  an  a  la  carte  basis,  or  vice  versa?  What  was  the  effect  of  this  migration  on  the  network's  economic 
 viability  and  cost  to  consumers? 
125
 THE  REPORT  119 
 ~  ~  \ 
 ~~  / 

 No  evidence  of  networks  migrating  Erom  being  part  of  a  tier  to  a  la  carte  sales  has  been  introduced  in  the  inquiry.  There  are  several  examples  of  migration  from  a  la  carte  sales  to 

 carriage  on  a  tier.  Among  those  networks  are  the  Disney  Channel  and  the  Golf  Channel.  Both  networks  report  that  they  have  been  able  to  improve  the  quality  of  their  programming  since  being 
 offered  as  part  of  a  large  package  of  networks  while  at  the  same  time  reducing  their  per  subscriber  license  fees.  The  experiences  of  these  networks  are  detailed  in  Section  II.  F.  4.  b  of  the 
 Report. 
 RETRANSMlSSION  CONSENT 
 How  have  broadcast  networks  and  affiliate  groups  used  the  retransmission  consent  process  to  expand  carriage  of  affiliated  programming?  How  has  this  affected  rates  for  MVPD 
 offerings  for  consumers? 
 Broadcast  stations  whose  owners  also  have  interests  in  non-  broadcast  program  networks  commonly  negotiate  carriage  of  such  networks  in  lieu  of  payment  for  retransmission  consent. 
 However,  the  impact  on  rates  is  unclear.  While  the  major  broadcast  networks  have  some  of  the  most  popular  programming  on  television,  the  market  price  in  a  cash  transaction  for  retransmission 
 consent  may  not  reflect  the  full  value  consumers  place  on  the  broadcast  station  since  many  consumers  have  the  option  of  obtaining  the  programming  for  free  over  the  air.  In  the  absence  of 
 any  information  on  cash  transactions  for  retransmission  consent,  a  comparison  with  the  license  fees  for  the  additional  non-  broadcast  program  networks  cannot  be  performed  and  the  impact  on 
 rates  is  indeterminate.  Sections  1II.  C  and  III.  D.  2  discuss  the  effects  of  retransmission  consent. 
 Do  the  rules  governing  retransmission  consent  and  must-  carry  limit  consumers  ability  to  select  their  own  programming?  If  so,  how? 

 Rules  governing  retransmission  consent,  must  carry,  and  the  basic  service  tier  do  limit  the  ability  of  consumers  to  select  their  own  programming.  Cable  subscribers  cannot  refuse  to  receive  and 
 pay  for  broadcast  television  stations.  Retransmission  consent  and  must  carry  also  limit,  to  some  extent,  the  ability  of  MVPDs  to  carry  unaffiliated  program  networks  on  the  most  widely 
 distributed  programming  tiers.  Sections  1II.  C  and  III.  D.  2  of  the  Report  discuss  the  effects  of  retransmission  consent  and  other  similar  requirements. 

 DIVERSITY  OF  PROGRAMMING 
 What  effect,  if  any,  would  the  voluntary  offering  of  a  la  carte  or  themed-  tier  service  have  on  the  ability  of  independent,  niche,  religious,  and  ethnic  programming  to  continue  to  be 
 carried  or  launched? 
 Program  networks  are  nearly  unanimous  in  their  belief  that  mandatory  a  la  carte  and  themed  tiers  will  lead  to  widespread  failure  among  existing  program  networks  that  are  currently  sold  on  a 
 packaged  basis.  The  ability  to  obtain  financing  to  launch  a  new  network,  already  a  difficult  task,  is  likely  to  become  even  more  arduous  as  investors  react  to  the  increased  risk  associated  with  a  la 
 carte  sales.  Section  II.  F.  3.  b  of  the  Report  and  Section  1I.  C  of  the  Economic  Appendix  address  the  effect  of  a  la  carte  and  themed-  tiers  on  network  viability. 
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 <  >  RURAL  AND  SMALLER  MARKETS 

 Describe  the  programming  cost  differential  for  the  largest  cable  and  satellite  companies  and  the  smallest  independent  MVPDs  in  smaller  markets  and  rural  areas.  What  is  the  volume 
 discount  to  the  larger  companies? 
 There  is  a  lack  of  detailed  data  on  program  rates  due  to  the  confidential  nature  of  contracts  between  MVPDs  and  program  networks.  Some  commenters  claim  that  small  cable  operators  pay 
 as  much  as  30%  more  than  larger  cable  operators  for  a  program  network.  However,  it  appears  that  there  is  no  industry  standard  volume  discount,  instead  the  discount  varies  widely  between 
 program  networks.  To  limit  the  impact  of  volume  discounts,  small  cable  operators  have  formed  a  collective,  the  National  Cable  Television  Cooperative  (  NCTC),  to  purchase  programming. 
 Section  1II.  E  of  the  Report  examines  volume  discounts  for  programming. 
 What  percent  of  total  expenses  do  smaller  MVPDs  in  smaller  markets  and  rural  areas  attribute  to  programming,  and  how  does  this  compare  to  the  largest  cable  and  satellite 
 companies? 
 Little  public  information  on  the  expenses  of  smaller,  privately-  held  cable  operators  is  available.  However,  one  source  indicates  that  a  majority  of  small  operators  allocate  between  35%  and  50% 
 of  their  expenses  to  programming.  For  large  MVPDs,  programming  appears  to  account  for  approximately  40%  of  expenses.  Some  sources  report  that  programming  expenses  for  DBS 
 comprise  a  greater  share  of  expenses  than  for  similarly  sized  cable  operators.  Section  1I.  D  of  the  Economic  Appendix  discusses  the  cost  structure  of  cable  operators. 

 What  would  be  the  impact  on  the  programming  costs  of  smaller  MVPDs  if  they  were  to  purchase  programming  on  a  stand-  alone  basis  rather  than  in  bundles? 
 Some  program  networks  discount  the  per-  subscriber  fees  when  an  MVPD  agrees  to  carry  multiple  networks,  so  programming  costs  of  smaller  MVPDs  that  choose  to  carry  only  a  few  networks  may 
 increase.  However  the  practice  vanes  widely  among  program  networks  with  some  reporting  that  the  license  fees  are  the  same,  regardless  of  the  number  of  networks  that  are  carried.  Section  1II.  E 
 of  the  Report  discusses  these  and  other  issues  in  the  wholesale  programming  market. 
 What  would  be  the  impact  on  the  programming  costs  of  smaller  MVPDs  if  they  were  allowed  to  offer  a  la  carte  or  themed-  tier  service  in  addition  to  bundled  packages? 

 While  it  is  estimated  that  program  networks  would  need  to  increase  their  license  fees  by  at  least  75%,  programming  expenses  of  cable  operators  are  projected  to  rise  by  only  50%  since  there 
 would  be  fewer  subscribers  to  the  networks.  Section  1I.  D  of  the  Economic  Appendix  discusses  the  impact  of  a  la  carte  and  themed-  tiers  on  the  cost  structure  of  cable  operators. 

 SET-  TOP  BOXES 
 Is  an  addressable  converter  box  required  for  every  television  set  on  which  a  consumer  might  wish  to  view  programming  offered  on  an  a  la  carte  or  themed-  tier  basis? 

 While  there  are  several  products  that  may  replicate  the  features  of  an  addressable  set  top  box,  such  as  digital  cable-  ready  television  sets,  set  top  boxes  are  considered  the  most  cost-  effective 
 means  of  controlling  access  to  a  la  carte  programming  at  this  time.  Depending  on  the  channel  composition  and  number  of  themed  tiers,  traditional  analog  solutions,  such  as  traps,  may  be 
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 .  ,  feasible.  The  equipment  required  to  view  programming  offered  on  an  a  la  carte  or  themed-  tier  basis  is  discussed  in  Sections  II.  F.  2.  a  and  II.  F.  3.  a  of  the  Report  and  Section  1I.  D  of  the  Economic 

 Appendix. 
 What  is  the  number  of  television  sets  that  are  not  currently  connected  to  addressable  converter  boxes? 

 In  DBS  households,  21%  of  television  sets  are  not  connected  to  set  top  boxes.  In  digital  cable  households,  42%  of  television  sets  are  not  connected  to  set  top  boxes.  Section  II.  F.  3.  a  of  the 
 Report  and  Section  1I.  D  of  the  Economic  Appendix  discuss  existing  consumer  equipment. 
 What  are  the  costs  to  consumers  of  buying  or  leasing  these  boxes? 
 According  to  the  most  recent  FCC  Report  on  cable  industry  prices,  the  average  rental  fee  for  a  digital  converter  box  was  $4.87  per  month. 

 Is  an  addressable  converter  box  required  for  every  television  set  on  which  a  consumer  might  wish  to  view  digital  programming? 
 No.  Television  sets  capable  of  decoding  digital  cable  channels  have  recently  been  introduced  to  the  marketplace.  Addressable  set  top  boxes  are  the  only  currently  deployed  technology  for 
 displaying  digital  programming  on  television  sets  without  uni-  directional  plug  and  play  capability.  Sections  II.  C.  3  and  II.  F.  2.  a  of  the  Report  discuss  the  capabilities  and  requirements  to 
 view  digital  programming. 
 Is  it  true  that  a  la  carte  or  themed-  tier  services  can  only  be  offered  on  a  digital  basis? 
 No.  However,  it  is  likely  to  be  the  most  cost-  effective  means  for  offering  a  la  carte  and  themed  tiers.  Section  II.  F.  2  of  the  Report  and  Section  1I.  D  of  the  Economic  Appendix  discuss  the  most 
 cost-  effective  means  of  providing  a  la  carte  or  themed-  tier  service. 
 What  percent  of  cable  and  satellite  distributors  offer  digital  programming  to  their  subscribers?  What  percent  of  consumers  currently  subscribe  to  digital  programming 
 packages? 
 All  satellite  carriers  have  deployed  digital-  only  systems.  In  excess  of  90%  of  cable  operators  offer  digital  programming  to  their  subscribers.  While  subscription  to  digital  cable  varies  widely 
 among  cable  operators,  the  industry-  wide  average  is  approximately  30%.  Approximately  50%  of  MVPD  customers  subscribe  to  digital  programming.  Section  1I.  C  describes  current  practices  in 
 the  MVPD  industry. 
 What  impact  would  an  a  la  carte  and  themed-  tier  service  have  on  the  uni-  directional  plug-  and-  play  regulations,  and  on  the  ongoing  discussions  regarding  potential  bi-  directional 
 plug-  and-  play  regulations? 
 A  la  carte  or  themed-  tier  service  is  unlikely  to  have  an  impact  on  uni-  directional  plug-  and-  play  regulations.  However,  a  la  carte  or  themed-  tier  service  may  delay  implementation  of  bi- 
 directional  plug-  and-  play  standards  if  cable  operators  have  to  devote  substantial  technical  expertise  to  implementing  a  la  carte  or  themed-  tier  requirements.  Further  delays  would  occur  if 
 implementation  of  a  la  carte  spurred  modifications  to  existing  technical  standards  for  two-  way  set 
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 THE  REPORT  122 
 <  >  top  boxes.  The  Commissions  plug-  and-  play  regulations  are  discussed  in  Section  II.  C.  3  of  the 

 Report. 
 LEGAL  AND  REGULATORY  QUESTIONS 
 Is  there  any  reason  to  treat  cable  and  satellite  operators  differently  with  regard  to  the  a  la  carte  and  themed-  tier  service? 

 Competition  between  cable  and  satellite  operators  is  promoted  when  regulations,  where  feasible,  treat  operators  in  a  similar  fashion  and  ensure  that  operators  can  offer  products  that  are  close 
 substitutes  for  each  other. 
 Would  MVPDs  be  in  compliance  with  the  must  carry  rules  so  long  as  they  offered  all  local  broadcast  stations  on  an  a  la  carte  or  themed-  tier  basis,  or  would  the  must-  carry  rules 
 prohibit  MVPDs  from  offering  local  broadcast  stations  on  an  a  la  carte  or  themed-  tier  basis? 

 Under  Section  338,  and  the  Commissions  rules,  a  satellite  carrier  may  offer  local  broadcast  stations  on  an  a  la  carte  basis  as  long  as  the  rates  for  individual  stations  are  comparable.  A  cable 
 operator  generally  cannot  offer  all  local  broadcast  stations  on  an  a  la  carte  basis  because  the  Act  requires  that  broadcast  stations  be  sold  together  on  the  basic  service  tier  and  provided  to  every 
 subscriber  of  the  cable  system.  Section  1I.  D.  1  of  the  Report  discusses  these  requirements. 
 What,  if  any,  Constitutional  or  other  legal  questions  are  raised  by  programmers  ability  to  bundle  services  through  retransmission  consent,  regional  sports  contracts,  and  national 
 programming  contracts  for  marquee  programming? 
 The  bundling,  or  tying,  of  video  programming  by  private  parties  at  the  wholesale  level  does  not  raise  any  constitutional  issues.  If  the  arrangements  raise  antitrust  issues  (i.  e.,  anti-  competitive 
 actions  resulting  in  consumer  harm),  they  are  best  addressed  by  the  antitrust  authorities  in  the  courts.  Section  III.  B.  4  discusses  antitrust  issues  in  the  wholesale  market  for  programming. 

 What,  if  any,  Constitutional  or  other  legal  questions  would  be  raised  if  Congress  required  programmers  to  offer  their  channels  to  MVPDs  on  a  stand-  alone  basis  and  prohibited  them 
 from  requiring  carriage  of  their  programming  on  particular  tiers?  What,  if  any,  Constitutional  or  other  legal  questions  would  be  raised  if,  in  addition  to  currently  offered 
 packages,  Congress  required  programmers  to  allow  MVPDs  to  voluntarily  offer  their  channels  on  an  a  la  carte  or  themed-  tier  basis? 

 Requirements  governing  the  terms  of  sale  of  programming  raise  potential  First  Amendment  and  Fifth  Amendment  issues.  Constitutional  issues  are  discussed  in  Section  II.  F.  2.  d  of  the  Report. 
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