Federal Communications Commission

Office of Plans and Policy

445 12th Street, SW

Washington, DC 20554

OPP Working Paper Series

37 Broadcast Television: 

Survivor in a Sea of 

Competition

 September 2002

Jonathan Levy

Marcelino Ford-Livene

Anne Levine
i

The FCC Office of Plans and Policy's Working Paper Series presents staff 

analysis and research in various states. These papers are intended to stimulate 

discussion and critical comment within the FCC, as well as outside the agency, on 

issues in telecommunications policy. Titles may include preliminary work and 

progress reports, as well as completed research. The analyses and conclusions in 

the Working Paper Series are those of the authors and do not necessarily reflect 

the views of other members of the Office of Plans and Policy, other Commission 

staff, or the Commission itself. Given the preliminary character of some titles, it is 

advisable to check with authors before quoting or referencing these Working 

Papers in other publications. This document is available on the FCC's World Wide 

Web site at http://www.fcc.gov/opp/. The inside back cover contains a partial list of 

previous titles.
i

Broadcast Television: Survivor in a Sea of Competition

Jonathan Levy

Marcelino Ford-Livene

Anne Levine

Federal Communications Commission

September 2002

OPP Working Paper No. 37

The FCC Office of Plans and Policy's Working Paper Series presents staff analysis 

and research in various states. These papers are intended to stimulate discussion 

and critical comment within the FCC, as well as outside the agency, on issues in 

telecommunications policy. Titles may include preliminary work and progress 

reports, as well as completed research. The analyses and conclusions in the 

Working Paper Series are those of the authors and do not necessarily reflect the 

views of other members of the Office of Plans and Policy, other Commission staff, 

or the Commission itself. Given the preliminary character of some titles, it is 

advisable to check with authors before quoting or referencing these Working 

Papers in other publications. 

 

 The authors would like to thank then numerous staff from the television and 

cable networks, the investment analysis community, advertising agencies, and 

trade associations who gave generously of their time and expertise to help us. 

The authors alone are responsible for the analysis and conclusions herein. 

Special thanks to Kenneth R. Carter of OPP for crucial assistance in preparing 

this report.
ii

Abstract

The television broadcast industry has entered the new millennium in good shape, 

but with many challenges on the horizon. Although the past decade has seen a 

continuing erosion of broadcast audience and advertising shares, television 

advertising prices and revenues have continued to grow. DBS and the 

expansion in cable availability and channel capacity have created an increasingly 

competitive environment for television broadcasting. This will lead to continuing 

audience fragmentation and further pressure on broadcast advertising revenues. 

The increasing competition for program production resources has led to an 

increase in production costs. The future profitability of the broadcast industry will 

depend on how it responds to competition and cost pressures, and on whether it 

can harness new technologies such as DTV and interactive services to its 

benefit.
iii

Contents

I. INTRODUCTION 1

II. THE MARKET FOR VIDEO MEDIA 3

III. THE ECONOMICS OF TELEVISION FINANCING METHODS 7

INTRODUCTION 7

THE IMPACT OF FINANCING METHODS ON VIDEO PROGRAMMING AVAILABILITY 7

AGGREGATE TRENDS IN VIDEO ADVERTISING 9

IV. BROADCAST TELEVISION 18

OVERALL INDUSTRY TRENDS 18

TELEVISION NETWORKS 27

TELEVISION STATIONS 29

SUMMARY 38

V. CABLE TELEVISION 40

THE NATURE OF CABLE TELEVISION 40

AVAILABILITY AND SUBSCRIBERSHIP OF CABLE TELEVISION 44

CABLE OPERATOR REVENUES 45

THE COMPETITIVE IMPACT OF CABLE ON BROADCAST TELEVISION 46

CONCLUSIONS 49

VI. DIRECT-TO-HOME SATELLITE TRANSMISSIONS 51

DIRECT-TO-HOME SATELLITE SERVICES 52

DBS PUBLIC INTEREST OBLIGATIONS 56

DBS AS A COMPETITOR IN THE MARKET FOR MULTICHANNEL VIDEO PROGRAMMING 

DISTRIBUTION 56

CONCLUSION 61

VII. OTHER VIDEO MEDIA DELIVERY PLATFORMS 62

INTRODUCTION 62

MMDS 62

OVERBUILDERS 64

UTILITIES 65

LOCAL EXCHANGE CARRIERS 66

THE INTERNET 68

HOME VIDEO PRODUCTS 71

THEATRICAL FILMS 73

VIDEO AND PC GAME PLATFORMS AND APPLICATIONS 73

CONCLUSION 75

VIII. TECHNOLOGICAL DEVELOPMENTS 76

INTRODUCTION 76

VIDEO COMPRESSION TECHNOLOGIES 77

DIGITAL TELEVISION 78
iv

DIGITAL RIGHTS MANAGEMENT 90

INTERACTIVE TELEVISION 92

PERSONAL VIDEO RECORDERS 96

CONCLUSION 100

IX. ADVERTISING MARKET DEVELOPMENTS 102

INTRODUCTION 102

CHANGES IN ADVERTISING MARKET STRUCTURE 102

CURRENT TRENDS AND NEW ADVERTISING FORMATS 106

INTERACTIVE ADVERTISING TARGETING CHILDREN RAISES CONCERNS 110

PRIVACY AND INTERACTIVE ADVERTISING 112

CONCLUSION 112

X. THE MARKET FOR BROADCAST AND NON-BROADCAST VIDEO 

PROGRAMMING 114

INTRODUCTION 114

REPEAL OF SYNDICATION AND FINANCIAL INTEREST RULES 114

THE PROGRAMMING MARKETPLACE 115

FROM PITCH TO FALL LINE-UP 116

PRIME TIME PROGRAMMING TRENDS 117

INDEPENDENT PRODUCTION 118

REPURPOSING AND SUMMER PROGRAMMING 120

SPORTS PROGRAMMING 122

CABLE PROGRAMMING 123

COMPARATIVE EXPENDITURES 130

CONCLUSION 133

XI. CONCLUSIONS 134

TELEVISION STATIONS 134

TELEVISION NETWORKS 135

RIVAL DELIVERY SYSTEMS 136

TECHNOLOGICAL CHANGE 136

PROGRAMMING 138

THE FINAL ANALYSIS 139
v

Tables

TABLE 1: AVAILABILITY OF VIDEO MEDIA 4

TABLE 2: END-USER EXPENDITURES ON VARIOUS VIDEO MEDIA 1990-2000 6

TABLE 3: TOTAL ADVERTISING VOLUME, VIDEO ADVERTISING VOLUME, AND GDP 10

TABLE 4: COMPONENTS OF VIDEO ADVERTISING (MILLIONS OF CURRENT $) 13

TABLE 5: COMPONENTS OF VIDEO ADVERTISING (MILLIONS OF 1982-84 $) 14

TABLE 6: COMPONENTS OF VIDEO ADVERTISING (PERCENTAGE OF TOTAL VIDEO 

ADVERTISING VOLUME) 15

TABLE 7: TELEVISION STATIONS ON AIR 19

TABLE 8: TV VIEWING BY CABLE AND NON-CABLE HOUSEHOLDS, 1990-91 AND 2000-

01 (HOURS/WEEK) 20

TABLE 9: ALL DAY VIEWING SHARES, CABLE AND NON-CABLE HOUSEHOLDS 21

TABLE 10: PRIME TIME VIEWING SHARES BY CHANNEL TYPE 23

TABLE 11: COMPARISON OF CABLE TELEVISION SHARE OF TOTAL VIDEO ADVERTISING 

REVENUES AND CABLE TELEVISION ALL-DAY VIEWING SHARES 24

TABLE 12: PRIMETIME HOUSEHOLD DELIVERY (IN THOUSANDS) 25

TABLE 13: AVERAGE REVENUE PER TELEVISION STATION BASED ON AGGREGATE 

DATA, CURRENT AND CONSTANT DOLLARS 32

TABLE 14: AVERAGE REVENUES, EXPENSES, PRE-TAX PROFITS, AND CASH FLOW OF 

COMMERCIAL TELEVISION STATIONS, 2000 33

TABLE 15: AVERAGE REVENUES, EXPENSES, PRE-TAX PROFITS, AND CASH FLOW OF 

COMMERCIAL TELEVISION STATIONS, 1990 34

TABLE 16: AVERAGE PROFITS OF COMMERCIAL TV STATIONS AS A PERCENTAGE OF 

NET REVENUES, 1975-2000 34

TABLE 17: AVERAGE INFLATION-ADJUSTED NET REVENUES OF COMMERCIAL TV

STATIONS, 1975-2000 (1982-1984 = 100) 36

TABLE 18: EXPENSE ITEMS OF COMMERCIAL BROADCAST STATIONS BY SELECTED 

MARKET SIZE, 2000 (% OF TOTAL EXPENSES) 37

TABLE 19: EXPENSE ITEMS OF COMMERCIAL BROADCAST STATIONS BY SELECTED 

MARKET SIZE, 1990 (% OF TOTAL EXPENSES) 37

TABLE 20; PROGRAMMING EXPENSES OF COMMERCIAL BROADCAST STATIONS, 1975-

2000 (% OF TOTAL EXPENSES) 38

TABLE 21: CABLE SUBSCRIBERS AND HOMES PASSED 41

TABLE 22. CABLE OPERATOR REVENUES ($MIL) 46

TABLE 23; SYSTEM CAPACITY, JULY 2001 48

TABLE 24: DIRECT-TO-HOME SUBSCRIBERS AND CABLE SUBSCRIBERS 51

TABLE 25: ESTIMATED SHARE OF U.S. TV HOME SET USAGE BY PROGRAM SOURCE 62

TABLE 26: INTERNET VIDEO STATISTICS 70

TABLE 27: VCR PENETRATION 71

TABLE 28: HOME VIDEO SPENDING, RENTAL AND RETAIL ($ MILLIONS) 72

TABLE 29: VIDEO AND PC GAME GROWTH 74

TABLE 30: CONSUMER HDTV SURVEY 82

TABLE 31: TELEVISION ADS NOT WATCHED (PRIME TIME) 99

TABLE 32: PROGRAMMING EXPENDITURES ($MIL) 131
vi

Figures

FIGURE 1: CABLE AND SATELLITE USAGE: SUBSCRIBERS/TVHH (%) 52

FIGURE 2: SAMPLE DIAGRAM OF ONE TYPE OF DATA BROADCAST NETWORK 

ARCHITECTURE 89

FIGURE 3: TOLLIN/ROBBINS ROSTER (2002-2003 SEASON) 119
1

I. Introduction

This study updates Office of Plans and Policy Working Paper 26, released in 

June 1991 (“Working Paper 26”). That paper and this one address changes over time 

in the competitive position of the television broadcasting industry and present some 

cautious predictions for the future. The approach is to examine audience shares, 

advertising revenues, and profitability of television networks and stations in some depth 

based primarily on published sources, supplemented with some discussions with 

network staff, analysts, and representatives of the advertising community. That 

examination is followed by a review of developments in the cable and direct broadcast 

satellite sectors, the major multichannel video program distribution platforms. The 

paper also considers developments in technology, advertising, and programming.

Working Paper 26 concluded that broadcast television “has suffered an 

irreversible long-term decline in audience and revenue share, which will continue 

throughout the current decade.” This prediction has proved to be accurate, but it is fair 

to say that Working Paper 26 overestimated the severity of the impact on actual 

television industry performance and profitability. The decline in broadcast advertising 

as a share of total video advertising revenues was much smaller than the decline in 

broadcast audience shares. Moreover, the absolute level of both network and station 

advertising revenues actually increased, even in real terms (with the exception of a dip 

in 2001, from which it appears that the industry will recover). The television broadcast 

industry is larger, in terms of stations on the air, than it was then, and no full power 

stations have gone dark. Although the available data have limitations, it appears that, 

overall, the television station sector is at least as profitable as it was ten years ago. 

Networking remains a viable and efficient program distribution technique, and the 

number of broadcast networks has actually increased. However, profit margins in that 

business are and were very small. Working Paper 26 predicted that digital compression 

would be a crucial technological development during the 1990’s, and that has certainly 

been true, both in the cable and Direct Broadcast Satellite (DBS) contexts. It predicted 

rising programming costs and measures taken to adjust to them, such as a shift in the 

composition of programming toward less expensive genres. Finally, Working Paper 26 

recommended relaxing various FCC media ownership rules in light of increased 

competition. Whether or not it was due to the paper, the Commission has, in some 

cases with Congressional instructions, eliminated the network-cable crossownership 

rule, relaxed the dual network and television duopoly rules, eliminated the broadcastcable crossownership rule, and relaxed but not eliminated the television multiple 

ownership rule.

The present paper finds that, notwithstanding declining audience shares for 

broadcast television compared to cable in the aggregate, network and station audiences 

remain much larger than the audience for any particular cable network. This is the 

primary reason why broadcast advertising revenues have remained relatively strong. 

Broadcasting has survived a substantial increase in multichannel video programming 
2

distribution (“MVPD”) penetration and analysis and projections suggest that this 

penetration is flattening out. While MVPD subscribers will continue to increase their 

viewing of nonbroadcast programming, absent a major change in the media landscape,

broadcasting will retain its relative audience size edge and hence its basic source of 

support. One possible major event is the rise of the personal video recorder which 

could undermine the revenue base for broadcasting. On the other hand, technological

developments such as Interactive Television hold out the possibility of preserving and 

even enhancing broadcast television’s advertising base.

The paper is organized as follows. Chapter II provides a brief overview of the 

size and structure of the video sector. Chapter III reviews some analyses of the impact 

on consumer welfare of video market structure (including a comparison of results under 

subscription payment and advertiser support for television). Chapter III also provides a 

retrospective look at trends in video advertising revenues. Chapter IV provides a 

detailed analysis of the television broadcasting sector, while Chapters V, VI, and VII 

review the impact of cable, DBS, and other technologies, respectively, on broadcast 

television. Chapter VIII considers important changes in technology, Chapter IX 

examines changes in the structure of the advertising market, and chapter X examines 

the market for video programming. Conclusions are found in Chapter XI (no reference 

to the bankruptcy code intended), which also serves as an executive summary of the 

paper.
3

II. The Market for Video Media

Working Paper 26 chronicled the evolution of the market for video media from the 

mid-1970’s to 1990. During this period, video media availability expanded from 

broadcast television and movie theaters (with a smattering of cable television carrying 

mostly retransmitted broadcast signals) to a world in which cable television 

(supplemented by C-Band home satellite dish systems) brought a substantial range of 

non-broadcast programming to the home and movies were available for home viewing 

on videocassette not too long after theatrical release.

Since 1990, both the availability of broadcast television and the use of alternative 

video distribution platforms have expanded. In the broadcast space, the number of 

over-the-air broadcast television stations available to the median household increased 

by from ten (10) stations in 1990 to approximately thirteen (13) stations in 2001.1 

During this same time, as demonstrated by Table 1, the use of alternative video 

distribution platforms increased.2 As of 2001, 65 percent of television households 

subscribed to cable service, up from 55.5 percent in 1990. The increase has occurred 

despite a relatively small rise in cable availability during this period. The share of 

television households passed by cable was 96.7 percent in 2001, up from 92.4 percent 

in 1990.3 In 1990, DBS was not yet available, and only a small share of television 

households subscribed to home satellite dish (“HSD”) service.4 As of year-end 2001, 

approximately 17.7 percent of television households subscribed to satellite-delivered 

video services, most of them DBS. Table 1 also indicates that the penetration of 

players for pre-recorded media, videocassette players and DVD players, has increased 

noticeably in recent years.

Not only has the use of non-broadcast video distribution platforms expanded over 

the past decade, but the channel capacity on those platforms has also increased over 

that time. Indeed, most cable systems have expanded capacity significantly, and the 

satellite services offer channel capacity greater than virtually any cable system.5 This 

expanded channel capacity coincides with an increase in the availability of nonbroadcast, cable origination video programming networks. In 1990, there were only 

about 70 cable origination networks available to multichannel video program distributors 

 

1Working Paper 26, at 13. Nielsen last reported the number of over-the-air broadcast televisions stations 

available to the median household in 1996 as 13. Nielsen Media Research, Television Audience 1996, at 

13. Nielsen has not reported this figure since, but we do not believe this number has changed 

substantially over the last five years. We base this estimation partly on the fact that the total number of 

new stations overall has not increased substantially. See Table 4.

2 See Chapter VIII for a discussion of some other platforms which have limited usage. In addition, note 

that the footprint of the DBS services covers the entire contiguous United States, but, because a clear line 

of sight to the southern sky is needed for reception, DBS is not available to 100 percent of television 

households.

3 See discussion in Chpater V, infra regarding the reliability of the homes passed data.

4 The large size of HSD antennas and local zoning restrictions meant that the service was not effectively 

available to a large fraction of households.

5 These services are discussed in detail in Chapters V and VI.
4

(“MVPDs”) for carriage.6 By year-end 2001, there were nearly 287 national nonbroadcast, cable origination networks available for carriage.7

 

Table 1: Availability of Video Media

1975 1980 1985 1990 1995 2000 2001 2010p

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

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

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

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

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

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

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

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

*Data is year-end unless otherwise noted

Sources: Total HH and TVHH: (1975-2001):Television Bureau of Advertising, Inc., Television Households, Trends in 

Television, at http://www.tvb.org (citing Nielsen). (2010p): Kagan World Media, Broadband Cable Financial Databook, 

July 2002, at 10. Cable Subs: (1975 and 2010p): Kagan World Media, Broadband Cable Financial Databook, July 

2002, at 7 and 10; (1980-2001): Paul Kagan Associates, Cable TV Investor, May 24, 2002, at 9. Cable HP: (1975-

2001): Paul Kagan Associates, Cable TV Investor, May 24, 2002, at 9; (2010p): Kagan World Media, Broadband 

Cable Financial Databook, July 2002, at 10. DBS and C-Band Subs (Satellite Subs): (1995-2010p): Kagan World 

Media, Economics of Basic Cable Networks 2002, Sept. 2001, at 23-27. C-Band Subs: (1990): 1995 MVPD 

Competition Report at Table G-1. VCR and DVD Homes: (1990-2001): Veronis Suhler, Communications Industry 

Forecast, 2001, at 192 and 194. (1980 and 1985): Television Bureau of Advertising, Inc., Cable, Pay Cable & VCR 

Households, Trends in Television, at http:///www/tvb.org.

Notes:

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

2001 are actually Jan 1, 2002)

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

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

(4) Based on 1976 data.

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

Despite the proliferation in the number of non-broadcast programming networks, and 

despite the increase in availability of non-broadcast programming, broadcasters still 

attract substantial revenues to support the production, acquisition, and distribution of 

programming. Table 2 gives a rough indication of the relative size of various sectors of 

the video market, by providing figures on end user expenditures (advertising plus direct 

viewer payment) for broadcast television, cable television, DBS, and filmed 

 

6 See Rate Deregulation & the Commission’s Policies Relating to the Provision of Cable Television Serv., 

Report on Competition, MM Docket No. 89-600, Report (“1990 Cable Report”), 5 FCC Rcd 4962, 5106-07 

(1990).

7 NCTA, National Video Programming Services: 1994-2001, Cable Developments 2002, May 2002, at 23. 

In the Commission’s Annual Report on the Status of Competition in the Market for the Delivery of Video 

Programming, the Commission estimated the number of national programming services at 294. NCTA 

notes in its latest Cable Developments, that there were errors in this calculation, and that the number of 

national programming networks was actually 287. See Video Annual Assessment of the Status of 

Competition in the Market for the Delivery of Video Programming, CS Docket No. 01-129, Eighth Annual 

Report (“2001 MVPD Competition Report”), 17 FCC Rcd 1244, 1309-10 ¶ 157 (2002).
5

entertainment.8 The table shows that in 1990 total expenditures (by advertisers) on 

broadcast television were $26.7 billion, compared to a total of advertiser and subscriber 

expenditures on cable television of $18.4 billion. By the year 2000, broadcast 

expenditures had risen by 67.7 percent, to reach $44.8 billion. Expenditures on cable 

television also equaled $44.8 billion in 2000, an increase of 143.5 percent since 1990. 

Cable plus DBS expenditures in 2000 were $53.3 billion, so the increase in 

expenditures on pay media (cable plus DBS in 2000 over cable in 1990) was 189.5 

percent.9 As noted above, the 1990-2000 time period saw a major increase in the 

number of cable networks. Even considering the modest increase since 1990 in 

broadcast networks, broadcasting continues to generate more revenue than cable on a 

per-network basis. Within the filmed entertainment category it is clear that home video 

(which more than doubled in revenue from 1990 to 2000) rather than box office receipts 

(which rose by 48 percent from 1990 to 2000) is the major growth area. By comparison, 

US GDP grew by 73.7 percent during this period.

 

8 The figures are not precise measures of the resources available to broadcasters, cable operators, DBS 

operators, or film producers to acquire and distribute programming, since the advertising figures are gross 

expenditures. Nor do they separate out the costs of distribution infrastructure and programming for the 

four (five, if one separates theatrical and home video distribution) delivery platforms. Moreover, because 

advertiser valuation of viewer exposures is not the same as viewer valuation of programming, and 

because direct payments for video programming underestimate their total value to consumers, the figures 

do not reflect the total value to consumers of video programming.

9 Table 2 does not include HSD revenues or revenues from other delivery platforms (e.g., MMDS) that 

have low subscriber levels.
6

Table 2: End-User Expenditures on Various Video Media 1990-2000

1990 1995 2000

Broadcast TV 26,716 32,720 44,802

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

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

Stations’ Advertising Revenues 

(local+national spot) 15,644 19,104 25,806

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

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

Advertising Revenues 476 1,075 2,430

Basic Cable Network Advertising 

Revenue 1,797 3,972 10,456

Total Cable Video-Related 

Revenue 18,401 26,870 44,808

DBS Revenue 0 663 8,467

Video Subscriptions 0 663 8,440

Advertising(3) 0 0 27

Total Subscription Video-related 

Revenue 18,401 27,533 53,275

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

Box Office 5,022 5,494 7,453

Home Video 11,107 15,529 22,453

Sources: Broadcast TV Revenues: See Table 4. Cable Operator Revenues: Kagan World Media, Cable TV Investor, 

May 24, 2002, at 9. Cable Network Revenues: Kagan World Media, The Economics of Basic Cable Networks DBS 

Revenues: Kagan World Media, The State of DBS 2002, Dec. 2001, at 16. Filmed Entertainment Revenues: Veronis 

Suhler, Communications Industry Forecast, July 2001, at 203.

Notes:

(1) Only video-related revenues are listed here. Revenues from installations, equipment and non-video services like 

high-speed Internet access services and telephony are not included.

(2)Includes home shopping commissions.

(3)DBS advertising is the equivalent of cable’s “local avails,” though they are sold as national time.

(4)The data source for filmed entertainment includes expenditures on television programming as a third category. 

Because programming is an input into television, cable, and DBS services, it is not listed separately under filmed 

entertainment. 
7

III. The Economics of Television Financing Methods

Introduction

Broadcast television in the United States is financed by the sale of advertising 

time. Other video media generally have two revenue streams—subscription fees from 

viewers and advertising revenues. The different financing methods of course affect the 

financial viability of video media, as well as the range of programming that these media 

find it profitable to present. This chapter briefly reviews the ways that financing 

methods influence the range of programming made available and then examines trends 

in the availability of advertising revenues to support broadcast programming. Later 

chapters discuss in more detail the financing of broadcast and cable television and 

technological changes, such as the personal video recorder and interactive television, 

that may have a significant impact on the future flow of advertising revenues to video 

programmers. 

The Impact of Financing Methods on Video Programming Availability10

Video programming, like other types of intellectual property, has the 

characteristic that consumption by one viewer does not reduce the amount available for 

others. Hence, assuming that a program has been produced and that it is being 

transmitted, the cost of serving an additional viewer is zero.11 In order to maximize 

consumer welfare from the transmission, the optimal price is also zero. At this price, all 

who value the program more than its cost of delivery gain access to the program. Of 

course, a zero price will not lead to efficient production of video programming, since 

there would be no compensation to producers. 

When television is supported by advertising, the revenue that a program attracts 

is based roughly on the size of the audience it attracts (demographic composition is also 

important) and the value of that audience to the advertisers who have bought time on 

the program. The value of the programming to the viewers will differ from the value of 

the audience to the advertisers. Viewers of broadcast programs cannot express the 

intensity of their preference for the programs. All they can do is tune in or not tune in. 

By contrast, pay media permit subscribers to (imperfectly) register the intensity of their 

preferences for different programs and networks. Broadly speaking, advertisersupported channels tend to cater to the mass audience and pay channels to more 

specialized audiences. Even within the broadcasting sector, however, an increase in 

the number of channels available will make it profitable for at least some broadcasters 

 

10 For a more detailed discussion of this topic, see generally Owen, Bruce and Wildman, Steven, Video 

Economics (Cambridge, MA: Harvard University Press) 1992 (“Owen and Wildman”) and Setzer, Florence 

and Levy, Jonathan, Broadcast Television in a Multichannel Marketplace, chapter II; OPP Working Paper 

26, Federal Communications Commission, June 1991.

11 “Additional viewer” must be understood as an additional viewer who is within the range of a broadcast 

station or DBS operator’s signal or who is connected to a cable system carrying the signal.
8

to cater to segments of the audience, e.g., particular demographic groups. While many 

cable channels are narrowly targeted, some do provide mass appeal programming.

Owen and Wildman provide a useful summary of the economics of program 

choice.12 Drawing on their own and others’ theoretical work, they note that both 

advertiser-supported and pay television are subject to three biases. Compared to the 

benefits that viewers receive, both delivery systems are biased against minority-taste 

programming, against high-cost programming, and in favor of “mass appeal” 

programming (programming that attracts large audiences). Because pay television 

subscribers can indicate the intensity of their programming preferences via subscription 

payments, the biases are weaker for pay than for advertiser-supported television. 

Ideally, the policy maker would like to know which video media market structure 

leads to maximum consumer welfare. Although theory suggests that a competitive pay 

television industry performs better than a monopoly pay television industry, the relative 

ranking of a monopoly advertiser-supported industry, a competitive advertiser-supported 

industry, and a competitive pay television industry depends on the nature of viewer 

preferences for programming (i.e., whether tastes are relatively homogeneous or 

whether preferences vary widely across viewers) Of course, the real-world situation is 

even more complex, since we have both pay and advertiser-supported video 

programming distributors. 

We can conclude, based on revealed subscriber willingness to pay, that cable 

and DBS subscribers value those services highly. If we knew that the “qualtity” of 

broadcast service had not declined, we could say unambiguously that the welfare of 

subscribers to cable and DBS was higher than it would be in their absence. We could 

also conclude in this case that nonsubscribers to pay media were at least not worse off 

than before. Quality is, of course, elusive to define let alone measure. We do know that 

the quantity of television broadcast service has increased over time, as measured by 

the number of stations on the air. And we can speculate that even if broadcast quality 

has declined, the nonbroadcast services to which 85 percent of US television 

households subscribe probably more than compensate even taking subscription fees 

into account. The situation of those who do not subscribe to pay television is less clear. 

If they are people who value video highly but whose income prohibits them from 

purchasing video service, then they are vulnerable to declines in the quality of 

broadcast service. If they are people, rich or poor, who place a low value on video 

service generally, then they will be less affected by any quality decline. 

The balance of this study examines the advertising and programming markets in 

which television broadcasters operate and the impact of new media and technologies 

with a view to understanding how changes in these areas have and will affect the 

broadcasting industry and consumers. The first step is to consider advertising—the 

financial base of broadcast television.

 

12 Owen and Wildman at 148-150.
9

Aggregate Trends in Video Advertising

Advertising revenues fund the television broadcasting industry, so any 

assessment of that industry must consider developments in the market for advertising. 

This section examines the growth of advertising revenues over the past 25 years or so, 

and how the composition of those revenues has changed. Chapter IX discusses 

structural changes on both the “buy” and “sell” sides of the market; i.e., the rise of 

companies that own (and sell advertising time in) multiple program channels and the 

consolidation of advertising agencies.

The Growth and Composition of Advertising Revenues

Television advertising is one component of a larger advertising market. One 

standard source of data on advertising presents information for the following categories: 

newspapers, magazines, broadcast television, cable television, radio, yellow pages, 

direct mail, business papers, out of home (including billboards), internet, and 

miscellaneous.13 Depending on the product or service being advertised, the purpose of 

the advertisement (e.g., creating brand awareness, introducing a new product, 

announcing a sale), and the target audience, many of these media may serve as 

substitutes for one another. Because different advertisers may wish to reach different 

demographic groups, an advertising exposure in a particular television program will be 

worth different amounts to each, depending on the demographic composition of the 

audience.

Chapter IV presents data showing that the composition of viewing has shifted 

over time, with cable increasing at the expense of broadcast television. This suggests 

that broadcast and cable advertising are, at some level, substitutes for one another, and 

the remainder of this chapter concentrates on those categories.14 Table 3 presents 

historical data on Gross Domestic Product (GDP) and various categories of advertising. 

Because advertising demand is cyclical, it is important to examine data over a long 

period of time. The cyclical components come, in part, from demand generated by 

political campaigns, presidential and Congressional, and from the Olympics. The 

significant drop in expenditures in 2001 compared to 2000 is due in part to these 

considerations. The year 2000 featured not only the Summer Olympics but presidential 

and congressional elections as well. The collapse of the “dot com” sector also likely 

contributed to the decline. Moreover, the tragedy of September 11, 2001 and its 

aftermath undoubtedly had an impact on the level of advertising. It is premature to 

project any long-term downturn in advertising expenditures based on the 2001 

experience. 

 

13 Television Bureau of Advertising, www.tvb.org

14 A detailed analysis of substitutability among advertising media is beyond the scope of this paper, but 

see Silk, Alvin et al., “Íntermedia Substitutability and Market Demand by National Advertisers.” Working 

Paper 8624, National Bureau of Economic Research (December 2001); available at 

www.nber,org/papers/w8624.
10

Table 3: Total Advertising Volume, Video Advertising Volume, and GDP

It is also important to note that the advertising data in table 3 and the other tables 

in this section are gross revenue data. That is, they depict gross payments by 

advertisers, including agency commissions. The dataset is valuable because it provides 

consistent information over a long time period for all advertising categories. It is better 

used for examining trends in advertising than for assessing for a particular year the 

funding available for supporting particular sectors of the media industry.

Because advertising is designed, broadly speaking, to provide information about 

goods and services offered for sale, it has exhibited a stable relationship to GDP, a 

measure of the economy’s total output. The share of total advertising in GDP has 

ranged between 1.7 and 2.5 percent of GDP in the period from 1975-2001, having 

ratcheted up in the mid-1980’s. It is too early to tell whether the somewhat more modest 

upward jump in the late 1990’s represents any kind of longer term shift.

The share of video (broadcast plus cable) advertising has increased over time, 

doubling from 1975 to 2000. This increase has been accompanied by a decline in the 

GDP

Total Ad 

Volume

Video Ad 

Volume

Broadcast 

Ad 

Volume

Cable Ad 

Volume

Total Ad 

Volume as 

Percentage 

of GDP

Total Video 

Ad Volume 

as 

Percentage 

of GDP

Total 

Broadcast 

Ad Volume 

as 

Percentage 

of GDP

Total Cable 

Ad Volume 

as 

Percentage 

of GDP

1975 1,635,200 27,900 5,263 5,263 0 1.71 0.32 0.32 0

1980 2,795,600 53,570 11,488 11,416 72 1.92 0.41 0.41 0.0026

1985 4,213,000 94,900 21,287 20,298 989 2.25 0.51 0.48 0.0235

1990 5,803,200 129,968 29,247 26,616 2,631 2.24 0.50 0.46 0.0453

1991 5,986,200 128,352 28,606 25,461 3,145 2.14 0.48 0.43 0.0525

1992 6,318,900 133,750 31,079 27,249 3,830 2.12 0.49 0.43 0.0606

1993 6,642,300 140,956 32,471 28,020 4,451 2.12 0.49 0.42 0.0670

1994 7,054,300 153,024 36,342 31,133 5,209 2.17 0.52 0.44 0.0738

1995 7,400,500 165,147 38,886 32,720 6,166 2.23 0.53 0.44 0.0833

1996 7,813,200 178,113 43,824 36,046 7,778 2.28 0.56 0.46 0.0995

1997 8,318,400 191,307 45,643 36,893 8,750 2.30 0.55 0.44 0.1052

1998 8,781,500 206,697 49,513 39,173 10,340 2.35 0.56 0.45 0.1177

1999 9,268,600 222,308 52,581 40,011 12,570 2.40 0.57 0.43 0.1356

2000 9,872,900 243,680 60,257 44,802 15,455 2.47 0.61 0.45 0.1565

2001 10,082,200 231,287 54,423 38,887 15,536 2.29 0.54 0.39 0.1541

Sources: Television Bureau of Advertising; Trends in GDP/Total Ad Volume/TV Ad Volume, Trends in Advertising Volume, 

available at www.tvb.org/tvfacts/trends, visited June 26, 2002. For GDP 2001, see US Department of Commerce, Bureau 

of Economic Analysis, "Gross Domestic Product: Second Quarter 2002 (preliminary)," available at 

www.bea.doc.gov/bea/newsrel/gdpnewsrelease.htm, visited Sept. 24, 2002.

Note: All figures other than percentages are in millions of dollars
11

newspaper share of total advertising revenues from 27.6 percent in 1980 to 19.8 

percent in 2000.15

The video advertising market can be divided into two major sub-markets—

national and local. The national market includes network advertising, “national spot,” 

and syndication. Networks, both broadcast and cable, sell time to national advertisers, 

with broadcast networks reaching virtually 100 percent of television households and 

cable networks reaching no more than about 80 percent via cable, Direct Broadcast 

Satellite, and other distribution platforms.16 National spot advertising is sold by stations 

to national advertisers, who aggregate national or regional coverage by purchasing 

advertising spots from stations in multiple markets.17 The syndication sector refers to 

advertisements sold in syndicated programs (programs that are distributed to ad hoc 

groups of stations assembled by syndicators). Television stations participate in the local 

as well as the national spot advertising markets. Cable television system advertising 

sales are virtually all local.

Table 4 provides data on the components of video advertising from 1975-2001 in 

current dollars. Total video advertising volume has been steadily increasing over the 

years, with the exception of dips in 1991 and 2001. The same pattern holds for 

broadcast network and national and local television station spot advertising. The 

syndication sector has grown steadily as have total cable advertising and cable network 

advertising. Local cable advertising, i.e., advertising sold by local cable television 

systems18, dipped slightly in 2001.

Table 5 presents the components of video advertising in constant dollars. The 

pattern is similar to that of table 4, but the constant dollar figures reveal more clearly the 

cyclical nature of the advertising market. For example, broadcast network advertising 

volume in constant dollars exhibits an upward trend over the 1975-2001 period, but it 

falls in 1991, 1993, 1997, 1999, and 2001. Three of these years (1993, 1997, and 

2001) follow election and Olympics years. The other two (1991 and 1999) follow years 

of Congressional elections and 1991 was a recession year.

Table 6 provides the percentage distribution of the components of video 

advertising. The most striking feature is the expansion of cable’s share in total video 

advertising. Cable accounted for no video advertising in 1975, but had risen to 28.5 

 

15 Television Bureau of Advertising, “Trends in Advertising Volume.” Available at 

www.tvb.org/tvfacts/trends/advolume; visited Jne 26, 2002.

16

 Multichannel video programming distributors (MVPDs), such as cable television and Direct Broadcast 

Satellite services are subscribed to by about 85 percent of US television households 2001 MVPD 

Competition Report, 17 FCC Rcd 1244 (2002), Table C-1.No cable network is carried by every MVPD. 

However, 12 cable networks reach more than 80 percent of television households, with TBS having the 

largest reach at 82.7 percent. See Paul Kagan Associates, Cable Television Investor, July 29, 2002, p. 

14 and table 1 in chapter II. 

17 Broadcast networks distribute their programming to affiliates via regional satellite feeds, so they have 

the flexibility to sell regional as well as national exposures.

18 Cable operators generally pay cable networks a per-subscriber fee and receive in return the right to 

retransmit the network’s programming and the right to sell some of the advertising availabilities within the 

program stream.
12

percent of the total in 2001. The composition of video advertising has also shifted 

slightly away from national to local, with the national share dropping from 74.7 percent 

to 70.8 percent from 1975 to 2001. Within the national video advertising sector, the rise 

of cable is particularly pronounced, with the cable share of national video advertising 

rising from zero in 1975 to 30.9 percent in 2001.19 A comparison of television station 

sales of local advertising spots with total local cable system advertising sales shows 

that the cable share in 2001 was 23 percent.

This retrospective examination of aggregate advertising revenues reveals that all 

components of video advertising have been growing over time but that the cable

components have been growing much faster than the broadcasting components. Cable 

accounted for 41.4 percent of the total increase in video advertising revenues from 1990 

to 2000. 

The longstanding stable relationship between GDP and advertising volume 

suggests that all of the video advertising sectors will continue to grow over time. 

Indeed, a recently released prediction by Veronis Suhler Stevenson (VSS) forecasts 

that broadcast television advertising spending will grow at a compound annual rate of 

3.6 percent from 2001-2006.20 VSS put the 1996-2001 growth rate at 2.7 percent, a 

figure heavily influenced by the 2001 drop in advertising revenues. It is also safe to 

assume that cable shares of total video advertising will continue to grow. 

 

19 If the focus is narrowed to network advertising sales only (i.e, national spot and syndication are not 

included), the cable network share in 2001 was 45.4 percent.

20

 Veronis Suhler Stevenson “Veronis Suhler Stevenson Issues Annual Communications Industry 

Forecast,” August 5, 2002 PR Newswire. See also Communications Daily, August 27, 2002 (quoting 

Standard and Poor’s chief economist to the effect that television advertising revenue will grow by 3.5 

percent this year, will pick up momentum in 2003, but will not return to the rapid growth levels of the mid 

and late 1990’s). 
13

Table 4: Components of Video Advertising (millions of current $) Na tion a l P lus Loca l Na tiona l Lo ca l Total V ideo Advertising Volum e Total B roadc as t A dvertising V olum e Total Cable A dvertis ing V olume National V ideo A dvertis ing V olume B roadc as t Network A dvertising V olum e National S pot A dvertis ing V olume S y ndic ation A dvertis ing V olume Cable Network A dvertis ing V olume

Local V ideo A dvertising V olume Loc al S pot A dvertis ing V olume

Local Cable A dvertis ing V olume

1975 5,263 5,263 0 3,929 2,306 1,623 0 0 1,334 1,334 0

1980 11,488 11,416 7 2 8,509 5,130 3,269 5 0 6 0 2,979 2,967 1 2

1985 21,287 20,298 989 15,377 8,060 6,004 520 793 5,910 5,714 196

1990 29,347 26,716 2,631 20,860 9,963 7,788 1,109 2,000 8,487 7,856 631

1991 28,606 25,461 3,145 20,296 9,533 7,110 1,253 2,400 8,310 7,565 745

1992 31,079 27,249 3,830 21,970 10,249 7,551 1,370 2,800 9,109 8,079 1,030

1993 32,471 28,020 4,451 22,880 10,209 7,800 1,576 3,295 9,591 8,435 1,156

1994 36,342 31,133 5,209 25,554 10,942 8,993 1,734 3,885 10,788 9,464 1,324

1995 38,886 32,720 6,166 27,235 11,600 9,119 2,016 4,500 11,651 9,985 1,666

1996 43,824 36,046 7,778 30,797 13,081 9,803 2,218 5,695 13,027 10,944 2,083

1997 45,643 36,893 8,750 31,907 13,020 9,999 2,438 6,450 13,736 11,436 2,300

1998 49,513 39,173 10,340 34,644 13,736 10,659 2,609 7,640 14,869 12,169 2,700

1999 52,581 40,011 12,570 36,736 13,961 10,500 2,870 9,405 16,025 12,860 3,165

2000 60,257 44,802 15,455 43,025 15,888 12,264 3,108 11,765 17,232 13,542 3,690

2001 54,423 38,887 15,536 38,514 14,300 9,223 3,108 11,883 15,909 12,256 3,653 S ourc e:Televis ion Bureau of A dvertis ing; Trends in A dvertising V olum e, available at www.tvb.org/tvfacts /trends , vis ited June 26, 2002. Note: The 1990 total broadc ast advertising volum e figure obtained by adding up its c om ponents in the s ourc e is 100 m illion dollars lower than the total reported in the s ourc e. This table reports the higher figure.
14

Table 5: Components of Video Advertising (millions of 1982-84 $) Na tion a l Plus Loca l Na tiona l Loca l Total V ideo Advertising Volum e Total B roadc ast A dvertis ing V olum e Total Cable A dvertis ing V olume National V ideo A dvertis ing V olume B roadc as t Network A dvertising V olum e National Spot Advertising Volum e Sy ndication Advertis ing Volum e Cable Network A dvertis ing V olume

Loc al V ideo A dvertis ing V olume Local Spot A dvertising V olum eLocal Cable Advertising Volum e

1975 9,783 9,783 0 7,303 4,286 3,017 0 0 2,480 2,480 0

1980 13,942 13,854 8 7 10,326 6,226 3,967 6 1 7 3 3,615 3,601 1 5

1985 19,783 18,864 919 14,291 7,491 5,580 483 737 5,493 5,310 182

1990 22,454 20,441 2,013 15,960 7,623 5,959 849 1,530 6,493 6,011 483

1991 21,003 18,694 2,309 14,902 6,999 5,220 920 1,762 6,101 5,554 547

1992 22,152 19,422 2,730 15,659 7,305 5,382 976 1,996 6,493 5,758 734

1993 22,471 19,391 3,080 15,834 7,065 5,398 1,091 2,280 6,637 5,837 800

1994 24,522 21,007 3,515 17,243 7,383 6,068 1,170 2,621 7,279 6,386 893

1995 25,516 21,470 4,046 17,871 7,612 5,984 1,323 2,953 7,645 6,552 1,093

1996 27,931 22,974 4,957 19,628 8,337 6,248 1,414 3,630 8,303 6,975 1,328

1997 28,438 22,986 5,452 19,880 8,112 6,230 1,519 4,019 8,558 7,125 1,433

1998 30,376 24,033 6,344 21,254 8,427 6,539 1,601 4,687 9,122 7,466 1,656

1999 31,561 24,016 7,545 22,050 8,380 6,303 1,723 5,645 9,619 7,719 1,900

2000 34,992 26,017 8,975 24,985 9,226 7,122 1,805 6,832 10,007 7,864 2,143

2001 30,730 21,958 8,772 21,747 8,075 5,208 1,755 6,710 8,983 6,920 2,063 Sourc e: Table 4 and U.S . B ureau of Labor S tatis tic s , "Cons umer P ric e Index 

for all Urban Cons um ers," available at http://data.bls .gov/servlet/S urveyOutputS ervlet, visited A ugust 9, 2002.
15

Table 6: Components of Video Advertising (Percentage of Total Video Advertising Volume) Na tion a l Plus Loca l Na tiona l Loca l Total V ideo Advertising Volum e Total B roadc ast A dvertis ing V olum e Total Cable A dvertis ing V olum e National Video Advertising Volum e B roadc ast Network A dvertis ing V olum e National Spot Advertising Volum e Sy ndicatio

n Advertis ing Volum e Cable Network A dvertising V olum e

Loc al V ideo A dvertis ing V olume Local S pot A dvertis ing V olumeLocal Cable Advertising Volum e

1975 100.0 100.0 0.0 74.7 43.8 30.8 0.0 0.0 25.3 25.3 0.0

1980 100.0 99.4 0.6 74.1 44.7 28.5 0.4 0.5 25.9 25.8 0.1

1985 100.0 95.4 4.6 72.2 37.9 28.2 2.4 3.7 27.8 26.8 0.9

1990 100.0 91.0 9.0 71.1 33.9 26.5 3.8 6.8 28.9 26.8 2.2

1991 100.0 89.0 11.0 71.0 33.3 24.9 4.4 8.4 29.0 26.4 2.6

1992 100.0 87.7 12.3 70.7 33.0 24.3 4.4 9.0 29.3 26.0 3.3

1993 100.0 86.3 13.7 70.5 31.4 24.0 4.9 10.1 29.5 26.0 3.6

1994 100.0 85.7 14.3 70.3 30.1 24.7 4.8 10.7 29.7 26.0 3.6

1995 100.0 84.1 15.9 70.0 29.8 23.5 5.2 11.6 30.0 25.7 4.3

1996 100.0 82.3 17.7 70.3 29.8 22.4 5.1 13.0 29.7 25.0 4.8

1997 100.0 80.8 19.2 69.9 28.5 21.9 5.3 14.1 30.1 25.1 5.0

1998 100.0 79.1 20.9 70.0 27.7 21.5 5.3 15.4 30.0 24.6 5.5

1999 100.0 76.1 23.9 69.9 26.6 20.0 5.5 17.9 30.5 24.5 6.0

2000 100.0 74.4 25.6 71.4 26.4 20.4 5.2 19.5 28.6 22.5 6.1

2001 100.0 71.5 28.5 70.8 26.3 16.9 5.7 21.8 29.2 22.5 6.7 S ourc e: Table 4
16

Advertising agency sources suggest that there is particular room for growth in the 

cable system sector. Earlier on, it was difficult to assemble full coverage of a local 

market via cable. This was due to fragmentation of ownership of cable systems within 

local markets and the limited availability of intermediaries to aggregate cable system 

availabilities to achieve full coverage. Two things have changed in this regard. First, 

cable multiple system operators (MSOs) are increasingly acquiring “clusters” of cable 

systems in individual markets. Second, cable “interconnects” are much more 

widespread and sophisticated than they were, say, ten years ago. Interconnects sell 

time and distribute advertisements on behalf of cable operators in a particular market, 

simplifying the task of an advertising buyer wishing to reach the market via cable. 

Interconnects also facilitate delivery of advertisements targeted to a particular 

geographic area within a market. This is an advantage for some advertisers, since a 

local television station advertisement of necessity reaches the station’s full service area 

and is priced accordingly.21

Just as it would be inappropriate to place too much predictive emphasis on one 

down year (2001), it is not possible to glean too much insight from the network 

advertising time sales for the current season that took place a few months ago. 

Nevertheless it is worth noting that they did show a fairly sizeable increase over last 

year’s figures. Network advertising, both broadcast and cable, is sold in two ways. 

There is an “upfront” market and a “scatter” market. The television “season” begins in 

September and networks sell a substantial majority of their advertising time in the 

upfront market that took place this year in early summer. The upfront market allows 

buyers to negotiate volume discounts and to lock in a base level of advertising 

availabilities for the coming season. During the season, advertisers make additional 

purchases as their needs and priorities become clearer. Press reports indicate that this 

year’s broadcast network upfront sales were up by around 14 percent over last year, 

while the cable network upfront market grew by roughly 15 percent over last year.22

While concurring that 2002 upfront sales are bigger than expected, Bear Stearns 

adds a note of caution, pointing out that the increases are due only in part to rising 

prices (“cost per thousand” or “CPM”). In part the increased revenues are a 

consequence of networks selling a larger portion of their total inventory in the upfront 

market than they did last year. In other words, apparently this year fewer sales will take 

place in the scatter market.23 Bear Stearns also comments on the local television 

advertising sector, raising the prospect of double digit growth in the second half of 

2002.24

 

21 Discussions with advertising agency personnel suggest that local cable can be attractive to different 

categories of advertising buyer. The discussion in the text emphasizes developments that appear to 

make local cable advertising an increasingly good substitute for local broadcast advertising. However, 

observers point out that cable also is attractive for low-budget local advertisers who may see it as much 

a substitute for local radio as for local television.

22 Electronic Media, July 8, 2002, p. 2 and Multichannel News, July 22, 2002 p. 2.

23 “Upfront on the Upfront.” Bear Stearns Equity Research Entertainment; June 7, 2002.

24 “Television Broadcasting: Local TV Advertising; Can It Post Double-Digit Growth in Second-Half 

2002?” Bear Stearns Equity Research, Media; June 2002.
17

Based on available evidence at this point, it appears that a solid and gradually 

expanding advertising revenue base will be available to support broadcast television 

programming. Future chapters will examine trends on the cost side of the programming 

industry and the likelihood that cable will cut further into broadcast advertising revenues. 

The chapters on technological change and the future of advertising will also consider 

developments, such as the personal video recorder (PVR) that have the potential to cut 

significantly into the revenue base and possible industry response strategies. If the 

PVR or some other development, substantially changes the relationship between GDP 

and video advertising, then the assumptions and predictions cited here of current trends 

basically continuing would have to be revised.
18

IV. Broadcast Television

Overall Industry Trends

Working Paper 26 painted a somewhat pessimistic picture of the future of 

broadcasting. While some of the report’s predictions have come true, and while the 

broadcasting industry continues to face competitive and technological challenges, 2002 

finds the industry in pretty good shape. The report referred to “an irreversible long-term 

decline in audience and revenue shares, which will continue throughout the current 

decade.” It highlighted the important role that digital video compression would play in 

making nonbroadcast media stronger competitors by increasing their channel capacity. 

It raised the possibility that some television stations might go dark. 

It is certainly true that television broadcast audience shares have continued to 

drop significantly and that the television share of total video advertising revenues has 

also continued to decline. However, broadcast advertising revenue shares have 

declined much less than viewing shares and, although 2001 was a tough year for 

television advertising, the actual level of advertising revenues has generally continued 

to grow. No television broadcast stations have turned in their licenses and gone dark. 

Indeed, the number of full power stations has increased substantially over the last ten 

years. This chapter reviews the financial and competitive position of the television 

industry over the past ten years and assesses the impact on its financial health of 

competitive and some regulatory developments during that time period.

Table 7 shows that the total number of television stations has continued to grow 

over the past decade, increasing from 1,442 to 1,619 between 1990 and 2000. This 

increase of 12.3 percent is almost entirely due to new UHF stations, and nine out of ten 

of them were commercial rather than educational stations. The result is that the number 

of stations available off-air to the average US television household rose from 11.7 in 

1990 to 13.1 in 1996, the last year for which Nielsen published this information.25 In 

view of the limited number of stations that came on the air between 1996 and 2000, the 

current figure is not likely to be much higher than 13.1.

In 1990, 35 percent of commercial television stations were classified as 

“independent,” i.e., not affiliated with a broadcast network.26 One important 

development of the past decade has been the entry of several new broadcast 

networks—UPN, the WB,and Paxson in particular—so the number of independent 

stations is far fewer now than it was in 1990. Network entry is discussed in more detail 

later in this chapter.

 

25 Nielsen Media Research, Television Audience 1996 (1997) contains average station per household 

figures for 1990 and 1996

26 Working Paper 26 Table 3, p. 15.
19

Table 7: Television Stations On Air

Total viewing of television has continued to expand over the past ten years, rising 

from 6 hours 53 minutes per household in 1990 to its highest level ever, 7 hours 35 

minutes, in 2000.27 Table 8 shows that cable households watch much more total 

television and much less broadcast television than broadcast-only households.28 

Households that choose to subscribe to cable likely have particularly strong demands 

for video programming. If cable were not available, these households would probably 

have watched more broadcast television than broadcast-only households do. However, 

it is unlikely that differences in viewer tastes for video account for the entire difference. 

The availability of a larger quantity of desirable programming on cable almost surely 

also plays a role. 

Table 8 shows that in 1990-91 broadcast-only households watched 41.6 hours of 

television per week, while cable households watched 54.7 hours per week, of which 

31.9 were of broadcast stations and 22.8 were of cable networks. Thus, cable 

households watched almost ten fewer hours of broadcast programming per week than 

did broadcast-only households. The gap increased to almost 19 hours per week in 

 

27 Neilsen Media Research, cited by the Television Bureau of Advertising at www.tvb.org.

28 The data for table 8 come from Nielsen. Unless otherwise specified, “cable viewing” data includes 

viewing via the other multichannel video program distributors, such as DBS. 

1975 1980 1985 1990 1995 2000

Num be r of Sta tions

 Tota l 953 1,011 1,197 1,442 1,532 1,619

 V HF 609 625 641 672 688 688

 Com m e rcia l 514 516 520 547 562 564

 Educa tion a l 9 5 109 121 125 126 124

 UHF 344 386 556 770 844 931

 Com m e rcia l 192 218 363 545 599 684

 Educa tion a l 152 168 193 225 245 247

 Tota l Com m e rcia l 706 734 883 1,092 1,161 1,248

 Tota l Educa tiona l 247 277 314 350 371 371

% Ch a nge Ove r 5 Ye a rs

 Tota l 6.1% 18.4% 20.5% 6.2% 5.7%

 V HF 2.6% 2.6% 4.8% 2.4% 0.0%

 Com m e rcia l 0.4% 0.8% 5.2% 2.7% 0.4%

 Educa tion a l 14.7% 11.0% 3.3% 0.8% -1.6%

 UHF 12.2% 44.0% 38.5% 9.6% 10.3%

 Com m e rcia l 13.5% 66.5% 50.1% 9.9% 14.2%

 Educa tion a l 10.5% 14.9% 16.6% 8.9% 0.8%

 Tota l Com m e rcia l 4.0% 20.3% 23.7% 6.3% 7.5%

 Tota l Educa tiona l 12.1% 13.4% 11.5% 6.0% 0.0%

 SO URCE: W arren Com m unications News , Television and Cable Factbook , 2001 ed.
20

2000-01. Moreover, the average cable subscriber reduced broadcast programming 

viewing by five hours per week between 1991 and 2001.

Table 8: TV Viewing by Cable and Non-Cable Households, 1990-91 and 2000-01 

(hours/week)

Table 9 chronicles trends in all-day viewing shares in total, cable, and non-cable 

households.29 By 2001 cable accounted for close to half of all-day viewing over all 

television households. In cable households, its share was 57.4 percent. The table 9 

figures make it clear that cable has cut substantially into the broadcast audience. The 

cable viewing share, measured across all television households, rose from 25.7 percent 

in 1990 to 46.6 percent in 2000. The cable share grew by 90 percent (13.5 to 25.7) 

from 1985 to 1990, 28 percent from 1990 to 1995, and 41 percent from 1995 to 2000. 

 

29 Viewing shares in this report are presented based on the sum of household delivery. Taking account of 

multiset viewing, the figures are percentages of total viewing and sum to 100 percent.

1990-91 2000-01 Broadc as t- Only Hous eholds Cable Hous eholds Difference B roadcast- O nly Hous eholds Cable Households Differenc e Tota l TV V ie w ing 41.6 54.7 13.1 45.3 63.0 17.7

 Tota l Broa dca st 41.6 31.9 -9.7 45.3 26.8 -18.5

 Ne tw o rk Affilia te s* 29.4 2 4 -5.4 29.4 20.8 -8.6

 Inde pe nde nts** 10.3 8.1 -2.2 12.9 4.7 -8.2

 P BS 1.9 1.3 -0.6 3.0 1.3 -1.7

 Tota l Ca ble -- 22.8 -- 36.2

 Ad-Su pporte d -- 18.2 -- 29.8

 P re m ium P a y -- 4.6 -- 4.0

 All Othe r Ca ble *** -- -- -- 2.4

 S ourc e: Cabletelevision A dvertis ing Bureau,Cable TV Fac ts 1992 ed., p. 6 and 2002 ed. p. 41. Notes : * Network affiliates A B C/CB S/NB C in 1990-91 and A B C/CB S/NB C/FOX in 2000-01. ** W B /UPN/P AX affiliates and independents . ***This category was not listed separately in 1990-91. It inc ludes cable network s neither ad- s upported nor prem ium pay , e.g., pay per view, home s hopping.
21

Table 9: All Day Viewing Shares, Cable and Non-Cable Households A ll Households Cable Hous eholds Non-Cable Households 1984/85 1989/90 1994/95 1999/00 2000/01 1984/85 1989/90 1994/95 1999/20002000/01 1984/85 1989/90 1994/95 1999/00 2000/01 Network Affiliates 63.5 52.4 53.2 39.9 37.4 52.8 43.0 44.1 35.2 33.1 74.3 70.7 77.2 66.7 64.9

Independents 20.2 19.0 11.0 10.7 10.2 19.8 15.0 8.1 7.8 7.4 21.9 24.2 17.8 27.0 28.4

 Loc al 14.4 13.3 n a n a n a 11.3 9.3 n a n a n a 18.1 22.2 n a n a n a

 Dis tant and Supers tations 5.8 5.7 n a n a n a 8.5 5.6 n a n a n a 3.8 2.0 n a n a n a Public 2.9 2.9 2.8 2.8 2.7 2.8 2.8 2.7 2.1 2.1 3.8 5.1 5.0 6.3 6.7 Cable 13.5 25.7 33.0 46.6 49.7 24.5 39.3 45.0 54.9 57.4 - - - - - - - - - -

 Bas ic 7.7 20.0 27.5 38.1 41.1 14.2 29.9 37.8 44.9 47.3 - - - - - - - - - -

 Pay 5.8 5.7 5.5 5.5 5.4 10.4 9.3 7.2 6.4 6.2 - - - - - - - - - -

 Other 0.0 0.0 0.0 3.0 3.2 0.0 0.0 0.0 3.6 3.8 - - - - - - - - - - Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 S ourc es : Cabletelevis ion Advertising B ureau, Inc.; Cable TV Facts , 1986, 1991, 1996, 2001, and 2002 eds . Notes : A ffiliates inc ludes A BC, CB S, and NB C in all y ears and Fox s tarting with 1994/95. W B/UP N/PA X affiliates are inc luded under "independents." W TB S is inc luded under "Bas ic Cable" in all years exc ept 1984/85. In 1999/00 and 2000/01, the source breaks out "All Other Cable," which inc ludes c able networks "that are neither ad-s upported nor prem ium pay ," such as home s hopping or pay -per-view. For 1984/85 and 1989/90, the s ourc e divides the "Independent" c ategory into loc al, dis tant, and supers tations . S om e non- c able hous eholds rec eive dis tant s ignals via s atellite. S hares are normaliz ed to s um to 100 (totals originally exc eeded 100 due to m ulti-s et us e).
22

A similar pattern of broadcast share erosion is present in the prime time daypart, 

as illustrated by Table 10. For example, the cable share rose from 20 percent in 1990 

to 43.1 percent in 2000. This trend has apparently continued with cable achieving a 54 

percent primetime share in June 2002 and a cable trade association reporting that, over 

the 2001-02 season, advertiser-supported cable achieved higher primetime ratings than 

did the seven major commercial broadcast networks.30

An increase in the cable viewing share can be driven by at least two factors—

increased viewing of cable programming within existing cable households and an 

increase in the share of television households that subscribe to cable. As table 24 in 

chapter VI indicates, total MVPD subscribership has increased substantially since 1990. 

The increase in the second half of the decade due to the advent of DBS is particularly 

notable. With regard to the future, 86 percent of US television households now 

subscribe to an MVPD, mostly cable or DBS.31 While DBS is still growing, at least some 

of its subscribers come from cable. There is not nearly as much room for MVPD growth 

as there used to be, and some of the current non-subscribers may be people with a 

limited taste for video. Thus, further MVPD subscriber expansion is probably not going 

to be a substantial source of increased cable viewing shares. 

Table 8 shows, however, that cable subscribers have been increasing their 

viewing of cable programming, from 22.8 hours per week in 1991 to 36.2 hours in 2001. 

One could speculate that this increase was driven in part by expansion in the range of 

cable programming available, a consequence of increases in cable channel capacity 

and in the number of cable networks from which cable operators (and subscribers) can 

choose. To the extent that channel capacity and programming availability continue to 

grow, then broadcast shares are likely to continue to fall.

 

30 See “Editorial: Networks need to get serious about summer.” Electronic Media, July 22, 2002, p. 10. 

See also “A TV First: Ad-supported Cable Wins Primetime Viewership Race for Entire 2001/2002 

Season,” available at www.cabletvadbureau.com; visited Sept. 29, 2002.

31 2001 MVPD Competition Report, 17 FCC Rcd 1244 (2002), 
23

Table 10: Prime Time Viewing Shares by Channel Type

Notwithstanding the decline in broadcast viewing shares over time, advertising 

revenues have not dropped proportionately. Table 11 compares broadcast and cable 

shares of total video advertising revenues with broadcast and cable shares of all-day 

viewing of advertiser-supported programming.32 The universe of viewing for this table 

consists of advertiser-supported cable programming and programming of commercial 

broadcast stations. Pay cable and public television are not included.33 The last row of 

the table shows the cable advertising share as a percentage of the cable viewing share. 

If cable and broadcast advertising were perfect substitutes, one would expect the ratio 

to be equal to one (although the converse is not true). The fact that cable’s revenue 

share is lower than its viewing share suggests that advertisers, overall, value broadcast 

exposures more highly than cable exposures. The fact that the ratio is rising toward 

one suggests that cable advertising is becoming a closer substitute for broadcast 

advertising and that cable is likely to make further inroads into the broadcast advertising 

share. 

 

32 The comparison could not be done for prime time due to the lack of data on total cable and broadcast 

advertising revenues for the prime time daypart.

33 In 2000 and 2001, Nielsen separated out “all other cable” from pay and basic. This is not included in 

the universe of advertiser-supported programming. See notes to table 11.

1984/85 1989/90 1994/95 1999/00 2000/01

Network 

Affiliates 69.2 57.3 58.4 50.9 49.6

Independents 15.0 19.1 9.7 3.4 3.5

Public 3.7 3.6 3.5 2.6 2.6

Basic Cable 6.5 14.5 23.9 35.3 36.5

Pay Cable 5.6 5.5 4.4 5.2 5.2

All O ther 

Cable 0.0 0.0 0.0 2.6 2.6

Com mercial 

Broadcast 84.1 76.4 68.1 54.3 53.0

S ource: Neilsen Galaxy E xplorer.

Notes: S hares are norm alized to 100 to account for 

m ultiset usage. A ffiliates are B ig 4 up to 1994/95; seven 

afterwards. "A ll Other Cable" is cable networks neither 

ad-supported nor premium pay, e.g., pay-per-view, hom e 

shopping.
24

Table 11: Comparison of Cable Television Share of Total Video Advertising 

Revenues and Cable Television All-Day Viewing Shares

The obvious question is why broadcast advertising is, overall, so much more 

attractive to advertisers. The general consensus of advertising, broadcast, and cable 

industry personnel consulted is that the broadcast audience is more valuable because 

1984 1985 1990 1995 2000 2001 Tota l V ide o Adve rtising Re ve nue s ($ m illions) 20,043 21,287 29,247 38,886 60,257 54,423 Broadc as t ($m illions ) 19,310 20,298 26,616 32,720 44,802 38,887 Cable ($ m illions) 733 989 2,631 6,166 15,455 15,536 Broadc as t S hare (% ) 96.3 95.4 91.0 84.1 74.4 71.5 Cable Share (% ) 3.7 4.6 9.0 15.9 25.6 28.5 Broadc as t S hare of A ll- day Viewing of A d- Supported P rogramm ing (% ) 90.72 91.58 78.13 70.00 57.04 53.70 Cable Share of All-day Viewing of A d-s upported Program m ing(% ) 9.28 8.42 21.88 30.00 42.96 46.30 Ca b le Ad ve rtising Sha re a s a Pe rce nta ge of Ca ble V ie w ing Sha re 39.4 55.2 41.1 52.9 59.7 61.7 Sources : Advertis ing data from "Trends in A dvertising V olume," Televis ion Bureau of Advertis ing, available at www.tvb.org/tvfac ts/trends, vis ited June 26,2002. V iewing data 

from Cable TV Fac ts, Cabletelevis ion A dvertis ing Bureau (various years), ex cept 1984 

from Cable Televis ion Developm ents , S eptem ber 1991, National Cable and Telec om m unications A s sociation. Notes: Viewing shares data are based on the s um of US household delivery of advertiser-s upported program m ing; i.e., network and independent broadc as t s tations and advertiser-s upported cable, and so s um to 100. For 2000 and 2001, the s ourc e separates out "all other c able," which inc ludes channels neither ad-s upported nor prem ium pay (e.g., hom e shopping channels and pay-per view). This c ategory is not 

inc luded in the c alc ulations in this table. To the ex tent that viewing of this nature was 

inc luded in bas ic c able in earlier y ears , the c able viewing shares of ad supported program m ing are biased upward and the c able ad shares as a perc entage of c able viewing s hares are bias ed downward. V iewing s hares data are for a viewing y ear, not a calendar y ear (i.e., year 2000 data are for the viewing y ear beginning in Fall 1999). 
25

of its greater size and national reach. It would be possible in principle to put together a 

national audience via a purchase of time on multiple cable networks, but the audience 

would not necessarily be unduplicated. The same person might see the advertisement 

on more than one network. Also, the transactions costs of negotiating with multiple 

cable networks are higher than those of dealing with a single broadcast network. 

Table 12 provides historical data on prime time household delivery (i.e., the 

number of households viewing particular categories of stations) for broadcast and cable 

outlets. When considering the data in table 12 it is important to keep in mind that the 

definition of “network affiliate” changed with the 1999-00 season, moving from affiliates 

of the four commercial networks (ABC, CBS, NBC, FOX) to affiliates of seven 

commercial networks (the four plus UPN, WB, and Paxton). Hence the most 

meaningful comparison is probably of total commercial broadcast households delivered 

over time with basic and total cable households delivered over time. Commercial 

broadcast household delivery has dropped steadily since 1985, except for a small rise in 

2001. Cable household delivery has risen steadily over the years. However the 

increase in cable household delivery has been accompanied by a massive rise in the 

number of cable networks. As suggested above, the efficiency and value of an 

advertising buy is a function of the size of the audience on the individual network on 

which an advertisement is being purchased. No one buys “all cable households.”

Table 12: Primetime Household Delivery (in thousands)

For this reason, it is instructive to examine households delivered on a per 

network basis. The four major commercial networks (ABC, CBS, NBC, and FOX) 

delivered 42,366,000 primetime households during the 1989-90 season and 32,761,000 

primetime households during the 1999-00 season. The average number of households 

delivered per network was 10.6 million in the earlier year and 8.2 million in the later 

year. During the 1999-00 season, UPN delivered an average of 2.7 million households 

N etw o rk A ffilia te sIn de p. S ta tio n s P ub lic S tation s C om m . B roa dc a st Tota l B roa d ca st Tota l B a s ic Ca b le P ay C ab le A ll O th er C ab le C a ble To tal 19 84 -8 5 3 8,0 3 5.2 8 ,23 5 .3 2 ,20 7 .4 46 ,27 0 .5 4 8, 47 7.9 3 ,0 56 .4 3 ,39 6 .0 6 ,45 2. 4

19 89 -9 0 3 3,6 1 6.5 1 0 ,95 9 .9 2 ,02 6 .2 44 ,57 6 .4 4 6, 60 2.6 8 ,2 89 .0 3 ,31 5 .6 1 1 ,60 4. 6

19 94 -9 5 3 6,7 2 9.0 6 ,20 1 .0 2 ,09 8 .8 42 ,93 0 .0 4 5, 02 8.8 15 ,1 68 .6 3 ,05 2 .8 1 8 ,22 1. 4

19 99 -0 0 3 4,7 7 6.0 2 ,11 6 .8 2 ,01 6 .0 36 ,89 2 .8 3 8, 90 8.8 24 ,1 92 .0 3 ,52 8 .0 1 ,9 15 .2 2 9 ,63 5. 2

20 00 -0 1 3 5,1 5 6.8 2 ,45 2 .8 2 ,04 4 .0 37 ,60 9 .6 3 9, 65 3.6 26 ,0 61 .0 3 ,47 4 .8 2 ,0 44 .0 3 1 ,57 9. 8 S ou rc e:C a lc ula ted from N ie ls e n G a lax y E x plo rer ra ting s da ta an d ho us e ho ld s /ratin g p o in t 

from B ea r S tea rn s, Te le vis io n B ro ad c as ting : B roa d ca st Te le vis io n F ac tb oo k , M a y 20 0 2, p . 1 22 . N ote : U p to 1 9 98 -99 a ffiliate s are b ig 4; afterw a rds inc lu d es W B , U P N, P a x. Up to 19 9 8- 9 9, p a y-p e r-view is in ba s ic ; afte rwa rd s, p a y-p e r-vie w a n d p ay a ud io a re in "a ll o th er c a ble." N etw o rk a ffiliate s fig ure fo r 1 99 8 -99 , th e la st y e ar in wh ic h on ly th e big fo ur n e two rk s w e re 

inc lu d ed , is 3 1, 50 9.8 .
26

in prime time and the WB delivered an average of 2.6 million households34 During the 

year 2000, the four cable networks with the largest audiences were USA, TBS, Lifetime, 

and Nick at Nite. 35 The average number of households delivered per network was 1.4 

million (for the full sample of 33 networks it was 0.6 million). In 1990, the four largest 

were USA, TBS, ESPN, and CNN, with an average number of households delivered per 

network of 1.1 million (for the full sample of 15 networks it was 0.5 million). 

Thus, in 1990, the major broadcast networks delivered audiences on average 

nine times as big as those for the largest cable networks. In 2000 the broadcast 

audience averaged 5.6 times the size of the cable audience on a per network basis. 

Even the new broadcast networks UPN and WB delivered audiences almost twice as 

big as the largest cable networks and four times as large as the average cable network. 

Although this scenario is based on prime time household delivery, it is illustrative of the 

conditions that keep broadcast advertising revenues disproportionately large relative to 

overall broadcast viewing shares. At the same time, the fact that the gap in broadcast 

and cable network prime time audience size is narrowing suggests once again that 

cable will continue to expand its advertising revenue share at the expense of 

broadcasting.

The preceding discussion utilized comparisons of total households delivered by 

cable and broadcast channels. In fact, advertisers are frequently concerned with 

reaching specific demographic groups and make their purchases accordingly. Although 

a detailed analysis of advertising markets is beyond the scope of this paper, the 

following brief discussion is designed to demonstrate that, even taking demographics 

into account, the broad conclusion regarding the greater value of broadcast network 

advertising exposures remains valid.

Depending on the nature of the product and the particular message, different 

advertisers are interested in reaching different demographic groups with their 

messages. Thus, while some advertisers in some cases might merely purchase 

“tonnage,” and pay for the slots that they buy based on the size of the total audience, 

many if not most “buys”, particularly on the national level, are based on demographics 

such as “Adults 18-49,” “Women 18-34,” or “Men 25-54.” Advertisers are frequently 

interested in other demographic characteristics of the audience, such as income. 

Media Dynamics, Inc. reports advertising “cost per thousand” (“CPM”) estimates 

for the 2000-01 season for various video media, dayparts, and demographic groups.36 

For the big three broadcast networks, the CPM in prime time over all households 

reached is $15.75. However, the price by demographic ranges from $11.35 for “Adults 

18+” to $77.35 for “Men 18-34.” The corresponding figure for “Women 18-34” is $61.50 

 

34

 Nielsen data compiled by Bear Stearns in Bear Stearns Equity Research, Media, Broadcast Television 

Fact Book ; May 2002, p. 122.

35 Paul Kagan Associates, Economics of Basic Cable Networks 2002, p. 61.

36 See Media Dynamics, Inc., TV Dimensions 2001 at 60.
27

and for “Adults 25-54” it is $21.35. The patterns are broadly similar in other dayparts 

and for the “spot” advertising rates that television stations receive.37

Turning to a comparison of broadcast and cable CPMs, data are available in 

prime time for three different categories of cable network: “youth,” “mass,” and 

“upscale.” The all households CPMs range from $6.75 for mass to $11.15 for upscale, 

compared to the network level of $15.75. The upscale figure for “Men 18-34” is $86.15, 

even higher than the comparable figure for broadcast networks, illustrating the value of 

the relatively homogeneous demographics that some cable networks can deliver. 

Nevertheless, in general, cable advertisements do sell at a significant CPM discount to 

broadcast. A recent analysis of 2001-02 data from a different source suggests that the 

cable “discount” ranged from 30 to 60 percent, depending on the daypart and the 

demographic target of the cable network. Interestingly enough, the analysis showed 

that the cable discount is apparently slightly larger than it was four years back during 

the 1997-98 season.38

Television Networks

The last ten years have seen substantial changes in the structure of the 

television network business. These changes were to a great extent set off by changes 

in the regulatory environment. The major event was the repeal of the Commission’s 

syndication and financial interest (“fin syn”) rules, but the relaxation of the dual-network 

rule also played a role.39 The fin syn rules essentially prohibited television networks 

from owning any of their prime time entertainment programming. The dual network rule 

prohibited any company from owning more than one television network. The current 

version of the rule merely prohibits the big four commercial networks from merging with 

each other.

As television networks increased the amount of programming produced “inhouse,” the movie studios, which had produced most prime time programming, 

apparently began to fear that it would become more difficult for them to find outlets for 

their programming. It is likely that the desire to ensure the availability of a distribution 

outlet for their programming provided at least some of the motivation for the studios 

Viacom and Warner Brothers to launch the UPN and WB networks, respectively. This 

factor may also have played a role in the decision by Disney to purchase ABC and 

 

37 Data are available for spot rates received by affiliates of the big three networks. For all households, the 

average CPM is $17.45. Id. The rate is slightly higher than the network rate of $15.75. This is likely a 

reflection of the fact that most network advertising is bought in bulk during the “upfront” market and also 

the lower transactions costs associated with purchasing national exposure via a single transaction as 

opposed to assembling coverage from multiple sources in the spot market.

38 John M. Higgins and Allison Romano, “Cheaper by the thousand.” Broadcasting and Cable Feb. 4, 

2002, at 20-28.

39

 See Report and Order in MM Docket No. 95-39 (Review of the Syndication and Financial Interest 

Rules), 10FCC Rcd 12165 (1995) and Report and Order in MM Docket No. 00-108 (Amendment of 

Section 73.658(g) of t he Commission’s Rules – The Dual Network

Rule), 16 FCC Rcd 11114 (2001).
28

Viacom to purchase CBS. Even if one were to concede that the motivation to launch 

UPN and WB was primarily defensive, it is still true that well over 200 television stations 

found it advantageous to affiliate with these networks, suggesting that networking 

remains a valuable program distribution technique. The emergence of the smaller “Pax” 

network is also consistent with this. The repeal of the dual network rule permitted 

Viacom to purchase UPN alongside CBS and for NBC to acquire the Spanish language 

network Telemundo.

Notwithstanding the entry into television networking, the business is currently not 

particularly profitable. Precise data are not publicly available, but most observers 

suggest that, in the aggregate, the networks are losing money. 40 It is certainly true that 

their revenues have been growing only very slowly. Table 5 shows that, in real terms, 

network advertising revenues grew at an average annual rate of 2.1 percent from 1990-

2000. The large and increasing share of network video advertising accounted for by 

cable networks suggests that broadcast networks are feeling significant competitive 

pressure. In addition, it appears that programming costs have been rising.

The networks have adopted various measures to respond to the competitive 

environment and cost pressures that they face. On the revenue side, they have been 

able to raise prices (costs per thousand) fairly steadily. Primetime broadcast network 

CPMs have risen from $9.74 in 1990 to $13.42 in 2000, an average annual growth rate 

of 3.8 percent.41 They have also been able to increase the quantity of advertising 

availabilities for sale by adding more commercial minutes per hour. An advertising 

industry compilation indicates that the big four commercial networks increased hourly 

commercial minutes by 16.4 percent from 1991 to 2000, from an average of seven 

minutes and 47 seconds to an average of nine minutes and three seconds.42 Many 

observers doubt that it will be possible to increase further the number of commercial 

minutes per hour on network television. Too many advertising interruptions could 

reduce viewer willingness to watch network programming and too much advertising 

clutter could reduce advertiser willingness to pay for network advertising exposures.

On the cost side, different networks have adopted a variety of approaches to 

containment. NBC has reduced the amount of expensive sports programming in its 

schedule. Several networks have increased the amount of news magazine type 

programming and reality programming in their schedules.43 Various networks have 

 

40 See Bear Stearns Diversified Entertainment Equity Research, Media, Diversified Entertainment, We 

Are Family, May 2002, p. 5 (stating that the big three commercial networks were marginally profitable in 

the 1980’s and that in 2002 the six major commercial networks, taken together, will lose money). 

41

 “Network Television Cost and CPM Trends,” in Trends in Media, Television Bureau of Advertising, at 

www.tvb.org/tvfacts/index.html, visited Aug. 13, 2002. The 2000 figure includes seven networks—ABC, 

CBS, NBC, Fox, UPN, WB, and Pax.

42 Bear Stearns, Broadcasting/TV&Radio, Equity Research Media, November 2001, p. 23.

43 Reality programming has lower production cost than scripted series, so adding reality programming to 

the regular season lineup cuts production costs. On the other hand, to the extent reality programming is 

introduced during the summer, replacing reruns, then it does not actually result in lower programming 

costs. Reality programming is unlikely to represent a long term solution to the cost pressures networks 

face.
29

resorted to “repurposing” programming. Repurposing generally refers to exhibiting a 

program on cable very shortly after it runs on broadcast, say within the same week. 

Chapter X provides a more detailed look at network programming strategies.

As the next section of this chapter shows, profit margins remain high for a large 

segment of the television station business. Network programming is, of course, a major 

input into the service that stations provide, and they presumably value it highly. Hence 

it is possible that some of the revenue problems of the networks will be solved via 

evolution in the relationship between networks and affiliates.44 Currently most 

networks pay some “network compensation” to affiliates. In 2000, network 

compensation accounted for 4.3 percent of net revenues on average of affiliates of 

ABC, CBS, and NBC.45 Interestingly enough, the reported figure for Fox is -1.4 

percent. This underlines the possibility that, to finance network programming in the 

future, affiliates may need to contribute directly to the networks. This could happen via 

direct payments or a change in the division of advertising availabilities within and 

adjacent to network programs, some of which are now assigned to affiliates.46

An additional possibility for networks and stations, for that matter, is to secure a 

second revenue stream via cash payments by cable and DBS operators for

retransmission consent. Historically, most broadcasters have opted for (or settled for) 

in-kind compensation from cable operators in exchange for retransmission consent—the 

right to program a channel on the cable system or some cable advertising availabilities. 

In the event that broadcast stations were able at some point to secure cash payments 

for retransmission consent, it would clearly be due in significant measure to the value of 

network-supplied programming, so the network would likely participate in any revenue 

from retransmission consent.

Television Stations

This subsection examines in some detail trends in profitability, cash flow, and 

expenditures for television broadcast stations. It does not examine one key aspect of 

the television station environment—the transition from analog to digital television. That 

subject is addressed in Chapter VIII, the review of technological change. 

As indicated above, the number of television stations has increased by 12.3 

percent from 1990 to 2000. The increase in the number of networks since 1990 means 

that many more stations are now network affiliates than in 1990. Of the 1,248 

commercial television stations in 2000, over 1,000 are affiliated with one of the seven 

 

44 A discussion of a pending petition for revision of Commission rules governing network-affiliate relations 

is beyond the scope of this paper.

45 National Association of Broadcasters, Television Financial Report, 2001 edition, p. 34.

46 Some have argued that the way for network companies to become more profitable is to buy additional 

stations with high profit margins. While this could raise the profitability of the resulting combination, it is 

not clear that purchase of a station is required in order to effect a change in the revenue split between 

stations and networks.
30

largest commercial networks.47 In addition to the increase in the number of networks 

since 1990, the Commission’s recently-relaxed television duopoly rules are likely to 

affect the profitability of stations that become parts of duopolies, but it is too early to 

assess that effect quantitatively.

48

The year 2001 was a difficult one for television stations and the decline in 

advertising revenues during that year had a significant negative impact on their financial 

situation. As argued in chapter III, however, the industry is expected to recover from 

this year. Rather than emphasizing this one year excessively in the present analysis, 

the approach is to examine longer term trends. The review of television station 

profitability herein draws on the aggregate advertising revenue data cited in chapter III 

and data from the National Association of Broadcasters Television Financial Reports. 

The Television Financial Reports provide a wealth of data on television stations, based 

on a survey, and aggregated into various categories. This paper uses the data 

extensively, but it has certain limitations with respect to various reported performance 

ratios.49

Table 13 contains data on total television station advertising revenues (national 

spot plus local spot) and also on total broadcasting advertising revenues per 

commercial station in current and constant dollars. It is important to look at both 

because network programming is an input, a crucial input, into the service distributed by 

television stations to viewers. From 1990-2000 the average annual growth rate of both 

categories of current dollar revenue was in the neighborhood of 4.5 percent, while in 

constant dollars it was around one percent. A revenue growth rate of one percent in 

constant dollars does not appear too favorable, but it is still higher than the 1980-1990 

average annual growth rate, which was actually negative for total broadcast advertising 

revenue per station during this period. This may be due in part to the fact that the 

number of commercial stations increased by 49 percent from 1980-1990 and only 14 

percent from 1990-2000.

Tables 14 and 15 provide data for 2000 and 1990, respectively, on average net 

revenues, expenses, profits, and cash flow of commercial television stations by market 

size. In 2000, both profits and cash flow data are positive in every category and quite 

robust particularly for the larger markets. Dollar values of profits and cash flow are 

reported in addition to their percentages of net revenue because the data on which the 

 

47 According to network company staff, the big four commercial networks have anywhere from 176 to 213 

affiliates. The others have smaller numbers of affiliates.

48 See Broadcasting and Cable, January 21, 2002, p. 60, for a list of duopoly combinations.

49 The Television Financial Report provides average figures for a variety of measures. It also provides 

various performance ratios, which are calculated by first averaging the numerator values, then averaging 

the denominator values, and the calculating the quotient. The problem with this procedure is best 

illustrated by an example. Suppose that two stations had ratios of profit to net revenues of one-fourth 

and one-sixth, respectively. The average profit to net revenue ratio for the two is 5/24. However, the 

financial report calculation procedure is to average the numerators and denominators and then divide, 

yielding an estimate of 1/5.
31

calculations are based do not permit precise calculations of margins.50 In 1990, the 

cash flows are positive in every category. It appears that cash flow margins for the 

average station have increased over the past decade. The 1990 profit figures are 

negative in four of the smaller market size categories; in every category but one, profits 

and profit margins are up in 2000 over 1990.

In addition to averages, the Television Financial Report also provides 25th

percentile data for all of the categories cited in tables 14 and 15. For 2000 every market 

size category showed positive cash flow, while the pre-tax profit levels were mostly 

negative but small in magnitude. For 1990, all but one market category had positive 

cash flow and all but one had negative pre-tax profits. While caution should be used in 

drawing inferences from these data, it does appear that, even among the less profitable 

stations, the situation probably did not deteriorate since 1990.51

Station revenues are predominantly from advertising, but some network affiliates 

receive “network compensation” payments from the parent network. In 2000 these 

payments averaged 3.2 percent of net revenues for big three affiliate stations.52 

Network compensation looms larger for stations in the smaller markets, as illustrated by 

the fact that the average in 2000 was 2.4 percent for the top 25 markets and 6.3 percent 

for markets outside the top 100. In 1990, the average level of compensation for big 

three affiliates was 5.1 percent of net revenues, so this category of revenue has 

declined.

 

50

 The National Association of Broadcasters Television Financial Report provides average figures for 

profits, cash flow, net revenues, etc. for each station category. Dividing, for example, the average cash 

flow figure by the average net revenue figure, gives a result that is different from what would be obtained 

if the quotient were first calculated for each station and then averaged. This does not, of course, affect 

the sign of the calculated percentages, and the magnitudes are roughly correct. See note 49, supra.

51 See National Association of Broadcasters, Television Financial Report, 1991 and 2001 eds. The 25th

percentile figure is the one that has 75 percent of the observations in the sample above it. It is, of course, 

true that the identity of stations in the “bottom quarter” may have changed from 1990 to 2000.

52 National Association of Broadcasters, Television Financial Report, 1991 and 2001 eds.
32

Table 13: Average Revenue per Television Station Based on Aggregate Data, 

Current and Constant Dollars 

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

Table 16 provides profits as a percentage of net revenues for affiliate and 

independent stations over the 1975-2000 period and compares the figures with 

comparable data for the 500 largest industrial corporations. The data show that 

margins for big three network affiliates have risen slightly over the past 25 years and 

compare very favorably to margins for the largest corporations. Historically, 

independent station margins have been lower than those for network affiliates, but still 

above the largest corporation level. The year 2000 figure for independents is probably 

not too significant, since by 2000 most stations were affiliates of one network or 

another. The relatively high year 2000 margins of ABC compared to NBC probably do 

T e le v isio n 

S ta tio n 

A d ve rtisin g 

V o l u m e

B ro a d ca st 

A d ve rtisin g 

R e ve n u e

T o ta l 

Co m m e rcia l 

T e le v isio n 

S ta tio n s

T V S ta tio n 

A d v e rtisin g 

R e v e n u e 

p e r S ta tio n 

in Cu rre n t 

D o lla rs

Bro a d c a st 

Ad v e rtisin g 

Re v e n u e 

P e r S ta tio n 

in C u rre n t 

Do lla rs

T e le v isio n 

S ta tio n 

A d v e rtisin g 

Re v e n u e 

p e r S ta tio n 

in Co n sta n t 

Do l la rs

B ro a d c a st 

A d v e rti sin g 

R e v e n u e 

p e r S ta tio n 

in Co n sta n t 

Do lla rs

1 97 5 2 ,9 57 5,2 6 3 70 6 4 .2 7 .5 7 .8 13 .9

1 98 0 6 ,2 36 1 1,4 1 6 73 4 8 .5 15 .6 10 .3 18 .9

1 98 5 11 ,7 18 2 0,2 9 8 88 3 13 .3 23 .0 12 .3 21 .4

1 99 0 15 ,6 44 2 6,6 1 6 1 09 2 14 .3 24 .4 11 .0 18 .6

1 99 1 14 ,6 75 2 5,4 6 1 1 09 8 13 .4 23 .2 9 .8 17 .0

1 99 2 15 ,6 30 2 7,2 4 9 1 11 8 14 .0 24 .4 10 .0 17 .4

1 99 3 16 ,2 35 2 8,0 2 0 1 13 8 14 .3 24 .6 9 .9 17 .0

1 99 4 18 ,4 57 3 1,1 3 3 1 14 5 16 .1 27 .2 10 .9 18 .3

1 99 5 19 ,1 04 3 2,7 2 0 1 16 1 16 .5 28 .2 10 .8 18 .5

1 99 6 20 ,7 47 3 6,0 4 6 1 17 4 17 .7 30 .7 11 .3 19 .6

1 99 7 21 ,4 35 3 6,8 9 3 1 20 5 17 .8 30 .6 11 .1 19 .1

1 99 8 22 ,8 28 3 9,1 7 3 1 20 4 19 .0 32 .5 11 .6 20 .0

1 99 9 23 ,3 60 4 0,0 1 1 1 21 6 19 .2 32 .9 11 .5 19 .8

2 00 0 25 ,8 06 4 4,8 0 2 1 24 8 20 .7 35 .9 12 .0 20 .8

2 00 1 21 ,4 79 3 8,8 8 7 1 30 2 16 .5 29 .9 9 .3 16 .9

A verag e 

A n nu a l 

G row th R ate 

19 80 -1 99 0 6 .8 6% 5.6 7 % 0.6 3% -0 .1 2%

A verag e 

A n nu a l 

G row th R ate 

19 90 -2 00 0 4 .4 3% 4.7 3 % 0.9 6% 1 .1 8%

S o u rce s : Ta b le s 3 , 4 , 5
33

not reflect the current realities, given the relatively strong performance of the NBC 

network and the relatively weak current performance of the ABC network. The negative 

profits for the Paxson affiliates are unlikely to prompt the owners of those stations to 

turn in their licenses. The owner of some of those stations has estimated that the 

channel 60-69 spectrum band in which many of them are located will bring as much as 

$30-36 billion at auction.53

Table 14: Average Revenues, Expenses, Pre-tax Profits, and Cash Flow of 

Commercial Television Stations, 2000

 

53 See “Bud Paxson leads deal to clear analog channels for wireless use.” Electronic MediaU, Feb. 26, 

2001, p. 32.

M a rk e t Ra n k Av e ra g e N e t Re ve n u e ($ M illio n ) A v e ra g e E x p e n se s ($ M ill io n ) A v e ra g e P re -T a x P ro fit

($ M illio n ) P ro fit a s % o f N e t R e ve n u e A ve ra g e Ca sh F lo w ($ M illio n ) Ca sh F lo w a s % o f N e t R e ve n u e

1-1 0 6 0 .2 32 .3 27 .8 46 .2 % 33 .5 55 .6 %

11 -2 0 3 4 .6 23 .4 11 .3 32 .7 % 15 .5 44 .8 %

21 -3 0 2 7 .0 20 .4 6 .5 24 .1 % 10 .8 40 .0 %

31 -4 0 1 9 .0 15 .5 3 .5 18 .4 % 7 .3 38 .4 %

41 -5 0 1 4 .0 12 .7 1 .3 9 .3 % 4 .9 35 .0 %

51 -6 0 1 3 .7 10 .2 3 .5 25 .5 % 5 .9 43 .1 %

61 -7 0 1 1 .0 8 .8 2 .2 20 .0 % 4 .5 40 .9 %

71 -8 0 9 .7 9 .5 0 .2 2 .1 % 3 .0 30 .9 %

81 -9 0 1 0 .8 8 .7 2 .0 18 .5 % 4 .1 38 .0 %

91 -1 00 9 .4 8 .7 0 .7 7 .4 % 3 .2 34 .0 %

10 1-11 0 7 .8 6 .8 1 .0 12 .8 % 3 .0 38 .5 %

11 1-12 0 6 .8 6 .4 0 .4 5 .9 % 2 .1 30 .9 %

12 1-13 0 6 .8 6 .2 0 .6 8 .8 % 2 .1 30 .9 %

13 1-15 0 5 .7 5 .1 0 .6 10 .5 % 1 .9 33 .3 %

15 1-17 5 5 .3 4 .6 0 .7 13 .2 % 1 .9 35 .8 %

17 6+ 4 .0 3 .4 0 .7 17 .5 % 1 .5 37 .5 %

 S o u rce : N atio na l A s so c ia tio n of B roa dc a ste rs , Te levis ion F ina nc ial Re p ort, 20 01 e d., pp . 2 - 33 . No te : In 1 99 0 the R ep ort in clu de d de prec ia tion , a m o rtiza tio n , an d in te res t in to ta l e xp e ns e s, bu t in 2 0 00 it did n o t. F o r co n sist en cy , th e tota l ex pe n se fig ure s he re in ha ve b e en ad jus te d 

to in clud e the s e c a teg o rie s in tota l ex p en se s . He n ce , p re-t ax profit e q ua ls n et reven u e les s ex p en se s , wh ile ca s h flow eq u als ne t re ve nu e le s s e xp e ns e s o th er th a n d e pre cia tio n , am o rtiz a tio n, an d in tere s t.
34

Table 15: Average Revenues, Expenses, Pre-tax Profits, and Cash Flow of 

Commercial Television Stations, 1990

Table 16: Average Profits of Commercial TV Stations as a Percentage of Net 

Revenues, 1975-2000

Table 17 uses the NAB Television Financial Report data to calculate average 

television station net revenues in constant dollars and should be reviewed in 

Ye a r Affilia te s* ABC CB S NB C Fox U P N W B P a x

In d e p . S ta tio n s

50 0 L a rg e st 

In d u stria l C o rp o ra tio n s

19 75 2 6 .2% 8 .1%

19 80 2 9 .1% 1 7 .1% 4.5 %

19 85 2 9 .9% 1 3 .3% 3.9 %

19 90 2 2 .6% 6 .4% 4.1 %

19 95 2 9 .8% 29 .1 % 2 4.5 % 34 .8% 2 5 .9% 2 1 .8%

20 00 3 0 .2% 38 .0 % 2 3.7 % 25 .2% 5 .6% 21 .8 % 2 7. 5% -1 54 .0 % 4 2 .3% 6.8 %

 S OU R C E S : 1 9 75 an d 1 98 0, FC C , P ub lic N o tice , "TV B ro ad ca s t Fin a ncia l D a ta ," Aug u s t 2 , 1 97 6 a nd Au gu s t 10 , 19 8 1; o the r ye ars , N atio n al As s o ciatio n o f B ro ad ca s ters , Tele vis ion Fina n cia l R ep o rt, 1 99 1 , 19 9 6, a n d 20 0 1 ed s .; 50 0 larg e s t c orp or atio ns , 1 97 5 a nd 19 8 0, S ta tis tica l Abs tract o f the U n ite d S ta tes : 1 99 0 (1 10 th ed .), p. 5 42 . Fo r 19 9 8, S ta tis tical Ab s trac t of th e U n ite d S tates : 1 99 8 (1 18 th ed .), p. 5 6 4. For 20 0 0, Fo rtu ne , Apr il 1 6, 20 01 , p . F-1 9 . N o te: * AB C /C B S /N B C a ffiliate s on ly.

M a rk e t Ra n k A v e ra g e Ne t R e v e n u e ($ M illio n ) A ve ra g e Ex p e n se s ($ M illio n ) A ve ra g e P re -T a x P ro fit

($ M illio n ) P ro fi t a s % o f N e t R e ve n u e A ve ra g e Ca sh F lo w ($ M illio n ) Ca sh F lo w a s % o f N e t Re ve n u e

1-1 0 5 8 .4 4 1. 8 1 6.6 28 .4 % 20 .1 34 .4 %

11 -2 0 2 7 .3 2 3. 2 4.2 15 .4 % 7 .2 26 .4 %

21 -3 0 2 2 .4 1 8. 7 3.7 16 .5 % 7 .2 32 .1 %

31 -4 0 1 4 .6 1 3. 4 1.2 8 .2 % 4 .5 30 .8 %

41 -5 0 1 1 .3 1 0. 4 0.9 8 .0 % 2 .9 25 .7 %

51 -6 0 9 .6 9. 2 0.4 4 .2 % 3 .0 31 .3 %

61 -7 0 8 .5 8. 1 0.4 4 .7 % 2 .5 29 .4 %

71 -8 0 7 .3 6. 9 0.4 5 .5 % 1 .8 24 .7 %

81 -9 0 6 .3 5. 6 0.7 11 .1 % 1 .8 28 .6 %

91 -1 00 7 .0 6. 4 0.5 7 .1 % 2 .0 28 .6 %

10 1-11 0 6 .2 6. 7 -0.6 -9 .7 % 1 .5 24 .2 %

11 1-12 0 4 .8 5. 0 -0.2 -4 .2 % 1 .4 29 .2 %

12 1-13 0 4 .0 4. 4 -0.4 -10 .0 % 1 .1 27 .5 %

13 1-15 0 3 .8 3. 9 -0.1 -2 .6 % 1 .2 31 .6 %

15 1-17 5 3 .6 3. 2 0.4 11 .1 % 1 .2 33 .3 %

17 6+ 2 .8 2. 6 0.2 7 .1 % 0 .9 32 .1 %

 S O U R C E : N a tion al As s o ciatio n o f B ro ad ca s te rs , Te le vis io n Fin an cia l R e po rt, 1 9 91 ed itio n , pp . 1 -16 .
35

comparison with table 13. Table 13 is based on aggregate advertising revenues and 

yields a 2000 figure of $12 million per station in constant dollars. This is certainly the 

same order of magnitude as the 2000 figures from the NAB data, which adds some 

certainty that the picture is roughly correct.54 They confirm that, by and large, station 

revenues in constant dollars have not grown much. The decline in net revenues from 

1995-2000 for independent stations is likely a consequence of the fact that many 

stations that were independents in 1995 had affiliated with one of the new networks by 

2000.

Tables 18 and 19 provide a breakdown of station expenses for several market 

size categories in 2000 and 1990 respectively. The tables show that the share of 

expenses devoted to programming and production has fallen for all size categories but 

the share of expenses devoted to news has increased in all categories. Of course, the 

averages mask increases for some stations and decreases for others. Some stations 

have, in fact, dropped local news service in recent years.55 

News expenditures, of course, vary by station category as well. Thus, in 2000 big 

three affiliates averaged 27.2 percent of expenses for news. The figure for Fox was 

12.5 percent, UPN 7.6 percent, WB 10.1 percent, Pax 0 percent, and 16.8 percent for 

independents. In both years the share of programming in expenses rises with market 

size. This is due to the fact that even network affiliates acquire some syndicated 

programming and this programming is priced based on market size.

 

54 There are, of course, differences in the two data sets. The Table 13 data do not include network 

compensation, but do include gross advertising revenues, including agency commissions, so they

overestimate what is available to stations. The table 17 data include network compensation and do use 

net advertising revenues, but, as the introduction to the 2001 Television Financial Report makes clear (at 

i), several large market NBC and Fox stations that had previously participated in the survey did not do so 

in 2000. This likely explains the precipitous drop in the Fox net revenue figure from 1995 to 2000.

55 See Dan Trigoboff, “The news not out of Topeka,” Broadcasting and Cable, April 22, 2002, p. 12 

(noting that the third-ranked station in Topeka, DMA 138, has dropped local news, as have some stations 

in other markets).
36

Table 17: Average Inflation-Adjusted Net Revenues of Commercial TV Stations, 

1975-2000 (1982-1984 = 100) 19 75 19 8 0 19 8 5 19 9 0 1 99 5 2 00 0 Re v e n u e s ($ M illio n )

 Affilia te s* 6.3 8.0 1 2.1 1 2.1 1 2. 1 1 1 .9

 A BC 1 2. 3 1 4 .5

 C BS 1 1. 3 1 0 .6

 N BC 1 2. 7 1 0 .4

 F o x 1 1. 4 5 .4

 U P N 7 .2

 W B 1 3 .7

 P a x 0 .9

 In d e p e n d e n ts 7.5 9.4 1 2.2 1 2.3 1 2. 7 1 0 .3 % Ch a n g e in R e v e n u e s**

 Affilia te s* 27 .0 % 50 .7 % 0.7 % -0.2 % -2.0 %

 A BC 1 7.7 %

 C BS -5.8 %

 N BC -1 8.6 %

 F o x -5 2.3 %

 U P N

 W B

 P a x

 In d e p e n d e n ts 25 .3 % 30 .0 % 0.8 % 3.4 % -1 9.2 %

 S O U R CE S : 19 7 5 a n d 1 9 80 , F C C, P u blic N otic e, " TV B ro ad c as t F ina nc ial D ata ," A u gu s t 2, 19 76 a nd A ug u st 1 0 , 19 8 1; o th er y e ars , N atio na l A s so c ia tio n of B roa dc a ste rs , Te levis ion F in a nc ia l Re po rt, 1 9 91 , 1 99 6, an d 2 0 01 e ds .; n um b ers infla tion -ad jus te d u sin g B u rea u of La bo r S ta tis tic s "C o ns um e r P ric e In de x fo r all Urb a n C o ns um e rs," a va ila ble at http ://d ata .b ls .g ov/s ervle t/S urve yO u tp utS e rvle t, visite d A u gu s t 9, 2 0 02 . No te s:*A B C /CB S /N B C a ffilia te s o n ly . **P e rc en t c ha n ge ove r previo u s five ye ars.
37

Table 18: Expense Items of Commercial Broadcast Stations by Selected Market 

Size, 2000 (% of Total Expenses)

Market 

Rank Engineering

Programming 

and 

Production News Sales

Advertising 

and 

Promotion

General and 

Administrative

1-10 8.9% 35.1% 23.2% 12.8% 4.8% 15.1%

41-50 8.4% 25.2% 22.7% 16.7% 5.0% 21.9%

91-100 9.2% 23.9% 20.2% 16.9% 4.2% 25.7%

131-150 8.5% 22.5% 20.1% 18.1% 3.6% 27.2%

176+ 10.0% 20.8% 18.6% 18.0% 3.5% 29.0%

 

Source: National Association of Broadcasters, 

Television Financial Report, 2001

Table 19: Expense Items of Commercial Broadcast Stations by Selected Market 

Size, 1990 (% of Total Expenses)

Table 20 examines more closely station programming expenses over time for 

affiliates (ABC, CBS, and NBC only) and independents. For both categories of station, 

the share of news in expenses has risen steadily. The “other” category is a residual, 

calculated by subtracting broadcast rights, news, and music licensing fees from total 

programming expenses. Other therefore includes (and is probably best interpreted as 

an upper bound on) the share of expenses devoted to non-news local programming. 

There is no strong trend in the data, but the share dropped from 1995 to 2000 for both 

affiliates and independents. The decline in the programming expenses share for 

independents from 1995-2000 is likely a consequence of many formerly independent 

stations affiliating with one of the new networks during the 195-2000 period. 

Mark et Rank Engineering P rogram ming and P roduc tion News S ales A dvertis ing and P rom otion General and A dm inistrative

1-10 7.7% 47.1% 19.1% 7.7% 6.2% 12.1%

41-50 8.0% 35.3% 17.6% 12.8% 4.9% 21.4%

91-100 9.2% 31.9% 15.3% 15.5% 4.2% 24.0%

131-150 11.6% 26.7% 16.5% 17.3% 3.6% 24.3%

176+ 13.3% 21.6% 15.0% 18.4% 3.9% 27.8%

Source: National As s oc iation of B roadcas ters , Televis ion Financ ial Report, 1991
38

Table 20; Programming Expenses of Commercial Broadcast Stations, 1975-2000 

(% of Total Expenses)

Summary

Television broadcasting viewing shares and shares of video advertising revenue 

continued to fall during the past decade. That the revenue share fell much more slowly 

than the viewing share is explained by the fact that broadcast audience on a pernetwork basis remain much larger than cable network audiences on a per-network 

basis. This keeps broadcast advertising availabilities, on the whole, more valuable than 

cable advertising availabilities. However, cable advertising revenue shares are rising 

and moving closer to cable viewing shares, suggesting that cable advertising is 

becoming a closer substitute for broadcast advertising. While broadcast audiences 

remain much larger than cable audiences, the ratio (comparing the largest four 

broadcast and cable networks in primetime) has dropped from about nine to one down 

to about five to one.

1975 1980 1985 1990 1995 2000 AFF ILIAT ES*

 Progra m m in g 42.8 42.5 50.9 55.9 53.6 52.6

 Broa d ca st Rights 12.1 11.5 13.7 22.6 15.4 15.2

 Ne w s -- -- 23.9 24.5 27.3 27.2

 M usic Lice n se Fe e s 2.5 2.0 1.7 1.5

 Othe r -- -- 10.8 6.8 9.2 8.7

INDEP ENDENTS

 Progra m m in g 48.8 49.4 60.9 66.1 62.4 39.3

 Broa d ca st Rights 26.8 32.6 44.6 50.9 41.7 11.9

 Ne w s -- -- 5.0 6.0 9.6 16.8

 M usic Lice n se Fe e s 1.7 1.1 1.0 1.1

 Othe r -- -- 9.6 8.2 10.1 9.5

 

SOUR C ES: 1975 and 1980, FCC , Public N otice, "TV Broadcas t Financial D ata," Augus t 2, 1976 and August 10, 1981; other years , N ational As sociation of Broadcasters , Television Financial R eport, 1986, 1991, 1996, and 2001 eds. N OTES: *ABC , C BS, and NBC affiliates only Expens e categories from the original FC C reports are us ed. The "Program m ing" category consists of the N AB categories of program m ing and production and new s . The "Other" category is a res idual calculated as program m ing les s broadcas t rights 

les s new s les s m us ic licens e fees . Expenditures for locally-produced non-news program m ing w ould fall in this category. The 1986 and 1991 reports include D epreciation and Am ortization and Interest in total expenses, but the 1996 and 2001 reports do not. The expens e figures used to calculate the percentages in this table have these categories rem oved. 
39

Broadcast revenues, whether it be for networks or stations, have risen gradually 

in absolute terms over the 1990-2000 period, although 2001 saw a significant (but likely 

transitory) drop. Programming costs continue to rise. The program production and 

distribution environment has changed over the past decade, with the elimination of the 

syndication and financial interest and dual network rules, the entry of new broadcast 

networks, and the increased ownership and production of primetime programming by 

networks and their sister studios.

Television networking by itself continues to be roughly a breakeven business 

while television station margins remain rather robust. The efficiency of networking and 

the value of network programming to affiliates, along with the strong margins realized by 

many television stations, means that the networks will, in fact, obtain the financial 

support they need to continue in operation. Television stations will face increasing 

competition in the local spot advertising market as cable interconnects become more 

widespread and sophisticated. 
40

V. Cable Television

Cable television remains the most significant competitor to over-the-air broadcast 

television. Cable television was originally developed to provide broadcast television to 

areas with poor over-the-air reception. The first cable systems were built in 1955, at 

which time there were approximately 250,000 subscribers and grew to only 750,000 

subscribers during the next five years.56 It wasn’t until the creation of non-broadcast or 

“cable-origination” programming that cable subscribership began to proliferate. With the 

development of such cable programming networks as HBO, CNN, and ESPN, cable 

operators began to find a market for cable in urban areas as well as the predominately 

rural areas that were first served. Table 21 provides data on subscribership for various 

categories of cable service. It shows that by 1975, basic subscribership had reached 

nearly 9.8 million and only five years later, with the addition of even more cable 

origination networks such as MTV, TBS, and USA, cable subscribership grew to more 

than 19.2 million. As of year-end 2001, there were approximately 287 national and 

approximately 56 regional satellite-delivered cable origination programming networks 

available for carriage over cable networks and nearly 69 million cable television 

subscribers.57 Table 21 reports an estimate that by 2010, there will be more than 74 

million basic cable subscribers.

The Nature of Cable Television

Some people subscribe to cable television with the sole intent of obtaining better 

reception of local broadcast signals, though it is not known exactly how many. The vast 

majority, however, subscribe to cable in order to obtain increased programming options, 

though many of those subscribers also benefit from the improved reception of local 

broadcast networks. Yet others subscribe to cable television to receive better reception 

of local broadcast networks, while seeking increased programming options through 

subscription programming services from a non-cable subscription video provider such 

as direct broadcast satellite (“DBS”).58 

Currently, most cable system operators offer five categories of service: the basic 

service tier (“BST”); the expanded basic tier, otherwise known as the cable 

programming service tier (“CPST”); the digital tier, (which offers channel capacity for 

both additional “basic” cable origination networks and additional premium and 

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

 

56 Kagan World Media, History of Cable and Pay TV Subscribers And Revenues, Cable TV Investor, May 

24, 2002, at 8.

57 See NCTA, National Video Programming Services: 1994-2001, Cable Program Services, Cable 

Developments 2002, May 2002, at 23, 27-212; see also Table 21.

58 While some DBS subscribers do receive local broadcast signals via their DBS service pursuant to the 

Satellite Home Viewer Improvement Act of 1999, DBS subscribers in approximately 158 DMA’s are not 

provided with local broadcast network signals via satellite. DBS can offer distant network signals, but 

only to a portion of DBS households (only those households unserved by local network affiliates over the 

air).
41

Table 21: Cable Subscribers and Homes Passed

1975 1980 1985 1990 1995 2000 2001 2010p

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

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

Basic Cable

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

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

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

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

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

Premium ("Pay") Cable

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

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

Digital Cable

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

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

Sources: Total HH and TVHH: (1975-2001): Television Bureau of Advertising, Inc., Television Households, Trends in 

Television, at http://www.tvb.org (citing Nielsen). (2010p): Kagan World Media, Broadband Cable Financial Databook, 

July 2002, at 10. Cable Subs and Premium Subs: (1975 and 2010p): Kagan World Media, Broadband Cable 

Financial Databook, July 2002, at 7 and 10; (1980-2001): Kagan World Media, Cable TV Investor, May 24, 2002, at 9. 

Cable HP and Premium Households: (1975-2001): Kagan World Media, Cable TV Investor, May 24, 2002, at 9; 

(2010p): Kagan World Media, Broadband Cable Financial Databook, July 2002, at 10. Digital Subs: (2000): Kagan 

World Media, Broadband Cable Financial Databook, July 2001, at 10; (2001 and 2010p): Kagan World Media, 

Broadband Cable Financial Databook, July 2002, at 10.

Notes:

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

2001 are actually Jan 1, 2002).

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

(3)1976 data

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

both the analog and digital tiers); and pay-per-view (“PPV”) services (also offered in 

both the analog and digital tiers). Some cable operators have also begun to offer their 

customers such video products as video-on-demand (“VOD”) and high-definition 

television (“HDTV”) formatted programming. Most cable operators also offer their 

customers non-video services, (e.g., high-speed Internet access, cable telephony, 

digital audio programming, and interactive services such as electronic programming 

guides, and video gaming). By offering these non-video, ancillary services, cable 

operators are able to attract and retain subscribers more easily than without these 

services. These services also provide additional revenue streams for cable operators. 

The basic service tier (“BST”) includes, at minimum, all local broadcast signals 

distributed by the cable operator, along with any public, educational, and government 

(“PEG”) access channels that the local franchise authority requires the system operator 
42

to carry on the basic tier.59 Pursuant to the Communications Act, cable operators have 

an obligation to set aside a specified number of channels, based on their total channel 

capacity for the carriage of local broadcast signals.60 At the discretion of the cable 

operator, this tier may also include additional program services such as national or 

regional satellite-delivered cable origination networks. Currently, more than 50 percent 

of cable systems voluntarily carry superstation TBS on the BST and approximately 25 

percent of all cable systems report carrying either Discovery, CNN, or ESPN.61

Consumers pay a flat monthly fee for the BST package of channels. As of July 

2001, the industry-wide average price of the BST was $12.84.62 The BST is the lowest 

level of service offered by cable operators, and is required for any additional level of 

service.63 With a few exceptions (e.g., PEG access channels, public television 

stations), most of the programming offered on the BST is advertiser-supported. 

The CPST provides all analog video programming distributed over the system 

that is not on the basic service tier and for which the operator does not charge a perchannel or per-program basis.64

 Most of the programming carried on the CPST is 

advertiser-supported national and regional cable origination networks. Subscribers do 

 

59 47 U.S.C. § 543(b)(7); 47 C.F.R. § 76.901(a).

60 47 U.S.C. § 534(a), (b)(1), 47 C.F.R § 76.56(b) (obligations to carry local commercial stations); 47 

U.S.C. § 535(a), (b); 47 C.F.R. § 76.56(a) (obligations to carry qualified noncommercial stations). Under 

these statutory provisions and the Commission's rules, commercial broadcast television stations may 

elect whether they will be carried by local cable television systems. 47 U.S.C. § 325(b)(3)(B); 47 C.F.R. 

§ 76.64(f). The must carry provisions of the 1992 Cable Act also directed the Commission to initiate a 

proceeding at the time that it prescribes modified standards for what is now referred to as digital television 

("DTV") and “to establish any changes in the signal carriage requirements of cable television systems 

necessary to ensure cable carriage of such broadcast signals of local commercial television stations 

which have been changed to conform with such modified standards." This provision is codified as Section 

614(b)(4)(B) of the Communications Act, 47 U.S.C. § 543(b)(4)(B). In the 1996 Act, Congress stated that 

no ancillary or supplementary broadcast service shall have must carry rights. 47 U.S.C. § 336(b)(3) which 

was added to the Communications Act by Section 201 of the 1996 Act In the context of adopting digital 

television standards, the Commission sought comment on relevant must carry rules or policies that might 

be needed both during the transition to DTV and once DTV has replaced the current analog system. 

Advanced Television Systems and Their Impact Upon the Existing Television Broadcast Service, MM Dkt. 

No. 87-268, Fourth Notice of Proposed Rulemaking and Third Notice of Inquiry, 10 FCC Rcd 10540, 

10552-10554 (1995). Depending on the rules that the Commission may ultimately adopt, if any, cable and 

OVS operators subject to the must carry rules would be required to allocate a portion of their channel 

capacity to the carriage of DTV signals.

61 Information gathered in re: Implementation of Section 3 of the Cable Television Consumer Protection 

and Competition Act of 1992, Statistical Report on Average Prices for Basic Service, Cable Programming 

Services, and Equipment, MM Docket No. 92-266, Report on Cable Industry Prices, 17 FCC Rcd 6301, 

6308, Tbl. 1 (2002).

62 Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, 

Statistical Report on Average Prices for Basic Service, Cable Programming Services, and Equipment, 

MM Docket No. 92-266, Report on Cable Industry Prices, 17 FCC Rcd 6301, 6308, Tbl. 1 (2002). 

63 Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, 

Buy-Through Prohibition, MM Docket No. 92-262, Order, 8 FCC Rcd 2274 (1993); Implementation of 

Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, Tier Buy-Through 

Prohibitions, MM Docket No. 92-262, Order, 7 FCC Rcd 8672 (1992).

64 47 U.S.C. § 543(l)(2); 47 C.F.R. § 76.901(b).
43

not need to subscribe to the CPST to subscribe to other, higher tiers of cable service 

such as premium or pay-per-view.65

The digital tier was first introduced commercially in 1996 and provides additional 

channels of basic and premium services through the use of digital compression 

technologies.66 Digital service was initially offered by cable operators as a response to 

the entry of high-capacity DBS services to the multichannel marketplace. DBS offered 

and continues to offer greater channel capacity than cable systems and also superior 

video quality. In some cases, the video programming offered on cable’s digital tier is 

offered at a higher quality than standard analog video. In other cases, the digital tier is 

used simply to compress more analog-quality channels into the same bandwidth. 

At year-end 1996, there were approximately 100,000 digital video subscribers, 

and just three years later, there were approximately 7.2 million digital video 

subscribers.67 As Table 21 shows, there are approximately 16.7 million digital video 

subscribers by year-end 2001, and it is estimated that by 2010, there will be more than 

62 million digital video subscribers.

Premium cable services are channels of service offered on an a la carte basis. 

Sometimes these channels are marketed in groups of channels for special discounts. 

Premium cable services include such well-known cable networks as HBO, Showtime, 

and Cinemax. These services rarely include advertising and derive revenue primarily 

through the subscription fee charged for each service. Premium services are offered in 

analog and also on the digital tier. In 1990, there were five premium networks available 

for carriage over cable systems.68 By 1995, 21 premium networks are available to cable 

operators for distribution over their systems.69 By 2001, with expanded channel 

capacity enabled by digital compression, there were 40 premium cable networks 

available for delivery over cable systems.70 The premium service model allows 

consumers to pay for those networks that have the most value to them, as opposed to 

purchasing groups of general programming and niche networks available on the basic, 

expanded basic, and digital basic tiers.

 

65 Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, 

Buy-Through Prohibition, MM Docket No. 92-262, Order, 8 FCC Rcd 2274 (1993); Implementation of 

Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, Tier Buy-Through 

Prohibitions, MM Docket No. 92-262, Order, 7 FCC Rcd 8672 (1992).

66 See Paul Kagan Assocs., Inc., Paul Kagan’s 10-Year Cable TV Industry Projections, The Cable TV 

Financial Databook, July 1996, at 11; see also Paul Kagan Assocs., Inc., Paul Kagan’s 10-Year Cable TV 

Industry Projections, The Cable TV Financial Databook, July 1997, at 10.

67 See Paul Kagan Assocs., Inc., Paul Kagan’s 10-Year Cable TV Industry Projections, The Cable TV 

Financial Databook, July 1997, at 10; Paul Kagan Assocs., Inc., Paul Kagan’s 10-Year Cable TV Industry 

Projections, The Cable TV Financial Databook 2000, July 2000, at 10.

68 NCTA, National Cable Video Networks by Type of Service, Cable Television Developments, Apr. 1994, 

at 7-A.

69 NCTA, National Cable Video Networks by Type of Service 1976-1995, Cable Television Developments, 

Spring 1996, at 6.

70 NCTA, National Cable Video Networks by Type of Service 1980-2000, Cable Television Developments 

2001, Fall 2001, at 8.
44

Pay-per-view services offer video programming on a program-by-program basis 

for a fee. Programming offered includes movies, sporting events, concerts, and other 

similar programming. Pay-per-view services rarely include advertisements and derive 

revenue primarily through the fees charged per-program. In 1990, there were seven 

pay-per-view networks offering pay-per-view services to cable operators for carriage on 

their systems.71 The number of pay-per-view networks has remained relatively stable 

over the last decade. As of 2001 there are 11 pay-per-view networks available for 

carriage over cable systems.72 

Video-on-demand (“VOD”) is the newest video service category being developed 

and deployed by cable operators. VCD services are similar to pay-per-view services in 

that video-on-demand provides mostly advertising-free material on a program-byprogram basis. The subscriber may choose from a wide array of programming and pick 

the time of viewing. Some operators are opting to offer video-on-demand via the 

subscription model (“SVOD”). In the SVOD model, the subscriber pays one monthly fee 

for unlimited access to a finite library of select programming. This model more closely 

resembles the premium service tier, and may offer fewer programming options than 

standard video-on-demand services. In contrast to the pay-per-view model, in which 

programming is essentially cablecast (the same) to every home at network-selected 

times, VOD systems both subscription and standard, utilize a server located in the cable 

operator’s headend (or central office). Consumers may choose from a number of video 

programming selections at virtually any time, with VCR-like pause and rewind 

capabilities. Video-on-demand is largely in test-phase, though commercial deployments 

have begun in a few systems.73

Availability and Subscribership of Cable Television

Table 21 provides data on the availability and subscribership of cable television 

since 1975. It shows that, since 1990, at least 90 percent of television households have 

had access to cable television. The percentage has been rising gradually over that 

period. The homes passed data in Table 21 are drawn from Kagan World Media 

(“Kagan”). This is the only consistent source of time series homes passed figures 

available. However, a comparison of the Kagan 2001 homes passed figure with one 

from Warren Communications News reveals a significant discrepancy. The Kagan 

figure is 102 million, while the Warren Communications News figure is 89.6 million.74 

This difference suggests that the Kagan data should be used with some caution and 

that they are probably most reliable as a trend indicator rather than a precision estimate 

for any one year. Nevertheless, it is reasonable to conclude that the share of television 

households passed by cable is very high and rising gradually over time. Those homes 

 

71 NCTA, National Cable Video Networks by Type of Service, Cable Television Developments, Apr. 1994, 

at 7-A.

72 NCTA, National Cable Video Networks by Type of Service 1980-2000, Cable Television Developments 

2001, Fall 2001, at 8.

73 Kagan World Media, Major U.S. VOD Deployments and Trials, Broadband Cable Financial Databook 

2002, July 2002, at 79.

74 Warren Publishing, Television and Cable Factbook 2002, Services Volume, at G-3.
45

not passed by cable are likely located in rural, sparsely-populated areas. Given the 

virtually nationwide presence of DBS and the cost of building cable infrastructure in 

areas with low population density, these homes may never be served by cable.

Bearing in mind the caveats about the cable homes passed figures, Table 21 

shows that the share of television households with access to cable that chose to 

subscribe jumped from 60 to 67 percent from 1990 to 2001. As a share of total 

television households, cable subscribership jumped from 56 percent in 1990 to 67 

percent in 2000, before dropping in 2001 to 65 percent. The slow growth in homes 

passed as a fraction of television households, the apparent flattening out of cable 

penetration of total television households, the flattening out of subscribers as a 

percentage of homes passed, and the fact that only 13.6 percent of television 

households do not subscribe to some form of multichannel video programming 

distribution service,75 all are consistent with the conclusion that cable is approaching a 

saturation point. The KAGAN projections for 2010 in Table 21 are also consistent with 

this conclusion, showing cable penetration of television households in 2010 at 61.4 

percent and an average annual subscribership growth rate from 2001-2010 of under 

one percent, slower than the expected growth rate for television households. 

The expected decline in cable penetration of television households is 

undoubtedly due in part to the development of other attractive delivery systems, e.g., 

DBS. Chapter VI discusses DBS and presents and analyzes comparative data on cable 

and DBS penetration. It should be noted that the pattern of consumer demand for new 

non-video and video services that cable and, in some cases DBS, will offer will also 

affect penetration patterns. For example, cable operators provide or will provide highspeed Internet access and cable telephony, as well as video-on-demand. Strong 

consumer take up of these services (not all of which can be provided in a comparable 

way by DBS) could lead to a higher than expected cable subscribership in the future.

Cable Operator Revenues

Table 22 provides comparative data on cable operator revenues. Perhaps the 

most striking feature of the table, consistent with the discussion in the previous 

paragraph, is the expected jump in “advanced services” (e.g, Internet access, cable 

telephony) revenues. The jump in subscription revenues for advanced analog and 

digital services attests to the value subscribers apparently place on expanded 

programming choice. Pay-per-view and video-on-demand revenues are currently quite

modest, but are poised to increase, and the data show a modest increase in home 

shopping and advertising revenues for cable operators.76 These share increases come 

at the expense of the traditional basic and pay subscription categories. Basic 

 

75 See Video Annual Assessment of the Status of Competition in the Market for the Delivery of Video 

Programming, CS Docket No. 01-129, Eighth Annual Report (“2001 MVPD Competition Report”), 17 FCC 

Rcd 1244, 1338.

76

 Advertising is an important source of revenue for cable networks. See Chapter X.
46

subscription revenues are expected to continue growing significantly in absolute terms, 

but pay revenues will grow, and indeed already have been growing at a very low

Table 22. Cable Operator Revenues ($mil)

1990 1995 2000 2001 2010p

Cable Operator Revenue

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

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

 PPV/VOD 253 498 751 993 5,623

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

Home Shopping Commissions 96 129 239 260 530

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

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

High-speed Internet access, cable 

telephony, and video games

0.0 0.0 1,164 2,835 19,316

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

Percent of Total Revenue

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

 Premium Revenue (“Pay”) 29.0% 17.4% 13.5% 12.8% 7.4%

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

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

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

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

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

High-speed Internet access, cable 

telephony, and video games

0.0% 0.0% 3.1% 6.4% 20.4%

Sources: (1990-2001): Kagan World Media, Cable TV Investor, May 24, 2002, at 9; (2010p): Kagan World Media, 

Kagan’s 10-Year Cable TV Industry Projections, Broadband Cable Financial Databook 2002, July 2002, at 10.

rate. This is true notwithstanding an increase in the number of pay channels and pay 

service subscriptions. The likely explanation for this is increased competition from 

home video. The same phenomenon also possibly explains the low level of PPV 

revenues.

The Competitive Impact of Cable on Broadcast Television

Considering the enormous value that consumers continue to place on cable 

television viewing options, it is no wonder that (as documented in Chapter IV) 

viewership shares of non-premium cable networks have continued to grow over the past 

decade, while viewership shares of broadcast television stations have steadily declined. 

Both cable subscribership and viewing patterns in cable households depend on the 

menu of programming offered by cable. Growth in programming options (both in terms 

of an increased number of networks offered and increased quality of programming) 

have and will continue to increase the popularity of cable television relative to broadcast 

television.
47

Programming Choice Factors

Chapter X contains a detailed examination of cable programming. For now, it is 

important to note that, while cable’s collective share of the viewing audience has been 

increasing over the years, ratings for individual networks (and programs) remain quite 

low. The Television Bureau of Advertising provides an analysis of “season-to-date” 

network ratings, covering the period from August 27, 2001-May 26, 2002.77 It shows the 

following prime time ratings for the major broadcast networks: NBC 8.6, CBS 8.0, ABC 

6.4, and Fox 5.0. The corresponding figures for the top four cable networks are: 

Lifetime 1.7, TBS 1.4, TNT 1.4, and USA 1.3.78 The same source provides a listing of 

the top 100 programs on broadcast and cable for various periods.79 The May 2002 

compilation reveals that 92 of the top 100 programs were on broadcast television. The 

top five were all broadcast programs. Their ratings ranged from 12.8-16.0. The 

highest-rated cable program was number 76, and the ratings for the top five cable 

programs ranged from 2.0-3.4. The eight cable programs that ranked within the top 100 

included three from children’s network Nickelodeon, one MTV reality program (“The 

Osbournes”), one professional wrestling show, and three Sunday night movies on 

Lifetime.

These data illustrate that, while cable programmers do provide some general 

interest channels, in the mold of traditional broadcast services, in many cases, they 

program to a particular audience niche, e.g., children, young adults, sports fans, etc. 

One additional niche worthy of note is news. Chapter X documents the significant 

increase in news service provided via cable, including in many markets local news. Ten 

years ago local broadcast stations were the only providers of local television news.

Technological Factors 

Cable operators have invested substantial sums over the past decade to upgrade 

channel capacity, both by expanding bandwidth and by employing digital compression. 

From 1990 to 2000, the share of cable subscribers served by cable systems with 54 or 

more analog channels increased from 24 percent to 62 percent.80 In the absence of 

information on the number of channels devoted to digitally compressed signals and the 

precise compression ratio used, however, it is not possible to infer from these data the 

number of channels available to cable subscribers. The Commission’s recent cable 

industry price survey provides some data on this subject.

Table 23 provides survey data on cable system capacity and channel allocation as 

of July 2001. It shows that approximately two–thirds of all cable systems have facilities 

 

77

 “Season-to-Date Broadcast v. Cable Primetime Ratings: 2001-2002,” in “Viewer Track” section, 

available at http://www.tvb.org/rcentral.

78 Cable networks tend to have somewhat lower total day ratings compared to prime time. See e.g, 

Kagan World Media, Cable Programming Investor, at 11

79

 “Top 100 Programs on Broadcast & Cable: May-2002,” in “Viewer Track” section, available at 

http://www.tvb.org/rcentral.

80 Warren Publishing, Television and Cable Factbook: 1990 Edition, at C-385, and 2001 Edition, at F-2.
48

that provide bandwidth of 750 MHz or above. The average system capacity in the 

survey is 659 MHz and it devotes 82.5 channels, or 495 MHz, to video delivery.81 If the 

Table 23; System Capacity, July 2001

Average system capacity (MHz) 659

Percent of Cable Systems with capacity of:

 330 MHz and below 8.40%

 331 through 749 MHz 25.65%

 750 MHz and above 65.95%

Number of 6-MHz activated channels:

 Devoted to analog service 70.95

 Devoted to digital service 11.55

 Total number of channels 82.5

Source: Implementation of Section 3 of the Cable Television Consumer Protection and 

Competition Act of 1992, Statistical Report on Average Prices for Basic Service, Cable 

Programming Services, and Equipment, MM Docket No. 92-266, Report on Cable Industry 

Prices, 17 FCC Rcd at 6313, Tbl. 11 (2002). These figures are based on sampling derived 

from a survey administered by the Commission. For detailed survey methodology, see Id., 

17 FCC Rcd at 6304.

digital channels are provided at a 10:1 compression ratio, then the average system 

could, in theory, be offering 187 channels.

The combination of increased channel capacity and, as documented above, a 

growing share of television households passed by cable and, since 1994, DBS, means 

cable networks can begin to approach the national reach of the biggest broadcast 

networks. The big four broadcast networks each reach around 98 percent of television 

households. KAGAN provides subscribership data for cable networks as of June 30, 

2002.82 Utilizing the January 2002 television household estimate of 105.5 million, the 

largest cable network, TBS, reached 83 percent of television households, and 11 other 

cable networks reached at least 80 percent of television households. In 1990, the 

largest cable network was ESPN, and it reached only 62 percent of television 

households.83

The relatively slow growth of individual cable network audience sizes suggests 

that even the mass appeal cable networks will not soon approach the audience size of 

broadcast networks. The increases in channel capacity and homes passed, however, 

do suggest that the gap between cable network and broadcast network audience sizes, 

which has been narrowing, will continue to do so. And the same factors suggest that 

cable subscribers will have an increasingly wide range of program channels from which 

to choose, so that cable will continue to chip away at total broadcast audience sizes.

 

81 The remaining capacity its used to provide non-video services such as high-speed Internet access 

services and cable telephony.

82 Kagan World Media, Cable Program Investor, July 29, 2002 at 14.

83 Kagan World Media, Economics of Basic Cable Networks 2002, at 50. TVHH from Table 1
49

In addition, at the time of Working Paper 26, VOD was a relatively fledgling 

product. These services were expected to attract subscribers because of the improved 

quality and advanced timeshifting capabilities these technologies could offer. Because 

cable operators have instead shifted the focus to system upgrades and installation of 

digital capability, cable operators have yet to launch VOD widespread. Many are 

waiting until their systems are fully digital-ready before launching VOD. As discussed in 

Working Paper 26, video-on-demand and pay-per-view allow the customer greater 

flexibility than broadcast services, increasing the relative value of these MVPD platforms 

compared to broadcasting. The economics of VOD and PPV also could have significant 

potential to impact the broadcast market because the ability to charge for single highlyvalued events could come closer than conventional cable services to measuring 

consumer’s tastes for programming. 

Psychological Factors That Influence Cable Viewing

It appears that many cable subscribers watch broadcast channels in part out of 

habit and in part due to lack of good information on cable program availability. While 

consumer habit may be reasonably stable, multichannel video programmers are 

devising technologically advanced ways to disseminate programming information to 

consumers.

While most changes in viewer habit are largely evolutionary, versus 

revolutionary, certain events may accelerate the process of change, increasing both 

cable subscribership and viewing of cable by subscribers. For example, since the 

Persian Gulf War, consumers have become accustomed to 24-hour news coverage of 

world-wide and national interest events. Again, a gradual shift in viewing patterns is 

more likely than a radical change in the relative popularity of broadcast television and

cable. Willingness to subscribe to cable may be sensitive to income as well as 

programming choices and habitual or convenience factors. Economic theory shows that 

one would expect the demand for cable services to increase as consumers’ income 

rises.84 

Conclusions 

Cable television has significantly expanded the reach of non-broadcast networks. 

These services are very valuable to viewers because they provide highly targeted 

programming not otherwise available. Although cable subscriber growth appears to be 

slowing, increased channel capacity and flexibility in viewing options may make cable 

subscribers shift viewing more to cable programming from broadcast. Again, radical 

 

84 In its 2001 Annual Report on Cable Industry Prices (“Price Survey”), the Commission analyzed demand 

for cable services by creating a demand equation model. Based on its analysis, the Commission found 

that changes in median household income has a direct relationship to demand (i.e., as this variables 

increases, the demand for cable service increases), since, as income rises, households can better afford 

cable service. Implementation of Section 3 of the Cable Television Consumer Protection and Competition 

Act of 1992, Statistical Report on Average Prices for Basic Service, Cable Programming Services, and 

Equipment, MM Docket No. 92-266, Report on Cable Industry Prices, 17 FCC Rcd 6313 (2001).
50

changes in the popularity of cable programming are not anticipated and changes in the 

relative popularity of cable over broadcast will likely be evolutionary not revolutionary.
51

VI. Direct-to-Home Satellite Transmissions

The most significant technological advance in the distribution of video media of the last 

ten years is the widespread deployment of direct broadcast satellite systems. In 1990, 

direct-to-home satellite transmission services (also known as “satellite-to-home”) were 

comprised mostly of home satellite dish systems in the C-Band. As Table 24 shows, in 

1990, there were approximately 760,000 C-Band subscribers.85 By year-end 2001, 

however, there were less than one million home satellite C-Band subscribers left, but 

Table 24: Direct-to-Home Subscribers and Cable Subscribers

1985 1990 1995 2000 2001 2010p

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

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

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

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

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

DBS Subscribers (mil) 0.0 0.0 2.2 14.8 17.9 27.0

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

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

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

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

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

Sources: Total HH and TVHH: (1975-2001):Television Bureau of Advertising, Inc., Television Households, Trends in 

Television, at http://www.tvb.org (citing Nielsen). (2010p): Kagan World Media, Broadband Cable Financial Databook, 

July 2002, at 10. Cable Subs: (1975 and 2010p): Kagan World Media, Broadband Cable Financial Databook, July 

2002, at 7 and 10; (1980-2001): Kagan World Media, Cable TV Investor, May 24, 2002, at 9. DBS and C-Band 

Subs: (1995-2010p): Kagan World Media, Economics of Basic Cable Networks 2002, Sept. 2001, at 23-27. C-Band 

Subs: (1990): 1995 MVPD Competition Report at Table G-1.

Notes:

* All data is year-end unless otherwise noted.

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

2001 are actually Jan 1, 2002).

(2) Receipt of video programming through the use of a C-Band dish does not require a subscription, therefore there 

are a greater number of C-Band users than there are C-Band subscribers. There is no way to track the total number 

of C-Band users, only the number of subscribers.

(3) 1991 Data.

more than 17.9 million direct broadcast satellite subscribers, together comprising nearly 

20 percent of the subscription video market.86 In fact, in the last ten years, the rapid 

growth of the subscription video services market has been largely due to direct to home 

 

85 In 1990, there were approximately 1.4 million active C-Band users, of which more than half subscribe to 

packaged programming services. See Working Paper 26, at 95.

86 C-Band and DBS make up 20 percent of the total MVPD market. See Table of Competing technologies 

in the 2001 MVPD Competition Report, 17 FCC Rcd 1244, 1338.
52

satellite services, namely direct broadcast satellite services. Figure 1 shows that the 

usage of cable and satellite services combined appears to be leveling off at around 83 

percent of television households.87 Projections for 2010 cable and satellite

subscribership indicate that usage will continue this pattern.88 

Figure 1: Cable and Satellite Usage: Subscribers/TVHH (%)

Source data:

TVHH: Television Bureau of Advertising, Inc., Trends in Television, at http://www.tvb.org (citing Nielsen). Cable Subs: 

Kagan World Media, Cable TV Investor, May 24, 2002, at 9. Satellite Subs: Kagan World Media, Economics of Basic 

Cable Networks 2002, Sept. 2001, at 23-27, except 1990 C-Band Subs: 1995 MVPD Competition Report at Tbl G-1.

Direct-to-Home Satellite Services

Direct-to-home satellite systems (“satellite-to-home”) use satellites to deliver 

video programming directly to subscribers. As Table 24 indicates, there are two types 

of satellite-to-home services: home satellite dish (“HSD”) services in the C-Band 

frequency, and direct broadcast satellite (“DBS”) services in the Ku-band frequency. 

Both offer subscribers many of the same video programming services typically provided 

by cable systems, in addition to some offerings not typically available from cable 

systems. 

 

87 Since DBS does not provide local broadcast stations in every market and some subscribers subscribe 

to both cable and DBS services. We do not account for the overlap in this regard.

88 Kagan World Media, Broadband Cable Financial Databook, July 2002 at 10, and The State of DBS 

2001 at 3.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Cable Subs/TVHH (%)

Satellite Subs/TVHH (%)

Cable+Satellite Subs/TVHH(%)
53

Home Satellite Dish

HSD is the original satellite-to-home service offered to consumers, and involves 

the home reception of signals transmitted by satellites operating generally in the C-Band 

frequency.89 HSD technology was first developed in 1976, and commercialized in 1980. 

HSD users employ a 4-8 foot dish to receive unscrambled programming for free (subject 

to section 705(b) of the Communications Act),90 and scrambled programming purchased 

in a secondary market from program packagers that are licensed to facilitate 

subscribers’ receipt of video programming.

Owners of HSD systems have access to more than 500 channels of 

programming placed on C-Band satellites by programmers. Approximately 350 of these 

programming channels are unscrambled and approximately 150 are scrambled.91 In 

order to receive one or more scrambled channels, an HSD owner must purchase an 

integrated receiver-decoder (“IRD”) from an equipment dealer and then pay a monthly 

or annual subscription fee to a program packager. HSD systems are typically designed 

to receive programming from several different satellites at several different orbital 

locations. As such, most HSDs include motors that permit the receiving dishes to rotate 

and receive signals from these many satellites. Space considerations and zoning 

regulations restrict many viewers’ ability to install the large antenna needed for HSD 

reception.

At its peak of popularity in 1994, there were an estimated 4.5 million active HSD 

users, roughly half of whom subscribed to one or more programming services.92 As 

Table 24 shows, however, that the number of HSD subscriptions appears to have 

peaked in 1995, with an estimated 2.4 million authorized subscribers. As of year-end 

2001, there were a little less than 1 million home satellite dish system subscribers 

remaining, and an unknown number of active system users. Much of the decline in HSD 

subscribership results from owners switching to DBS services. Not only are DBS 

systems smaller in size and easier to maintain, but they are also less expensive than 

the typical HSD equipment. 

Future growth of the HSD industry is unlikely. Nevertheless, HSD remains the 

delivery vehicle for a core, niche contingent of satellite subscribers. Many existing HSD 

transponder leases extend past 2010, and in 2000, six new satellites were launched to 

replace older satellites.93 The primary use of these satellites will be to distribute 

programming to cable headends, but they can also serve the HSD industry. 

 

89 Satellites in the C-Band frequency are also used to transmit programming to cable operators via CBand receiving dishes at the cable central office or “headend.”

90 See 47 U.S.C. § 605(b) (satellite cable programming for private viewing).

91 Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming, CS 

Docket No. 97-141, Fourth Annual Report (“1997 MVPD Competition Report”), 13 FCC Rcd 1034, 1077 ¶ 

68 (1998). 

92

 How Many DTH Households Are Out There Anyway?, SkyReport, Oct. 1994, at 1. 

93 Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, 

CS Docket No. 00-132, Seventh Annual Report (“2000 MVPD Competition Report”), 16 FCC Rcd 6005, 

6045 ¶ 85 (2001).
54

Furthermore, new, digital equipment for C-Band HSD systems continue to be developed 

and made available to subscribers.94

Direct Broadcast Satellites – Medium Power DBS

At the time of the release of Working Paper 26, medium power Ku-band, Fixed 

Satellite Service (also referred to as “medium power DBS”), was being offered to 

consumers by Primestar Partners, LP.95 Primestar was a joint venture owned by five of 

the major cable MSOs and GE American Communications, Inc., which owned the 

satellite used by Primestar. Primestar began operating as a medium-power Ku-band 

service provider in 1991. Subscribers used a 36 or 40 inch dish to obtain programming. 

At year-end 1998, prior to it’s acquisition by high-power DBS operator DirecTV, 

Primestar offered 160 channels of video programming, similar in type to the 

programming now being offered by DirecTV.96 

Over the last ten years many other entrants (other than Primestar), have 

received licenses to offer medium power DBS service and a few actually offered 

service. None of these firms ever attained significant subscribership, and none remain 

in the market today.

Direct Broadcast Satellites – High Power DBS

High-power Ku-band DBS service is also known simply as DBS. DBS offers 

high-power satellite service to subscribers who have a special 18-inch receiving dish. 

Each DBS operator transmits over 200 channels of video programming to subscribers 

from specific orbital locations. Permissible orbital locations are established by 

international telecommunications regulations (treaties) and Commission rules. Since 

launched in 1994, DBS has advanced substantially as a viable competitor to cable and 

 

94 Id. Although most C-Band satellite receivers are analog and do not receive digital signals, C-band 

customers may buy a digital decoder/receiver in order to access and view digital programming.

95 Inquiry into the Development of Regulatory Policy in Regard to Direct Broadcast Satellites, Docket No. 

Report & Order, 90 FCC 2d 676 (1982). 

96 Kagan World Media, The State of DBS 2002, July 2002, at 56.
55

broadcast television.97 Currently there are two major DBS operators offering service to 

consumers: DirecTV, owned by Hughes Corp., and Echostar Corp.98

Table 24 shows that DBS subscribership has grown substantially since it began 

offering service in 1994. At the end of 1994, DBS service had approximately 600,000 

subscribers.99 By year-end1995, there were more than 2.2 million subscribers. As 

Exhibit 1 shows, subscribership has continued to climb. At year-end 1996, there were 

about 4.3 million DBS subscribers; by year-end 1997, there were more than 6.4 million 

DBS subscribers; by year-end 1998, there were more than 8.8 million medium-power 

and high-power DBS subscribers; and as of year-end 2000, DBS providers had nearly 

14.8 million subscribers. As of year-end 2001, there were approximately 18 million DBS 

subscribers. As of June 2002, DirecTV was providing service to more than 10 million 

subscribers, and Echostar had approximately 7.5 million subscribers. 100 There is some 

overlap, however, between cable and DBS subscribership. Of the approximately 60 

 

97 On June 17, 1994, DirecTV and United States Satellite Broadcasting Co., Inc. (“USSB”) began 

providing high-power DBS service via a jointly owned satellite. Implementation of Section 19 of the 1992 

Cable Act (Annual Assessment of the Status of Competition in the Market for the Delivery of Video 

Programming), CS Docket No. 94-48, First Report (“1994 MVPD Competition Report”), 9 FCC Rcd 7442 

¶ 63 (1994). Echostar Communications Corp. initiated service in March 1996. Echostar Communications 

Corp., Echostar II Reaches Final Orbit (press release), Sept. 30, 1996. 

98 In 1999, DirecTV merged with USSB. See United States Satellite Broadcasting Co., Inc. Transferor 

and DirecTV Enterprises, Inc. Transferee; For Consent to Transfer of Control of the United States 

Satellite Broadcasting Co., Inc. and DirecTV Enterprises, Inc. for Consent to Transfer Control of the 

USSB II Authorization to Operate a Direct Broadcast Satellite System Using Five Channels at the 101

W.L. Orbital Location; Authorization to Construct, Launch, and Operate a Direct Broadcast Satellite 

System Using Three Channels at 110 W.L. Orbital Location; and the Related Earth Registration, (Call 

Sign E930437); Order and Authorization, 14 FCC Rcd 4585 (1999). In 1999, Hughes, the parent 

company of DirecTV, acquired PrimeStar. See Tempo Satellite, Inc., Assignor and DirecTV Enterprises, 

Inc., Assignee, Application for Consent to Assign Authorization to Construct, Launch and Operate a Direct 

Broadcast Satellite System Using 11 Frequencies at the 119 degrees W.L. Orbital Location, TCI Satellite 

Entertainment, Inc., Transferor And Primestar, Inc., Transferee, Application for Transfer of Control of 

Tempo Satellite, Inc. Echostar Satellite Corporation And Directsat Corporation, Applications for Special 

Temporary Authority to Operate a Direct Broadcast Satellite System, Order and Authorization (“Primestar 

Order”), 14 FCC Rcd. 7946 (1999).Dominion Video Satellite, Inc., a self-described Christian, family 

oriented DBS service, uses 2 transponders on an Echostar satellite offering 20 channels of video 

programming. Dominion has fewer than 1 million subscribers, and estimates that 60 to 65 percent of its 

subscribers also subscribe to Echostar’s DISH Network. 2000 MVPD Competition Report, 16 FCC Rcd at 

6038 ¶ 64. The Commission has granted the authority for R/L DBS Company to provide DBS service, but 

it has yet to commence service In re: Application of R/L DBS Company For Assignment of Continental 

Satellite Corporation’s Direct Broadcast Satellite Construction Permit, Memorandum Opinion and Order, 

DA 97-725 (1997); In re: Petition of R/L DBS Company, LLC, For Extension of its Direct Broadcast 

Satellite Construction Permit, Memorandum Opinion and Order, DA 00-2852 (2000).

99 Kagan World Media, The State of DBS 2002, July 2002, at 4.

100 Hughes Electronics Corp, Hughes Second Quarter 2002 Results TS Driven By Strong DirecTV U.S. 

Financial Performance (press release), July 15, 2002; Hughes Electronics Corp., http://www.directv.com/ 

DTVAPP/see/Landing.jsp; Echostar Communications Corp., Echostar Reports Second Quarter 2002 

Financial Results (press release), August 15, 2002.
56

percent of DBS subscribers with access to cable, around 24 percent subscribe to cable 

in addition to DBS, primarily to receive local broadcast signals.101

DBS Public Interest Obligations102

On November 19, 1998, the Commission adopted rules implementing Section 25 

of the 1992 Cable Act, which imposed certain public interest obligations on DBS 

providers.103 The statute requires DBS service providers to set aside a percentage of 

channel capacity for non-commercial programming of an educational or informational 

nature. In implementing the statutory requirement, the Commission ruled that DBS 

providers must set-aside four percent of their channel capacity exclusively for noncommercial programming of an educational or informational nature.104

 In carrying out 

Congress's mandate, the Commission balanced two important goals -- providing DBS 

subscribers access to a greater diversity of non-commercial, educational programming, 

and providing flexible rules for an industry that promises to provide significant competition 

to cable television. As specifically required by statute, DBS licensees must also comply 

with the political broadcasting rules of Section 312(a)(7) of the Communications Act, 

granting candidates for federal office reasonable access to broadcasting stations, and 

Section 315 of the Act, which requires that licensees provide equal opportunities for 

those candidates to use broadcast stations at the lowest unit charge.

DBS as a Competitor in the Market for Multichannel Video Programming 

Distribution

Today, DBS is a significant competitor in the market for the delivery of 

multichannel video programming distribution service (“MVPD”). DBS systems are a 

particularly significant source of MVPD services in areas where cable is not available. 

Furthermore, DBS provides a much higher channel capacity than most, if not all, cable 

systems choose to provide, thereby opening the market further for niche programming 

that could not be supported otherwise, providing highly-targeted advertising 

opportunities. Like cable, DBS operators offer video programming packages for a 

monthly fee, premium channels, and pay-per-view services. 

DBS services offer many features that consumers rate highly, such as digital 

picture quality, compact disc sound clarity, increased channel capacity and 

programming options, and near video-on-demand movies. For many consumers, the 

 

101 Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming, 

CS Docket No. 99-230, Sixth Annual Report (“1999 MVPD Competition Report”), 15 FCC Rcd 978, 1011-

1012 ¶ 70 (2000).

102 Cable also has public interest obligations. See Chapter VI.

103 Implementation of Section 25 of the Cable Television Consumer Protection and Competition Act of 

1992, Direct Broadcast Satellite Public Interest Obligations, MM Docket No. 93-25, Report and Order, 

(“DBS Public Interest Order”), 13 FCC Rcd 23254 (1998).

104 See Federal Communications Commission, Commission Implements Public Interest Obligations for 

Direct Broadcast Satellite Service, MM Docket 93-25, FCC News Release (Nov. 19, 1998).
57

large number of channels and programming variety was the initial draw to DBS 

services, especially sports and movies. DBS offers certain packages of out-of-market 

sports programming not elsewhere available to consumers. 

DBS providers have also begun to offer two-way high-speed Internet access to 

consumers. For example, DirecTV offers two-way Internet access services to their 

subscribers under the brand name DirecPC, and consumers can receive video and 

high-speed Internet access through one satellite dish called the DirecDUO.105 

In addition, DirecTV and EchoStar both provide subscribers with high-definition 

television (“HDTV”) programming. In 2001, DirecTV premiered HDNet, an HDTV 

channel that will show Major League Baseball games, National Hockey League games, 

qualifying events for the 2002 Winter Olympic games, and other non-sports 

entertainment programming.106 DirecTV also carries HBO, Showtime, and select payper-view movies in HDTV format.107

 EchoStar carries HBO, Showtime, CBS, Discovery,

and select pay-per-view movies in HDTV format.108

The primary disadvantage of DBS with respect to cable television systems has 

traditionally been the relative availability to carry local network signals via satellite 

systems. In the past, both copyright law and technical limitations on channel capacity 

restricted the ability of DBS providers to carry local broadcast signals. In turn, this 

appears to have impeded DBS’s ability to compete effectively with cable television. 

In 1988, Congress passed the Satellite Home Viewer Act ("SHVA").109 SHVA 

granted a limited exception to the exclusive programming copyrights enjoyed by television 

networks and their affiliates because it recognized that some households were unable to 

receive network station signals over the air.110 The exception was a narrow compulsory 

 

105 See http://www.direcpc.com. DirecTV also continues to offer its one-way high-speed access service, 

with a telephone line return path.

106 Monica Hogan, DirecTV Readies HDTV Sports Net, Multichannel News, Sept. 4, 2001.

107 Monica Hogan, DirecTV Readies HDTV Sports Net, Multichannel News, Sept. 4, 2001. To receive 

DirecTV’s HDTV service, subscribers must purchase either an HDTV set with a built-in DirecTV receiver, 

or a separate decoder box, and a second satellite dish that is capable of receiving the signals. See

http://www.directv.com:80/yourservice/yourservicepages/0,1125,384,00.html.

108 Monica Hogan, DirecTV Readies HDTV Sports Net, Multichannel News, Sept. 4, 2001. To receive 

EchoStar’s HDTV service, subscribers must purchase a second dish, use a specialized decoder box, and 

pay an extra fee. See http://www.dishnetwork.com/content/programming/locals/cbshd/index.shtml and 

http://www.dishnetwork.com/ppv/features/hdtv/hdtv.html.

109 17 U.S.C. § 119.

110 H.R. Rep. No. 103-703, at 5 (1994) (Congress enacted the SHVA so that "households that cannot 

receive over-the-air broadcasts or cable can be supplied with television programming via home satellite 

dishes"); S. Rep. No. 103-407, at 5 n.2 (1994) (the restriction on satellite delivery of network signals 

"actually refers to those geographic areas where subscribers are unable to receive the signal of a 

particular network"); H.R. Rep. No. 100-187(I), at 14-15, 18, 26, reprinted in 1988 U.S.C.C.A.N. 5638 

(1988) ("The distribution of network signals is restricted to unserved households; that is, those that are 

unable to receive an adequate over-the-air signal.").
58

copyright license that direct-to-home (DTH) satellite video providers111 were allowed to 

use for retransmitting signals of a defined class of television network stations112 "to 

persons who reside in unserved households" (also known as “white areas”).113 SHVA 

also contained a "superstation" compulsory copyright license with no geographic 

restrictions. Under SHVA, DirecTV and Primestar and Echostar each offered 

retransmission of distant broadcast signals to unserved households.

On November 29, 1999, a revision of the Satellite Home Viewer Act (“SHVA”) 

was enacted.114 Under the Satellite Home Viewer Improvement Act of 1999 ("SHVIA"), 

satellite providers are allowed to retransmit television broadcast signals on a local into 

local basis. During the six month period after the date of the enactment of SHVIA, DBS 

providers were allowed to retransmit local signals without consent.115 Thereafter, DBS 

operators were subject to retransmission consent rules similar to those established for 

cable operators.116

SHVIA also directed the Commission to undertake and complete rulemakings 

related to satellite carriage of broadcast stations within one year of enactment on 

November 29, 2000. As required by SHVIA, the Commission established rules to 

implement carriage of broadcast signals, retransmission consent, and program 

 

111 More specifically, the license is available to satellite carriers defined as an entity that uses the facilities 

of a satellite or satellite service licensed by the Commission and operates in the Fixed-Satellite Service 

under part 25 of title 47 of the Code of Federal Regulations.

112 Under 17 U.S.C. § 119(d)(2), the term "network station" means: (A) a television broadcast station, 

including any translator station or terrestrial satellite station that rebroadcasts all or substantially all of the 

programming broadcast by a network station, that is owned or operated by, or affiliated with, one or more 

of the television networks in the United States which offer an interconnected program service on a 

regular basis for 15 or more hours per week to at least 25 of its affiliated television licensees in 10 or 

more States; or (B) a noncommercial educational broadcast station (as defined in section 397 of the 

Communications Act of 1934)

113 17 U.S.C. §§ 119(a)(1), (d)(9), and (d)(10). The term "unserved household” is defined by SHVA as a 

household that: (A) cannot receive, through the use of a conventional outdoor rooftop receiving antenna, 

an over-the-air signal of grade B intensity (as defined by the Federal Communications Commission) of a 

primary network station affiliated with that network, and (B) has not, within 90 days before the date on 

which that household subscribes, either initially or on renewal, to receive secondary transmissions by a 

satellite carrier of a network station affiliated with that network, subscribed to a cable system that provides 

the signal of a primary network station affiliated with that network.

114 Pub. L. No. 106-113, § 1000(9), 113 Stat. 1501 (enacting S. 1948, including the Satellite Home Viewer 

Improvement Act of 1999 ("SHVIA"), Title I of the Intellectual Property and Communications Omnibus 

Reform Act of 1999 ("IPACORA"), relating to copyright licensing and carriage of broadcast signals by 

satellite carriers, codified in scattered sections of 17 and 47 U.S.C.). 

115 See 47 U.S.C. § 325(b)(2).

116 See 47 U.S.C. § 325(b)(3)(C)(I) directing the Commission to establish election time periods for satellite 

carrier retransmission consent consistent with those established pursuant to the 1992 Cable Act.
59

exclusivity with respect to satellite carriage of broadcast stations.117 Pursuant to SHVIA, 

these rules require that where a DBS provider chooses to offer local-into-local service 

pursuant to the statutory copyright license, it must carry all of the local stations within 

that market that request carriage.118

As of October 2002, DirecTV will offer for a fee, the local affiliates of ABC, CBS, 

NBC, and FOX in 51 markets, and a national PBS feed with every local station 

package.119 Similarly, EchoStar transmits a local network package to its subscribers for 

a fee, and offers the national PBS feed as an added option.120 DirecTV reports that its 

overall subscriber levels have increased by 20 percent due to the provisioning of local 

broadcast channel service, and that 47 percent of its customers to whom it is available 

take a local channel package.121

The vertical integration of non-broadcasting programming networks with cable 

operators is also an issue of continuing concern for DBS providers. The Commission’s 

“program access rules,” first adopted in 1993, prohibit unfair and discriminatory acts and 

prohibit or limit the types of exclusive programming contracts that may be entered into 

between cable operators and vertically-integrated programming vendors. In essence, 

the rules guarantee DBS access to satellite-delivered cable programming. DBS 

considers access to cable origination programming very important.122 The program 

 

117 Implementation of the Satellite Home Viewer Improvement Act 1999: Broadcast Signal Carriage 

Issues, Retransmission Consent Issues, CS Docket Nos. 00-96, 99-363, Report and Order, 16 FCC Rcd 

1918 (2000); Technical Standards for Determining Eligibility For Satellite-Delivered Network Signals 

Pursuant To the Satellite Home Viewer Improvement Act, ET Docket No. 00-90, Report, 15 FCC 24321 

(2000); Implementation of the Satellite Home Viewer Improvement Act of 1999: Application of Network 

Non-Duplication, Syndicated Exclusivity, and Sports Blackout Rules To Satellite Retransmissions of 

Broadcast Signals, CS Docket No. 00-2, Report and Order, 15 FCC 22548 (2000); Implementation of the 

Satellite Home Viewer Improvement Act of 1999, Enforcement Procedures for Retransmission Consent 

Violations, Order, 15 FCC Rcd 2522 (2000); Implementation of the Satellite Home Viewer Improvement 

Act of 1999, Retransmission Consent Issues: Good Faith Negotiation and Exclusivity, CS Docket No. 99-

363, First Report and Order, 15 FCC Rcd 5445 (2000).

118 SHVIA provides DBS carriers with the opportunity to carry local stations in a Designated Market Area 

(“DMA”) pursuant to a statutory copyright license similar to the one provided cable operators. If DBS 

carriers elect this option in a DMA, however, they must carry all the local stations in the DMA, effective 

January 1, 2002. The satellite industry challenged the SHVIA must-carry provisions. See DirecTV, 

Echostar, SBCA v. FCC & USA, No. 01-1151 (Fourth Circuit). In this consolidated case, the satellite 

carriers sought review of the Commission's Order implementing the statute. They also appealed a June 

19, 2001, judgment of the United States District Court for the Eastern District of Virginia, which granted 

the government's motion to dismiss their complaint challenging the SHVIA. On December 7, 2001, the 

United States Court of Appeals for the Fourth Circuit denied these petitions for review and affirmed the 

United States District Court for the Eastern District of Virginia’s opinion. See Satellite Broadcasting and 

Communications Association v. FCC, No. 01-1151 et al. (4th Cir. 2001). The Supreme Court has denied 

these petitions as well. Satellite Broadcasting Communications Assoc v. FCC, 275 F.3d 337 (4th Cir. 

2001), cert. denied, 122 S. Ct. 2588 (2002).

119 Satellite Business News Fax Update, Sept. 25, 2002.

120 See http://www.skyreport.com/skyreport/local.htm.

121 2001 MVPD Competition Report, 17 FCC at 1273-74 ¶ 59.

122 See 2001 MVPD Competition Report, 17 FCC Rcd at 1314.
60

access provisions, however, only apply to satellite delivered programming.123 

Programming services distributed by any other means are not subject to the program 

access requirements.124 As a result, some argue that vertically-integrated programming 

vendors may have the incentive and ability to modify the distribution of their 

programming, using fiber optics or other non-satellite means, thereby removing the 

programming from the purview of the program access provisions, and thusly withhold 

valuable programming from DBS operators.125 On June 13, 2002, the Commission 

extended for five years the statutory prohibition on exclusive contracts for satellitedelivered cable or satellite-delivered broadcast programming between cable operators 

and their affiliated programmers which was set to expire on October 5, 2002, but 

determined that it does not have the discretion to expand the prohibition to terrestrially 

delivered programming or non-vertically integrated programming.

DBS has also faced obstacles to competitive success in suburban and urban 

areas. Although the size of satellite dishes has shrunk significantly over the last ten 

years, many consumers were faced with local zoning restrictions and limits imposed by 

building managers and community associations on the use of satellite dishes for the 

reception of video programming. The Commission has preempted zoning restrictions 

by landlords, homeowner associations, etc., on dishes 1 meter or less in diameter.126 

Moreover, Commission rules on the use of over-the-air-reception devices (“OTARD”), 

prohibit restrictions that impair the installation, maintenance or use of antennas used to 

receive video programming.127 Effective January 22, 1999, the Commission amended 

the rule so that it applies to rental property where the renter has an exclusive use area, 

such as a balcony or patio. The rule applies to viewers who place satellite dishes that 

meet size limitations on property that they own or rent and that is within their exclusive 

use or control, including condominium owners and cooperative owners, and tenants 

who have an area where they have exclusive use, such as a balcony or patio, in which 

to install the antenna.128 The rule does not apply to common areas that are owned by a 

landlord, a community association, or jointly by condominium or cooperative owners. 

Other conditions, however, may continue to limit DBS access for some viewers. For 

instance, DBS antennas must face south to receive an acceptable quality signal from 

 

123 See Implementation of the Cable Television Consumer Protection And Competition Act of 1992, 

Development of Competition and Diversity in Video Programming Distribution: Section 628(c)(5) of the 

Communications Act,

Sunset of Exclusive Contract Prohibition, CS Docket 02-190, Report and Order (“Program Access Report 

& Order”) FCC 02-176, ¶¶ 123-41; 8 FCC Rcd at 3416-23; see also 47 C.F.R. §§ 76.1000 et seq.

124 See 1994 MVPD Competition Report ¶¶ 182-83

125 For example, regional clustering of systems combined with a system's ownership of one or more 

regional programming networks may create one such opportunity for cable operators to shift (regional) 

programming to terrestrial distribution to facilitate denial of the programming to competitors. See Program 

Access Report & Order, FCC 02-176, ¶¶ 123-41.

126 The satellite dishes may be of any size in Alaska.

127 47 C.F.R. § 1.4000

128 Restrictions on Over-the-Air Receptions Devices: Television Broadcast, Multichannel Multipoint 

Distribution and Direct Broadcast Satellite Services, CS Docket No. 96-83, Second Report and Order, 13 

FCC Rcd 23874 (1998); Restrictions on Over-the-Air Receptions Devices: Television Broadcast, 

Multichannel Multipoint Distribution and Direct Broadcast Satellite Services, CS Docket No. 96-83, Order 

on Reconsideration, 14 FCC 19924 (1999).
61

the satellite, which transmits the video programming service. Therefore, renters and 

property owners who do not have south-facing exclusive use areas cannot opt for DBS 

service.129

Conclusion

Consumers have adopted the DBS service at one of the fastest rates of any 

consumer good in history. The presence of DBS in the market for the delivery of video 

programming has expanded the market such that now almost all televisions households 

have access to subscription video. In addition, the competitive presence of DBS has 

forced cable to expand channel capacity and service options. Although DBS cannot 

now provide the advantage of local advertising availabilities, through its substantially 

expanded channel capacity, and ability to serve areas not reached by cable, DBS 

extends carriage opportunities for non-broadcast networks and by providing additional 

viewers for national advertising opportunities. 

Although DBS providers are not required to provide local broadcast signals into 

local markets, consumer demand has prompted them to provide local-into-local service 

in many markets.130 Although this will serve to deliver broadcast television 

programming even more widely, it will also serve to shore up the popularity of nonbroadcast networks and the pay television model. DBS has significantly solidified the 

pay-TV landscape, and promises to remain an enticing option for consumers for the 

foreseeable future.

 

129 DBS also expresses concern regarding potential interference from newly authorized MVDDS service.

The Commission has determined, however, that it is technically feasible for MVDDS and DBS to share 

spectrum and that such sharing can be accomplished under an already existing fixed allocation in the 

12.2-12.7 GHz band. This allocation requires that MVDDS not cause harmful interference to incumbent 

DBS services See Amendment of Parts 2 and 25 of the Commission’s Rules to Permit Operation of 

NGSO FSS Systems Co-Frequency With GSO and Terrestrial Systems in the Ku-Band Frequency Band; 

Amendment of the Commission’s Rules to Authorize Subsidiary Terrestrial Use of the 12.2-12.7 GHz 

Band by Direct Broadcast Licensees and Their Affiliates; and Applications of Broadwave USA, PDC 

Broadband Corporation, and Satellite Receivers, Ltd., to Provide A Fixed Service in the 12.2-12.7 GHz 

Band, ET Docket No. 98-206, RM-9147, RM-92-45, First Report and Order and Further Notice of 

Proposed Rulemaking, 16 FCC Rcd 4096 (2001).

130 The DBS signal carriage rules require that where DBS elects to carry a local signal into a local market, 

it must carry all of the local signals in that market.
62

VII. Other Video Media Delivery Platforms

Introduction

Consumers have several options for sources of video programming, in addition to 

free terrestrial broadcast television, cable and DBS. These include Multichannel 

Multipoint Distribution Service (“MMDS”), cable overbuilders of one kind or another, 

VHS tapes, DVDs, theatrical films, and IP-based video streams and downloads over the 

Internet. These video programming sources and viewing options clearly increase 

viewers’ choices and affect the broadcast television market. The cumulative effect of 

these alternatives may become considerable. As Table 25 suggests, the explosion of 

cable, DBS and home video, as well as video games has lured viewers away using their 

television sets to watch only broadcast television. Several of these alternative video 

programming sources are briefly discussed below. 

Table 25: Estimated Share of U.S. TV Home Set Usage by Program Source

Annual Averages

Early

1950s

Early

1960s

Early

1970s

Early

1980s

Early

1990s

Early

2000s

ABC/CBS/NBC 60% 58% 55% 49% 31% 21%

DuMont 4 - - - - -

Fox/WB/UPN/PAX - - - - 2 8

Network Affiliates131 30 29 25 23 18 10

Independent Stations132 6 11 16 20 16 11

PBS Stations - 2 4 3 3 3

Pay Cable - - - 4 4 6

Basic Cable133 - - 1 3 20 35

VCR Play - - - - 5 5

Video Games - - - 1 1 1

PPV - - - - - -

134

Ave. Hours of Set

Usage (Weekly)135

35 39 46 51 54 62

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

MMDS

Working Paper 26 discussed video distribution as provided by MMDS. MMDS 

systems, often referred to as "wireless cable," transmit video programming and other 

services to subscribers through 2GHz microwave frequencies, using Multipoint 

Distribution Service ("MDS") and leased access channel capacity on Instructional 

 

131 Includes syndicated shows.

132 Excludes WTBS and Fox or other on-air networks; includes syndicated shows.

133 Includes WTBS.

134 Less than 1%.

135 Counts multiple-set usage to different sources at the same time as separate exposures.
63

Television Fixed Service ("ITFS") channels.136 At the time of the release of Working 

Paper 26, MMDS was a promising competitor to traditional wireline cable services. 

Working Paper 26 noted that wireless cable subscribership was around 180,000 and 

growing.137 By year-end 1996, MMDS provided service to almost 1.2 million 

subscribers.

138

 As of December 2001, though, there were only about 700,000 MMDS 

subscribers out of the 36 million homes capable of receiving an MMDS signal ("homes 

seen").139 

Clearly, MMDS has not become a significant competitor in the market for the 

delivery of video programming since the release of Working Paper 26. MMDS provides 

competition to the cable industry in limited areas only, and subscribership remains low 

and declining. Despite its lack of promise as a future competitor in the market for video 

programming, however, or perhaps because of its lack of promise, many MMDS 

providers are currently focusing on data transmissions rather than video service. Some 

believe the MMDS industry is in fact transitioning from offering video programming to 

offering data services instead. In 1998, the Commission released the Two-Way Order

permitting MDS/ITFS licensees to construct digital two-way systems that could provide 

high-speed, high-capacity broadband service, including two-way Internet service via 

cellularized communication systems.140 In addition, on September 6, 2001, the 

Commission adopted a First Report and Order and Memorandum Opinion and Order

(“First R&O/MO&O”) in the New Advanced Wireless Services proceeding, which made 

the spectrum used by MMDS services potentially available for advanced mobile and 

fixed terrestrial wireless services, including 3G and future generations of wireless 

systems.141 The Commission decided not to relocate the existing licensees or 

otherwise modify their licenses.142 In addition, the Commission recognized that it will 

 

136Amendment of Parts 21 and 74 of the Commission's Rules with Regard to Filing Procedures in the 

Multipoint Distribution Service and in the Instructional Television Fixed Service and Implementation of 

Section 309(j) of the Communications Act - Competitive Bidding, MM Docket. No. 94-131 and PP Docket 

No. 93-253, Report and Order, 10 FCC Rcd at 9589, 9593 ¶ 7 (1995). 

137Working Paper 26, at 110. 

138 Paul Kagan Assoc., Inc., Wireless Cable Sub Count and Revenue Projections, 1996-2000, Wireless 

Cable Investor, Dec. 31, 1996, at 10-11; Paul Kagan Assoc., Inc., Wireless Cable Sub Cont and Revenue 

Projections 1997-2001, Wireless/Private Cable Investor, March 25, 1998, at 4-5.

139 NCTA, Cable & Telecommunications Industry Overview 2001, Cable Television Developments 2001, 

at 11.

140 Amendment of Parts 21 and 74 to Enable Multipoint Distribution Service and Instructional Television 

Fixed Service Licensees to Engage in Fixed Two-Way Transmissions, MM Docket No. 97-217, Report 

and Order, 13 FCC Rcd. 19112 (1998), recon., 14 FCC Rcd 12764 (1999), further recon., 15 FCC Rcd 

14566 (2000).

141 See Amendment of Part 2 of the Commission’s Rules to Allocate Spectrum Below 3GHz for Mobile 

and Fixed Services to Support the Introduction of New Advanced Wireless Services, Including Third 

Generation Wireless Systems, ET Docket No. 00-258, First Report and Order and Memorandum Opinion 

and Order, 16 FCC Rcd 17222 (2001).

142 See Amendment of Part 2 of the Commission’s Rules to Allocate Spectrum Below 3GHz for Mobile 

and Fixed Services to Support the Introduction of New Advanced Wireless Services, Including Third 

Generation Wireless Systems, ET Docket No. 00-258, First Report and Order and Memorandum Opinion 

and Order, 16 FCC Rcd 17222 (2001).
64

have to explore the service rules that would apply to permit mobile operations in the 2.5-

2.69 GHz band in a separate future proceeding.

143

Overbuilders

The term “overbuild” describes the situation in which a second cable operator 

enters a local market in direct competition with an incumbent cable operator. In these 

markets, the second operator, or “overbuilder,” lays wires in the same area as the 

incumbent, “overbuilding” the incumbent’s plant, thereby giving consumers a choice 

between cable service providers. Many overbuilders are LECs or utility companies as 

discussed below.

Historically, overbuilding incumbent cable systems has been economically 

difficult. Overbuilders appear to be attempting to overcome the economic difficulties of 

overbuilding by building systems that are more advanced than those of the incumbent 

cable operators. Building advanced systems allows these overbuilders, (also known as 

broadband service providers or "BSPs"), to offer a bundle of services, such as video, 

voice, and high-speed Internet access, which may increase per subscriber revenue and 

decrease churn. Overbuilders, or BSPs, have also become extremely careful in 

selecting communities to overbuild, focusing their efforts on communities with high 

population density for the highest potential subscriber base. But even with their 

selective strategy, BSPs face considerable challenges. BSPs are also facing difficulties 

in obtaining capital. As a result, many BSPs have scaled back plans, reduced capital 

expenditures, reduced staffs, or shut down operations altogether.144 BSPs also face 

difficulties obtaining franchises. As a result, many BSPs have been taking advantage of 

open video system rules stemming from the 1996 Act to help them gain entre into local 

communities. Nevertheless, 

At the time of Working Paper 26, the number of overbuilders was relatively small, 

although overbuild activity picked up significantly in 1995. By June 2001, competing

franchises had been awarded covering more than 460 communities in 38 states.145 

However, just because a franchise is awarded does not mean it is operational. After a 

franchise is awarded, it can take a significant amount of time for the franchisee to build, 

or gain access to, a network over which to provide video service. For example, in June 

1999, Ameritech held 108 franchises but offered service in only 90 communities. 

Competition from overbuilders is important part of competition to incumbent cable 

operators in local markets. But the future of competition from overbuilds is uncertain. 

 

143 See Amendment of Part 2 of the Commission’s Rules to Allocate Spectrum Below 3GHz for Mobile 

and Fixed Services to Support the Introduction of New Advanced Wireless Services, Including Third 

Generation Wireless Systems, ET Docket No. 00-258, First Report and Order and Memorandum Opinion 

and Order, 16 FCC Rcd 17222 (2001).

144 See New Broadband Players Retreat From Cable, Telecom Markets, Comm. Daily, Apr. 11, 2001, at 

2-3.

145 Kagan World Media, Cable TV Franchising Competition, 1995-1998 Franchise Awards, The 

Broadband Cable Financial Databook, 2001, at 76-79.
65

Capital constraints are just one of many difficulties being faced by overbuilders. And 

access to programming remains crucial to their survival. 

Utilities

At the time of Working Paper 26, electric and gas utilities were foreclosed from 

entering the video program distribution marketplace by the Public Utility Holding 

Company Act of 1935 ("PUHCA"). PUHCA imposed strict “line of business” restrictions 

on registered public utility holding companies which sought to diversify into 

telecommunications or information services markets.146 This changed, however with 

the 1996 Telecommunications Act. Section 103 of the 1996 Act, which added a new 

Section 34 to PUHCA, permitted registered public utility holding companies to enter 

telecommunications industries without prior SEC permission through the acquisition or 

maintenance of an interest in an “exempt telecommunications company” ("ETC").147 

This removed a significant regulatory barrier which had previously deterred registered 

public utility holding companies’ entry into telecommunications, information services, 

and video markets.

On September 12, 1996, the Commission adopted final rules to implement 

Section 103. Following Congress’s mandate, the rules provided a straight-forward 

procedure for determining ETC status, thus expediting the entry of public utility holding 

companies into the telecommunications industry.148 Shortly thereafter, registered public 

utility holding companies entered into partnerships to provide a package of services 

including video service. 

Electric and gas utilities continue to move forward with ventures involving 

multichannel video programming distribution, but are not yet major competitors in the 

telecommunications or cable markets.149 Because electric and gas utilities own fiber 

optic networks in some areas, and generally have access to public rights-of-way in the 

areas they serve; however, they could become competitively significant in the future, 

especially in specific local markets. 

 

146 A registered public utility holding company could only enter into “any business (other than the business 

of a public utility company as such)” that was reasonably incidental, or economically necessary or 

appropriate to the operations of one or more integrated public-utility systems...which the [SEC] shall find 

necessary or appropriate in the public interest or for the protection of investors or consumers and not 

detrimental to the proper functioning of such systems or systems. PUHCA Section 11 (b)(1). 

147 According to new PUHCA Section 34(a)(1), an ETC is “any person determined by the ‘Federal 

Communications Commission to be engaged directly or indirectly, wherever located, through one or more 

affiliates (as defined in Section 2(a)(11)(B) of PUHCA), and exclusively in the business of providing: (A) 

telecommunications services; (B) information services; (C) other services or products subject to the 

jurisdiction of the Commission; or (d) products or services that are related or incidental to the provision of 

a product or service described in (A), (B), or (C).”

148 In re Implementation of Section 34(a)(1) of the Public Utility Holding Company Act of 1935, as added 

by Section 103 of the Telecommunications Act of 1996, GC Docket No. 96-101, Report & Order, 11 FCC 

Rcd 11377 (1996).

149 2001 MVPD Competition Report, 17 FCC Rcd 1293 ¶ 104.
66

Some utilities seek to offer video program distribution services on their own, 

while others, like RCN have partnered with broadband service providers to provide a 

package of services to consumers. It also appears that some utilities, particularly some 

municipal utilities in rural areas, have built advanced telecommunications networks 

offering a full range of services where incumbent cable operators and telephone 

companies are not willing to do so. 

The largest utility to provide video programming distribution services is RCN 

which operates subscription video services in New York City, Washington, D.C., 

Washington, D.C. suburbs, South San Francisco, California, Boston, Massachusetts, 

and its suburbs, Northern New Jersey, and suburbs of Philadelphia.150 By the first 

quarter of 2001, RCN passed more than 1.4 million homes and a total of 443,011 video 

subscribers, although some of these are subscribers to incumbent cable systems it 

operates. 151

Although electric and gas utilities are not yet major competitors in the 

telecommunications or video distribution marketplace, utilities do in many cases, 

constitute the only competition to incumbent cable operators in specific local markets. 

But new entrants continue to report difficulties negotiating franchises, entering MDUs, 

gaining access to equipment, and gaining access to popular programming.152 (see

discussion of program access issues in Chapter 10 of this report ). If utilities are to 

remain competitive, many of these issues will need to be addressed.

Local Exchange Carriers

At the time of Working Paper 26, entry into the video marketplace by local 

exchange carriers (“LECs”) was not expected. At that time, local telephone companies 

were prohibited by statute and federal regulation from providing video programming 

directly to subscribers within their service areas.153 Although LECs were permitted to 

provide video programming outside their telephone service areas, and channel service 

to unaffiliated cable operators within their service areas, few LEC participated in such 

ventures.154 

 

150 2000 MVPD Competition Report, 16 FCC Rcd at 6063. RCN is not building within Philadelphia itself 

because it was unable to reach a franchise or OVS agreement with the city. See, e.g., Mass Media, 

Comm. Daily, Feb. 16, 2001, at 7.

151 2001 MVPD Competition Report, 17 FCC Rcd 1295 ¶ 109.

152 2002 Program Access Report and Order, 17 FCC Rcd 12124 ¶¶ 28, 50, and 67; 2001 MVPD 

Competition Report, 17 FCC Rcd 1293-94 ¶ 106.

153 Section 613 (b) of the Communications Act, 47 U.S.C. § 533 (b), prohibited a common carrier from 

providing video programming directly to subscribers in its telephone service area, either directly, or 

indirectly through an affiliate owned by, operated by, controlled by, or under common control with a 

common carrier. That statutory provision was referred to as the cross-ownership ban. In 1990, the 

Commission further restricted LECs to strict carrier-user relationships with cable operators, except in rural 

areas where telephone companies were permitted to provide video programming to subscribers within 

their service areas. See 47 C.F.R. §§ 63.54, 63.58 (1990).

154 See 1994 MVPD Competition Report, 9 FCC Rcd 7442 ¶ 103.
67

In 1992, the Commission adopted orders creating a framework for LEC 

participation in the video program distribution marketplace consistent called “video 

dialtone” which spurred increased interest in video program distribution by LECs.155 In 

1995, LECs obtained authority to pursue entry through construction of cable systems.

156

 In addition, LECs began in 1995 to pursue video program distribution through 

investments in, and acquisitions of, wireless providers, though none of these operators 

currently remain in the MMDS business.157 Later, the 1996 Act created LEC options to 

replace the video dialtone framework through open video systems (“OVS.”)158

Ameritech was the most aggressive and the most significant of the LECs offering 

subscription video service, acquiring as many as 111 franchises by 1999, serving as 

many as 250,000 subscribers, before it (as SBC) sold the franchised systems to cable 

overbuilder, WideOpenWest in May 2001.159 

A number of small LECs are using VDSL to offer a bundle of services, including 

multichannel video, over phone lines. It is estimated that approximately 40 to 50 

mostly-small LECs, are using VDSL technology to provide video to an aggregate of 

approximately 100,000 subscribers. 160 Companies are also deploying, or investigating 

 

155 See Telephone Company-Cable Television Cross Ownership Rules, Sections 63.54-63.58, Further 

Notice of Proposed Rulemaking, First Report and Order and Second Further Notice of Inquiry, 7 FCC Rcd 

300 (1991), recon., 7 FCC Rcd 5069 (1992), aff'd sub nom., National Cable Television Association v. 

FCC, 33 F.3rd 66 (D.C. Cir. 1994); Telephone Company-Cable Television Cross Ownership Rules, 

Sections 63.54-63.58, Second Report and Order, Recommendation to Congress, and Second Further 

Notice of Proposed Rulemaking, 7 FCC Rcd 5781 (1992), appeal pending sub nom., Mankato Citizens 

Telephone Company, No. 92-1404 (D.C. Cir. filed Sept. 9, 1992) and modified on recon., FCC 94-269, _ 

FCC Rcd _ (rel. Nov. 7, 1994) (Video Dialtone Reconsideration Order).

156 In August 1995, the Commission streamlined the Section 214 process for LECs to construct stand 

alone cable systems within their local service areas. The streamlined Section 214 procedures apply only 

to telephone companies that have obtained injunctions barring the Commission from enforcing the cabletelco cross-ownership ban. Telephone companies already had blanket Section 214 authority to operate 

cable systems outside their telephone service areas. Telephone Co.-Cable Television Cross-Ownership 

Rules, §§ 63.54-63.58, CC Docket No. 87-266, Fourth Report & Order, 11 FCC Rcd 818 (1995), 

summarized at 60 Fed. Reg. 44280 (1995), petition for review pending, Ameritech Corp. v. FCC, No. 

95-1423 (D.C. Cir. filed Aug. 18, 1995) and No. 95-1441 (DC Cir. filed Aug. 25, 1995); GTE Serv. Corp. v. 

FCC, No. 95-1488 (DC Cir. filed Sept. 22, 1995).

157 Bell Atlantic NYNEX, PacBell, Bell South, and GTE all made significant investments in wireless cable 

between 1995 and 2001, serving as many as 130,000 subscribers in aggregate, but none of these 

operators currently remain in the MMDS business. See CAI Wireless Systems, Inc., Prospectus 5 (Sept. 

21, 1995); Paul Kagan Assoc., Inc., Wireless Cable Public and Private Funding, June 1994 Through May 

1995, Wireless Cable Investor, May 31, 1995, at 1: Paul Kagan Assoc., Inc., Wireless Cable Public Bond 

Offerings, Wireless Cable Investor, June 30, 1995, at 1. In July 1995, PacBell acquired Cross Country 

which had wireless systems in PacBell's local telephone service area. Pacific Telesis Group, Pacific 

Telesis Becomes Nation's First Telco To Offer Wireless Cable Television (News Release), July 25, 1995; 

see also 2001 MVPD Competition Report, 17 FCC Rcd 1291 ¶ 101; 2000 MVPD Competition Report, 16 

FCC Rcd 6061, ¶ 121; 1999 MVPD Competition Report, 15 FCC Rcd 1036 ¶ 122 

158 47 U.S.C. § 571(a)(3)-(4).

159 SBC Sells Americast Cable Overbuild Systems To Wide Open West, Comm. Daily, May 25, 2001, at 

2-3. 

160 Matt Stump, In Omaha, Cox and Qwest Wage Three-Way Contest, Broadband Week, Oct. 1, 2001; 

Roger Bindl, Next Level Communications, Video In Telephony, Nov. 9, 2001; Karen Brown, Getting the 

Picture? Telcos Struggle With Unfocused Video Market, Broadband Week, June 4, 2001.
68

deploying, video over the lower bandwidth asymmetric digital subscriber line service 

("ADSL"). Because of the lower capacity, video over ADSL involves an IP-based videoon-demand service, rather than full-fledged multichannel video. Between 5,000 and 

10,000 households currently subscribe to ADSL video-on-demand service.161 It is too 

early to tell what kind of impact these technologies will have on the marketplace.

Incumbent LECs have largely exited the video business, though there are a few 

exceptions. BellSouth, in addition to reselling DBS service, continues to operate some 

overbuild cable systems.162 A number of smaller LECs are offering, or preparing to 

offer, video service over existing telephone lines (see discussion of “VDSL” in this 

Section). By-and-large, however, incumbent LECs do not appear to be potentially 

significant competitors in the market for video programming, even in local markets.

The Internet

The Internet provides not only a platform for the delivery of video programming, 

but it also supports a collection of other applications that may take time away from 

watching television. For example, the availability of real-time and downloadable video 

over the Internet (“Internet video”) has increased greatly since the late 1990s.163 The 

number of homes with access to the Internet, the number of home users accessing 

Internet video, and the amount of Internet video content has also increased over the last 

year. As of December 2001, an estimated 56.4% of all U.S. households had Internet 

access, compared with 52% as of July 2000.164 Additionally, as of July 2001, 41 million 

residential Web users had accessed streaming video.165 However, Internet video is not 

currently viewed by the Commission as a direct competitor to traditional video services, 

despite evidence of continued interest in Internet video deployment and use.166 

 

161 Roger Bindl, Next Level Communications, Video In Telephony, Nov. 9, 2001.

162 Kagan World Media, Cable TV Competitive Franchise, 1995-2001, Broadband Cable Financial 

Databook 2001, July 2001, at 76-80.

163 Internet video provided in real-time is also known as “streaming video.”

164 Understanding Broadband Demand: A Review of Critical Issues, Office of Technology Policy Report, 

U.S. Department of Commerce, September 2002, p. 5.; See Amanda Cantrell, Growth of Internet Access 

Slows Dramatically in U.S., The Industry Standard, Aug. 14, 2001.

165 Arbitron, Inc., Arbitron/Edison Media Research Study Reveals Most “Streamies” First Accessed 

Webcasting within the Last Year (press release), Sept. 5, 2001 (citing Nielsen// Net Ratings data). 

166 The Commission recently suggested that, given the nascent stage of the Internet video industry, it is 

premature to consider Internet video to be a full competitive alternative. Amendment of Section 73.658(g) 

of The Commission’s Rules – The Dual Network Rule, MM Docket No. 00-108, Report and Order, 16 FCC 

Rcd 11114, 11120 (2001). In addition, industry sources believe that Internet video still is substandard to 

broadcast quality and that hurdles remain to watching video on a computer screen. Robert La Franco, 

The Serious Game: Digital Video is Still Off-track, Red Herring Online, Aug. 22, 2001, at 

http://www.redherring.com/ind...01&doc_id=170020017&rh_special_report_id=; Alan Goldstein, Test 

Pattern: Yahoo Still Trying to Tune in Potential of Broadcast.com, The Dallas Morning News Online, July 

3, 2001, at http://www.dallas news.com/cgi-bin/...hnology/409092_yahoo_03bus.AR.html; Dot.Bomb 

Won’t Slow Streaming Media Growth, CERF Predicts, Comm. Daily, Apr. 27, 2001, at 5-6; Chris Wallace, 

Is Streaming Video Dead?, ZDNet, Mar. 19, 2001, at 

http://www.zdnet.com/filters/printerfriendly/0,6061,2697806-2,00.html; Streaming Media Poised for Big 

Growth, Speakers Say, Comm. Daily, June 21, 2001, at 5-6.
69

The Commission suggests that broadcast-quality Internet video service requires 

a high-speed broadband connection of about 300 kilobits per second (“kbps”) or 

higher.167 The number of high-speed lines connecting homes and businesses to the 

Internet increased by 33% during the second half of 2001, from 9.6 million to 12.8 

million lines, compared to a 36% increase, from nearly 7.1 million to 9.6 million lines, 

during the first half of 2001.168 Of the 12.8 million high-speed lines in service at the end 

of 2001, 11 million served residential and small business subscribers, a 41% increase 

from the 7.8 million residential and small business high-speed lines reported six months 

earlier. About 7.4 million of the 12.8 million high-speed lines were advanced services 

lines that provide services at speeds exceeding 200 kbps in both directions, an increase 

of 25% during the second half of 2001. About 5.8 million of the 7.4 million advanced 

services lines served residential and small business subscribers. 

At the end of 2001, the presence of high-speed service subscribers was reported 

in all 50 states, the District of Columbia, Puerto Rico and the Virgin Islands. High-speed 

service was also reported in 79% of the nation’s zip codes, compared to 78% in June 

2001 and 73% at the end of 2000. High-speed asymmetric DSL (“ADSL”) lines in 

service increased by 47% during the second half of 2001, from nearly 2.7 million to over 

3.9 million lines, compared to a 36% increase, from nearly 2 million to 2.7 million lines, 

during the preceding 6 months. High-speed Internet connections over coaxial cable 

systems (cable modem service) increased by 36% during the final six months of 2001, 

from 5.2 million to 7.1 million lines. By comparison, cable modem service increased by 

45%, from nearly 3.6 million to 5.2 million lines, during the first half of 2001. The 

presence of high-speed service subscribers were reported in 98% of the most densely 

populated decile of zip codes at the end of 2001, the same percentage at the end of 

2000, and in 43% of the least densely populated decile, compared to 28% at the end of 

2000. 

For zip codes ranked by median family income, high-speed subscribers were 

reported present in 97% of the top one-tenth of zip codes and in 63% of the bottom onetenth of zip codes at the end of 2001. The comparable figures for 2000 were 96% and 

55%. 

There are a number of recent significant legal, business and technological 

developments in the Internet video industry. Some Internet video providers face 

difficulties with U.S. copyright laws.169 Despite these obstacles, Internet users continue 

to download software for accessing Internet video. Streaming video websites continue 

to operate. Nielsen/Net Ratings estimates that Microsoft’s Windows Media Player has 

over 24.7 million users, while, RealNetworks’ RealPlayer has more than 24.4 million 

 

167 See 2000 Report, 16 FCC Rcd at 6054 (this data from this source is cited throughout this paragraph 

and the following twp paragraphs). 

168 See News Release Federal Communications Commission Releases Data on High-Speed Services for 

Internet Access, July 23, 2002, http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-224580A1.doc

(accessed August 11, 2002).

169 JumpTV.com Pullout Doesn’t End Debate on Streaming TV Copyright, Comm. Daily, Oct. 15, 2001, at 

3-4.
70

users (See Table 26).170 The amount of video programming content on the Internet also 

continues to grow.171 Some traditional broadcast and cable television programmers 

offer Internet video versions of their programming or supplemental programming. 

Table 26: Internet Video Statistics

2000 2001

Internet access from home

(% of U.S. population) 56% 58%

Total web users who have ever 

accessed streaming video (millions) 35 41

Microsoft Windows Media Player users 

(millions) 9.4 24.7

RealNetworks RealPlayer users 

(millions) 25.3 24.4

SOURCES: FCC, Annual Assessment of the Status of 

Competition in Markets for the Delivery of Video Programming, 

2000 and 2001

As of August 2002, RealNetworks had 750,000 subscribers to its RealOne 

premium service. RealOne streams audio and video from content providers such as 

ABCNews.com, E!, FoxSports.com, Major League Baseball and CNN.172 According to 

a recent study, U.S. consumers spent $300 million to access Web content in the first 

quarter of 2002. This represents a 155% increase from the same period in 2001.173 

Partnerships and marketing agreements between Web sites and entertainment 

companies continue to exist. In August 2001, MGM, Paramount, Sony Pictures, 

Universal and Warner Bros. announced a joint venture called Movielink to distribute 

movies on-demand over the Internet.174 Movielink has equal investments from these 

five studios.175 Movielink’s goal is to do more than just promote Internet-delivered

VOD.176 Its management believes that, over time, VOD will become a significant way 

consumers watch recorded material because of its convenience.177 Whether the 

demand for the service results in a profitable business model is an open question. 

 

170 RealNetworks Fuses Programs into Service, Reuters, Sept. 23, 2001, at http://news.cnet.com/news/0-

1005-200-7277594.html; RealNetworks Melds Audio, Video Platforms, InternetNews.com, Sept. 24, 2001, 

at http://www.internetnews.com/streaming-news/article /0,,861_889 881,00.html.

171 http://www.breaktv.com; http://www.feedroom.com; http://www.intv.net; http://www.television.com; 

http:// www.broadcast.com; http://www.tvtaxi.com; http://www.tvworldwide.com. 

172 See http://news.com.com/2100-1023-947617.html and http://news.com.com/2100-1023-944242.html

(both accessed August 6, 2002).

173 See http://news.com.com/2100-1023-947617.html (accessed August 6, 2002) citing a survey 

conducted by the Online Publishers Association (OPA) and Web measurement company ComScore 

Networks.

174 Bruce Orwall, Five Studios Join Venture for Video on Demand, Wall Street Journal, Aug. 17, 2001, at 

A3.

175 Ken Kerschbaumer, Leading Studios’ VOD Charge, Broadcasting and Cable, February 4, 2002.

176 Id.

177 Id.
71

Thus, the Internet may be able to support and deliver fairly traditional video 

programming and PPV plus much more. 

Home Video Products

Analysts estimate that Americans watch an average of 58 hours of movies at 

home each year.178 It is estimated that 89.9 million U.S. households, or about 85.2% of 

all television households, have at least 1 VCR (See Table 27). Nearly 46 million 

households own at least 2 VCRs.179

Table 27: VCR Penetration

Year VCR Households (Millions) % of Television Households

1975 0.00 0.0

1980 0.84 1.1

1985 17.74 20.7

1990 61.5 66.1

1995 76.4 79.7

2000 88.0 86.1

2001 89.9* 85.2*

 Source: Television Bureau of Advertising, Inc., "Cable and VCR Households;” *Estimates 

only from Veronis Suhler (2001).

By the end of 2001, the number of homes with DVD players reached 

approximately 13.7 million.180 Analysts estimate that 26.5 million homes will have DVDs 

players by the end of 2004.181 Approximately 2 million homes have laser disc 

players.182 In 2000, the total spent on home video cassette rentals was $10.27 billion, 

while the total spent on home video cassette sales was $7.55 billion.183 In 2000, the 

total spent on home video DVD rentals was $600 million, and the total spent on home 

video DVD sales was $4.03 billion.184 Overall, U.S. consumers spent approximately 

$22.45 billion renting and buying prerecorded video in 2000 (See Table 28).185

 

178 See W. Michael Cox and Richard Alm, Off the Books, Reason Magazine, Vol. 34, Issue 4, August 1, 

2002, citing Veronis Suhler’s & Associates’ Annual Communications Industry Forecast (Veronis Suhler).

179 Veronis Suhler at 6, 26. Other sources provide alternative estimates of VCR penetration ranging 

between approximately 87 percent to over 93 percent of all television households. See, e.g., Hollywood 

Entertainment 10-K citing Adams Media Research statistics; Veronis Suhler at 191.

180 Veronis Suhler at 192, 194.

181 Veronis Suhler at 6, 18. Hollywood Entertainment citing the DVD Entertainment Group estimates a 27 

percent penetration for DVDs by the end of 2001. The number of DVD households is expected to grow 

significantly as DVD player prices continue to decline. The average DVD player now sells for $193, down 

from an average price of $298 in 1999, and compared to the average VCR price of $73. Christopher 

Stern, Blockbuster Switching Focus to DVDs, Washington Post, Sept. 11, 2001, at E1, 12.

182 Tom Shales, Shall We Dance? With DVD, Indeed, Washington Post, June 2, 1999, at C1.

183 Id. at 194.

184 Id.

185 Id. at 191. 
72

Table 28: Home Video Spending, Rental and Retail ($ Millions)

Video 

Cassette 

Rentals

Video 

Cassette 

Sales

Total 

Video 

Cassette 

Spending 

DVD 

Rentals

DVD 

Sales

Total DVD 

Spending

Total 

Video 

Cassette 

and DVD 

Spending

Growth of 

Home 

Video 

Market 

Spending

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

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

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

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

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

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

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

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

 SOURCE: Veronis Suhler, Communications Industry Forecast, 2001

*Projected

In the last year, DVDs have doubled their share of both the rental and sales 

markets, accounting for 6.9% of all rental revenue and 16% of sales revenues.186 

Thus, the expenditures on home video products make it clear that viewers will spend 

large sums of money for small quantities of highly-valued programming. The video retail 

industry is the largest source of revenue for movie studios, generating approximately 

half of their revenues in 2000.187 Since 1997, the largest video chains and several 

movie studios have shared rental revenues.188 The video retail industry is competitive, 

with about 19,800 video specialty stores selling or renting home video programming.189 

More than 8,000 retail outlets, such as supermarkets and drugstores, rent videos.190 

Mass merchandise stores such as Wal-Mart and Target, and electronics chain stores 

such as Best Buy and Circuit City, compete with specialty video stores in the sale of 

videos.191 The Internet is also now a source for video rentals192 and sales.193 In recent 

 

186 Id. at 12, 16. Retailers, both video specialty stores and others, are allotting increasing amounts of 

shelf space to DVDs; Christopher Stern, Blockbuster Switching Focus to DVDs, Washington Post, Sept. 

11, 2001, at E1, 12. 

187 See, e.g., Hollywood Entertainment 10-K citing Adams Media Research statistics (the movie studios’ 

2000 home video revenues of $9.5 billion represented 54.8 percent of their $17.4 billion domestic 

revenue), Blockbuster 10-K citing Paul Kagan Associates statistics (the movie studios’ 2000 home video 

revenues of $7.9 billion represents 44.3 percent of their $17.8 billion domestic revenue).

188 Veronis Suhler at 13-14; 2000 Report, 16 FCC Rcd at 6058. 

189 See, e.g., Veronis Suhler at 8; (Viacom 10-K).

190 Id. 

191 Videos also can be borrowed from public libraries. 
73

years, the home video industry has consolidated, with many independent operators 

selling to larger concerns or closing their businesses.194

Theatrical Films

Analysts estimate that Americans go out to an average of 5.4 movies a year, up 

from 4.5 three decades ago.195 U.S. box office receipts rose 8.5% in 2001 to $8.35 

billion.196 Even with a 4% increase in the average ticket price, more people went to the 

movies in 2001 than in any year since 1998.197 The top draws of 2001 were films that 

appealed to younger audiences: "Harry Potter," which grossed over $300 million in the 

U.S., followed by "Lord of the Rings" with $270 million and the animated "Monsters, 

Inc." with $251 million. Analysts predict that box office receipts will advance another 

10% in 2002 and grow at annual rate of 7.2% from 2001 to 2006, resulting in annual 

receipts of $11.9 billion by 2006.198 Box office hits will continue to be largely driven by 

blockbuster hits. 

Video and PC Game Platforms and Applications

Video game consoles and PCs have provided interactive forms of entertainment 

to consumers for more than 25 years. 199 According to the Interactive Digital Software 

Association (“IDSA”), approximately 56% of the most frequent PC and video game 

console players have played games for six or more years, while 60% expect to play 

games ten years from now. Moreover, 60% of all Americans age six and older, or about 

145 million people, play PC and video console games. The average age of a game 

 

192 For example, for a monthly fee of $19.95, Netflix allows consumers to rent DVDs from its Internet site 

with the movies sent to the consumer and returned to the company through the mail. See

http://www.netflix.com. In addition, consumers in several markets can search Blockbusters’ inventory 

over the Internet and reserve videos online before going to the store to pick them up. See

http://www.blockbuster.com.

193 For example, Best Buy and Amazon.com sell video programming through their Internet sites. See

http://www.bestbuy.com and http://www.amazon.com. Express.com is limited to the sales of DVDs. See

http://www.express.com. Previously, Blockbuster and Hollywood Entertainment, using its reel.com web 

site, sold video programming over the Internet. However, both companies now are withdrawing from ecommerce and focusing on providing entertainment news and information on their sites. See

http://www.blockbuster.com and http://www.reel.com. See also 2000 Report, 16 FCC Rcd at 6058-9.

194 For example, video superstores (e.g., Blockbuster, Hollywood) have a 58.9 percent share of the video 

rental business. Veronis Suhler at 10. Etna comments that it is difficult for small independent video 

businesses to compete against the large video chain stores because of their revenue sharing agreements 

with the movie studios. Etna Comment at 1-2. 

195 See W. Michael Cox and Richard Alm, Off the Books, Reason Magazine, Vol. 34, Issue 4, August 1, 

2002, citing Veronis Suhler.

196 Christopher Grimes, The Americas – Lord of the Rings Tops Oscar List, Financial Times, February 13, 

2002.

197 Jack Mathews, Box Office Boasts Record Run, New York Daily News, January 1, 2002.

198 PR Newswire, Veronis Suhler Stevenson Issues Annual Communications Industry Forecast (2002), 

August 5, 2002.

199 State of the Industry Report 2000-2001, Interactive Digital Software Association (IDSA) at 5. 
74

player is 28 years old, and 43% of game players are female. In 2001, about 31% of 

game players played games online, up from 24% in 2000 and 18% in 1999. More than 

37% of Americans who own game consoles or PCs report that they also play games on 

mobile devices like handheld systems, personal digital assistants (“PDAs”) and cell 

phones. With today’s new technologies, the possibilities for interactivity seem endless 

for video console, PC and educational software (“Edutainment”) titles.200 

The video game industry has developed advanced technology that offers game 

players a rich, immersive interactive entertainment experience, which many find more 

compelling than passive art forms such as broadcast television or feature films. 

Advancements in video game console technology continue to position the console as a 

competitive media platform. The modern-day game console industry took shape in 

1985 when Nintendo introduced the 8-bit Nintendo Entertainment System (“NES”). 

Soon thereafter, the 16-bit Sega Genesis System was launched, followed by Super 

NES. In the early 1990s, the PC game business surged with the introduction of CDROMs, falling prices for multimedia PCs, and the introduction of high-level 3D graphics 

cards.

Recent advancements in game console technology have spurred the growth of 

this industry. In 1995-1996, Sony PlayStation and Nintendo 64 launched a new 

generation of game consoles. In 1999 and 2000, more powerful and multi-functional 

game consoles were introduced as platforms for home video and audio entertainment. 

For example, Sony’s PlayStation 2 consisted of a 300-MHz processor that allowed 

users to not only play games, but also watch DVDs and listen to audio CDs. Sega 

launched its Dreamcast console – the first 128-bit game console. 

The year 2000 affirmed the durability and maturity of the PC and video game 

console industry, as gaming software sales reached $6.02 billion (See Table 29). Video 

game rentals also rose in 2000, generating $919 million compared to $880 million in 

1999.

Table 29: Video and PC Game Growth

Video and PC Game

Software Unit Sales (millions)

Video and PC Game

Software Sales (billions)

1996 105 $3.7

1997 133 $4.4

1998 181 $5.5

1999 215 $6.1

2000 219 $6.02

2001 225 $6.3

Source: Interactive Digital Software Association (2002)

The total U.S. video game industry grew to $9.4 billion in 2001, breaking 1999's 

all-time record of $6.9 billion.201 Video and PC game software sales accounted for 

 

200 The rest of this discussion of video and PC game platforms and applications is based on the State of 

the Industry Report 2000-2001, IDSA (2002).

201 NPD Funworld Report.
75

almost two-thirds of the total industry sales with 225 million game software units sold. 

Sales growth in 2001 was triggered in part by the launch of 3 new gaming systems –

Nintendo's GameCube and Game Boy Advance and Microsoft's Xbox. The number of 

game console units sold increased 39%, while sales in dollar terms more than doubled, 

rising 120%. Next-generation console systems such as Sony Playstation 2, GameCube 

and Xbox, selling at higher price points, led to a triple-digit increase of over 120% in 

dollars for annual 2001 versus 2000. 

In portables, Game Boy Advance continued to surpass its predecessors, Game 

Boy and Game Boy Color. In fact, Game Boy Advance dominated the portable market 

in 2001 with a 22% increase in hardware unit share, compared to the prior year. 

Conclusion

Despite the decline of MMDS and LEC involvement in the market for the delivery 

of video programming, the number of video programming sources that consumers can 

choose from is growing. Since the release of Working Paper 26, digital technology has 

made pre-recorded video, theatrical movies and PC and video games more attractive 

alternatives for the average consumer. The market for high-quality pre-recorded video 

remains robust, as DVD sales continue to grow. As broadband deployment and 

consumer adoption increase, more viewers may opt to access and pay for more 

innovative Internet video streaming and downloads. Theatrical films and video games 

will continue to compete for eyeballs 24 hours a day, seven days a week. Video game 

consoles will become more of a mainstream media platform. Utilities and other 

overbuilders continue to challenge incumbent cable operators. The cumulative effect of 

these alternatives may become considerable. 
76

VIII. Technological Developments

Introduction

The entertainment and communications industries are in the midst of a digital 

revolution. Digital technologies have the potential to radically change the economics of 

video distribution and the range of services delivered to viewers. This chapter 

examines several technological developments, all based on digital transmission of video 

programming. The purpose of this discussion is to explore (1) how broadcasters will 

use their digital spectrum and DTV technology, and (2) how digital technology will affect 

competition among broadcast and non-broadcast video media.

To remain competitive, broadcasters must embrace, or at least respond to 

several new technologies. Over the past ten years, video compression and encoding 

technologies have increased the ability of broadcasters and other competitive video 

distributors to transmit video over various systems and networks including the Internet. 

These technologies have increased capacity to provide not only “analog quality” 

program streams but also better picture and sound. 

Transitioning from analog to digital technology has increased the picture and 

sound quality for consumers. It has created new categories of service, such as 

interactive services (e.g., those utilizing two-way communications). These categories 

may enhance services available today such as PPV and home shopping. If significant 

consumer demand and profitable business models develop for interactive services, new 

entertainment forms may emerge.

The digital transition is leading to an increased emphasis on copy protection and 

digital rights management. Any digital distribution system should have an adequate 

method of permitting access to the product while protecting copyright owners’ legitimate 

interests. Some multichannel analog video programming is encrypted and it appears 

that virtually all multichannel digital video programming is or will be encrypted. This 

ensures that only authorized subscribers get access. Copy protection engages after 

content has been decrypted in the subscriber’s premises. As discussed below, digital 

rights management for broadcast programming, which arrives “in the clear,” might be 

handled somewhat differently.

This chapter briefly discusses the technological developments outlined above. 

While there are many cutting-edge technologies that can be discussed in detail, the 

intent of this chapter is to highlight several that are relevant to this analysis. Digital 

video compression is examined first, followed by DTV and ancillary services, digital 

rights management, ITV and PVRs. 
77

Video Compression Technologies

Digital video compression is a digital signal processing technique that permits 

transmission of a television signal using less bandwidth than is currently needed (6MHz 

for terrestrial broadcast signals and cable and 24 MHz for satellite signals). A full 6MHz 

DTV signal consists of a packet stream of approximately 19.4 Mbps. Digital video 

compression technology is applicable to all of the video delivery systems – satellite, 

cable, broadcast, and wireless cable. Cable and DBS have a “head start” over 

broadcasters in the application of this technology. For a given compression ratio, twice 

as many National Television Standards Committee (“NTSC”) signals can be transmitted 

via a 24MHz satellite transponder as via a 6MHz terrestrial channel. 

Digital video is recorded and played digitally, i.e. in on-on bits.202 Traditional 

analog video – video consumers have viewed in their homes for over 60 years – is 

recorded and played back in analog format, or in analog wave forms. Due to its 

versatility, digital video has several advantages over analog video. In addition to editing 

capability, storage ease and transmission, it can be retrieved from an analog source, 

such as the standard over the air NTSC analog source.203 

For digitized audio-visual content to be truly high-quality and versatile, it has to 

be encoded. MPEG, which stands for Moving Picture Experts Group, is the name of a 

family of hardware and software standards used for encoding204 and compressing 

audio-visual information (e.g., movies, video, music) in a digital format.205 The major 

advantage of MPEG compared to other video and audio coding formats is that MPEG 

files are much smaller for the same quality. MPEG uses very sophisticated 

compression techniques.206 Without digital compression, the distribution of audio-visual 

content to consumers via delivery systems such as residential broadband would not be 

possible because uncompressed content requires too much bandwidth. 

The key effects of compression technology are not only a substantial increase in 

channel capacity but also a concomitant reduction in the cost of a channel. Thus, 

delivery systems that utilize compression are able to offer a substantial degree of time 

diversity. This means viewers can now receive separate feeds of cable and broadcast 

networks for each time zone in the United States, in addition to the offering of staggered 

starting times for the showing of PPV movies. In other words, a PPV programmer can 

transmit a box office hit several times each night, with starting times every ten minutes 

 

202 See Newton’s Telecom Dictionary (14th Ed. 1998) definition of digital video.

203 It can also be taken from an analog video camera and a VCR. Analog video is typically recorded on 

tape, such as a VCR. Digital video is typically recorded on a hard disk (magnetic or optical) or on a CDROM. 

204 Encoding is the process by which traditional forms of audio (cassette, compact disc, radio, etc.) and 

video (VHS, Beta, television, movies, etc.) media are converted into a digital format that allows their 

distribution and broadcast, in streaming or downloadable form, over the Internet or other digital 

distribution system. There are many different formats and standards for encoding, depending on whether 

it is streaming or download.

205 MPEG is most commonly known as a compression scheme for full motion video.

206 http://www.mpeg.org/MPEG/index.html#mpeg (accessed June 19, 2002).
78

or so during prime time. Since viewers do not have to wait very long for the start of their 

movie selection, this service has been characterized as “near video-on-demand” 

(“NVOD”).207

Working Paper 26 predicted that the reduction in the cost of channel capacity 

would also lower the barriers to entry for new channels. Working Paper 26 also 

expected more development of special interest or “niche” channels. While more 

program channels are now carried by cable operators and DBS providers, the reduction 

in channel capacity cost has not necessarily resulted in lower barriers to entry. While 

capacity may increase, this factor alone does not guarantee distribution of video 

programming content. There are a numerous other factors which affect which channels 

and what programs are distributed. Chapter Ten contains a more extensive discussion 

and analysis of this point. 

Digital Television

DTV: Brief Historical Background208

For almost 60 years, television broadcasters have transmitted signals based on 

the NTSC standard.209 However, since 1941 improvements or modifications include: (1) 

the introduction of color television in 1953, (2) “ghost canceling” provisions to enhance 

picture clarity, (3) the use of a previously unused portion of the transmission signal 

called the “vertical blanking interval” to send closed captioning, and (4) stereophonic 

sound.

To explore the issues posed by DTV, the Commission issued its First Notice of 

Inquiry of Advanced Television Service in July 1987.210 It also appointed a 25–member 

advisory panel called the Advisory Committee on Advanced Television Services 

 

207 An alternative to near video-on-demand is pure video-on-demand or VOD, a service that allows many 

users to request the same videos or movies at the same time or anytime. Video on demand requires a 

high-end video server with hundreds of gigabytes of storage. Successful deployment of VOD services by 

operators has faced several challenges, including the high cost of provisioning the necessary complex 

equipment and the lack of consumer research on whether consumers are prepared to pay the price that 

will be necessary to sustain a profitable business model.

208 DTV is sometimes referred to as “advanced television,” or ATV. Because ATV embraces any 

enhancements to the existing television format (known as the NTSC standard, for National Television 

Systems Committee), ATV is a more inclusive term than “digital television” or “high-definition television.” 

Once digital technology proved feasible and the most desirable technical standard for advanced 

television, the term DTV became virtually synonymous with ATV. See, e.g., In the Matter of Advanced 

Television Systems and Their Impact upon the Existing Television Broadcast Service, Notice of Proposed 

Rule Making, 6 FCC Rcd 7024 n.1 (discussing the definition of “ATV”). See also, Advanced Television 

Systems and Their Impact Upon the Existing Television Broadcast Service, Fourth Report and Order, 11 

FCC Rcd 17771, 17773 (1996)(discussing the introduction of the term “DTV”) (Fourth Report and Order).

209 In the Matter of Advanced Television Systems and Their Impact on the Existing Television Broadcast 

Service, Notice of Inquiry, 2 FCC Rcd 5125, 5126 (1987) (Notice of Inquiry on ATV) (discussing the 

evolution of the NTSC standard and noting that “the NTSC transmission standard has proven to be 

remarkably durable and adaptable to changes over the years”).

210 Notice of Inquiry on ATV.
79

(ACATS). ACATS reviewed the technical issues and recommended an advanced 

television system to the Commission. ACATS collaborated with the Advanced 

Television Systems Committee (“ATSC”), an industry group, to recommend a series of 

technical specifications. By early 1993, this combined group affirmed the superiority of 

digital over analog. 

This finding prompted seven entities, each with their own views and ideas 

regarding advanced television standards, to form a coalition to pool their expertise. 

They called this coalition the Grand Alliance.211 Working with ACATS, the Grand 

Alliance agreed jointly to develop a new standard. By November 1995, ACATS formally 

recommended a set of prototype DTV protocols (the “Grand Alliance Standards”) to the 

Commission. 

In December 1996, the Commission adopted the Grand Alliance Standards for 

terrestrial broadcasting with some modifications.212 The standards covered five major 

technical subsystems: (1) scanning, (2) video compression, (3) audio compression, (4) 

packetized data transport, and (5) radio frequency transmission. The standards also 

included 18 distinct scanning formats – a compromise that satisfied the interests of 

various industries (broadcasting, television set manufacturers, film studios, and 

computer and software makers) while ensuring greater flexibility in the use of DTV.

The Telecommunications Act of 1996 (“1996 Act”) established the framework for 

licensing DTV spectrum to existing broadcasters.213 Existing broadcasters are assigned 

a new DTV license and an additional 6 MHz channel to facilitate the transition from 

analog to DTV. They retain their original 6 MHz channel for analog broadcasts until the 

expected completion of the transition, when each licensee must return the channel to 

the Commission.214

To help broadcasters meet the target transition deadline of December 31, 2006, 

the Commission developed a schedule for the introduction of DTV that was designed to 

ensure that Americans receive a digital signal by the year 2002. 

When Congress passed the Balanced Budget Act of 1997, it specified that 

broadcasters could keep their analog television service beyond 2006 under several 

conditions, including: 

1) If one or more of the largest television stations in a market do 

not begin DTV transmission by the 2006 deadline through no fault 

of their own; or 

 

211 The seven members of the Grand Alliance were AT&T (now Lucent Technologies), General Instrument 

Corporation, Massachusetts Institute of Technology, Philips Electronics North American Corporation, 

Thomson Consumer Electronics, The David Sarnoff Research Center and Zenith Electronics Corporation.

212 Fourth Report and Order.

213 See 47 U.S.C. § 336.

214 The Balanced Budget Act of 1997 Act directs the FCC to auction the so-called analog spectrum in 

2002. The spectrum may be returned to the FCC and reassigned as early as 2006. 47 U.S.C. § 

309(j)(14)(A)-(C) (1998).
80

2) If fewer than 85% of the television households in a market are 

able to receive DTV signals (either off the air or through a cabletype service that includes all local DTV stations).215

 

The last exception – often referred to as “the 85% rule” – has the potential to delay the 

cutoff of analog signals and the eventual return of spectrum beyond 2006. One 

possible reason for this may be that the 85% rule relies, to a certain extent, on 

consumer demand and adoption of DTV equipment.216

Station Build-out

Congress set December 31, 2006 as the target date for ending television 

broadcaster’s analog transmissions. To meet this date, television stations must invest 

in new equipment, which can include antennas, digital transmitters and encoders, and 

additional transmission lines. The overall cost of building the DTV stations is more 

burdensome for some broadcasters than for others. Many stations are experiencing 

problems obtaining funding to pay for the transition to DTV.217 

In November 2001, the Commission adopted a temporary rule allowing stations 

to build less than maximum broadcast facilities and to reduce the amount stations must 

spend to meet the initial requirements for DTV transmission.218 The Commission also 

stated that in limited circumstances it will now consider financial hardship as a ground 

for extending the applicable construction deadline.219 Stations seeking an extension of 

time to construct DTV facilities on this basis must provide detailed evidence that the 

cost of meeting the minimum build-out requirements exceeds the station's financial 

resources.

 

215 Balanced Budget Act of 1997, Pub. L. No. 105-33 § 3003, 111 Stat. 251, 267 (1997). Some industry 

observers question whether the full transition to DTV and the return of analog spectrum will be 

consummated by 2006, as intended by the Balanced Budget Act of 1997. This view stems from doubts 

about consumer enthusiasm for DTV if sets are too expensive and, in turn, a likely triggering of the two 

contingency clauses adopted by Congress in 1997. Based on existing projections of the market 

penetration of DTV over the next 8 years, many analysts believe it is unlikely that 85 percent of 

households will be equipped to receive DTV by 2006. Josh Bernoff, a principal analyst with Forrester 

Research, an independent market research firm based in Cambridge, Massachusetts, estimates that only 

23 percent of U.S. households (nearly 20 million) will have DTV sets by 2004 and only 48 percent (42 

million) by the year 2007. See Statement by Josh Bernoff, Forrester Research, Transcript of Meeting of 

the Advisory Committee on the Public Interest Obligations of Broadcasters, at 33-34 (Jan.16, 1998) (on 

file with the Advisory Committee Secretariat). 

216 See Many Broadcasters Will Not Meet May 2002 Digital Television Deadline, Report to the Ranking 

Minority member, Subcommittee on Telecommunications and the Internet, Committee on Energy and 

Commerce, House of Representatives, U.S. General Accounting Office, GAO-020466, April 2002, p. 12. 

217 Id.

218 See In the Matter of Review of the Commission’s Rules and Policies Affecting the Conversion to 

Digital Television, MM Docket No. 00-39, Memorandum Opinion and Order on Reconstruction, FCC 01-

330 (2001). See also http://www.fcc.gov/Bureaus/Mass_Media/News_Releases/2001/nrmm0114.html

(accessed August 12, 2002).

219 Id.
81

Must Carry

In 2001, the Commission adopted rules resolving a number of technical and legal 

matters related to the cable carriage of digital broadcast signals. In its Report and 

Order, it noted that MSOs are currently undertaking significant cable system upgrades, 

including digital build-outs.220 It stated that a commercial or non-commercial digital-only 

television station can immediately assert its right to carriage on a cable system. The 

Commission also said that a television station that returns its analog spectrum and 

converts to digital operation must be carried by cable systems. The Commission’s 

action was one of a series of steps to facilitate the transition from analog to DTV. 

The Commission also reviewed the issue of material degradation of the digital 

signal during transmission. It noted that a cable operator would not materially degrade 

a DTV signal if the cable operator carried less than the full 19.4 Mbps transmitted by a 

broadcaster.221 The Commission stated that Section 614(b)(4)(A) of the 

Communications Act of 1934, as amended by the 1996 Act,222 requires that cable 

operators shall provide the same “quality of signal processing and carriage” for 

broadcasters’ signals as they provide for any other type of signal. Consequently, in the 

context of mandatory carriage of digital broadcast signals, a cable operator may not 

provide a digital broadcast signal in a lesser format or lower resolution than that 

afforded to any digital programmer (e.g., non-broadcast cable programming, other 

broadcast digital program, etc.) carried on the cable system, provided, however, that a 

broadcast signal delivered in HDTV must be carried in HDTV.223 The Commission’s 

January 2001 DTV Must Carry Order contains an initial determination that the 

requirement for cable operators to carry “primary video” refers to a single digital 

programming stream and “program-related” content.224 Petitions to reconsider this 

decision are currently before the Commission. Moreover, the statute is clear that feebased DTV services are considered ancillary and supplementary and are not subject to 

must carry obligations. For these reasons, broadcasters may well need to seek 

 

220 In the Matter of Carriage of Digital Television Broadcast Signals, First Report and Order and Further 

Notice of Proposed Rulemaking in CS Docket No. 98-120. 16 FCC Rcd 2598 (2001).

221 Id. at p. 32-33.

222 Id.; See also 47 U.S.C. 534.

223 Id. The Commission recognized that it may be especially burdensome for small systems with limited 

channel capacity (such as systems with fewer than 330 MHz) to carry a HDTV signal if they are not 

otherwise providing any HDTV programming. In this regard, it noted that mandatory carriage is limited to 

one-third of the cable system’s capacity. It also recognized that carriage of a HDTV signal using 8-VSB 

pass-through may require the allocation of more than 6 MHz of bandwidth due to the difference in 

channel alignments between broadcast over-the-air transmission and cable carriage. An 8-VSB passthrough of a broadcast station may straddle two cable channels and result in the loss of additional 

channels in the system (i.e., the cable operator is not able to use these additional channels to carry other 

programming). Therefore, if a small system, which is not otherwise carrying any HDTV signals, is 

required to carry a broadcast signal in HDTV such that it straddles two channels in this way, it may 

include all of its lost spectrum when calculating its one-third capacity. 

224 See In the Matter of Carriage of Digital Television Broadcast Signals, First Report and Order and 

Further Notice of Proposed Rulemaking in CS Docket No. 98-120, 16 FCC Rcd 2598 (2001.
82

commercial arrangements with cable (and DBS) operators for carriage of at least some 

Interactive Television material.225 

Consumer Adoption

Consumer adoption is a major factor critical to the success of DTV. Key issues 

include (1) how soon will consumers appreciate high-definition or other value-added 

DTV programming and services;226 (2) when will consumers choose to purchase DTV 

sets; (3) which companies will manufacture DTV sets and sell them in retail outlets; and 

(4) how much will the DTV sets cost? 

To date, consumer acceptance of DTV has been limited, but adoption rates are 

encouraging. Many consumers consider DTV a new viewing experience and do not 

posses enough information to justify the purchase of a new DTV set. Companies have 

pondered why consumers are or are not purchasing DTV equipment. Surveys, such as 

the Consumer HDTV Survey conducted by the Consumer Electronics Association 

(CEA), consistently point to several reasons, including the cost of the DTV sets and the 

lack of available high-definition or value-added DTV programming (See Table 30). 

Table 30: Consumer HDTV Survey

Overall Likely

HDTV

Buyer

ShortTerm

Likely 

Buyer

Potential

HDTV

Buyer

ShortTerm

Buyer

Premiere of Favorite TV Movie 

Super Bowl

World Series

Academy Awards

Daytona 500

NCAA Final Four

Grammy Awards

NBA Final

Stanley Cup

The Masters

WWF Wrestling

Triple Crown Horse Races

World Cup Soccer Finals

America’s Cup

60%

45%

31%

23%

22%

22%

21%

20%

13%

12%

12%

10%

8%

6%

69%

53%

34%

27%

26%

26%

25%

25%

13%

18%

12%

11%

9%

8%

73%

63%

44%

34%

29%

31%

29%

33%

12%

20%

16%

12%

13%

13%

56%

41%

29%

21%

20%

20%

19%

17%

13%

8%

12%

9%

7%

4%

66%

50%

39%

28%

25%

24%

26%

21%

16%

8%

19%

12%

9%

7%

 Source: CEA Market Research – Consumer Perspectives of Digital Television III (2002)

 

225

 See the discussion of Interactive Television later in this section and the discussion of Interactive 

Advertisements in Chapter IX.

226 Value-added DTV programming could be high-definition, innovative multicasting, interactive, etc. - so 

long as it gives consumers something significantly different than what they currently receive in analog. 

This would include something more than a single stream of standard-definition digital programming.
83

Many content producers are developing high-definition or value-added DTV 

programming, and it is important for all the industries and companies that stand to gain 

from the success of DTV to promote this new content to consumers.227 

Powell Proposal

FCC Chairman Michael K. Powell and previous FCC Chairmen and 

Commissioners have noted that there are many different players in the broadcast, 

cable, satellite, programming and consumer electronics industry that play a vital role in 

the development of DTV in the U.S.228 While some observers see progress towards 

that goal, efforts to achieve this result are hampered by what is termed a “chicken-andegg” dilemma facing the widespread adoption of DTV. 229

 In other words, broadcasters 

are concerned about the number of DTV sets that are manufactured by consumer 

electronics companies and are made available to consumers at retail outlets. 

Broadcasters are also concerned about the prospects of cable and DBS operators 

carrying broadcaster’s digital channels for subscriber’s enjoyment. The consumer 

electronics industry is concerned about federal mandates requiring manufacturers to 

install DTV tuners in sets because consumers may find the sets too expensive and 

unnecessary. MSOs, DBS operators and the consumer electronics industry are 

concerned about local and network television and cable programmers’ efforts to provide 

compelling HDTV programming with mass appeal. 

To provide a near-term boost to the DTV transition, FCC Chairman Powell 

presented a voluntary plan to key industry players.230 The intent of the proposal was to 

provide an immediate spur to the transition by giving consumers a reason to invest in 

 

227 HDNet is a network devoted largely to sports programming, showing major league baseball games, 

NHL games, Olympic events and other sports ranging from Arena Football, gymnastics, auto racing, 

lacrosse and even Dallas Mavericks' cheerleader tryouts.

228 See Statement by FCC Chairman Michael K. Powell: DTV Plan Update – Progress for Consumers, 

July 11, 2002, http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-224218A1.doc (accessed July 17, 

2002); See Statement by FCC Chairman William E. Kennard: Industry Agreement Will Jump Start Digital 

Television, February 23, 2000, http://www.fcc.gov/Speeches/Kennard/Statements/2000/stwek013.html

(accessed July 17, 2002); See “American Family Goes Digital,” Remarks of FCC Commissioner Susan 

Ness Before the California Cable Television Association Western Show in Los Angeles, CA, December 

16, 1999, http://www.fcc.gov/Speeches/Ness/spsn913.html (accessed July 17, 2002); See “DTV and 

DARS: Let’s Get On With It,” Speech by FCC Chairman Reed Hundt before the NAB State Leadership 

Conference in Washington, D.C., February 24, 1997, http://www.fcc.gov/Speeches/Hundt/spreh706.html

(accessed July 17, 2002).

229 http://www.iconocast.com/issue/9001,1,0402,17,1.html

230 See Letter Regarding Digital Television Plan by FCC Chairman Michael K. Powell to Senator Ernest F. 

Hollings, Chairman, Committee on Commerce, Science and Transportation, April 4, 2002, 

http://www.fcc.gov/commissioners/powell/hollings_dtv_letter-040402.pdf (accessed July 17, 2002). 

Chairman Powell did note in his letter to Chairman Hollings that “these goals sometimes get caught up in 

the policy debates over copy protection and cable compatibility for “plug and play” sets, and it is 

sometimes assumed that progress must wait until those broader issues are resolved. In my view, we can 

and should pursue these goals even as I’ve continue to work on the broader issues. I do not minimize the 

importance of copy protection and “plug and play” cable compatibility. These are issues that can and 

must be resolved. But I do not believe that we must defer all progress on the digital television transition 

until we do. The plan is purely voluntary but, as you can see, contemplates that each relevant industry will 

play a significant role. I intend to seek commitments along these lines in the near future.”
84

digital technology today while work continues on resolving the longer-term issues 

associated with the transition. While the plan was not intended to be comprehensive or 

to undermine the importance of other DTV issues under discussion, it sought to 

advance two key goals: (1) increase the level of compelling digital content available to 

consumers; and (2) provide cable subscribers access to that content over their cable 

systems.

Specifically, Chairman Powell’s proposal called for the following voluntary 

industry actions:

1. Top Four Broadcast Networks (ABC, CBS, Fox and NBC), HBO 

and Showtime

Provide high-definition or other “value-added DTV programming” 

during at least 50% of their prime-time schedule, beginning with the 

2002-2003 season.231

2. Broadcast Licensees

By January 1, 2003, or as soon thereafter as they commence 

broadcasting, DTV affiliates of the top four networks in markets 1-

100 will obtain and install the equipment necessary to pass through 

network DTV without degradation of signal quality (e.g., pass 

through HD programming, if that is what its network provides).232

3. Cable Operators

By January 1, 2003, cable systems with 750 MHz or higher channel 

capacity will:

A) Offer to carry, at no cost, the signals of up to five broadcast or 

other digital programming services that are providing value-added 

digital programming during at least 50% of their prime-time 

schedule.

B) Provide cable subscribers the option of leasing or purchasing a 

single set-top box that allows for the display of high definition 

programming.233

C) Market the digital television products the operator provides, 

including on their systems and in monthly bills, so that consumers 

know what programming is available and how they can receive it 

over the cable plant.

 

231 As noted earlier, value-added DTV programming could be high-definition, innovative multicasting, 

interactive, etc.

232 Stations broadcasting DTV programming will inform viewers of their digital content

through on-air promotional announcements over their analog broadcast facilities.

233 These devices will include digital connectors (e.g., 1394/5C and/or DWHDCP) at the request of the 

consumer.
85

4. Direct Broadcast Satellite Operators

By January 1, 2003, carry the signals of up to five digital 

programming services that are providing value-added digital 

programming during at least 50% of their prime-time schedule.

5. Consumer Electronic Equipment Manufacturers and Retailers

A) Commit to meeting the demand for cable set-top boxes that 

allow for the display of high definition programming.

B) Market broadcast, cable and satellite DTV options at point-ofsale.

C) Include over-the-air DTV tuners in new broadcast television 

receivers according to the following schedule:

 Sets 36” and above – 50% of units to have DTV 

tuners by January 1,2004; 100% by January 

1,2005;

 Sets 25”-35” – 50% of units to have DTV tuners 

by January 1,2005; 100% by January 1,2006;

 Sets 23“-24” – 100% of units to have DTV tuners 

by December 31, 2006.

D) Include digital input(s) (e.g., 1394/5C and/or DWHDCP) on all 

new HD-capable television receivers and display devices by 

January 1, 2004.

The plan received widespread support. In July 2002, Chairman Powell noted 

that virtually every industry – cable, broadcast and satellite – had either fully embraced 

the plan, or made real commitments to advance the transition.234 As a result of the 

committed efforts of these industries, many of the key elements of the DTV transition 

are beginning to fall into place.235

DTV Tuner Plan

In August 2002, the Commission adopted a Second Report and Order and 

Second Memorandum Opinion and Order that gives consumers access to digital 

programming by requiring over-the-air DTV tuners in nearly all new television sets by 

2007.236 By enacting a five-year rollout schedule that starts with larger, more expensive 

 

234 See Statement By FCC Chairman Michael K. Powell, DTV Plan Update – Progress for Consumers, 

July 11, 2002, http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-224218A1.doc (accessed 

September 26, 2002).

235 Id.

236 See In the Matter of Review of the Commission’s Rules and Policies Affecting the Conversion to 

Digital Television, MM Docket No. 00-39, Second Report and Order and Memorandum Opinion and 

Order, FCC 01-330 (2002). 
86

television sets, the Commission hopes to minimize the costs for equipment 

manufacturers and consumers.

The Commission noted that DTV receivers are a necessary element of broadcast 

television service in the same way that analog television receivers have been since the 

inception of analog television service. Although analog receivers are still dominant 

today, that will change as the transition to DTV progresses. The Commission said that 

its jurisdiction is established by the 1962 All Channel Receiver Act (“ACRA”), which 

provides it with the authority to require that television sets be capable of adequately 

receiving all frequencies allocated by the Commission for television broadcasting. The 

authority provided under the ACRA applies to all devices used to receive broadcast 

television service, not just those used to receive analog signals. 

The Commission said the roll-out schedule reflects and accounts for the following 

points: (1) inclusion of DTV reception capability in new television receivers requires the 

redesign of product lines; (2) prices are declining and will decline faster as economies of 

scale are achieved and production efficiencies are realized over time; and (3) prices of 

large television sets have been declining at a rate of $100 to $800 per year, so the 

additional cost of the DTV tuner may be partially or completely offset by the general 

price decline. The Commission said this plan will ensure that new television receivers 

include a DTV tuner on a schedule as close as economically feasible to the December 

31, 2006 deadline. 

Specifically, the Commission’s order requires that all television receivers with 

screen sizes greater than 13 inches and all television receiving equipment, such as 

VCRs and DVD players/recorders, be required to include DTV reception capability after 

July 1, 2007, according to the following schedule:

1. Receivers with screen sizes 36 inches and above – 50% of a 

responsible party’s units must include DTV tuners effective July 1, 

2004; 100% of such units must include DTV tuners effective July 1, 

2005.

2. Receivers with screen sizes 25 to 35 inches – 50% of a 

responsible party’s units must include DTV tuners effective July 1, 

2005; 100% of such units must include DTV tuners effective July 1, 

2006.

3. Receivers with screen sizes 13 to 24 inches – 100% of all such 

units must include DTV tuners effective July 1, 2007.

4. TV Interface Devices – VCRs and DVD players/recorders, etc. 

that receive broadcast television signals – 100% of all such units 

must include DTV tuners effective July 1, 2007.

The Commission temporarily declined to adopt labeling requirements for 

television receivers that are not able to receive any over-the-air broadcast signals. It 
87

stated that it is unclear when, or if, such products will become commercially available or 

how they will be marketed. The Commission will continue to monitor the state of the 

marketplace and take additional steps if necessary to protect consumers’ interests. 

Ancillary Services

Given the DTV transition and advancements in digital compression, broadcasters 

are struggling to figure out what to do with the extra bandwidth capacity. Some plan to 

use the additional capacity to offer consumers more television channels.237 Others are 

delivering high definition programming.238 Several plan to use the extra bandwidth 

capacity to offer ancillary, supplemental, and perhaps even interactive services. 

However, for the service to be fully interactive, a return channel is required. 

The technical standards for DTV operation approved by the Commission provide 

broadcasters with a range of service opportunities. To strengthen DTV’s chances for 

success, the Commission in 1997 decided to allow broadcasters to use their channels 

according to their best business judgment, as long as broadcasters continued to offer at 

least one stream of free programming to consumers.239 Thus, broadcasters must 

provide a free digital video programming service that is at least comparable in resolution 

to today’s service and aired during the same time periods as today’s analog service. 

Broadcasters are granted great flexibility in how they use their new spectrum, 

provided that uses do not interfere with the provision of over-the-air television 

programming. Broadcasters are still bound by the public interest standards that apply to 

broadcast television. DTV license holders must also pay the Federal Government a fee 

for ancillary and supplemental (subscription) DTV services. In requiring fees for 

proposed subscription services, Congress’ goal is to ensure that broadcasters pay 

approximately what they might pay if the spectrum were auctioned.240 Thus, the public 

receives some portion of the value of the spectrum assigned to broadcasters. 

In October 2001, the Commission ruled that noncommercial educational (“NCE”) 

broadcasters are required to use their entire DTV bitstream capacity primarily for 

nonprofit, noncommercial, educational broadcast services.241 It also ruled that the 

statutory prohibition against the broadcast of advertisements on NCE television stations 

applies only to broadcast programming streams provided by NCE licensees, but does 

not apply to any ancillary or supplementary services presented on their excess DTV 

channels that do not constitute broadcasting. The Commission further ruled that NCE 

licensees must pay a fee of 5% of gross revenues generated by ancillary or 

supplementary services provided on their DTV service. The Commission said it would 

not establish a bright line test to define the term “primarily” but will instead define it as a 

 

237 The Interactive Television (iTV) Guide, Version 1.0, ING Barings Report, September 2000, p. 26.

238 Id.

239 In the Matter of Advanced Television Systems and Their Impact Upon Existing Television Broadcast 

Service, Fifth Report and Order, MM Docket No. 87-268 (1997).

240 See 47 U.S.C. 336(e)(2)(B).

241 In the Matter of Ancillary or Supplemental Use of Digital Television Capacity by Noncommercial 

Licensees, Report and Order, MM Docket No. 98-203 (2001). 
88

“substantial majority” of a NCE station’s entire digital capacity, measured on a weekly 

basis.242

The Commission said that allowing advertising on NCE broadcasters’ ancillary or 

supplementary services that are non-broadcasting would permit NCE stations flexibility 

in providing such services as well as enhance their ability to raise revenue for their 

support and the transition to digital television. However, the Commission said that at 

the same time, observing the ban on advertising on any free-over-the air service will 

preserve NCE licensees’ fundamental mission of providing a nonprofit, noncommercial, 

educational broadcast service. The Commission concluded that NCE licensees are not 

exempt from the statutory requirement to pay fees on revenues generated by the 

remunerative use of their excess digital capacity, even when those revenues are used 

to support their mission related activities. 

Broadcasters have included data in their television signals for years. Date and 

time stamps, closed-captioning information and second language audio programming 

are the kinds of data that can be embedded in the current analog television signal. 

However, broadcasters are developing new digital products and services to help make 

the most use of their channels by using the Commission’s Fifth Report and Order as a 

guideline. One of these new digital services is “data broadcasting” or “datacasting.”243 

Exhibit 2 shows an example of one type of data broadcast network architecture 

and how it works.244 A content producer or distributor typically delivers encoded data 

electronically or by means of physical media to the data broadcasting ingest center or 

network operations center (“NOC”). 

 

242 It said the use of a weekly period would provide NCE stations with sufficient flexibility because stations 

typically schedule their programming on a weekly basis.

243 See http://www.redherring.com/mag/issue85/mag-iblast-85.html (accessed July 16, 2002); 

http://www.wired.com/news/business/0,1367,34831,00.html (accessed July 16, 2002); 

http://www.current.org/tech/tech006nets.html (accessed July 16, 2002); 

http://www.broadbandweek.com/news/010122/010122_through_data.htm (accessed July 16, 2002). 

244 See http://www.hd-plus.com/iblast.html (accessed September 25, 2002). 
89

Figure 2: Sample Diagram of One Type of Data Broadcast Network Architecture

Content Producers 

and Distributors Encoding, Storage, 

Program Servers, 

Network Management

Fiber Optic Cable

Local Network 

Affiliates/TV Stations

Consumer

receiver 

antenna

Satellite

Digital TV Antenna

TV

Network Operating Center

Because the data is digitized it can represent text, audio, video, graphics, 

software applications or even control information. Once the data is received, the data 

broadcaster formats the data, adding error and data-loss protection. The data is then 

scheduled for “playout” over satellite and terrestrial communication facilities. Client 

usage statistics and network errors are analyzed in the NOC. The NOC can also 

encrypt material and authorize its reception by subscribers if necessary. Television 

stations that are a part of the data broadcasting network form the nodes in the network. 

Content and necessary broadcast playlists are received at the nodes via satellite or fiber 

optic Wide Area Networks (“WANs”), and are stored in the node server. Content is 

injected into the node's ATSC bit stream and transmitted over-the-air with the station's 

television signal. 

The client245 uses a receiving device comprised of a terrestrial antenna, a 

demodulator and an ATSC receiver to tune into encrypted data broadcasts from one or 

more nodes. Registered clients are able to decrypt this material and cache it, or display 

it if it is streamed. The client may also filter content based on user preferences selected 

and stored in a file. 

Data broadcasting allows broadcasters to distribute data at phenomenal speeds 

using accessible opportunistic bandwidth. Broadcasters can take advantage of the 

tremendous throughput inherent in the channel because they have a full 6MHz DTV 

signal consisting of a packet stream with a speed of approximately 19.4 Mbps. Data 

broadcasting takes advantage of the variations in required video data rates to provide 

 

245 Clients are devices and software that request information.
90

an auxiliary service with a steady, average rate of data delivery over an established time 

interval.246

The data that is broadcast is embedded as digital data in existing television 

signals in the same way that teletext services use spare lines at the top of television 

picture frames. Data can be carried either by terrestrial broadcast, DBS or cable 

transmission. A receiver (e.g. satellite, UHF/VHF tuner) and a data broadcast decoder 

are required to receive the data. The advantage of data broadcasting is that data is 

transmitted instantly to anyone capable of receiving a television signal with the 

necessary receiver. 

In homes and workplaces, consumers can use receivers plugged into PVRs or 

other STBs, PCs or other storage-type devices to capture the digital signal. Once 

captured, the receiver separates the data bits from the television programming bits to 

display the data on-screen or to save on a hard drive for later use. 

Broadcasters are pursuing a wide range of data broadcasting opportunities in the 

consumer, small office/home office and business marketplace.247 As with many new 

digital technologies, the challenge is to develop products and services with profitable 

business models. This is tremendously important to broadcasters, who are searching 

for ways to develop new revenue streams. 

Digital Rights Management

Movie studios, television networks, computer-chip makers, software companies 

and consumer electronics manufacturers agree that DTV programs must be protected 

from unfettered distribution over the Internet by consumers.248 Many people in the 

creative community want to protect against unauthorized distribution of their works.249

As one media executive laments, “when viewers can download the entire season of a 

show from the Internet for free and without commercial advertising, what value does 

syndication have?”250

 

246 Id.

247 Capitol Broadcasting has built an operational datacasting facility it calls “TotalCast,” which is broadcast 

via WRAL-TV/DT in Raleigh, NC. TotalCast includes video-on-demand (VOD) from WRAL-TV/DT news, a 

custom news “microsite” from WRAL.com, computer games, short films, software, and other local 

programming. Received content may be stored on an end user’s computer hard disk, where it is available 

for nearly instant access. See http://www.digitaltelevision.com/2002/january/feature2.shtml (accessed 

July 16, 2002). iBlast, a datacasting network, launched a game service called iBlast Games at the 2002 

E3 conference on May 17, 2002. According to company officials, the game service is capable of 

delivering up to 10 gigabytes of game content per day. iBlast Games will be available in selected cities 

nationwide in 2002. See iBlast press release, www.iblastgames.com (accessed September 26, 2002).

248 Paige Albiniak, Raising the Flag on Copy Protection, Broadcasting and Cable, June 10, 2002, p. 25.

249 Testimony of Richard D. Parsons, CEO, AOL Time Warner, before the House Committee on Energy 

and Commerce Subcommittee on Telecommunications and the Internet Hearing “Ensuring Content 

Protection in the Digital Age,” April 25, 2002.

250 Id.
91

In August 2002, the Commission issued an NPRM designed to facilitate the 

transition to DTV and to explore whether it can and should mandate the use of a copy 

protection mechanism for digital broadcast television, and what impact such regulation 

would have on consumers.

251

 It noted that the current lack of digital broadcast copy 

protection may be a key impediment to the DTV transition’s progress. Without a digital 

copy protection scheme that prevents the unauthorized copying and redistribution of 

digital media, content owners assert that they will not permit the digital broadcast of high 

quality programming. Without such programming, consumers may be reluctant to buy 

DTV receivers and equipment, thereby delaying the DTV transition. 

Private industry negotiations have reached consensus on a technical “broadcast 

flag” standard (ATSC Standard A65/A) that would limit copying of some programming 

aired by broadcast-TV stations. However, there is no universal agreement on the use 

and implementation of the flag. There is also no industry agreement on how to enforce 

digital broadcast copy protection. The NPRM seeks comment on the jurisdictional basis 

for Commission action in this area and whether it should intercede in this matter.

If Commission-mandated digital broadcast copy protection rules are needed, the 

NPRM asks the following questions: (1) is the broadcast flag the appropriate 

technological model to be used; and (2) is a government mandate requiring broadcasters 

and content providers to embed the broadcast flag (or other content control mark) within 

digital broadcast programming necessary?

Regarding reception of the digital broadcast signal, the NPRM asks questions in 

several areas. For example, should the Commission mandate that consumer electronics 

devices recognize and give effect to the broadcast flag (or other content control mark)? 

What is the appropriate point in a consumer electronics device at which digital broadcast 

copy protection should begin? Would a digital broadcast copy protection system be 

effective in protecting digital broadcast content from improper redistribution? Would 

digital broadcast copy protection work for digital broadcast stations carried on cable or 

DBS systems, and if so, how? Should the Commission mandate the use of specific copy 

protection technologies (such as DTCP/5C or HDCP) in consumer electronics devices 

that are designed to respond to the broadcast flag? And, if so, how would a particular 

technology receive approval for use and who would be the appropriate entity to make that 

decision?

Consumers will be affected if the Commission adopts a rule mandating the 

adoption of a broadcast flag or other digital broadcast copy protection mechanism. This 

also raises several questions that must be considered. For example, will requirements to 

protect digital outputs interfere with the ability to send DTV content across secure digital 

networks? What is the impact of digital broadcast copy protection mechanisms on 

existing and future electronic equipment? Will digital broadcast copy protection have an 

effect on the development of new consumer technologies?

 

251 See In the Matter of Digital Broadcast Copy Protection, Notice of Proposed Rulemaking, MB Docket 

No. 02-230 (2002).
92

Interactive Television

The Commission has not previously defined ITV. It has, however, characterized 

ITV as a service that supports subscriber-initiated choices or actions that are related to 

one or more video programming streams.252 ITV is evolving rapidly and the services it 

provides may enable increased viewer control of the television viewing experience by 

permitting the integration of video and data services – including Internet content - and 

by allowing real-time interaction with other viewers.253 In connection with its review of 

the AOL Time Warner merger, the Commission issued a Notice of Inquiry to consider 

whether industry-wide rules were needed to address any impediments to the 

development of ITV services and markets.254 The NOI sought to gather a more 

complete record on the ITV industry, generally, and the deployment of ITV services by 

cable operators, in particular.

The Commission attempted to identify the major technical resources or “building 

blocks” necessary for the provision of ITV services (particularly high-speed ITV 

services) and, if it was determined that a general nondiscrimination principal should be 

adopted, how it should be applied to the provision of the building blocks.255 The 

components identified by the Commission in the ITV NOI are as follows: a video 

pipeline associated with interactive content (e.g., the MPEG video stream), a two-way 

connection (e.g., via the Internet) and specialized customer premises equipment (e.g., 

the interactive television set-top box).256 This narrow definition of what constitutes ITV 

was developed to address the concerns certain parties had with the merger between 

AOL and Time Warner. The scope of ITV services available to the public is much 

broader than what was contemplated by the Commission in the NOI. 

ITV services are currently being offered by television broadcasters, cable 

programmers, cable operators, satellite carriers and third party interactive service 

providers, with the broadcasters and programmers concentrating on enhanced 

television and ITV-over-television applications and the cable and satellite operators 

developing video-on-demand and personal video recorder technologies. The ITV 

services, described in detail below, are often referred to as single screen applications 

where all of the activity is received and processed either through the television receiver 

or the set top box provided by the cable operator, satellite carrier, or the ITV service 

provider. Programs or applications that require a viewer to access a computer, while 

watching television, are known as two screen services and are not generally accepted 

as true ITV. However, two-screen applications are being deployed in the interim to 

provide simple interactivity (e.g., users are able to log on to the associated website to 

retrieve more information, or participate in polls and/or quizzes). Some examples of 

current ITV applications are provided below.

 

252 Nondiscrimination in the Distribution of Interactive Television Services Over Cable, Notice of Inquiry, 

16 FCC Rcd 1321 (2001) (“ITV NOI”). 

253 See Id. at 1322.

254 ITV NOI, supra.

255 ITV NOI, 16 FCC Rcd at 1329.

256 ITV NOI, 16 FCC Rcd at 1324-25.
93

Enhanced Television

Enhanced television services generally allow the viewer to obtain more 

information on certain programming, purchase products, permit the manipulation of the 

video image, or provide input on questions posed by the program distributor.257 With 

this type of technology, the subscriber accesses a graphic interface, overlay, or a 

screen that wraps around the displayed video signal(s), providing supplementary 

information related to the video display or a related t-commerce transaction 

opportunity.258 

While broadcast television stations were among the first delivery systems to offer 

enhanced television services to viewers, cable operators have recently entered the fray. 

AOL Time Warner, for example, has deployed technology allowing subscribers to 

change and manipulate camera angles when viewing sports programming. Oceanic 

Cable, AOL Time Warner’s cable division in Hawaii, has recently launched this type of 

ITV service using software developed by NDS.259 Interactive polling is another growth 

area in the ITV field, and another type of interactive service Oceanic Cable is now 

providing to its Hawaii cable television subscribers. The application presents banner 

strips on subscribers’ television screens asking them to answer questions and taking 

votes during programs and advertisements. Subscribers reply using their remote 

controls with the results then compiled and presented to the audience.260 

Internet Over Television

Internet over television gives a subscriber the ability to launch an Internet 

browser on the subscriber’s television screen, and navigate between surf, chat, and 

email applications.261 Depending on the system, a subscriber may have the ability to 

view a program or commercial using a remote control or wireless keypad device. The 

subscriber can click on a hyperlink that appears on the screen while the user is 

watching regular programming and be taken to the corresponding website containing 

the supplemental information through a process called “channel hyperlinking.”262

Electronic Program Guides

Electronic Program Guides (“EPGs”) are on-screen directories of programming 

delivered through various means, including cable plant, telephone lines, and over-the-

 

257 Id.

258 Id.

259 See NDS Announcement: Hawaii To Experience Oceanic Time Warner’s New “Sportsview.” NDS 

Press Release, September 19, 2002.

260 Oceanic Cable has rolled out this type of service using Navic’s set top data services software. See

Karen Brown, Oceanic Unveils Interactive Duo, Multichannel News, September 18, 2002.

261 See PowerTV press release regarding Internet over TV Application, April 3, 2001, 

http://www.powertv.com/News/2001_news/04_03_01_news.html (accessed July 22, 2002).

262 Interactive Television – Turning Couch Potatoes into Mouse Potatoes, Donaldson, Lufkin & Jenrette 

Report, December 1999, p. 1. 
94

air broadcast signals.263 Original-generation EPGs are not interactive, but rather 

continually scroll programming listings. These EPGs are generally delivered as discrete 

video programming channels. Newer, interactive EPGs, (“IPGs”) however, allow users 

to sort and search programming, give program descriptions, provide reminders of 

upcoming programming, and take users to programming they select. Interactive EPGs 

can be transmitted via the Vertical Blanking Interval (“VBI”)264 of analog channels, or 

may be transmitted as stand-alone digital data streams. The distributors of EPGs are 

MVPDs such as cable and DBS operators.265 The sellers of EPGs are EPG 

companies.266 Gemstar,267 the current market leader in the provision of EPGs, has 

contracted with AT&T for provision of EPGs on AT&T cable systems, and several other 

operators such as Comcast, Charter, and Intermedia. Some regard interactive EPGs as 

the most important interactive application because they act as electronic gateways to 

the variety of services offered by multichannel video programming distributors.268

Video-on-Demand

Video-on-Demand (“VOD”) is analogous to the PVR in its function.269 VOD 

permits subscribers to instantly access video programming of any kind for a small fee 

for each event ordered.270 Subscribers are able to pause, fast-forward or rewind 

programming in the same manner as permitted by a traditional video recorder. VOD is 

an evolved form of pay-per-view where subscribers do not have to wait to view desired 

programming. VOD requires video servers271 with hundreds of gigabytes of storage as 

 

263 AOL Time Warner, 16 FCC Rcd 6547 (2001).

264 Newton’s Telecom Dictionary (14th Ed. 1998) defines the VBI as: The interval between television 

frames in which the picture is blanked to enable the trace (which “paints” the screen) to return to the 

upper left hand corner of the screen, from where the trace starts, once again to paint a new screen.

This time period is the equivalent of 21 scanning lines. The VBI is used to transmit data to organize the 

television picture, as well as other data. Line 21 of the VBI is reserved for distribution of closed 

captioning information. See Closed Captioning and Video Description of Video Programming, 

Implementation of Section 305 of the Telecommunications Act of 1996, Video Programming Accessibility, 

Report, MM Docket No. 95-176, 11 FCC Rcd 19214 (1996).

265 Some set-top boxes and television sets will have EPGs technology built inside.

266 In addition, some ITV providers may provide interactive EPGs as part of their ITV service. Other EPG 

companies, besides Gemstar, are WorldGate (who provides “TV Gateway” for WorldGate subscribers) 

and Liberate Tribune.

267 On July 11, 2000, Gemstar and TV Guide, Inc. announced the completion of their merger, in which TV 

Guide, Inc. will become a wholly owned subsidiary of Gemstar. TV Guide, Inc., Gemstar International 

Group Limited and TV Guide, Inc. Announce Completion of Their Merger (press release) July 11, 2000. 

268 See Gene Feroglia, Portal Shmortal—It’s the IPG That Counts, Multichannel News, August 27, 2001 

(“What cable operators cannot lose sight of is the fact that the most crucial application available is the 

interactive program guide. . . .For the viewer, the IPG is the application that makes life easier by providing 

a tool to effectively navigate among programming options.”)

269 SeaChange International Inc., Concurrent Computer Corp., nCube Corp., Intertainer Inc., and DIVA 

are currently the principal VOD product and service vendors. (Note: DIVA filed for bankruptcy protection 

in May 2002.)

270 James Chiddix, President of AOL Time Warner’s Interactive Personal Video Division, has stated that 

“The one kind of interactive television that makes money today is video-on-demand.” See Matt Stump, 

Time Warner’s Chiddix on State of VOD, Multichannel News, November 5, 2001.

271 A video server is a device that stores video information on hard disks or optical disk drives. See 

Newton’s Telecom Dictionary (17th Ed. 2001) at p. 748.
95

well as a digital set top box in the subscriber’s home.272 Cable systems, and to some 

extent, local telephone companies have the necessary upstream and downstream 

architecture and bandwidth to offer VOD. The major issues facing the rollout of VOD by 

cable operators includes: (1) channel capacity; (2) set top box deployment273; (3) tiering 

and marketing decisions; (4) pricing decisions; and (5) content. In a key development 

for delivering VOD, Comcast has agreed to launch a video-on-demand system that is 

combined with Gemstar’s EPG in a Motorola set top box.274 This integration of 

technologies simplifies subscriber selection and ordering of VOD programming 

options.275 Other variants of VOD include:

Subscription Video-on-Demand 

Subscription Video-on-Demand (“SVOD”) functions like VOD, but has a different 

marketing structure.276 Rather than pay for each event viewed, the subscriber pays an 

additional monthly fee, on top of a premium service fee, to access certain programming 

on an at-will basis. For example, a subscriber would pay an additional $3.00 more per 

month for HBO which would allow him to access certain programming, such as “Sex 

and the City” or “The Sopranos,” for instantaneous viewing. Charter Communications 

has recently launched an SVOD package in several of its systems where subscribers 

can access children’s’ programming provided by several cable programmers and PBS 

for a $9.00 flat fee.277

Near Video-on-Demand

As mentioned earlier in this chapter, NVOD is similar to VOD in that the 

subscriber selects the individual program for a fee, but the video is not delivered 

instantaneously. Rather, the program starts at certain time intervals, likely every ten 

minutes or so, and the user switches between video streams to simulate fast-forward, 

rewind, etc. The program is likely to be stored at the headend, while the program is 

stored on video servers for traditional VOD.

Other ITV services 

There are other types of ITV services that are being developed by technology 

firms and deployed by either cable operators or satellite carriers. One burgeoning area 

 

272 A conditional access system is a necessary component of any video delivery system providing VOD. 

Conditional access is an electronic security system set up to prevent theft of service.

273 A set top box with a hard drive can remove some network congestion caused by interactive 

applications, such as VOD.

274 See Comcast’s VOD System First to Link With Gemstar, Hollywood Reporter, October 4, 2001.

275 Mark Hess, Comcast Vice President for Digital Services, has stated that the integration of Gemstar’s 

EPG with SeaChange’s VOD system “will help the company launch interactive TV services on the 

Motorola box.” See id.

276 SVOD initially launched in four markets: Columbia, S.C. (Time Warner), Cincinatti, OH (Time Warner), 

Cleveland, OH (Adelphia), and New York City (Cablevision). Matt Stump, Approaches Differ, But Product 

Remains SVOD, Multichannel News, November 5, 2001.

277 Matt Stump, Quietly, Cable VOD Efforts Head Toward Critical Mass, Multichannel News, November 5, 

2001.
96

is interactive gaming where, for example, individuals with high speed Internet access 

can engage in multiplayer games through certain websites. Also, there are several 

firms that have developed software permitting subscribers to place wagers on sporting 

events. However, the legality of this type of ITV service is questionable absent 

legislation permitting its deployment.

Personal Video Recorders

Since the 1970s, devices and services such as the VCR and PPV television have 

increased personalization of television viewing.278 Instead of passively receiving 

whatever broadcasters choose to show the public, control over content and when it is 

viewed is shifting from the broadcaster to the viewer.279 Increased penetration of digital 

video services and new home video technologies such as the PVR mean the trend 

towards personal television will be even more pervasive in the future.280

A PVR is a device connected to a television set, either embedded in an STB or 

as a stand-alone device, which uses a hard disk drive, software, and other technology 

to digitally record and access programming. PVR technology allows a consumer to 

pause, replay, rewind, fast-forward and otherwise time-shift television programs.281 

While PVRs cannot play prerecorded videocassettes or DVDs, they make it relatively 

simple to record pay-per-view signals or other content from digital platforms, such as 

DBS, and provide the user with the same level of control over the playback of a movie 

as home video provides.

The devices are “smart” in that they can select shows for a user based on a 

particular topic, categorization or prior viewing habits. Users simply select the shows 

they are interested in from the television viewing guide with the press of a button. PVRs 

enable the user to skip past commercials in recorded material with one simple click.

Compared to the launch of other consumer electronic devices such as the DVD 

player, consumer adoption of PVRs has been marginal but promising. However, the 

integration of PVR functionality with other devices, such as television sets or STBs, 

should rapidly increase deployment and consumer adoption.282 Integrated products 

allow service operators to bundle their services, which may provide an attractive 

business model while undercutting retail sales of standalone PVR units.283 Although the 

market for PVRs is still small at approximately $38 million in 2001, analysts project the 

market to reach about $35 million in 2002 with an anticipated growth rate of 

approximately 12.6% per year to $61 million in 2005.284 

 

278 Stuart Thomson and Aalia Walker, Datafile, Cable and Satellite Europe, September 1, 2001.

279 Id.

280 Id.

281 TiVo Inc., SEC Form 10-K405, March 30, 2000 (“TiVo 10-K”); ReplayTV Inc., SEC Form S-1/A, May 1, 

2000 (“ReplayTV S-1/a”).

282 Id.

283 Id.

284 Bear, Stearns & Co. Inc., Hard Lines Retailing: Consumer Electronics Report (2002) at p. 32.
97

Studies show that most consumers may not purchase a stand-alone PVR in the 

near future because the VCR satisfies most of their current recording needs.285 Price 

and lack of product knowledge are also factors limiting sales of stand-alone PVRs. For 

example, the average cost of a PVR was approximately $304 in 2001 compared to $309 

in 2000 and the initial $460 in 1999. These prices are quite high relative to the average 

price of a VCR, which was $72 in 2001 and $83 in 2000. A PVR combined with an 

NVOD subscription service may prove to be a better model for video programming 

distribution instead of pure VOD, which requires a considerable amount of bandwidth. 

A device which combines a PVR with a DVD recorder (“DVD-R”) may also be an 

attractive consumer product because of its ability to make permanent copies of 

programs on a DVD from the PVR.286

Several companies offer PVRs, including ReplayTV Inc. and TiVo, Inc. Last 

year, ReplayTV announced that it would no longer sell PVRs directly to consumers, but 

would focus on licensing its technology to cable and other television-oriented 

companies.287 In August 2001, Sonicblue acquired ReplayTV, and announced that it 

again would sell PVRs over the Internet and at select retail outlets.288 TiVo, the market 

leader, has an installed customer base of more than 280,000. The second generation 

box, TiVo Series 2, currently sells for approximately $399.99 and operates with any 

television system: antenna, cable, digital cable, satellite and combination.289 TiVo is 

offered on a subscription basis for approximately $10 a month.290 About 20% of its 

reported 200,000 subscribers receive the service through DirecTV using an STB that 

combines DBS and PVR functions.291 In addition, EchoStar offers STBs, the 

DISHPlayer and the DishPVR, with PVR capabilities.292

One television executive notes that consumer adoption of PVRs has not been as 

widespread as predicted.293 Consumers may adopt the PVR, much like the VCR and 

 

285 Id., citing an eBrain Market Research Study from July 2001. (Note that all the figures used in this 

paragraph are from the Bear,Stearns & Co. Report).

286 Id., at p. 32.

287 2000 Report, 16 FCC Rcd at 6059-60.

288 Natalie Weinstein, Sonicblue Completes ReplayTV Acquisition, CNET News.com, Aug. 2, 2001, at 

http://news.cnet.com/newx/0-1006-200-6762533.html; Khanh T.L. Tran, TiVo, Sonicblue Still See the 

Bright Side, Wall Street Journal, Aug. 31, 2001, at B3. Sonicblue also plans to provide Ethernet 

capabilities in order to offer a subscription service for niche programming. Michael Grotticelli, Reviving 

ReplayTV, Broadcasting & Cable, Sept. 10, 2001, at 32. 

289 Bear, Stearns Hard Lines Retailing: Consumer Electronics, p. 32.

290 http://www.tivo.com; Walter S. Mossberg, Personal Technology, SuperSet-Top Boxes Put Viewers in 

Charge, Change TV Habits, Wall Street Journal, Feb. 22, 2001, at B1. See also 1999 Report, 15 FCC 

Rcd at 1035. 

291 TiVo Reports Subscriber Increases, Lower Losses, Satellite Business News Fax Update, May 30, 

2001, at 2; http://www.directv.com. 

292 http://www.dishnetwork.com/content/products/receivers/index.shtml. 

293 Michael Freeman, Execs Debate Issues at TCA: Product Placements, PVR Use Top Agenda, 

Electronic Media, Vol: 21, No. 29, July 22, 2002 (citing remarks by Leslie Moonves, President, CBS 

Television).
98

every other new form of entertainment, but the PVR may not have quite the same effect 

as experts assume.294 

Another broadcast executive compares potential revenue losses from skipped 

commercials and the disk storage of copyrighted programming to the current massive 

losses threatening the music industry.295 He estimates that almost one million 

households (or less than 1% of total television viewers) currently use PVR devices on a 

regular basis.296 He cautions that if cable and satellite operators continue plans to 

integrate PVR technology into their STBs, within five to ten years there might not be any 

commercial ads on television.297 In his opinion consumers may be asked to pay for 

programming if the networks lose advertisers. He warns that PVRs could present a real 

threat to the television industry, translating into a future cost to American consumers of 

approximately $250 annually per household through cable subscriber fee increases or 

conversion to “pay for” services of advertiser-supported basic cable networks.298

 

A different network head, who admits to owning a PVR, suggests that PVR users 

might not be inclined to skip past commercials during sporting events because the 

commercials are sports-related and almost weave into the programming.299 For 

instance, during televised golf tournaments, players often talk about equipment during 

the commercials.300 The content of the commercials tends to be compatible with the 

format of the golf show.301 Thus, golf enthusiasts might “stay tuned” during the 

commercial breaks to find out what brand of golf ball or golf club their favorite 

professional golfer endorses. 

Overall, there is a growing concern that given the opportunity to skip through 

entire commercial and promotional pods during a network break, a large number of 

consumers will choose to skip. This concern may be valid, considering a recent study 

which concluded that people who watch recorded television shows on PVRs skip past 

commercials over 71% of the time (See Table 31).302 The study noted that the skip rate 

for PVR users was more than four times that of viewers watching shows recorded on a 

 

294 Id.

295 Michael Freeman, Execs Debate Issues at TCA: Product Placements, PVR Use Top Agenda, 

Electronic Media, Vol.: 21, No. 29, July 22, 2002 (citing remarks by Jamie Kellner, Chairman, Turner 

Broadcasting).

296 Id.

297 Comm. Daily, Vol. 22, No. 135, July 15, 2002 (citing remarks by Jamie Kellner, Chairman, Turner 

Broadcasting).

298 Id.

299 Lisa de Morales, The TV Column, The Washington Post, July 25, 2002 (citing remarks by Bob Wright, 

CEO, NBC). 

300 Id.

301 Id.

302 Marla Matzer Rose, Study: PVR Users Skip 71% of Ads, Hollywood Reporter, July 3, 2002, citing 

research study from CNW Marketing Research. 
99

VCR.303 The skip rate was also more than 65% higher with PVR users than with people 

who actively ignored commercials on live television.304 

Table 31: Television Ads Not Watched (Prime Time)305

Summary -- Sort by "Fast Forward PVR..."

Fast 

Forward

Fast 

Forward

Fast 

Forward Fast Forward Fast Forward Fast Forward

Actively

Ignored on

Video 

Taped PVR

Of Video 

Taped

Of Video 

Taped

Of PVR 

Recorded

Of PVR 

Recorded

Live TV* TV TV Cable TV Network TV Cable TV Network TV

Fast Food 44.4% 23.7% 94.6% 22.2% 25.4% 94.4% 94.7%

Credit Cards 62.8% 18.8% 93.6% 14.2% 23.1% 93.5% 93.7%

Upcoming Program 74.2% 21.4% 93.4% 15.8% 27.6% 92.4% 93.7%

Mortgage Financing 73.9% 19.6% 92.7% 19.4% 19.8% 91.1% 93.5%

Home Products 40.6% 17.2% 88.5% 13.3% 22.8% 80.4% 93.6%

Personal Improvement 68.2% 14.3% 85.6% 12.4% 16.9% 80.3% 91.2%

Pet Related 55.7% 16.2% 81.9% 12.8% 21.3% 80.2% 84.6%

Soft drinks 21.9% 8.7% 81.4% 6.1% 9.8% 80.7% 82.9%

Male Hygiene Products 63.8% 15.1% 78.2% 12.4% 19.7% 75.6% 82.1%

National Automotive 52.6% 18.4% 71.3% 15.3% 26.1% 65.7% 79.4%

Feminine Products 41.3% 13.7% 64.1% 8.7% 19.2% 50.3% 78.6%

Local Automotive 58.1% 14.6% 62.8% 10.4% 19.3% 57.5% 68.2%

Specialty Clothing 32.7% 15.6% 61.3% 13.7% 24.1% 55.2% 64.9%

National Dept Store 37.8% 16.9% 60.8% 12.5% 22.2% 58.3% 62.7%

Home Improvement 16.2% 17.9% 56.7% 10.2% 25.8% 41.2% 68.8%

Local Dept Store 21.6% 10.2% 55.1% 8.8% 13.4% 52.6% 61.3%

Movie Trailers 11.3% 15.9% 47.3% 11.9% 13.6% 29.7% 41.3%

Drug 31.7% 13.1% 46.9% 11.2% 15.7% 41.2% 49.7%

Beer 4.4% 5.1% 32.7% 4.9% 5.3% 20.1% 35.6%

Unweighted Avg. 42.8% 15.6% 71.0% 12.4% 19.5% 65.3% 74.8%

Samples 8,654 1,148 976

Source: CNW Marketing Research (2002)

Overall, with PVR users, commercials on cable fared a bit better than on network 

television. However, in the top “turn-off” categories of fast food, credit cards, mortgage 

 

303 Id.

304 The research characterizes “ignoring” live TV as getting a snack, starting a conversation or taking a 

bathroom break. 

305 Data table compiled by CNW Marketing Research and used with permission from Art Spinella of CNW. 

CNW Marketing Research is primarily known for its automotive research, and the study was done mainly 

to learn about viewer habits in the automotive category. While its methodology was not designed to be 

definitive for other categories, the results may offer a window into the still-new world of PVRs, a 

worrisome area for advertisers concerned about avoidance of commercials. Total sample size: all 

surveyed were over age 18; 8,146 people watched live TV; 1,159 used videotapes and 944 were PVR 

owners. The survey is part of a larger television interactive study with a total sample size in excess of 

18,000.
100

financing and home products, the statistics were virtually the same as network-run 

commercials.306 

While the broadcast and advertising industries are concerned about viewers 

skipping commercials, it is foreseeable that the PVRs personalization functionality may 

radically affect the advertising model.307 The concept of primetime may become much 

less important, as programs are viewed other than when they are broadcast. Scheduling 

programs and the significance of ratings during specific time periods may change the 

rules for airtime pricing.308

PVR manufacturers acknowledge that advertisers are concerned about the 

commercial skipping features of the PVR. One manufacturer has announced a new 

initiative that demonstrates how advertisers can establish far deeper communication 

with consumers by using key functions of a PVR to transform the traditional 30-second 

commercial into “advertainment.”309 Using the new advertainment capabilities, 

advertisers will be able to provide an electronic tag for commercials that come into view 

of PVR subscribers. Simply clicking the PVR remote control while the commercials are 

on the television screen will transport the PVR subscriber to a “video showcase” area 

where the viewer can watch innovative advertiser-produced and branded entertainment. 

This strategy gives advertisers new abilities, including (1) telescoping 30-second 

commercials that viewers can watch; (2) branded video showcases stored on the PVR 

hard drive; (3) lead generation and request for information features; and (4) real-time 

audience measurement data.310

Conclusion

There are technological advancements and deployment concerns, economics 

issues, regulatory challenges and consumer adoption questions that broadcasters face 

as they compete in the media industry. However, MPEG compression and encoding 

technologies have increased the ability for broadcasters and other competitive video 

distributors to transmit video over video distribution systems and the Internet.

The transition from analog to digital television is underway. Ultimately, the DTV 

transition will shift into high gear when three factors come together: (1) a critical mass of 

high-definition or value-added digital content; (2) distribution of that content to 

consumers; and (3) DTV sets in consumer’s hands. For some broadcasters, securing 

financing to pay for station equipment is difficult.311 Many worry that some broadcasters 

will not meet the transition deadline.312 Cable operators feel pressure to carry 

 

306 Id.

307 Stuart Thomson and Aalia Walker, Datafile, Cable and Satellite Europe, September 1, 2001.

308 Id.

309 See New TiVo Advertainment Debuts as Part of Best Buy National ‘Go Mobile’ press release, May 16, 

2002.

310 Id.

311 See Many Broadcasters Will Not Meet May 2002 Digital Television Deadline, GAO-020466, April 2002.

312 Id.
101

broadcaster’s digital signals. Consumers are evaluating the value proposition of DTV 

sets and programming, and are encouraged by the sharp picture and superior sound 

quality. Local and network television, cable programmers and other content producers 

are offering more DTV programming in their program schedules. Broadcasters, movie 

studios, television networks, computer-chip makers, software companies and consumer 

electronics manufacturers are concerned about digital rights management and copyright 

protection but cannot agree on a solution. 

Broadcasters are developing plans to utilize portions of the excess capacity in 

the spectrum to offer ancillary, supplemental and interactive services. To date, 

however, the vast majority of television stations have not acted on these plans. This is 

likely due to the uncertain business models for such new services. If significant demand 

and profitable business models develop, these additional services may generate new 

revenue streams and help defray the costs of the station’s digital build-out. It appears 

that the growth of the ITV industry continues to proceed at a cautious pace. Ancillary 

and interactive services are slowly gaining consumer acceptance and are slowly 

becoming available through cable operators and satellite carriers as well as broadcast 

television stations. The rollout of ITV services will accelerate as (1) content owners and 

video programming distributors form strategic alliances; (2) the cost of providing ITV 

services continues to decline; (3) the deployment of two-way capable STBs increases; 

and (4) the transition to a digital environment progresses. PVRs may increase 

consumer’s programming options and alter behavior patterns. The Commission will 

continue to monitor this line of business and report, where appropriate, on new 

developments and issues that may arise in the future. 

Overall, technological developments increase the opportunities, challenges and 

competition faced by broadcasters. These digital technologies may permit broadcasters 

to become multichannel, multi-revenue stream video programming providers. However, 

these developments per se do not change the apparent scenario for broadcast 

television in the near term – a continuing gradual decline in viewing shares. If new 

services are developed and successfully deployed by competitors, the potential exists 

for rapid erosion of broadcasting’s share.
102

IX. Advertising Market Developments

Introduction

This chapter briefly considers and discusses changes in the advertising market 

both in terms of market structure and in terms of new advertising formats. The 

advertising market has experienced consolidation, both on the buy and sell-sides in 

recent years.

With regard to new advertising formats, the arrival of interactive capability may 

present new models and opportunities for advertisers. However, given the valuable 

consumer feedback and data retrieval capabilities of interactive formats, any potential 

added value also raises issues relating to the protection of children and consumer 

privacy. Thus, advertisers and broadcasters may have to balance their interests in 

targeting and monetizing eyeballs versus the viewer’s interest in privacy. 

Changes in Advertising Market Structure

Sell-Side Consolidation

Over the past ten years the major broadcast networks have either entered the 

business of cable network provision or expanded an already existing smaller presence. 

In 1990, ABC and NBC each had some cable network holdings. Disney’s purchase of 

ABC increased the portfolio of cable networks associated with ABC, while NBC has 

added modestly to its cable holdings over the decade. Fox started two cable networks 

in the 1990’s and also bought and sold the Family Channel. CBS had modest 

purchased cable holdings of its own at the time of its purchase by Viacom. In addition 

to expanding the group of cable networks under common ownership with CBS, Viacom 

also recently added a second broadcast network, UPN, to the mix. AOL Time Warner 

started out as a cable network owner and then added the WB, a broadcast network.313

Consolidated media companies who own television and radio stations, cable 

channels and print publications can offer advertisers a wide variety of package deals.314 

For example, in May 2001 Procter & Gamble Co. and Viacom Plus, the cross-media 

sales and marketing unit of Viacom, announced the creation of a cross-platform 

marketing partnership.315 The agreement encompassed marketing initiatives for Proctor 

& Gamble brands across twelve Viacom television properties in the United States: CBS 

Television Network, MTV, MTV2, VH1, Nickelodeon/Nick at Nite, CMT, BET, UPN, TV 

Land, Paramount Television, King World and Comedy Central. Cross-platform 

marketing partnerships offer advertisers "one-stop shopping" to leverage and integrate 

 

313 See Chapter X, “Cooperative Efforts with Broadcasters” subsection for more detail on this issue.

314 Consolidation Good for Public, Advertisers, Karmazin Tells TVB, Comm. Daily, Vol. 22, Issue 59, 

March 27, 2002, citing remarks by Mel Karmazin, President, Viacom.

315 Proctor &Gamble and Viacom Plus Announce Major Marketing Partnership, PR Newswire, May 31, 

2001.
103

brand messages across a media company's full range of advertising-based assets. 

According to industry estimates, cross-platform agreements will represent up to 40% of 

media buys in the future.316

There are many business reasons for media mergers and consolidations. 

Companies join forces to expand their packaging, content production and distribution 

platforms (such as AOL Time Warner); to be self-sufficient supplier-distributors (as with 

Viacom and CBS); to strategically change or reposition themselves (as when 

Westinghouse bought CBS and Vivendi bought Universal); or for a company's cash 

resources (as when Viacom bought Blockbuster).317 Media owners suggest that 

consolidation can lead to lower cost structures and higher revenues as a result of more 

advertising and cross-promotional opportunities.318 

Broadcast television executives at companies which own two stations in a market 

believe that their companies gain greater influence with advertisers.319 For example, a 

station group which owns two television stations and one or two sports networks in a 

city such as New York, NY or Los Angeles, CA is in a position to have a powerful voice 

with advertisers.320 Other benefits include cost-control, higher profit margins and 

better-quality news and entertainment for viewers.321 If a company owns multiple 

stations in a market, the company can have a strong position in the syndication 

business, and the opportunity to grow its own syndication business or to have more 

leverage when dealing with third parties.322

Media executives also suggest that vertical integration in the media business is 

beneficial because a vertically integrated company has an opportunity to generate 

revenue not only as a program producer but also from advertising on its local television 

stations, domestic cable and international channels.323 Successful shows make money, 

and a program’s wide-spread appeal can be monetized in a vertically integrated 

organization.

Some media executives suggest that consolidation among advertising agencies 

contributes to smaller advertising revenues because of greater information flow among 

advertisers.324 Before consolidation occurred in the advertising and marketing services 

 

316 Id.

317 Diane Mermigas, Not All Mergers Made in Heaven, Electronic Media, Vol. 21, No. 25 June 24, 2002.

318 WPSG-TV, KYW Newsradio, KYW-TV to Debut Headline Service on UPN57 This Fall; Local News, 

Weather and Traffic to be Updated Every 10 Minutes, PR Newswire, June 3, 2002.

319 Sallie Hofmeister, Q&A with Murdoch Empire’s Chief Engineer, Los Angeles Times, September 2, 

2001, citing remarks by Peter Chernin, Chief Operating Officer, News Corp. News Corp. holds and 85% 

stake in Fox Entertainment Group Inc. which operates the Fox Television Stations unit (Fox Television). 

320 Id.

321 Business Brief, Fox Entertainment Group Inc.: Pact is Set to Buy WPWR-TV in Chicago From 

Newsweb, The Wall Street Journal, June 28, 2002. See also Entravision Communications Corporation 

Reports First Quarter2002 Results, PR Newswire, May 9, 2002.

322 Sallie Hofmeister, Q&A with Murdoch Empire’s Chief Engineer, Los Angeles Times, September 2, 

2001.

323 Id.

324 Id.
104

industry, broadcasters discreetly sold ad space to diverse and independent agencies.325 

Today, broadcasters sell ad space to agency networks with knowledge of similar sales 

arrangements, which tends to decrease ad prices.326

Buy-Side Consolidation 

There has been a considerable amount of consolidation, merger and acquisition 

activity not only among advertising agency clients, but also within the advertising and 

marketing service industry. Over the last few years, there has been acceleration in the 

rate of account consolidation that has moved business to the top consolidated 

advertising agency networks and holding companies at an unprecedented rate.327 

These large companies, such as WPP Group, Interpublic Group of Cos. and Omnicom 

Group, participate, via their subsidiaries, in many other areas beyond traditional 

advertising such as public relations, promotional sales and event marketing.328 

Advertising industry analysts suggest that ad agency clients will continue to 

consolidate their accounts at fewer ad agency networks for several reasons, including 

pricing leverage, elimination of redundant costs and inefficiencies and brand 

harmony.329 The relationship and planning may still be down on the agency or 

subsidiary level but the purchase negotiation is typically done on a consolidated basis. 

Moreover, more accounts will be consolidated as merger and acquisition activity 

continues among clients. While there has always been pricing pressure by clients in 

search of price concessions when soliciting bids, the leverage a client has over an 

agency when that agency is its sole supplier creates an opportunity for the client to seek 

special price considerations. Clients note that it is expensive to have multiple agency 

relationships due to agency costs which include back office functions, legal support and 

additional staff. Frequently, it makes better business sense to consolidate an account 

due to cost redundancies. While price is still not likely the main criteria for an account 

move, it is becoming more and more of an incentive to readdress an agency 

relationship and shop around. 

Media buyers appear to have a stronger position in the industry today than ever 

before. Consolidation on the buy-side has occurred for several reasons, including: 1) 

consolidation within advertising and marketing services companies; 2) acquisitions; and 

3) account movement. The major agency networks and holding companies have 

realized that they can achieve greater leverage and service their clients better by having 

larger media buying organizations. Within the last few years, all of the major holding 

companies have pooled most of the media buying functions out of their agency 

networks and created a stand-alone entity. OMD was formed through the media buying 

business at DDB and BBDO at Omnicom. Mindshare is the media buying business of 

 

325 Id.

326 Id.

327 Bear, Stearns & Co. Inc., Advertising & Marketing Services Report, March 2002 at 6.

328 It is important to note that these other areas are often not reflected in many industry statistics. 

329 Much of the discussion in this working paper regarding buy-side consolidation is taken from the Bear, 

Stearns Advertising & Marketing Services Report (2002).
105

both Ogilvy Mather and J. Walter Thompson at WPP Group, and Magna Global is the 

umbrella for all of the media business within Interpublic.

Agency networks and holding companies are aggressively combining their own 

internal media businesses and acquiring others to attain scale and to secure more 

business from clients. Scalability is particularly important when pursuing media 

business. Larger media advertising buyers may benefit from stronger relationships with 

the media and better media rates. Given the escalating costs of mass media in the late 

1990s, even the slightest ad price discount is meaningful to a large client. 

Securing a price discount, however, can be problematic for several reasons. As 

the agency networks acquire more subsidiaries, they face the challenge of realizing 

synergy within the new larger network.330 To be successful, they must get their 

individual subsidiaries cooperating with each other to offer clients a fully integrated suite 

of advertising and marketing services, while making sure that the costs of servicing the 

client are fairly apportioned.331 Another reason is that the potential exists for client 

conflicts.332 While many clients will insist that a competitor is not represented by the 

same agency, some global clients may try to claim category exclusivity for the entire ad 

agency.333 Clients may also want to keep business at several agencies for creative 

diversity.334 Because of the need for creative flexibility and trend-driven ad campaigns, 

clients will often spread business to several places or review their agency contracts on a 

regular basis. Furthermore, using different agencies may enable each brand manager 

to pursue his or her own style and create different strategies for different product lines 

within a company.335

It would stand to reason that the more dollars a media buying company has 

within its network, the more leverage that company will have in negotiating pricing and 

placement of advertising dollars for their clients. A decade ago, there were three major 

television networks and 25 leading media buying entities. The balance of power was 

clearly with the sellers of advertising space. At issue is whether that pendulum has 

switched today, given that there are only a handful of top media buyers and a multitude 

of sellers, as cable and other national networks evolve.336 One reason in favor of 

agency consolidation was that agency networks and holding companies, with their 

massive combined spending, were supposed to bring clients more clout in the upfront 

television buying market, which typically lasts no longer than a week.337 However, it has 

been suggested by some sellers and buyers at midsize media agencies that the larger 

 

330 Richard Tomkins, Commercial Break-up, The Financial Times, July 15, 2002.

331 Id.

332 Id.

333 Bear, Stearns Report at 11.

334 Id.

335 Id.

336 According to industry analysts, the top ten companies control an estimated 39% of the revenues in the 

advertising industry. However, as a percentage of the entire marketing industry, this figure is more like 

25%.

337 Richard Linnett and Wayne Friedman, Sellers: Mega-shops Slow in Upfront, Advertising Age, June 24, 

2002 at 3.
106

agency networks tend to be the slowest and bulkiest players in the market.338 Because 

of their size in terms of dollars and number of clients, they have to balance competing 

needs, which hampers the negotiation process. While size does earn agency networks 

a certain amount of clout at the bargaining table, they might not be able to use their size 

to negotiate from a position of strength. By not moving quickly, they are not able to 

react because they have so many client accounts to service. As a result, they may cut 

hasty last-minute deals, mostly on terms favorable to media sellers, or risk being left out 

of the market.339 Many believe that these shops are so large they cannot force 

networks to lower prices because they cannot afford to pull out of deals. They have so 

much money and so many clients at stake they are practically forced to compromise. 

As one top industry executive has noted, “an agency’s ability to make a deal is 

commensurate with its ability to walk away.”340

Current Trends and New Advertising Formats

Product Placement and Sponsor-Supplied Programming

If, as expected, integrated PVRs become popular, broadcasters must find 

additional revenue streams. As discussed in Chapter VIII of this paper, some in the 

broadcast industry are looking to DTV and ITV to provide new revenue opportunities. 

Regardless of the type of technological advancement, broadcasters must ensure that 

they provide ad buyers the greatest number of advertising and promotional options. 

Proactive advertising companies, for example, are already looking at future 

opportunities within sponsorship and product placement. Increasingly, marketers are 

shouldering production expenses in return for benefits or rewards that may include 

product placement, sponsorships, and in some cases, sweepstakes. On behalf of their 

advertising clients, media companies are even staging and paying for parties and 

corporate events, developing elaborate promotions and mailings and agreeing to do 

unusual product placements.341

Movie viewers may be used to seeing commercial goods placed in films, but 

product placement will appear on all the broadcast networks, as well as on some cable 

shows, during the 2002-2003 television season.342 One reason television and cable 

networks are chasing such partnerships is to help offset rising production costs in a 

weak advertising environment. These networks are eager to capitalize on the fastgrowing demand from marketers to push beyond the limits of traditional commercials. 

In 2002, Johnson & Johnson and AOL Time Warner Inc.’s TNT cable network 

entered into an arrangement where Johnson & Johnson agreed to fund two movies for 

 

338 Id.

339 Id.

340 Id. (citing John Mandel, CEO, MediaCom).

341 Matthew Rose and Suzanne Vranica, Prolonged Ad Slump Puts Media in the Mood to Pander to 

Buyers, Wall Street Journal, May 9, 2002.

342 Frank Ahrens, The Spy Who Loved Nokia, and Other Next-Stage Ads: TV Plots Thicken With Real 

Brands, The Washington Post, September 28, 2002.
107

TNT.343 TNT agreed to support the movie with a multi-million dollar promotional 

campaign, spreading it across various sister properties owned by AOL Time Warner. 

Johnson & Johnson agreed to pay for the production of the film in exchange for 

extensive sponsorship rights. It also received about half of each movie’s television ad 

inventory to promote its own products. Such partnerships illustrate the recent trend 

toward high-profile consumer brand companies entering into financial arrangements 

which result in the anticipated outcome – credit from consumers for bringing audiences 

quality entertainment.344 

Today, even on the cable networks, sponsor-supplied programming may not be 

as prominent as it was from 1942 to 1960, the so-called “Golden Age” of the broadcast 

networks.345 At that time, marketers such as General Electric, Texaco, Kraft Foods, 

Proctor and Gamble, Colgate Palmolive and Philip Morris together with ad agencies 

such as BBDO, Foote, Cone & Belding, J. Walter Thompson Co. and Young & Rubicam 

were involved in producing shows for ABC, CBS and NBC. Decades later, that joint 

venture concept moved into the barter-syndication realm via advertisers like Colgate. 

On network cable, Bristol Myers – now Bristol Myers Squib – supplied the “Alive & Well”

series to USA Network in the 1970s. Today, advertisers such as Proctor & Gamble still 

supply some programming for broadcasting. Proctor & Gamble’s daytime programs “As 

the World Turns” and “Guiding Light” continue to run. During primetime, Proctor & 

Gamble has a partnership role with Paramount Television in the airing of “Dawson’s 

Creek” and the syndicated “Star Trek: Deep Space Nine.”

Programmers find that advertisers are interested in financing shows focused on 

outdoorsy and family-oriented genres, plus those emphasizing male and female 

interests. The male-oriented, outdoor-themed shows in particular afford product 

placement opportunities.346 For instance, at the cable network ESPN, most of its 

outdoor and fishing programs are pre-sold to advertisers – meaning they are sponsorsupplied or pre-sponsored. Nearly all secure one-year commitments to see how the 

shows will perform in the ratings. When the shows arrive with a pre-sold title sponsor, 

ESPN gives the sponsor exclusivity in the client category. However, the presenting 

sponsors must purchase the majority of the commercial time within the program. 

Accounts in bartered programs must buy additional inventory elsewhere on the 

schedule.

Individual consumer product companies are not the only entities financing 

network or cable channel programming. Firms representing an entire product category 

are also sponsoring and financing category-themed programming in exchange for 

category exclusivity.347 In exchange for advertisers accepting production expenses, they 

 

343 Suzanne Vranica, Reisenberg is the Marrying Kind, Wall Street Journal, May 3, 2002.

344 Id.

345 Jim Forkan, On Some Cable Shows, the Sponsors Take Charge, Multichannel News, June 4, 2001. 

(The discussion in this paragraph and the next two paragraphs is drawn from this article).

346

 According to an Outdoor Channel executive, the Outdoor Channel has aired a variety of sponsorsupplied programs including: Hunting with Penn’s Woods (a game-call marketer), Hunting with Country 

(from camouflage designer Mossy Oak) and Primos’ Truth About Hunting (from Primos Hunting Calls).

347 Suzanne Vranica, FX Faces Headaches with ‘World Beer Games,’ Wall Street Journal, May 3, 2002.
108

receive commercial time, sponsorship rights and product placements during the actual 

show. Advertisers believe these efforts will help break through the “clutter” of network 

commercials. However, partnerships between advertisers and content producers can 

lead to constraints in the ability to sell time to advertisers not in the partnership –

especially those whose products are in a similar category (e.g., a program sponsored by 

one brewing company may not be able or willing to sell ads to another brewing 

company).348

Broadcaster’s business models face mounting challenges as viewers continue to 

channel surf each time a scene ends, or opt to skip a commercial with the aid of a 

PVR.349 Media and advertising companies are looking at future opportunities within 

sponsorship and product placement. However, there may be legal and regulatory 

issues that could potentially restrict or limit product placement options. Many network 

executives indicate they are open to sponsor-supplied programs and detailed product 

placement schemes as long as the network retains editorial control. Yet, why would an 

advertiser invest millions of dollars without expecting to have at least some control over 

how it is used? 

Recurring questions include:

1. How can a network please two large account marketers, competing 

in the same category, when one marketer underwrites a successful 

show and has its product displayed within the show itself and also 

in the commercials? 

2. How will viewers react to shows that are developed, produced and 

sponsored by advertisers whose (a) products are featured 

prominently in the show and (b) whose commercials are aired 

during the breaks?

3. How will the creative talent such as writers, directors, actors and 

producers react to editorial control being given to the advertisers? 

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

Ultimately, time will tell whether product placement and sponsorship significantly add to 

the broadcaster’s bottom line.

Interactive Advertisements

For broadcasters and other providers of video programming with business 

models based on advertising, digital technology may provide new interactive advertising 

opportunities for media buyers and incremental revenue for ad sellers. The concept of 

ordering a product or service via electronic communication is not new; e-commerce, 

 

348 Id.

349 See Brian Lowry, Going Far Beyond Product Placement, Los Angeles Times, July 10, 2002.
109

where lets consumers purchase goods and services via the Internet, has been a rapidly 

growing industry350 since the mid-1990s.351 In fact, a recent study predicts that global 

business-to-consumer e-commerce transaction revenues will grow from $88 billion in 

2002 to $361 billion in 2007.352 The PC is expected to remain as the dominant platform 

for e-commerce transactions over the next five years.353 Transaction revenues from 

fixed Internet or PC-based e-commerce will grow from almost $80 billion in 2002 to 

$255 billion in 2007.354 Analysts also note that television based e-commerce (tcommerce) has significant potential as an alternative for PC-based e-commerce. They 

forecast that it could account for almost 20% of total e-commerce revenues by 2007, 

while contributing to slowing growth in PC-based e-commerce.355

For some time now, viewers have also had the opportunity to tune into 

infomercials or shopping channels. The success of home shopping channels has been 

tied to appealing product mixes, user-friendly call-in ordering systems and solid 

customer service. If this approach is utilized with t-commerce, the potential payoff from 

selling a product or service directly to the TV viewer is intriguing not only to 

broadcasters, but also to ad agencies and large marketers. 

Interactive service opportunities such as PPV and VOD, opened up by 

conditional access technologies, have the potential for giving broadcasters many 

options for attracting more revenue. By offering a number of unique formats for 

interactive ads, broadcasters benefit by assisting ad agencies in targeting specific 

groups of customers based on location or other criteria that are recorded in a 

conditional access system. Depending upon the model and the underlying strategy, 

interactive advertisements can offer broadcasters and advertisers: (1) the ability to 

directly target specialized market cross sections; (2) the chance to gather valuable 

consumer data based on surveys and user requests; and (3) the opportunity to offer 

interactive contests and quizzes as viewing incentives. Moreover, the ability to target 

individuals with a personalized message is particularly appealing for advertisers. 

The prospect of interactive advertising is a fundamental shift from mass market 

advertising to a more focused and response-based process, and a reliable feedback 

mechanism to measure ad effectiveness.356 Interactive advertising, along with tcommerce, represent a fundamental change in the way companies will advertise and 

market and the way consumers will see advertising in the future. Today, many major 

advertisers and ad agencies view interactive ads as an experimental platform and are 

 

350 eMarketer’s Global Report notes that year 2004 projections of total worldwide e-commerce revenues 

range from $963 billion (ActivMedia Research) to $4 trillion (Forrester Research). IDC Research expects 

total e-commerce revenues of $2.8 trillion and Goldman Sachs & Co. expects revenues of $3.48 trillion

351 Phillip Swann, Is the Future Now? Response TV, February 1, 2002.

352 See B2C E-Commerce: Key Messages and Forecasts Report by Ovum Research, 

http://www.ovum.com/go/product/latestresearch/008308.htm, (accessed August 9, 2002).

353 Id.

354 Id.

355 Id.

356 Jeremy Thorp, What Benefits Do Interactive and Enhanced TV Service Provide?, Broadcast 

Engineering, Vol. 43, No. 3, March 1, 2001. 
110

struggling to balance new interactive concepts with traditional brand-building functions. 

Moreover, the added element of transaction capability adds more challenges such as 

(1) providing a good product mix with an easy-to-use ordering system; (2) managing 

customer service; and (3) offering compelling graphical user interfaces.

Interactive Advertising Targeting Children Raises Concerns

Clearly, regulatory restrictions and consumer acceptance pose a tremendous 

challenge, when one considers the potential transaction-oriented focus of t-commerce 

and interactive advertising. Parents, community organizations, industry groups, 

politicians and regulators may have concerns about the captivating nature of interactive 

ads. There may be an interest in limiting or controlling access by children and 

teenagers, particularly if t-commerce functionality is offered. Both Congress and the 

Commission have noted that (1) television plays a significant role in the lives of children; 

(2) it has great potential to contribute to children’s development, and (3) Congress has a 

substantial interest in promoting children’s welfare.357 

The Commission has placed obligations on broadcasters to protect the interests 

of children, given broadcaster’s responsibility as trustees of the public airwaves. In 

1974, the Commission instituted a wide ranging inquiry into children’s programming and 

advertising practices, which led to publication of the Children’s Television Report and 

Policy Statement (“1974 Policy Statement”).358 The Commission concluded that children 

are more “trusting and vulnerable to commercial ‘pitches’ than adults” and that children 

“cannot distinguish conceptually between programming and advertising.”359 

In 1990, Congress enacted the Children’s Television Act of 1990 (“CTA”).360 The 

objective of Congress in enacting the CTA was to increase the amount of educational 

and informational programming on television.361 The CTA imposed two principal 

requirements. First, commercial television broadcast licensees and cable operators had 

to limit the amount of commercial matter that could be aired during children’s programs 

to not more than 10.5 minutes per hour on weekends and not more than 12 minutes per 

hour on weekdays. Second, the Commission had to consider whether all television 

broadcast licensees had served “the educational and informational needs of children 

 

357In the Matter of Children’s Television Obligations Of Digital Television Broadcasters, Notice of 

Proposed Rulemaking, MM Docket No. 00-167 at 2 (2000). See also S. Rep. No. 227, 101st Cong., 1st 

Sess. 17 (1989) (“Senate Report”).

358 Children’s Television Report and Policy Statement, 50 FCC 2d 1 (1974), affd., Action for Children’s 

Television v. FCC, 564 F.2d 458 (D.C. Cir. 1977) (“1974 Policy Statement”).

359 1974 Policy Statement, 50 FCC 2d at 11. The Commission stated its expectation that the industry 

would eliminate “host selling” and product “tie-ins,” use separation between programs and commercials 

during children’s programming, and honor the industry’s voluntary advertising guidelines for children’s 

programs.

360 Children’s Television Act of 1990, Pub. L. No. 101-437, 104 Stat. 996-1000, codified at 47 U.S.C. §§ 

303a, 303b, 394. The Senate Report on the CTA cited the Commission’s 1984 decisions as precipitating 

factors in the enactment of the CTA. See Senate Report at 4-5.

361 Senate Report at 1.
111

through the licensee’s overall programming, including programming specifically 

designed to serve such needs.”362

In October 2000, the Commission issued an NPRM seeking comment on how 

existing children’s television obligations, developed with analog technology in mind, 

should be adapted to apply to DTV.363 The NPRM noted that DTV offers a range of 

possible applications, including potential revenue generating video and data services, 

such as subscription television, interactive services, time-shifted video programming 

and new video/information services.364

At issue in the NPRM proceeding is how the Commission’s children’s 

programming advertising limits and policies will apply to DTV broadcasters. By 

converging Internet capabilities with broadcasting, DTV permits a new level of 

interactivity between broadcasters, advertisers and viewers. Clearly this capability 

offers great potential for enhancing the educational value of children’s programs by, for 

example, permitting children to click on icons that appear on the screen during the 

program which take them to websites with more in-depth information about the topics 

covered in the program. However, the interactive capabilities of DTV also allow for the 

direct sale of goods and services over the television. This capability presents marketers 

with new opportunities to reach children, which raises concerns in light of the difficulty 

young children have in distinguishing commercials from programming and the particular 

vulnerability of children to advertising. 

The Commission is considering children’s advertising and programming policy 

issues regarding:

(1) applicability to free over-the-air channels, or to all digital 

channels both free and pay, 

 

362 In August 1996, the Commission adopted its current educational programming rules enforcing the 

CTA. See Report and Order, Policies and Rules Concerning Children’s Television Programming, MM 

Docket No. 93-48, 11 FCC Rcd 10660 (1996) (“Children’s Programming Report and Order”). The 

Commission first adopted rules implementing the CTA’s educational programming mandate in 1991. 

These rules included a very flexible definition of educational programming, did not establish quantitative 

guidelines regarding the amount of educational programming licensees were required to provide, and did 

not include measures designed to inform the public about educational programming. Within a few years 

after these initial rules took effect, questions began to be raised regarding the effectiveness of the new 

rules, and in particular about the content of the programs stations claimed were educational. The 

Commission’s rules included several measures to improve public access to information about the 

availability of children’s “core” programming. The Commission defined “core” programming as regularly 

scheduled, weekly programming of at least 30 minutes, aired between 7:00 a.m. and 10:00 p.m., that had 

the significant purpose of serving the educational and informational needs of children ages 16. The 

program had to be identified as core programming when aired and in information provided to program 

guide publishers.

363 In the Matter of Children’s Television Obligations Of Digital Television Broadcasters, Notice of 

Proposed Rulemaking, MM Docket No. 00-167 at 2-3 (2000).

364 Id.
112

(2) prohibition of all direct links to commercial websites 

during children’s programming,

(3) prohibition of the use of DTV interactivity capability in 

children’s programs to sell products, and

(4) changing the definition of “commercial matter” to include 

some or all types of program interruptions that do not 

currently contribute toward the commercial limits.365

Privacy and Interactive Advertising

In addition to child protection issues, privacy issues concerning the aggregation, 

use and confidentiality of consumers viewing and purchasing information also pose 

challenges to the widespread acceptance of interactive ads. If these concerns become 

obstacles, interactive advertising formats will have to allow for parental control over the 

content viewed by different family members. They will also have to provide a 

guaranteed level of privacy and security, especially if these formats allow for consumers 

to purchase products or services.

Opinions vary as to the likelihood for success of interactive advertising and its 

underlying technological platform. Despite the economic, technical, regulatory and 

programming challenges inherent in deploying an ITV platform that can support 

interactive advertising, industry executives and analysts still believe that ITV has great 

long-term potential.366 However, as audiences become more fragmented, some in the 

industry believe that ITV producers will have to create content for each audience base, 

making the sheer volume of content needed difficult in terms of cost and time to 

produce.367 With respect to interactive advertising, others suggest that there will surely 

be faster, less expensive ways to produce advertisements and programming catered to 

ITV in the future. 368 To be successful, interactive advertising must be designed to work 

in a hybrid, integrated environment that incorporates the best of advertising with the 

best of broadcast television.369 

Conclusion

There have been changes in the advertising market both in terms of market 

structure and in terms of new advertising formats. The advertising market has 

 

365 Id.

366 Comm. Daily, Experts Say Interactive TV Profits Still Are Years Away, Vol. 21, Issue 41, March 1, 

2001.

367 Jeremy Thorp, What Benefits Do Interactive and Enhanced TV Service Provide?, Broadcast 

Engineering, Vol. 43, No. 3, March 1, 2001.

368 Id.

369 Id.
113

experienced consolidation, both on the buy and sell-sides in recent years. Media 

owners suggest that consolidation can lead to lower cost structures and higher 

revenues as a result of more advertising and cross-promotional opportunities. 

Broadcast television executives at companies which own two stations in a market 

believe that their companies gain greater influence with advertisers. Buyers of 

advertising have also faced consolidation activity in their industry. These consolidations 

have been the result of several factors, including consolidation within advertising and 

marketing services companies, acquisitions and account movement. Product 

placement and sponsor-supplied programming are not new concepts, but they may 

provide additional revenue for broadcasters. New advertising formats promise to 

present new models and opportunities for advertisers. However, given the valuable 

consumer feedback and data retrieval capabilities of interactive formats, any potential 

added value also raises issues relating to the protection of children and consumer 

privacy. The Commission is reviewing issues related to potential effects that DTV and 

interactivity may have on children’s advertising and programming. Thus, advertisers 

and broadcasters may have to balance their interests in targeting and monetizing 

eyeballs versus the viewer’s interest. 
114

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

Introduction 

This section provides a brief overview of the financial interest and syndication 

rules (“Fin-Syn”), which were repealed in the mid 1990s, and discusses the evolution of 

the programming market after the repeal of those rules. The section then discusses 

prime time programming trends and the role of independent production in the 

programming market. The section also briefly discusses some recent trends, including 

repurposing and summer programming. The section also reviews the status of 

programming in the cable arena—with a particular focus on sports and news 

programming. It is clear that since Working Paper 26, television programming has 

undergone monumental changes as producers have found increasing outlets to display 

programming, most notably over the cable platform.

Repeal of Syndication and Financial Interest Rules

Like the program distribution market, the program production market has also 

undergone significant changes since the release of Working Paper 26. Broadcast 

network program production in particular has experienced a significant shift over the last 

decade. From 1970 through the early 1990’s, the broadcast networks were subject to 

Fin-Syn.370 These rules prohibited any network from acquiring financial interest in 

television programs produced wholly, or in part, by a person other than the television 

network; networks could only purchase rights from the producer to air such 

programming, or alternatively, they could produce programming entirely in-house. 

Later, pursuant to Consent Decree entered into between the Department of Justice and 

each of the respective networks (NBC in 1978, and ABC & CBS in 1980), the amount of 

in-house program production activity was limited. Furthermore, under the Fin-Syn rule, 

the networks could not engage in the business of syndication for programming 

distributed over the network, but produced outside the network. For programs wholly 

produced by the networks, the Fin-Syn rule required that, if the program was to be 

syndicated, the networks were required to sell their syndication rights to others. 

But since the release of Working Paper 26, all of these regulations have been 

eliminated. In January 1993, the Commission repealed significant portions of FinSyn.371

 Then in November 1993, in response to a joint motion filed by the three 

networks, the U.S. District Court for the Central District of California entered an order 

lifting the prohibitions imposed upon the three networks pursuant to the 1978 and 1980 

 

370 In the Matter of Amendment of Part 73 of the Commission’s Rules and Regulations With Respect to 

Competition and Responsibility in Network Television Broadcasting, Report and Order, Docket No. 

12782, (“Fin Syn”), 23 FCC 2d 382 (1970). 

371 In the Matter of Evaluation of the Syndication and Financial Interest Rules, MM Docket No. 90-162, 

Second Report and Order, 8 FCC Rcd 3282, recon. Granted in part, In the Matter of Evaluation of the 

Syndication and Financial Interest Rules, MM Docket No. 90-162, Memorandum Opinion and Order, 8 

FCC Rcd 8270 (1993), aff’d sub nom. Capital Cities/ABC, Inc. v. Fcc, 29 F.3d 309 (7th Cir. 1994).
115

Consent Decrees.372 In September 1995, the Commission eliminated the remaining 

Fin-Syn rules.373

 

Since these regulations were eliminated, the market for broadcast program 

production has evolved significantly. Many challenges and trends have emerged in the 

programming marketplace. Some of these were evident during 2001-2002 and continue 

in the 2002-2003 broadcast network season. They are briefly discussed below. 

The Programming Marketplace

In the days before multimedia competition, the primary way networks increased 

advertising revenues was to increase audience shares. The networks could increase 

the total audience by (1) adding television households or (2) by increasing hours of 

viewing of existing viewers. The networks could also increase their audience shares by 

luring viewers away from other networks. In these cases, spending more money on 

development and production as a way to generate more popular programming was a 

rational strategy, as long as doing so resulted in equal or greater increases in 

advertising revenues.

Since the release of Working Paper 26, however, there have been several 

notable changes in the network program production market. The Fin-Syn rules were 

repealed, and production costs have skyrocketed. Because of (1) changes in 

demographics and work behavior, (2) audience fragmentation, and (3) the enormous 

clutter of video programming and sources, broadcast network program viewing per 

household is declining. 

To adapt to these changes, the networks have developed programming 

strategies with an eye towards developing brand awareness to differentiate themselves 

from each other. Broadcast networks and their parent companies are also 

concentrating on controlling more of the programming they distribute.374 When a 

network controls its product, it may realize several advantages. It can become involved 

early on in the show development process to attract the desired demographic and build 

the brand. It may also have the ability to negotiate better terms with the sister studio 

than with a third-party studio, with the corporate parent as the ultimate beneficiary. This 

could mean more leverage in negotiations with other production studios. Also, there 

may be the opportunity for the network to repurpose content on sister networks (cable 

and broadcast) and leverage it on-line at a lower incremental cost to the network. 

The broadcast network business remains highly volatile due to the fact that every 

show that a network runs is not an overnight success with viewers. Before the repeal of 

 

372 United States v. National Broadcasting Company, 842 F. Supp. 402 (C.D. Cal. 1993).

373 Review of the Syndication and Financial Interest Rules, Sections 73.659 – 73.663 of the Commission’s 

Rules, MM Docket No. 95-39, Report and Order, 10 FCC Rcd 12165 (1995).

374 Bear, Stearns & Co. Inc., Diversified Entertainment, May 2002 at 8 (parts of the discussion in this 

section are drawn from the Bear, Stearns Report).
116

the Fin-Syn rules, the major studios provided lots of programming. Even then, there 

were several joint ventures with independent producers seeking financing from a studio. 

With the repeal of the Fin-Syn rules, networks can own their own programming and pool 

together some the costs and risks associated with developing and producing shows. 

These factors contributed to various merger and network startup activity in the television 

industry.

From Pitch to Fall Line-Up

The process whereby an idea for a network series makes it into the fall line-up 

can be costly, tedious and stressful for producers, writers, directors, talent and network 

programmers and schedulers. The process starts with network executives reviewing a 

series of pitches, which come from sources such as aspiring affiliated or non-affiliated 

writers and producers, affiliated or non-affiliated studios that have writers and producers 

under contract, talent agencies and even the actors themselves. For example, in the 

drama category alone, a network programming department can hear between 250-300 

pitches for an upcoming season. The network may then purchase roughly 50 scripts, 

paying anywhere from tens of thousands of dollars to an outright guarantee depending 

on the track record and prestige of the writer or creator. The network may then select 

and produce ten or so pilots. Networks conduct extensive scheduling meetings and test 

the pilots in front of network executives and randomly-selected or targeted audiences.375 

As a result, of the ten that are produced, maybe six or seven make it to the fall 

schedule. Out of this six or seven, perhaps only two may be selected for a second year 

of production.376

Programming Costs

The broadcast network business is very risky because good content tends to be 

expensive and the advertising base has not been large enough to support all the 

networks with an economic return for all. 377 Thus, the economics surrounding series 

network television production are extremely imperfect. The costs associated with 

producing dramatic and sitcom programming have changed since the repeal of the FinSyn rules. The estimated cost of producing one hour long drama episode is up from

$1.1 – $1.5 million (during Fin-Syn) to $1.4 – $1.6 million (after Fin-Syn).378 Episodes of 

programs such as NBC’s “ER” can cost ten times that amount to produce.379 For a halfhour sitcom episode, the estimated production cost is up from $400,000 – $900,000 

 

375 The general consensus among networks executives interviewed is that the number one consideration 

for scheduling is what show is going to work, not whether it is owned by the network, sister studio or 

parent company.

376 Information based on interviews with broadcast network executives and company sources.

377 Bear Stearns Diversified Entertainment Equity Research, Media, Diversified Entertainment, We Are 

Family, May 2002 at 9.

378 Michael Freeman, Special Report: The New Economics of TV, Electronic Media, January 28, 2002.

379 See Marcelino Ford-Livene, The Digital Dilemma, Federal Communications Law Journal, Vol. 51, No. 

3, May 1999 at 606, fn. 4.
117

(during Fin-Syn) to $550,000 – $1.2 million (after Fin-Syn). 380 Programs such as NBC’s 

“Friends” can cost much more than that per episode to produce each week. Also, 

“movies of the week” (MOWs) also pose production challenges because they can cost 

upwards of $3.5 million to produce. Rising costs and poor ratings have led to most of 

the networks discontinuing the production of MOWs.381

The high cost of programming can stem from the high cost of talent, which does 

not help the economics of the network or the studio.382 Yet, from the studio’s 

perspective, if a show in which it has an ownership interest is successful for 100 

episodes, that show can be syndicated or licensed in a foreign market.383 Recent 

trends indicate, however, that many syndication and foreign market opportunities are 

diminishing rapidly.

Prime Time Programming Trends

The amount of prime time hours produced by the networks has increased since 

the early 1990s. During the 1993-1994 broadcast season, the Big Four networks 

produced 18%–34% of their primetime hours.384 However, for the 2002-2003 season, 

the Big Four networks will produce 49%–67% of their primetime hours.385 

A large proportion of the shows aired by the networks are produced by sister 

studios. For example, of the 94 weekly hours of prime-time programming planned for 

the 2002-2003 broadcast season, only 21.5 hours of that programming (approximately 

23%) is produced by a studio not affiliated with any one of the major broadcast 

networks.386 On average, 57% of the programming aired by the major networks is 

affiliated with that network. Fox aired the most affiliated programming during primetime, 

airing nearly 58% of its primetime hours with programming from Fox studios. 

For the 2002-2003 season, a large portion of shows produced are aired on sister 

networks.387 With the exception of AOL Time Warner studio, networks carry a high 

proportion of sister studio shows, leaving few studio shows to air on non-affiliated 

networks.388 NBC studios air 100% of their shows on the NBC network, while Disney 

studios air 88% of their shows on the ABC network. Compared to the 2001-2002 

season, each studio’s percentage is roughly the same.

 

380 Id.

381 Information based on interviews with broadcast network executives and company sources.

383 Id.

384 Figures from Bear, Stearns, “Primetime Hours Produced by Network—1993-1994, 1997-1998, 2002-

2003 Broadcast Seasons—Percent” (2002) 

385 Id. (Note that for 2002-2003 season, CBS and UPN are combined).

386 Data from company insiders, presentations and Bear, Stearns & Co. Inc. (2002) (Note that the number 

of shows represents the beginning of the 2002-2003 broadcast season. Each studio received full credit 

for its participation in a co-production. Pre-scheduled mid-season replacements were given full credit. 

CBS and UPN are combined).

387 Id.

388 Id.
118

A large percentage of pilots ordered by sister networks are picked up.389 For the 

2002-2003 season, AOL Time Warner studios ordered and picked up the highest 

number of total pilots with a total of 11. It also had the highest percentage of its pilots 

picked up with 40%, while NBC studios had the lowest with 20%.

In addition, almost every studio had a higher percentage of pilots picked up by an 

affiliated network versus pilots originally ordered by that network for the 2002-2003. For 

example, 96% of Disney studios’ pilots were ordered by ABC, and 100% of these pilots 

were picked up by ABC. Although the Fox broadcast network originally ordered only 

59% of Fox studios total pilot production, it picked up 88% of Fox studios’ final output.390 

There may be several reasons for this, such as (1) the network is picking up pilots it did 

not originally order to help out sister studios, or (2) they may have underestimated their 

need for new pilots, and their sister studios helped them out. In either case, the 

networks and their sister studios appear to be leveraging vertical integration. The one 

exception was AOL Time Warner studio, where 59% of AOL Time Warner studios’ pilots 

were ordered by The WB, but 55% of those ordered pilots were picked up by The 

WB.391

Independent Production

Case Study #1: Tollin/Robbins

The number of independent production companies has declined due to the high 

costs associated with financing the development and sustained production of network 

television programming. Yet, some independent and non-affiliated production 

companies continue to operate. In the independent production arena, smaller 

companies have found that they need to secure financing from a strategic partner or 

larger entity and diversify their business in order to compete. For example, 

Tollin/Robbins Productions is involved in all forms of entertainment – reality series, 

comedy and drama series, motion pictures and talent management.392 It has nine 

series in production for the 2002-2003 season, including four destined for The WB’s 

primetime schedule (See Figure 3).

 

389 Id.

390 Id.

391 Id.

392 Michael Freeman, For Whom Production Tolls: Small Tollin/Robbins Outfit Becoming a Giant Killer, 

Electronic Media, August 12, 2002.
119

Figure 3: Tollin/Robbins Roster (2002-2003 Season)

Series Network Season Co-Production Partner

All That Nickelodeon 9 Nickelodeon Productions

Arli$$ HBO 7 -

Birds of Prey WB 1 Warner Bros. Television

The Back Sash WB Midseason Warner Bros. Television

Cousin Skeeter Nickelodeon 6 Nickelodeon Productions

The Nick Cannon Show Nickelodeon 2 -

Slamball TNN 1 Telepictures Productions

Smallville WB 2 Warner Bros. Television

What I Like About You WB 1 Warner Bros. Television

Source: Electronic Media (2002)

To better handle the exposure to financial risk on the deficit financing of 

television series programming, Tollin/Robbins was purchased by Clear Channel 

Communications. With Clear Channel as a parent company, it now has access to deep 

pockets and the promotional synergies of numerous radio stations, billboards and 

television stations.393

Production Companies Face Challenges

Ironically, success can prove to be problematic for production companies. Even 

if a production company is able to get one or more series picked up by a network, it has 

to keep them on the air. Trends suggest that in order to remain in business, a 

production company must not only develop network television programming that gets 

picked up by a network, but it must also minimize its exposure to downside risks by 

securing financing from a third party or major studio.394 Otherwise, if a production 

company cannot keep its show on the air, the potential upside from possible syndication 

or foreign licensing revenues is lost. It is almost certain that it may never recover from 

the production deficits. The burdens associated with keeping several deficit-financed 

shows on the air, maintaining strong network ties and relinquishing significant 

ownership stakes has led high-profile independent production entities such as Sony’s 

Columbia Tristar Television Studio and the Artists Television Group to either close or 

exit the new network television series production business.395 In Columbia TriStar's 

case, the studio spent more than $75 million on long-term talent-holding deals over a 

two year period, which left it typically carrying significant deficits while its network 

co-production partners were largely off the hook.396

Case Study #2: Television Production Deals 

While the trend is for more programming to be supplied by a sister studio, not all 

of a network’s programs are supplied by the sister studio. Growing in their place are 

 

393 Id.

394 Id.

395 Michael Freeman, Special Report: The New Economics of TV, Electronic Media, January 28, 2002.

396 Id.
120

situations where producers enter into production deals directly with the broadcast 

networks.397

Some networks have opted for “work-made-for-hire” deals with production 

companies that are staffed by members of the screen actor and writer’s guilds.398 

These independent contractor-type production companies usually have an infrastructure 

in place and maintain autonomy.399 They can also create a streamlined process in

dealing with writers, producers, directors and actors. 

Broadcast networks desire to air the best programs that work and bring in a large 

audience share while containing front-end costs.400 Production deal negotiations take 

into account the track record and leverage of the producer along with the network’s 

desire to broadcast a winning show while keeping costs down. Thus, networks are 

eager to work with successful writing and non-writing producers, directors and others 

who have solid track records. Most of the networks, however, try to offer high-profile 

producers lower front-end salaries in exchange for greater financial rewards on the 

back-end cable network and domestic or international syndication sales of prime-time 

television series.401 Because of (1) the increase in the number of distribution outlets 

(e.g., cable channels), (2) the decrease in available syndication fees, and (3) the 

collapse of the foreign market, there are no guarantees that an agreement to accept 

more of an interest in the backend will be lucrative.

Some non-affiliated production companies, such as Tollin/Robbins Productions, 

HBO Independent Productions (HIP) and Regency Television, are guaranteed a level of 

discretionary financing to do most of the legwork in corralling big-name talent for 

television series.402 In the case of Tollin/Robbins, which has a production deal with 

Warner Bros. Television, this has paved the way for Tollin/Robbins’ talent management 

division to deliver Nickelodeon teen star Amanda Bynes for The WB's fall 2002 comedy 

“What I Like About You.”403

Repurposing and Summer Programming

Broadcast networks have engaged in the practice offering their cable network 

counterparts shared exhibition on certain prime-time dramas and sitcoms in order to 

 

397 Michael Freeman, TV in Transition: Invasion of the Pod Deals, Electronic Media, August 19, 2002.

398 A network may opt for a “work made for hire” arrangement if the contractor has expertise in a particular 

category and it makes sense to use their services. However, the network may force the contractor to 

partner with an affiliated or non-affiliated production company as a condition of the deal. 

399 Freeman, TV in Transition: Invasion of the Pod Deals.

400 Id.

401 Id.

402 Id.

403 Id.
121

aggregate viewers to make up for declining ratings.404 The ultimate goal of this practice, 

called “repurposing,” is to provide a solution to escalating programming costs.405 

Given (1) the recent rise in the popularity of some cable programming, and (2) 

the desire to schedule more original scripted programming in the summer, some madefor-cable scripted programming is now being licensed to broadcast networks for a 

second shared broadcast window. In 2002, for example, “Monk” (produced by Disney’s 

Touchstone) which aires on the USA Network, is now being licensed to ABC for a 

second shared broadcast.406 

If this practice continues, the trend towards the sharing of the licensing costs 

could serve as another business model for the broadcast networks to program more of 

their summer schedules with original scripted programming. However, it remains to be 

seen whether scripted series will have the same upside in the ratings as non-scripted, 

reality-based programming.

ABC Entertainment and the ABC Television Entertainment Group also broke 

ground with traditional cable network players in striking a two-year development deal 

with HIP.407 Under the terms of the deal, HIP develops and produces series 

programming funded by ABC and for broadcast on the network.408 

The summertime ratings success of cable programming has forced the networks 

to develop new strategies for attracting summer audiences. Before the rise in cable’s 

summer audience share, the broadcast networks were primarily concerned with getting 

as much mileage as possible out of each original series, given the high production cost 

of each program.409 That meant reruns, and with its lower ad rates, summer was the 

natural destination.410 However, in response to cable’s summertime success, broadcast 

networks have turned to developing and producing reality shows, some scripted series 

and specials-turned-series for broadcast during the summer months. This creates an 

incremental cost to the network because, but for the success of cable, the networks 

would air reruns and not finance programming to be aired during the summer. Even 

with its lower ad rates, the summer season has become an important battleground. If 

nothing else, its symbolic importance to cable looms large. If the cable networks can 

beat the broadcast networks in summer, similar success in fall and spring may not be 

 

404 Freeman, Special Report: The New Economics of TV.

405 Id.

406 Michael Freeman, Rethinking Repurposing, Electronic Media, August 12, 2002.

407 Id.

408 Id.

409 Editorial: Networks Need to Get Serious About Summer, Electronic Media, July 22, 2002.

410 Id.
122

far behind.411 This might lead to a situation in the not too distant future where the 

broadcast networks and the cable networks are competing 52 weeks a year with some 

category of original programming.412

Sports Programming

The current trend in sports programming is that the number of games covered is 

increasing, but costly to produce. Where very few televised sports result in a profit for a 

network, they remain effective platforms for promoting unrelated television programs

and broadcast networks are paying billions of dollars for the right to broadcast these 

games. The expensive broadcast rights are resulting, however, in the migration of more 

sports programming to cable television. For example, the National Basketball 

Association (“NBA”) entered into a six-year, $4.6 billion deal with Disney and AOL Time 

Warner.413 This deal shifts 90% of NBA games to basic cable and relies as heavily on 

subscriber fees and other media platforms as it does on advertising for economic 

support. This trend may continue, since broadcast and even cable networks no longer 

singularly can command the hefty advertising premiums needed to offset record high 

multiyear license fees, particularly in the wake of declining viewer ratings.

When pursuing sport’s rights, it appears that there may be a benefit of owning 

multiple networks to share programming costs and aggregating audience to garner 

advertising dollars. Perhaps the only way to generate revenue is to amortize the license

costs over a broader range of media outlets, including cable, broadcast TV and radio, 

print and the Internet. 

ABC, CBS, NBC and Fox each spend more than $1 billion annually on sports 

rights, compared with an estimated $750 million on series and entertainment programs 

and $400 million on news. Additionally, the networks have to pay huge costs to 

produce sports programming, while little or none of this expense is absorbed by the 

network affiliates. This model may change, and affiliates may be forced to bear some of 

the cost to provide sports programming to viewers. However, since the networks have 

lost more than an estimated $1 billion on sports telecasts in 2001, they may opt for 

more “time buy” sales of advertiser-sponsored soccer, motorcycling and other sports.414

 

411 "The Sopranos" hit a record-shattering high note for HBO on Sunday, September 15, 2002, as the 

pay-cable series' long-deferred fourth-season premiere dominated the ratings. Estimates from Nielsen 

Media Research indicate that 13.4 million people were watching one of HBO's channels while "The 

Sopranos" aired – the pay channel's biggest audience ever, eclipsing the show's 2001 premiere by 2 

million viewers. That audience would have placed "Sopranos" sixth among all prime-time programs 

during the previous week – a stunning figure given that HBO is received by roughly a third of the U.S. 

television viewing households. The program easily won its time period, beating all the broadcast 

networks (some of which had not yet launched their new seasons). See Brian Lowry, Bada Bing!, Los 

Angeles Times, September 18, 2002. 

412 Michael Freeman, Summer Strategy Becomes Necessity, Electronic Media, July 29, 2002. 

413 Diane Mermigas, NBA Passes Over to Disney and AOL, Electronic Media, January 28, 2002 (much of 

the discussion of dollar amounts mentioned in this sports programming section are drawn from this 

article).

414 Id.
123

Cable Programming 

The substantial increases in MVPD channel capacity over the last decade, due to 

cable system upgrades, the advent of DBS, and the application of digital compression 

technology, have supported a concomitant increase in the number of cable networks 

available, both national and regional. This section examines trends in cable 

programming.

Cable networks fall into two broad categories and several subcategories. Some 

cable channels provide general interest fare and “look like” broadcast networks, while 

the majority target niche audiences (although some “niches” are fairly large). The 

difference between “general interest” and “niche” is a bit blurry at the boundary. As the 

number of broadcast networks has increased, they have found it more and more 

profitable to target certain demographic groups with their programming. In the cable 

context, general interest channels include such networks as TNT, USA, and Lifetime. 

Lifetime, of course, targets the female audience. Some might call that a “niche,” but it is 

broader than the “young women” demographic at which many programs on the WB 

broadcast network are aimed. General interest networks tend attract the largest 

audiences among cable networks and for that reason are most able to support original 

scripted programming.

There are several popular “niches” for cable programming. Among them are 

sports, news, children’s programming, and music. Along with the niche concept, to 

understand cable programming it is also useful to consider the concept of branding. 

Cable programmers work not only to forge and promote an identity for a single channel, 

but, once a successful brand has been created, leverage it into new companion 

networks. Coordinated efforts go beyond the cable network sphere. Increasingly, 

broadcast and cable networks, often under common ownership, coordinate some of 

their programming activities. The remainder of this subsection examines cable program 

network development in light of these categories and concepts.

General Interest Programming

There are, of course, some cable networks that provide general interest 

programming not unlike that of the broadcast networks. For example, USA Network, 

Lifetime, and TNT fall into this category. And pay networks such as HBO also provide 

some series programming and made for cable movies in addition to the theatrical films 

that remain a large share of their total schedules. In order to examine the question of 

network ownership and control of programming from a cable perspective, then, the most 

fruitful approach appears to be to examine some of these networks. The following brief 

sketch is based on discussions with staff at the four networks mentioned above.

General interest cable networks still rely on off-network or other previously 

exhibited programming for a substantial portion of their primetime schedules, and thus 
124

much less original programming than broadcast television. Lifetime’s all-day schedule 

includes more than 50 percent original programming, with a disproportionate share in 

prime time. Of the original programming close to half is owned by Lifetime. Data on 

USA Network’s primetime schedule indicate noticeably lower levels of original and 

network-owned programming. TNT’s original programming is a small share of the total 

schedule, but it is concentrated in prime time. On the premium network side, HBO’s all 

day schedule includes 23 percent of scheduled hours devoted to original programming.

Niche Programming

Many cable programming networks target niche audiences, such as news, 

sports, and music. In general, the news channels produce all of their own 

programming, although they may acquire some footage from outside suppliers. Even 

though the sports networks produce their own coverage of sporting events, these 

networks generally spend a significant amount to acquire the rights to air sporting 

events. The music channels mostly began with music videos as their staple 

programming. The channels generally do not own the videos, but they are usually 

acquired without payment, since the music producers value the publicity of network 

exposure. The music channels continue to exhibit videos but have also moved into 

longer form programming as well (some of which is original programming), but much of 

that is not scripted series. Examples include reality programming such as “The 

Osbornes” on MTV and documentaries/biographies such as “Behind the Music” on VH1.

Sports

The provision of sports programming warrants special attention because of its 

widespread appeal and strategic significance for video program distributors. Regional 

sports programming in particular has been, and continues to be, an important segment 

of programming for all video program providers.415 According to a 2000 survey, 

between 40 and 58 percent of cable subscribers would be less likely to subscribe to 

cable service if it lacked local sports.416 Cable overbuilders have frequently noted that 

access to sports programming is so essential to the success of a cable system that many 

operators will pay exorbitant prices and agree to entertain other less attractive business 

arrangements just to obtain it.417

It is clear that the advent of cable and DBS has vastly increased the total amount 

of sports programming available and has brought coverage of plenty of sports 

programming that was not and would not be transmitted via broadcast television. Some 

have argued that this has been accompanied by "migration" of some sports 

programming from broadcast to cable television and other pay media. A 1994 

Commission inquiry concluded that there was little evidence of migration of sports 

 

415 Of the 80 regional cable channels identified in 2001, 29, or 36 percent, were sports channels. See

2001 Video Competition Report, App. D, Tbl. D-3.

416 See 2000 Video Competition Report, 17 FCC Rcd at 1354-1356.

417Ameritech Comments in the 1997 Video Competition Report; 1998 Video Competition Report, 13 FCC 

Rcd at 24298-99 and 24380-81.
125

programming from broadcast to cable.418 This report does not purport to update that 

inquiry. It is worth noting, however, the distinction between the following two situations. 

Some sports programming that was on broadcast television and has moved to cable 

would, in fact, still be on broadcast television if cable did not carry it. Other sports 

programming that has moved from broadcast to cable television may have done so due 

to declining broadcast audience levels and would not, in fact, have remained available 

on broadcast even if it were not carried on cable. Conceptually, one might not want to 

count as "migration" programming that is dropped from broadcast television due to 

declining audience ratings. It is possible that some local coverage of baseball games is 

in this category. 

Increasingly, cable operators have acquired interests in sports programming 

networks and sports franchises, and more and more key programming is controlled by a 

few of the largest cable MSOs.419 The most widely distributed sports programming 

network, ESPN, is owned by Disney. EPSN reaches 81 million television households 

through a variety of delivery technologies. Although ESPN dominates national sports 

programming, regional sports distribution is dominated by Fox Sports Net, which owned 

69 percent (20 of 29) of all regional sports networks as of June 2001. Fox Sports Net, 

jointly owned by News Corp. and Cablevision, reaches 77 million television 

households.420 Both News Corp. and Disney also have interests in sports teams and 

sports venues making them vertically integrated at all levels of the sports industry.

Fox/Liberty also has an ownership interest in Cablevision's other sports businesses and 

networks, including the Madison Square Garden Network, the Madison Square Garden 

arena complex, and the New York Knicks National Basketball Association ("NBA") and 

Rangers National Hockey League ("NHL") teams.421 Comcast Corporation ("Comcast") 

holds a 66% interest in a partnership named Comcast-Spectacor, which owns the 

Philadelphia Flyers NHL team, the Philadelphia 76ers NBA team, and the CoreStates 

Spectrum and CoreStates Center sports arenas.422 Comcast Spectacor has also entered 

into a joint venture agreement with the Philadelphia Phillies Major League Baseball 

("MLB") team to create SportsNet.423

News

At the time of the release of Working Paper 26, local news programming was one 

significant programming advantage held by broadcasters over cable. Cable systems 

 

418 In the Matter of Implementation of Section 26 of the Cable Television Consumer Protection and 

Competition Act of 1992, Inquiry into Sports Programming Migration, Final Report, 9 FCC Rcd 3440 

(1994).

419 Bell Atlantic Comments in the 1997 Video Competition Report

420 NCTA, Regional Cable Networks, Cable Developments 2002, May 2002, at 171-194.

421 Liberty Media Press Release, Cablevision's Rainbow Media and Fox/Liberty Complete Transaction to 

Create Sports Partnership, Dec. 18, 1997, at 1

422See Memorandum Opinion and Order In the Matter of DirecTV, Inc. Complainant, v. Comcast 

Corporation, Comcast-Spectacor, L.P., Comcast SportsNet, Defendants, DA 98-2151 (rel. Oct. 27, 1998) 

at ¶ 7. 

423 See Memorandum Opinion and Order In the Matter of DirecTV, Inc. Complainant, v. Comcast 

Corporation, Comcast-Spectacor, L.P., Comcast SportsNet, Defendants, DA 98-2151 (rel. Oct. 27, 1998) 

at ¶ 7.
126

have carried local news services since at least 1986, when Cablevision first launched its 

local news network “News 12 Long Island,” and provision of local news is increasing. 

Most regional news networks cover a single city or other limited geographic market, or 

subsections of that market. Networks provide such localized information as local and 

regional news, public affairs programming, local and regional government assembly 

sessions, school closings, and coverage of high school sports.424 News networks are 

increasingly moving into smaller markets and market subsets. Cablevision Systems 

Corp., for example, has three “hyperlocal" news channels in the New York designated 

market area ("DMA").425 Such networks are viable because of the lower cost of digital 

production (compared with analog news production). Furthermore, regional and local 

news programming networks can offer lower advertising rates than local broadcast 

stations in these smaller markets attracting advertising dollars as easily as their larger, 

more national competitors. As of July 2002, as many as 22.3 million cable subscribers 

had access to local or regional news programming.426

Despite their local nature, twenty-four hour local news services compete for 

ratings with national news services like CNN and broadcast news.427 Again, digital 

production allows these local news networks to be cost competitive in large and small 

markets alike.428 A regional news channel in a major market can cost between $15 and 

$20 million a year to operate, and cable operator license fees and advertising revenues 

have recently begun to cover more of the channels' operating costs.429 New England 

News (a regional news channel), for example, receives 60 percent of its revenues from 

subscriber fees from cable operators, charging nearly as much as CNN.430 

While some analysts believe that regional news programming has not yet 

reached "critical mass," many predict that regional news programs could become a 

significant competitive force in the video programming marketplace. 431 As of June 2001, 

36 percent of the 80 regional programming networks counted (29 networks), were 

regional news networks. Unlike sports programming, regional and local news networks 

have a more diverse ownership. Some regional news networks are vertically integrated 

with cable MSOs, but many are not.432

 

424 Deborah D. McAdams, Cable News Nets Go Small, Broadcasting & Cable, Sept. 27, 1999, at 48.

425 The use of digital production technology has enabled the provision of “hyper-local news.” Marianne 

Paskowski, Dolan's 'Hyperlocalism', Multichannel News, Oct. 5, 1998, at 52.

426 NCTA, Cable Developments 2002, at 171-194

427 Variety, News Derby Upset by Dark Horse, John Dempsy and Gary Levin, Sept. 22-28, 1997, at 71.

428 Deborah D. McAdams, Cable News Nets Go Small, Broadcasting & Cable, Sept. 27, 1999, at 44.

429 Variety, News Derby Upset by Dark Horse, John Dempsy and Gary Levin, Sept. 22-28, 1997, at 71.

430 Variety, News Derby Upset by Dark Horse, John Dempsy and Gary Levin, Sept. 22-28, 1997, at 71.

431 Variety, News Derby Upset by Dark Horse, John Dempsy and Gary Levin, Sept. 22-28, 1997, at 71.

432 Cablevision, the seventh largest MSO, owns news networks, including MSG Metro Traffic and 

Weather in New York and the News 12 group of regional news services in Connecticut, New Jersey, and 

Westchester County and Long Island, New York. See also 2001 Video Competition Report, 17 FCC Rcd 

at 1354.
127

Children’s Programming 

Children’s programming networks are among the most popular of all cable 

networks. In the second quarter of 2001, children-oriented programming networks 

ranked among the top three networks in terms of full-day ratings averages, and 

children’s programs ranked among the most highly rated of all cable network programs. 

Children’s networks are an instrumental element to any cable operator lineup, with 

Nickelodeon and the Carton Network reaching more than 80 million households.

Branding

In order to differentiate themselves from one another and from the broadcast 

networks, cable networks are by and large distinctly branded. Most have accomplished 

this through specialized, or niche programming, as described above. General audience 

networks brand themselves as well in order to distinguish themselves from one another 

and from the general audience broadcast networks. Many have done this by introducing 

an increasing amount of original programming and marquee events. Carriage by cable 

operators depends on a well-established brand and distinct value to subscribers. Below 

is a discussion of some of the strategies cable networks have used to uniquely position 

themselves with respect to cable operators.

Original vs. Acquired 

Cable networks continue to consider the proper balance of original programming 

and repurposed programming. Repurposed programming is less risky because its 

relative popularity has been proven during its initial run, but original programming helps 

the network better establish brand identity. Broadcast and cable origination 

programmers alike, however, find it difficult to create, develop, and see to completion, 

original production programming. 

There is significant risk in developing an original concept and producing it in a 

way that will appeal to viewers. Program producers often find it difficult to recoup their 

initial investments in program development. Since original production programming is 

deficit financed, the programming must be developed first before it can begin to 

generate a return on investment. In the past, broadcasters have relied on syndication 

for a substantial portion of the return on investment. Specifically, the foreign market has 

been the most lucrative market for syndication sales, but this is rapidly changing. 

Whereas in the past, there was a tremendous foreign market for American productions, 

this is becoming less so. Foreign producers are rapidly entering the market and there is 

less of a need for American programming. This could have substantial impact on the 

domestic market for program production causing a greater reluctance to sink large 

investments in original programming. Although this is more applicable to broadcast 

programming, it is also true for cable network programming, as cable networks begin to 

provide more and more original programming in order to establish brand identity.
128

As Table 32 shows, basic cable networks and premium networks alike are 

spending more of their programming dollars on original programming. Table 32 also 

shows that cable networks will continue to spend more money on original programming 

than on acquired programming.

Quality vs. Economy

Working Paper 26 noted that increased expenditures on programming would 

likely become a less effective profit-maximizing strategy for cable networks, and that the 

new strategy might be to offer lower quality programming to contain costs. Today, 

networks must strike a delicate balance between expensive programming and cost 

effective programming. Networks continue to struggle to find the most effective strategy 

to please audiences, cable operators, and to some degree, advertisers as well. 

Networks must find the most accurate mix of quality and price that will appeal to cable 

operators. Networks have learned that more expensive programming does not 

necessarily generate larger audiences. Nevertheless, some networks opt to spend a 

great deal of money on a few marquee programs to help establish brand name 

recognition for the network, while disbursing the balance of programming dollars on less 

expensive, more broad appeal programming. Brand name recognition promotes overall 

efficiency for the networks; if viewers can come to expect a certain amount quality of 

programming from a particular network, then the network will not have to expend as 

much to promote the balance of its lesser quality or lesser cost programming to attract 

viewers or advertisers. 

Brand Extensions

A recent trend in cable origination programming is brand extension. Brand 

extension helps cable networks, and ultimately operators, create significant additional 

value from new networks by extending the brand of existing networks. As such, many 

cable operators have decided to carry derivative or “multiplex” programming of the 

established cable networks.433 The Commission first reported this trend in the 1998 

MVPD Competition Report, when it noted that there was a general trend by existing 

programming service providers, regardless of whether they were vertically integrated 

with MSOs, to create derivative programming services or brand extensions of their 

programming offerings.434 For example, The Discovery Channel, affiliated with Liberty 

Media and Cox Communications, has launched several new “Discovery” networks, 

including Animal Planet, Discovery Civilization, Discovery En Espanol, Discovery 

Health, Discover Home & Leisure, Discovery Kids, Discovery Science, Discovery 

Wings, and Discovery Travel and Living.435 Similarly, HBO, affiliated with AOL Time 

Warner, has launched several new “HBO” networks including HBO Plus, HBO 

 

433 Multiplexing is use of programming related to an original network.

434 Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming, 

CS Docket No. 98-102, Fifth Annual Report (“1998 Report”), 13 FCC Rcd 24284, 24376-7, 24380 (1998).

435 1998 Video Competition Report, 13 FCC Rcd at 24429-24453; 2001 Video Competition Report, 17 

FCC Rcd at 1344-1364.
129

Signature, HBO Comedy, HBO Family and HBO Zone.436 Viacom, a major program 

provider that is not affiliated with any MVPD, has also utilized derivative programming 

and brand extension approaches. Viacom's MTV has launched such MTV derivatives 

as MTV2, MTV “S’, and MTV “X “. Another non-vertically integrated program provider, 

Lifetime Television has launched a new “Lifetime” network called the Lifetime Movie 

Network, which airs made-for-television movies and theatrical films targeted to 

women.437

Cooperative Efforts with Broadcasters

In spite of competition in such areas as news and sports programming, many 

broadcasters and cable networks are joining forces to provide programming. In some 

cases, the ventures are jointly produced programming, blending brand-name 

recognition and viewing flexibility. For example, NBC News is carried on both broadcast 

and cable through the NBC broadcast network and by CNBC and MSNBC cable 

networks. Similarly, ABC’s Sports is a joint effort of ABC broadcast network and ESPN 

cable network. Other joint efforts include NBC’s efforts with cable network CourtTV to 

present several jointly produced news magazine segments. In other cases, the venture 

is one of immediate repurposing, either from broadcast to cable within a week’s time 

(e.g. name shows), or vice versa (e.g., Monk). Most recently, ABC entered into a “first 

look” programming deal with HBO Independent Producers to jointly create new 

programming for the broadcast television audience. Under the deal, HBO will develop 

and produce series programming for broadcast on ABC, while ABC will finance the 

production, possible in partnership with HBO.

There has been significant consolidation on the network side of the business. In 

addition to affecting advertising sales and cross-promotion opportunities, this process 

has allowed the networks’ to spread their programming and scheduling expertise over a 

wider range of product and thus use that expertise more efficiently. Viacom has 

assembled the largest network group, encompassing broadcast networks CBS and 

UPN in addition to following cabvle networks: BET, Country Music Television, MTV, 

CH1, Nickelodeon, TV Land, The National Network, Showtime/The Movie Channel, and 

50 percent of Comedy Central. 438 Disney holdings include ABC, the Disney Channel, 

Toon Disney, the Family Channel, 80 percent of ESPN and its progeny, 50 percent of 

Lifetime, 37.5 percent of Arts and Entertainment and the History Channel, and 39.5 

percent of E! Entertainment Network. GE’s portfolio includes NBC, CNBC, 50 percent 

of MSNBC, and 25 percent each of Arts and Entertainment, American Movie Classics, 

Bravo, and the History Channel. AOL Time Warner owns two thirds of the WB 

broadcast network, along with CNN, Headline News.the Cartoon Network, TNT, TBS 

Superstation, three quarters of HBO/Cinemax, 58 percent of Court TV and 37.3 percent 

of Comedy Central. Fox owns the Fox broadcast network as well as national cable 

 

436 2001 Video Competition Report, 17 FCC Rcd at 1345.

437 2001 Video Competition Report, 17 FCC Rcd at 1350.

438 Ownership information in this paragraph are taken from Bear Stearns Broadcast/Entertainment 

Research, “Ratings Race,” Week 37 01/02 (6/3/02-6/9/02).
130

networks Fox News Channel, and FX, along with more than a dozen regional sports 

networks. 

Comparative Expenditures

This subsection provides estimates of the expenditures on programming of cable 

networks, broadcast networks, and broadcast stations. For the purposes of this 

discussion, it is assumed that cable systems do not spend money on program 

production directly. Estimates for basic and pay cable networks are available from PKA, 

while estimates for broadcasting networks and stations must be constructed from 

available data. The figures appear in Table 32.

Working Paper 26 contains a discussion of revenues and programming 

expenditures of broadcast and cable networks. It develops an estimate that broadcast 

networks spend .65 of their gross revenues on programming.439 Applying that figure to 

year 2000 four-network gross advertising revenues yields an estimate of $10.3 billion, or 

$2.6 billion per network. A contemporaneous trade press estimate indicates that the big 

four each spend around $2.15 billion on programming, for a total of $8.6 billion.440 It 

appears reasonable to assume, then, that each of the big four networks spends $2.2-

2.6 billion per year on programming. Table 4 provides a1990 network advertising 

revenue figure of $9.963 billion, so using the estimating procedure of this paragraph, 

1990 network programming expenditures were $6.5 billion. 441

Table 32 indicates that basic cable network programming expenditures in 2000 were 

equal to 40.8 percent of network revenues, a noticeably lower fraction than assumed in 

the broadcast network case. The figure for pay networks is 51 percent. A lower ratio for 

cable than broadcast networks is plausible, given that there are many dozens of cable 

networks and only four broadcast networks in the figures reported herein. The ratio of 

basic plus premium cable, to total broadcast programming expenditures, was 30.7 

percent in 1995 and 48.6 percent in 2000.

 

439 WP 26 at 150. The estimate is based on the following chain of reasoning. FCC data for 1980 indicate 

that networks’ net advertising revenues were .806 of gross advertising revenues, and a 1991 trade press 

estimate stated that networks spend 75-80 percent of their budget on programming. Assuming budgets 

are based on 100 percent of net revenues, network programming expenses would be between .605 and 

.685 of gross revenues. On that basis, WP 26 used a factor of .65.

440

 Mermigas, Diane “NBC passes over to Disney and AOL,” Electronic Media, Jan. 28, 2002.

441 WP 26 estimated that three network programming expenditures in 1995 would be $7.9 billion, based 

on estimated gross advertising revenues of $12.2 billion. In fact, four-network advertising revenues for 

1995 turned out to be $11.6 billion. The implied level of programming expenditures (for four networks) is 

thus $7.5 billion. Clearly, the predictions were over-optimistic
131

Table 32: Programming Expenditures ($mil)

1990 1995 2000 2001 2010

BROADCAST(1)

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

Total Broadcast Programming 

Expenditures

11,216 13,386 17,114 n/a n/a

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

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

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

BASIC CABLE NETWORKS

Total Basic/Expanded Basic 

Network Revenue 2,976 6,562 15,857 17,867 40,690

Total Basic/Expanded Basic 

Programming Expenditures 1,437 2,933 6,471 7,206 15,496

Original Programming 

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

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

Programming Acquisition 

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

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

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

PREMIUM CABLE NETWORKS

Total Premium Network 

Revenue n/a 2,319 3,609 3,979 5,626

Total Premium Network 

Programming Expenditures n/a 1,175 1,846 2,062 2,982

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

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

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

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

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

Sources: Broadcast data: Staff estimate based on data in Table 4 and NAB Television Financial 

Report, 1995 and 2001 editions. Basic cable data: Kagan World Media, Economics of Basic 

Cable Networks 2002, Dec. 2001, at 23-28. Premium cable data: Kagan World Media, The State 

of DBS 2002, Sept. 2001, at 273-274; Kagan World Media, Pay TV Newsletter, July 2002.

Notes:

(1)Syndication is not accounted for.

The Table 32 estimates for television station expenditures on programming, both 

purchased and original (including local news, etc.), are based on the NAB Television 

Financial Reports. They are rough estimates and are subject to the caveats mentioned 

above regarding the Television Financial Report data.442 The categories in the report 

that include programming expenses are programming, production, and news. In 2000 

(2001 Television Financial Report at 2-3), those categories accounted for .291 of net 

 

442

 See note 49, supra, for a discussion of the manner in which average ratios are constructed in the 

Television Financial Reports. Note also that some Fox and NBC affiliates that had previously participated 

did not take part in the 2000 survey.
132

revenues on average. Moreover, agency commissions were .14 of gross advertising 

revenues, national and regional representative commissions were .064 of the relevant 

national and regional advertising revenues, and national and regional advertising 

revenues were .4 of total gross advertising revenues. The report also lists three other 

revenue categories: “Tradeouts and Barter,” “Network Compensation,” and “Other 

Broadcast-related Revenues.” In 2000, these accounted for .077 of net revenues. 

These figures allow calculation of a conversion factor from gross advertising revenues 

to net revenues (from advertising and other sources) of .904.443 The Television 

Financial Report indicates that programming expenditures are .291 of net revenues, so 

they are .291*.904=.263 of gross advertising revenues for 2000.444 The earliest year for 

which the data from Television Financial Report permit a similar calculation is 1994, and 

the procedure outlined in this paragraph yields a programming expenditures factor of 

.303 of gross advertising revenues. 445

Table 4 contains data on television station gross advertising revenues (national 

plus local spot) for 1990 and 2000. The figures are $15.644 billion in 1990 and $25.806 

billion in 2000. Applying the relevant factors yields the table 38 estimates of $4.7 billion 

for 1990 and $6.8 billion for 2000 programming expenditures by television stations. 

It is now possible to compare cable and broadcast programming expenditures. 

The 2000 total for basic plus premium cable is $8.3 billion, compared to $10.3 billion for 

broadcast networks and $6.8 billion for broadcast stations. In terms of total resources 

devoted to program acquisition, broadcast networks alone outspend cable networks. 

Mroeover, on a per-network basis, broadcast networks spend far more than cable 

networks on programming. Although 1990 data on pay cable network expenditures are 

not available, table 38 suggests that broadcast networks far outstripped cable networks 

in 1990, since basic and premium cable1995 total programming expenditures of $4.1 

billion are smaller than broadcast networks’ 1990 programming expenditures of $6.5 

billion.

 

443 To derive net advertising revenues from gross advertising revenues, it is necessary to subtract out all 

commissions. Agency commissions are .14 and representatives’ commissions are .064, but they apply to 

only .4 of all gross revenues. Hence, one must subtract (.14 + .064*.4) =.166 to get from gross to net 

advertising revenues. Net revenues are equal to net advertising revenues plus other revenues, and 

other revenues are equal to .077* net revenues. Hence, net revenues= .834*gross ad revenues + .077* 

net revenues and net revenues = .904*gross ad revenues. 

444 Programming expenditures are taken as the some of the program, production, and news categories in 

the TVFB.

445 See 1995 TVFB at 2-3. The programming/net revenue ratio is .333. Agency commissions were .144 

of gross ad revenues, national and regional advertising was .44 of the total and representatives’ 

commissions were .058 of that total. Hence, net advertising revenues were .144+(.058*.44)=.170. Thus 

net advertising revenues are .83 of gross advertising revenues. The other revenue categories account for 

.087 of net revenues. Therefore, total net revenue =.83* gross advertising revenue plus .087* net 

revenue, and net revenue =.909*gross advertising revenue. Thus programming expenditures are 

.333*.909 =.303 of gross ad revenues. 
133

Conclusion

The repeal of the Fin/Syn rules allowed networks to take ownership of studios 

and shows and resulted in considerable consolidation, with all the broadcast networks 

now sharing the same parent with at least one full-service television production 

studio.446 While not every television studio owns a network, every network but NBC has 

a full-service sister studio. Networks have also outsourced production efforts to 

independent contractors as a way to curb deficit financing of programming. The repeal 

of Fin/Syn has also led to the networks increasingly taking equity stakes in third-party 

studio productions, thus ensuring their participation in possible upside from syndication 

sales, while potentially lowering their costs and potential risk.447 Plenty of data are 

available regarding broadcast network ownership of programming, but only limited 

information was available regarding cable ownership. It suggests a lower level of 

network ownership of programming for general interest cable networks compared to 

broadcast networks. 

In the cable sphere, expanded channel capacity has increased the number of 

cable channels available. Some are of the general interest variety, but most cater to 

niche interests, such as news, sports, music, or children. Expenditures on programming 

by both cable networks and broadcasters (networks and stations) has risen over the 

past decade. Broadcasters continue to spend more than cable, particularly if the 

comparison is made on a per-network basis.

 

446 Bear, Stearns Diversified Entertainment Equity Research, Media, Diversified Entertainment, We Are 

Family, May 2002, p. 10.

447 Id.
134

XI. Conclusions

The year 2001 was a difficult year in many respects, including for video 

advertising revenues. However, just as the television industry recovered from the last 

revenue drop in 1991, indications are that it will recover from this one as well. A review 

of longer term trends suggest that, as it entered the new millennium, the television 

industry was in fairly good financial shape and continues to provide a high level of 

service to viewers and a valuable platform for advertisers to reach the public with their 

messages. 

The television industry faces competitive and technological challenges, some of 

them the same ones that were facing them ten years ago. Non-broadcast channels 

delivered by cable (and now DBS) continue to eat into broadcast audience shares. On 

the other hand, television broadcast programming (primetime in particular) continues to 

attract audiences far larger on a per network basis than cable. The small per network 

audiences for cable are one important reason why broadcasters have been able to 

increase their advertising revenues over the past decade in the face of viewing share 

declines. Although the advertising dollars did not shift proportionately from broadcast 

to cable, the broadcasting share of video advertising revenues continued to drop. It 

appears that cable advertising has become a better substitute than before for broadcast 

advertising, so it is likely that, in the future, cable audience share gains will be more 

strongly reflected in advertising revenue share gains. On the other hand, in retrospect, 

some of the predictions of Working Paper 26 appear to have been too pessimistic. 

Television Stations

The number of television stations has grown by over 12 percent since 1990, and 

none have gone dark. Gross advertising revenues per station, in both nominal and real 

terms, were higher in 2000 than in 1990. Additionally, the latest industry-wide 

performance data available (for the year 2000) indicate that the television station sector 

is at least as profitable in 2000 as it was in 1990. Cash flow figures are particularly 

robust, and this is true across all market sizes. The limited data available suggest that 

the bulk of locally-produced programming is news and that, as a percentage of total 

expenditures, per station spending on news has risen on average for all market sizes. 

On the other hand, anecdotal evidence suggests that some stations have cut back on 

their news programming over the past decade.

Television networking remains a very efficient method of program distribution, 

and it appears that the formation of new broadcast networks during the past decade (a 

development not anticipated in Working Paper 26) has strengthened the position of 

many formerly independent stations. Well over 200 stations are affiliated with the new 

networks WB, UPN, and Paxton. Although hard evidence is not yet available, it is likely 

that the relaxation of the television duopoly rule (recommended in Working Paper 26)

has strengthened the position of some of the formerly weaker stations. On the other 

side of the competitive ledger, cable systems are becoming stronger competitors in the 
135

local advertising market, as cable system clustering and the increasing sophistication of 

cable interconnects make local cable a more efficient advertising buy.

Television Networks

In the aggregate, television networking is a barely profitable business. Most 

observers believe that currently the seven commercial broadcast networks are losing 

money (with substantial profits for NBC outweighed by losses by others). On the other 

hand, 20 years ago, networking also was a marginally profitable business. Although the 

impetus for forming the UPN and WB networks may well have been the desire of 

studios to ensure some distribution capacity for their program output, the reality is that 

the number of television networks has risen not fallen, and that, as mentioned above, 

previously independent stations were quite willing to affiliate.

Regulatory changes have substantially affected the television network 

environment. The biggest influence was the repeal of the Commission’s former 

syndication and financial interest rules (along with the termination of related consent 

decrees that the big three networks had signed with the Justice Department). The 

relaxation of the Commission’s dual network rule also was of some importance. Once it 

became possible for television networks to own primetime programming without 

restriction, it apparently became attractive for the movie studios, who were the primary 

producers of television programming, to affiliate with a network. Network ownership can 

provide assured distribution for some of the sister studio’s product. Thus, Viacom and 

Warner formed the UPN and WB networks, respectively. Disney purchased ABC and 

Viacom acquired CBS.

In addition to network-studio combinations, another important structural 

development has been the combination of broadcast and cable networks in the same 

company. This makes it possible for network companies to spread their expertise in 

program selection, promotion, and advertising sales over a larger range of outputs (i.e., 

networks) and possibly realize some economies of scope in network operation. The 

aggregation of broadcast and cable networks into a single company also apparently 

allows efficient sharing of the costs of the rights to some major sports and also has 

affected the manner in which advertising is bought and sold. This aggregation also can 

facilitate (although it is not a prerequisite for) “repurposing” of broadcast programming. 

The idea is to re-use a broadcast program (whether it be a newscast, a drama, or a 

comedy) on an appropriate cable channel and thereby increase the revenue it 

generates. 

Notwithstanding all of the difficulties that broadcast networks face, from declining 

advertising revenue shares to rising costs of program production, their output is a major 

portion of the programming schedule of over 1,000 commercial television stations, and, 

overall, those stations enjoy rather high margins. Hence, one should not place too 

much emphasis on the meager aggregate profits of television networks. It is likely that, 
136

as time goes on, the networks will find ways for their affiliates to contribute more to 

programming costs. 

Rival Delivery Systems

The television broadcasting industry faces challenges both from current 

multichannel video programming distributors and from technological developments as 

well. The data suggest that cable and DBS are and will continue to be major video 

distribution rivals to broadcast television. Both have grown substantially in 

subscribership over the past decade, particularly the rapid expansion of DBS since its 

1994 launch. The rate of growth of cable subscribership has flattened and, within the 

next ten years, the same is likely to occur with DBS. A simple extrapolation of 

subscriber penetration trends suggests that cable plus DBS penetration of television 

households will peak at somewhere between 80 and 85 percent, with other platforms 

accounting for a small additional share of households.

The advent of DBS, cable investment in increased capacity, and the application 

of digital compression technology means that MVPD subscribers now have access to a 

far larger menu of programming choices than they did in 1990. The growing share of 

cable subscribers choosing the digital tier suggests that they are taking advantage of 

the expanded range of programming on offer. This, of course, is one of the primary 

explanations for the increase in cable viewing shares. Moreover, although the rate of 

increase in MVPD subscribership is slowing, the trends toward increased viewing hours 

of cable programming and decreased viewing hours of broadcast programming continue 

in cable and DBS households.

Viewers also are spending more money on prerecorded media. The 

development of the DVD, with its higher picture and sound quality compared to 

videocassettes, has fueled this expansion. Sales and rentals of cassettes also remain 

robust.

Technological Change

Broadcast television has always been an industry with a single revenue stream 

(advertising) which has put it at some disadvantage to MVPDs, with their dual revenue 

streams (advertising and subscription fees). Technological developments have the

potential both to threaten the advertising base of broadcast television and to provide 

new revenue stream opportunities.

Although the current penetration of PVRs is quite low, this device poses a 

potential threat to the advertising revenue base of television. The PVR functions as a 

kind of combination search engine and digital recorder. It enables viewers to “time shift” 

their favorite programs (reducing the value of time-sensitive advertisements actually 

viewed) and to skip commercials entirely. It appears that the industry is taking the 
137

“threat” of PVRs seriously and taking or contemplating various measures to respond. 

One possibility is to make the advertisements more interesting or entertaining, so 

people will want to watch. Another possibility is increasing use of product placements 

within the actual programming, thus making the advertising message harder to avoid. 

One unresolved factor in this regard is the limit of viewer tolerance for product displays 

of this nature.

Perhaps the single biggest technological development in broadcast television 

since Working Paper 26 has been the beginning of the transition to DTV. Well over 500 

stations are transmitting in digital mode now. The remaining commercial stations were 

subject to a May, 1, 2002 deadline to commence transmissions and most have received 

short-term waivers. DTV offers broadcasters a substantial increase in transmission 

capacity, which they can use to provide HDTV, multiple streams of standard quality 

programming, data broadcasting, or some combination of these services. Broadcasters 

are permitted to offer services for a fee on their DTV channels, so there is a possibility 

for the elusive second revenue stream. Beginning DTV transmissions requires a fairly 

significant up-front investment in facilities, but the precise range of services that will be 

provided over time is not yet obvious.

An increasing amount of HDTV programming is being transmitted and, when the 

cost of DTV reception equipment declines further, the mass of US consumers will 

benefit. On the other hand, it is fair to say that business models for other DTV services 

have yet to emerge. Among the business issues yet to be resolved is the carriage of 

fee-based DTV services by cable and DBS providers. Because the Commission’s 

broadcast signal carriage rules do not require carriage of ancillary and supplementary 

services, carriage would have to come as the result of a commercial agreement 

between the broadcaster and the cable or DBS operator. Among the issues that would 

likely be subject to negotiation is the split of revenues that the broadcaster’s service 

would earn. 

Many of the services under discussion for DTV can be placed under the heading 

of “Interactive Television,” or ITV. ITV is a term for which a clear consensus definition 

has not yet emerged. The one common thread in the ITV discussion is 

subscriber/viewer interaction. Somehow the subscriber or viewer exercises control over 

or reacts to what she sees on the screen. The interaction could be to choose among 

streams of information or programming delivered in real time; to choose to access 

supplementary material that has been previously transmitted and stored on a hard drive 

at the viewer’s premises; or it could be to use some sort of return channel to request the 

transmission of particular content, to make a purchase or conduct another type of 

transaction. Digital transmission is not a prerequisite for ITV, although it is fair to say 

that the bulk of ITV applications rely on digital transmissions.

In view of the fact that neither the broadcast industry nor any of its competitors 

has yet demonstrated a compelling ITV business model, it is necessary to be cautious 

in commenting on the possible long-run impact of ITV. A few observations can be 

made, however. First, ITV has the potential to target advertisements precisely, and 
138

even individually, to viewers. This could ultimately make advertising more valuable and 

ensure that viewers who could skip advertisements do not do so. Targeting techniques 

raise issues of viewer privacy and proper treatment of child viewers. 

Second, broadcasters rely on MVPD delivery platforms to reach most 

households. They will need to make commercial arrangements with the MVPD for 

carriage of their ITV content and, at least in the case of cable, probably need a 

commercial arrangement for the return path, if a return path is needed. In the case of 

off-air broadcast transmissions, the return path would likely be a dialup telephone 

connection, a cable modem, or DSL. In the case of DBS, the situation is less clear, but 

the telephone return path currently appears more likely than a satellite-based return 

path. 

The third observation applies to all of the technological developments discussed, 

and that is that none of them appear to benefit broadcasting differentially compared to 

other video delivery platforms. Hence, while these developments are likely to benefit 

consumers, their impact on the relative position of broadcast television is more 

questionable. To the extent that new technology moves broadcasting from a onerevenue stream world to a multiple-revenue stream world, it will put broadcasting on a 

more similar footing to MVPDs than before.

Programming

The last decade has seen a substantial increase in the number of programming

networks available, including an expansion in the number of broadcast networks. While 

the broadcast networks continue to cater to the mass audience, there is a greater 

tendency to target their programming to particular demographic groups. On the cable 

side, although some networks (including some of the most popular ones) continue to 

provide general interest programming, the growth has primarily been in niche services, 

providing, e.g., children’s, sports, news, music, nature, or lifestyle programming.

Program costs have risen substantially in recent years, probably due to the 

expansion in demand, continuing a trend identified in Working Paper 26. The decline in 

foreign demand for syndicated US programming has reduced one source of revenue 

from which to recover production costs. Broadcast networks have adopted a variety of 

approaches as a response to rising costs. None is applicable across all situations and 

none is the definitive answer to the cost challenge. Network responses include the 

following. With regard to high-cost sports programming, at least one network has 

reduced its total exposure, while others have signed deals that spread sports rights over 

broadcast and cable networks. Responses to the increasing cost of scripted 

programming include repurposing (re-using programming by running it on a cable 

channel almost simultaneously to the broadcast run) and some increased use of 

unscripted news magazine or reality programming. To the extent that reality 

programming is introduced during the summer as a response to new cable 
139

programming, it would actually represent a cost increase over the re-runs previously 

shown at this time of year.

On the program production side, the rising upfront costs of broadcast network 

entertainment programming appear to have perpetuated a structure in which most 

programming is produced by or in association with a large scale company that can 

spread the production risk over a large range of programs. The repeal of the 

syndication and financial interest rules has meant that most of these large scale 

companies are integrated network-studio firms. Currently the major broadcast networks 

own anywhere from one half to two thirds of their primetime programming, but there is 

some anecdotal evidence that the pendulum may be swinging back in the other 

direction. It is also important to note a trend in which some top level producers or 

writers are signing exclusive or “first-look” deals with studios, a situation that positions 

them somewhere in between “independent” and “in-house.”

On the cable side, most cable general entertainment networks go through a 

process of evolution in which they begin with almost exclusively programming drawn 

from the broadcast networks or films and move eventually to a greater level of original 

programming, including some that is produced in-house. Only fragmentary information 

is available on cable network ownership of its programming.

The Final Analysis

Broadcast television is certainly a survivor, even a vigorous survivor. It still 

provides the most popular and widely viewed video programming. It is swimming in a 

sea of competition and it is fair to say that the currents of cable and DBS rivalry will only 

strengthen. Working Paper 26 made some predictions about the future of broadcasting 

and recommended some policy changes. In retrospect, some of those predictions were 

too pessimistic, so this paper is more circumspect. Although broadcast television’s 

competitive position is likely to erode further, the fact that it is still delivering on a pernetwork basis audiences roughly five times the size of the largest cable networks, 

suggests that any further decline is likely to be gradual. The future of broadcasting will 

depend on its ability to continue to provide valuable programming on a cost-effective 

basis and to respond to the challenges and grasp the opportunities that new technology 

has to offer.
Working Papers Series

Office of Plans and Policy

Federal Communications Commission

Broadcast Television: Survivor in a Sea of Competition, by Jonathan Levy, Deputy Chief Economist 

Marcelino Ford-Livene, Office of Plans and Policy and Anne Levine, Media Bureau; Working Paper #37, 

September 2002; pp. 139

The Potential Relevance to the United States of the European Union’s Newly Adopted Regulatory 

Framework for Telecommunications, by J. Scott Marcus, Office of Plans and Policy; Working Paper #36, 

July 2002; pp. 32

Horizontal Concentration in the Cable Television Industry: An Experimental Analysis, by Mark M. 

Bykowsky, William W. Sharkey; Office of Plans and Policy, and Anthony M. Kwasnica; Pennsylvania 

State University, Smeal College of Business Administration; Working Paper #35, June 2002; (Revised 

July 2002); pp. 115 

A Competitively Neutral Approach to Network Interconnection, by Jay M. Atkinson, Christopher C. 

Barnekov; Economists in the Competitive Pricing Division, Common Carrier Bureau; Working Paper #34, 

December 6, 2000; pp. 36

Bill and Keep at the Central Office As the Efficient Interconnection Regime, by Patrick DeGraba, Deputy 

Chief Economist; Working Paper #33, December 2000. pp. 43

The Digital Handshake: Connecting Internet Backbones, Michael Kende, Director of Internet Policy 

Analysis; Working Paper #32, September 2000. pp. 50

The FCC and the Unregulation of the Internet, by Jason Oxman, Counsel for Advanced Communications; 

Working Paper #31, July 1999. pp. 29

Internet Over Cable: Defining the Future In Terms of the Past, by Barbara Esbin, Associate Bureau Chief, 

Cable Service Bureau; Working Paper #30, August 1998. pp. 130

Digital Tornado: The Internet and Telecommunications Policy, by Kevin Werbach; Working Paper #29, 

March 1997. pp. 98

Putting It All Together: The Cost Structure of Personal Communications Services, by David P. Reed; 

Working Paper #28, November 1992. NTIS PB93 114882 pp. 86

Changing Channels: Voluntary Reallocation of UHF Television Spectrum, by Evan R. Kwerel and John 

R. Williams; Working Paper #27, November 1992. NTIS PB93 114874 pp. 146

Broadcast Television in a Multichannel Marketplace, by Florence Setzer and Jonathan Levy; Working 

Paper #26, June 1991. NTIS #PB91 201749; $23.00; pp. 180 

What Makes the Dominant Firm Dominant?, by John Haring and Kathy Levitz; Working Paper #25, April 

1989. NTIS PB89 190425; pp. 29

Through the Looking Glass: Integrated Broadband Networks, Regulatory Policy, and Institutional 

Change, by Robert Pepper; Working Paper #24, November 1988. NTIS #PB89 136923; pp. 106

Loosening the Ties that Bind: Regulating the Interstate Telecommunications Market for the 1990's, by 

Kathleen B. Levitz; Working Paper #23, February 1987. NTIS #PB87 220265; pp. 52