a

GAO

United States General Accounting Office

Report to the Subcommittee on Antitrust, 

Competition Policy and Consumer 

Rights, Committee on the Judiciary, U.S. 

Senate

February 2004 TELECOMMUNICATIONS

Wire-Based 

Competition Benefited 

Consumers in Selected 

Markets

GAO-04-241
www.gao.gov/cgi-bin/getrpt?GAO-04-241.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Mark Goldstein 

at (202) 512-2834 or goldsteinm@gao.gov. 

Highlights of GAO-04-241, a report to the 

Subcommittee on Antitrust, Competition 

Policy and Consumer Rights, Committee 

on the Judiciary, U.S. Senate 

February 2004

TELECOMMUNICATIONS 

Wire-Based Competition Benefited 

Consumers in Selected Markets 

BSPs’ primary business strategy is to build a fiber-optic network to provide 

consumers with a bundle of services, including subscription television, highspeed Internet access, and local telephone. To entice consumers to 

purchase more than one service of the three services they offer—a key 

marketing goal—all of the BSPs we reviewed offer substantial savings to 

consumers who buy more than one service. 

The rates for telecommunications services were generally lower in the 6 

markets with BSPs than in the 6 markets without a BSP. For example, 

expanded basic cable television rates were 15 to 41 percent lower in 5 of the 

6 markets with a BSP when compared with their matched market. 

Comparison of Monthly Cable TV Rates in 6 Matched-Pair Markets 

0 25 30 35 40 45

Monthly rate for expanded basic TV service (dollars)

6

5

4

3

2

1

Market pairs

32% less in BSP market

41% less in BSP market

17% less in BSP market

15% less in BSP market

31% less in BSP market

3% more in BSP market

Lowest rate in BSP market

Source: GAO.

Lowest rate in non-BSP market

The 6 BSPs we interviewed said that demographic factors, such as city size, 

income, and computer use were important factors in their decision to enter a 

market. For example, most of the BSPs avoided entering large cities. 

Location of the markets to key facilities and receptivity of local government 

officials were also considered when deciding which markets to enter. 

The 6 BSPs we interviewed have gained significant market shares for the 

services they provide, but they have also faced a number of obstacles that 

may be hindering their success. For example, the BSPs we spoke with are 

experiencing some financial difficulties and are putting off network 

expansion. Two of these companies also currently lack the resources 

necessary to adequately market their services within their existing markets. 

We provided a draft of this report to the FCC and DOJ. The DOJ did not 

provide any comments, and FCC provided technical comments that we 

incorporated. We invited the Broadband Service Provider Association, the 

National Association of Telecommunications Officers and Administrators, 

the National Cable & Telecommunications Association (NCTA), and the 

United States Telecom Association to comment on a draft of this report. We 

summarize and discuss NCTA’s detailed comments in the report. 

One of the primary purposes of the 

Telecommunications Act of 1996 

was to promote competition in 

telecommunication markets, but 

wire-based competition has not 

developed as fully as expected. 

However, a new kind of entrant, 

called broadband service providers

(BSP), offers an alternative wirebased option for local telephone, 

subscription television, and highspeed Internet services to 

consumers in the markets they 

have chosen to enter. This report 

provides information on (1) BSPs’ 

business strategy, (2) the impact of 

BSPs’ market entry on incumbent 

companies’ behavior and consumer 

prices for telecommunications 

services, (3) the key factors that 

BSPs consider when making 

decisions about which local 

markets to enter, and (4) the 

success of BSPs in attaining 

subscribership and any key factors 

that may limit their success. 

We developed a case-study 

approach to compare 6 cities 

where a BSP has been operating for

at least 1 year with 6 similar cities 

that do not have such a competitor. 

The 6 markets with a BSP presently 

account for more than 20 percent 

of the households nationwide that 

are in areas where BSPs currently 

offer the three-service package, but 

the results of these case studies are 

not generalizable to all markets. 
Page i GAO-04-241 Telecom Competition

Contents

Letter 1

Results in Brief 4

Background 6

BSPs’ Business Strategy Focuses on Providing Bundled 

Telecommunications Services 9

Consumers Enjoy Lower Rates in Markets with BSPs 12

BSPs Consider Specific Demographic, Geographic, and Local 

Government Factors When Deciding Which Markets to Enter 17

BSPs Are Gaining Market Share, but a Variety of Factors May Hinder 

Their Success 21

Conclusions 28

Agency Comments 28

Industry Association Comments and Our Evaluation 28

Appendixes

Appendix I: Scope and Methodology 32

Appendix II: Price and Channel Information in Six Market Pairs 35

Appendix III: Broadband Service Provider Association Member Markets as 

of February 2003 36

Appendix IV: GAO Contacts and Staff Acknowledgments 37

GAO Contacts 37

Staff Acknowledgments 37

Tables Table 1: Case-Study Cities and Industry and Local Government 

Participants 33

Table 2: Price and Channel Information in Six Market Pairs 35

Figures Figure 1: Case-Study Locations and Telecommunications 

Companies Interviewed 3

Figure 2: Telecommunications Service Subscriptions 9

Figure 3: Average BSP À la carte and Bundle Price for Premium 

Three-Service Bundle 12

Figure 4: Extent to Which Rates For Telecommunications Services 

Were Lower in the 6 Markets with BSP Competition When 

Compared with Each BSP Markets’ Matched-Pair 16

Figure 5: Penetration of Subscription Television, High-Speed 

Internet, and Telephone Services for BSPs in Case-Study 

Markets, June 2003 23
Contents

Page ii GAO-04-241 Telecom Competition

Abbreviations

BSP broadband service provider 

BSPA Broadband Service Provider Association

FCC Federal Communications Commission

NATOA National Association of Telecommunications Officers and 

Administrators

NCTA National Cable & Telecommunications Association

USTA United States Telecom Association

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Page 1 GAO-04-241 Telecom Competition

United States General Accounting Office

Washington, D.C. 20548

A

February 2, 2004 Letr

The Honorable Mike DeWine 

Chairman

The Honorable Herb Kohl

Ranking Minority Member

Subcommittee on Antitrust, Competition 

 Policy and Consumer Rights

Committee on the Judiciary

United States Senate

One of the primary purposes of the Telecommunications Act of 1996 was to 

promote competition in telecommunications markets. In local telephone 

markets, companies began to provide competition to local telephone 

companies after passage of the act. Much of that competition focused on 

service to business customers, and many of these companies have gone out 

of business in the past few years. Regarding the subscription television 

market—that is, the market for pay television service—there were 

expectations that certain provisions of the act, along with some provisions 

of the earlier Cable Television Consumer Protection and Competition Act 

of 1992, would spur new competition in a market that had long been 

dominated by cable television providers. However, entry by wire-based 

providers (such as telephone companies) into the subscription television 

market has not developed as fully as expected. 

In the past few years, a new kind of wire-based provider—typically known 

as a broadband service provider (BSP)—has emerged to provide 

competition to local incumbent telephone and cable television providers 

through a bundled offering of subscription television, local telephone, and 

high-speed (or broadband) Internet services. These BSPs could enhance 

the competitiveness of these markets, but they also may face certain 

challenges that make it difficult for them to become fully viable 

competitors. 

You asked us to provide information about a variety of issues related to 

BSPs’ operations and the influence of their entry into selected markets. 

For a selected set of markets, this report provides information on (1) BSPs’ 

business strategy; (2) the impact of BSPs’ market entry on incumbent cable 

and telephone companies’ market behavior and on consumer prices of 

subscription television, high-speed Internet, and local telephone services; 

(3) the key factors that BSPs consider when making decisions about which 

local markets to enter; and (4) the success of BSPs in attaining 
Page 2 GAO-04-241 Telecom Competition

subscribership and any key factors that may limit their success. We also 

recently issued a report on cable rates that examined several related 

issues.1

 

To address these objectives, we developed a matched-pair case-study 

approach to compare cities, or markets, where a BSP is operating with 

similar cities that do not have such a competitor. We selected 6 cities in 

which a BSP had offered three services—local telephone, subscription 

television, and high-speed Internet access—for at least 1 year. We then 

chose a match for each of the 6 cities by selecting another city in the same 

state, where possible, which was of a similar size and demographic profile, 

but that did not have a BSP. See figure 1 for a list of 12 cities that were 

chosen. Of the 6 city pairs, 3 were small city pairs, 2 were medium-sized 

city pairs, and 1 was a large city pair. In the case of the large city with a 

BSP—Boston—we chose a matched city that was not in the same state 

because there was no appropriate in-state match for Boston, nor were 

there other large cities that had an extensive BSP presence. The 6 casestudy markets with a BSP presently account for more than 20 percent of 

the households nationwide that are in areas where BSPs currently offer the 

three-service package.2

 

In each of the cities, we conducted semistructured interviews with relevant 

industry representatives as well as state and local regulatory officials. As 

depicted in figure 1, we interviewed officials from 

• six BSPs in the cities where there was such a provider, 

• four incumbent cable companies that operate in our 6 matched-pair 

cities,

• four incumbent telephone companies that operate in our 6 matched-pair 

cities,

• twelve local franchising authorities, and

• seven state public utility commissions.

1

See U.S. General Accounting Office, TELECOMMUNICATIONS: Issues Related to 

Competition and Subscriber Rates in the Cable Television Industry, GAO-04-8

(Washington, D.C.: Oct. 24, 2003).

2

The Broadband Service Provider Association (BSPA) has 11 members, 6 of which provide 

all three services to more than one market. (See app. III for a list of BSPs that are members 

of the BSPA.) For our sample, we selected 1 city for each of the providers serving multiple 

markets.
Page 3 GAO-04-241 Telecom Competition

Figure 1: Case-Study Locations and Telecommunications Companies Interviewed

Waco

Beaumont

Savannah

Augusta

SBC

Grande

SBC

Everest

Time

Warner

SBC

Time

Warner

Time

Warner

SBC

Time

Warner Comcast

Knology

Bell South

Comcast

BellSouth

Lenexa

Prairie Village

St. Cloud

MINNESOTA

KANSAS TEXAS GEORGIA

SOUTH

DAKOTA

WASHINGTON MASSACHUSETTS

Rochester

Yankton

Seattle

Boston

Vermillion

Qwest

Charter

Astound

Qwest

Mediacom Charter

Prairie

Wave

Qwest

Mediacom

Qwest

Verizon/Qwest

Comcast

Verizon

RCN

Comcast

Incumbent cable TV

Incumbent telephone

Broadband

service provider

Sources: GAO analysis; Nova Development (clip art).
Page 4 GAO-04-241 Telecom Competition

Although our analysis provides details on the 12 geographic locations we 

examined, because we used a case-study method, our results are not 

generalizable to all markets. Statistics presented in the Background 

section of this report regarding the local telephone, subscription video, and 

high-speed Internet markets were obtained from the Federal 

Communications Commission (FCC). This information was presented for 

background and illustrative purposes only; therefore, we did not assess the 

reliability of this information. 

We performed our work from May 2003 through December 2003 in 

accordance with generally accepted government auditing standards. See 

appendix I for a more detailed discussion of our scope and methodology. 

Results in Brief BSPs focus on a core business strategy of building a new fiber-optic 

network over which they can provide three services to consumers: local 

telephone, subscription television, and high-speed Internet services. The 

BSPs we interviewed attempt to entice subscribers to take more than one 

service, and they have specific targets for the average revenues that they 

hope to obtain per subscriber. In order to encourage subscribers to take 

more than one of the three services they offer, these providers offer 

significant discounts for purchases of packaged services. 

On the basis of 12 markets we examined, it appears that BSPs’ entry into a 

market benefited consumers in the form of lower prices for subscription 

television, high-speed Internet access, and local telephone services. 

Incumbent cable operators often responded to BSP entry by lowering 

prices, enhancing the services that they provide, and improving customer 

service. Incumbent local telephone providers did not appear to have 

responded as much to BSP entry as was the case with cable providers; 

these local telephone providers told us that certain federal and state laws 

limit their ability to respond to new entrants. The combined effect of BSP 

entry and incumbent companies’ response provides significant benefits for 

consumers. The rates for telecommunications services were generally 

lower in the 6 markets with BSPs than in the 6 markets without a BSP. For 

example, expanded basic cable television rates were 15 to 41 percent lower 

in 5 of the 6 markets with a BSP when compared with their matched 

market. The prices were also generally lower in markets with BSPs for 

local telephone and high-speed Internet services. In some cases, the lowest 

price in the BSP market was that offered by the BSP, while, in other cases 

the lowest price in that market was that offered by the incumbent provider. 
Page 5 GAO-04-241 Telecom Competition

Some of the rate impacts that we found may be due to factors other than 

the BSP entry, such as population density. 

BSPs analyze a variety of factors when determining which local markets to 

enter. For the 6 BSPs we interviewed, demographic characteristics, such 

as the size of the city and the income and level of computer use of its 

residents, were important factors that BSPs considered when determining 

which markets to enter. For example, these providers generally targeted 

small to medium markets because, in their view, it would be difficult to 

quickly construct infrastructure in larger markets. Also, the BSPs we 

interviewed enter markets that are geographically close to a parent 

company or close in proximity to other key facilities, such as the BSP’s 

headquarters, network, or other needed infrastructure. Finally, 5 of the 6 

providers selected specific markets that, in their view, had officials in city 

government who were actively interested in having new competition and 

who took steps to ease the providers’ entry. 

Despite making significant progress in attracting customers to purchase 

their services, the BSPs we interviewed face some obstacles in the 

application of their business strategy. In the 6 markets we reviewed, the 

BSPs have attracted, on average, 25 percent of households to their 

subscription television service, 29 percent to their local telephone service, 

and 17 percent to their high-speed Internet services. The penetration 

levels—that is, the percentage of the population in an area that are 

subscribing to a BSP’s service—vary considerably across the markets and 

services, ranging from a low of 6 percent penetration for high-speed 

Internet in 1 market to a high of 63 percent penetration in telephone service 

in another market. We also found that BSPs’ business strategy can be 

difficult to implement because of certain factors that may limit their 

success. First, BSPs we interviewed noted that certain factors could hinder 

their ability to effectively compete in the specific markets that they have 

entered. For example, some of these providers said that an inability to gain 

access to certain cable networks that subscribers want to receive, or 

difficulty being able to provide service to residents of some apartment and 

condominium complexes, created barriers to their success in certain 

markets. Second, the BSPs we interviewed may be facing more 

competition in the markets they have entered than they may have 

envisioned when they developed their marketing plans, which is making it 

difficult to reach the penetration targets they had set. Lastly, the BSPs we 

interviewed have had difficulties securing continued access to adequate 

financial resources that are needed to rapidly construct their networks and 

market their services. As a result, the BSPs we interviewed are currently 
Page 6 GAO-04-241 Telecom Competition

experiencing varying states of financial problems due to a lack of capital. 

None of the 6 companies are actively expanding their networks, and 2 

currently lack the resources that are necessary to adequately market their 

services within their existing markets. These financial problems may be 

alleviated as the nation’s telecommunications sector recovers.

We provided a draft of this report to the FCC and the Antitrust Division of 

the Department of Justice for their review and comment. The Department 

of Justice did not provide any comments, and the FCC provided technical 

comments that we have incorporated. 

We also invited representatives from the Broadband Service Provider 

Association (BSPA), the National Association of Telecommunications 

Officers and Administrators (NATOA), the National Cable & 

Telecommunications Association (NCTA), and the United States Telecom 

Association (USTA) to review and comment on the draft report. USTA did 

not provide any comments. BSPA and NATOA provided technical 

comments that we have incorporated as appropriate. NCTA provided 

detailed comments. In particular, NCTA stated that because the sample of 

franchises examined as part of this case study was so small, no broad 

conclusions should be drawn. Moreover, they noted that the observed 

pricing differences between cities with and those without a BSP entrant 

could have occurred for reasons other than competitive entry. Finally, they 

noted that GAO did not evaluate whether the lower prices available in cities 

with BSPs represented economically sustainable price levels. GAO’s 

response to these comments, as well as a more complete summary of 

NCTA’s comments appears at the end of this report.

Background Today, 95 percent of American households purchase local telephone 

service, 85 percent purchase subscription television service (usually from a 

cable company or a satellite provider), and about 62 percent purchase 

some form of access to the Internet. Of those with access to the Internet, 

about 39 percent have a high-speed—or broadband—connection usually 

through either a cable modem or a digital subscriber line provided over a 

telephone connection. 

Local telephone service has been available since the late 1800s, and, by 

1950, over 60 percent of households had telephone service. Since the early 

20th century, certain aspects of telephone service, such as its price, have 

been regulated by state public utility commissions and by the FCC. With 

the Telecommunications Act of 1996, the Congress sought to increase 
Page 7 GAO-04-241 Telecom Competition

competition in the local telephone market. Today, incumbent local 

telephone companies face competition from a variety of types of 

companies. However, nearly 87 percent of residential local telephone 

subscribers continue to receive service from an incumbent, or traditional, 

local telephone company. 

Subscription television service has been available since the late 1940s when 

cable television providers first emerged, and, by the late 1980s, cable 

service was available to nearly 90 percent of households throughout the 

United States. Today, according to FCC, about 67 percent of American 

households purchase cable service.3

 The 1992 Cable Television 

Competition and Consumer Protection Act took steps to increase 

competition to cable providers. The act prohibited the awarding of 

exclusive franchises by local franchising authorities. Also, as required by 

the act, FCC developed rules—commonly referred to as program access

rules—that require cable operators that have affiliated cable networks to 

make those networks (if they are delivered to the cable operator via 

satellite) available to competitors.4

 The Telecommunications Act of 1996 

also took steps to allow telephone and electric companies to enter the 

subscription television market. In the 1990s, direct broadcast satellite 

providers (such as DIRECTV and EchoStar) began offering subscription 

television service through satellites. According to FCC, over 17 percent of 

American homes currently purchase satellite television service, and these 

providers have become the primary competitors to the cable television 

industry. At this time, competition in the subscription video market from 

wire-based providers exists in only about 2 percent of markets nationwide, 

according to FCC information.

3

Cable operators obtain a franchise license under agreed-upon terms and conditions from a 

franchising authority—referred to as a local franchising authority—such as a township or 

county. In some instances, the state public utility or public service commission regulates 

cable television service. These franchise agreements govern many aspects of cable 

television service, including access to rights-of-way; the schedule for the company to build 

its infrastructure; and the provision of public, educational, and governmental channels. 

4

Cable networks typically deliver their programming to cable operators via satellite. 

However, if the cable network delivers its programming to the affiliated cable operator via a 

different technology (such as a wire), then the program access obligations do not apply.
Page 8 GAO-04-241 Telecom Competition

High-speed Internet is a relatively new service that provides a continuous, 

high-speed, high-capacity connection to the Internet.5

 High-speed 

connections to the Internet became widely available in the late 1990s, and, 

as of mid-2002, nearly 15 percent of American homes had a high-speed 

connection to the Internet. In recent years, local telephone companies 

adapted their networks to provide new services, such as digital subscriber 

line service, which is a form of high-speed Internet service. Through their 

digital subscriber line service, telephone companies serve approximately 

33 percent of subscribers who purchase a broadband connection. Similar 

to local telephone companies, many cable television companies upgraded 

their networks to provide high-speed Internet service through cable 

modem service. Cable modem service is the most widely subscribed to 

high-speed service with approximately 57 percent of subscribers 

purchasing this service.6

 

Figure 2 provides information on the extent of competition in the local 

telephone, subscription television, and high-speed Internet markets. 

5

With high-speed Internet service, subscribers can download material sometimes as much as 

50 times faster than a dial-up modem. This additional capacity allows users to download 

more material and also makes other services, such as streaming video, possible.

6

In addition to digital subscriber line and cable modem service, households can acquire 

high-speed Internet service from other wire-based, fiber, and wireless technologies. These 

technologies serve the remaining 10 percent of high-speed Internet customers. 
Page 9 GAO-04-241 Telecom Competition

Figure 2: Telecommunications Service Subscriptions

BSPs’ Business 

Strategy Focuses on 

Providing Bundled 

Telecommunications 

Services

Broadband service providers are a new type of telecommunications 

provider. Unlike local telephone and cable television companies, which are 

adapting their existing networks to provide additional services, and other 

entrants that focus on providing service in one communications market, 

broadband service providers focus on a core business strategy of building a 

new fiber-optic network over which they can provide local telephone, 

subscription television, and high-speed Internet services. 

A fiber-optic network requires a long-term commitment to build. 

According to the BSPA, companies must first obtain a local franchise that 

authorizes them to begin construction. They then must obtain the rights-ofways to build the network and work with utility companies to make sure 

that they do not disrupt other services. Once the BSP begins building its 

network, construction usually takes between 2.5 to 4 years if the company 

(1) has steady access to capital and has no difficulties in obtaining the 

necessary local government accommodations and (2) is able to receive 

Cable

modem

57%

33%

Other

10%

Cable TV

77%

20%

Other

3%

Local telephone

87%

13%

Subscription television High-Speed Internet

Telecommunications services

Sources: GAO and Nova Development.

Competitive

local 

telephone 

providers Digital 

subsriber 

line

Satellite 

TV

Incumbent 

local 

telephone 

providers
Page 10 GAO-04-241 Telecom Competition

needed information from utility companies. According to the BSPA, the 

time it takes to build a network varies with the size of the market and 

whether the BSP can string its cable on poles or if it must bury the cable in 

the ground. Because it takes 4 to 5 times longer for a BSP to build a 

network if it must bury the cable, some BSPs target communities that allow 

them to string their cable on poles according to the BSPA. A BSPA 

document indicates that BSPs have spent over $6 billion in capital 

investments to build 32,000 miles of fiber network. BSPs’ networks 

currently expand across areas that would enable them to service up to 

4 million homes as of June 2003; of this possible subscriber base, these 

companies have gained over 1 million subscribers. 

A representative of the BSPA said that most BSPs have specific targets 

regarding the minimum threshold of the potential customers in an area they 

need to attract in order to ensure that the large financial investment is 

profitable. Additionally, a common goal is to have most of their subscribers 

purchase more than one of the three offered services. Finally, we were told 

that the target average revenue per subscriber each month is about $100. 

In order to be able to achieve these goals, BSPs use several marketing 

strategies. First, part of the BSP business strategy is to enter markets that 

do not have any wire-based providers other than the incumbent cable and 

telephone providers. That is, BSPs look to become the second major wirebased provider of subscription television and local telephone service in 

each of the markets they enter. Second, BSP officials told us that they 

attempt to entice customers to stay with their company in the long term by 

building the most modern network in the market, thus enabling the BSPs to 

upgrade services as new technologies become marketable. Third, and most 

central to the BSP business strategy, the 6 BSPs we interviewed offer 

pricing discounts to encourage the purchase of multiple services. This 

business focus allows the BSPs to capitalize on network efficiencies by 

generating more marginal revenue on the second or third service that the 

subscriber purchases. 

In order to illustrate the savings available to consumers from BSPs’ 

bundled telecommunications offerings, we compared the packaged price of 

a certain bundle of communications services offered by BSPs with the 

prices that these companies would charge for the same set of services 

individually. While some of the BSPs offered packaged deals on a relatively 

low end package of services, we found that to compare a similar package of 

services across the 6 BSPs we interviewed, we needed to examine the price 

for a higher end package of services that included such items as digital tiers 

of video service, premium channels, and higher end speeds of Internet 
Page 11 GAO-04-241 Telecom Competition

access. For the 6 markets with BSPs that we interviewed, figure 3 shows 

the average savings a consumer can receive by purchasing this particular 

set of telecommunications services in a bundle versus purchasing them 

individually. The average monthly BSP à la carte prices for this bundle of 

telecommunications services in the 6 markets is $136.63. If purchased as a 

bundle, the subscriber is able to receive a discount that would bring the 

cost for this bundle of services down to $117.28. That is, a BSP customer 

will save, on average, about $20, or 14 percent, if they select three services 

as a bundle package rather than buy them individually from the BSP. 

Across the 6 markets with BSPs that we interviewed, the additional savings 

a consumer could receive by purchasing this basket of services as a bundle 

ranged from $11.66 to $28.74 per month.
Page 12 GAO-04-241 Telecom Competition

Figure 3: Average BSP À la carte and Bundle Price for Premium Three-Service 

Bundle

Consumers Enjoy 

Lower Rates in 

Markets with BSPs

In the 12 markets we reviewed, the entry of a BSP appears to induce 

incumbent cable operators to respond by providing more and better 

services and by reducing rates and offering special deals. Incumbent 

telephone providers have not shown as much of a competitive response to 

BSP entry. The ultimate result of the BSP operations, along with 

incumbents’ response, is substantially lower prices for consumers. 

0

20

40

60

80

100

120

140

Average monthly rate (in dollars)

$136.63

$117.28

At least one

local telephone

line:

$14.96

High-speed 

Internet: 

$55.46

1.5 mb 

download or 

fastest 

available

BSP à la carte 

price for three 

services

Telecommunications services

Source: GAO analysis of BSP data.

Three-service 

price with 

bundle discount

Subscription 

TV: 

$66.21

Basic, 

expanded basic, 

digital package, 

and 

two premium 

channels 

The same 

à la carte 

package 

including 

bundle 

discount
Page 13 GAO-04-241 Telecom Competition

Incumbent Cable Operators 

Responded to BSP Entry by 

Lowering Prices and 

Improving Services, but 

Incumbent Telephone 

Operators Show Less 

Response to BSP Entry

In the 6 markets we reviewed that had a BSP providing service, incumbent 

cable operators appear to respond competitively to the presence of the 

BSP. Although cable operators told us they generally viewed satellite 

providers as their primary competitors, they indicated that BSP 

competition in individual markets can be a significant factor when they 

develop their business strategies for that market. In particular, incumbent 

cable providers facing competition from a BSP told us that they responded 

to the BSP activity by lowering rates or offering special deals or packages 

and, in some cases by providing more local content and advanced services. 

For example: 

• Almost all of the incumbent cable operators we contacted said they 

lowered their cable and high-speed Internet prices in the markets where 

a BSP was operating in order to be more competitive. Moreover, we 

found that one incumbent cable provider in a BSP market chose to offer 

discounts to subscribers who purchased both cable and high-speed 

Internet service, thus enabling it to compete directly with the BSP’s 

packaged offerings. In this market, the incumbent cable operator priced 

a package combining cable and high-speed Internet services at a 45 

percent discount when compared with the same package that the cable 

operator offered in the non-BSP matched market.

• Two incumbent cable operators also said that exclusive programming 

helps them to differentiate themselves from the BSP. For example, one 

incumbent cable operator said that they respond to BSP entry in a 

number of ways, including providing more local programming and 

advanced services. Another cable operator told us that its provision of 

local high school sports games, a community-focused talk show, and 

city council meetings provides an advantage over the BSP. However, the 

incumbent cable provider said that it provided this programming before 

the BSP’s entry into the market. 

• Some incumbent cable providers also responded to BSP competition by 

improving their customer service. For example, one cable operator 

noted that its company initiated door-to-door visits to customers to 

ensure good picture reception and answer customer questions. 

Similarly, on the basis of the information we gathered from local 

franchising authorities, it appeared that in some cases customer 

satisfaction with the incumbent cable providers improved after the BSP 

entered the market.
Page 14 GAO-04-241 Telecom Competition

The incumbent telephone companies that we interviewed had not generally 

taken steps to respond to the BSP presence in their markets. Incumbent 

telephone providers told us that their primary competition comes from 

providers other than BSPs. The telephone companies varied in terms of 

which other providers they viewed as providing the most competition to 

their services, but this list of important competitors included a variety of 

provider types, such as long-distance telephone providers, wireless 

carriers, and Internet-based providers of telephony services. 

Incumbent local telephone providers we spoke with told us that they do not 

perceive BSPs as a significant source of competition because the BSPs 

have a very small presence focused only in scattered markets, and because 

they face greater sources of competition, such as wireless and long 

distance providers.7

 For example, these providers generally did not lower 

prices or enhance their services in markets where BSPs provided telephone 

service. However, the incumbent telephone providers told us that their 

ability to respond to BSP competition was limited by federal and state laws 

and regulations that they view as restrictive.8

 Regarding the high-speed 

Internet market, incumbent telephone providers also noted that they did 

not view BSPs as important competitors. Instead, telephone companies 

told us that their most important competitors in the high-speed Internet 

market are incumbent cable television providers. Moreover, they noted 

that, in their opinion, cable operators were likely to remain dominant in the 

high-speed Internet market. In fact, one incumbent local phone provider 

said that it reduced prices for high-speed Internet service to compete with 

cable operators’ cable modem service—not because of competition from 

BSPs. 

7

One incumbent telephone company provided data indicating that wireless lines have 

increased so much in recent years that they now surpass the aggregate number of wirebased lines provided by the largest telephone companies by as much as 15 million in 2003. 

By contrast, the number of telephone lines served by BSPs number only about 540,000. 

8

For example, all 4 of the incumbent telephone providers we spoke with stated that 

provisions of the 1996 Telecommunications Act force them to lease critical network 

elements to competing entities at government-mandated rates that these providers view as 

being below cost.
Page 15 GAO-04-241 Telecom Competition

Consumers Benefited from 

Lower Prices for 

Telecommunications 

Services in the 6 Markets 

With BSPs That We 

Reviewed

Rates were generally lower for the subscription television, high-speed 

Internet, and local telephone services in the 6 markets we examined with a 

BSP present than in the 6 markets that did not have BSP competition. 

However, the extent to which prices were lower in a BSP markets 

compared to its “matched market” varied considerably across markets and 

services. For example, in 1 BSP market, the monthly rate for cable 

television service was 41 percent lower compared with the matched 

market, and in 2 other BSP locations, cable rates were more than 30 

percent lower when compared with their matched markets. On the other 

hand, in 1 market, the price for cable television service was 3 percent 

higher in the BSP market than it was in the matched market. Also, we 

found that rates for high-speed Internet service were at least 20 percent 

lower in the 3 BSP markets compared each of their matched markets, but 

for the other 3 market-pairs, high-speed Internet rates were roughly the 

same across BSP markets and their matched markets. The extent to which 

rates were lower for one local phone line in BSP markets compared to their 

matched market varied considerably: rates were 4 to 33 percent lower in 5 

of the 6 markets with a BSP we reviewed, and the rates for local telephone 

service were the same in 1 of the matched-pair markets we reviewed. See 

figure 4 and appendix II for more information on pricing patterns between 

market-pairs.

In some cases, the lowest price in the market with a BSP was the BSP price, 

however, in other cases, the lowest price was the incumbent’s price. 

Specifically, in the 6 markets with a BSP, the BSP price was lowest for cable 

television in 4 markets, the BSP price was lowest for high-speed Internet in 

2 markets, and the BSP price was lowest for local telephone service in 5 

markets. 
Page 16 GAO-04-241 Telecom Competition

Figure 4: Extent to Which Rates For Telecommunications Services Were Lower in the 6 Markets with BSP Competition When 

Compared with Each BSP Markets’ Matched-Pair

0

30

35

40

45

50

55

60

7

9

11

13

15

17

19

0

25

30

35

40

45

Monthly rate (dollars) Monthly rate (dollars)

Monthly rate (dollars)

Expanded basic cable TV Telephone service

High-Speed Internet

Lowest rate in BSP market

Source: GAO.

Lowest rate in non-BSP market

31% less 

in BSP 

market

1

32% less 

in BSP 

market

41% less 

in BSP 

market

17% less 

in BSP 

market

15% less 

in BSP 

market

3% more 

in BSP 

market

7% less 

in BSP 

market

33% less 

in BSP 

market

No

difference

in BSP 

market

11% less 

in BSP 

market

4% less 

in BSP 

market

28% less 

in BSP 

market

29% less 

in BSP 

market

20% less 

in BSP 

market

38% less 

in BSP 

market

2% less 

in BSP 

market

No

difference

in BSP 

market

No

difference

in BSP 

market

2 345 6 123 456

123 456

0

Market pair

Market pair

Market pair 
Page 17 GAO-04-241 Telecom Competition

Note: For markets with a BSP, we used the lowest price that could have been offered by the incumbent 

provider or by the BSP. In markets without a BSP, the lowest price is that offered by the incumbent 

provider. 

It is possible that some of the differences in pricing we observed are caused 

by factors other than the presence of a BSP in certain markets. For 

example, our earlier study on cable pricing included an econometric model 

that showed that several factors, such as the number of cable channels, 

direct broadcast satellite penetration, and population density, influence 

cable prices. We attempted to minimize the influence that other factors 

would have on price differences across markets by choosing case-study 

markets and matched-pair markets that had certain similarities. Because 

the number of channels is known to be an influence on cable rates, we 

examined channel line-ups of each of the 12 providers. Our analysis 

showed that the provider with the best price in the markets with a BSP also 

offered more channels than the provider in their matched market in 4 of the 

6 cases and offered the same number of channels in the other two matchedpair markets. This indicates that the number of channels is not a cause of 

lower prices in markets with BSPs. See appendix I for a discussion of our 

methods and appendix II for a more complete listing of the channel line-up 

analysis.

BSPs Consider Specific 

Demographic, 

Geographic, and Local 

Government Factors 

When Deciding Which 

Markets to Enter

The BSPs we analyzed considered a variety of factors when determining 

which markets to enter. These considerations were directly tied to the 

ability to enter a market quickly and to further their business strategy of 

selling multiple services to most of their subscribers. The primary factors 

considered regarding market selection fell into the following three 

categories: demographic factors, geographic factors, and factors related to 

the local governments in the communities of interest.

Demographic Factors Were 

Considered in Market 

Selection 

Three primary demographic factors were considered by the BSPs we 

interviewed when deciding which markets to enter and provide service. In 

particular, the size of the city, the level of income of residents, and the level 

of computer use among residents were primary determinants of market 

selection. Despite the commonality in the factors considered, there was 

some variation in how BSPs considered each of these demographic factors. 

All 6 of the BSPs we interviewed mentioned the size of the market as a key 

factor that they considered in market selection. Only 1 BSP focused its 
Page 18 GAO-04-241 Telecom Competition

business development toward larger cities. This company was the first to 

take the approach of competing with an incumbent by offering bundled 

service packages; thus this BSP believed that in order to attract adequate 

venture capital, it was important to focus its operations in major markets. 

This BSP also told us that it believed a large-city focus would have the 

benefit of enabling the company to rapidly gain subscribers in high-density 

corridors where a greater number of customers could be served with a 

given amount of infrastructure deployed. This BSP further noted that a 

downside of entering large markets was that construction in larger cities is 

significantly harder and more costly than in smaller cities, which made it 

difficult to meet an aggressive construction schedule. In fact, this BSP was 

unable to meet the 4-year construction deadline that was mandated by its 

franchise agreement.

Five BSPs built new infrastructure in medium and smaller cities. They told 

us that they took this approach, in part, because they recognized how 

difficult it would be to meet construction requirements in a large city. 

These BSPs also said that a benefit of entering a smaller city is that 

incumbent cable operators are less likely to vigorously compete with them 

as would likely, in their view, be the case if they entered a major city. 

Representatives from 3 BSPs also told us that they enter smaller markets 

because they may be able to leverage customers’ dissatisfaction with the 

incumbent—which they believe tend to be more of an issue in smaller 

markets. Similarly, 3 of the BSPs told us that small and medium markets 

tend to have old networks, and this provided an opportunity for the entrant 

with an upgraded system to successfully compete for subscribers.9

 

Representatives from the 5 BSPs also noted that entering smaller sized 

cities allows them to better target markets with favorable demographics, 

rather than have to serve the wide array of residents that would live in a 

larger market. 

Four of the 6 BSPs we spoke with stated that the average household 

income in a market was a key criterion in their decisions about what 

markets to enter. However, BSPs took various approaches regarding what 

income levels they were targeting. For example, 2 BSPs told us that they 

choose to enter markets with high-income level populations because these 

subscribers are more likely to take two or more telecommunications 

9

Three BSPs we interviewed stated that incumbent providers focus more attention on their 

largest markets. As such, the quality of infrastructure as well as customer service may, in 

their view, be lower in smaller cities.
Page 19 GAO-04-241 Telecom Competition

services. On the other hand, the other 2 BSPs look more for markets with a 

balance of varied income levels. Representatives of these companies told 

us that a mix of income levels among subscribers helps to ensure that each 

of the communications services offered by the company has a target 

audience. In fact, 1 BSP stated that higher level income subscribers may be 

most likely to subscribe to broadband service, but middle income 

subscribers may be most likely to subscribe to subscription television 

service. 

Two of the 6 BSPs noted that high levels of computer use and Internet 

connections among residents of a community are factors they consider 

when determining what markets to enter because high-speed Internet 

service has a high profit margin. In particular, these BSPs told us that they 

selected markets with a high number of college students because the 

academic environment has a large amount of computer ownership and 

Internet use.

Geographic Factors Were 

Considered in Market 

Selection 

We found that BSPs consider certain geographic factors when deciding 

which markets to enter and provide services. In particular, BSPs looked for 

markets that were in close proximity to other markets that were served by 

a parent company or in proximity to other key facilities, such as the BSP 

headquarters or network, or other needed infrastructure. 

Officials of 2 BSPs that are subsidiaries of energy companies told us that a 

key factor considered in market selection was proximity to the parent 

company’s service area, which they said helps to leverage the parent 

company’s name brand, infrastructure, and human capital. For example, a 

BSP representative told us that his BSP chose to enter one of the markets 

we studied because it was close to its parent company, and the BSP was 

thus able to benefit from the parent company’s good reputation within the 

community as a power provider. The local franchising official in that 

market agreed that the community’s positive relationship with the parent 

power company gave citizens confidence in the BSP’s proposal and to trust 

that it would fulfill its infrastructure construction requirements. In 

addition to name recognition, another BSP official said that entering cities 

where the parent company has a presence allows the BSP to take 

advantage of the parent company’s workforce to assist with the 

construction of the new infrastructure. 

Two BSP representatives said that their BSP chose to enter markets on the 

basis of close proximity to their BSPs’ headquarters or physical network. 
Page 20 GAO-04-241 Telecom Competition

For example, 1 BSP that we interviewed chose markets that were close to 

the BSP headquarters. Another BSP told us that choosing cities in close 

proximity to its existing physical network was important in order to 

minimize the cost of fiber connecting any new market to the company’s 

network. In fact, some markets that this BSP chose not to enter were too 

far from existing infrastructure and would have been very costly to 

connect. 

Characteristics of Local 

Government Were 

Considered in Market 

Selection 

We found that when deciding which markets to enter, BSPs considered the 

receptivity of local government officials to new entrants. Moreover, the 

degree to which government officials took steps to reduce administrative 

requirements—which BSPs told us could be considerable—was a key 

factor for some BSPs when considering market entry. 

Representatives from 5 BSPs indicated that specific markets were selected 

because the city government officials had a positive attitude toward 

competition, were easy to work with, or invited the BSP to provide services 

in their market. Similarly, one BSP told us that they avoided entering 

markets that had local franchising officials who showed limited interest in 

their services. 

During our interviews, BSPs mentioned that they needed to overcome a 

variety of administrative issues before market entry. Gaining access to 

rights-of-way, fulfilling costly franchise requirements,10 and obtaining 

access to apartment buildings that have exclusive contracts with the 

incumbent cable operators were a few of the varied administrative issues 

that were mentioned by the BSPs. Representatives from 2 BSPs told us 

that when government officials are welcoming to the new entrants, the 

officials often take steps to mitigate administrative costs and requirements. 

For example, one local franchising authority, which was eager to have a 

BSP offer services in its market, presented a franchise agreement with 

reduced-fee payments for rights-of-way access and construction permits. 

Also, 2 different BSPs told us that the timeliness for gaining approvals for 

various required applications often were directly influenced by the 

receptivity of the regulators. We were told that two enthusiastic local 

10Franchise requirements are agreed-upon terms and conditions between the local 

government officials and cable operators, which can include provisions such as fees, Public 

Education and Government channels, construction schedules, and customer service 

requirements. 
Page 21 GAO-04-241 Telecom Competition

franchising authorities took only 120 days to approve a BSP’s application 

for a franchise. In contrast, another BSP told us that it was unable to 

obtain a franchise after 2 and 1/2 years of working with a local franchising 

authority that was not receptive to competition, and the BSP did not 

succeed in entering that market. 

Five of the 6 case study markets that do not have a BSP competitor had 

companies express interest in entering their cities, but, according to local 

government officials, these companies decided not to enter for several 

reasons. For example, one local official told us that the level-playing-field 

law in his state—which are laws that require any new cable franchiser to 

agree to the same terms and conditions that the incumbent cable provider 

must meet—was a factor in an interested competitive cable company’s (not 

1 of the 6 companies we studied) retracting a franchise application.11 

Another factor that may cause BSPs to choose not to enter a market is the 

local government’s lack of administrative resources. Specifically, one local 

official said that the lack of administrative resources to process 

applications quickly caused some BSPs to withdraw their applications and 

seek more receptive markets. 

BSPs Are Gaining 

Market Share, but a 

Variety of Factors May 

Hinder Their Success 

BSPs are gaining market share in the service markets they have entered, 

with varying success. BSPs we interviewed said that certain factors, such 

as difficulty in gaining access to certain programming, can create obstacles 

to their ability to compete effectively. Moreover, BSPs may be finding that 

these telecommunications markets are more competitive than they had 

expected when they first developed their business strategy. Currently, all 

of the BSPs we interviewed are having problems with access to capital and, 

thus are struggling to continue expanding their market presence. 

BSPs Are Having Varied 

Success in Gaining 

Subscribers

On the basis of statistics provided by the 6 BSPs we interviewed, these 

companies appear to be having varied success in gaining subscribers for 

their television, local telephone, and high-speed Internet services. The 6 

BSPs have made significant inroads in gaining market share in the three 

service markets. In particular, for the 6 cities with BSPs we interviewed, 

the average BSP market penetration for subscription television service was 

25 percent, the average penetration of subscribers for local telephone 

11According to a recent article, at least 12 states have level-playing-field laws.
Page 22 GAO-04-241 Telecom Competition

service was 29 percent, and the average subscriber penetration for highspeed Internet service was 17 percent.12 As figure 5 shows, there was 

substantial variation across the companies in the penetration rates for each 

service—ranging from a low of 6 percent penetration for high-speed 

Internet in 1 market to a high of 63 percent penetration in telephone service 

in another market. We found that entering smaller markets may be 

associated with an ability to gain greater market penetration. For example, 

we found that in the 3 smaller markets we examined, the BSPs were able to 

attract a larger share of the potential subscribers—that is, to achieve a 

higher level of penetration—than was the case for BSPs that entered the 

medium and the larger markets included in our case study. 

12In its comments on a draft of this report, the BSPA noted that an additional benefit of BSP 

entry into markets is greater penetration of high-speed Internet access. In particular, BSPA 

noted that it believes that the total high-speed Internet access penetration rate in markets 

with BSPs is at least double that of the national average high-speed penetration rate.
Page 23 GAO-04-241 Telecom Competition

Figure 5: Penetration of Subscription Television, High-Speed Internet, and 

Telephone Services for BSPs in Case-Study Markets, June 2003

Certain Factors in Local 

Markets Can Hinder BSPs’ 

Ability to Compete 

All of the BSPs we interviewed noted that various barriers arise that can 

hinder their ability to effectively compete in the markets that they have 

entered. Although a host of issues were mentioned during our interviews, 

the greatest concern surrounded issues related to an inability to gain 

access to certain cable networks, an inability to serve certain apartment 

and condominium complexes, and restrictive local regulatory 

requirements.

Program Access Concerns In 4 markets, BSP officials said they have experienced problems obtaining 

certain cable networks—such as regional sports, weather, and local 

informational channels—that the incumbent cable provider of that market 

Cable 

television

Source: GAO analysis of BSP data as of June 2003.

Residential 

telephone 

service

High-speed 

Internet

25%

29%

17%

0

10

20

30

40

50

60

70

80

90

100

Range

Average

Percentage of households that subscribe to BSP services 

in the 6 case-study markets
Page 24 GAO-04-241 Telecom Competition

owns or holds exclusive rights to within that market. Of the 4 BSPs that 

expressed concern with program access, 2 specifically told us that they 

were unable to gain access to regional sports networks because the 

incumbent cable provider, which owned that network, provided the 

network to its own facilities terrestrially—that is, not via a satellite.13 

Similarly, the third BSP stated that it could not obtain access to a popular 

local news network because the incumbent cable provider partially owned 

it. The incumbent, however, explained that FCC ruled that program 

exclusivity in this case was in the public interest and therefore FCC granted 

it an exemption to the program access rules. The last BSP stated that even 

though the incumbent cable provider had not produced a local sports 

network, it still could not obtain access because the incumbent had 

secured an exclusive deal with the producers of that network. The BSP 

was able to gain access to that cable network only after the network was 

sold from one owner to another. 

While 4 of the BSPs said they had a problem with program access, only two 

cable operators we spoke with said that they were aware of program 

access issues in the markets we reviewed. Moreover, one incumbent cable 

provider told us that producing or having access to exclusive content can 

be a good marketing strategy for it and that without the ability to develop 

exclusive content, the incentive to produce innovative programming is 

minimized. Regarding the market where an incumbent cable provider had 

exclusive rights to certain programming, the incumbent’s view was that it 

created the concept for the programming package and the BSP was 

unwilling to make such a commitment on an unproven product. 

Multiple Dwelling Units Three of the BSPs we interviewed expressed concern about being 

prevented from providing service to large segments of the population that 

live in apartments or condominiums, which are generally referred to as 

“multiple dwelling units.” We were told that owners of multiple dwelling 

units often enter into exclusive contracts with one cable provider, thereby 

limiting a competitor’s access to that building. Also, even when BSPs have 

gained access into a building, we were told that the building owners may 

not allow them to lay additional wires because of the associated costs and 

disruptions. In fact, 1 BSP we spoke with estimated that it could not 

provide service to 20 percent of subscribers in 1 of our case-study markets 

13As required by the Cable Television Consumer Protection and Competition Act of 1992, 

FCC developed rules designed, in part, to ensure that vertically integrated cable operators 

generally make their satellite-delivered programming available to competitors. 
Page 25 GAO-04-241 Telecom Competition

because of problems gaining access to multiple dwelling units. The 

incumbent cable operators we interviewed said that in some cases they had 

exclusive contracts to serve multiple dwelling units. However, in 3 of the 

markets, these providers noted that the BSPs also had exclusive contracts 

with some multiple dwelling units. 

Recently, FCC reviewed issues related to access by telecommunications 

companies to multiple dwelling units. In a January 2003 order, FCC did not 

establish federal access requirements or preempt state regulation of these 

matters.14 Likewise, FCC continued to permit exclusive or perpetual 

contracts for subscription television service in multiple dwelling units 

because, according to FCC, it found that it was not clear that there are 

anticompetitive effects from exclusive and perpetual contracts, and, as 

such, FCC could not support government intervention in privately 

negotiated contracts. 

Burdensome Franchise 

Requirements 

Some of the BSPs also told us that certain franchise requirements can be 

burdensome. As we previously noted, BSPs told us that the administrative 

requirements of local jurisdictions can influence the markets they enter, 

but we were also told that these requirements could affect how quickly 

they can begin providing service in markets they have chosen to enter. For 

example, we were told that required construction time frames often burden 

new entrants, even though these rules are generally designed to create a 

“level playing field” by ensuring that new providers must meet all of the 

same requirements that incumbent providers have had to meet. These 

construction rules can require extensive capital, reprioritization of the 

business plan, or the provision of service in areas that are not economic to 

serve. In some cases, BSPs have changed their legal status in order to 

avoid costly and labor-intensive construction requirements.15 One BSP 

noted that the incumbents effectively receive a longer build-out schedule 

because they were able to grow with the communities they serve.

14See In the Matter of Telecommunications Inside Wiring, 18 F.C.C.R. 1342 (FCC 1st order 

on recon., 2003)

15A company that wants to provide subscription television service in a community can elect 

to operate under the “open video system” (OVS) provisions of the 1996 Telecommunications 

Act. An OVS provider may not always need to obtain a franchise and as such may not 

generally face specific construction requirements. However, companies with OVS status 

must open portions of their network to competing entities. 
Page 26 GAO-04-241 Telecom Competition

BSPs May Have 

Underestimated the Level of 

Competition in 

Telecommunications 

Markets

One of the most significant factors that may hinder the BSP’s marketing 

success is that the communications markets BSPs seek to serve may be 

more competitive today than these providers envisioned when they first 

developed their plans. We found that BSPs avoid markets where another 

new wire-based operator had entered the market, but this avoidance does 

not ensure that there are not other new competitors providing service in 

the three service markets.16 For example: 

• Regarding subscription television service, direct broadcast satellite 

service (such as DIRECTV or EchoStar) service is available nationwide 

and, thus, represents a second and third formidable competitor in every 

market that a BSP may choose to enter. As the number of direct 

broadcast satellite subscribers continues to grow, it will be even harder 

for the BSPs to achieve the penetration rates that are necessary for 

profitability.17 

• Competition in the market for local telephone service has been 

emerging. Incumbent local telephone companies noted that consumers 

are increasingly turning to mobile telephones as their sole telephone 

line in lieu of a wire line connection. If more consumers replace their 

wire line telephone service with wireless service (which is not 

traditionally provided by BSPs), such action will also have the effect of 

decreasing the number of potential subscribers to which BSPs can 

market their services. Also, incumbent local telephone providers view 

the large established cable operators as their primary competitive threat 

in the future. In fact, some established cable operators are increasingly 

providing telephone service in markets around the country.

• In the high-speed Internet market, BSPs already compete against cable 

and local telephone providers. In addition, new platforms for the 

16Interestingly, none of the incumbent cable operators we interviewed chose to enter other 

markets to compete against an existing incumbent cable company despite the fact that 

incumbent cable providers have extensive know-how, reasonably reliable access to capital, 

and lucrative contracts for programming. These companies’ lack of interest in competing in 

new markets may indicate a view that such entry poses a difficult business challenge.

17However, some BSPs and incumbent cable operators we spoke with noted that DBS 

subscribership is low in some of the markets with BSPs. For example, in 4 of the 6 markets 

with a BSP present, the incumbent cable provider or the BSP had data indicating that DBS 

penetration was well below the national average, and as low as 2 percent in 1 market. 

Representatives of the incumbent cable operator said that the low rate was due to the 

greater competition and lower prices in that market.
Page 27 GAO-04-241 Telecom Competition

provision of Internet service may erode the market for all wire-based 

companies. For example, one incumbent local telephone company 

noted that the presence of a large university that provides free highspeed Internet service to its students and faculty reduces its potential 

high-speed Internet market. Other new means of Internet access, such 

as through wireless modes, are also becoming more widely available.

BSPs Serving the Markets 

We Reviewed Are Now 

Struggling to Obtain 

Adequate Access to Capital 

The BSPs we spoke with gained financial capital to construct their 

infrastructure and operate their business in a variety of ways. Two BSPs 

that are providing services in the markets we reviewed were wholly owned 

subsidiaries of large power companies and were able to receive all of their 

investment capital from their parent company. Two other BSPs providing 

service in the markets we reviewed are, or had been, part of larger 

telecommunications companies and received their startup financing from 

these parent companies. The remaining BSPs serving markets we reviewed 

were funded through venture capital or a mixture of venture capital and 

money obtained through a partnership with an energy company.

Despite these sources of capital in the early stages of their business, the 6 

BSPs we interviewed are currently experiencing some level of financial 

problems. In particular, they told us that their difficulty in obtaining access 

to necessary capital is threatening their ability to construct their networks 

and market their services. None of the 6 BSPs we studied are aggressively 

expanding their operations. Two of the BSPs are still completing 

construction within their current markets in order to comply with their 

agreed-upon schedule, but another BSP was currently unable to complete 

construction. Beyond their current markets, all of the BSPs we reviewed 

have had to put expansion plans on hold until the market conditions 

improve. Additionally, 2 BSPs told us that they do not have enough capital 

to advertise their service offerings to their current base of potential 

subscribers, and 1 BSP reorganized through a Chapter 11 bankruptcy 

proceeding.18 BSPs told us that, to a large extent, these financial problems 

are the result of the economic problems that have affected the entire 

telecommunications sector. 

18The BSPA told us in their comments that the bankruptcy proceeding was a prepackaged 

conversion of debt to equity, through which no creditors lost money.
Page 28 GAO-04-241 Telecom Competition

Conclusions Although our study indicates that there are measurable consumer benefits 

in markets with BSPs compared with markets without such competition, 

the degree to which the BSP model is replicable throughout a broader set 

of markets remains unclear. For example, the majority of BSPs we spoke 

with stated that they avoid entering large metropolitan cities because they 

believe serving such markets might prove difficult. Moreover, even in the 

markets that they have successfully entered, the companies are struggling 

to achieve their key business targets. As a result, nationwide, BSPs serve 

only about 1 percent of the subscription television market and even less of 

the local telephone market, although BSPs do serve about 2 percent of all 

high-speed Internet subscribers. Nevertheless, at this time, with the 

telecommunications sector struggling to recover from diminished capital 

investments, it is difficult to determine the long-term prospects for success 

of BSPs as new telecommunications providers. The problems BSPs face 

may be mitigated as the current economic downturn of the 

telecommunications sector subsides, but the long-term viability of these 

providers is not clear. 

Agency Comments We provided a draft of this report to the Federal Communications 

Commission and the Antitrust Division of the Department of Justice for 

their review and comment. The Department of Justice did not provide 

comments on this report. The FCC provided technical comments that we 

incorporated. 

Industry Association 

Comments and Our 

Evaluation

We also invited representatives from the Broadband Service Provider 

Association (BSPA), the National Association of Telecommunications 

Officers and Advisors (NATOA), the National Cable & Telecommunications 

Association (NCTA), and the United States Telecom Association (USTA) to 

review and comment on a draft of this report. The USTA did not provide 

any comments. The BSPA and NATOA provided some comments that we 

incorporated as appropriate. 

NCTA officials provided extensive comments on the draft. These officials 

expressed concern with certain summary statistics on price differences in 

BSP markets compared with markets without BSPs that appeared in the 

draft of this report that they reviewed. We modified the presentation of the 

data on these price differences. In particular, rather than providing 

summary statistics on price differences across the markets with BSPs 

compared to the markets without BSPs, we provide information on the 
Page 29 GAO-04-241 Telecom Competition

price difference between each BSP market and its match. Additionally, 

NCTA made the following points:

• NCTA officials note that a case study of 6 markets with and 6 markets 

without a BSP competitor is a very small sample of the roughly 10,000 

cable systems in operation in the United States. They view the study as 

thus having no statistical significance. In particular, NCTA official 

express concern that our draft “implies vastly broader conclusions 

regarding the effect of BSPs on cable pricing than are warranted by the 

limited case studies.” They also note that, as we reported, the larger 

pricing differences were found for the 3 smaller city-pair case studies, 

while smaller price differences were found in the medium and larger 

city pairs. The officials stated that, as such, for the larger percentage of 

subscribers covered by the study, the differences were much smaller. 

GAO response: We agree that our approach in this report—a case study 

analysis—is not generalizable to the universe of cable systems. We 

have stated this several times in the report, and have added more 

discussion of this in response to NCTA’s comments. However, as 

stated in the report, our BSP sample represents more than 20 percent of 

the households nationwide that are in areas where BSPs currently offer 

the three-service package. Given the caveats we place on our own 

work, we do not believe that our conclusions imply a broader 

interpretation than is warranted.

• NCTA officials note their concern that just 4 months after we released a 

report on cable pricing that was based on an econometric analysis, we 

would provide new information on cable pricing in competitive and 

noncompetitive markets that are based on a different methodology. 

GAO response: We do not believe there is a problem in conducting a 

second study on cable rates and competition that analyzes the issue 

using an alternative methodology. The two studies used different data 

and different methods to examine an overlapping issue. The 

fundamental findings of both studies were similar, but the specifics 

were different—as would be expected given the different methods 

used. While our October 2003 study examined the issue of cable rates 

broadly, the current study focuses on 12 markets and compares rates in 

the 6 with a BSP to the 6 without such a competitor. The findings from 

this study relate to those 12 markets.
Page 30 GAO-04-241 Telecom Competition

• NCTA officials note that the reported pricing differences between 

markets with BSPs and those without BSPs could be misinterpreted as 

implying that BSP entry engenders a substantial price response by 

incumbent providers, when in fact, for cable pricing, the BSP (not the 

incumbent) offered the lower price in the BSP market in 4 out of the 6 

case-study markets. Moreover, NCTA officials note that to the extent 

that incumbents are responding to competition, this response may be to 

competition from DBS providers, rather than competition from BSPs.

GAO response: We agree with NCTA that price differences in cable 

rates across the BSP markets compared to those without a BSP do not 

necessarily mean that the incumbent providers lowered their prices 

entirely in response to BSP entry. We added some discussion in the 

report to clarify this point. Also, we note in the report that incumbent 

cable providers told us that their most important competitors are the 

two DBS providers. However, almost all of the incumbent cable 

providers also told us that when faced with wire-based competitors in 

particular local markets, they tend to lower their prices.

• NCTA officials also note that any observed price difference between 

markets with and without BSPs could be related to other factors not 

controlled for by the case-study analysis. For example, they noted that 

the number of channels in a cable system’s line up is a key factor that 

may drive pricing differences across locations and providers. 

GAO response: We agree with NCTA’s point that some of the 

differences in cable rates across our case study locations with a BSP as 

compared to those without such a provider could be caused by factors 

other than the presence of the BSP. We have added language to that 

effect in the report. However, after receiving NCTA’s comments, we 

also examined the number of channels provided in the case study 

markets—which NCTA specifically cited as a possible cause of rate 

differences—and found a similar number of channels available in the 

markets with a BSP when compared to its matched market. Moreover, 

when we asked incumbent cable operators why their prices differed 

across the markets in our sample, they usually cited the presence of the 

BSP as the primary cause.

• NCTA officials note that the draft report did not adequately address the 

possibility that in markets with BSPs, prices are uneconomically low 

and are unsustainable. That is, they noted that the low prices available 

in markets with BSPs may be of a transitory nature only. The officials 
Page 31 GAO-04-241 Telecom Competition

noted that this seems particularly possible in light of the fact that we 

found that all BSPs interviewed in the course of the study were facing 

various degrees of financial difficulty. NCTA officials also said that we 

did not fully describe the extent of financial problems currently 

experienced by the BSPs.

GAO response: We did not evaluate the long-term sustainability of the 

BSPs in the markets we reviewed. However, to address this to some 

extent, we only selected markets where the BSP had been in operation 

for at least a year.

• NCTA officials note that they believe that BSPs have overstated claims 

that certain local conditions (e.g., related to program access concerns, 

multiple dwelling unit access, and local franchising conditions) may 

hinder BSPs’ ability to compete. 

GAO response: We did not evaluate BSPs’ concerns about the effect of 

local market conditions on their entry and success. Similarly, we did 

not evaluate the veracity of incumbent providers’ statements on these 

issues. In this section of the report, we are simply reporting the views 

of these providers. 

As agreed with your offices, unless you publicly release its contents earlier, 

we plan no further distribution of this report until 30 days after the date of 

this letter. At that time, we will provide copies to interested congressional 

committees; the Chairman, FCC; and other interested parties. We will also 

make copies available to others upon request. In addition, this report will 

be available at no charge on the GAO Web site at http://www.gao.gov. If 

you have any questions about this report, please contact me at (202) 512-

2834 or goldsteinm@gao.gov. Key contacts and major contributors to this 

report are listed in appendix IV.

Mark L. Goldstein

Director, Physical Infrastructure Issues
Page 32 GAO-04-241 Telecom Competition

Appendix I

Scope and Methodology AAppenednxidexiIs

We employed a case-study approach in gathering information in responding 

to our four objectives. In particular, this report provides information on (1) 

BSPs’ business strategy; (2) the impact of BSPs’ market entry on incumbent 

cable and telephone companies’ market behavior and consumer prices of 

subscription television, high-speed Internet, and local telephone services; 

(3) the key factors BSPs consider when making decisions about which 

local markets to enter; and (4) the success of BSPs in attaining 

subscribership and any key factors that may limit their success. The case 

study consisted of 6 matched pairs of cities (12 total) that shared certain 

key traits except that 1 city in each pair has a BSP providing service and the 

other does not. 

In selecting the cities with BSPs, we considered several factors. We 

selected cities in various parts of the country with BSPs that met some 

basic criteria. To be considered for selection in our case study, a BSP had 

to provide subscription television, local telephone, and high-speed Internet 

services in the city for more than 1 year; had to have constructed its own 

network (rather than having purchased an existing network); and had to 

have a network that was nearly completed. We also analyzed population 

data to ensure that our case study included markets of varying sizes. We 

selected 3 small cities (with populations under 100,000), 2 medium-sized 

cities (with populations of 100,000 to 200,000) and 1 large city (with a 

population over 200,000). The 6 cities chosen for the case studies 

represented more than 20 percent of the households to which BSPs 

currently offer the three-service package. See appendix III for a detailed 

listing of the BSPs and areas of service.

To choose cities without BSPs for our analysis, we matched the 6 BSP 

cities with cities that were similar in terms of size and demographics. 

Where possible, we matched each BSP city with a city that did not have a 

BSP in the same state to avoid any possible differences caused by state 

laws or regulations and to help ensure reasonably similar demographic 

characteristics across the city-pairs. However, in the case of the only large 

city in our sample of BSP cities we selected a city in another state—

Seattle—to match with Boston because there was no city in Massachusetts 

with similar size and demographics, and no other large cities had extensive 

BSP presence.1

 Each city-pair also has the same incumbent local telephone 

1

Although Boston had the largest presence of a BSP for any large city, the BSP operating in 

Boston has not fully constructed a system.
Appendix I

Scope and Methodology

Page 33 GAO-04-241 Telecom Competition

and cable television providers, although in one case two incumbent 

telephone companies served different parts of a city. 

We conducted semistructured interviews with a variety of industry and 

local government participants for each of the selected markets. Our 

interviews included questions about telecommunications competition in 

each city, the price of telecommunications services, and the factors that 

favor or discourage competition in each city. We interviewed the BSPs (in 

the 6 cities where they existed), the incumbent cable companies, the 

incumbent telephone companies, the local franchising authorities, and the 

public utility commissions. Table 1 provides the details of the cities we 

chose and the primary companies and local representatives we 

interviewed. In addition, we interviewed officials from the BSPA and the 

Mid-American Regional Council (a support organization for local 

governments). 

Table 1: Case-Study Cities and Industry and Local Government Participants

Source: GAO.

Our analysis provides details on the competitive status of markets with 

BSPs. However, because we used a case-study method, our results are not 

generalizable to all markets with such providers. We performed our work 

State

Type of market

BSP

Incumbent 

telephone

Incumbent 

cable

Local 

franchising 

authority

State 

telecommunications 

With BSP Without BSP regulator 

Kansas Lenexa Prairie Village Everest SBC Time Warner Lenexa 

Prairie Village

Kansas Corporation 

Commission

Texas Waco Beaumont Grande SBC Time Warner Waco 

Beaumont 

Public Utility 

Commission of Texas

Minnesota St. Cloud Rochester Astound Qwest Charter St. Cloud 

Rochester 

Minnesota Public 

Utilities Commission

South Dakota Yankton Vermillion Prairie Wave Qwest Mediacom Yankton 

Vermillion 

South Dakota Public 

Utilities Commission

Georgia Augusta Savannah Knology BellSouth Comcast Augusta 

Savannah 

Georgia Public Service 

Commission

Massachusetts 

& Washington

Boston Seattle RCN Verizon 

Qwest

Comcast Boston 

Seattle 

Massachusetts 

Department of 

Telecommunications 

and Energy, 

Washington Utilities 

and Transportation 

Commission
Appendix I

Scope and Methodology

Page 34 GAO-04-241 Telecom Competition

between May 2003 and December 2003 in accordance with generally 

accepted government auditing standards.
Page 35 GAO-04-241 Telecom Competition

Appendix II

Price and Channel Information in Six Market 

Pairs ApendxiI

The following table provides additional data on the price patterns between 

the matched pair markets. The percentage price difference between each 

matched market pair was calculated by subtracting the lowest price in the 

BSP market from the incumbent’s price in the non-BSP market, and then 

dividing that difference by the incumbent’s non-BSP market price.

Table 2: Price and Channel Information in Six Market Pairs

Source: GAO.

Note: The difference in numbers of channels was based on the comparison of the channels offered by 

the provider with the lowest price in the market with a BSP and the channels offered by the sole wirebased provider in the comparison market. 

Case study 

market pair

Expanded basic cable television High-Speed Internet 

service: Percentage 

monthly rate is lower in 

BSP market

One local telephone 

line: Percentage 

monthly rate is lower in 

BSP market

Percentage monthly rate 

is lower in BSP market

Number of additional 

channels in BSP market

Market pair 1 31% No difference 29% 7%

Market pair 2 32% No difference 20% 33%

Market pair 3 41% 3 38% No difference

Market pair 4 17% 7 2% 11%

Market pair 5 15% 5 No difference 4%

Market pair 6 -3% 1 No difference 28%
Page 36 GAO-04-241 Telecom Competition

Appendix III

Broadband Service Provider Association 

Member Markets as of February 2003 ApendxiI

Source: BSPA.

Notes: The markets noted in bold were those included in our case study. The table only includes 

markets in which these companies currently offer subscription television, local telephone, and highspeed Internet services.

Several changes in the membership of BSPA have taken place since we selected our case-study 

markets in early 2003.

a

Low is less than 25%; Moderate is from 25% to 75%; and Substantial is more than 75%.

Broadband service 

provider Markets under franchise

Total households 

under franchise

Percentage of network 

constructeda

Altrio California: Arcadia 19,970 Low

Astound Minnesota: St. Cloud

California: Concord, Contra Costa County, 

and Walnut Creek 119,471 Moderate

Everest Kansas: Lenexa, Overland Park, Shawnee, 

and Merriam

Missouri: Kansas City and Kearney 321,000 Low

Grande Texas: Austin, San Marcos, Corpus Christi, 

Midland, Odessa, San Antonio, and Waco 1,355,419 Low

Hiawatha Minnesota: Winona 12,893 Substantial

Knology Alabama: Huntsville and Montgomery

Florida: Panama City

Georgia: Augusta and Columbus

South Carolina: Charleston

Tennessee: Knoxville 628,392 Substantial

Prairie Wave Iowa: Lakeside and Storm Lake

Minnesota: Luverne, Marshall, Pipestone, 

Slayton, Tracy, and Worthington

South Dakota: Canton, Coleman, 

Flandreau, Madison, North Sioux City, 

Watertown, and Yankton 43,667 Substantial

RCN California: Gardena and San Francisco

Illinois: Chicago

New York: New York

Massachusetts: Boston

Pennsylvania: Philadelphia 4,575,362 Low

Starpower Washington, D.C. 650,000 Low

Utilicom Networks Indiana: Evansville 77,000 Substantial

WideOpenWest Colorado: Lakewood 12,000 Substantial
Page 37 GAO-04-241 Telecom Competition

Appendix IV

GAO Contacts and Staff Acknowledgments ApendxiIV

GAO Contacts Amy Abramowitz (202) 512-2834

Keith Cunningham (202) 512-2834

Staff 

Acknowledgments

In addition to those named above, Julie Chao, Michael Clements, Andy 

Clinton, David Dornisch, Etana Finkler, Bert Japikse, Sally Moino, and 

Carrie Wilks made key contributions to this report.

(545031)
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