GAO

United States General Accounting Office

Report to Congressional Requesters

July 2000 TELECOMMUNICATIONS

The Effect of

Competition From

Satellite Providers on

Cable Rates

GAO/RCED-00-164

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Contents

Letter 3

Appendixes Appendix I: A Brief History of the Subscription Video Market 12

Appendix II: GAO’s Cable Rate Model 17

Appendix III: Further Issues Pertaining to the Data Used in GAO’s

Cable Rate Model 34

Appendix IV: Descriptive Statistics for Variables Included in GAO’s

Cable Rate Model 39

Appendix V: Comments From the Federal Communications

Commission 40

Appendix VI: Comments From the National Cable Television

Association 43

Appendix VII: Comments From the Satellite Broadcasting and

Communications Association 46

Appendix VIII:GAO Contacts and Staff Acknowledgments 50

Tables Table 1: Expected Effects of All Explanatory Variables on Cable

Rates 22

Table 2: Price and Nonprice Competition Relationships in Model 25

Table 3: 3SLS Model Results 28

Table 4: Regression Estimates of Reduced-Form Cable Rates

Equation 31

Table 5: Regression Estimates for Cable Rates, Sample Strata Analysis 33

Table 6: FCC Sample and GAO Data Set 36

Table 7: Table of Descriptive Statistics 39

Abbreviations

DBS direct broadcast satellite

FCC Federal Communications Commission

MABLE Master Area Block Level Equivalency

MSO multiple system operator

NCTA National Cable Television Association

SBCA Satellite Broadcasting and Communications Association

SHVA Satellite Home Viewer Act

3SLS Three-Stage Least Squares

2SLS Two-Stage Least Squares
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United States General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-284341 Letr

July 18, 2000

The Honorable Patrick Leahy

Ranking Minority Member

Committee on the Judiciary

United States Senate

The Honorable Mike DeWine

Chairman

The Honorable Herb Kohl

Ranking Minority Member

Subcommittee on Antitrust, Business Rights,

and Competition

Committee on the Judiciary

United States Senate

The Honorable Russell Feingold

United States Senate

For many years, cable television companies faced little competition in the

market for subscription video service. In 1994, however, a new generation

of satellite service known as direct broadcast satellite (DBS) was

introduced. This service enables subscribers to use small satellite

reception dishes to receive television programming. DBS has become the

most important competitor to the cable industry, but until recently, DBS

firms’ ability to compete against cable was limited because they could not

generally provide local broadcast networks (such as ABC and NBC) in their

programming packages in most areas of the United States. Changes to the

relevant law went into effect in late 1999, and DBS operators are now

permitted and have begun to offer local broadcast signals in many markets

throughout the United States. (App. I provides a brief history of the

subscription video market.)

Because of your interest in the degree of competitiveness between cable

and DBS providers, you asked us to provide information on (1) the extent

to which the level of subscribership (or “penetration”) of DBS has

influenced cable rates and (2) other key factors that may influence the level

of cable rates. To respond to this request, we developed an econometric

model that examines whether, in 1998 (the most recent year for which

cable rate data from the Federal Communications Commission (FCC) were
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available), the penetration of DBS subscribership and a variety of other

factors influenced the level of cable rates. This model indicates the

influence of each factor on cable rates, holding the effects of each of the

other factors constant. We discussed our model development with FCC and

two academic experts on telecommunications. A detailed description of

the model is provided in appendix II. Some limitations of this model are

discussed at the end of this letter and in appendix III.

Results in Brief We did not find that in calendar year 1998—a time when DBS firms did not

generally transmit local broadcast signals as part of the DBS package—

greater DBS penetration was correlated with lower cable rates. In fact, our

model results indicate that greater DBS penetration was correlated with

somewhat higher cable rates. These results suggest that, even though DBS

increased the number of substitutes available in the subscription video

market, DBS did not exert significant pricing pressure on cable companies

to reduce rates at that time. However, we did find that the penetration of

DBS was correlated with nonprice competition—in particular, where DBS

penetration was high, cable systems tended to provide more channels to

subscribers. The greater number of channels may contribute to the higher

prices in these areas. DBS also appears to have been more competitive with

cable in nonmetropolitan areas. We found DBS penetration to be much

higher—holding other factors constant—in nonmetropolitan locations.

Because DBS firms are currently making local broadcast signals available

in several cities, it is likely that DBS will become a more important

competitor to cable in the coming years.

Our model indicated that several other factors influenced cable rates in

1998. We found—as have FCC and others—that a greater number of

channels offered by a cable system led to higher cable rates, suggesting

that consumers were willing to pay more for a greater number of channels

and that providing additional channels is costly for cable companies. We

also found that the presence of a nonsatellite competitor had an important

effect on cable rates. In particular, we found, as have other studies, that

when a second cable system or other ground-based competitor (such as a

“wireless cable” provider) is operating in part or all of a franchise area,

cable rates were lower. Finally, we found that when a cable franchise was

owned by one of the larger national cable systems, cable rates tended to be

slightly higher.
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Background Cable television is currently the dominant means of television program

delivery to U.S. households. According to FCC, as of June 1999, almost 97

percent of television households in the United States had access to a cable

television system, and approximately 67 percent of television households

subscribed to a cable service. Local cable systems are often owned by large

media companies and usually face little or no competition as a local

provider of subscription video service.

To date, the most significant competitor to cable is the home satellite

industry, particularly DBS, which was first launched in 1994. The monthly

subscription charges for DBS are generally comparable with cable,

although DBS subscribers typically need to purchase the equipment

required to receive the satellite signals. Today there are over 10 million

DBS subscribers in the United States, accounting for about 12.5 percent of

households subscribing to a video service.

Until recently, there was a significant difference between the programming

packages of cable and DBS in terms of local broadcast stations. DBS

providers were governed by the 1988 Satellite Home Viewer Act, as

amended, which was passed at a time when satellite providers did not

possess the technology to transmit local broadcast signals to many markets

throughout the country. This act gave DBS providers a copyright license to

retransmit broadcast network programming only to certain customers—

those who could not adequately receive broadcast signals over the air via

traditional rooftop antennas.

During the late 1990s, pressure grew on the Congress to provide DBS firms

with a broader license to transmit local broadcast signals. First, advances

in technology during the 1990s—for example, the ability of DBS providers

to use “spot beam” technology to target the signal from a local broadcast

station only to satellite subscribers within that station’s viewing area—

provided DBS firms with the ability to include local broadcasts for many

markets. Second, there was a growing realization that the legal restrictions

on broadcast carriage had become an important disadvantage for satellite

companies. For example, according to FCC, consumers have historically

reported that their inability to receive local signals from DBS operators

may negatively affect their decision on whether to subscribe to DBS.

Therefore, in late 1999, to facilitate DBS companies’ provision of local

broadcast signals, the Congress enacted the Satellite Home Viewer

Improvement Act, which provided a broader copyright license to these

carriers to provide broadcast signals. Many Members of Congress noted
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that, in doing so, they hoped to make DBS a closer substitute for cable

services. As a result of that law, DBS subscribers in more than 20 major

cities now can watch their local broadcast stations’ programming via

satellite.

No Evidence Was

Found That 1998 DBS

Subscribership Was

Associated With Lower

Cable Rates

We did not find that greater DBS penetration was correlated with lower

cable rates in 1998. In fact, our model found that greater DBS penetration

was statistically associated with somewhat higher cable rates. While this

finding may indicate that, in 1998, the penetration of DBS did not exert

significant pricing pressure on cable companies, we also found that the

presence of DBS was correlated with nonprice competition. In particular,

our findings suggest that cable companies responded to DBS entry by

increasing the number of channels they provide to consumers. Another

possible explanation for the estimated relationship between DBS

penetration and cable rates is that it is the level of cable rates that

influences DBS penetration. In other words, our results could indicate that

in places with higher cable rates, subscribers were more likely to migrate

to DBS. In fact, we found some evidence that this could be the case. A

further discussion of this issue is contained in appendix II.

Our model results indicate that in cable franchises outside of metropolitan

statistical areas, DBS penetration tended to be much higher—holding other

factors that affect the penetration of DBS constant. Thus, in 1998, rural

subscribers may have viewed DBS as a closer substitute for cable than

urban and suburban subscribers did. This could be due to several factors.

For example, urban dwellers can have more problems installing a satellite

dish that is able to “see” the appropriate satellite because of foliage or tall

buildings that block the necessary line of sight between the reception dish

and the satellite. Also, it was only in 1996 that FCC imposed rules requiring

building owners and homeowners’ associations to allow homeowners to

install satellite reception dishes and only in 1999 that many of these

provisions were effectively extended to renters. It is also possible that, at

that time, people in rural areas were more familiar with satellite services

than those in urban areas because satellite services had been marketed in

rural areas for many years. And finally, the law in 1998 provided DBS

companies with a copyright license to provide broadcast signals to

households in “unserved” areas but not elsewhere. Thus, it may be that in

some rural areas that came under the “unserved” definition, DBS actually

operated as a very close substitute for cable because some of these

subscribers were already receiving broadcast signals over the DBS system.
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Our finding that DBS did not impose significant pricing pressure on cable

rates may be short-lived. In 1998, consumers were not very familiar with

DBS, and the programming packages the companies offered did not

generally include local broadcast signals. Today, on the other hand, the two

DBS companies are making local broadcasts available in many cities.

Therefore, it seems likely that DBS will become a more important

competitor to cable systems in the near future.

Several Demand, Cost,

and Market Structure

Factors Were

Associated With Cable

Rates

We found that several key factors influence the level of cable rates. In

particular, our model results indicate that the following factors related to

consumer demand for cable, the cost of providing cable service, and the

competitiveness of the market were correlated with cable rates:

• The number of channels provided by a cable system had the greatest

influence on rates of all the variables included in the model. This

finding—that a greater number of channels was correlated with

considerably higher cable rates—is likely related to both demand and

cost. Consumers are willing to pay more for a higher-quality cable

channel lineup, and the cost of providing more channels is higher for

cable companies.

• The presence of a nonsatellite competitor—such as another cable

company or a wireless cable operator—was associated with lower cable

rates. In particular, we found that when such a competitor was

operating in part or all of a franchise area, cable rates were, on average,

10 percent lower than in franchise areas with no ground-based

competitors.

• Rates were slightly higher in cable franchise areas that had had a cable

system in place for a long period of time. This finding has been

attributed in other studies to demand for the service growing ever

greater as consumers become more aware and knowledgeable of a wellestablished system.

• Cable rates were slightly higher if the owner of a system in a particular

franchise area was one of the larger national cable companies. There

has been no consensus on how this result should be interpreted.

• Finally, we did not find average wages in a franchise area to be related to

higher cable rates.

With the exception of our findings for the wage factor, these basic model

results are generally consistent with the findings of other studies. (See app.

II for a full discussion of our results.) The stability of these model results

over time may also be affected, however, by changes in the marketplace.
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Many of the factors affecting cable rates relate to demand, cost, and market

structure characteristics that are likely to be influenced by the dramatically

changing market for telecommunications, of which cable is a part. As

varied telecommunications companies move to provide several services

over a given infrastructure—a phenomenon that has been called

“convergence”—the cost of providing each service may come to be

influenced by the overall costs of providing the bundle of services.

Additionally, demand factors are likely to be influenced by convergence as

well since consumers’ choices for telecommunications services are

increasingly affected by their decisions about the entire bundle of

telecommunications services that they purchase. And finally, the

convergence of technologies is also influencing the competitive nature of

the market as companies that traditionally provided only one service over a

given infrastructure enter new markets by providing an array of

telecommunications services over that same infrastructure. Therefore, the

manner in which cable rates are set is likely to change as the

telecommunications marketplace develops.

Agency Comments We provided a draft of this report to FCC for review and comment. FCC

recommended that we clarify our finding that DBS did not exert significant

pressure on cable companies to reduce rates during 1998, suggesting that

our results could also be interpreted as showing that when cable rates are

high, more consumers switch to DBS. We believe that our report

thoroughly discusses the two possible relationships between cable rates

and DBS penetration and that the model we developed allows us to

appropriately interpret the results as we have. The discussion appears

primarily in appendix II. FCC also believed that we should better highlight

that DBS providers are an important multichannel alternative to cable.

Once again, we believe our report adequately makes this point. FCC’s

comments and our response are contained in appendix V. In addition to the

written comments, FCC staff also provided technical comments and

corrections related to our model design and other issues, which we

incorporated as appropriate.

In addition, we provided a draft of this report to the National Cable

Television Association and the Satellite Broadcasting and Communications

Association for comment. Generally, both associations believed that the

time period studied was too early to detect the full effect of DBS on cable

rates. We agree with this concern, particularly in light of the dramatically

changing telecommunications marketplace. We suggest that a full

understanding of the response to the entry of DBS into the video market
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will require continued analysis in the coming years. Our view is that this

study provides a helpful baseline for such further studies. The comments of

the National Cable Television Association are presented in appendix VI.

The comments of the Satellite Broadcasting and Communications

Association are presented in appendix VII.

Scope and

Methodology

To address the objectives of this report, we developed an econometric

model to ascertain whether the penetration of DBS and several other

factors were associated with the level of cable rates in various franchise

areas across the country in 1998. In particular, the model sought to

determine whether and how two categories of key factors affected cable

rates: (1) factors that relate to subscribers’ demand for cable service and

cable companies’ costs of providing service and (2) factors that relate to

the degree of competition in the market. The penetration of DBS is one of

the competition variables included in the model. We discussed our model

development with FCC and two academic experts on telecommunications.

There are some important limitations to the interpretation of our model

results. Generally, econometric models provide measures of statistical

correlations between explanatory factors and the factor to be explained

and do not imply causation between these factors. Some specific

limitations of our model relate to the characteristics of the sample of

franchise areas chosen by FCC. In particular, our statistical analysis was

performed on a sample of 698 cable franchise areas that were included in a

survey conducted by FCC. This survey asked questions about cable

services, rates, and system characteristics. The survey included all

“competitive”—as defined under statute—franchise areas, while the

remaining “noncompetitive” franchises were selected within several size

classifications (or “strata”). We found that the average number of

subscribers within some strata in our sample is substantially greater than

the average number of subscribers among all franchises within those

strata. Accordingly, the results of our analysis are most applicable in

describing the influences on cable rate-setting in larger franchise areas. At

the same time, however, we conducted additional analyses on the available

data that suggested that the nonrepresentativeness of FCC’s franchise data

set did not impose a serious problem for our model estimation and

interpretation.

A complete discussion of the model development, data sources, estimation

design, model results, and model limitations is contained in appendixes II
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and III. A table of descriptive statistics for all variables included in the

model appears in appendix IV.

We conducted our review from September 1999 through July 2000 in

accordance with generally accepted government auditing standards.

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

we plan no further distribution of this report until 14 days after the date of

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

committees; the Honorable William E. Kennard, Chairman, Federal

Communications Commission; and other interested parties. We will also

make copies available to others upon request.

If you or your staffs have any questions about this report, please contact

me at (202) 512-7631. Key contributors to this report are listed in appendix

VIII.

Stanley J. Czerwinski

Associate Director, Housing, Community

Development, and Telecommunications Issues
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Appendix I

A Brief History of the Subscription Video Apendxies

Market ApendxiI

Cable television systems were originally deployed in rural or mountainous

areas where traditional broadcast television reception was poor. As cable

systems expanded their channel offerings, however, the demand for cable

services grew, and cable deployment spread throughout the country.

Satellite television companies also focused first on serving rural areas, but

these services are now marketed to consumers in urban and suburban

areas as well, and the acceptance of satellite television services among

consumers has enabled these providers to become the cable industry’s

most viable competitor. While restrictions on satellite firms’ carriage of

broadcast signals previously limited these firms’ competitive viability, the

recent passage of a law allowing satellite providers to include broadcast

signals as part of their satellite offerings was designed to enhance

competition in the video market.

The Cable Industry

Initially Developed to

Fill Broadcast

Transmission Gaps and

Evolved to Be the

Dominant Means of

Television Delivery

In the early 1950s, the Federal Communications Commission (FCC) helped

advance the deployment of broadcast television by devising a system to

assign broadcast television channels. The resulting local broadcast system

provided licenses for television stations in local areas—rather than in

larger regional areas. Because rural areas with few households provided

less economic opportunity for a local television station, these areas had

fewer stations than did more urbanized areas. As a consequence,

households in rural and mountainous areas were often unable to receive

broadcasts from local television stations. To fill these gaps in the

availability of over-the-air television, cable systems (known at the time as

“community antenna TV”) began to develop.1 These systems employed

large antennas to capture the broadcast signals of nearby television

stations and then retransmitted those signals—for a fee—to homes through

coaxial cable wires owned by the cable companies. Most early cable

systems focused solely on the retransmission of broadcast networks.

1

The Congress has divided the authority to regulate cable systems between federal and state

authorities. Over the years, FCC has adopted a variety of rules regulating cable, while local

communities have explicit power to regulate cable through franchise agreements. These

local franchises give cable systems the right to operate in a specified area and to install

cables beneath streets or along other public rights-of-way. In some cases, municipalities

granted exclusive cable franchises, although the Communications Act now prohibits this.
Appendix I

A Brief History of the Subscription Video

Market

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In the 1970s, cable systems began to expand their programming packages

by adding channels that had been developed specifically for distribution on

cable systems, such as Home Box Office and Cable News Network.2 This

greater array of channels available on cable systems led to a broadening of

demand for cable television, and cable was rapidly deployed throughout

urban and suburban areas across the country. According to FCC, as of June

1999, almost 97 percent of television households in the United States have

access to a cable system, and approximately 67 percent of television

households subscribe to a cable service, making cable the dominant means

of television delivery to U.S. households.

As cable system deployment and subscribership grew, the ownership

structure of the industry changed. Early on, the cable industry was

characterized by privately owned small systems scattered throughout the

country. Cable’s success in the 1980s, however, attracted the interest of

large media companies such as Tele-Communications, Inc.,3 and Time

Warner.4 These companies, and others, purchased cable systems

throughout the country, emerging as large national cable owners known as

multiple system operators (MSO). Several of these MSOs also invested in

the development of cable programming and thereby established ownership

ties between two vertically connected markets: companies producing and

supplying cable programming and companies purchasing that

programming. This greater concentration of cable properties, combined

with ownership ties to cable programming, sparked concerns about the

market power of the cable industry and the need for greater competition in

the delivery of subscription video services.5

2

By the early 1990s, dozens of such cable programming networks had been developed, many

targeting niche audiences.

3

Tele-Communications, Inc., merged with AT&T in 1999 and is now known as AT&T Cable

Services.

4

American Online (AOL) has proposed purchasing Time Warner in an all-stock transaction

valued at $350 billion. The new company would be named AOL Time Warner, Inc.

5

The Congress responded to these concerns, and to numerous consumer complaints about

rising cable rates, by passing the Cable Television Consumer Protection and Competition

Act of 1992. Under this act, FCC rolled back and began to regulate cable television rates and

prohibited exclusive contracts between cable systems and their affiliated program

suppliers. Four years later, the Congress moved toward a more deregulatory approach in the

Telecommunications Act of 1996, which sought to open the subscription video market to

greater competition and ended most cable rate regulation on Mar. 31, 1999 (although rates

for the basic service tier of programming on cable systems, which is not subject to effective

competition, remain regulated).
Appendix I

A Brief History of the Subscription Video

Market

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The Satellite Industry

First Focused on Rural

Areas but Has Now

Become an Important

Competitor to Cable

To date, the most significant competitor to cable is the satellite television

industry. Satellite subscription service emerged in the early 1980s as an

alternative to cable service in rural areas where over-the-air broadcast and

cable systems were inaccessible, and it has become popular in many areas

in recent years. The most successful of these satellite services has been

direct broadcast satellite (DBS). First introduced in 1994, DBS quickly

became one of the fastest-growing product lines in the history of consumer

electronics. DBS operators have always marketed the technical advantages

of DBS’ fully digital systems, comparing them to cable’s continued reliance

on an older technology. Because DBS is fully digital, every video signal can

be “compressed” to make more efficient use of satellite capacity and

provide hundreds of channels to subscribers. This technical advantage,

however, will be short-lived as cable operators move to upgrade their

systems to include digital technology.

Monthly service charges for DBS are roughly similar to monthly cable

rates, although DBS subscribers may have higher up-front costs because

they generally must buy satellite reception equipment.6 DirecTV and

EchoStar, the two providers of DBS in the United States, currently have

over 10 million subscribers, accounting for about 12.5 percent of the

households subscribing to a multichannel video service.7 According to

FCC, in 1998 almost two out of every three new subscribers to a

multichannel video service chose DBS, and from 1998 to 1999, DBS

subscribership grew 39 percent. Despite the growing popularity of DBS,

FCC reported that 82 percent of all multichannel video service subscribers

still receive their video programming from a locally franchised cable

operator.

6

However, prices for DBS equipment have fallen since 1994.

7

Dominion Video Satellite, Inc., also currently provides DBS service. However, Dominion

offers religious-oriented programming on a smaller number of channels than DirecTV or

EchoStar. Also, a fourth satellite service, called Primestar, was acquired by DirecTV in May

1999. Primestar was a medium-powered service that required a larger reception dish and

had lower channel capacity; its subscribers are being moved to DirecTV’s high-powered

DBS service.
Appendix I

A Brief History of the Subscription Video

Market

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The Carriage of Local

Broadcast Signals by

Cable and by Direct

Broadcast Satellite Is

Covered Under

Different Laws

Until recently, a fundamental difference between the service offerings of

DBS companies and those of the cable industry was due to technological

and legal limitations on DBS operators’ transmission of local broadcast

station signals. On the cable side, a 1976 copyright law permits

retransmission of local television signals by local cable franchises through

permanent copyright licenses. Under this copyright license scheme (17

U.S.C. 111), commonly referred to as a compulsory cable copyright license,

copyright owners are required to license their works to cable systems at

government-set prices, terms, and conditions. Generally, cable operators

pay minimal or no copyright fees to carry local broadcast signals.

A different compulsory copyright license scheme, however, applies to

satellite operators. DBS providers were governed by the 1988 Satellite

Home Viewer Act, as amended (17 U.S.C. 119), which was originally passed

at a time when satellite providers did not possess the technology to

transmit local broadcast signals to many markets throughout the country.8

Until recently, the act granted only a limited exception to the exclusive

programming copyrights of television networks and their affiliates. This

limited exception gave satellite companies license to deliver broadcast

network programming only to those customers living in “unserved

households.” 9 A household so defined generally would not adequately

receive broadcast signals.10 DBS firms had no license to provide broadcast

signals to households in urban or suburban areas that generally could

receive adequate over-the-air local broadcast signals.

Recently, the technical ability of DBS operators to provide local broadcast

signals improved because of more advanced digital compression

technologies as well as “spot beam” technology, which allows DBS to target

the signal from a local broadcast station only to the satellite subscribers

8

Several changes to the 1988 law were included in the 1994 amendments.

9

The broadcast programming that satellite providers generally offered these subscribers

consisted of a package of “distant network signals,” or the signals of stations from faraway

markets such as Los Angeles or New York.

10Specifically, an unserved household was defined in the Satellite Home Viewer Act as one

that is not capable of receiving an acceptable over-the-air television signal using a

conventional rooftop antenna and that has not received a network signal from the local

cable operator within the previous 90 days. An acceptable television signal under the statute

is “a signal of Grade B intensity,” which is a measure of a signal’s strength defined by FCC.

The 90-day waiting period before switching from cable to satellite network service was

recently deleted by legislation.
Appendix I

A Brief History of the Subscription Video

Market

Page 16 GAO/RCED-00-164 DBS Effect on Cable Rates

within that station’s viewing area. Thus, the legal restrictions on broadcast

carriage had become an important disadvantage for satellite companies:

While cable subscribers were able to receive their local broadcast stations

as part of their programming package, most DBS subscribers could not.

According to FCC, consumers have historically reported that their inability

to receive local broadcast signals from DBS operators made subscribing to

DBS less attractive.

In late 1999, the Congress enacted the Satellite Home Viewer Improvement

Act (P.L. 106-113) to, among other things, allow DBS companies to provide

local broadcast signals. Both EchoStar and DirecTV began rolling out local

network television service to more than 20 major cities in November 1999.

However, according to the satellite industry, DBS is unlikely to provide

local stations to all markets because DBS satellites have limited capacity.11

11According to executives of DirecTV and EchoStar, the provision of local broadcast stations

to more cities by satellite will be limited because of rules—known as “must-carry rules”—

included in the act that require DBS firms to include all broadcast signals in markets in

which they choose to provide any broadcast signals. The must-carry rules take effect on Jan.

1, 2002.
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Appendix II

GAO’s Cable Rate Model ApendxiI

The purpose of this appendix is to describe our model of cable rate-setting.

In particular, we discuss (1) the conceptual development of the model, (2)

the data used for the model, and (3) the estimation results of the model. See

appendix III for a discussion of the nature of the franchise sample used in

the model and data-processing tasks related to matching information

across varied geographic contexts. See appendix IV for a table with

descriptive statistics on variables included in the model.

The Econometric

Model

In response to a congressional request for a study examining the effects of

DBS service on cable rates, we developed an econometric model to

examine the influence of satellite penetration, among other factors, on the

cable rates charged in a large sample of cable franchise areas in 1998. We

surveyed the existing empirical literature on cable rates to develop a model

that would appropriately analyze these issues. Relying on that literature

and our assessment of the contemporary subscription video marketplace,

we developed a model that included a variety of explanatory factors—or

variables—that have been included in previous models but that also

extends those analyses by adding new variables to account for the recent

emergence of DBS as an important competitor to cable and for recent

system upgrades among many cable firms.

Examination of the

Competitive Effects in the

Subscription Video Market

In 1998, the national market share of cable systems—as measured by

subscribership—in what we call the subscription video market was about

85 percent, and the share of the DBS carriers was about 12 percent. In the

context of this market, cable operators can be thought of as the “dominant”

distributors of video programming, while the other providers can be

thought of as “fringe” suppliers. Therefore, to examine the competitive

influence of DBS providers on cable rates, we employed a model based on

the subscription video market, rather than on the narrower market for

cable TV.1

1

This is consistent with the FCC approach to analyzing cable rates. See FCC’s Fifth Annual

Report, “Annual Assessment of the Status of Competition in Markets for the Delivery of

Video Programming,” CS Dkt. No. 98-102, FCC 98-335 (released Dec. 23, 1998).
Appendix II

GAO’s Cable Rate Model

Page 18 GAO/RCED-00-164 DBS Effect on Cable Rates

Our model is based on the generalized form of an economic model known

as the “dominant firm-competitive fringe model.”2 Cable providers and

satellite providers can be regarded as “differentiated,” not so much because

they use different technologies but because the services they provide are

perceived to be different by subscribers and because these varied providers

face different laws and regulations that influence their cost structures as

well as the type of product they provide. For example, Consumer Reports

reported that satellite subscribers were generally more satisfied with their

services than were cable subscribers.3 Also, cable companies must pay

local franchise fees and are required to provide capacity for public,

educational, and government channels. Satellite providers, on the other

hand, had only a limited compulsory copyright license to provide broadcast

channels during the period our model examined. In sum, cable and satellite

providers are differentiated in consumers’ perception, legal context, and

their product offerings.

2

Economists have traditionally used the dominant firm-competitive fringe model to analyze

markets where there is a dominant firm and a competitive fringe of small firms. See, for

example, H. Yamawaki, “Dominant Firm Pricing and Fringe Expansion: The Case of the US

Iron and Steel Industry, 1907-1930,” Review of Economics and Statistics (Aug. 1985), pp. 429-

37. Moreover, the dominant firm-competitive fringe model provides an excellent theoretical

link between economists’ measure of market power and quantifiable variables such as

market share and price elasticity of demand. This model is closely aligned with what has

been dubbed the New Empirical Industrial Organization. See p. 36 of L. Blank, D. L.

Kaserman, and J. W. Mayo, “Dominant Firm Pricing With Competitive Entry and Regulation:

The Case of IntraLATA Toll,” Journal of Regulatory Economics, 14 (1998), pp. 35-53. The

authors used a generalized dominant firm-competitive fringe model to derive a fully

reduced-form price equation for dominant carriers in the local exchange telephone toll

market subject to regulation.

3

Dec. 1999, p. 25.
Appendix II

GAO’s Cable Rate Model

Page 19 GAO/RCED-00-164 DBS Effect on Cable Rates

Under a generalized dominant firm-competitive fringe model, cable rates

will depend broadly on the demand and cost conditions affecting both the

cable and noncable providers of subscription video services. A desirable

attribute of this model framework was that we could incorporate the

competitive influence of noncable providers—such as DBS firms—on cable

rates. DBS providers represent the single largest competitor to cable

operators, and industry reports indicate that in 1998, almost two thirds of

new video subscribers were choosing satellite over cable. To measure the

competitive influence of the noncable providers (the competitive fringe),

we use the DBS share of video subscribers in each franchise area.4 Because

provisions of the 1988 Satellite Home Viewer Act (SHVA) constrained the

provision of broadcast carriage by DBS providers in 1998, DBS providers

may have been unable to fully compete with cable companies. The

dominant firm-competitive fringe framework makes it possible for us to

also incorporate this influence on cable rates.

The Specification of Cable

Rate Model

We believe our measure of DBS penetration provides an appropriate

measure to investigate the competitive influence of DBS on cable rates.

However, the issue of estimating the influence of DBS penetration on cable

rates is complicated by the possibility that the level of DBS penetration in

an area is itself determined, in part, by the level of cable rates in that area.

One method of statistical estimation in this situation is to estimate a system

of structural equations in which certain variables that may be

simultaneously determined are estimated jointly. In previous studies that

defined the market more narrowly to be cable television, equations for

cable rates, the number of cable subscribers, and the number of cable

channels have been estimated jointly.5 To incorporate the influence of DBS

on cable rates in the broader subscription video market, we also include an

equation for DBS penetration. We therefore estimated the effect of DBS

4

Blank, Kaserman, and Mayo measure the competitive presence of the fringe as the number

of fringe firms. However, in the subscription video context, there are two DBS providers

operating in every local market. Therefore, we cannot use the number of firms for this

purpose because the number of firms does not vary across franchise areas. However,

because there is variation across franchise areas in the degree of DBS penetration, we use

the DBS share variable to measure the degree of competition cable operators face from

noncable providers.

5

See, for example, G. S. Ford and J. D. Jackson, “Horizontal Concentration and Vertical

Integration in Cable Television Industry,” Review of Industrial Organization, 12(4) (1997),

pp. 501-18; and R. N. Rubinovitz, “Market Power and Price Increases for Basic Service Since

Deregulation,” RAND Journal of Economics, 24(1) (1993), pp. 1-18.
Appendix II

GAO’s Cable Rate Model

Page 20 GAO/RCED-00-164 DBS Effect on Cable Rates

penetration on cable rates within a four-equation structural model in which

cable rates, the number of cable subscribers, the number of cable channels,

and the DBS share of the subscription television market (DBS penetration)

are jointly determined.

One implication of this estimation technique is that the estimated effects

that we report for the effect of DBS penetration on cable rates must be

interpreted as direct effects on price. At the same time there are indirect

effects of DBS on price wherein the effect on price works through its effect

on other endogenous variables. For instance, the level of DBS penetration

may influence a cable operator’s decision about the number of channels to

include in programming packages, which can in turn affect its cable rate.

We later present a table with results from a reduced-form cable rate

equation to show how the exogenous variables not included in the price

equation affect cable rates.

Other findings of our model that we emphasize relate to the presence of

nonprice competition. In particular, some key findings suggest that in

response to DBS, cable companies increased the quality of their services—

in particular, the number of channels that they offered consumers. Such

nonprice competitive responses have been noted by many observers as a

key aspect of the contemporary subscription video market, in addition to

price competition.

We estimated the following four-equation structural model of the

subscription television market:
Appendix II

GAO’s Cable Rate Model

Page 21 GAO/RCED-00-164 DBS Effect on Cable Rates

• Cable rates are hypothesized to be related to (1) the number of cable

channels, (2) the number of cable subscribers, (3) the DBS share of the

subscription television market, (4) average wages, (5) regulation, (6)

horizontal concentration, (7) vertical relationships, and (8) the presence

of a nonsatellite competitor. The cable rate variable used in the model is

defined as the total monthly rate charged by a cable franchise to the

“typical subscriber,” including fees paid for the most commonly

purchased programming tier and rented equipment (a converter and

remote).6 The explanatory variables in the cable rate relationship are

essentially cost and market structure variables.

• Number of cable subscribers is hypothesized to be related to (1)

cable rates (per channel), (2) DBS share, (3) the number of broadcast

channels, (4) urbanization, (5) the age of the cable system, (6) homes

passed by the cable system, (7) median income, and (8) the presence of

a nonsatellite competitor. The number of cable subscribers is defined as

the number of subscribers in a franchise area that subscribe to the most

commonly purchased programming tier. This represents the demand

equation for cable services, which depends on rates and other demandrelated factors.

• Number of cable channels is hypothesized to be related to (1) the

number of cable subscribers, (2) DBS share, (3) median income, (4)

system megahertz, (5) the extent of multiple dwelling units, (6) vertical

relationships, and (7) the presence of a nonsatellite competitor. The

number of cable channels is defined as the number of channels included

in the most commonly purchased programming tier. The number of

cable channels can be thought of as a measure of cable programming

quality and is explained by a number of factors that influence the

willingness and ability of cable operators to provide high-quality service

and consumers’ preference for quality.

6

The price paid for cable services should reflect their value to the customer. A higher cable

rate may be due to the higher quality or value of the services provided. One of the ways to

measure the value of cable services, albeit, an imperfect one, is to use the cable rate per

channel; see, for example, “Report on Cable Industry Prices,” MM Dkt. No. 92-266, FCC 99-

091 (May 7, 1999), p. 7. Our key results were unchanged when we used the cable rate per

channel as the dependent variable. In our model, we used the number of channels to capture

the idea that higher cable rates may be due to higher quality or value resulting from the

availability of more channels.
Appendix II

GAO’s Cable Rate Model

Page 22 GAO/RCED-00-164 DBS Effect on Cable Rates

• DBS share of subscription television market is hypothesized to be

related to (1) cable rates, (2) the age of cable system, (3) median

income, (4) system megahertz, (5) dummy variable for areas outside

metropolitan areas, (6) regulation, and (7) the presence of a nonsatellite

competitor. The DBS variable is defined as the number of DBS

subscribers in a franchise area expressed as a share or proportion of the

total subscription video market in the area (that is, DBS subscribers plus

cable subscribers). As hypothesized, the DBS share is expected to

depend on the rates set by the “dominant” cable providers as well as on

the demand, cost, and regulatory conditions in the subscription video

market that directly affect DBS.

Several of the explanatory variables in our model have been used in

previous studies of cable rates.7 The explanatory variables included in

those studies fall into two general categories: demand and cost factors, and

market structure and regulatory conditions. Table 1 presents the expected

effects of all the explanatory variables in the structural model on cable

rates and notes whether a variable has been used previously in cable rate

studies. Table 2 presents a description of some variables in the model that

provide evidence on price and nonprice competition occurring in the

market.

Table 1: Expected Effects of All Explanatory Variables on Cable Rates

7

See, for example, R. W. Crandall and H. Furchtgott-Roth, Cable TV: Regulation or

Competition? (Washington, D.C.: Brookings Institution, 1996); W. M. Emmons III and R. A.

Prager, “The Effects of Market Structure and Ownership on Prices and Service Offerings in

the U.S. Cable Television Industry,” RAND Journal of Economics, 28(4) (Winter 1997), pp.

732-750; Ford and Jackson (1997); J. W. Mayo and Y. Otsuka, “Demand, Pricing, and

Regulation: Evidence from the Cable TV Industry,” RAND Journal of Economics, 22(3)

(1991), pp. 396-410; and Rubinovitz (1993).

Explanatory variable Expected effect on cable rates Included in previous studies

Number of channels Consumers will be willing to pay more for a greater

number of channels. Also, costs are greater for the

cable operator to provide more channels.

Yes

Number of subscribers Costs per subscriber of providing cable services can

increase or decrease with the number of subscribers,

depending on scale economies.

Yes

Average wages Areas with higher average wages have higher costs of

operation, which will make cable rates higher.

Yes
Appendix II

GAO’s Cable Rate Model

Page 23 GAO/RCED-00-164 DBS Effect on Cable Rates

Regulationa Regulation may be associated with lower cable rates

when compared with rates that would prevail under

profit-maximizing pricing by monopoly cable systems.

However, cable rates could be higher under regulation if

the unregulated cable systems are more competitive.

Yes

Horizontal concentration This market structure variable denotes whether a

franchise area is operated by a large national multiple

system operator (MSO). If large MSOs have some cost

advantages, rates could be lower; if MSO ownership

imposes competitive disadvantages to potential

entrants, cable rates could be higher.

Yes

Vertical relationship This market structure variable captures the effects of

vertical ownership ties between cable companies and

cable programming networks. The expected effect of

the variable is not clear because a vertical relationship

could lower cable system costs if programming costs

are reduced or efficiencies are gained, but vertical

relationships could signify market power that would

tend to lead to higher cable rates.

Yes

Presence of nonsatellite competitor This competitive variable signifies whether a cable

company faces direct competition from another cable

operator (including, for example, a local exchange

telephone carrier offering cable services) or a wireless

cable company in part or all of its franchise area. Few

cable companies face such competition, but rates

should be lower when they do.

Yes

DBS share of the subscription television

market

We expect the presence of DBS to restrain cable rates if

cable and satellite were close substitutes in 1998.

However, because of the provisions of the law at that

time, DBS providers could not provide local broadcast

signals to many of their subscribers, so the competitive

pricing pressure on cable rates may not have been

great then.

No

Number of broadcast channels Consumers will pay more for a greater number of

broadcast channels on the cable system.

Yes

Urbanization Consumers will have a lower demand for cable services

in more urban settings that have many alternative forms

of entertainment competing with cable, which will lead

to lower cable rates.

Yes

Age of cable system Subscribers have a higher demand in franchise areas

with older cable systems because they are more likely

to be aware of the availability and quality of the cable

system. Therefore, cable rates will be higher.

Yes

(Continued From Previous Page)

Explanatory variable Expected effect on cable rates Included in previous studies
Appendix II

GAO’s Cable Rate Model

Page 24 GAO/RCED-00-164 DBS Effect on Cable Rates

a

The basic service tier (and equipment) is regulated by municipal franchising authority

(which is a state or local entity empowered by federal, state, or local law to grant a

franchise). FCC’s authority to directly regulate rates for the expanded basic tier expired on

Mar. 31, 1999; see CS Report No. 99-5, NRCB 9005, FCC (released Mar. 29, 1999).

b

It is possible that cable operators upgrade to higher megahertz to meet competition from

nonsatellite or satellite competitors.

Homes passed by cable system A higher number of homes passed means a greater

potential market size and, therefore, higher demand

leading to higher cable rates. Conversely, the costs of

operations could increase with the number of homes

passed since the scale of operations will be larger—

however, the costs per subscriber should decline if

there are scale economies.

Yes

Median income As consumers’ incomes rise, demand for cable services

should increase, which will increase cable rates.

Yes

System megahertzb Higher-megahertz systems may enable the provider to

offer more channels and to bundle several services

together—video, voice, and high-speed Internet access.

This could increase demand for cable, leading to higher

rates; or cable rates may be discounted to attract

consumers to the other (new) services. Conversely,

lower cost of operations could arise with new

technology, which will lead to lower cable rates.

No

Extent of multiple dwelling units Where there are more multiple dwelling units, the

market has been found to be more naturally competitive

because cable systems may face greater actual or

potential competition, which will lead to lower cable

rates.

Yes

Nonmetropolitan areas We expect the competitive impact of DBS on cable

rates to be stronger in franchise areas that lie outside of

metropolitan statistical areas.

Yes

(Continued From Previous Page)

Explanatory variable Expected effect on cable rates Included in previous studies
Appendix II

GAO’s Cable Rate Model

Page 25 GAO/RCED-00-164 DBS Effect on Cable Rates

Table 2: Price and Nonprice Competition Relationships in Model

Data Sources We required several data elements to build the data set used to estimate

this model. The following is a list of our primary data sources. (App. III

discusses two data issues in greater detail: (1) FCC’s stratified sample

design for its cable franchise survey and (2) how we matched data across

varied sources when geographic boundaries for data did not match.)

Explanatory variable Equation Expected effect

Cable rate DBS share We expect higher cable

rates to be associated

with higher DBS share

if high cable prices

induce consumers to

migrate to DBS from

cable or if cable and

DBS are close

substitutes.

System megahertz DBS share We expect more

capacity to be

associated with lower

DBS share if cable

providers are able to

offer more channels

and bundled services—

telephony and highspeed Internet

services.

Nonmetropolitan area

status

DBS share We expect

nonmetropolitan status

to be associated with

higher DBS share if

DBS is a closer

substitute for cable in

nonmetropolitan areas,

owing to, for instance,

“line of sight” and

SHVA considerations.

DBS share Number of cable channels We expect higher DBS

shares to be

associated with more

cable channels if cable

providers increased

channels to meet

competition from DBS.
Appendix II

GAO’s Cable Rate Model

Page 26 GAO/RCED-00-164 DBS Effect on Cable Rates

• We obtained data on cable rates and service characteristics from the

1998 survey of cable franchises that FCC conducted as part of its

mandate to report yearly on cable competition. FCC’s survey asked a

sample of franchise areas to provide information about a variety of

items pertaining to cable rates, service offerings, subscribership,

franchise area reach, franchise ownership, and system capacity. We

used the survey to define measures of each franchise area’s cable rates,

number of subscribers, and number of cable channels as described

above. In addition, we used the survey to define variables measuring (1)

the number of broadcast television channels, (2) system age—the

number of years since the cable system went online, (3) system

megahertz—the capacity of the cable system in megahertz, (4) homes

passed by the cable system serving the franchise area and perhaps other

franchises in the same area, (5) regulatory status—a dummy equal to 1 if

in 1998 the basic service tier was regulated by a local franchise authority

or FCC was regulating the cable programming service tier, and (6)

competitive status—a dummy variable equal to 1 if the franchise faced

“nonsatellite” competition from an unaffiliated subscription video

company (or “overbuilder”) or from a local exchange telephone

company.

• FCC also provided satellite subscriber counts as of 1998 for each zip

code in the United States.8 We used this information to calculate the

number of DBS subscribers in a cable franchise area, which, when used

in conjunction with the number of cable subscribers, was used to define

DBS share. The data actually includes other satellite subscribers—such

as C-band users. However, we refer to the variable as DBS throughout

the report.

• We used the most recent data from the Census of Population (1990) to

obtain the following demographic information for each franchise area:

median household income, proportions of urban and rural populations,

proportion of housing units accounted for by structures with more than

five units (multiple dwelling units), and nonmetropolitan statistical

areas.

8

The satellite subscriber counts also include C-band and medium-power satellite

subscribers. The number of these subscribers has been declining in recent years, in part

because of the growth of DBS.
Appendix II

GAO’s Cable Rate Model

Page 27 GAO/RCED-00-164 DBS Effect on Cable Rates

• We used state-level information collected by the Bureau of Labor

Statistics on the average weekly wages for cable television employees.

• To define the dummy variable indicators of vertical integration and large

MSOs, we used information on the corporate affiliations of the franchise

operators provided in FCC’s master file of franchises. To define the

indicator of vertical integration, we then used this information in

conjunction with industrywide information on vertical relationships

between cable operators and suppliers of program content gathered by

FCC in its 1998 annual video report. To define the indicator of large

MSOs, we compared the information on corporate affiliations against a

list maintained by the National Cable Television Association that ranks

the largest MSOs. Cable franchises affiliated with one of the 10 largest

MSOs received a value of 1.

Estimation

Methodology and

Results

We employed Three-Stage Least Squares (3SLS) to estimate our model.9

The majority of the results are consistent with our expectations and with

findings of previous studies. We also performed various diagnostics to test

the stability of our model results. None of these tests implied that the

results we report were highly sensitive to model specification, the nature of

the stratified sample, or to measurement of key variables included in the

model.

9

We preferred the 3SLS to Two-Stage Least Squares (2SLS) because the 3SLS accounts for

the contemporaneous relationships among cable rates, cable subscribers, cable channels,

and DBS penetration by using all available information. Our results for the 3SLS and the

2SLS are generally similar. Also, we assumed that price per channel in the subscriber

equation is exogenous because cable providers simultaneously decide how many channels

to provide and what to charge for a package of channels, rather than deciding how much to

charge for each channel. However, considering that price and channels are endogenous in

the model, we considered the possibility that price per channel might also be appropriately

considered as an endogenous variable. The overall results under this assumption were

substantively the same as our base-case model results.
Appendix II

GAO’s Cable Rate Model

Page 28 GAO/RCED-00-164 DBS Effect on Cable Rates

Estimation Results Table 3 includes the estimation results for each of the four structural

equations. All the variables, except dummy variables,10 are expressed in

natural logarithmic form.11 This means that coefficients can be interpreted

as “elasticities”—the percentage change in the value of the dependent

variable associated with a 1-percent change in the value of an independent,

or explanatory, variable. The coefficients on the dummy variables are

elasticities in decimal form.12 Most of our results are consistent with the

economic reasoning that underlies our model as well as with the results

from several previous studies. We compare our findings concerning various

influences on cable rates with those found in previous empirical studies.

Table 3: 3SLS Model Results

10A dummy variable takes a value of 1 if a certain characteristic is present and a value of 0

otherwise.

11The dummy variables in the model include the following: horizontal concentration of cable

systems, vertical relationship, regulation, overbuilders and local exchange telephone

companies, and metropolitan statistical area. Also, because the natural log of 0 is undefined,

we added 1 to the observed value of any continuous variable that can take the value of 0.

12That is, 0.10 means 10 percent.

Variable

Cable

rates

equation

Cable

subscribers

equation

Cable

channels

equation

DBS

share

equation

Cable rate -3.2222

[0.0001]a

0.1984

[0.7924]

Cable channels 0.1687

[0.0007]a

Cable subscribers 0.0363

[0.0006]a

0.1321

[0.0001]a

DBS share 0.0876

[0.0030]a

-1.2653

[0.0001]a

0.1767

[0.0250]b

Broadcast channels 0.2087

[0.0015]a

Average wages 0.0246

[0.4159]

Regulation 0.0302

[0.0539]c

-0.6991

[0.0001]a

Median income -0.0487

[0.0083]a

0.1133

[0.0088]a

0.2041

[0.1245]
Appendix II

GAO’s Cable Rate Model

Page 29 GAO/RCED-00-164 DBS Effect on Cable Rates

Notes: System-weighted R-square: 0.62.

P-values are in square brackets.

a

Significance at the 1-percent level.

b

Significance at the 5-percent level.

c

Significance at the 10-percent level.

We did not find that greater DBS penetration was associated with lower

cable rates. In fact, as shown in table 3, we found that the direct effect of

DBS penetration on cable rates was positive and significant. This finding

suggests that, in 1998, DBS penetration did not translate into significant

pricing pressure on cable providers. In addition, the results of our primary

specification, shown in table 3, do not suggest that cable prices influenced

the level of DBS market share.13 However, the results of alternative

specifications suggest that such an effect does hold. Thus, we find some

Horizontal concentration 0.0879

[0.0056]a

Vertical relationship -0.0690

[0.0401]b

-0.0542

[0.0299]b

Presence of nonsatellite

competitor

-0.0702

[0.0093]a

-1.5471

[0.0001]a

0.1777

[0.0055]a

-0.8843

[0.0001]a

Nonmetropolitan areas 0.4724

[0.0001]a

Urbanization 0.0354

[0.0116]b

Extent of multiple dwelling units 0.0074

[0.0657]c

Age of cable system 0.2445

[0.0077]a

-0.4596

[0.0001]a

Homes passed by cable system 0.3093

[0.0001]a

System megahertz 0.2200

[0.0001]a

-0.6109

[0.0001]a

Sample size 698 698 698 698

13In particular, we found that cable price was significant in the DBS market share equation

only when the number of cable channels was included as an explanatory variable in the

equation.

(Continued From Previous Page)

Variable

Cable

rates

equation

Cable

subscribers

equation

Cable

channels

equation

DBS

share

equation
Appendix II

GAO’s Cable Rate Model

Page 30 GAO/RCED-00-164 DBS Effect on Cable Rates

evidence that subscribers migrate to DBS in locations with higher cable

rates.

We also found strong evidence of nonprice competition in response to

increased DBS penetration. For instance, in the cable channels equation,

we found that DBS share is positively related to the number of cable

channels. This result is consistent with the view that cable operators

responded to DBS competition by increasing the number of channels they

offered. Correspondingly, in the DBS share equation, we found that cable

system megahertz was negatively related to DBS share. This is consistent

with the notion that where cable operators have invested to upgrade their

systems, DBS represented a smaller share of the subscription video market,

thereby limiting the competitive impact of DBS on cable rates. Also, in the

cable subscribers’ equation, we obtained an estimate of the price elasticity

of demand for basic cable services that was much greater (in absolute

value) than found in previous estimates.14 This is consistent with the view

that the subscription video market now has more substitutes, making the

market generally more competitive.

Several conditions existed in 1998 that suggest rural subscribers may have

viewed DBS as a closer substitute for cable. For example, in urban and

suburban areas, satellite companies have technical problems with

installing a satellite dish that is able to “see” the appropriate satellite

because of foliage or tall buildings that block the necessary line of sight

between the reception dish and the satellite. And finally, because the law in

1988 provided DBS companies with a copyright license to provide

broadcast signals to households in “unserved” areas but not elsewhere, it

may be that in some rural areas that came under the “unserved” definition,

DBS actually operated as a very close substitute for cable because some of

these subscribers were already receiving broadcast signals. We therefore

expected a nonmetropolitan status dummy to be positively related to DBS

share, reflecting more intense competition from DBS. In fact, in the DBS

equation, DBS penetration was estimated to be about 50 percent higher in

14The price elasticity of demand is estimated to be −3.22, which is highly elastic; this means

that a 1-percent decrease in cable rates results in a 3.22-percent increase in the quantity

demanded of cable. In previous studies, Mayo and Otsuka (1991), using 1982 data, found the

price elasticity to be between −0.69 to −1.51; Rubinovitz obtained a value of −1.46 between

1984 and 1990; and Ford and Jackson (1997) estimated the value to be −2.41 in 1994. The

estimates of the price elasticity of basic cable demand have been increasing over time,

which is an indication of the declining market power of cable systems.
Appendix II

GAO’s Cable Rate Model

Page 31 GAO/RCED-00-164 DBS Effect on Cable Rates

nonmetropolitan areas. This suggests that the competitive influence of DBS

was greater in nonmetropolitan areas in 1998.

Finally, we present a reduced-form cable rate equation (see table 4) in

which all exogenous variables in the system are included to show the net

effects on cable rates of the exogenous variables. For example, these

results show that the number of broadcast channels—included in the cable

subscriber equation—is associated with higher cable rates. Also, these

results show that cable systems that have been in place longer tend to have

higher rates. The age of the cable system was included in the subscriber

and the DBS share equations.

Table 4: Regression Estimates of Reduced-Form Cable Rates Equation

Variable Cable rates equation

Cable rate NA

Cable channels NA

Cable subscribers NA

DBS share NA

Broadcast channels 0.0329

[0.0004]a

Average wages 0.0323

[0.3023]

Regulation 0.0268

[0.0456]b

Median income 0.0022

[0.9138]

Horizontal concentration 0.0921

[0.0065]a

Vertical relationship -0.1069

[0.0017]a

Presence of nonsatellite competitor -0.0984

[0.0001]a

Nonmetropolitan areas -0.0930

[0.0001]a

Urbanization -0.0086

[0.0001]a

Extent of multiple dwelling units -0.0004

[0.8259]

Age of cable system 0.0250

[0.0215]b
Appendix II

GAO’s Cable Rate Model

Page 32 GAO/RCED-00-164 DBS Effect on Cable Rates

Notes: R-square: 0.25.

NA means not applicable.

The p-values are based on consistent covariance estimates. See, H. White, “A HeteroscedasticityConsistent Covariance Matrix Estimator and a Direct Test for Heteroscedasticity,” Econometrica (48)

(1980), pp. 817-38.

a

Significance at the 1-percent level.

b

Significance at the 5-percent level.

Diagnostic Tests of

Regression Results

The results obtained from a regression model can be sensitive to the

sample design and how the model is specified. A potential concern involves

the use of stratified sampling. FCC used a complex sampling design (see

app. III for a further discussion of the sample design) to gather information

on cable franchise areas. We investigated whether our results were

sensitive to the stratification of the sample by investigating the stability of

the coefficients across the strata for a key variable (specifically, DBS share)

in the cable rate equation and believe that our results are not influenced by

the sampling design. We report these results in table 5. The estimated DBS

share effects were similar in the competitive and noncompetitive strata.

This is particularly important because the overall model results do not

appear to be driven by the competitive subsample of cable franchises,

which were, by design, overrepresented in the FCC sample in comparison

with their numbers in the universe of franchises. The estimated DBS share

effects were insignificant in all of the size-related strata. This could mean

that DBS shares were related to the stratification scheme—for example,

larger systems tend to be more urban and may have lower average DBS

penetration—in such a way that there was insufficient variation within the

strata to establish a significant relationship between DBS share and cable

rates. This suggests that the overall results were not driven by the results of

a particular size-related stratum.

The effect of DBS was the primary focus of this model. Because we

hypothesized that DBS penetration levels could differ across different

kinds of markets—in particular, metropolitan and nonmetropolitan

markets—we included a dummy measure of nonmetropolitan status in the

Homes passed by cable system 0.0264

[0.0001]a

System megahertz 0.0359

[0.1118]

Sample size 698

(Continued From Previous Page)

Variable Cable rates equation
Appendix II

GAO’s Cable Rate Model

Page 33 GAO/RCED-00-164 DBS Effect on Cable Rates

DBS equation to test this hypothesis. As an alternative, we used a

continuous variable—population density—in the DBS share equation.

Model results using this alternative specification also supported our finding

that DBS penetration was more pronounced in nonmetropolitan areas than

it was in metropolitan areas.

We also investigated the extent to which our model results were sensitive

to the inclusion of those franchise areas with very high DBS penetration.

We did this because our model was based on the assumption that the cable

franchise was the “dominant” provider of subscription video services, but

this assumption may not always hold at the level of the individual

franchise. However, when we excluded observations with DBS market

shares exceeding 30 percent, our overall results were quite similar (based

on a sample of 618 franchises).

Table 5: Regression Estimates for Cable Rates, Sample Strata Analysis

Notes: The values reported are the coefficients; p-values are in square brackets.

a

Significant at the 10-percent level or less.

Variable Full sample Competitive Noncompetitive Large Medium Small

Cable channels 0.1687

[0.0007]a

0.4398

[0.0001]a

0.1680

[0.0036]a

0.1106

[0.0392]a

0.1745

[0.0804]a

0.2774

[0.0016]a

Cable subscribers 0.0363

[0.0006]a

-0.0485

[0.0302]a

0.0401

[0.0001]a

0.0033

[0.5969]

0.0057

[0.7183]

-0.0165

[0.6037]

DBS share 0.0876

[0.0030]a

0.0977

[0.0001]a

0.0670

[0.0825]a

-0.0128

[0.2854]

0.0607

[0.1313]

0.0200

[0.7370]

Average wages 0.0246

[0.4159]

-0.0508

[0.3112]

0.0428

[0.1754]

0.0483

[0.0797]a

-0.0671

[0.2417]

0.1296

[0.2066]

Regulation 0.0302

[0.0539]a

0.1533

[0.0001]a

-0.0135

[0.3759]

-0.0239

[0.0724]a

0.0784

[0.0032]a

0.0314

[0.4985]

Horizontal

concentration

0.0879

[0.0056]a

0.0253

[0.5691]

0.0760

[0.0280]a

0.0992

[0.0152]a

0.0927

[0.0433]a

0.0749

[0.5422]

Vertical relationship -0.0690

[0.0401]a

0.0438

[0.3480]

-0.0788

[0.0292]a

-0.1191

[0.0046]a

-0.0874

[0.0697]a

-0.0230

[0.8126]

Presence of

nonsatellite

competitor

-0.0702

[0.0093]a

NA NA -0.1264

[0.0001]a

-0.0973

[0.0146]a

-0.1448

[0.0612]a

Sample 698 224 474 287 253 158
Page 34 GAO/RCED-00-164 DBS Effect on Cable Rates

Appendix III

Further Issues Pertaining to the Data Used in

GAO’s Cable Rate Model ApendxiI

This appendix provides further information on two issues pertaining to the

data used in the cable rate model. First, we provide details about the FCC

sample of franchise areas and our use of that data. Second, we describe

how we linked information from these franchise areas—which represent a

wide range of community types—to other data that we used. That is, we

describe how we combined various data sources that were reported across

varied geographic coverage areas.

FCC Employed a

Stratified Sampling

Design to Survey

Franchise Areas, but

the Sample Selection of

Noncompetitive Areas

May Not Represent the

Universe of

Noncompetitive Areas

Because there are a very large number of cable franchise areas in the

United States—roughly 30,000—FCC selected a sample of these areas for

the analysis of cable competition it is required under law to conduct

annually.1 FCC used a complex sampling design to select the cable

franchises it surveyed. Because of its focus on competitive issues, FCC sent

a survey to all 286 franchise areas in which the cable system was found to

face “effective competition.”2 For the remaining “noncompetitive”

franchises—which constitute about 99 percent of all franchise areas—FCC

used a stratified sample. Noncompetitive cable franchise areas were

assigned to size groups, or strata, according to the number of subscribers in

the cable system with which each franchise was affiliated. The largest

group contained cable systems with 50,000 or more subscribers, the

medium group contained systems with between 10,000 and 49,999

subscribers, and the smallest group contained systems with fewer than

10,000 subscribers. FCC sampled a higher proportion from the largest

group than it did from the medium group and a larger proportion of the

medium group than of the small group. A key goal of this sampling design

was to ensure that, in comparison to what was likely to have occurred

under a simple random sample, the survey would include many more of the

competitive franchises as well as franchises from the larger systems from

which more consumers receive service.

FCC’s sampling procedure produced a sample of franchise areas that

overrepresented larger franchise areas within some of the size strata. In

particular, we found that most of the larger franchise areas within some of

1

Cable Television Consumer Protection and Competition Act of 1992.

2

There are four tests for effective competition in a cable franchise area under the 1992 Cable

Act: (1) low penetration by cable operators in the franchise area; (2) competition between

two or more unaffiliated subscription video competitors (also called overbuilders); (3)

operation of the cable system by a municipal franchising authority; and (4) competition

from local exchange telephone carriers.
Appendix III

Further Issues Pertaining to the Data Used in

GAO’s Cable Rate Model

Page 35 GAO/RCED-00-164 DBS Effect on Cable Rates

the strata were selected into the sample. As a consequence, the average

number of subscribers for the sample of franchises for two of the strata are

much larger than the average number of subscribers for those strata in the

universe of franchises. While this calls into question the overall

representativeness of the FCC sample, we found that model results, as

reported in table 5, were reasonably consistent—particularly for the DBS

variables—across strata. This suggests that the nonrepresentativeness of

the sample is not a critical problem for our estimated results. The sample of

franchises we used to estimate the model accounts for over 17 million of

the approximately 65 million cable subscribers in 1998, or about 26 percent

of all subscribers.

Of the data we received from FCC, we were not able to use the information

for all of the 783 franchise areas that responded to FCC’s survey. Not all of

them provided answers to all of the questions on the survey, and we could

not successfully merge demographic data from other data sources with

some franchise areas. We also excluded two franchise areas in Hawaii

because DBS service as envisioned in our model was not provided in

Hawaii in 1998. As a consequence, we were able to use observations on 698

cable franchise areas in estimating the model.3 Table 6 provides

information, by strata, on the number and type of cable franchises

nationally, the number surveyed by FCC, and the number we were able to

include in our analysis.

3

We found little evidence that the cable franchise areas that we were not able to include in

the analysis for whatever reason differed systematically from the cable franchise areas that

we were able to include. For example, the average cable rate for the included franchise

areas was $29.71, and the average rate for the excluded franchise areas was $30.20. The

average DBS share for the included franchise areas was 12.2 and was 12.48 for the excluded

franchise areas. Nonmetropolitan franchises made up 19 percent of the included franchise

areas and 31 percent of the excluded franchise areas.
Appendix III

Further Issues Pertaining to the Data Used in

GAO’s Cable Rate Model

Page 36 GAO/RCED-00-164 DBS Effect on Cable Rates

Table 6: FCC Sample and GAO Data Set

Source: FCC and GAO.

Boundaries of

Franchise Areas Do

Not Always Relate

Easily to Other

Geographic Definitions

To match data from franchise areas with other data, the geographic

boundaries of each franchise had to be determined to match them against

other geographic areas, such as counties or towns. We were able to define

the boundaries of many franchise areas using information in the survey and

in other FCC records, but for some franchise areas, there was not enough

information to easily determine their true geographic extent.4 This problem

with insufficient information occurred in several contexts. Where multiple

franchises existed in a jurisdiction, particularly in unincorporated areas of

counties5 and in large cities,6 we acquired additional information on the

franchises’ boundaries or used allocation rules to estimate the geographic

Type of franchise Number of franchises

In

universe

Surveyed by

FCC

Responding

to FCC survey

With

responses to

all survey and

nonsurvey

variables

used in GAO

model

Competitive 286 286 253 224

Noncompetitive 29,595 560 530 474

Large 3,145 289 265 247

Medium 7,046 190 186 163

Small 19,404 81 79 64

Total 29,881 846 783 698

4

Our general approach was to identify the geographic extent of each franchise area by

combining the community name field with an indicator of community type and matching

this name to census place or county subdivision (minor civil division) files.

5

For those franchise areas in which the community type was identified as “county,” we

attempted to first identify whether other franchises in that county were identified with

particular places and, if so, to approximate that area of the county that was not contained in

these other franchise areas. For purposes of assigning demographic information, however,

we used county-level data for these franchises.

6

Many large cities have multiple cable franchise areas. For instance, Los Angeles has 14,

New York City has 9, and Chicago has 5 franchise areas and 7 franchises.
Appendix III

Further Issues Pertaining to the Data Used in

GAO’s Cable Rate Model

Page 37 GAO/RCED-00-164 DBS Effect on Cable Rates

context and retain the franchise areas in the sample.7 However, in some

other contexts, we were unable to retain franchise areas. In particular,

some observations had an associated community type that was listed as a

recognizable census term, such as town or city, but no census place or

county subdivision8 could be matched. Also, some franchise areas were

associated with a community type that was not recognizable in terms of

census geography.9

7

For those jurisdictions for which there were multiple franchises, we attempted to define

more precise geographical boundaries for each franchise area, especially in larger cities.

Specifically, we contacted local government offices responsible for cable franchise

oversight and received maps or other information linking the specific franchise areas to zip

codes, census tracts, local government districts, or some other boundary information. When

local governments did not directly provide zip code or census tract information, we used the

information they did provide in conjunction with zip code overlay maps to assign zip codes

to the franchise areas. We then used census data at either the zip code or census tract level

to calculate the demographic measures associated with each franchise area.

8

Places consist of what are known as census-designated places and places that are

incorporated according to the laws of their respective states. Generally, incorporated places

can be thought of as cities, boroughs, towns, townships, and villages. However, towns and

townships in some states are not considered places in terms of census reporting, even

though they might both serve some local government purpose and have large populations.

Census data for many franchise areas designated as towns in the franchise master file are

found in the county subdivisions file rather than the places file.

9

For instance, FCC has a category called “unincorporated area adjacent to an incorporated

community” that can describe a situation in which a cable system primarily designed to

serve a particular jurisdiction may spill over into an unincorporated part of the county and

serve a small number of homes that are more easily connected to that system than to

another system that serves other portions of the county.
Appendix III

Further Issues Pertaining to the Data Used in

GAO’s Cable Rate Model

Page 38 GAO/RCED-00-164 DBS Effect on Cable Rates

The satellite subscriber information we used to calculate our measure of

DBS penetration was organized by zip code, and because zip codes often

do not share boundaries with other geographies, we had to relate the zip

code data to our set of franchise areas. Because different places (in this

context, cable franchise areas) can share the same zip code, we needed to

identify different franchise areas that might share the same zip code in

order to accurately calculate the degree of satellite penetration in each

franchise area. For most franchise areas—that is, those that correspond to

census places, county subdivisions or entire counties as well as those

franchises in multiple-franchise jurisdictions for which we were able to

identify franchise boundaries—we accomplished this directly by using

software designed to relate varied geographic units to one another.10 In this

way, we were able to identify each zip code that was associated with a

particular place (or county, county subdivision, or census tract) and to find

the share of each zip code’s population that was contained in that area. We

then used these population shares to allocate shares of each zip code’s total

satellite subscribers among franchises.11 For other multiple-franchise

jurisdictions for which we did not have more precise franchise boundaries,

we first determined the total number of satellite subscribers in zip codes

associated with those jurisdictions, and then allocated subscribers to each

franchise area on the basis of the number of franchises in the place.12

10In particular, we used the MABLE/Geocorr correspondence engine

(http://www.census.gov/plue). MABLE is an acronym for Master Area Block Level

Equivalency file. The code was developed by John Blodgett, senior programmer/analyst at

the University of Missouri St. Louis, under contract with CIESIN/SEDAC, and is jointly

owned by John Blodgett and CIESIN.

11As an illustration, assume we have a cable franchise area that corresponds to the town of

Anytown, which is served by zip code 12345. Assume further that zip code 12345 had a

population of 10,000 people in 1990, of which 8,000 were in Anytown proper and 2,000 were

in the surrounding area. In this case, 80 percent of the zip code population is associated with

Anytown, so that our approach would assign 80 percent of the satellite subscribers in zip

code 12345 to the cable franchise in the town of Anytown.

12For each county-type franchise area, we had already approximated that area of the county

that was not contained in these other franchise areas and calculated the number of satellite

subscribers in the zip codes associated with that portion of each county.
Page 39 GAO/RCED-00-164 DBS Effect on Cable Rates

Appendix IV

Descriptive Statistics for Variables Included in

GAO’s Cable Rate Model ApendxiIV

Table 7 provides basic statistical information on all of the variables

included in the cable rates model. We calculated these statistics using all

698 observations in the GAO data set.

Table 7: Table of Descriptive Statistics

a

1989 median household income, expressed in 1998 dollars using Consumer Price Index-All

Urban Consumers.

b

1997 wages, expressed in 1998 dollars using the Consumer Price Index-All Urban

Consumers.

Variable Mean

Standard

deviation

Minimum

value

Maximum

value

Total monthly cable TV rate paid by a

“typical” subscriber, June 1998 (dollars)

29.71 4.54 10.95 42.07

Number of cable subscribers 24,102.3 37,920.6 1 293,774.0

Number of cable channels 50 14 10 103

Number of local broadcast channels 10 4 0 23

Urbanization (percentage) 64.58 45.82 0 100

Age of cable system (years) 20.80 9.52 1 47

Homes passed 117,774 153,928 123 1,031,023

Median household income (dollars)a 40,495 14,262 12,815 131,648

Average weekly wages (dollars)b 682 146 414 1,074

System megahertz 537 163 220 900

Regulation 0.48 0.50 0 1

Horizontal concentration 0.43 0.49 0 1

Vertical relationships 0.40 0.49 0 1

Extent of multiple dwelling units

(percentage)

17.27 14.03 0 95.66

Presence of nonsatellite competitor 0.11 0.32 0 1

DBS share of subscription television

market (percentage)

12.21 18.15 0.02 97.71

Nonmetropolitan area status 0.19 0.43 0 1
Page 40 GAO/RCED-00-164 DBS Effect on Cable Rates

Appendix V

Comments From the Federal Communications

Commission ApendxiV

Note: GAO comments

supplementing those in the

report text appear at the

end of the appendix.

See comment 1.

See comment 2.

See comment 3.

See comment 4.
Appendix V

Comments From the Federal

Communications Commission

Page 41 GAO/RCED-00-164 DBS Effect on Cable Rates

GAO’s Comments 1. We do not believe that we need to further clarify our finding that DBS

did not exert significant pressure on cable companies to reduce rates in

1998. We believe we discuss in sufficient detail and with sufficient

prominence the issue of disentangling two possible relationships

between cable rates and DBS penetration: (1) the “competitive” effects

of DBS share on cable rates and (2) the “switching” or “migration”

effects that can occur if high cable rates lead subscribers to drop their

cable in favor of DBS. We tested the first of these relationships by

including the DBS penetration variable in the cable rates equation of

the model and the second relationship by including cable rates in the

DBS equation of the model.

We also note that FCC stated in its recently released report on 1999

cable industry prices that it “sought information on the number of DBS

subscribers in each surveyed cable franchise area in order to determine

if DBS penetration has had an effect on the demand for cable as well as

on the monthly charges for cable service.” Although FCC does not

examine whether DBS penetration has an effect on cable rates, its

recent study does examine whether DBS penetration influences the

demand for cable services. FCC finds no significant statistical

relationship between DBS penetration and cable demand and provides

an interpretation that is very similar to our own: “... that DBS exerts

only modest influence on the demand for cable services.” (See FCC,

Report on Cable Industry Prices, June 9, 2000, p. 37.) Ultimately, we

believe that our results are fundamentally consistent with FCC’s own

views.

2. We agree with FCC that DBS provides an important multichannel

alternative to cable. However, we believe our report sufficiently

presents this issue. First, we note that our empirical findings suggest

that the presence of DBS led to important nonprice competition as

cable companies in areas with high DBS penetration offered consumers

more channels. Second, we note that DBS penetration is much higher in

rural areas—supporting our hypothesis that DBS and cable services

were seen as more substitutable products in rural areas in 1998. Finally,

we suggested that DBS and cable will become viewed as more similar

services in the future because of the ability of DBS providers to now

offer local broadcast signals as part of their programming packages.

3. We agree that more detailed data enables an analyst to study issues

with greater clarity. However, our cross-sectional analysis, which is
Appendix V

Comments From the Federal

Communications Commission

Page 42 GAO/RCED-00-164 DBS Effect on Cable Rates

based on variations in cable rates and DBS penetration across nearly

700 franchise areas, allowed us to reasonably investigate the influence

that DBS may have on cable rates. A time-series analysis would have

been difficult because of the lack of readily available data on all

variables necessary. Moreover, it is not clear how much would have

been gained from such an analysis. Our study looked at the industry in a

very early stage of competition between cable and DBS. It will be more

useful to include a time-series component in such a model in the future

when DBS penetration is greater and the effects of the legislative

change allowing DBS firms to provide local broadcast channels can be

better estimated. FCC’s most recent cable rates study also does not

include a time-series component in its econometric model, although it

does provide estimates of a single-year model for 2 adjacent years.

4. We believe that the model specification that we used allowed us to

disentangle the two possible relationships between DBS penetration

and cable rates. FCC staff had questioned the appropriateness of our

initial proposed presentation of a single-equation reduced-form cable

rate model that included DBS share and the number of cable channels

as explanatory variables because these variables could be jointly

determined with cable rates (i.e., they are endogenous). Partly in

response to FCC’s concerns, we based the findings presented in this

report on a four-equation structural model—which we had indicated

was the basis of the initial single-equation model—in which cable rates,

DBS market share, cable subscribers, and cable channels are jointly

determined. In addition, we do present a reduced-form pricing equation

in the report that we included for the purpose of discussing how those

variables that are not determined in the system of equations affect

cable rates. The reduced-form cable rates equation includes no

endogenous variables—that is, channels, DBS penetration, and cable

subscribers are excluded from this equation. Accordingly, we are

uncertain what remaining concerns FCC has with “the econometric

specification of the model.”
Page 43 GAO/RCED-00-164 DBS Effect on Cable Rates

Appendix VI

Comments From the National Cable

Television Association ApendxiVI

Note: GAO comments

supplementing those in the

report text appear at the end

of this appendix.

See comment 1.

See comment 2.

Now on p. 14.
Appendix VI

Comments From the National Cable

Television Association

Page 44 GAO/RCED-00-164 DBS Effect on Cable Rates

See comment 3.

See comment 4.
Appendix VI

Comments From the National Cable

Television Association

Page 45 GAO/RCED-00-164 DBS Effect on Cable Rates

GAO’s Comments 1. We agree that the subscription video market is very dynamic and that

an analysis of the contemporary market environment will require up-todate information and data. The National Cable Television Association

(NCTA) suggests that we should have used data from a period prior to

the introduction of DBS in 1994 to understand the effect of the

introduction of this service on the cable industry. Such an analysis was

not feasible because of limited data. However, there was enough

variation in the level of DBS penetration across cable franchise areas

for us to capture the competitive effects of DBS on cable rates.

2. We understand that DBS has grown dramatically in the last 2 years. We

caveat our overall finding with the view that these model results are

likely to change as the nature of this market unfolds. We believe that a

full understanding of the issues we examine will require more analysis

using more recent data. In particular, to understand the effects of the

legislative change enabling DBS firms to include local broadcast signals

in their DBS programming packages will require using data for some

period after that law went into effect.

3. Because this is a cross-sectional model, it is not relevant that cable

rates may have been high at that time. This model examines what drives

differences in rates across local markets within a given period: It can

examine a year when rates are on average high or on average low, and

we would expect similar findings.

4. One of our major findings is that the competitive response to greater

DBS penetration was largely in the form of nonprice competitive

response.
Page 46 GAO/RCED-00-164 DBS Effect on Cable Rates

Appendix VII

Comments From the Satellite Broadcasting

and Communications Association ApendxiVI

Note: GAO comments

supplementing those in the

report text appear at the end

of this appendix.

See comment 1.

See comment 2.
Appendix VII

Comments From the Satellite Broadcasting

and Communications Association

Page 47 GAO/RCED-00-164 DBS Effect on Cable Rates
Appendix VII

Comments From the Satellite Broadcasting

and Communications Association

Page 48 GAO/RCED-00-164 DBS Effect on Cable Rates

See comment 3.
Appendix VII

Comments From the Satellite Broadcasting

and Communications Association

Page 49 GAO/RCED-00-164 DBS Effect on Cable Rates

GAO’s Comments 1. Although 1999 DBS data were available, we could not do the analysis

for 1999 because the cable data, which constitute a major, important

part of the database for our study, were not available at the time we

began this analysis. Thus, we had to use 1998 as the year of observation

for this model.

2. We understand that DBS has grown dramatically in the last 2 years. We

caveat our overall finding with the view that these model results are

likely to change as the nature of this market unfolds. We believe that a

full understanding of the issues we examine will require more analysis

using more recent data. In particular, to understand the effects of the

legislative change enabling DBS firms to include local broadcast signals

in their DBS programming packages will require using data for some

period after that law went into effect.

3. Copyright fees do not vary across localities and therefore cannot be

included in this model. However, we note in our discussion of the

model’s development that cable and satellite providers are

differentiated in many ways, including their cost structures. Thus, these

underlying cost differentials play an important role in this kind of

model.
Page 50 GAO/RCED-00-164 DBS Effect on Cable Rates

Appendix VIII

GAO Contacts and Staff Acknowledgments ApendxiVI

GAO Contacts Stanley J. Czerwinski, (202) 512-7631

Amy D. Abramowitz, (202) 512-4936

Acknowledgments In addition to those named above, Stephen M. Brown, Jay Cherlow,

Venkareddy Chennareddy, John A. Karikari, and Faye Morrison made key

contributions to this report.

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