United States General Accounting Office 

GAO Report to the Chairman, Committee on 

Commerce, Science, and 

Transportation, U.S. Senate 

October 2003 TELECOMMUNICATIONS 

Issues Related to 

Competition and 

Subscriber Rates in 

the Cable Television 

Industry 

GAO-04-8

Highlights of GAO-04-8, a report to 

Senator John McCain, Chairman, 

Committee on Commerce, Science, and 

Transportation, U.S. Senate 

Over 70 million American 

households receive television 

service from a cable television 

operator. In recent years, rates for 

cable service have increased at a 

faster pace than the general rate of 

inflation. GAO agreed to (1) 

examine the impact of competition 

on cable rates and service, (2) 

assess the reliability of information 

contained in the Federal 

Communications Commission’s 

(FCC) annual cable rate report, (3) 

examine the causes of recent cable 

rate increases, (4) assess the 

impact of ownership affiliations in 

the cable industry, (5) discuss why 

cable operators group networks 

into tiers, and (6) discuss options 

to address factors that could be 

contributing to cable rate 

increases. 

GAO recommends that the 

Chairman of the FCC 

• 	 take immediate steps to improve the cable rate survey and 

• 	 review the commission’s 

process for maintaining the 

status of effective competition. 

In commenting on GAO’s report, 

FCC agreed to make changes to its 

annual cable rate survey, but FCC 

questioned, on a cost/benefit basis, 

the utility of revising its process to 

keep the status of effective 

competition up to date. GAO 

believes that FCC should examine 

whether cost-effective alternative 

processes could help provide the 

Congress with more accurate 

information. 

www.gao.gov/cgi-bin/getrpt?GAO-04-8. 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Mark Goldstein 

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

October 2003 

TELECOMMUNICATIONS 

Issues Related to Competition and 

Subscriber Rates in the Cable Television 

Industry 

Competition leads to lower cable rates and improved quality. Competition 

from a wire-based company is limited to very few markets. However, where 

available, cable rates are substantially lower (by 15 percent) than in markets 

without this competition. Competition from direct broadcast satellite (DBS) 

companies is available nationwide, and the recent ability of these companies 

to provide local broadcast stations has enabled them to gain more 

customers. In markets where DBS companies provide local broadcast 

stations, cable operators improve the quality of their service. 

FCC’s cable rate report does not appear to provide a reliable source of 

information on the cost factors underlying cable rate increases or on the 

effects of competition. GAO found that cable operators did not complete 

FCC’s survey in a consistent manner, primarily because the survey lacked 

clear guidance. In particular, GAO found that 84 of the 100 franchises it 

surveyed did not provide a complete or accurate accounting of their cost 

changes for the year. Also, GAO found that FCC does not initiate updates or 

revisions to its classification of competitive and noncompetitive areas. 

Thus, FCC’s classifications might not reflect current conditions. 

A variety of factors contribute to increasing cable rates. During the past 3 

years, the cost of programming has increased considerably (at least 34 

percent), driven by the high cost of original programming, among other 

things. Additionally, cable operators have invested large sums in upgraded 

infrastructures, which generally permit additional channels, digital service, 

and broadband Internet access. 

Some concerns exist that ownership affiliations might indirectly influence 

cable rates. Broadcasters and cable operators own many cable networks. 

GAO found that cable networks affiliated with these companies are more 

likely to be carried by cable operators than nonaffiliated networks. 

However, cable networks affiliated with broadcasters or cable operators do 

not receive higher license fees, which are payments from cable operators to 

networks, than nonaffiliated networks. 

Technological, economic, and contractual factors explain the practice of 

grouping networks into tiers, thereby limiting the flexibility that subscribers 

have to choose only the networks that they want to receive. An à la carte 

approach would facilitate more subscriber choice but require additional 

technology and customer service. Additionally, cable networks could lose 

advertising revenue. As a result, some subscribers’ bills might decline but 

others might increase. 

Certain options for addressing cable rates have been put forth. Although 

reregulation of cable rates is one option, promoting competition could 

influence cable rates through the market process. Policies to bring about 

lower cable rates could have other effects that would need to be considered. 
Contents 


Letter 


Results in Brief 


Background


Competition Leads to Lower Cable Rates and Improved Quality 


and Service among Cable Operators 


Concerns Exist about the Reliability of FCC’s Data for Cable 


Operator Cost Factors and Effective Competition 


A Variety of Factors Contribute to Cable Rate Increases 


Some View Ownership Affiliations as an Important Indirect 


Influence on Cable Rates


Several Factors Generally Lead Cable Operators to Offer Large 


Tiers of Networks Instead of Providing À La Carte or Minitier 


Service 


Industry Participants Have Cited Certain Options That May 

Address Factors Contributing to Rising Cable Rates 


Conclusions 


Recommendations for Executive Action 


Agency Comments and Our Evaluation


1 

3 

7 

9 

12 

20 

27 

30 

39 

44 

45 

46 

Appendix I Scope and Methodology 

Appendix II GAO Survey of Cable Franchises 

Appendix III 	 GAO’s Modifications to FCC’s Competition 

Classification 

Appendix IV Cable-Satellite Model 56 


Definitions and Sources for Variables 56


Estimation Methodology and Results 57


Appendix V Cable Network Carriage Model 63 


Set-up of Our Cable Network Carriage Model 63


Data Sources and Descriptive Statistics 64


Estimation Methodology and Results 66


Alternative Specification 68


Page i GAO-04-8 Cable Television Industry 

48 

51 

54 
Appendix VI 	 Comments from the Federal Communications 

Commission 70 

GAO Comments 76 

Appendix VII Comments from Industry Participants 

American Cable Association 


Consumer Federation of America 


Consumers Union 


National Association of Broadcasters 


National Association of Telecommunications Officers and Advisors 


National Broadcasting Company 


National Cable and Telecommunications Association 


News Corporation 


Satellite Broadcasting and Communications Association 


Viacom


Walt Disney Company 


80 

80 

80 

81 

82 

82 

83 

84 

85 

86 

86 

86 

Appendix VIII GAO Contacts and Staff Acknowledgments 88 

GAO Contacts 88 

Staff Acknowledgments 88 

Tables 

Table 1: Definition and Source for Variables 56 

Table 2: Descriptive Statistics 58 

Table 3: Three-Stage Least Squares Model Results 59 

Table 4: Definitions and Sources of Variables 65 

Table 5: Descriptive Statistics 66 

Table 6: Logistic Model Results 67 

Table 7: Logistic Model Results 69 

Figures 

Figure 1: Section of FCC’s 2002 Cable Rate Survey Covering Cable 

Franchises’ Rate and Cost Changes 13 

Figure 2: Change in the General and Cable Television Consumer 

Price Indexes, 1997 – 2002 21 

Page ii GAO-04-8 Cable Television Industry 
Figure 3: Average Monthly License Fees per Subscriber—Sports 

Programming Networks v. Nonsports Networks, 1999 – 

2002 23 

Figure 4: Expenditures by 79 Cable Networks to Produce 

Programming, 1999 – 2002 24 

Figure 5: Cable Industry Infrastructure Expenditures, 1996 – 2002 26 

Figure 6: Ownership Affiliation of the 90 Most Carried Cable 

Networks 28 

Figure 7: Percentage of Cable Network Advertising Revenue 

Compared with License Fee Revenues for 79 Cable 

Networks, 1999 – 2002 35 

Abbreviations 

ACA American Cable Association 


BLS Bureau of Labor Statistics 


CPI consumer price index 


DBS direct broadcast satellite 


FCC Federal Communications Commission 


LEC local exchange carrier 


MMDS multichannel multipoint distribution service 


MSA metropolitan statistical area 


MSO multiple system operator 


NATOA National Association of Telecommunications Officers and 


Advisors 

NBC National Broadcasting Company 

NCTA National Cable and Telecommunications Association 

YES Yankees Entertainment and Sports Network 

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

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

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

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

reproduce this material separately. 

Page iii GAO-04-8 Cable Television Industry 
United States General Accounting Office 

Washington, DC 20548 

October 24, 2003 

The Honorable John McCain 

Chairman, Committee on Commerce, 

Science, and Transportation 

United States Senate 

Dear Mr. Chairman: 

In recent years, cable television has become a major component of the 

American entertainment industry—today more than 70 million households 

receive their television service through a subscription to a cable television 

operator. As the industry has developed, it has been affected by regulatory 

and economic changes. Since 1992, the industry has undergone rate 

reregulation and then in 1999, partial deregulation. Additionally, 

competition to cable operators has emerged erratically. Companies 

emerged in some areas to challenge cable operators, only to halt 

expansion or discontinue service altogether. Conversely, competition from 

direct broadcast satellite (DBS) operators (such as DIRECTV and 

EchoStar)—which did not exist a decade ago—has emerged and grown 

rapidly in recent years. Nevertheless, cable rates continue to increase at a 

faster pace than the general rate of inflation. 

You asked us to review several issues related to recent increases in cable 

rates and the competitiveness of the subscription video industry—an 

industry that includes cable television, satellite service (including DBS 

operators), and other technologies that deliver video services to 

customers’ homes. We agreed to (1) examine the impact of competition in 

the subscription video industry on cable rates and service; (2) assess the 

reliability of the information contained in the Federal Communications 

Commission’s (FCC) annual cable rate report on the cost factors 

underlying cable rate increases, FCC’s current classification of cable 

franchises regarding whether they face effective competition, and FCC’s 

related findings on the effect of competition; (3) examine the causes of 

recent cable rate increases; (4) assess whether ownership of cable 

networks (such as CNN and ESPN) may indirectly affect cable rates 

through such ownership’s influence on cable network license fees or the 

carriage of cable networks; (5) discuss why cable operators group 

networks into tiers, rather than package networks so that customers can 

purchase only those networks they wish to receive; and (6) discuss 

options to address factors that could be contributing to cable rate 

increases. 

Page 1 GAO-04-8 Cable Television Industry 
To respond to the first objective on the impact of competition on cable 

rates and service, we used an empirical model (our cable-satellite model) 

that we previously developed that examines the effect of competition on 

cable rates and service.1 Using data from 2001, the model considers the 

effect of various factors on cable rates, the number of cable subscribers, 

the number of channels that cable operators provide to subscribers, and 

DBS penetration rates for areas throughout the United States. We further 

developed the model to more explicitly examine whether varied forms of 

competition have differential effects on cable rates. We also discussed the 

degree and impact of competition in the subscription video industry with 

an array of industry stakeholders and experts (see below). 

For the second objective on the reliability of data in FCC’s annual cable 

rate report, we randomly sampled 100 of approximately 750 cable 

franchises that responded to FCC’s 2002 cable rate survey.2

 We designed 

this sample to be representative of the universe of franchises that 

responded to FCC’s survey. Using a telephone survey (our cable franchise 

survey), we asked these franchises a series of questions about how they 

completed a portion of FCC’s survey that addresses cost factors 

underlying annual cable rate changes (see app. II). We also examined 

FCC’s process for classifying cable franchises regarding whether they face 

effective competition, a term defined by statute (see app. III). 

For the third, fourth, fifth, and sixth objectives addressing the causes of 

recent cable rate increases, the impact of ownership affiliations, why cable 

operators group networks into tiers, and possible options for addressing 

factors that may be contributing to rate increases, we interviewed officials 

and obtained documents and data from FCC and the Bureau of Labor 

Statistics. We also interviewed officials from several trade associations 

and other organizations: the National Cable and Telecommunications 

Association (NCTA), Consumers Union, the National Association of 

Broadcasters, the National Association of Telecommunications Officers 

and Advisors, the American Cable Association, the National Cable 

Television Cooperative, three major sports leagues, and the Cable 

Television Advertising Bureau. We also conducted semistructured 

1

See U.S. General Accounting Office, Telecommunications: Issues in Providing Cable and 

Satellite Television Service, GAO-03-130 (Washington, D.C.: Oct. 15, 2002). 

2

Each year, FCC samples between 700 and 800 of the universe of roughly 10,000 cable 

systems using a stratified sampling approach that is based on the status of effective 

competition and the size of the cable system. 

Page 2 GAO-04-8 Cable Television Industry 
interviews with a variety of companies: 11 cable operators, one DBS 

operator, four broadcast networks (such as ABC and NBC), 15 cable 

networks (such as CNN and ESPN), and representatives of five financial 

analysis firms. Furthermore, we used data on cable network revenues and 

programming expenses that we acquired from Kagan World Media, which 

is a private communications research firm that specializes in cable 

industry data. We used these data to develop models that examine whether 

ownership of cable networks by broadcasters or by cable operators 

influences (1) the level of license fee (our cable license fee model) or (2) 

the likelihood that the network will be carried (our cable network carriage 

model). 

We conducted our review from December 2002 through September 2003 in 

accordance with generally accepted government auditing standards. For 

additional information on our scope and methodology, see appendix I. 

Results in Brief 
 Competition from wire-based and DBS operators leads to lower cable 

rates and improved quality and service among cable operators. 

Competition from a wire-based provider—that is, a competitor using a 

wire technology, such as a second cable operator, a local telephone 

company, or an electric utility—is limited to very few markets. However, 

in those markets where this competition is present, cable rates are 

significantly lower—by about 15 percent—than cable rates in similar 

markets without wire-based competition. Since 1999, when DBS operators 

acquired the legal right to provide local broadcast stations (such as 

affiliates of ABC, CBS, Fox, and NBC), these companies have emerged as 

important competitors to cable operators. In particular, in areas where 

subscribers can receive local broadcast stations from both primary DBS 

operators, the DBS penetration rate—that is, the percentage of households 

that subscribe to satellite service—is approximately 40 percent higher 

than in areas where subscribers cannot receive local broadcast stations 

from both primary DBS operators. In addition, the DBS provision of local 

broadcast stations has induced cable operators to improve the quality of 

their service by providing their subscribers with approximately 5 percent 

additional cable networks. 

FCC’s cable rate report may not provide reliable information on the 

factors underlying recent cable rate increases or on the effect of 

competition. In particular, cable franchises responding to FCC’s 2002 

survey did not complete in a consistent manner the section pertaining to 

the factors underlying cable rate increases primarily because of a lack of 

clear guidance; 73 of 100 cable franchises whom we spoke with said that 

Page 3 GAO-04-8 Cable Television Industry 
the instructions included with FCC’s survey were insufficient. These 

inconsistencies may have led to unreliable information in FCC’s report on 

the relative importance of factors underlying recent cable rate increases. 

For example, we spoke with 83 franchises that reported zero for 

infrastructure investment to FCC, 33 of these franchises told us that they 

had incurred costs for such investments, thereby implying that they 

understated the contribution of infrastructure investment to their cable 

rate increases. Overall, we found that 84 of the 100 franchises we surveyed 

did not provide a complete or accurate accounting of their cost changes 

for the year. Regarding the effect of competition, because FCC’s process 

does not provide for updates or revisions to the competitive classification 

of cable franchises unless specifically requested to do so, FCC’s 

classifications of cable franchises as having (or not having) effective 

competition on the basis of the statutory definition do not always 

accurately reflect current competitive conditions. In our analysis of the 

impact of wire-based competition, we checked the current status of 

competition in each franchise. The changes we made as a result of this 

process may explain, in part, the differential findings regarding the impact 

of wire-based competition reported by FCC, which found a nearly 7 

percent reduction in cable rates, and our finding of a 15 percent reduction 

in cable rates. Because the Congress and FCC use this information in their 

monitoring and oversight of the cable industry, the lack of reliable 

information in FCC’s report on these two issues—factors underlying cable 

rate increases and the effect of competition—may compromise the ability 

of the Congress and FCC to fulfill these roles. Additionally, the potential 

for this information to be used in debate regarding important policy issues, 

such as media consolidation, also necessitates reliable information in 

FCC’s report. To improve the quality and usefulness of the data FCC 

collects annually on cable television rates and competition in the 

subscription video industry, we recommend that the Chairman of FCC 

take steps to improve the reliability, consistency, and relevance of 

information on rates and competition in the subscription video industry. 

Several key factors—including programming costs and infrastructure 

investments—are putting upward pressure on cable rates. Programming 

costs incurred by cable operators have risen considerably—on average by 

as much as 34 percent—in the last 3 years, and, in particular, programming 

costs associated with cable networks showing sporting events have risen 

even more—on average by 59 percent—during the same time frame. The 

cable industry has also spent billions of dollars in upgrading its 

infrastructure to enable new services, such as digital channels and 

broadband Internet access. While these upgrades benefit cable subscribers 

by expanding the number of cable networks available and improving 

Page 4 GAO-04-8 Cable Television Industry 
picture quality, some of this benefit accrues to subscribers who purchase 

new, advanced services, such as broadband Internet access. Additionally, 

cable operators have increased spending on customer service, which 

typically is now available 24 hours a day, 7 days a week. For the 9 cable 

operators3

 that provided financial information to us, we found that 

programming expenses and infrastructure investment appear to be the 

primary cost factors that have been increasing in recent years.4 

Several industry representatives whom we spoke with believe that certain 

factors related to the nature of ownership affiliations may also indirectly 

influence cable rates through their influence on cable operators’ choice of 

which cable networks to carry and the cost to the cable operator for the 

right to carry the networks. We did not find that ownership affiliations 

between cable networks (such as CNN and ESPN) and broadcasters (such 

as NBC and CBS) or between cable networks and cable operators (such as 

Time Warner and Cablevision) are associated with the level of license 

fees—that is, the fees cable operators pay to carry cable networks. 

However, we did find that both forms of ownership affiliations are 

associated with the likelihood that a cable operator would carry a cable 

network. Holding constant certain other factors that might influence the 

likelihood of a cable network being carried by a cable operator—such as 

the popularity of the network or the type of programming the network 

carries—we found that operators were more likely to carry cable 

networks that were majority-owned by either cable operators or by 

broadcasters than to carry other cable networks. Moreover, cable 

operators were substantially more likely to carry cable networks that they 

directly own than to carry cable networks owned by other cable operators, 

broadcasters, or others. 

Currently, technological, contractual, and economic factors lead cable 

operators to sell large numbers of networks on tiers. On average, a basic 

tier of service includes about 25 channels, including local broadcast 

stations, and the next tier provides, on average, 36 additional channels, 

including such popular cable networks as CNN and ESPN. Because 

3

These 9 cable operators that provided data to us serve approximately 62 percent of all 

cable subscribers in the United States as of 2002. 

4

While programming expenses are directly related to the cable rates, it is less clear how 

much of the infrastructure investment underlies cable rate increases since some of these 

costs are more directly related to the provision of digital cable tiers and cable modem 

service. 

Page 5 GAO-04-8 Cable Television Industry 
subscribers must buy all of the networks offered on a tier that they choose 

to purchase, they have little choice regarding the individual networks they 

receive. Greater subscriber choice might be provided if cable operators 

used an à la carte system, wherein subscribers would receive and pay for 

only the networks they want to watch. But, an à la carte system could 

impose additional costs on subscribers in the near term because additional 

equipment—which many subscribers do not currently have—will be 

required on every television attached to the cable system to unscramble 

networks the subscriber is authorized to receive. Moreover, an à la carte 

system could alter the current economics of the cable network industry, 

wherein cable networks derive significant revenues from advertising. In 

particular, cable networks experiencing a falloff in subscribers could also 

see an associated decline in advertising revenues, since the amount that 

companies are willing to pay for advertising spots is based on the number 

of potential viewers. Although cable networks may take steps to reduce 

their production costs to compensate for the decline in advertising 

revenue, cable networks may also raise the license fees charged to cable 

operators for the right to carry the networks. If license fees rise, some of 

the increase is likely to be passed on to subscribers. Because of the 

reliance on advertising revenues by the cable network industry, most cable 

networks require that cable operators place their networks on widely 

distributed tiers. A variety of factors—such as the pricing of à la carte 

service, consumers’ purchasing patterns, and whether certain niche 

networks would cease to exist with à la carte service—make it difficult to 

ascertain how many consumers would be better off and how many would 

be made worse off under an à la carte approach. Creating a separate tier 

for sports channels may be viable because this genre of programming has 

a loyal base of customers. However, sports leagues may be reluctant to 

have sporting events appear on cable networks that are placed on a 

separate sports tier because the programming would not be widely 

available. 

Certain options for addressing factors that may be contributing to cable 

rate increases have been put forth. Although reregulation of cable rates 

stands as a possible option, taking steps to promote competition would 

help to reduce cable rates by leveraging the normal workings of the 

marketplace. Specific options include reviewing whether modifications to 

the program access rules would be beneficial, promoting wireless 

competition, and reviewing whether changes to the retransmission 

consent process should be considered. Any options designed to help bring 

down cable rates could have other unintended effects that would need to 

be considered in conjunction with the benefits of the lower rates. We are 

Page 6 GAO-04-8 Cable Television Industry 
Background 

not making any specific recommendations regarding the adoption of any 

of these options. 

FCC provided comments on a draft of this report in which they stated that 

the agency is taking steps to redesign their survey questionnaire in an 

attempt to obtain more accurate information. However, FCC questioned, 

on a cost/benefit basis, the utility of adopting a revised process to keep the 

status of effective competition in franchises up to date. We believe that 

providing the Congress with reliable information on cable rates and 

competition is important, and that more accurate effective competition 

designations would help to accomplish this. Therefore, we believe that 

FCC should examine whether cost-effective alternative processes exist to 

enhance the accuracy of its effective competition designations. FCC’s 

comments are contained in appendix VI, along with our responses to those 

comments. We also provided a draft of this report to several industry 

participants and other experts for their review and comment. The 

comments we received covered a broad range of issues and each groups’ 

comments are summarized in appendix VII. 

Cable television emerged in the late 1940s to fill a need for television 

service in areas with poor over-the-air reception, such as mountainous or 

remote areas. By the late 1970s, cable operators began to compete more 

directly with free over-the-air television by providing new cable networks, 

such as HBO (introduced in 1972), Showtime (introduced in 1976), and 

ESPN (introduced in 1979). According to FCC, cable’s penetration rate— 

as a percentage of television households—increased from 14 percent in 

1975 to 24 percent in 1980 and to 67 percent today. Cable television is by 

far the largest segment of the subscription video market, a market that 

includes cable television, satellite service (including DBS operators such 

as DIRECTV and EchoStar), and other technologies that deliver video 

services to customers’ homes. 

To provide programming to their subscribers, cable operators (1) acquire 

the rights to carry cable networks from a variety of sources and (2) pay 

license fees—usually on a per-subscriber basis—for these rights. The three 

primary types of owners of cable networks are large media companies that 

also own major broadcast networks (such as Disney and Viacom), large 

cable operators (such as Time Warner and Cablevision), and independent 

programmers (such as Landmark Communications). 

At the community level, cable operators obtain a franchise license under 

agreed-upon terms and conditions from a franchising authority, such as a 

Page 7 GAO-04-8 Cable Television Industry 
township or county.5

 During cable’s early years, franchising authorities 

regulated many aspects of cable television service, including franchise 

terms and conditions and subscriber rates. In 1984, the Congress passed 

the Cable Communications Policy Act, which imposed some limitations on 

franchising authorities’ regulation of rates.6

 However, 8 years later, in 

response to increasing rates, the Congress passed the Cable Television 

Consumer Protection and Competition Act of 1992. The 1992 Act required 

FCC to establish regulations ensuring reasonable rates for basic service— 

the lowest level of cable service, which includes the local broadcast 

stations—unless a cable system has been found to be subject to effective 

competition, which the act defined.

7

 The act also gave FCC the authority 

to regulate any unreasonable rates for upper tiers (often referred to as 

expanded-basic service), which include cable programming provided over 

and above that provided on the basic tier.8 Expanded-basic service 

typically includes such popular cable networks as USA Network, ESPN, 

and CNN. In anticipation of growing competition from satellite and wirebased operators, the Telecommunications Act of 1996 phased out all 

regulation of expanded-basic service rates by March 31, 1999. However, 

franchising authorities can regulate the basic tier of cable service where 

there is no effective competition. 

As required by the 1992 Act, FCC annually reports on average cable rates 

for operators found to be subject to effective competition compared with 

operators not subject to effective competition. To fulfill this mandate, FCC 

annually surveys a sample of cable franchises regarding their cable rates. 

In addition to asking questions that are necessary to gather information to 

provide its mandated reports, FCC also typically asks questions to help the 

agency better understand the cable industry. For example, the 2002 survey 

included questions about a range of cable issues, including the cost factors 

5

In some cases, state public service commissions are also involved in cable regulation. 

6

The 1984 Act restricted regulation to only basic services for cable systems that were not 

subject to effective competition. In its rulemaking, FCC initially said that effective 

competition existed if three or more over-the-air broadcast signals existed in a given 

market. Under this definition, over 90 percent of all cable systems would be subject to 

effective competition and therefore not subject to rate regulation. 

7

Under statutory definitions in the 1992 Act, substantially more cable operators would be 

subject to rate regulations than had previously been the case. 

8

Basic and expanded-basic are the most commonly subscribed to service tiers—bundles of 

networks grouped into a package—offered by cable operators. In addition, customers in 

many areas can purchase digital tiers and also premium pay channels, such as HBO and 

Showtime. 

Page 8 GAO-04-8 Cable Television Industry 
underlying changes in cable rates, the percentage of subscribers 

purchasing other services (such as broadband Internet access and 

telephone service), and the specifics of the programming channels offered 

on each tier. 

Some franchise agreements were initially established on an exclusive 

basis, thereby preventing wire-based competition to the initial cable 

operator. In 1992, the Congress prohibited the awarding of exclusive 

franchises, and, in 1996, the Congress took steps to allow telephone 

companies and electric companies to enter the video market. Initially 

unveiled in 1994, DBS served about 18 million American households by 

June 2002. Today, two of the five largest subscription video service 

providers are DIRECTV and EchoStar—the two primary DBS operators. 

Today, wire-based competition—that is, competition from a provider using 

a wire technology, such as a local telephone company or an electric 

utility—is limited to very few markets, with cable subscribers in about 2 

percent of markets having the opportunity to choose between two or more 

wire-based video operators. However, in those markets where this 

competition is present, cable rates are significantly lower—by about 15 

percent—than cable rates in similar markets without wire-based 

competition, according to our analysis of rates in 2001. DBS operators 

have emerged as a nationwide competitor to cable operators. This 

competition has been facilitated by the opportunity to provide local 

broadcast stations. Competition from DBS operators has induced cable 

operators to lower cable rates slightly, and DBS provision of local 

broadcast channels has induced cable operators to improve the quality of 

their service. 

Competition Leads to 

Lower Cable Rates 

and Improved Quality 

and Service among 

Cable Operators 

Wire-Based Competition Is Although the Telecommunications Act of 1996 sought to increase wireLimited but, Where based competition, few customers have a choice among companies 

Available, Has a providing video service via wire-based facilities. In a recent report, FCC 

noted that very few markets—about 2 percent—have been found to have Downward Impact on effective competition based on the presence of a wire-based competitor.9 

Cable Rates Our interviews with 11 cable operators and five financial analysis firms 

9

See Federal Communications Commission, Annual Assessment of the Status of 

Competition in the Market for the Delivery of Video Programming, Ninth Annual Report, 

FCC 02-338 (Washington, D.C.: Dec. 31, 2002). 

Page 9 GAO-04-8 Cable Television Industry 
yielded a similar finding—wire-based competition is limited. Local 

telephone companies are not providing widespread competition to cable, 

and FCC also reported in their 2002 video competition report that the four 

largest local telephone companies have largely exited the cable market. 

Also, electric and gas utilities—which can use their networks and rights of 

way to provide video services—are only providing competition to cable 

operators in scattered localities. Broadband service providers—a 

relatively new kind of entrant, such as Knology and WideOpenWest—are 

building new, advanced networks to provide a bundle of services (video, 

voice, and high-speed Internet access) and compete with cable operators 

as well as with telephone companies. However, the three largest 

broadband service providers only serve approximately 940,000 

subscribers. 

Although wire-based competition is limited, in those markets where it 

exists, this competition has a measurable impact. According to our cablesatellite model (see app. IV), in 2001, cable rates were approximately 15 

percent lower in areas where a wire-based competitor was present.10 With 

an average monthly cable rate of approximately $34 that year, this implies 

that subscribers in areas with a wire-based competitor had monthly cable 

rates about $5 lower, on average, than subscribers in similar areas without 

a wire-based competitor. Our interviews with cable operators also 

revealed that these companies generally lower rates and/or improve 

customer service where a wire-based competitor is present. For example, 

1 cable operator told us that it stopped raising rates 3 years ago in one 

market where a wire-based competitor had entered.11 

DBS Has Become an 

Important Competitor to 

Cable Operators 

Nationwide 

In recent years, DBS has become the primary competitor to cable 

operators in the subscription video industry. As of June 2002, about 18 

million households—roughly 20 percent of the total video subscribers— 

were served by DBS. Most cable operators that we interviewed described 

competition from DBS as substantial. The ability of DBS operators to 

compete against cable operators was bolstered in 1999 when they acquired 

the legal right to provide local broadcast stations—that is, to offer the 

10Our model was based on data from 2001 since this was the most recent year for which we 

were able to acquire the required data on cable rates and services and DBS penetration 

rates when we began this analysis. 

11This cable operator also noted that current rates in the market are not sustainable given 

the increasing cost of programming. 

Page 10 GAO-04-8 Cable Television Industry 
signals of over-the-air broadcast stations, such as affiliates of ABC, CBS, 

Fox, and NBC—via satellite to their customers.12 On the basis of our cablesatellite model, we found that in areas where subscribers can receive local 

broadcast stations from both primary DBS operators, the DBS penetration 

rate—that is, the percentage of housing units that have satellite service—is 

approximately 40 percent higher than in areas where subscribers cannot 

receive these stations from the DBS operators. In a recent report, FCC 

noted that in 62 of the 210 television markets in the United States, at least 

one DBS operator offered local broadcast stations.

13 Both EchoStar and 

DIRECTV continue to roll out the provision of local broadcast stations in 

more markets. 

DBS competition is associated with a slight reduction in cable rates as well 

as improved quality and service. In terms of rates, we found that a 10 

percent higher DBS penetration rate in a franchise area is associated with 

a slight rate reduction—about 15 cents per month.

14 Also, in areas where 

both primary DBS operators provide local broadcast stations, we found 

that the cable operators offer subscribers approximately 5 percent more 

cable networks than cable operators in areas where this is not the case. 

These results indicate that cable operators are responding to DBS 

competition and the provision of local broadcast stations by lowering 

rates slightly and improving their quality. During our interviews with cable 

operators, most operators told us that they responded to DBS competition 

through one or more of the following strategies: focusing on customer 

service, providing bundles of services to subscribers, and lowering prices 

and providing discounts. 

12In 1999, the Congress passed the Satellite Home Viewer Improvement Act, which allows 

satellite operators to provide local broadcast stations to their customers. Prior to this act, 

satellite operators were limited to providing local broadcast signals to unserved areas 

where customers could not receive sufficiently high-quality, over-the-air signals. This 

practice had the general effect of preventing satellite operators from providing local 

broadcast stations directly to customers in most circumstances. 

13See Ninth Annual Report, FCC 02-338. 

14In our October 2002 report (GAO-03-130), we did not find that DBS competition was 

associated with lower cable rates. Although the parameter estimate was negative— 

indicating that DBS competition was associated with lower cable rates—the estimate was 

not statistically significant. As part of our analysis for this report, we further examined and 

refined our competition measures to more accurately reflect the true nature of competition 

in the franchise areas that were included in our analysis. Although the parameter estimate 

remains negative and the estimate is now statistically significant, the magnitude of estimate 

is very small. 

Page 11 GAO-04-8 Cable Television Industry 
Concerns Exist about 

the Reliability of 

FCC’s Data for Cable 

Operator Cost Factors 

and Effective 

Competition 

Responses to our cable franchise survey suggest that certain issues 

undermine the reliability of information in FCC’s cable rate report, which 

provides information on cable rates and competition in the subscription 

video industry. In particular, we found that respondents did not fill out 

FCC’s survey on factors underlying cable rate increases in a consistent 

manner. Additionally, FCC’s designations of franchise areas as having (or 

not having) effective competition do not always accurately reflect current 

competitive conditions. For determinations of effective competition that 

are based on DBS service, local franchising authorities have raised 

concerns about the industry data used to substantiate these filings. 

Because the Congress and FCC use this information in their monitoring 

and oversight of the cable industry, the lack of reliable information in 

FCC’s cable rate report may compromise the ability of the Congress and 

FCC to fulfill these roles. Additionally, the potential for this information to 

be used in debates on important policy decisions, such as media 

consolidation, also necessitates reliable information in FCC’s report. 

Weaknesses in FCC’s 

Survey May Lead to 

Inaccuracies in the 

Relative Importance of 

Cost Factors 

Results of our cable franchise survey indicated considerable variation in 

how cable franchises completed the section of FCC’s 2002 cable rate 

survey on which they provide information about the factors underlying 

recent cable rate increases. Figure 1 shows the actual section of FCC’s 

survey that franchises completed to provide their cost change information; 

see also appendix II for our cable franchise survey. We identified two key 

problems with FCC’s survey, as follows: a lack of guidance on how the 

survey was to be completed, and the requirement that the sum of the cost 

and noncost factors equal the change in cable rates. 

Page 12 GAO-04-8 Cable Television Industry 
Figure 1: Section of FCC’s 2002 Cable Rate Survey Covering Cable Franchises’ 

Rate and Cost Changes 

Our telephone survey with 100 cable franchises indicated that a lack of 

specific guidance regarding this cost change section of the survey caused 

considerable confusion about how to complete the form.15 Every franchise 

that we surveyed said it was unclear what FCC expected for at least one of 

the six factors (five cost factors plus a noncost factor) listed in figure 1 

above, and 73 of the 100 franchises said that the instructions were 

insufficient. In particular, several cable representatives we surveyed noted 

that there were no instructions or examples to show how to calculate 

investment, what types of cost elements should go into the “other cost” 

category, and what FCC meant by “non-cost-related factors.” This lack of 

guidance created considerable variation in the approaches taken to 

develop the cost factors. For example, although 76 of the franchises left 

the noncost factors answer blank, other franchises included a number to 

15See U.S. General Accounting Office, Telecommunications: Data Gathering Weaknesses 

In FCC’s Survey of Information on Factors Underlying Cable Rate Changes, GAO-03-742T 

(Washington, D.C.: May 6, 2003), page 7, for a summary of the approaches used by cable 

operators to complete the form. 

Page 13 GAO-04-8 Cable Television Industry 
reflect a change in profit margin or the need to establish uniform rates 

across franchises. 

Our cable franchise survey also indicated that another source of confusion 

for respondents was the requirement that the sum of the underlying cost 

and noncost factors (see fig. 1, lines 52-57) equal the change in the 

franchise’s cable rates (see fig. 1, line 51). Because the expanded-basic 

service was deregulated in 1999, it is no longer necessary that the cost 

factors equal the yearly change in cable rates.16 FCC officials told us that, 

cable operators could use the noncost factor element to adjust the sum of 

the factors to ensure that they equal the change in annual rates. That is, 

FCC officials suggested that after accounting for all cost factors, any 

difference between the sum of these costs and the rate change—whether 

positive or negative—could be accounted for by the noncost factor. 

However, it appears that this information may not have been clearly 

communicated to the cable franchises. We found that only 10 of the 100 

franchises that we surveyed took this approach and instead, most 

franchises told us that they chose to change their estimate of one or more 

of the cost factors in order to achieve the rate-cost balance. In most cases, 

cable representatives told us that this meant reducing other cost factors 

because most franchises told us that their actual annual cost increases for 

the year covered by the 2002 survey exceeded their rate change for 

expanded basic service.17 In fact, most franchises—84 of the 100 franchises 

we surveyed—did not provide a complete or accurate accounting of their 

cost changes for the year.18 

According to FCC’s 2002 cable rate report, cable franchises attributed 65 

percent of their rate increases last year to the changes in the cost of new 

and existing programming. Comparatively, investment and other cost 

changes had a lesser role in the rate increases. However, our findings 

regarding how cable franchises responded to FCC’s survey on these issues 

16In unregulated markets, for example, costs are an important factor in price setting by 

companies, but several other key factors, such as consumer demand and the 

competitiveness of the market, also influence the market price. Thus, costs and prices need 

not move in tandem. 

17Many cable franchises we surveyed said that their profit margins for basic and expandedbasic cable services decreased in 2002, but many also said that those decreases were offset 

by increased profits from other services, such as cable Internet and digital cable. 

18For example, 15 cable franchises said that they entered dollar values in the factors until 

the entire rate increase was justified and did not consider the remaining cost factors; many 

others cited specific cost factors that were adjusted to reach a balance. 

Page 14 GAO-04-8 Cable Television Industry 
indicated that the survey findings may not accurately reflect the relative 

importance of these cost factors. In particular, we found that most 

franchises used real cost data to calculate the change in new or existing 

programming costs. However, franchises often understated their estimates 

for investments and other costs. For example, 33 of the 83 respondents 

who entered zero for infrastructure investment, noted in our survey 

discussions with them that there had been costs for such investments that 

year. Similarly, we found that 64 franchises entered a zero for the other 

cost category, even though half of these respondents told us during our 

survey that there were costs in that category during that year. Moreover, 

the investment and other cost factors were often used to adjust overall 

costs to equal the rate change for the year—these adjustments most often 

required downward adjustments in these cost factors. As such, an overall 

accurate picture of the relative importance of various cost factors, which 

may be important for FCC and congressional oversight, may not be 

reflected in FCC’s data. 

FCC’s Cable Rate Report 

Does Not Appear to 

Provide a Reliable Source 

of Information on the 

Effect of Competition 

FCC is required by statute to produce an annual report on the differences 

between average cable rates in areas that FCC has found to have effective 

competition compared with those that have not had such a finding. FCC 

reported that on July 1, 2001, competitive operators were charging an 

average monthly rate of $34.93, while noncompetitive operators were 

charging $37.13—a 6.3 percent differential for the combined basic and 

expanded-basic tiers of service and equipment.19 In another analysis, FCC 

looked at a subset of those areas that had been found to have effective 

competition—that is, areas in which effective competition had been 

granted on the basis of the existence of a wire-based competitor. Using a 

regression model, FCC found that cable rates were nearly 7 percent lower 

when such a competitor existed. Conversely, as previously mentioned, we 

found a greater impact of wire-based competition using a similar model, 

that is, rates were lower by 15 percent in locations where a wire-based 

competitor was operating, according to our cable-satellite model. 

One possible explanation for the difference between FCC’s results and 

those of our cable-satellite model may be the differences in the criteria 

used to classify the status of competition. When reporting on differences 

19See Federal Communications Commission, Report on Cable Industry Prices 

(Washington, D.C.: Apr. 1, 2002). This is the most recent FCC report that is consistent with 

the data used in our analysis. 

Page 15 GAO-04-8 Cable Television Industry 
between average rates for locations with and without effective 

competition, FCC is mandated to include in the group defined to have 

effective competition only those franchise areas that have had a finding by 

FCC that is based on the statutory definition of effective competition.20 

However, FCC’s process for implementing this mandate may lead to 

situations in which the effective competition designation does not reflect 

the actual state of competition in the current time frame. In particular, key 

aspects of FCC’s process are as follows: 

• 	 As set forth in FCC’s rules, cable franchises are presumed not to face 

effective competition. 

• 	 Cable operators can petition FCC for a finding of effective competition, 

which would prohibit the franchising authority from regulating the rates 

for basic-tier service.21 If the cable franchise can show that at least one of 

the statutory criteria for effective competition is met, FCC classifies the 

cable franchise as facing effective competition. 

• 	 A franchising authority can file a petition for recertification to regulate 

rates for basic-tier service, if it believes that the conditions under which 

effective competition was granted no longer exist. If recertification is 

granted, the franchise will no longer be considered to have effective 

competition. 

Our analysis of FCC’s classification of cable franchises regarding effective 

competition revealed that FCC’s process for maintaining this 

classification—namely, their reliance on external parties to file for 

20The 1992 Act established three conditions for a finding of effective competition, and a 

fourth was added in the 1996 Act. Specifically, a finding of effective competition in a 

franchise area requires that FCC has found one of the following conditions to exist: fewer 

than 30 percent of the households in the franchise area subscribe to cable service (lowpenetration test); at least two companies unaffiliated with each other offer comparable 

video programming service (through a wire or wireless (e.g., DBS service)) to 50 percent or 

more of the households in the franchise area, and at least 15 percent of the households take 

service other than from the largest company (competitive provider test); the franchising 

authority offers video programming service to at least 50 percent of the households in the 

franchise area (municipal test); or a local telephone company or its affiliate (or any other 

company using the facilities of such a carrier or its affiliate) offers video programming, by 

means other than DBS, that is comparable to that offered by the cable provider in the 

franchise area (local exchange carrier (LEC) test). For the LEC test to be applicable, the 

telephone company and the cable provider must be unaffiliated. 

21Without a finding of effective competition, the cable operator must also charge a uniform 

rate for cable services throughout the cable franchise. 

Page 16 GAO-04-8 Cable Television Industry 
changes in the classification—may lead to some classifications of the 

competitive status of franchises that do not reflect current conditions. 

Using data from FCC’s 2002 cable rate survey, we conducted several tests 

to determine whether information contained in franchises’ survey 

information—which was filed with FCC in mid-2002—was consistent with 

the classification of effective competition for the franchise in FCC’s 

records. We found some discrepancies. We subsequently interviewed 

officials from local franchising authorities in a number of areas with 

seemingly inconsistent information to further investigate the nature of the 

discrepancies. 

Of 86 franchises in FCC’s 2002 survey classified as satisfying the lowpenetration test22 for effective competition, we found that 48 franchises 

reported current information to FCC that indicate, on the basis of our 

calculations, the penetration rate exceeded the 30 percent threshold.23 We 

spoke with officials from three local franchising authorities in areas 

having a low-penetration classification and found the following: a 

Maryland franchise with a current penetration rate of 75 percent, a 

Virginia franchise with a penetration rate of 76 percent, and a California 

franchise with a penetration rate of 97 percent. In the aforementioned 

franchise areas, the local officials told us that they did not know why the 

franchise was classified as low penetration. However, our review of FCC 

filings found that the cable operators in those franchise areas had filed for 

and received an effective competition finding that was based on the lowpenetration test in the years between 1994 and 1997. Because there had 

never been a petition by the franchise authority to be recertified to 

regulate basic cable rates, the franchise area remained designated as 

having low penetration. 

Under the statute, local franchising authorities do not have the authority 

to regulate cable rates in franchises found to have effective competition. 

Therefore, a franchise should not simultaneously be listed as facing 

effective competition and having regulation of basic rates. Of 262 

franchises in FCC’s survey classified as facing effective competition, 40 

also reported that the franchising authority regulated their basic service 

rates. For example, FCC survey data include one franchise each in three 

22The low-penetration test of effective competition applies if fewer than 30 percent of the 

households in the franchise area subscribe to cable service. 

23We calculated the penetration rate by dividing the number of franchise subscribers by the 

number of households in the franchise area, as reported by the cable operator to FCC. 

Page 17 GAO-04-8 Cable Television Industry 
states—New Jersey, Kentucky, and California—that were identified as 

facing effective competition and also as subject to rate regulation. Officials 

from the franchising authorities in New Jersey and Kentucky told us that 

they indeed regulate the basic service tier, and that no competitor was 

present. The official in Kentucky said that the discrepancy could be the 

result of a wire-based competitor that was granted a franchise but has yet 

to enter the market due to a lawsuit filed by the incumbent cable operator 

attempting to block the competitor’s entry. The official in New Jersey said 

there is no competition in the area and the discrepancy may be attributed 

to the fact that two cable operators hold franchise agreements in the 

community, but do not compete against each other because each serves a 

different area of the community. According to an official in the California 

franchise, the franchise is not regulated—implying that the cable operator 

incorrectly answered FCC’s question. However, the official also told us 

that there is no competition in the area—that is, while two cable operators 

hold franchise agreements, they do not compete against each other. We 

also found one franchise each in two states—Texas and Illinois—that were 

identified as facing effective competition and also reporting that they are 

subject to rate regulation. The official in the Texas franchise said that the 

discrepancy may be attributed to the fact that the incumbent cable 

operator filed for a finding of effective competition, but a finding has not 

yet been granted. According to a local franchising authority official in the 

Illinois franchise, the discrepancy could be a result of a wire-based 

competitor that expressed an interest in entering the market, but never 

did. 

When the information contained in FCC’s database on effective 

competition conflicts with a cable operator’s response on the annual 

survey, FCC uses the information in their database for the purpose of its 

analysis of the differences in prices in areas with and without effective 

competition. We found that the survey responses on effective competition 

were not in accord with FCC’s files for 24 percent of all franchises—or 165 

franchises—in its 2002 survey. 

DBS Subscriber 

Information Used in 

Effective Competition 

Filings Has Not Been 

Independently Validated 

In the last several years, there have been dozens of petitions for a 

determination of effective competition based on DBS competition. 

However, the data on subscriber counts by zip code, which are used to 

make these petitions, are considered proprietary business information by 

DBS companies. DBS providers EchoStar and DIRECTV, as well as big 

dish satellite provider Motorola, have agreed to make their individual 

market data available to SkyTRENDS—a market research and reporting 

firm for the satellite industry—which aggregates the information across 

Page 18 GAO-04-8 Cable Television Industry 
the providers.24 SkyTRENDS subsequently makes the aggregated data 

available to cable operators for the purpose of making filings for effective 

competition to FCC. Although FCC has not verified the SkyTRENDS data 

or the method used by SkyTRENDS (and by cable operators) to calculate 

penetration levels at the franchise level, it nonetheless accepts 

SkyTRENDS data for these petitions. 

The SkyTRENDS data used to make effective competition petitions that 

are based on DBS competition are generally not available to government 

regulators. According to government regulators and a SkyTRENDS 

official, SkyTRENDS will not provide local franchising authorities with the 

underlying data used to support these filings, unless (in accordance with 

agreements with the satellite providers) the cable operator authorizes that 

dissemination. However, franchising authorities do have access to the data 

provided by cable franchises in their submissions for effective competition 

to FCC. According to FCC officials, the agency has not obtained detailed 

SkyTRENDS data since 1999. Some local franchise authorities have 

questioned the accuracy and validity of the DBS data and methods used by 

SkyTRENDS and cable operators for developing DBS penetration levels 

used to support effective competition determinations. Nevertheless, FCC 

has reiterated that it finds the SkyTRENDS data reliable for purposes of 

effective competition determinations, and that these data are the only 

available source for determining DBS penetration. 

The Lack of Reliable 

Information May 

Compromise Monitoring 

and Oversight of the Cable 

Industry 

FCC’s annual cable rate report provides an important source of 

information about the cable industry. This report provides an extensive 

analysis of the cable industry, including such important factors as cable 

rates, factors underlying changes in cable rates, and provision of advanced 

services (such as cable modem Internet access). FCC’s findings provide 

the Congress with information relevant to important policy decisions, 

including the regulation of cable rates and/or services and media 

consolidation and the convergence of video, voice, and data services. The 

lack of reliable information in FCC’s cable rate report may compromise 

the ability of the Congress to make these important policy decisions and of 

FCC to monitor and provide oversight of the cable industry. As such, it is 

important for FCC’s report to provide accurate, current, and relevant 

information about the cable industry. 

24The provision of DBS data for effective competition has recently been transferred to the 

Satellite Broadcasting and Communications Association. 

Page 19 GAO-04-8 Cable Television Industry 
A Variety of Factors 

Contribute to Cable 

Rate Increases 

During the preceding 5 years, cable rates have increased approximately 40 

percent—well in excess of the approximately 12 percent increase in the 

general rate of inflation. We found that a number of factors contributed to 

the increase in cable rates. These factors include increased expenditures 

on programming, infrastructure investments, and costs associated with 

customer service. On the basis of data from 9 cable operators, 

programming expenses and infrastructure investment appear to be the 

primary cost factors that have been increasing in recent years. 

Rates for Cable Service 

Have Increased Rapidly, 

Far Outpacing the General 

Rate of Inflation 

FCC data indicate that the average monthly rate subscribers are charged 

for the combined basic and expanded-basic tiers of service rose from 

$26.06 in 1997 to $36.47 in 2002—a 40 percent increase over the 5 years. 

This rate of increase is much greater than the general rate of inflation, as 

measured by the Consumer Price Index (CPI), which rose 12 percent over 

the same period. The CPI cable television subcategory index also shows 

cable rates increasing much faster than inflation, although the rise is 

somewhat less than the rise in rates as reported by FCC, likely because the 

Bureau of Labor Statistics (BLS) calculates this index in a way that takes 

into account the increasing number of channels offered over time. As 

figure 2 shows, the CPI cable television subcategory index rose just under 

30 percent in the same 5-year time frame. 

Several cable industry officials told us that the general rate of inflation is 

not an appropriate gauge for evaluating cable rates. In particular, these 

officials told us that a more appropriate comparison against which to 

evaluate the price increases for cable television would be other services 

that have the same kind of cost factors, such as other forms of 

entertainment media and services, which have also experienced significant 

price increases in recent years. Moreover, several cable industry 

representatives told us that on a per-channel basis, the increase in cable 

rates has not been as dramatic because cable operators are providing 

additional cable networks.25 However, it is not clear how meaningful cable 

rates reported on a per-channel basis are since subscribers cannot 

purchase cable service on a per-channel basis. Alternatively, in a recent 

analysis, a researcher found that because the number of hours subscribers 

25In addition to the BLS cable television subcategory index, FCC also reports the price per 

channel over time. Contrary to the BLS index indicating that cable prices increased just 

under 30 percent, FCC found that the price per channel rose by about 5 percent during this 

5-year span. 

Page 20 GAO-04-8 Cable Television Industry 
view cable networks has increased, cable rates, adjusted for this 

additional viewing, have actually declined.26 

Figure 2: Change in the General and Cable Television Consumer Price Indexes, 

1997 – 2002 

As discussed in the previous section, one important factor contributing to 

higher cable rates is cable operators’ increased costs to purchase 

programming from cable networks. Ten of the 11 cable operators, 8 of the 

15 cable networks, and all of the financial analysts we interviewed told us 

that higher programming costs contribute to rising cable rates. On the 

basis of financial data supplied to us by 9 cable operators, we found that 

these operators’ yearly programming expenses, on a per-subscriber basis, 

increased from $122 in 1999 to $180 in 2002—a 48 percent increase. Using 

26See Wildman, S.S. Assessing Quality-Adjusted Changes in the Real Price of Basic Cable 

Service. Michigan State University: September 10, 2003. 

Increases in Expenditures 

on Cable Programming 

Contribute to Higher Cable 

Rates 

Page 21 GAO-04-8 Cable Television Industry 
data from Kagan World Media, we found that the average fees cable 

operators must pay to purchase programming (referred to as license fees) 

increased by 34 percent from 1999 to 2002.

27 Although these estimated 

increases are somewhat different—which probably occurs because the 

data underlying these analyses are from different sources—both methods 

appear to reflect a substantial rise in programming expenses over the past 

few years. 

Almost all of the cable operators we interviewed cited sports programming 

as a major contributor to higher programming costs. On the basis of our 

analysis of Kagan World Media data, the average license fees for a cable 

network that shows almost exclusively sports-related programming 

increased by 59 percent in the 3 years between 1999 and 2002.28 

Conversely, for the 72 nonsports networks, the average increase in license 

fees for the same period was approximately 26 percent. Further, the 

average license fees for the sports networks were substantially higher than 

the average for other networks. See figure 3 for a comparison of the 

average license fees for sports programming networks compared with 

nonsports networks from 1999 to 2002. 

27Since the rates that cable networks negotiate with their clients/affiliates are confidential, 

we do not know the actual fees cable operators pay to carry the networks. We thus relied 

on license fee data compiled by Kagan World Media. 

28The seven national sports networks that we included in our analysis were ESPN, ESPN 

Classic, ESPN2, FOX Sports Net, The Golf Channel, The Outdoor Channel, and the Speed 

Channel. 

Page 22 GAO-04-8 Cable Television Industry 
Figure 3: Average Monthly License Fees per Subscriber—Sports Programming 

Networks v. Nonsports Networks, 1999 – 2002 

The cable network executives we interviewed cited several reasons for 

increasing programming costs. We were told that competition among 

networks to produce and show content that will attract viewers has 

become more intense. This competition, we were told, has bid up the cost 

of key inputs (such as talented writers and producers) and has sparked 

more investment in programming. Most notably, these executives told us 

that networks today are increasing the amount of original content and 

improving the quality of programming generally. Also, some executives 

cited the increased cost of sports rights29 and increased competition 

among networks for the broadcast rights of existing programming (such as 

syndicated situation comedies). As figure 4 shows, data from Kagan World 

29Two of the three sports leagues with whom we spoke told us that the cost of sports rights, 

paid by networks to the leagues, has not increased faster than the cost of other network 

programming in the last couple of years. However, representatives of the leagues did note 

that the cost to sports networks of producing sports programming is increasing because 

these are live events that require complex and costly production. 

Page 23 GAO-04-8 Cable Television Industry 
Media indicate that of 79 cable networks we analyzed, expenditures by 

these networks to produce programming increased from $6.47 billion in 

1999 to $8.90 billion in 2002, or by about 38 percent.30 

Figure 4: Expenditures by 79 Cable Networks to Produce Programming, 1999 – 2002 

Although programming is a major expense for cable operators, several 

cable network executives we interviewed also pointed out that cable 

operators offset some of the cost of programming through advertising 

revenues. In fact, 3 cable networks with whom we spoke said that they 

believe at least half of the license fees cable operators pay to carry their 

networks are recouped through the sale of the local advertising time that 

cable networks allow the cable operators to sell, which typically amounts 

to 2 minutes per hour. According to industry data, cable operators 

received over $3 billion from the sale of local advertising time in recent 

30For this analysis, we only used networks included in the Kagan publication that had 

financial data for the years 1999 to 2002. Later in this report, we have other analyses that 

use more of the networks included in the Kagan publication. In those analyses, we did not 

need 4 historical years of data. 

Page 24 GAO-04-8 Cable Television Industry 
years. Local advertising dollars account for about 7 percent of the total 

revenues in the 1999 to 2002 time frame for the 9 cable operators that 

supplied us with financial data. For these 9 cable operators, gross local 

advertising revenues—before adjusting for the cost of inserting and selling 

advertising—amounted to about $55 per subscriber in 2002 and offset 

approximately 31 percent of their total programming expenses.31 However, 

we were told that only the larger cable operators gain significant revenues 

from the sale of advertising, and that smaller cable operators generally do 

not sell as much local advertising because it is not always cost-effective 

for them to do so. In fact, even the larger cable operators do not sell all of 

the local advertising time that is available to them because there are 

significant costs of selling television ads. 

Several Other Factors 

Appear to Contribute to 

Higher Rates for Cable 

Service 

In addition to higher programming costs, the cable industry has incurred 

other increased costs. For example, according to industry sources, the 

cable industry spent over $75 billion between 1996 and 2002 to upgrade its 

infrastructure by replacing degraded coaxial cable with fiber optics and 

adding digital capabilities (see fig. 5). As a result of these expenditures, 

FCC reported that there have been increases in channel capacity; the 

deployment of digital transmissions; and nonvideo services, such as 

Internet access and telephone service.32 Five of the 11 cable operators, 9 of 

the 15 cable networks, and three of the five financial analysts we 

interviewed said investments in system upgrades contributed to increases 

in consumer cable rates. For example, one network with whom we spoke 

said that the major cause of recent cable rate increases is the cable 

industry’s capital improvements. Although these upgrades benefit cable 

subscribers by expanding the number of cable networks available and 

improving picture quality, much of the benefit of infrastructure 

improvements accrue to subscribers who purchase new, advanced 

services, such as broadband Internet access. One expert who commented 

on our report noted that there is no need for cable operators to pass on 

costs associated with infrastructure upgrades to subscribers purchasing 

basic and expanded-basic service because, by his calculations, these costs 

31Advertising sales revenues net of expenses incurred to insert and sell local advertising 

would offset a lower percentage of cable operators’ programming expenses. 

32For example, FCC reported that approximately 74 percent of cable systems had system 

capacity of at least 750 MHz, and that approximately 70 percent of cable subscribers were 

offered high-speed Internet access by their cable operator in 2002. 

Page 25 GAO-04-8 Cable Television Industry 
are almost fully offset by increases in revenues for digital tier and 

advanced (e.g., cable modem) services. 

Figure 5: Cable Industry Infrastructure Expenditures, 1996 – 2002 

Another factor contributing to higher cable rates is cable operators’ 

increased expenditures on customer service. NCTA said that the industry 

is paying more in labor costs because it has sought better-educated and 

more highly trained employees to provide customer support for the new 

services that the cable operators are offering. Additionally, customer 

service is now typically available to cable subscribers 24 hours a day, 7 

days a week. Three of the five financial analysts we interviewed agreed 

that increased customer service costs contributed to increases in cable 

rates, while 5 of the 11 cable operators we interviewed said increases in 

customer service, labor costs, or both contributed to higher cable rates. 

Page 26 GAO-04-8 Cable Television Industry 
Programming Expenses 

and Infrastructure 

Investment Appear to Be 

Primary Contributors to 

Cable Rate Increases 

Some View 

Ownership 

Affiliations as an 

Important Indirect 

Influence on Cable 

Rates 

On the basis of financial data from 9 cable operators, we found that 

annual subscriber video-based revenues—that is, revenues from basic, 

expanded-basic, and digital tiers; pay-per-view; installation charges; and 

other revenues such as equipment rental—increased approximately $79 

per subscriber from 1999 to 2002. By 2002, revenues per subscriber 

averaged $561, or $47 per month. During this same period, programming 

expenses increased approximately $57 per subscriber. Depreciation 

expenses on cable-based property, plant, and equipment—an indicator of 

expenses related to infrastructure investment—increased approximately 

$80 per subscriber during the same period. Although this may indicate that 

the marginal profits for the video business have been declining—which is 

consistent with what we were told during our interviews with financial 

analysts—there are two important caveats to this conclusion. First, 

depreciation expenses (and therefore infrastructure investment) represent 

a joint (or common) expense for both video-based and Internet-based 

services. Because these expenses are associated with more than one 

service, it is unclear how much of this cost should be attributed to videobased services. Second, cable operators are enjoying increased revenues 

from these nonvideo sources. For example, revenues from Internet-based 

services increased approximately $74 per subscriber during the same 

period. Thus, even if video profit margins have been in decline, this does 

not imply that overall profitability of cable operators has declined. 

Several industry representatives and experts we interviewed told us that 

they believe ownership affiliation may also influence the cost of 

programming and thus, indirectly, the rates for cable service. We found 

that there are two primary ownership relationships that some believe 

influence the cost of cable programming: relationships between cable 

networks and cable operators, and relationships between cable networks 

and broadcasters. To understand the nature of these ownership 

relationships, we analyzed the ownership of 90 cable networks that are 

carried most frequently on cable operators’ basic or expanded-basic tier 

(see fig. 6). Of these 90 cable networks, we found that approximately 19 

percent were majority-owned (i.e., at least 50 percent owned) by a cable 

operator.33 For example, cable operators have ownership interests of at 

33We also performed the analysis reported in this section with a 20 percent ownership 

affiliation threshold—that is, we considered a network as “owned” by a broadcast network 

or cable operator if the network was at least 20 percent owned by either of these types of 

providers. With this ownership threshold, our findings were nearly identical to those 

reported here. 

Page 27 GAO-04-8 Cable Television Industry 
least 50 percent in such widely distributed cable networks as TBS, TNT, 

CNN, AMC, and the Cartoon Network.34 We also found that approximately 

43 percent of the 90 networks were majority-owned by a broadcaster. For 

example, broadcasters have ownership interests of at least 50 percent in 

such widely distributed cable networks as ESPN, FX, MSNBC, and MTV. 

The remaining 38 percent of the networks are not majority-owned by 

broadcasters or cable operators. 

Figure 6: Ownership Affiliation of the 90 Most Carried Cable Networks 

Note: Cable networks were assumed affiliated if the ownership interest was 50 percent or greater. 

Despite the view held by some industry representatives with whom we 

spoke that license fees for cable networks owned by either cable 

operators or broadcasters tend to be higher than fees for other cable 

networks, we did not find this to be the case. In particular, we found that 

cable networks that have an ownership affiliation with a broadcaster did 

not have, on average, higher license fees (i.e., the fee the cable operator 

pays to the cable network) than cable networks that were not majority34Only 3 of the large cable operators are majority owners of national cable networks. 

Page 28 GAO-04-8 Cable Television Industry 
owned by broadcasters or cable operators.35 We did find that license fees 

were statistically higher for cable networks owned by cable operators than 

was the case for cable networks that were not majority-owned by 

broadcasters or cable operators. However, when using a regression 

analysis (our cable license fee model) to hold constant other factors that 

could influence the level of the license fee, we found that ownership 

affiliations—with broadcasters or with cable operators—had no influence 

on cable networks’ license fees.36 We did find that networks with higher 

advertising revenues per subscriber (a proxy for popularity) and sports 

networks received higher license fees. 

Industry representatives we interviewed also told us that cable networks 

owned by cable operators or broadcasters are more likely to be carried by 

cable operators than other cable networks. There was a particular concern 

expressed to us regarding retransmission consent agreements. These 

agreements often include, as part of the agreement between cable 

operators and broadcasters for the right of the cable operator to carry the 

broadcast station, a simultaneous agreement to carry one or more 

broadcast-owned cable networks. Many representatives from cable 

operators and several independent (nonbroadcast) cable networks told us 

that because the terms of retransmission consent agreements often 

include carriage of broadcast-owned cable networks, cable operators 

sometimes carry networks they might otherwise not have carried, and this 

practice can make it difficult for independent cable networks to be carried 

by cable operators. Alternatively, representatives of the broadcast 

networks told us that, to their knowledge, cable networks had not been 

dropped nor were independent cable networks unable to be carried by 

cable operators because of retransmission consent agreements. Further, 

these representatives told us that they accept cash payment for carriage of 

the broadcast station, but that cable operators prefer to carry broadcastowned cable networks in lieu of a cash payment. 

35License fees received by broadcaster-affiliated networks were higher than those received 

by cable networks that were not majority-owned by broadcasters or cable operators, but 

the difference was not statistically significant. Moreover, when sports networks were 

eliminated from the analysis, the average level of license fee was almost identical across 

these two groups. 

36In the cable license fee model, we regressed the average monthly license fee for 90 cable 

networks on a series of variables that might influence the license fee. See appendix I for a 

list of variables included in that model. 

Page 29 GAO-04-8 Cable Television Industry 
On the basis of our cable network carriage model—a model designed to 

examine the likelihood of a cable network being carried—we found that 

cable networks affiliated with broadcasters or with cable operators are 

more likely to be carried than other cable networks. In particular, we 

found that networks owned by a broadcaster or by a cable operator were 

46 percent and 31 percent, respectively, more likely to be carried than a 

network without majority ownership by either of these types of 

companies. Additionally, we found that cable operators were much more 

likely to carry networks that they themselves own. A cable operator is 64 

percent more likely to carry a cable network it owns than to carry a 

network with any other ownership affiliation. Appendix V provides a 

detailed discussion of this model. 

Several Factors 

Generally Lead Cable 

Operators to Offer 

Large Tiers of 

Networks Instead of 

Providing À La Carte 

or Minitier Service 

Most cable operators with whom we spoke provide subscribers with 

similar tiers of networks, typically the basic and expanded-basic tiers, 

which provide subscribers with little choice regarding the specific 

networks they purchase. Adopting an à la carte approach, where 

subscribers could choose to pay for only those networks they desire, 

would provide consumers with more individual choice, but could require 

additional technology and impose additional costs on both cable operators 

and subscribers. Additionally, this approach could alter the current 

business model of the cable network industry wherein cable networks 

obtain roughly half of their overall revenues from advertising. A move to 

an à la carte approach could result in reduced advertising revenues and 

might result in higher per-channel rates and less diversity in program 

choice. Because of this reliance on advertising revenues by cable 

networks, most cable networks require cable operators to place their 

network on widely distributed tiers. A variety of factors—such as the 

pricing of à la carte service, consumers’ purchasing patterns, and whether 

certain niche networks would cease to exist with à la carte service—make 

it difficult to ascertain how many consumers would be better off and how 

many would be made worse off under an à la carte approach. Creating a 

greater number of smaller tiers could cause many of the same 

technological and economic concerns as an à la carte approach. 

Most Cable Operators The 11 cable operators that we interviewed adopt very similar strategies 

Offer Similar Bundles of for bundling networks into tiers of service. These cable operators offer 

Networks their subscribers the following tiers of service: basic tier (11 operators), 

expanded-basic tier (11 operators), digital tier (11 operators), and 

premium services (7 operators). Five of the 11 cable operators offer the 

same or similar tiers of service to subscribers in all their franchise areas. 

The remaining 6 cable operators offer different tiers of service among their 

Page 30 GAO-04-8 Cable Television Industry 
franchise areas; we were told that these differences are generally the 

result of the cable operators acquiring franchises with different tiering 

strategies. 

Using data from FCC’s 2002 cable rate survey, we also examined the 

networks included in the basic, expanded-basic, and digital tiers of 

service. With basic tier service, subscribers receive, on average, 

approximately 25 channels, which include the local broadcast stations.37 

The expanded-basic tier provides, on average, an additional 36 channels. 

With a digital tier, subscribers receive, on average, 104 channels. In 

general, to have access to the most widely distributed cable networks— 

such as ESPN, TNT, and CNN—most subscribers must purchase the 

expanded-basic tier of service. 

Concerns Exist about a 

Lack of Subscriber Choice 

The manner in which cable networks are currently packaged has raised 

concern among policy makers and consumer advocates about the lack of 

consumer choice in selecting the programming they receive. Under the 

current approach, it is likely that many subscribers are receiving cable 

networks that they do not watch. In fact, a 2000 Nielsen Media Research 

Report indicated that households receiving more than 70 networks only 

watch, on average, about 17 of these networks. The current approach has 

sparked calls for more flexibility in the manner that subscribers receive 

cable service, including the option of à la carte service, in which 

subscribers receive only the networks that they choose and for which they 

are willing to pay. Additionally, an organization representing small cable 

operators recently released a report advocating an à la carte approach 

because they believe it will mitigate the ability of broadcast networks to 

gain carriage agreements for their cable networks through the 

retransmission consent process.38 

37Representatives of a broadcast organization told us that the digital local broadcast signals 

are sometimes carried on a digital tier. 

38See The Carmel Group, The Telecom Future of Independent Cable: ACA Member 

Concerns and Issues (Carmel-by-the-Sea, CA: May 2003), a report prepared for the 

American Cable Association. 

Page 31 GAO-04-8 Cable Television Industry 
An À La Carte Network 

Offering Could Impose 

Costs on Cable 

Subscribers and Operators 

If cable operators were to offer all networks on an à la carte basis—that is, 

if consumers could select the individual networks they wish to purchase— 

additional technology upgrades would be necessary in the near term. In 

particular, subscribers would need to have an addressable converter box 

on every television set attached to the cable system. Today, the networks 

included on the basic and expanded-basic tiers are usually transmitted 

throughout the cable system in an unscrambled fashion. Because most 

televisions in operation today are cable ready, a cable wire can usually be 

connected directly into the television and the subscriber can view all of 

the networks on those tiers. An addressable converter box—which serves 

to unscramble any scrambled networks—is only needed if the subscriber 

chooses to purchase networks that the cable operator transmits in a 

scrambled fashion, as is usually the case for networks placed on digital 

tiers, certain premium movie channels, and pay-per-view channels.39 

If all networks were offered on an à la carte basis, cable operators would 

need to scramble all of the networks they transmit to ensure that 

subscribers are unable to view networks they are not paying to receive. 

Under such a scenario, addressable converter boxes, which enable the 

operator to send messages from the cable facility to the box to indicate 

which networks the subscriber is purchasing and thus allowed to watch, 

would need to be connected to all television sets attached to the cable 

system. The addressable converter box would unscramble the signals of 

the networks that the subscriber has agreed to purchase. The need for an 

addressable converter box deployment could be costly. According to 

FCC’s 2002 survey data, of the franchises that responded to the survey and 

provided cost data on addressable converter boxes, the average monthly 

rental price for a box is approximately $4.39. For homes that have multiple 

television sets, the expense for these boxes could add up—the extra cost 

for a home that needs to add three addressable converter boxes would be 

about $13.17 a month at current prices. 

Although cable operators have been placing addressable converter boxes 

in the homes of customers who subscribe to scrambled networks, many 

homes do not currently have addressable converter boxes or do not have 

them on all of the television sets attached to the cable system. For 

example, a representative of 1 cable operator we interviewed indicated 

39Sometimes certain cable networks are transmitted unscrambled and trapping devices are 

used outside of the customer’s home to keep networks that the home has not purchased 

from transmitting to the customer’s televisions. This trapping technology would not be 

economically viable in an à la carte regime. 

Page 32 GAO-04-8 Cable Television Industry 
that most of its subscribers do not have addressable converter boxes. A 

representative of another cable operator stated that only 40 percent of its 

subscribers have addressable converter boxes. Conversely, 1 operator told 

us that nearly three out of four of its subscribers do have at least one 

addressable converter box in place, and that the number of homes with a 

box will only continue to increase. Addressable converter boxes are 

becoming more commonly deployed as more customers subscribe to 

digital tiers. Since cable operators may move toward having a greater 

portion of their networks provided on a digital tier in the future, these 

boxes will need to be deployed in greater numbers. Moreover, consumer 

electronic manufacturers have recently submitted plans to FCC regarding 

specifications for new television sets that will effectively have the 

functionality of an addressable box within the television set. Once most 

customers have addressable converter boxes or these new televisions in 

place, the technical difficulties of an à la carte approach would be 

mitigated. Several experts that we spoke with offered a wide divergence of 

views on how long it would be before addressable converter boxes and/or 

new televisions with built-in boxes are fully deployed in all American 

homes. 

In addition to the subscriber costs of converter boxes, cable operators 

also would incur costs to monitor and manage an à la carte approach. 

Cable operators likely would have to add additional customer service and 

technical staff to deal with the increased number of transactions that 

would occur under an à la carte regime. One cable network representative 

we interviewed indicated that an à la carte regime would be a substantial 

undertaking for the cable operators. For example, this network 

representative told us that a cable operator offering 150 channels of à la 

carte programming could have its subscribers choosing all different 

numbers of networks, which would mean that subscribers would be 

spending much longer periods of times on the telephone with customer 

service staff. 

Cable Networks Often 

Specify Placement on the 

Basic or Expanded-Basic 

Tier 

Even if cable operators desired to offer customers a wider variety of 

bundles of services or even à la carte service, most contracts negotiated 

between cable networks and cable operators prohibit these alternatives. 

All 11 cable operators and four of five financial analysts that we 

interviewed told us that program contracts generally specify the tier that 

the network must appear on, or the contract establishes a threshold 

percentage of subscribers that must be able to see a network—which 

effectively requires the same tier placements. For example, one individual 

responsible for negotiating program contracts for cable operators noted 

Page 33 GAO-04-8 Cable Television Industry 
that all of the top 40 to 50 networks specify that their networks appear on 

either the basic or expanded-basic tier. We also reviewed sample contracts 

for 2 cable networks, one contract specified that the network appear on 

the basic or expanded-basic tier and the other contract specified “the most 

widely subscribed level of service.” We were told that cable networks 

include these provisions in their contracts because their business models 

are developed on the basis of a wide distribution of their network. 

Economic Characteristics 

of the Cable Network 

Market Are a Constraint to 

an À La Carte Approach 

If cable subscribers were allowed to choose networks on an à la carte 

basis, the economics of the cable network industry could be altered, and, 

if this were to occur, it is possible that cable rates could actually increase 

for some consumers. In particular, we found that cable networks earn 

much of their revenue from the sale of advertising that airs during their 

programming. For example, 3 of the 15 cable network representatives we 

interviewed indicated that they receive approximately 60 percent of their 

revenue from advertising. Our analysis of information on 79 networks 

from Kagan World Media indicates that these cable networks received 

nearly half of their revenue from advertising in 2002. The majority of the 

remaining revenue is derived from the license fees that cable operators 

pay to networks for the right to carry their signals. Figure 7 provides a 

breakdown of the relationship in recent years between advertising 

revenues and license fee revenues on the basis of data from Kagan. 

Page 34 GAO-04-8 Cable Television Industry 
Figure 7: Percentage of Cable Network Advertising Revenue Compared with 

License Fee Revenues for 79 Cable Networks, 1999 – 2002 

Note: Although cable networks have other sources of revenues, advertising and license fee revenues 

comprise the vast majority of cable network revenues. 

To receive the maximum revenue possible from advertisers, cable 

networks strive to be on cable operators’ most widely distributed tiers. In 

other words, advertisers will pay more to place an advertisement on a 

network that will be viewed, or have the potential to be viewed, by the 

greatest number of people. According to cable network representatives we 

interviewed, any movement of networks from the most widely distributed 

tiers to an à la carte format could result in a reduced amount that 

advertisers are willing to pay for advertising time because there would be 

a reduction in the number of viewers available to watch the networks. To 

compensate for any decline in advertising revenue, network 

representatives contend that cable networks would likely increase the 

license fees they charge to cable operators. In particular, we were told by 

many cable networks that under an à la carte system, the cost burden of 

cable television would become less reliant on advertising revenues and 

much more reliant on license fees that would likely be passed on to 

Page 35 GAO-04-8 Cable Television Industry 
consumers. For example, one cable network representative estimated that 

to compensate for the loss of advertising revenue in an à la carte scenario, 

the network would have to raise its monthly license fee from the current 

monthly rate of $0.25 per subscriber to a level several fold higher— 

possibly as much as a few dollars per subscriber per month. Additionally, 

four of the five financial analysts we interviewed also stated that license 

fees would increase under an à la carte approach. At the same time, if 

cable networks see advertising revenues decline, they will also likely take 

steps to reduce production costs, because cable operators might be 

unwilling to accept increases in license fees to fully offset the decline in 

adverting revenues. As such, it is not clear whether license fees would 

need to completely offset any declines in advertising revenues. 

Because increased license fees, to the extent that they occur, are likely to 

be passed on to subscribers, it appears that subscribers’ monthly cable 

bills would not necessarily decline under an à la carte system. The cable 

networks that we interviewed generally told us that they believe that an à 

la carte approach would not reduce cable rates for most subscribers. In 

fact, representatives of 7 cable networks noted that costs to subscribers 

could actually increase under an à la carte system, while 6 networks said 

that subscribers might pay about the same monthly bill but would likely 

receive far fewer channels. Conversely, for subscribers who purchase only 

a few cable networks, rates would likely decline under this approach 

because they would only have to pay for the limited number of networks 

that they choose to purchase. Thus, an à la carte approach would provide 

consumers with greater control over their cable choices, even if, on 

average, consumer bills did not decline. 

Most of the cable networks we interviewed also believe that programming 

diversity would suffer under an à la carte system because some cable 

networks, especially small and independent networks, would not be able 

to gain enough subscribers to support the network. For example, one 

network told us that under an à la carte system, fewer networks would 

remain financially viable and new networks would be less likely to be 

developed. Three of the cable operators and four of the five financial 

analysts we interviewed also said that smaller networks or those providing 

specialty programming would be hurt the most by an à la carte system. A 

number of the cable networks indicated that launching a new network 

under an à la carte system would be very difficult. Similarly, according to 

NCTA, an à la carte approach could result in the disappearance of many 

networks and could undermine the prospects for any new basic cable 

networks. Further, if an à la carte system resulted in limited subscribers 

Page 36 GAO-04-8 Cable Television Industry 
and decreased advertising revenue, several networks said the quality of 

programming available might be adversely impacted. 

The manner in which an à la carte approach might impact advertising 

revenues, and ultimately the cost of cable service, rests on assumptions 

regarding customer choice and pricing mechanisms. In particular, the 

cable operators and cable networks that discussed these issues with us 

appeared to assume that many—if not most—customers, if faced with an à 

la carte selection of networks, would choose to receive only a limited 

number of networks. This assumption is consistent with the data on 

viewing habits—as previously mentioned, a recent study has shown that 

most people, on average, watch only about 17 networks. Nevertheless, 

under an à la carte scenario, cable companies may price large packages of 

networks in a way that provides an incentive for subscribers to choose a 

wide number of networks. Additionally, under this approach, cable 

operators may choose to price cable services in an entirely different way. 

One option suggested was that, similar to common pricing schemes in the 

electric and natural gas industries, subscribers might pay a flat charge for 

the connection to the cable operator’s system plus additional charges for 

each network the subscriber chooses to purchase. This could result in 

subscribers purchasing only a few channels paying a higher rate per 

channel than subscribers purchasing many channels. One of the issues 

that some industry representatives discussed with us concerned the value 

consumers place on networks they do not typically watch. While two 

experts suggested that it is not clear whether more networks are a benefit 

to subscribers, others noted that subscribers place value in having the 

opportunity to occasionally watch networks they typically do not watch. 

Thus, there are a variety of factors that make it difficult to ascertain how 

many consumers would be made better off and how many would be made 

worse off under an à la carte approach. These factors include how cable 

operators would price their services under an à la carte system; the 

distribution of consumers’ purchasing patterns; whether niche networks 

would cease to exist, and, if so, how many would exit the industry; and 

consumers’ true valuation of networks they typically do not watch. 

Creating Additional Tiers Another alternative to the à la carte approach that has been discussed is a 

of Service Is More move to minitiers, under which subscribers would choose small tiers of 

Feasible, but Economic programming that are grouped by genre (such as sports, news and 

information, and general entertainment). Although industry and Technological representatives told us that this approach might be more viable than an à Constraints Would Also la carte approach, we were also told that all of the issues associated with 

Apply an à la carte regime would also apply to minitiers. Representatives of 8 of 

Page 37 GAO-04-8 Cable Television Industry 
the 15 cable networks we interviewed indicated that the creation of 

additional tiers would be a disadvantage to the cable industry. Four cable 

network representatives stated that increasing the number of tiers would 

result in the same outcome as an à la carte system: a decline in cable 

network advertising revenue that would force networks to increase their 

license fees to cable operators, which would result in higher cable rates. 

Six of the 11 cable operators we interviewed also noted that a minitier 

approach would also require more deployment of addressable converter 

boxes. Finally, a representative of 1 cable operator told us that after 

experimenting with genre tiers in the past, the operator determined that 

this was not a successful strategy. This representative stated that 

subscribers felt the cable operator was forcing them to buy many tiers, 

since a typical household wanted to see one or more networks in several 

of the tiers. 

However, officials representing 5 of the 11 cable operators we interviewed 

indicated that the tier concept might be viable in the case of sports 

programming. A representative of 1 cable operator indicated that a sports 

tier would be appropriate because sport fans are loyal customers and the 

cost of sports programming is very high. A representative of another cable 

operator noted that creating a sports tier should be an option, but that 

other types of programming would not work on separate tiers. Recently, 

several regional sports networks have been placed on sports-only tiers in 

the New York City metropolitan area.

40 

Alternatively, representatives from two major sports leagues and a sports 

network do not believe that a sports-only tier is necessary, and some of 

these representatives did not believe such a tier would be viable. One 

important objective of the major sports leagues is to obtain the widest 

distribution of their games as possible. Therefore, many games appear 

either on broadcast television or on cable networks carried on the basic or 

expanded-basic tier. To ensure this wide distribution of their games, the 

major sports leagues include provisions in their contracts with cable 

networks that specify carriage of their games on a tier with broad 

distribution. A representative of a sports network said that if their network 

were offered on a sports-only tier, the nature of the network would 

40Recently, the Yankees Entertainment and Sports (YES) network was placed on a sportsonly tier, with Madison Square Garden and FOX Sports Net New York, on selected 

Cablevision systems in the New York City metropolitan area following a lengthy dispute 

between YES and Cablevision. Subsequently, YES was offered on an à la carte basis on 

Time Warner Cable franchises in New York. 

Page 38 GAO-04-8 Cable Television Industry 
Industry Participants 

Have Cited Certain 

Options That May 

Address Factors 

Contributing to Rising 

Cable Rates 

change. In fact, representatives of the three leagues with whom we spoke 

said that if sports networks were on a sports-only tier, the leagues would 

not want to sell the right to carry certain events on those networks since it 

would likely not be available to most viewers.41 One of these three 

representatives said that under this scenario, sports-only networks might 

cease to exist and any sports on cable would only be placed on general 

entertainment networks that provide variety programming—similar to 

broadcast networks. Finally, representatives from two of the sports 

leagues and a sports network said that there is no reason to believe that 

removing the sports networks from the expanded-basic tier would result 

in any substantial reduction in the rate for expanded-basic tier cable 

service. When two cable operators in the New York City metropolitan area 

moved regional sports networks to a separate tier, these companies 

lowered the expanded-basic cable rate by only 50 cents to a dollar.42 

In recent years, there has been concern about the rapidity of cable rate 

increases. As we previously noted, cable rates have risen by about 40 

percent in the last 5 years, far outstripping increases in the general rate of 

inflation. Several approaches for addressing the rise in cable rates have 

been put forth. These approaches can be grouped into the following two 

main categories: (1) the control of rates through regulation and (2) the 

promotion of lower rates through market mechanisms, such as through 

greater competition. 

Some consumer groups have pointed to the lack of competition as 

evidence that reregulation needs to be considered. One representative of a 

consumer group noted that regulation might be the only alternative to 

mitigate increasing cable rates and cable operators’ market power. For 

example, one consumer group has recommended, among a variety of 

options, returning authority to reregulate cable rates to local and state 

governments. However, some experts expressed concerns about cable 

regulation after the 1992 Act. First, some academic critics believe that 

cable regulation lowered the quality of programming, discouraged 

investment in new facilities, and imposed administrative burdens on the 

41One sports league also requires its cable network carriers to arrange for all cablecast 

games to be simulcast (subject to league sell-out rules) on free over-the-air television in the 

home cities of the participating clubs. 

42In one case, the cable operator simultaneously added one or two other networks to the 

expanded-basic tier. 

Page 39 GAO-04-8 Cable Television Industry 
industry and regulators. Second, according to these same critics, there is 

no strong evidence that cable rates were significantly constrained during 

that regulated era. Finally, regulation today could be considerably more 

complex than it was 11 years ago. Today, video providers use varied 

platforms (cable, DBS) to provide an array of communication services, 

including video service, Internet access, and video on demand. A 

regulatory scheme would need to consider which services and providers 

to regulate, and how to allocate the common costs of a communications 

network in a regulatory context across the various services provided. 

Alternatively, taking steps to promote competition could help to reduce or 

slow the growth of cable rates by leveraging the normal workings of the 

marketplace. In those few local markets where a second wire-based 

provider exists, we found that cable rates are about 15 percent lower than 

local markets without this competition. Moreover, even though the 

influence of DBS on cable rates is minor, our current finding—in contrast 

to our earlier study and earlier studies by FCC that did not find such an 

effect—is that the presence of DBS does help to lower cable rates slightly. 

This may indicate that as more households subscribe to DBS service, cable 

operators will ultimately respond by reducing rates. Below, we discuss 

options that have been suggested for addressing the cable rate issue. We 

note that in this overview, we are neither making any specific 

recommendations regarding the adoption of any of these options, nor 

suggesting that this list is a necessarily comprehensive review of possible 

options. 

Program access issues. The 1992 Act includes provisions aimed at, among 

other things, enhancing competition in the subscription video industry. As 

required by the act, FCC developed rules—commonly referred to as the 

program access rules—which were designed in part to ensure that cable 

networks that have ownership relationships with cable operators (i.e., 

vertically integrated cable operators) generally make their satellitedelivered programming available to competitors. Since 1992, some 

entering companies and consumer groups have stated that current 

program access rules are not broad enough to provide assurances that 

entrants can obtain necessary programming. In particular: 

• 	 Some have expressed concern that the law is too narrow because it 

applies only to the satellite-delivered programming of vertically 

integrated cable operators. In recent years, some regional cable networks 

owned by cable operators have been delivered to their cable facilities 

through wires—that is, they are not satellite delivered. When this is the 

case, the cable operator need not make the programming available to 

Page 40 GAO-04-8 Cable Television Industry 
competitors. Additionally, although it is not clear how widespread this 

practice is in local markets across the country, a recent report by a 

consumer group raised concerns that it could become more prominent at a 

national level.43 Although questions have been raised about this issue— 

which has come to be called the terrestrial loophole—FCC has pointed out 

that the statue is specific in that the program access rules apply only to 

satellite-delivered programming. 

• 	 Although the program access rules generally prohibit exclusive contracts 

for programming of vertically integrated cable operators, these rules do 

not prohibit exclusive contracts between a cable operator and an 

independent cable network.44 Some operators entering the market believe 

that some programming may not be available to them because large 

incumbent cable operators have secured such exclusive arrangements. 

Given these concerns, some have suggested that changes in the statutory 

program access provisions might enhance the ability of other providers to 

compete with the incumbent cable operators. However, others have noted 

that altering these provisions could reduce the incentive for companies to 

develop innovative programming. That is, we were told that companies 

may have less incentive to invest in certain new programming if they are 

not able to market that programming through their own distribution 

channels on an exclusive basis.45 

Promoting wireless competition. The medium used to provide video 

services over wireless platforms—radio spectrum—is a scarce and 

congested resource. DBS operators have stated that they are currently not 

able to provide local broadcast stations in all 210 television markets in the 

United States because they do not have adequate spectrum to do so while 

still providing a wide variety of national networks.46 DBS companies 

43U.S. Public Interest Research Group, The Failure of Cable Deregulation: A Blueprint for 

Creating a Competitive, Pro-Consumer Cable Television Marketplace (Washington, D.C.: 

August 2003). 

44Under the Communications Act, the prohibition on exclusive contracts enacted as part of 

the program access provisions in the 1992 Act were set to sunset in October 2002 unless 

FCC determined the rules were still necessary. In 2002, FCC extended the prohibition until 

October 2007 because the commission determined that the prohibition continues to be 

necessary. 

45In July 2003, FCC adopted a Notice of Inquiry asking for comment on a variety of issues 

related to competition in the video market. One of the issues related to program access 

issues. 

46Recently, DIRECTV announced that it would provide local broadcast stations in all 210 

television markets by 2008. 

Page 41 GAO-04-8 Cable Television Industry 
gained the right to provide these local stations in 1999, and this has been 

important in enabling them to compete more effectively with locally based 

cable operators. However, as part of the so-called carry one, carry all 

provisions, these companies are required to provide all local broadcast 

stations in markets where they provide any of those stations. According to 

executives at the two primary DBS companies, if DBS companies only 

provided the local stations that they view as desired by their subscribers, 

they might more quickly provide local broadcast stations in more markets, 

thereby rendering DBS a more effective competitor to cable. However, any 

modifications to the DBS carry one, carry all rules would need to be 

examined in the context of why those rules were put into place—that is, to 

ensure that all broadcast stations are available in markets where DBS 

providers choose to provide local stations. In fact, a U.S. Court of Appeals 

found that certain government interests promoted by the carry one, carry 

all provisions applicable to DBS providers are sufficient to justify this 

requirement under a First Amendment analysis.47 Additionally, any review 

of these rules would need to take into account how they relate to other 

similar requirements, including, for example, must-carry requirements for 

the cable industry as well as how must carry will be applied to cable and 

DBS in the coming digital age. As with many complex policy issues, 

balancing what are often conflicting considerations is very complex. 

Retransmission consent issues. In the 1992 Act, the Congress created a 

mechanism, known as retransmission consent, through which local 

broadcast station owners (such as local ABC, CBS, Fox, and NBC stations) 

could receive compensation from cable operators in return for the right to 

carry their broadcast stations. Prior to the 1992 Act, cable operators could 

retransmit local broadcast stations without approval of the broadcasters 

and without compensation. As cable operators began to carry more cable 

networks that competed with broadcast networks for viewers and 

associated advertising revenues, broadcasters argued that it was important 

for them to be able to receive compensation for retransmission of their 

stations. The retransmission consent provisions included in the 1992 Act 

allow local broadcast stations and cable operators to negotiate for 

47Satellite Broadcasting and Communications Association v. FCC, 275 3d 337 (4th Cir. 

2001) cert. Denied 536 U.S. 922 (2002). 

Page 42 GAO-04-8 Cable Television Industry 
payment or some other form of compensation in exchange for the cable 

operator’s right to carry broadcast networks.48 

Today, few retransmission consent agreements include cash payment for 

carriage of the local broadcast station; rather, agreements between some 

large broadcast groups and cable operators generally include provisions 

for carriage of broadcaster-owned cable networks. We were told that, after 

the passage of the 1992 Act, the cable industry indicated its reluctance to 

pay for carriage of local broadcast stations—which they had previously 

been carrying free of charge. The negotiations for retransmission consent 

at that time quickly turned to examining carriage of broadcaster-owned 

cable networks as compensation for the right to carry the local broadcast 

station. Both the Congress and FCC had indicated that carriage of 

broadcast-owned cable networks would be a possible way for 

broadcasters to receive compensation for carriage of broadcasters’ overthe-air stations. A variety of parties with whom we spoke mentioned 

specific broadcast-owned cable networks (such as ESPN2 and MSNBC) 

that were launched as part of retransmission consent agreements during 

the 1990s. 

One concern that was expressed to us regarding retransmission consent 

relates to its influence on the carriage decisions of cable operators. In 

particular, many representatives from cable operators and several 

independent (nonbroadcast) cable networks told us that because the 

terms of retransmission agreements often include the carriage of 

broadcast-owned cable networks, cable operators sometimes carry 

networks they otherwise might not have carried. Several of the cable 

networks we spoke with noted that this practice can make it difficult for 

independent cable networks to gain carriage, particularly in the case of 

new networks. Alternatively, representatives of the broadcast networks 

told us that they did not believe that cable networks had been dropped or 

that independent cable networks could not gain carriage because of 

retransmission consent agreements. Further, these representatives told us 

that they accept cash payment for carriage of the broadcast signal, but that 

cable operators tend to prefer carriage options in lieu of a cash payment. 

Broadcast executives also told us that the retransmission process has been 

very important in preserving free over-the-air television. 

48Each local broadcast station has the right to negotiate for retransmission or to assert 

must-carry status. Under must carry, the cable operator is required to carry a local 

broadcast station, but can do so without paying any compensation. 

Page 43 GAO-04-8 Cable Television Industry 
Several of the industry representatives with whom we met also expressed 

concern that ownership relationships between broadcast networks and 

cable networks could lead to higher cable rates for consumers. Although 

we did not find that license fees are higher when such an ownership 

relationship exists, we did find that cable networks owned by broadcast 

networks are more likely to be carried on cable systems than networks not 

owned by broadcasters or by cable operators.49 (See app. V for a 

discussion of our carriage model). As such, the influence of retransmission 

consent on consumer rates is not clear, since these rates could be affected 

by the carriage patterns. 

Certain parties with whom we met advocated the removal of the 

retransmission consent provisions and told us that this may have the effect 

of lowering cable rates.50 However, other parties have stated that such 

provisions serve to enable television stations to obtain a fair return for the 

retransmitted content they provide—which they believe was not the case 

prior to 1992. Moreover, these industry representatives noted that 

retransmission rules help to ensure the continued availability of free 

television for all Americans. Currently, there is a petition pending before 

FCC that asks for a review of the impact of retransmission consent. 

In the last decade, the subscription video industry has undergone dramatic 

changes. The regulatory and competitive environments have both evolved; 

cable rates have been regulated and later partially deregulated; and limited 

wire-based competition has been supplanted by nationwide competition 

from satellite-based companies. It appears that this evolution has created 

problems for FCC’s monitoring and reporting on the industry. As 

mandated by the Congress, FCC prepares a yearly report on cable rates in 

the United States. But, aspects of how information for the report is 

collected—such as the cost factors underlying cable rate increases—are 

closely associated with the earlier, regulated era of the cable industry. For 

example, information on cost changes underlying cable rate increases are 

reported to FCC on a survey form that requires the cost factors and rate 

changes to balance. Because rates and costs need not balance in an 

unregulated environment, cable franchise representatives filing out the 

49We also found that cable networks owned by cable operators are also more likely to be 

carried than networks not owned by broadcasters or cable operators. 

50One possible option would be to replace the retransmission consent provisions with a 

must-carry right. 

Conclusions 

Page 44 GAO-04-8 Cable Television Industry 
form made accommodations in their answers that may have compromised 

the accuracy of the cost data they were reporting. Similarly, maintaining 

current information on the effective competition status of cable operators 

under FCC’s current process has proven difficult. Some expected 

competitors have emerged but did not fully deploy their networks and, in 

some cases, discontinued service altogether, and DBS companies—which 

were not yet providing service in 1992—have thrived, but information on 

their market participation is not readily available on a local level. We 

found that because FCC’s current process does not provide for updates to 

the status of effective competition, some designations do not appear to 

reflect current competitive conditions. 

In the face of the rapid evolution of the subscription video industry, it 

remains important for accurate, current, and relevant information to be 

available to the Congress and FCC. Both the Congress and FCC monitor 

and provide oversight of this industry, for which FCC’s report can serve as 

an important input. Additionally, FCC’s report can provide information 

relevant to the Congress, as it considers important policy decisions, 

including the regulation of cable rates and/or services, media 

consolidation, and the convergence of video, voice, and data services. 

Lacking reliable information, the Congress and FCC face the challenge of 

performing monitoring and oversight, as well as making important policy 

decisions, without the benefit of important price, cost, and competition 

information. As such, it is important for FCC’s report to provide accurate, 

current, and relevant information about the cable industry. 

Recommendations for To improve the quality and usefulness of the data that FCC collects on 

cable television rates and competition in the subscription video industry,

Executive Action we recommend that the Chairman of the FCC take the following actions: 

• 	 take immediate steps to improve the cable rates survey by (1) including 

more detailed, standardized instructions and examples for how to 

calculate the cost changes that the cable operators experienced in the 

previous year and (2) eliminating the requirement for the cost increases to 

sum to the change in rates and 

• 	 review the commission’s process for maintaining the status of effective 

competition among franchises in order to keep these designations more up 

to date. 

Page 45 GAO-04-8 Cable Television Industry 
Agency Comments 


and Our Evaluation 


We provided a draft of this report to FCC for comment. FCC had two key 

comments on the draft report. First, FCC stated that they are taking steps 

to redesign their survey questionnaire in an attempt to obtain more 

accurate information. Second, FCC questioned on a cost/benefit basis the 

utility of adopting a revised process to keep the status of effective 

competition in franchises up to date. We believe that providing the 

Congress with reliable information on cable rates and competition is 

important, and that improving the accuracy of effective competition 

designations would help to accomplish this. We recognize that there are 

costs associated with FCC’s cable price survey, and we recommend that 

FCC examine whether cost-effective alternative processes exist that would 

enhance the accuracy of its effective competition designations. FCC’s 

comments are contained in appendix VI, along with our responses to those 

comments. 

We also provided a draft of this report to several industry participants and 

other experts for their review and comment. In particular, we provided the 

draft to representatives of Consumers Union, the Consumer Federation of 

America, the American Cable Association, the National Association of 

Telecommunications Officers and Advisors, the National Association of 

Broadcasters, the National Cable and Telecommunications Association, 

the Satellite Broadcasting and Communications Association, Walt Disney 

Company, the National Broadcasting Company, Viacom, and the News 

Corporation. The comments received covered a broad range of issues and 

each groups’ comments are summarized in appendix VII. In addition, these 

groups provided clarifications to the draft report. As appropriate, we made 

changes in our report that are based on the broad comments summarized 

in appendix VII as well as the technical clarification provided to us by 

these parties. 

As agreed with your office, unless you publicly announce its contents 

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

date of this letter. At that time, we will send copies to interested 

congressional committees; the Chairman, FCC; and other interested 

parties. We will also make copies available to others upon request. In 

addition, this report will be available at no cost on the GAO Web site at 

http://www.gao.gov. 

Page 46 GAO-04-8 Cable Television Industry 
If you or your staff have any questions concerning this report, please 


contact me on (202) 512-6670 or at goldsteinm@gao.gov. Key contacts and 


major contributors to this report are listed in appendix VIII. 


Sincerely yours, 


Mark L. Goldstein 


Director, Physical Infrastructure Issues 


Page 47 GAO-04-8 Cable Television Industry 
Appendix I: Scope and Methodology 


To respond to the first objective of this report—examine the impact of 

competition on cable rates—we used an empirical model (our cablesatellite model) that we previously developed that examines the effect of 

competition on cable rates and services.1 Using data from the Federal 

Communications Commission’s (FCC) 2001 cable rate survey, the model 

considers the effect of various factors on cable rates, the number of cable 

subscribers, the number of channels that cable operators provide to 

subscribers, and direct broadcast satellite (DBS) penetration rates for 

areas throughout the United States. We further developed the model to 

more explicitly examine whether varied forms of competition—such as 

wire-based, DBS, multipoint multichannel distribution systems (MMDS) 

competition—have differential effects on cable rates. See appendix IV for 

a further discussion of this model. In addition, we spoke with an array of 

industry stakeholders and experts (see below) to gain further insights on 

these issues. 

The second objective of this report consists of two parts. To respond to 

part one—assess the reliability of the cost justifications for rate increases 

provided by cable operators to FCC, we conducted a telephone survey 

(our cable franchise survey), from January 2003 through March 2003, of 

cable franchises that responded to FCC’s 2002 cable rate survey (see app. 

II). We drew a random sample of 100 of these cable franchises; the sample 

design was intended to be representative of the 755 cable franchises that 

responded to FCC’s survey. We used data from FCC, and conversations 

with company officials, to determine the most appropriate staff person at 

the franchise to complete our survey. To ensure that our survey gathered 

information that addressed this objective, we conducted telephone 

pretests with several cable franchises and made the appropriate changes 

on the basis of the pretests. We asked cable franchises a series of openended questions regarding how the franchise staff calculated cost and 

noncost factors on FCC’s 2002 cable rate survey, how well the franchise 

staff understood what FCC wanted for those factors, and franchise staff’s 

suggestions for improving FCC’s cable rate survey. All 100 franchises 

participated in our survey, for a 100 percent response rate. In conducting 

this survey, we did not independently verify the answers that the 

franchises provided to us. 

1

See U.S. General Accounting Office, Telecommunications: Issues in Providing Cable and 

Satellite Television Services, GAO-03-130 (Washington, D.C.: Oct. 15, 2002). 

Page 48 GAO-04-8 Cable Television Industry 
Appendix I: Scope and Methodology 

Additionally, to address part two of the second objective—assess FCC’s 

classifications of effective competition—we examined FCC’s classification 

cable franchises regarding whether they face effective competition. Using 

responses to FCC’s 2002 cable rate survey, we tested whether the 

responses provided by cable franchises were consistent with the various 

legal definitions of effective competition, such as the low-penetration test. 

Further, we reviewed documents from FCC proceedings addressing 

effective competition filings and contacted franchises to determine 

whether the conditions present at the time of the filing remain in effect 

today. We also reviewed filings for effective competition that were based 

on DBS subscribership to assess how data from SkyTRENDS are used in 

these filings. 

To address the third, fourth, fifth, and sixth objectives (examine reasons 

for recent rate increases, examine whether ownership relationships 

between cable networks and cable operators and/or broadcasters 

influence the level of license fees for the cable networks or the likelihood 

that a cable network will be carried, examine why cable operators group 

networks into tiers rather than sell networks individually, and discuss 

options to address factors that could be contributing to cable rate 

increases), we took several steps, as follows: 

• 	 We conducted semistructured interviews with a variety of industry 

participants. We interviewed officials and obtained documents from FCC 

and the Bureau of Labor Statistics. We interviewed 15 cable networks—12 

national and 3 regional—from a listing published by the National Cable 

and Telecommunications Association (NCTA), striving for a mixture of 

networks that have a large and small number of subscribers and that 

provide varying content, such as entertainment, sports, music, and news. 

We interviewed 11 cable operators, which included the 10 largest publicly 

traded cable operators and 1 medium-sized, privately held cable operator. 

In addition, we interviewed the four largest broadcast networks, one DBS 

operator, representatives from three major professional sports leagues, 

and five financial analysts that cover the cable industry. Finally, we 

interviewed officials from NCTA, Consumers Union, the National 

Association of Broadcasters, the National Association of 

Telecommunications Officers and Advisors, the American Cable 

Association, the National Cable Television Cooperative, and the Cable 

Television Advertising Bureau. 

• 	 We solicited the 11 cable operators we interviewed to gather financial and 

operating data and reviewed relevant Securities and Exchange 

Commission filings for these operators. Nine of the 11 cable operators 

Page 49 GAO-04-8 Cable Television Industry 
Appendix I: Scope and Methodology 

provided the financial and operating data we sought. We also acquired 

data from Kagan World Media,2

 which is a private communications 

research firm that specializes in the cable industry. These data provided us 

with revenue and programming expenses for over 75 cable networks.3 

• 	 We compared the average license fees among three groups of networks: 

those that are majority-owned by a broadcaster, those that are majorityowned by a cable operator, and all others. We preformed t-tests on the 

significance of these differences. We also ran a regression (our cable 

license fee model) in which we regressed the license fee across 90 cable 

networks on the age of the network, the advertising revenues per 

subscriber (a measure of network popularity), dummy variables for sports 

and news programming, and a variety of factors about each franchise. 

• 	 We conducted several empirical tests on the channel lineups of cable 

operators as reported to FCC in its 2002 cable rate survey. We developed 

an empirical model (our cable network carriage model) that examined the 

factors that influence the probability of a cable network being carried on a 

cable franchise, including factors such as ownership affiliations and the 

popularity of the network. This model is discussed in greater detail in 

appendix V. Further, we developed descriptive statistics on the 

characteristics of various tiers of service and the channels included in the 

various tiers. 

2

Kagan World Media, Economics of Basic Cable Networks 2003 (Carmel, CA: 2003). 

3

Due to the confidential requirement of industry contracts, we could not independently 

verify the data from Kagan World Media. To assess the reliability of these data, we asked 

cable networks that we interviewed about the Kagan data. Eight of the 12 national cable 

networks we interviewed said that Kagan data on license fees, revenues, and programming 

expenses were fairly accurate. 

Page 50 GAO-04-8 Cable Television Industry 
Appendix II: GAO Survey of Cable Franchises 


Page 51 GAO-04-8 Cable Television Industry 
Appendix II: GAO Survey of Cable Franchises 

Page 52 GAO-04-8 Cable Television Industry 
Appendix II: GAO Survey of Cable Franchises 

Page 53 GAO-04-8 Cable Television Industry 
Appendix III: GAO’s Modifications to FCC’s 

Competition Classification 

To determine the status of competition from a wire-based competitor for 

our cable-satellite model, we took steps to review the accuracy of FCC’s 

classification of effective competition for the cable franchises surveyed in 

2001—the year of data used in our model. For those cases in which a 

finding of effective competition had been made because of the presence of 

a local exchange carrier (LEC) or a competitive overbuilder, we took steps 

to determine if that competition was still present as of 2001. For cases 

without a designation of effective competition, we checked to see if there 

was a possible LEC or overbuilder operating in the areas. This process was 

only designed to check the status of competition other than that provided 

by DBS. This is because we did not rely on FCC’s competitive 

classifications related to DBS because information on DBS for our model 

was obtained from a different source, and we did not use FCC’s 

classification at all in that case. 

Our sample contained 705 cable franchises, of which 133 had been found 

to face effective competition from a LEC or overbuilder, and 572 had not. 

In most cases in which a finding of effective competition had been made 

(95 of the 133), we found evidence that, in fact, a nonsatellite provider was 

competing with the incumbent cable provider. In the other 38 cases, we 

found evidence suggesting that a nonsatellite provider was not present in 

2001.

1

 To make these determinations, we used various sources of 

information, including FCC’s master list of cable franchises. We noted that 

if there were competitive cable franchises, we would expect to find two 

franchises operated by different companies in the same geographic area. 

If, for example, we found only one operating franchise in an area but that 

franchise was listed as having effective competition, we investigated 

further. Also, if we found two franchises operating in an area that were 

classified as having effective competition, but both were operated by the 

same company, we also investigated further. Also, in some cases, we made 

attempts to determine if the nonsatellite competitor was operating as an 

MMDS, which is sometimes referred to as wireless cable. This further 

investigation usually involved Web research and information obtained 

through contacts with local franchising authorities. In those instances for 

which we were able to gather information indicating that an incumbent 

cable provider that once faced a nonsatellite competitor no longer did in 

2001, we defined our nonsatellite competition variable accordingly. 

1

In the course of our review, we also identified some cable franchises that were apparently 

sampled because of clerical-type mistakes, such as the transposition of a franchise 

identification number or an inconsistency between franchises identified in the effective 

competition report and the franchises ultimately sampled. 

Page 54 GAO-04-8 Cable Television Industry 
Appendix III: GAO’s Modifications to FCC’s 

Competition Classification 

To check whether franchise areas without a designation of effective 

competition might have nonetheless faced nonsatellite competition in 

2001, we used lists of service areas of cable overbuilders and compared 

these areas with the list of sampled franchises. We also examined FCC’s 

master franchise list for areas in which more than one company appeared 

to operate an active franchise. We investigated these lists further by calling 

local franchising authorities to determine whether those franchise areas 

were geographically distinct or whether this pattern could represent 

competition. We also attempted to identify areas where wireless cable 

companies provided video service and whether any of those areas 

overlapped sampled franchises. In all, we found a number of cases where 

a nonsatellite provider appeared to be offering service in areas where no 

filings for effective competition had been made. In these cases, we defined 

our variable to reflect this competition. Of the 572 franchises without a 

designation of effective competition, we found that 28 were facing some 

form of nonsatellite competition in 2001. 

Finally, we made a distinction between those franchises that were found 

to face effective competition because of the availability of MMDS versus 

areas with a wire-based overbuilder. We separated these kinds of 

competition into distinct variables under the assumption that they may 

have a differential effect on cable operators. We believed that this might 

be the case because many MMDS providers have been modifying their 

business plans and placing less emphasis on their video businesses. For 

example, FCC noted that “MMDS has never become a significant 

competitor in the market for the delivery of video programming, rather 

many MMDS providers are focusing on data transmission rather than video 

service.”2 

2

See Federal Communications Commission, Annual Assessment of the Status of 

Competition in the Market for the Delivery of Video Programming, Ninth Annual Report, 

FCC 02-338 (Washington, D.C.: Dec. 31, 2002). 

Page 55 GAO-04-8 Cable Television Industry 
Appendix IV: Cable-Satellite Model 


This appendix provides a brief description of our model of cable-satellite 

competition. With this model, we estimate the influence of wire-based, 

MMDS, and DBS competition, along with other variables, on cable prices 

and services through a system of structural equations in which certain 

variables that may be simultaneously determined are estimated jointly. 

The model includes equations for cable prices, the number of cable 

subscribers, the number of cable channels, and the DBS penetration rate. 

Our October 2002 report provides a more detailed discussion of the data 

sources, our process for merging various data into a single dataset, and the 

specification of our model.1 

Definitions and 	 Table 1 includes a list of all the variables included in our model, with the 

definition and source identified for each variable. 

Sources for Variables 

Table 1: Definition and Source for Variables 

Variable Definition Source 

Cable price The monthly rate charged for the Basic Service Tier, Cable Programming FCC 2001 Cable Rate 

Service Tier, and rental of a converter box and remote control. Survey 

Number of subscribers The number of subscribers to the Basic Service Tier and Cable FCC 2001 Cable Rate 

Programming Service Tier. Survey 

Number of channels The number of channels provided with the Basic Service Tier and Cable FCC 2001 Cable Rate 

Programming Service Tier (the most commonly purchased tier). Survey 

Direct broadcast satellite 

(DBS) penetration rate 

The fraction of housing units in a cable franchise area that have satellite 

service. 

SkyREPORT 

DBS provision of local stations A binary variable that equals 1 if both DBS operators offer local broadcast National Association of 

stations in the cable franchise area. Broadcasters 

Television market size The number of television households in the market. Neilsen Media Research 

Horizontal concentration	 A binary variable that equals 1 if 1 of the 10 largest national multiple 

system operators (MSO) provides service in the franchise area. 

FCC 2001 Cable Rate 

Survey 

Vertical relationship A binary variable that equals 1 if the cable operator is affiliated with an FCC 2001 Cable Rate 

MSO that has an ownership interest in a national or regional video 

programming service. 

Survey and 2001 Annual 

Video Report 

Presence of a wire-based A binary variable that equals 1 if a second wireline company provides FCC 2001 Cable Rate 

competitor 	 cable service (including, for example, a local exchange telephone carrier Survey and GAO 

offering video services) in the franchise area. analysis 

1

See GAO-03-130. 

Page 56 GAO-04-8 Cable Television Industry 
Appendix IV: Cable-Satellite Model 

Variable Definition Source 

Presence of multichannel A binary variable that equals 1 if a company provides cable service via FCC 2001 Cable Rate 

multipoint distribution system MMDS technology in the franchise area. Survey and GAO 

(MMDS) competitor analysis 

Average wage	 The average weekly wage for telecommunications equipment installers Bureau of Labor 

and repairers in the state where the cable franchise is located. Statistics 

Population density The ratio of population to square miles in the franchise area. U.S. Census Bureau 

Number of broadcast stations The number of over-the-air broadcast stations in the television market. BIA MEDIA AccessPro 

Urbanization 	 The percentage of the county’s population that is classified as urban by the U.S. Census Bureau 

U.S. Census Bureau. 

Age of cable franchise	 The number of years between when the cable franchise began operation 

and 2001. 

FCC Master List of 

Cable Franchises 

Homes passed by cable The number of homes passed by the cable system that serves the FCC 2001 Cable Rate 

system franchise area, including homes outside of the franchise area. Survey 

Median per-capita income The median per-capita income in the franchise area. U.S. Census Bureau 

System megahertz The capacity, measured in megahertz, of the cable system that serves the FCC 2001 Cable Rate 

franchise area. Survey 

Percentage of multiple The percentage of housing units accounted for by structures with five or U.S. Census Bureau 

dwelling units more housing units. 

Nonmetropolitan areas A binary variable that equals 1 if the franchise area is outside of a 

metropolitan statistical area (MSA). 

U.S. Census Bureau 

Angle (or “elevation”) of The angle relative to the ground that a DBS subscriber must mount the Web pages of DIRECTV 

satellite dish satellite dish to “see” the satellite. and EchoStar 

Regulation A binary variable that equals 1 if the cable franchise is subject to regulation FCC 2001 Cable Rate 

of the rate charged for the Basic Service Tier. Survey 

Source: GAO (2003). 

Estimation We employed the three-stage least squares method to estimate our model.2 

Table 2 includes the descriptive statistics for the variables included in our 

Methodology and model, and table 3 includes the estimation results for each of the four 

Results structural equations. All of the variables, except dummy variables,3

 are 

expressed in natural logarithmic form, so coefficients can be interpreted 

as elasticities—which is the percentage change in the value of the 

dependent variable associated with a 1 percent change in the value of an 

2

See GAO-03-130 for a discussion of why we use the three-stage least squares method, 

rather than the two-stage least squares method. 

3

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

otherwise. 

Page 57 GAO-04-8 Cable Television Industry 
Appendix IV: Cable-Satellite Model 

independent, or explanatory, variable.4 The coefficients on the dummy 

variables are elasticities in decimal form. 

Table 2: Descriptive Statistics 

Variable Mean Standard deviation Minimum value Maximum value 

Cable price 36.15 5.02 14.00 47.84 

Cable price per channel 0.66 0.19 0.30 

Cable subscribers 21,460.68 43,673.73 4.00 302,964.00 

Cable channels 58.17 14.06 10.00 99.00 

DBS penetration 15.91 11.31 1.59 63.64 

DBS provision of local stations 0.52 0.50 0.00 

Regulation 0.36 0.48 0.00 

Number of broadcast stations 12.00 5.64 1.00 25.00 

Median income 43,965.25 16,202.17 13,529.00 139,997.00 

Horizontal concentration 0.85 0.36 0.00 

Vertical relationship 0.55 0.50 0.00 

Presence of wire-based competitor 0.16 0.37 0.00 

Presence of MMDS competitor 0.01 0.10 0.00 

Nonmetropolitan areas 0.25 0.43 0.00 

Urbanization 73.53 28.12 0.00 100.00 

Percentage of multiple dwelling units 14.38 13.70 0.00 98.12 

Age of cable franchise 24.11 9.52 2.00 50.00 

Homes passed by cable system 181,024.81 235,085.38 30.00 1,260,734.00 

Cable system megahertz 638.98 172.13 216.00 870.00 

Television market households 1,459.89 1,664.50 50.00 7,301.00 

Population density 2,888.92 7,144.36 2.25 87,139.78 

State-level wages 788.91 102.28 575.38 1,045.58 

Dish angle or elevation 40.29 6.67 27.19 57.28 

Source: GAO (2003). 

4

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

systems, vertical relationship, regulation, presence of a wire-based competitor, presence of 

a MMDS competitor, DBS provision of local channels, and nonmetropolitan 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. 

Page 58 GAO-04-8 Cable Television Industry 

1.80 

1.00 

1.00 

1.00 

1.00 

1.00 

1.00 

1.00 
Appendix IV: Cable-Satellite Model 

Table 3: Three-Stage Least Squares Model Results 

Cable prices Cable subscribers Cable channels DBS penetration 

Variable equation equation equation equation 

Cable price per channel -1.5368 0.7839 

[0.0001]a [0.0001]a 

Cable subscribers 0.0079 0.0603 

[0.3938] [0.0001]a 

Cable channels 0.2428 

[0.0001]a 

DBS penetration -0.0441 -2.2403 -0.0174 

[0.0898]c [0.0001]a [0.5933] 

DBS provision of local -0.0063 0.4276 0.0527 0.3386 

stations [0.7285] [0.0800]c [0.0408]b [0.0001]a 

Regulation -0.0213 

[0.1157] 

Number of broadcast 0.5896 

stations [0.0081]a 

Median income -0.3772 0.0672 0.1903 

[0.0813]c [0.0032]a [0.0023]a 

Horizontal concentration 0.0528 

[0.0006]a 

Vertical relationship -0.0051 -0.0335 

[0.6682] [0.0351]b 

Presence of wire-based -0.1636 -1.2766 0.0339 -0.3797 

competitor [0.0001]a [0.0001]a [0.1832] [0.0001]a 

Presence of MMDS 0.0420 -0.2247 0.0426 -0.1350 

competitor [0.3697] [0.7350] [0.5391] [0.4596] 

Nonmetropolitan areas 0.4456 

[0.0001]a 

Urbanization 0.0541 

[0.5117] 

Percentage of multiple -0.0228 -0.2162 

dwelling units [0.0261]b [0.0001]a 

Age of cable franchise 0.3027 -0.1778 

[0.0463]b [0.0001]a 

Homes passed by cable 0.2918 

system [0.0001]a 

Page 59 GAO-04-8 Cable Television Industry 
Appendix IV: Cable-Satellite Model 

Cable prices Cable subscribers Cable channels DBS penetration 

Variable equation equation equation equation 

Cable system megahertz 0.5038 -0.0434 

[0.0001]a [0.5304] 

Television market 0.0072 -0.2902 -0.0023 -0.1195 

households [0.3639] [0.0670]c [0.8489] [0.0001]a 

Population density -0.0120 

[0.0256]b 

State-level wages 0.0392 

[0.3676] 

Dish angle or elevation 0.6028 

[0.0001]a 

Intercept 2.4077 14.1843 -0.3218 0.5324 

[0.0001]a [0.0001]a [0.3259] [0.5601] 

Sample size 705 705 705 

Source: GAO (2003). 

Note: System-weighted R-square: 0.65. P-values are shown 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 found that competition has an effect on the subscription video market. 

Competition from a second wire-based operator appears to significantly 

lower cable prices—cable prices were approximately 15 percent lower in 

areas where a second wire-based operator provides service. 5

 Yet, this 

competition had no effect on the quality of cable service, as measured by 

the number of channels the cable operator provides. Additionally, we 

found that higher DBS penetration rates were associated with a slight 

reduction in cable prices; a 10 percent higher DBS penetration rate was 

5

For dummy variables (those variables that can take a value of 0 or 1 depending on the 

presence of a condition (e.g., presence of wire-based competitor, DBS providers offering 

local broadcast stations)), we report the percentage change arising from a discrete change 

from 0 to 1. We calculated this percentage change as: [exp(parameter estimate)-1] times 

100. 

Page 60 GAO-04-8 Cable Television Industry 

705 
Appendix IV: Cable-Satellite Model 

associated with a 15 cent reduction in cable rates.6 In areas where both 

DBS operators provide local broadcast stations, we found that cable 

operators offer subscribers approximately 5 percent more channels than 

cable operators in areas where both DBS operators do not provide local 

stations. Unlike wire-based and DBS competition, we found that the 

presence of a company providing video service via MMDS technology was 

not associated with a different level of cable rates or number of channels 

provided to subscribers.7 

We found that a variety of other factors affect the level of cable prices and 

the quality of cable service. Cable prices are higher in areas where the 

cable operator provides more channels, indicating that some consumers 

may be willing to pay for additional channels and that providing additional 

channels raises a cable company’s costs. We found that cable prices were 

5 percent higher when the cable operator was affiliated with 1 of the 10 

largest MSOs. Finally, we found that cable operators affiliated with a cable 

network provided their subscribers with 3 percent fewer basic and 

expanded-basic cable networks than similar cable operators unaffiliated 

with a cable network. 

DBS operators’ provision of local broadcast stations is associated with 

significantly higher DBS penetration rates. As shown in table 3, our model 

results indicate that in cable franchise areas where these local stations are 

available from both DBS operators, the DBS penetration rate is 

approximately 40 percent higher than in areas where local stations are not 

available via satellite from both DBS operators. This finding suggests that 

in areas where local broadcast stations are available from both DBS 

operators, consumers are more likely to subscribe to DBS service; 

therefore, DBS appears to be more competitive with cable than in areas 

where local stations are not available from both DBS operators. 

6

In our October 2002 report (GAO-03-130), we did not find that DBS penetration was 

associated with lower cable rates. As part of our analysis for this report, we further refined 

our measure of competition to more accurately reflect the actual status of competition at 

the time our data were gathered. These refinements contributed to our finding that DBS 

penetration was associated with lower cable rates. 

7

In our October 2002 report(GAO-03-130), MMDS competitors were included in our variable 

that measured nonsatellite competition. For this report, we removed MMDS competitors 

from the nonsatellite competition variable, thereby creating a wire-based only competition 

variable, and created a separate variable for MMDS competition. We made this adjustment 

because (1) MMDS relies on a different technology than either wire-based or DBS 

competitors and (2) many MMDS operators are scaling back or discontinuing video service. 

Page 61 GAO-04-8 Cable Television Industry 
Appendix IV: Cable-Satellite Model 

Several additional factors also influence the DBS penetration rate. Our 

model results indicate that the DBS penetration rate is greater in 

nonmetropolitan areas and also tends to increase as the size of the 

television market decreases. Additionally, the DBS penetration rate is 

higher in areas that require a relatively higher angle or elevation at which 

the satellite dish is mounted and is lower in areas where there are more 

multiple dwelling units. These two factors can be associated with the need 

of DBS satellite dishes to “see” the satellite. That is, a dish aimed more 

toward the horizon (as opposed to aimed higher in the sky) is more likely 

to be blocked by a building or foliage, and people in multiple dwelling 

units often have fewer available locations to mount their dish. 

Page 62 GAO-04-8 Cable Television Industry 
Appendix V: Cable Network Carriage Model 


Set-up of Our Cable 

Network Carriage 

Model 

This appendix describes our model of cable network carriage that we 

developed to test whether ownership affiliations influence cable 

operators’ decisions about what networks they will carry. Specifically, we 

discuss (1) the set-up of our model, (2) the data sources and descriptive 

statistics, (3) the estimation methodology and results, and (4) an 

alternative specification. 

A cable operator will carry a cable network if, on the margin, the network 

increases the operator’s profit or increases its profits more than an 

alternative cable network. Cable operators receive revenue associated 

with cable networks from both subscriber fees and local advertising. 

Therefore, the addition of a popular cable network will likely increase the 

operator’s revenues by allowing the operator to impose higher monthly 

cable rates on subscribers and sell additional local advertising at higher 

rates than would be possible with a less popular network. At the same 

time, the cable operator will incur programming costs associated with the 

cable network. Thus, the cable operator will balance these various 

revenue and cost factors when deciding whether to carry a given cable 

network. 

In interviews with 11 cable operators, we were told that broadcast 

networks often link carriage of cable networks to retransmission of local 

broadcast stations. In addition to these broadcaster affiliations with cable 

networks, some cable operators are also affiliated with cable networks. In 

fact, several studies have indicated that cable ownership of cable 

networks influences the carriage of cable networks—so there is some 

precedent that ownership, albeit of a different form, influences carriage 

decisions.1

 To examine whether these ownership affiliations—broadcaster 

and cable operator ownership of cable networks—influence the carriage 

of cable networks by cable franchises, we employed a model that tests 

whether certain variables increase or decrease the probability of a cable 

network being carried on a particular cable franchise. To empirically test 

1

For example, see Waterman, D. and A.W. Weiss, “The Effects of Vertical Integration 

Between Cable Television Systems and Pay Cable Networks,” Journal of Econometrics, 72 

(1996): 357-395 and Chipty, T., “Vertical Integration, Market Foreclosure, and Consumer 

Welfare in the Cable Television Industry,” American Economic Review, 91(3) (2001): 428-

453. These studies found that cable operators were more likely to carry networks that they 

owned. These studies, however, did not test whether cable operators were more likely to 

carry a network owned by a broadcaster. 

Page 63 GAO-04-8 Cable Television Industry 
Appendix V: Cable Network Carriage Model 

these hypotheses, we estimated the following. Carriage of a cable network 

on a cable franchise is a function of 

• the age of the cable network, 

• 	 the popularity of the cable network as measured by advertising revenues 

per subscriber, 

• 	 whether the cable network primarily distributes news- or sports-related 

programming, 

• 	 whether the cable network is affiliated with a broadcast network or a 

cable operator, 

• cable system capacity in terms of megahertz, 

• the number of households passed by the cable system, 

• the percentage of people in the franchise area between ages 25 and 65, 

• 	 the percentage of households in the franchise area that own their homes, 

and 

• whether the cable franchise is owned by a cable multiple system operator. 

We required several data elements to build the dataset used to estimate 

this model. The following is a list of our primary data sources. In addition, 

we list all of the variables, definitions, and sources in table 4 and basic 

statistical information on all of the variables in table 5. 

• 	 We obtained data on the carriage of individual cable networks on cable 

franchises from FCC’s 2002 survey of cable franchises. FCC’s survey asked 

a sample of cable franchises whether the franchise carried various cable 

networks. We used the survey to define a variable representing whether a 

given cable network was carried on either the basic or expanded-basic 

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

system megahertz (the capacity of the cable system in megahertz), (2) the 

number of households passed by the cable system, (3) the affiliation of the 

cable franchise with a multiple system operator, and (4) the ownership 

affiliation of the cable operator. 

• 	 From Kagan World Media, we obtained data on cable networks, including 

(1) the year the cable network launched, (2) the number of cable 

Data Sources and 

Descriptive Statistics 

Page 64 GAO-04-8 Cable Television Industry 
Appendix V: Cable Network Carriage Model 

subscribers that received the cable network in 2002, (3) the advertising 

revenue the cable network received in 2002, and (4) the ownership 

affiliation of the cable network. 

• 	 We used the most recent data from the U.S. Census Bureau to obtain the 

following demographic information for each franchise area: proportion of 

the population between ages 25 and 65 and the percentage of the 

households that reside in owner-occupied housing. 

Table 4: Definitions and Sources of Variables 

Variable Definition Source 

Carry A binary variable that equals 1 if the cable network is carried on the basic or FCC 2002 cable rate 

expanded-basic tier. survey 

Age 2003 minus the launch year of the cable network. Kagan World Media 

Advertising revenue per The cable network’s advertising revenues divided by the number of Kagan World Media 

subscriber subscribers that could receive the cable network in 2002. 

News 	 A binary variable that equals 1 if the cable network primarily delivers news- GAO analysis 

related programming. 

Sports 	 A binary variable that equals 1 if the cable network primarily delivers sports- GAO analysis 

related programming. 

Broadcaster affiliation 	 A binary variable that equals 1 if the cable network is affiliated with a Kagan World Media 

broadcast network group (Disney/ABC, Viacom/CBS, News Corporation/Fox, 

General Electric/NBC, or Scripps), and the cable network began operation in 

1992 or later. 

Cable affiliation 	 A binary variable that equals 1 if the cable network is affiliated with a cable Kagan World Media 

operator (Time Warner, Cablevision, or Comcast). 

Homes passed by cable The number of households passed by the cable system that serves the FCC 2002 cable rate 

system franchise, including homes outside of the franchise area. survey 

Cable system megahertz 	 The capacity, measured in megahertz, of the cable system that serves the FCC 2002 cable rate 

franchise area. survey 

Multiple system operator 	 A binary variable that equals 1 if the cable franchise is affiliated with a cable FCC 2002 cable rate 

multiple system operator. survey 

Population between ages 25 The percentage of the population in a franchise area between ages 25 and 65. U.S. Census Bureau 

and 65 

Home ownership 	 The percentage of households in the franchise area residing in owner- U.S. Census Bureau 

occupied housing units. 

Source: GAO (2003). 

Page 65 GAO-04-8 Cable Television Industry 
Appendix V: Cable Network Carriage Model 

Table 5: Descriptive Statistics 

Variable Mean Standard deviation Minimum value Maximum value 

Carry 0.43 0.50 0.00 

Age 10.68 6.61 1.00 27.00 

Advertising revenue per subscriber 1.91 2.19 0.00 10.98 

News 0.06 0.24 0.00 

Sports 0.09 0.28 0.00 

Broadcaster affiliation 0.25 0.43 0.00 

Cable affiliation 0.20 0.40 0.00 

Homes passed by cable system 178,212.05 244,160.35 73.00 1,286,698.00 

Cable system megahertz 672.57 171.08 212.00 870.00 

Multiple system operator 0.95 0.23 0.00 

Population between ages 25 and 65 52.09 2.92 37.26 62.94 

Home ownership 68.16 10.02 19.46 84.90 

Source: GAO (2003). 

Estimation Because we are estimating a binary choice model—that is, the cable 

franchise either carries or does not carry a given cable network—we 

Methodology and employed the logit method to estimate our reduced-form equation of cable 

Results network carriage.2

 We present the estimation results for our reduced-form 

equation in table 6. 

2

An alternative method to estimate the reduced-form equation is the probit model. In a 

binary choice model, the differences between the logistic and probit models are generally 

not significant. Differences can arise in the multinomial model, where there are three or 

more choices, because the logistic model imposes independence conditions that sometimes 

do not reflect the conditions being modeled. Such was not the case in our model, since we 

estimated a binary choice equation. 

Page 66 GAO-04-8 Cable Television Industry 

1.00 

1.00 

1.00 

1.00 

1.00 

1.00 
Appendix V: Cable Network Carriage Model 

Table 6: Logistic Model Results 

Variable Parameter estimate and [p-value] 

Age 0.1558 

[0.0001]a 

Advertising revenue per subscriber 0.7537 

[0.0001]a 

News 0.6769 

[0.0001]a 

Sports 0.0812 

[0.0472]b 

Broadcaster affiliation 0.8265 

[0.0001]a 

Cable affiliation 0.5817 

[0.0001]a 

Homes passed by cable system 0.0000 

[0.0011]a 

Cable system megahertz 0.0029 

[0.0001]a 

Population between ages 25 and 65 0.0061 

[0.1191] 

Home ownership 0.0068 

[0.0001]a 

Multiple system operator 0.3059 

[0.0001]a 

Intercept -6.5658 

[0.0001]a 

Sample size 55,728 

Rescaled R-square 0.5075 

Source: GAO (2003). 

a

Significance at the 1 percent level. 

b

Significance at the 5 percent level. 

Our model results indicate that ownership affiliation does influence the 

carriage of cable networks, as both broadcaster affiliation and cable 

operator affiliation are associated with a greater probability of a cable 

network being carried on a cable franchise. When calculated at the mean 

values for all of the variables in the model, cable networks affiliated with 

broadcast networks are 46 percent more likely to be carried than networks 

Page 67 GAO-04-8 Cable Television Industry 
Appendix V: Cable Network Carriage Model 

Alternative 

Specification 

that do not have broadcast ownership.3 Similarly, when calculated at mean 

values for all of the variables included in the model, cable networks 

affiliated with a cable operator are 31 percent more likely to be carried on 

a cable franchise than noncable-affiliated networks. 

The remaining variables generally had the expected impact on the 

likelihood of a cable network being carried on a cable franchise. Popular 

networks—as represented by high levels of advertising revenues per 

subscriber—and news- and sports-related networks were more likely to be 

carried on franchises than less popular networks and networks primarily 

delivering other program genres. Also, cable franchises with larger 

capacity were more likely to carry any given cable network, and franchises 

with a high percentage of people residing in owner-occupied housing were 

also more likely to carry any given network. 

In addition to the above specification, we also considered a narrower 

definition of cable affiliation. In this specification, a cable network was 

only considered to be cable affiliated if the cable operator that owned the 

cable network also owned the cable franchise. For example, a cable 

network owned by Comcast would be considered cable affiliated when it 

appeared on a Comcast cable franchise, but not on another cable 

company’s franchise, such as a Time Warner franchise. In this 

specification, cable networks affiliated with a cable operator are 64 

percent more likely to be carried on the affiliated cable franchise than a 

nonaffiliated cable network. Cable networks affiliated with broadcast 

networks remain more likely to be carried than cable networks not 

affiliated with broadcasters. We present the estimation results for this 

alternative specification in table 7. 

3

We calculated these percentages by taking the mean values of all variables included in the 

model and deriving a predicted value of carriage for a broadcast-affiliated network and a 

nonbroadcast-affiliated network. We then took the percentage differences in these 

predicted values. The same methodology was used for determining the relative likelihood 

that a cable-affiliated network would be carried. 

Page 68 GAO-04-8 Cable Television Industry 
Appendix V: Cable Network Carriage Model 

Table 7: Logistic Model Results 

Variable Parameter estimate and [p-value] 

Age 0.1558 

[0.0001]a 

Advertising revenue per subscriber 0.7360 

[0.0001]a 

News 0.6495 

[0.0001]a 

Sports 0.1558 

[0.0001]a 

Broadcaster affiliation 0.6877 

[0.0001]a 

Cable network owned by operator 1.4091 

[0.0001]a 

Homes passed by cable system 0.0000 

[0.0131]b 

Cable system megahertz 0.0029 

[0.0001]a 

Population between ages 25 and 65 0.0054 

[0.1677] 

Home ownership 0.0069 

[0.0001]a 

Multiple system operator 0.2915 

[0.0001]a 

Intercept -6.3393 

[0.0001]a 

Sample size 55,728 

Rescaled R-square 0.5065 

Source: GAO (2003). 


a

Significance at the 1 percent level. 


b

Significance at the 5 percent level. 


Page 69 GAO-04-8 Cable Television Industry 
Appendix VI: Comments from the Federal 

Communications Commission 

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix. 

See comment 1. 

Page 70 GAO-04-8 Cable Television Industry 
Appendix VI: Comments from the Federal 

Communications Commission 

See comment 2. 

See comment 1. 

See comment 1. 

See comment 3. 

See comment 1. 

See comment 4. 

See comment 5. 

See comment 6. 

Page 71 GAO-04-8 Cable Television Industry 
Appendix VI: Comments from the Federal 

Communications Commission 

See comment 7. 

See comment 6. 

See comment 7. 

Page 72 GAO-04-8 Cable Television Industry 
Appendix VI: Comments from the Federal 

Communications Commission 

Page 73 GAO-04-8 Cable Television Industry 
Appendix VI: Comments from the Federal 

Communications Commission 

See comment 8. 

See comment 9. 

See comment 10. 

Page 74 GAO-04-8 Cable Television Industry 
Appendix VI: Comments from the Federal 

Communications Commission 

See comment 10. 

Page 75 
 GAO-04-8 Cable Television Industry 
Appendix VI: Comments from the Federal 

Communications Commission 

GAO Comments 

The following are GAO’s comments on the Federal Communications 

Commission’s letters dated September 24 and October 9, 2003. 

1. 	 In a letter dated September 24, 2003, FCC contended that under the 

statutory framework to which the commission is legally obligated to 

adhere in making effective competition determinations, it would be 

ultra vires for the commission to update designations of effective 

competition on a periodic basis. In other words, FCC stated that it did 

not have the legal authority to update periodically its view of the 

competitive situation in individual franchise areas. We disagree that 

the commission’s authority is so limited. In order to better understand 

the view that the commission stated in its letter (i.e., it was prohibited 

from modifying its rules to ensure that effective competition 

designations are reflective of current conditions and continue to meet 

the statutory definition to the maximum extent possible), we 

contacted FCC. On the basis of a conversation between commission 

staff and GAO staff, FCC provided us with a second letter dated 

October 9, 2003, that modified its views as expressed in the September 

24 letter. In the second letter, FCC acknowledged that it was not 

statutorily prohibited from revising its process (see GAO’s comment 

8). 

2. 	 Although local franchising authorities do see the information that a 

cable franchise provides to FCC in an application for effective 

competition, from filings that we reviewed, we found that these 

authorities at times question the validity of the data and/or estimation 

methodologies. For example, some have noted that reliance on 2000 

census data on housing units can lead to an overstatement of DBS 

penetration because in areas with growing populations, housing 

estimates from 2000 will understate the current number of housing 

units in an area. Such an understatement will result in an 

overstatement of the DBS penetration rate. Moreover, under FCC’s 

rules, local franchising authorities have limited time to review such 

information after it is submitted. 

3. 	 Resources could clearly be an issue for taking steps to update the 

status of effective competition, and FCC should consider this issue 

when revising its process to keep the status of effective competition up 

to date. FCC could consider requiring cable operators to certify on a 

periodic basis that they still meet the statutory definition and if no 

certification is provided, the finding would be removed. Alternatively, 

as part of the cable rate survey, FCC could ask any franchise having a 

designation of effective competition to provide information if that 

Page 76 GAO-04-8 Cable Television Industry 
Appendix VI: Comments from the Federal 

Communications Commission 

status has changed and, under modified rules, use this as a basis for 

changing the effective competition finding. 

4. 	 To develop our measure of competition, we reviewed many sources of 

information, including information from FCC, information from and 

about particular providers, as well as information gathered through 

discussions we had with local franchising authorities. We were not 

attempting to determine which franchises would have effective 

competition under the legal definition. Instead, we focused on 

establishing when meaningful competition, from an economic 

perspective, was likely to exist. 

5. 	 We cite FCC’s finding on the difference in prices in places with and 

without effective competition, but the more direct comparison for our 

model is FCC’s output from its econometric model contained in its 

2002 Cable Pricing report. In that model, FCC tests for the price 

reduction that occurs where there is wireline competition. Although 

FCC did not explicitly define this term in their report, our review of 

that analysis led us to believe that this measure is equivalent or very 

close in concept to our definition of wire-based competition. That is, 

FCC is attempting to measure how prices differ when a cable franchise 

faces a direct wireline overbuilder in the area, which does not include 

all places that have effective competition. Thus, we believe that the 

two measures of wireline competition—that is FCC’s and GAO’s—did 

not differ in concept. 

6. 	 We performed standard statistical tests for the evidence of 

multicollinearity in our model and did not find a significant problem. 

Moreover, we tested FCC’s variable for wireline competition in our 

model, and we tested our measure of wireline competition on FCC’s 

model. Since we know the findings from each agencies’ variable on its 

own model, we were able to discern whether the differences in the 

findings from the two models were caused by differences in the two 

models or by the measure of wireline competition. We found that using 

FCC’s measure of wireline competition in our model produced a 

finding similar to that reported by FCC, and using our measure of 

competition in FCC’s model produced a finding similar to that found in 

our model. From these findings, we have concluded that any 

differences between the findings of FCC and those of GAO are not 

caused by differences in the two models, but are due to differences in 

how the wireline variable was measured. Further, the GAO and FCC 

models have much overlap in the independent variables specified in 

the model, and, as such, the degree to which there are concerns about 

multicollinearity, this would be true of both models. 

Page 77 GAO-04-8 Cable Television Industry 
Appendix VI: Comments from the Federal 

Communications Commission 

7. 	 We agree that FCC’s estimate of the percentage of the yearly rate 

increase that can be attributed to programming costs is relatively 

accurate because, as we note in our report, most of the 100 cable 

franchises we interviewed noted that they used actual data when 

calculating these costs. However, we did find that other cost items, 

such as infrastructure investment, were reported with less accuracy 

and, in some instances, were simply “plugs” to ensure that the cost and 

rate increases were equal. In fact, while FCC found that in 2002 about 

6.2 percent of the rate increase was attributable to infrastructure costs, 

the findings from our survey of 9 large cable operators shows that 

overall infrastructure costs increased by $2.23 per month per 

subscriber—or about 84 percent of the average rate increase reported 

in 2002. While these estimates of infrastructure costs vary 

considerably, we recognize that our reported infrastructure cost are 

not directly comparable to the average rate increase since the average 

cost of $2.23 per month per subscriber includes some infrastructure 

costs not attributable to the basic and expanded-basic tiers of video 

service. We believe that these findings are consistent with a major 

point in our report: that is, the data reported on cost increases for 

programming were largely accurate, but the requirement that the sum 

of cost increases equal the average rate increase may have caused 

reduced estimates for other cost factors. 

8. 	 In its October 9 letter, FCC recognizes that while the statute authorizes 

it to make findings of effective competition, the commission 

implements this authority through the rules it has established. The 

commission notes that its current rules do not contemplate a 

reassessment of effective competition adjudication, except through the 

Local Franchise Authority recertification process. However, FCC 

states that the statute neither explicitly prohibits nor authorizes the 

commission from revising its rules. Accordingly, FCC now 

acknowledges that it could possibly modify the procedural rules 

associated with findings of effective competition, although the 

commission notes that it is unclear, in its view, whether this would 

work in communities lacking an effective competition designation. 

9. 	 We believe that when effective competition designations more 

accurately reflect current conditions, the resulting analysis provides a 

better measure of the impact of competition on cable rates. As we note 

in our report, we found that wire-based competition was associated 

with 15 percent lower cable rates, while FCC’s report found that cable 

rates were approximately 7 percent lower with this competition. We 

believe the difference in these results is primarily the result of steps 

Page 78 GAO-04-8 Cable Television Industry 
Appendix VI: Comments from the Federal 

Communications Commission 

we took to update FCC’s wire-based competition variable (see GAO’s 

comment 6). 

10. In our subsequent conversation with FCC staff, they asked us to 

identify possible ways that effective competition determinations could 

be kept more up to date. We identified a number of possible options 

that the commission could consider, recognizing that the commission 

would be the appropriate party to determine how this could best be 

done. We made a number of suggestions including (1) having effective 

competition determinations be time limited, (2) having the cable 

operator periodically certify that the circumstances under which the 

effective competition determination had been made had not changed, 

and (3) utilizing the information gathered as part of its Annual Price 

Survey to update the effective competition determinations. In its 

October 9 letter, the commission questions from a cost/benefit 

perspective the utility of such approaches. 

FCC’s underlying concerns about these approaches is that the market 

has changed. The commission notes that the level of competition is 

increasing year to year so that the number of communities reverting to 

a noncompetitive status is likely to be limited, while the number of 

communities facing effective competition for the first time is likely to 

be significant. For example, the commission provides that DBS 

penetration has reached an average of 15 percent or more (the 

threshold for a finding of effective competition) in at least 40 states. In 

our view, these changes in the market emphasize the need for FCC to 

review its process for making effective competition determinations. 

Moreover, as FCC emphasizes, the commission has a statutory 

mandate to report on average prices comparing cable systems that it 

has found are subject to effective competition with cable systems that 

it has found are not subject to effective competition. We believe that 

this report should, to the maximum extent possible, reflect the current 

conditions in order to ensure its utility. 

Page 79 GAO-04-8 Cable Television Industry 
Appendix VII: Comments from Industry 

Participants 

American Cable 

Association 

Consumer Federation 

of America 

Below we summarize the written and oral comments that we received 

from industry participants that reviewed a draft of our report. Because 

many of these comments are opinion-based, we are not offering our views 

on them. In one case, however, we provide some clarifying information 

about the GAO model on cable rates. 

The American Cable Association (ACA) noted that because we focused 

much of our analysis on larger cable operators, the report does not 

address issues of great importance to ACA and its membership, which are 

mostly small cable operators. ACA noted that for smaller cable operators, 

DBS providers are highly competitive, and programming costs are an even 

higher percentage of overall costs than is the case for larger cable 

operators. As a result, ACA disagreed with our suggestion that greater 

competition is a potential solution to increasing cable rates. 

ACA provided, in its comments, a number of policy solutions that would 

address, in their view, the level of programming costs. Such options 

include mandating public disclosure of programming rates, requiring an à 

la carte or minitier regime, overhauling of the retransmission consent 

process, and requiring similar regulatory obligations for the DBS and the 

cable industries. Additionally, ACA disagreed with our conclusion that an 

à la carte system would impose additional technical costs and not cause 

cable rates to generally decline. Further, ACA did not believe that we 

adequately addressed the link between increased carriage of cable 

networks affiliated with broadcasters and higher cable rates. 

A representative of the Consumer Federation of America suggested that 

the costs associated with infrastructure upgrades were recouped from 

revenues generated by advanced services, such as the digital tier and cable 

modem service, and should not influence cable rates for the basic and 

expanded-basic tiers. Therefore, this representative believes that we 

overstate the contribution of infrastructure costs to increasing cable rates. 

Moreover, this representative noted that we do not fully account for the 

revenue obtained from advertising, which in this representative’s view, 

should mitigate the need for increasing cable rates. 

This representative also provided several comments on GAO’s cable 

network carriage econometric model. First, this representative suggested 

that advertising revenues per subscriber could be treated as an 

endogenous variable—that is, it is a variable that is codetermined with 

other dependent variables in the model. Second, this representative 

Page 80 GAO-04-8 Cable Television Industry 
Appendix VII: Comments from Industry 

Participants 

Consumers Union 

suggested that we include a table reporting the results for the alternative 

specification, in which we consider cable networks owned by a cable 

operator. 

A representative of Consumers Union believes that our finding that cable 

rates are 15 percent lower where a second wire-based competitor is 

present is evidence of cable operators’ market power. He believes that we 

should measure the savings to American consumers that would accrue if 

cable rates were 15 percent lower in all franchises throughout the country. 

Additionally, this representative believes that our draft overstated the 

negative aspects of regulation. He stated that regulation may be the only 

viable option for addressing cable operators’ market power because wirebased competition may not be feasible on a widespread basis. 

Regarding our analysis of ownership affiliations, this representative 

believes that we should test for the impact of lower ownership thresholds, 

in addition to the analysis of majority-owned networks. 

This representative made numerous comments regarding an à la carte 

system. First, he suggested that we overstated the costs of equipment 

associated with an à la carte system, and he noted that (1) the necessary 

equipment is currently being deployed and (2) the Congress is pushing the 

cable industry toward a digital conversion. Second, he noted that our 

discussion assumed that cable operators would pay any increases in 

license fees arising from a decline in cable networks’ advertising revenues. 

But, he believes cable operators will exercise their market power and 

therefore refuse to fully pay the higher license fees that cable networks 

will seek. Moreover, this representative did not accept that advertising 

revenues would dramatically decline in an à la carte regime, and he stated 

that advertising revenues for the most popular cable networks might 

increase because advertisers will be able to clearly target subscribers 

viewing these networks. Third, he stated that GAO understates how many 

subscribers could benefit from an à la carte approach. He also stated that a 

substantial percentage of subscribers—perhaps as many as 40 percent— 

could see their monthly bill decline because most subscribers do not 

watch many networks. Finally, he noted that fundamentally there is 

tremendous uncertainty regarding the outcome under an à la carte regime. 

Page 81 GAO-04-8 Cable Television Industry 
Appendix VII: Comments from Industry 

Participants 

National Association 

of Broadcasters 

National Association 

of 

Telecommunications 

Officers and Advisors 

National Association of Broadcasters officials identified several issues 

associated with the cable industry. First, they stated that while our report 

implies that a greater number of channels are a benefit to subscribers, it is 

not clear whether this is the case. Second, they also noted a concern about 

how we measured the popularity of cable networks for the cable network 

carriage model. 

These officials noted that in discussing pricing under an à la carte system, 

we should include the possibility of cable operators implementing a 

pricing scheme wherein subscribers are charged a flat monthly fee for 

access to the cable network and additional fees for each network selected. 

They believe that this would be the pricing structure implemented because 

cable operators must be able to recoup costs associated with their 

networks and overhead that are currently imbedded in the price for the 

basic and expanded-basic tiers. 

Regarding retransmission consent, these officials do not believe there was 

sufficient discussion in our report of the history of retransmission consent. 

In particular, the option for cable network carriage in lieu of cash payment 

for retransmission of the broadcast station was largely supported by the 

cable industry. Additionally, they noted that our discussion regarding how 

retransmission consent is used was too broad because it implied that all 

broadcast stations use retransmission consent to gain carriage, while there 

are only a limited number of stations that do so. 

The National Association of Telecommunications Officers and Advisors 

(NATOA) noted that the focus of our review was cable rates for the basic 

and expanded-basic service tiers, but equipment rental—such as converter 

boxes—are also rising. NATOA noted that we correctly pointed out that 

the benefits of infrastructure investment may confer largely to subscribers 

of advanced services, but it noted that FCC rules continue to allow these 

costs to be allocated to basic rates and rates for equipment. 

NATOA also raised concerns about the lack of government data on cable 

rates and related issues. NATOA expressed concerns that we relied on 

FCC data—which we have noted may not be of high reliability—as well as 

on data from Kagan World Media, a cable industry data vendor. For 

example, NATOA expressed concern that we had no hard data on 

expenditures on customer service. NATOA noted that we should 

recommend to the Congress that some responsible agency (such as the 

Department of Justice) conduct an audit of the cable industry, including 

Page 82 GAO-04-8 Cable Television Industry 
Appendix VII: Comments from Industry 

Participants 

an examination of the contracts between cable networks and cable 

operators for the purchase of programming. 

NATOA also raised concerns about how we analyzed the effect of 

ownership relationships on the cost of programming. NATOA’s comments 

noted that our analysis of the effect of “majority-owned” programming was 

too limited, and that we should have included a broader definition of 

ownership affiliations, including, for example, agreements between 

companies that are separately owned, for this analysis. 

According to NATOA, infrastructure investments are largely a benefit to 

subscribers of advanced services and, to the extent that basic and 

expanded-basic rates rise due to these investments, it represents a crosssubsidy. 

NATOA also pointed out that, as we have noted, DBS penetration data 

used for effective competition filings have not been fully validated and are 

generally not available to stakeholders other than the cable operators. 

Moreover, NATOA noted that the Congress should reevaluate the 15 

percent penetration level required under law for a finding of effective 

competition when the basis is competition from DBS providers. NATOA 

also noted that our finding of a 15 percent price reduction in areas with a 

wire-based competitor may be the result of temporary price discounts by 

new companies. Finally, NATOA noted that we do not fully discuss in this 

report the ramifications of a finding of effective competition. In particular, 

NATOA noted that we did not discuss that cable franchises with such a 

finding no longer have to price uniformly across the franchise area and are 

no longer subject to the tier buy-through provisions of the Cable 

Television Consumer Protection and Competition Act of 1992. 

Lastly, NATOA noted that it is critical for us to make it clear that, on the 

basis of the model results, there is only a slight reduction in cable rates 

due to the level of DBS penetration. 

National Broadcasting Company (NBC) officials suggested that we explain 

why broadcaster-owned cable networks are more frequently carried than 

other cable networks. In their view, cable operators, as a rule, do not pay 

any license fees for the right to carry a local broadcast station, 

notwithstanding the value of that programming to the cable operator. They 

also noted that, according to our data, cable operators also do not pay 

higher license fees for the right to carry these broadcaster-affiliated 

networks. Instead, NBC officials said that the sole compensation that 

National Broadcasting 

Company 

Page 83 GAO-04-8 Cable Television Industry 
Appendix VII: Comments from Industry 

Participants 

National Cable and 

Telecommunications 

Association 

broadcasters receive in exchange for retransmission of the local broadcast 

stations’ programming is an arguably higher penetration of cable carriage 

for their affiliated programming networks. 

The National Cable and Telecommunications Association (NCTA) had 

serious concerns about the finding from our econometric model, which 

indicates that cable rates are 15 percent lower in markets with a second 

wire-based competitor. NCTA officials noted that only about 45 franchise 

communities have such an overbuilder compared with about 10,000 cable 

systems nationwide. They also noted that the number of such overbuilders 

has declined in recent years, and the type of companies operating these 

businesses has been changing. As such, they believe that it is not 

appropriate to extrapolate these findings for the vast majority of markets 

that currently have no wireline competition. In its written comments, 

NCTA noted that “given the limited nature of wireline overbuild 

competition, it is important not to overstate its importance to determining 

a ‘competitive’ rate.”1 

NCTA officials stated that there is no link between the possible exercise of 

market power and the increase in cable rates. They noted that, according 

to FCC’s survey, rates for areas with effective competition have actually 

risen in the last 2 years at a slightly faster pace, on a percentage basis, than 

rates in areas without effective competition. 

These officials also noted that our study did not take into account the rise 

in the quality of cable programming. In particular, they noted that a recent 

study by Professor Wildman, of Michigan State University, found that 

when analyzed on a price per-viewing-hour basis, cable rates have 

declined significantly in recent years. Additionally, they noted that there 

have been enormous benefits from the upgraded infrastructure of cable 

systems. They also noted that important benefits to those upgrades accrue 

to video subscribes (even if they do not take advanced services) in the 

form of better picture quality and more reliable cable service. 

1

In our model, we included approximately 100 franchises that were classified as facing 

wire-based competition—we believe that FCC’s number of only 45 overbuilders, as cited by 

NCTA, does not include all wire-based competitors. Moreover, the sample of franchises 

included in our model was only about 720, which were randomly selected by FCC to be 

representative of the universe of franchises. As such, approximately 16 percent of the 

franchises included in our model were classified as having a wire-based competitor. 

Page 84 GAO-04-8 Cable Television Industry 
Appendix VII: Comments from Industry 

Participants 

News Corporation 

NCTA officials had two comments related to cable operators ownership of 

cable networks. First, they stated that our discussion of program access 

rules implied that there could be a significant problem for entrants’ gaining 

access to programming. Conversely, they noted that program access 

concerns have always been minimal and that, if anything, these problems 

have declined in recent years, in part because few cable networks are 

owned by cable operators. Second, in terms of the carriage benefits that 

accrue to cable networks owned by cable operators, these officials noted 

that few cable networks are owned by cable operators. As such, they 

believe that while these cable networks may have an advantage in 

carriage, this is not a serious concern. 

Regarding programming costs, News Corporation (Fox) officials stated 

that the 59 percent increase in the cost of sports programming that we 

reported seemed high, and they suggested that we mention that the 

analysis did not include regional sports networks. Further, these officials 

also noted that the 72 networks that we compared with the sports 

programming networks include some networks that are not widely 

distributed. They said that our inclusion of such networks could 

exacerbate the difference in programming costs between the sports and 

nonsports networks because some of the less distributed networks would 

have low license fees. 

News Corporation officials noted that one reason the sports leagues might 

have told us that the cost of sports rights has not increased much in the 

past year is because the leagues are in the middle of multiyear contracts. 

These officials noted, however, that when compared with previous 

multiyear contracts, there has been a large increase in the cost of sports 

rights. 

Regarding retransmission consent, News Corporation officials noted that 

broadcast networks are highly valuable to consumers. Further, they noted 

that there are important objectives served by the retransmission 

provisions that should be more fully discussed in the body of our report. 

These officials cited two concerns regarding our cable network carriage 

model. First, they indicated that we should include an explanatory variable 

for the price, or license fee, for each cable network. Second, they believe 

our model should include a variable that incorporates launch fees. 

News Corporation officials believe that it is important to note that even if 

people only watch 17 channels, consumers value having access to more 

Page 85 GAO-04-8 Cable Television Industry 
Appendix VII: Comments from Industry 

Participants 

than 17 channels. Moreover, they indicated that consumers may not 

choose to watch the same 17 channels in any given year. 

Satellite Broadcasting 	 The Satellite Broadcasting and Communications Association chose to 

provide no comments.

and Communications 

Association 

Viacom Viacom (CBS) chose to provide no comments. 

Walt Disney Company 
 Walt Disney Company (ABC) officials said that our draft provided 

extensive information on how programming costs have increased over 

time, but did not provide enough coverage of how infrastructure costs 

have changed over time. Additionally, they believe the figures for 

programming costs that we reported are too high, and similarly that 

advertising revenues offset a greater portion of programming costs than 

we reported. 

Disney officials noted that the value of cable service today is much greater 

than it was in the past in terms of the number of networks and quality of 

programming that subscribers receive. As evidence, they said that 

subscribers are watching cable networks more and broadcast networks 

less. They referred to a study prepared by Professor Wildman, of Michigan 

State University, which estimated the “real” cost of cable by considering 

viewing hours; the study finds that the value of cable service to 

subscribers has risen dramatically in recent years. 

Regarding a sports tier, these officials noted that a sports tier only exists in 

New York, and that it has been bitterly fought-over, involved mediation, 

and is only a 1-year agreement. Moreover, they believe we should 

emphasize that the Yankees Entertainment and Sports (YES) network 

agreement only applies to regional sports networks, not ESPN. They said 

that the YES arrangement does not represent a trend and noted, for 

example, that cable operators continue to place cable-affiliated sports 

networks on the expanded-basic tier. 

Regarding retransmission consent, Disney officials said that we should 

provide more discussion about why the Congress passed this provision. 

They believe that without retransmission consent, free over-the-air 

television would be undermined. Moreover, they said that, prior to 

Page 86 GAO-04-8 Cable Television Industry 
Appendix VII: Comments from Industry 

Participants 

retransmission consent, broadcasters were required to provide content 

free of charge to cable operators that they subsequently sold to 

subscribers. Additionally, they said that it is important to note that the 

option of carriage of broadcaster-affiliated cable networks instead of 

payment for retransmission was discussed by Congress and has been 

endorsed by FCC. More importantly, according to these officials, Disney 

always offers a cash option to cable operators—their most recent offer 

was 70 cents per subscriber per month. 

Page 87 GAO-04-8 Cable Television Industry 
Appendix VIII: GAO Contacts and Staff 

Acknowledgments 

GAO Contacts 

Staff 

Acknowledgments 

(545024) 

Amy Abramowitz, (202) 512-2834 

Michael Clements, (202) 512-2834 

In addition to those named above, Stephen Brown, Julie Chao, Andy 

Clinton, Keith Cunningham, Michele Fejfar, Sally Moino, Tina Sherman, 

Wendy Turrene, Mindi Weisenbloom, and Carrie Wilks made key 

contributions to this report 

Page 88 GAO-04-8 Cable Television Industry 
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