Testimony 

Before the Committee on Commerce, 

Science, and Transportation, U.S. Senate

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 9:30 a.m. EST 

Thursday, March 25, 2004 TELECOMMUNICATIONS

Subscriber Rates and 

Competition in the Cable 

Television Industry 

Statement of Mark L. Goldstein, Director 

Physical Infrastructure Issues 

GAO-04-262T 
www.gao.gov/cgi-bin/getrpt?GAO-04-262T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Mark Goldstein 

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

Highlights of GAO-04-262T, a testimony 

before the Committee on Commerce, 

Science, and Transportation, U.S. Senate 

March 25, 2004

TELECOMMUNICATIONS 

Subscriber Rates and Competition 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. 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. While industry 

participants have suggested several options for addressing increasing cable 

rates, these options could have other unintended effects that would need to 

be considered in conjunction with the benefits of lower rates. 

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 issued its findings and 

recommendations in a report 

entitled Telecommunications: 

Issues Related to Competition and 

Subscriber Rates in the Cable 

Television Industry (GAO-04-8). 

In that report, GAO recommended 

that the Chairman of FCC take 

steps to improve the reliability, 

consistency, and relevance of 

information on cable rates and 

competition in the subscription 

video industry. 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 

classification of effective 

competition up to date. GAO 

believes that FCC should examine 

whether cost-effective alternative 

processes could help provide more 

accurate information. This 

testimony is based on that report. 
Page 1 GAO-04-262T 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to report on our work on cable rates and 

competition in the cable television industry. In recent years, cable 

television has become a major component of the American entertainment 

industry, with more than 70 million households receiving television service 

from 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 

has emerged and grown rapidly in recent years. Nevertheless, cable rates 

continue to increase at a faster pace than the general rate of inflation. As 

you know, on October 24, 2003, we issued a report to you on these issues, 

and issued a subsequent report to the Senate Judiciary Subcommittee on 

Antitrust, Competition Policy and Consumer Rights on similar issues.1

 My 

statement today will summarize the major findings from our October 2003 

report, and additional findings from our February 2004 report. 

At the request of this committee, we have (1) examined the impact of 

competition on cable rates and service; (2) assessed 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) examined the causes of recent cable rate 

increases; (4) assessed 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) discussed 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) discussed options to address 

factors that could be contributing to cable rate increases. 

 1

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

and Subscriber Rates in the Cable Television Industry, GAO-04-8 (Washington, D.C.: Oct.

24, 2003) and U.S. General Accounting Office, Telecommunications: Wire-Based 

Competition Benefited Consumers in Selected Markets, GAO-04-241 (Washington, D.C.: 

Feb. 2, 2004). 
Page 2 GAO-04-262T 

To address these issues, we developed an empirical model (our cablesatellite model) that examined the effect of competition on cable rates and 

service using data from 2001;2

 conducted a telephone survey with 100 

randomly sampled cable franchises that responded to FCC’s 2002 cable 

rate survey, and 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; interviewed representatives of the 

cable operator, cable network, and broadcast industries; and developed 

empirical models that examined whether ownership of cable networks by 

broadcasters or by cable operators influenced (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) based on data from 2002. For a 

more detailed description of our scope and methodology, see appendix I. 

This testimony is based on our report issued October 24, 2003, for which 

we did our work from December 2002 through September 2003. We 

provide additional information based on our report issued February 2, 

2004, for which we did our work from May 2003 to December 2003. We 

preformed our work for both assignments in accordance with generally 

accepted government auditing standards. 

My statement will make the following points: 

• Wire-based competition is limited to very few markets; according to FCC, 

cable subscribers in about 2 percent of all markets have the opportunity to 

choose between two or more wire-based operators. However, in those 

markets where this competition is present, cable rates are about 15 

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

competition in 2001. In our February 2004 report, we examined 6 markets 

with wire-based competition in depth and found that cable rates in 5 of 

these 6 markets were 15 to 41 percent lower than similar markets without 

wire-based competition in 2003. DBS operators have emerged as a 

nationwide competitor to cable operators, which 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 stations has induced cable operators to 

improve the quality of their service. 

 2

Our 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 our analysis. 
Page 3 GAO-04-262T 

• As we mentioned in our May 6, 2003, testimony before this Committee, 

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.3

 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. To improve the 

quality and usefulness of the data FCC collects annually, 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 

• We found that a number of factors contributed to the increase in cable 

rates. 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. During the past 3 years, the cost of 

programming has increased at least 34 percent. Also, since 1996, the cable 

industry has spent over $75 billion to upgrade its infrastructure. 

• Some industry representatives believe that certain factors related to the 

nature of ownership affiliations may also indirectly influence cable rates. 

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 higher 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 a greater 

likelihood that a cable operator would carry a cable network. 

• Today, subscribers have little choice regarding the specific networks they 

receive with cable television service. 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 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. A variety of 

factors—such as the pricing of à la carte service, consumers’ purchasing 

 3

See 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 4 GAO-04-262T 

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 worse off under an à la carte 

approach. 

• Certain options for addressing factors that may be contributing to cable 

rate increases have been put forth. Some consumer groups have suggested 

that reregulation of cable rates needs to be considered, although others 

have noted problems with past efforts at regulation. Other options put 

forth 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 lower rates. We are not making any 

specific recommendations regarding the adoption of these options. 

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, Showtime, and ESPN. 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 

local or state government. During cable’s early years, franchising 

authorities regulated many aspects of cable television service, including 

subscriber rates. In 1984, the Congress passed the Cable Communications 

Background 
Page 5 GAO-04-262T 

Policy Act, which imposed some limitations on franchising authorities’ 

regulation of rates.4

 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.5

 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.6

 Expanded-basic service typically includes such 

popular cable networks as USA Network, ESPN, and CNN. In anticipation 

of growing competition from satellite and wire-based operators, the 

Telecommunications Act of 1996 phased out all regulation of expandedbasic 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 

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. 

 4

Under the 1984 Act and FCC’s subsequent rulemaking, over 90 percent of all cable systems 

were not subject to rate regulation. 

5

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

subject to rate regulations than had previously been the case. 

6

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 6 GAO-04-262T 

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. 

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

wire technology—is limited to very few markets, but where available, has 

a downward impact on cable rates. In a recent report, FCC noted that very 

few markets—about 2 percent—have been found to have effective 

competition based on the presence of a wire-based competitor.7

 Our 

interviews with cable operators and financial analysis firms yielded a 

similar finding—wire-based competition is limited. However, according to 

our cable-satellite model that included over 700 cable franchises 

throughout the United States in 2001, cable rates were approximately 15 

percent lower in areas where a wire-based competitor was present. 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 our February 2004 report to the Senate Judiciary Subcommittee on 

Antitrust, Competition Policy and Consumer Rights, we developed an 

alterative methodology to examine the relationship between cable rates 

and wire-based competition. In particular, we developed a case-study 

approach that compared 6 cities where a broadband service provider 

(BSP)—new wire-based competitors that generally offer local telephone, 

subscription television, and high-speed Internet services to consumers—

has been operating for at least 1 year with 6 similar cities that do not have 

such a competitor. We compared the lowest price available for cable 

 7

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). 

Competition Leads to 

Lower Cable Rates 

and Improved Quality 

and Service among 

Cable Operators 
Page 7 GAO-04-262T 

service in the market with a BSP to the price for cable service offered in 

markets without a BSP. 

We found that cable rates were generally lower in the 6 markets we 

examined with a BSP present than in the 6 markets that did not have BSP 

competition. However, the extent to which rates were lower in a BSP 

market compared to its “matched market” varied considerably across 

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

television service was 41 percent lower compared with the matched 

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

percent lower when compared with their matched markets. In two other 

BSP markets, rates were lower by 15 and 17 percent, respectively, in the 

BSP market compared to its matched market. On the other hand, in 1 of 

the BSP markets, the price for cable television service was 3 percent 

higher in the BSP market than it was in the matched market. 

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

operators. 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—such as over-the-air affiliates of ABC, 

CBS, Fox, and NBC—via satellite to their customers.8

 On the basis of our 

cable-satellite model, we found that in areas where subscribers can 

receive local broadcast stations from both primary DBS operators, the 

DBS penetration rate is approximately 40 percent higher than in areas 

where subscribers cannot receive these stations from the DBS operators. 

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. 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. 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. 

 8

In 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 stations 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. 
Page 8 GAO-04-262T 

As we mentioned in our May 6, 2003, testimony before this Committee, 

weaknesses in FCC’s survey of cable franchises may lead to inaccuracies 

in the relative importance of cost factors reported by FCC. 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. These 

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

the relative importance of factors underlying recent 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. 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 also 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. However, FCC’s process for 

implementing this mandate may lead to situations in which the effective 

competition designation may not reflect the actual state of competition in 

the current time frame. In particular, FCC relies exclusively on external 

parties to file for changes in the designation. Using data from FCC’s 2002 

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 designation of effective competition 

for the franchise in FCC’s records. We found some discrepancies. These 

discrepancies 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 decisions, 

such as media consolidation, also necessitates reliable information in 

FCC’s report. As a result, we recommended that the Chairman of FCC 

improve the reliability, consistency, and relevance of information on cable 

rates and competition in the subscription video industry by (1) taking 

immediate steps to improve its cable rate survey and (2) reviewing the 

Concerns Exist about 

the Reliability of 

FCC’s Data for Cable 

Operator Cost Factors 

and Effective 

Competition 
Page 9 GAO-04-262T 

commission’s process for maintaining the classification of effective 

competition.9

 In commenting on our report, FCC agreed to make changes 

to its annual cable rate survey in an attempt to obtain more accurate 

information, but questioned, on a cost/benefit basis, the utility of revising 

its process to keep the classification of effective competition in franchises 

up to date. We recognize that there are costs associated with FCC’s cable 

rate survey, and we recommend that FCC examine whether cost-effective 

alternative processes exist that would enhance the accuracy of its 

effective competition designations. 

Increases in expenditures on cable programming contribute to higher 

cable rates. A majority of cable operators and cable networks, and all 

financial analysts that we interviewed told us that high programming costs 

contributed 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.10 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, 

compared to approximately 26 percent for 72 nonsports networks, in the 3 

years between 1999 and 2002.11 Further, the average license fees for the 

sports networks were substantially higher than the average for the 

nonsports networks (see fig. 1). 

 9

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

and Subscriber Rates in the Cable Television Industry, GAO-04-8 (Washington, D.C.: Oct.

24, 2003), page 45 for a full discussion of our recommendations. 

10Using 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. 

11The 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. 

A Variety of Factors 

Contribute to Cable 

Rate Increases 
Page 10 GAO-04-262T 

Figure 1: Average Monthly License Fees per Subscriber—Sports 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. 

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. 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 
Page 11 GAO-04-262T 

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

approximately 31 percent of their total programming expenses.12

In addition to higher programming costs, the cable industry has spent over 

$75 billion between 1996 and 2002 to upgrade its infrastructure by 

replacing degraded coaxial cable with fiber optics and adding digital 

capabilities. 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.13 Many cable operators, cable networks, and financial 

analysts we interviewed said investments in system upgrades contributed 

to increases in consumer cable rates. 

Programming expenses and infrastructure investment appear to be the 

primary cost factors that have been increasing in recent years. On the 

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

subscriber video-based revenues increased approximately $79 per 

subscriber from 1999 to 2002. 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. However, because these 

infrastructure-related expenses are associated with more than one service, 

it is unclear how much of this cost should be attributed to video-based 

services. Moreover, cable operators are enjoying increased revenues from 

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

increased approximately $74 per subscriber during the same period. 

 12Advertising sales revenues net of expenses incurred to insert and sell local advertising 

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

13For 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 12 GAO-04-262T 

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. Of the 90 

cable networks that are carried most frequently on cable operators’ basic 

or expanded-basic tiers, we found that approximately 19 percent were 

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

approximately 43 percent were majority-owned by a broadcaster, and the 

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

broadcasters or cable operators (see fig. 2). 

Figure 2: 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. 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 majority-owned 

by broadcasters or cable operators. 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 

Some View 

Ownership 

Affiliations as an 

Important Indirect 

Influence on Cable 

Rates 
Page 13 GAO-04-262T 

broadcasters or with cable operators—had no influence on cable 

networks’ license fees.14 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. 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. 

Using data from FCC’s 2002 cable rate survey, we found that with basic 

tier service, subscribers receive, on average, approximately 25 channels, 

which include the local broadcast stations. The expanded-basic tier 

provides, on average, an additional 36 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. 

Because 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. 

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 to unscramble the 

signals of the networks that the subscriber has agreed to purchase. 

 14In 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 GAO-04-8 for a

list of variables included in that model. 

Several Factors 

Generally Lead Cable 

Operators to Offer 

Large Tiers of 

Networks Instead of 

Providing À La Carte 

or Minitier Service 
Page 14 GAO-04-262T 

According to FCC’s 2002 survey data, the average monthly rental price for 

an addressable converter box is approximately $4.39. 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. 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, although it is unclear of the time frame over which this will 

occur. Also, consumer electronic manufactures have recently submitted 

plans to FCC regarding specifications for new television sets that will 

effectively have the functionality of an addressable converter 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. 

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

basis, the economics of the cable network industry could be altered. 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. 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 networks 

for the right to carry their signal (see fig. 3). 
Page 15 GAO-04-262T 

Figure 3: 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 

because 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.15 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. To compensate for any 

decline in advertising revenue, network representatives contend that cable 

 15Most contracts negotiated between cable networks and cable operators specify the tier 

that the network must appear on. 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. 
Page 16 GAO-04-262T 

networks would likely increase the license fees they charge to cable 

operators. 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. Moreover, most 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. 

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 customers, if faced with an à la carte 

selection of networks, would choose to receive only a limited number of 

networks, which is consistent with the data on viewing habits. In fact, 

some industry representatives had different views on the degree to which 

consumers place value 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. 

Additionally, the number of cable networks that customers choose to 

purchase will also be influenced by the manner in which cable operators 

price services under an à la carte scenario. 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. 

Industry participants have suggested the following options for addressing 

the cable rate issue. This discussion is an overview, and we are not making 

any specific recommendations regarding the adoption of any of these 

options. 

• Some consumer groups have pointed to the lack of competition as 

evidence that reregulation needs to be considered because it might be the 

only alternative to mitigate increasing cable rates and cable operators’ 

market power. However, some experts expressed concerns about cable 

regulation after the 1992 Act, including lowering of the quality of 

Industry Participants 

Have Cited Certain 

Options That May 

Address Factors 

Contributing to Rising 

Cable Rates 
Page 17 GAO-04-262T 

programming, discouragement of investment in new facilities, and 

imposition of administrative burdens on the industry and regulators. 

• The 1992 Act included provisions to ensure that cable networks that have 

ownership relationships with cable operators (i.e., vertically integrated 

cable operators) generally make their satellite-delivered programming 

available to competitors. Some have expressed concern that the law is too 

narrow because it applies only to the satellite-delivered programming of 

vertically integrated cable operators and it does not prohibit exclusive 

contracts between a cable operator and an independent cable network. 

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 while others have noted that 

altering these provisions could reduce the incentive for companies to 

develop innovative programming. 

• 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. 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. 

Some suggest modifying the carry one, carry all provisions to promote 

carriage of local stations in more markets. 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 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 affiliates) could receive 

compensation from cable operators in return for the right to carry their 

broadcast stations. 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. As a result, cable operators sometimes carry cable networks 

they otherwise might not have carried. Alternatively, representatives of the 

broadcast networks told us that they did not believe that cable networks 

had been dropped and 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. Certain industry participants with whom we met 

advocated the removal of the retransmission consent provisions and told 
Page 18 GAO-04-262T 

us that this may have the effect of lowering cable rates, but others have 

stated that such provisions serve to enable television stations to obtain a 

fair return for the retransmitted content they provide and that 

retransmission rules help to ensure the continued availability of free 

television for all Americans. 

Mr. Chairman, this concludes my prepared statement. I would be happy to 

respond to any questions you or other Members of the Committee may 

have at this time. 

For questions regarding this testimony, please contact Mark L. Goldstein 

on (202) 512-2834 or goldsteinm@gao.com. Individuals making key 

contributions to this testimony included Amy Abramowitz, Stephen 

Brown, Julie Chao, Michael Clements, Andy Clinton, Keith Cunningham, 

Bert Japikse, Sally Moino, Mindi Weisenbloom, and Carrie Wilks. 

Contact and 

Acknowledgments 
Page 19 GAO-04-262T 

To respond to the first issue—examine the impact of competition on cable 

rates—we used an empirical model (our cable-satellite 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. In addition, we spoke with an array of 

industry stakeholders and experts (see below) to gain further insights on 

these issues. 

The second issue 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. 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 open-ended 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. 

Additionally, to address part two of the second issue—assess FCC’s 

classifications of effective competition—we examined FCC’s classification 

of cable franchises regarding whether they face effective competition. 

 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).

Appendix I: Scope and Methodology 
Page 20 GAO-04-262T 

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. 

To address the third, fourth, fifth, and sixth issues (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 

provided the financial and operating data we sought for the period 1999 to 

2002. We also acquired data from Kagan World Media, 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. 
Page 21 GAO-04-262T 

• 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. Further, we developed descriptive statistics on 

the characteristics of various tiers of service and the channels included in 

the various tiers. 

(543084) 
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