Video Marketplace: Competition Is Evolving, and Government Reporting Should Be Reevaluated
Published: 2013-06-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Video provided through subscription video services, such as cable and satellite television, is a central source of news and entertainment for the majority of U.S. households. Technological advances have ushered in a wave of new products and services, bringing online distribution of video to consumers. Federal laws and regulations have sought to foster competition in the video programming and distribution marketplace, but many such laws were adopted prior to the emergence of these advances.
Among other things, GAO examined (1) how competition has changed since 2005; (2) the increased choices that consumers have in acquiring video programming and content; and (3) stakeholders' views on how the government's regulations, reports, and other activities have kept pace with changes in the industry. GAO reviewed relevant literature and reports; interviewed agency officials, industry stakeholders, and experts; and analyzed prices and service offerings in 20 randomly sampled zip codes (the prices and services offerings reflect conditions in the 20 zip codes and are not generalizable to all zip codes).
section_title: What GAO Found
paragraphs: Since GAO reported on competition in 2005, competition among video content producers is little changed, while competition among distributors has increased. According to data cited by the Federal Communications Commission (FCC), seven companies' broadcast and cable networks accounted for about 95 percent of all television viewing hours in the United States. Further, ownership of broadcast and cable networks changed little from 2005 through 2012. Alternatively, the introduction of video service provided by telephone companies, such as Verizon's FiOS service, has brought additional competition to video distribution. At year-end 2010, roughly 1 in 3 households could choose among 4 or more subscription video distributors: typically a cable company, 2 satellite companies, and a telephone company. With technological advances, companies are increasingly distributing video online. Online video distributors (OVD) are developing a variety of business models, including free and subscription-based services. However, online viewing and revenues represent a small portion of overall media viewing hours and revenue.
Consumers continue to acquire programming and content through packages, but OVDs are delivering new choices. All the video distributors that GAO analyzed required consumers to purchase a package of channels often through the basic, expanded basic, and premium tiers. According to FCC data, in 2011, the average price for expanded basic service was $57.46, and had increased over 33 percent since 2005, exceeding the 15 percent increase in the Consumer Price Index. OVDs and other companies allow consumers to select content on a program or episode basis. However, these services typically do not include the most recent television programs and movies, thereby limiting their value for some consumers.
Stakeholders generally noted that laws and regulations have not kept pace with changes in the video industry, and FCC has not consistently reported on competition. Some legislation governing the media industry was adopted over 20 years ago, before telephone companies entered the marketplace and the commercialization of the Internet facilitated new OVD services. A majority of stakeholders with whom GAO spoke stated that some provisions should be revisited. FCC is required to annually report to Congress on cable industry prices and competition in the video marketplace. However, since 1992, FCC has not published the cable industry price report 4 times--in 2004, 2006, 2007, and 2010--and has not published the video competition report 4 times--in 2007, 2008, 2010, and 2011. According to FCC officials, a variety of administrative factors contributed to the missed reports, and the reports are time consuming to prepare. The reports also impose burdens on some industry participants.
Less frequent reporting on cable industry prices and competition in the video marketplace could allow for continued measurement of industry performance while reducing the burden on FCC and industry participants. GAO found little change in the reported findings from year-to-year in FCC's video competition report. FCC's 2009 cable industry price and 2012 video competition reports followed missed reports, and these reports included data covering multiple years; these reports could serve as a model for issuing such reports less frequently. Since these reports are statutorily required, Congress, with input from FCC, would need to determine any new reporting frequency.
section_title: What GAO Recommends
paragraphs: FCC should study the advantages and disadvantages of different reporting frequencies for its cable industry price and video competition reports and transmit the results of its analysis to Congress. FCC said that the Commission strives to use its resources efficiently to meet the agency's mission and its Congressional requirements, and the Commission is reviewing GAO's recommendation.

section_title: Letter
paragraphs: Video provided through cable and satellite television services is a central  source of entertainment, news, and other information for most American  households. Today, over 100-million U.S. households subscribe to and  rely on these television services, viewing on average more than 140  hours of content every month. Federal laws and regulations, including the  Cable Television Consumer Protection and Competition Act of 1992 and  the Telecommunications Act of 1996, sought to foster competition in the  video programming and distribution marketplace. These laws and  regulations were essential to the emergence and growth of direct  broadcast satellite (DBS) television service in the late 1990s and early  2000s, which saw DBS companies gain market share at the expense of  traditional cable companies. More recently, competition from new  entrants—most prominently traditional telephone companies—has  increased in some areas of the country. In addition, advances in  digitalization and Internet infrastructure have ushered in a wave of new  products and services, bringing online distribution of video through  services such as Netflix and YouTube to consumers. Some consumer  advocates, industry stakeholders, and policymakers have expressed  concern that laws and regulations, first adopted in the 1990s, are no  longer adequate to address changing competition in the emerging digital  environment. And despite the myriad of technological and other changes,  the rates paid by consumers for subscription video services continue to  increase at a faster pace than the general rate of inflation.
We examined (1) how competition has changed since 2005; (2) the  increased choices that consumers have in acquiring video programming  and content; (3) the factors that can spur or hinder competition; and (4)  stakeholders’ views on how the federal government’s regulations, reports,  and other activities have kept pace with changes in the industry.
To address these questions, we reviewed relevant literature and reports  published since 2005. In particular, we conducted a literature search and  reviewed relevant articles on competition, technology, and economics in  the video programming and distribution marketplace, including academic  journals and studies. We also reviewed relevant reports prepared by the  Federal Communications Commission (FCC), the Department of Justice  (DOJ), and the Federal Trade Commission (FTC). To identify the prices  for cable service, we gathered data from FCC’s Cable Industry Price  reports for the years 2005 through 2012, which represent the most recent  available data. We reviewed FCC documentation and information  provided by FCC staff to assess the reliability of the cable price data and  determined that FCC’s data were sufficiently reliable for the purposes of  our report. We conducted interviews with FCC and DOJ, industry  associations and participants, and experts; we selected industry  associations and participants to ensure a diversity of participants,  including content companies, broadcast and cable networks, multichannel  video programming distributors (MVPD)—cable, satellite, and telephone  companies—and online video distributors (OVD). We reviewed relevant  laws, regulations, and FCC proceedings, including Notices of Inquiry,  Proposed Rulemakings, and Reports and Orders. To determine the level  of competition, available packages and pricing, and other program  options, we conducted an analysis of MVPD services in 20 randomly  sampled zip codes across the United States; these zip codes represented  dense, urban areas as well as sparsely populated rural areas. For each  zip code, we identified the MVPDs providing service and collected  information from the MVPDs on their services and prices. Our results  reflect the competition, packages, and pricing in the 20 zip codes and are  not generalizable to all zip codes. For more details on our scope and  methodology, see appendix I.
We conducted this performance audit from July 2012 to June 2013 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Video Programming and Distribution
paragraphs: Various entities and groups develop and distribute video content. Content  producers, such as Sony Pictures Entertainment and CBS Television  Studios, sell the right to use their content to a variety of users, such as  broadcast networks, cable networks, and local television stations. The  financial compensation received by content producers for the use of their  copyright-protected content is a licensing fee or royalty. Broadcast and  cable networks produce and aggregate programming from other content  producers for distribution to the public. Broadcast networks consist mainly  of four major networks (ABC, CBS, FOX, and NBC), and several smaller  networks, such as the CW Television Network, MyNetworkTV, and ION  Television. Content is produced by the major networks’ affiliated  production companies, which can include movie and television studios,  and independent producers. Cable networks aggregate programming  from content producers and some also produce programming, which can  include niche programming—that is, programming that targets specific  demographics. For instance, Lifetime Television offers programming that  specifically targets women, while MTV offers programming that targets  the 18-to-34 age group.
Video content is distributed to households by local television stations,  cable and satellite companies, and most recently, OVDs. Each of the  four major broadcast networks owns and operates some local television  stations; other stations may be independently owned but affiliated with  one of the major networks or, as is the case with noncommercial  educational television, unaffiliated with any major network. FCC licenses  local television stations, which have the right to transmit a video  broadcast signal on a specific radio frequency in a particular area and at  a particular strength. Local television stations that are affiliated with a  broadcast network negotiate licensing agreements with their network for  the right to air network-furnished content, including prime time shows,  afternoon soap operas, and national news programs. MVPDs obtain a  variety of programming from both local stations and cable networks. Time  Warner Cable, DISH Network, and Verizon are examples of cable,  satellite, and telephone MVPDs, respectively, that license and distribute  content to subscribers. Figure 1 illustrates how television programming is  distributed through broadcast and traditional subscription video service.
Consumers can watch movies and television programs through  computers, set top boxes, game consoles, and of course televisions.  Some may also have the option of using tablets, smartphones, and other  mobile devices to view content via the Internet, either through a MVPD  service or an OVD, such as Netflix. Typically, the general public views  television programming through broadcast or subscription video service.  Local television stations provide free over-the-air programming to the  public. In contrast, consumers pay fees to providers of subscription video  services, including cable companies, satellite providers, or telephone  companies. According to the National Cable and Telecommunications  Association (NCTA), the trade association for cable companies, in 2012,  over 85 percent of U.S. households had a MVPD subscription, with the  remainder accessing television through an antenna.
Industry participants receive revenue from a variety of sources.  Companies that create programming receive the majority of their revenue  from license fees. Broadcast networks receive the majority of their  revenue from advertising. Cable networks receive revenue from both  monthly subscriber fees, paid by MVPDs, and advertising. MVPDs— which own, operate, and maintain their cable and satellite networks— receive the majority of their revenues from monthly subscription fees paid  by consumers, supplemented with advertising. Many MVPDs also provide  broadband Internet and telephone services over their networks or in  partnership with other companies.
section_title: Federal Laws, Regulations, and Responsibilities
paragraphs: Pub. L. No. 98-549, 98 Stat. 2780 (1984). ensuring reasonable rates for both the basic cable service and the  cable programming service tier (CPST), commonly referred to as  expanded basic, for cable systems not subject to effective competition  as defined by the Act; Congress passed the 1992 Act in response to  increasing rates. In addition, the 1992 Act required cable companies  to carry all local television stations that requested carriage—known as  must carry—or negotiate with television stations seeking  compensation—known as retransmission consent. Cable companies  that also produced content were required to provide their content to  unaffiliated MVPDs at nondiscriminatory rates—known as program  access.
The Telecommunications Act of 1996 phased out regulation of rates  for the CPST and included provisions that allowed for the growth of  telephone companies in the video distribution marketplace. For example, the 1996 Act eliminated the restriction on telephone  companies providing video service directly to subscribers in areas  where they provided telephone service.
section_title: Competition among Content Producers Is Little Changed, while Competition among Distributors Has Increased
subsections: section_title: Several Large Media and Entertainment Companies Produce Much of the Content Viewed In the United States
paragraphs: Several large media and entertainment companies continue to produce  much of the content watched by consumers. According to a 2012 report  cited by FCC, seven companies’ broadcast and cable networks  accounted for about 95 percent of all television viewing hours in the  United States. These seven companies hold some combination of  television and movie production studios, broadcast networks, and cable  networks. The seven companies and some of their holdings include:
CBS: CBS (broadcast network), CBS Television Studios, Showtime;
Discovery Communications: Discovery Channel, TLC, A&E, Animal
Disney: ABC (broadcast network), ESPN, Disney Channel, Walt
NBCUniversal: NBC (broadcast network), Universal Pictures, USA  Network, Telemundo Television Studios, The Weather Channel;
News Corporation: FOX (broadcast network), FOX News Channel,  20th Century Fox, 20th Century Fox Television;
Time Warner: The CW Network (broadcast network), CNN, HBO,  TBS, Warner Brothers Studios; and
Viacom: MTV, Comedy Central, Nickelodeon, Paramount Pictures.
We previously reported that the major broadcast networks (ABC, CBS,  FOX, and NBC) and their affiliated studios produced from 76 to 86  percent of prime-time programming hours in 2002, 2005, 2008, and 2009,  with the remaining hours coming from independent producers.similarly reported that the production studios of major media and  entertainment companies, which also hold broadcast and cable networks,  often create and license television programs and movies. This pattern  does not hold for all companies. For example, Discovery Communications  does not own a major television or movie studio and Sony Corporation,  another large media and entertainment company, operates a television  and movie studio, but does not operate a broadcast or cable network.
The concentration of content production among a handful of large media  and entertainment companies has changed little in recent years. We  compared the ownership of major broadcast and cable networks from  2005 through 2012, and found little change in the pattern of ownership  and concentration of production. For example, of the top 20 cable  networks by subscribership in 2005, more than half experienced no  change in ownership from 2005 through 2012. However, some ownership  change did occur during this period. In 2005, the former Viacom split into  two companies—CBS and Viacom. In 2009, the Time Warner Cable  distribution business was spun off from the Time Warner Inc. content  business. Lastly, Comcast, the largest distribution company in the United  States, merged with NBCUniversal;NBCUniversal’s content and networks to Comcast’s existing, more limited  media holdings, which include the Golf Channel and E! Entertainment.
section_title: Since 2005, Some Local Markets Have Gained Access to Additional MVPD Service
paragraphs: Since 2005, the introduction of telephone-based video service has  brought additional MVPD competition to some areas. Traditional  telephone companies AT&T and Verizon—through their respective U- verse and FiOS products—have led this change, introducing video  services in various areas across the country and competing with cable  and satellite companies. Verizon first introduced its FiOS TV service in  2005 and as of year-end 2012, reported having 4.7 million subscribers  with service available to 17.6 million households. As of year-end 2012,  AT&T’s U-verse service had 4.5 million subscribers with service available  to more than 24.5 million households. In addition to AT&T and Verizon,  other competition has emerged in a limited number of areas. For  example, Google introduced Google Fiber in the Kansas City metropolitan  area. Like cable companies, AT&T, and Verizon, Google Fiber includes  broadband Internet and television service. Google Fiber is a pilot  project, and it is unknown to what extent Google will expand its  deployment to other cities; although, in April 2013, Google announced  that it would introduce Google Fiber in Austin, Texas, and Provo, Utah. In  addition, we have previously reported that the Universal Service Fund  managed by FCC, which provides subsidies to telephone companies that  serve rural and other remote areas with high costs, enables some  companies to upgrade their telephone networks, including upgrading to  fiber optic cable and extending it closer to their customers. The  upgraded networks enable these companies to provide video and  broadband service in some rural and remote areas.
With the new entry in some areas, roughly 1 in 3 households had access  to at least 4 MVPDs at year-end 2010. As a result, the nationwide  market shares have shifted among MVPDs since 2005 (see fig. 2). In  particular, cable companies have seen their nationwide market share  drop, continuing a longer-term decline. For example, NCTA estimated  that cable companies’ share of MVPD subscribers has dropped from 98  percent in 1992 to 57 percent in 2012. Satellite services have continued  to grow, although more slowly in recent years. Financial analysts and  other experts report that satellite companies could face increasing  competitive challenges from cable and telephone companies going  forward. In particular, as consumers increasingly purchase a bundle of  video, broadband Internet, and telephone services, satellite’s slower  Internet service could dissuade consumers from purchasing satellite   For example, DirecTV reported that various telephone and  service.broadband companies also sell its service as part of a bundle with their  voice and data services, and these companies could focus less effort and  resources selling DirecTV’s service or decline to sell it at all as they  deploy networks with the capability of providing video, voice, and data  services.
Although more households have access to at least 4 MVPDs than in the  past, roughly 2 in 3 households still had access to 3 or fewer MVPDs at  year-end 2010, 2 of which were the satellite providers. While the entry of  telephone companies into the video marketplace offers some households  more options, representatives from AT&T and Verizon were uncertain  about the scope of future expansion. AT&T announced that the company  will expand its U-verse service to be available to 33 million households— an increase from 24.5 million—but the company may also discontinue  service to other areas simultaneously. Verizon officials reported that the  company has no current plans to expand FiOS beyond its goal of making  service available to 18 million households. In addition, according to FCC,  at year-end 2010, about 1.5 percent of households had access to just 2  MVPDs, which are the two major satellite companies. In our analysis of  MVPD service in 20 zip codes, one zip code—encompassing Limon,  Colorado—was not served by a cable company and relied solely on  satellite service.
section_title: Online Video Products Have Emerged as a New Form of Video Distribution
paragraphs: Technological advances increasingly enable distribution of video online.  Internet speeds have increased as companies deploy new, high-speed  technologies, such as fiber optic cable, to the neighborhood or the  residence. These new technologies enable many U.S. households to  stream video—that is, access and view video content via online sources.  Watching video online generally requires an Internet connection with a  speed of .7 to 4 megabits per second, depending on the quality of the  video; for example, high-definition video requires higher Internet speeds  than standard definition video. In August 2012, FCC reported that over 40  percent of U.S. households had adopted broadband speeds of at least 3  megabits per second.
A variety of business models supporting online video have emerged;  some online video is available free, while other content is available with  payment. Online sites such as YouTube aggregate user-created and  other content and make this content available to viewers free with an  Internet connection. Increasingly, professional content is appearing on  YouTube. For example, ABC News has segments from ABC World News  and Good Morning America available on YouTube. Other services, such  as Netflix and Amazon Prime Instant Video, entail one-time or monthly  rental fees to access content, including television programs and movies.  Still other models exist, where content owners sell their content directly to  consumers. In particular, Hulu—a joint venture that includes News  Corporation, NBCUniversal, and Disney—offers a free advertiser- supported service and a monthly subscription service with fewer  commercials and access on a wide variety of devices.
While the Internet has emerged as a new source for viewing video, online  viewing and revenues represents a small portion of overall media activity,  particularly as compared to traditional television. In September 2012,  Nielsen reported that 162 million Americans watched online video,  consuming on average nearly 7 hours of content over that month. In  contrast, Americans watch over 34 hours of live television per week.  Additionally, several financial analysts and experts whom we interviewed  described Internet advertising as still in its infancy, with viewership and  advertising still developing and companies exploring successful business  models. For example, FCC, citing data from Investor’s Business Daily,  reported that in 2009 advertisers spent $908 million on U.S. online video  advertising compared to $68.9 billion spent on U.S. television advertising  during that same period.
section_title: Consumers Continue to Acquire Programming and Content through Packages, but Online Video Providers Are Delivering New Choices
subsections: section_title: MVPDs Generally Provide Large Packages of Channels
paragraphs: In general, MVPDs provide video content by packaging together a large  number of channels in different programming tiers—often the basic,  expanded basic, and premium tiers. In our analysis of MVPD services in  20 zip codes in 2013, all MVPDs reported requiring consumers to  purchase tiered packages of channels. We found that the basic tier of  these MVPDs consisted of a minimum of 13 channels, with local  broadcast and informational channels sometimes dominating this tier; the  price of the basic tier ranged from $9.95 to $40 per month. The  expanded basic tier usually included the channels in the basic tier and  additional cable networks, such as ESPN, Nickelodeon, USA Network,  MTV, and A&E. Higher end, premium tiers usually included more than  100 channels and the monthly subscription price for this tier ranged from  $53 to $200.49. In all 20 zip codes we analyzed, the MVPD included  HBO, Showtime, and Cinemax in its premium tier. Because subscribers  must receive all of the channels offered on a tier that they choose to  purchase, they have little choice regarding the individual channels that  they receive. À la carte service—where consumers purchase content on a  channel-by-channel basis—is generally not provided by MVPDs. None of  the MVPDs we interviewed, or any MVPDs included in our analysis of 20  zip codes, provided à la carte service; the only exceptions were premium  channels and pay-per view services, which were often available on a  stand-alone basis.$6.00 to $26.95 per month in the 20 zip codes we analyzed.
For example, HBO was available for an additional  Contractual and economic factors lead MVPDs to package channels into  tiers rather than providing à la carte service. Contractually, content  companies generally seek to have their networks carried on the largest  tier, typically the expanded basic tier. These companies have an  economic incentive to pursue this strategy; content providers typically  receive both a monthly fee for each customer that subscribes to the tier  on which their network appears and advertising revenues, which are  based in part on the number of potential viewers (e.g., subscribers) to the  tier on which their network appears. Content companies and others  reported that they might need to charge more for certain content under an  à la carte system because of potential revenue losses and that the price  of a single channel could be significantly higher with an à la carte system  compared to the current tiered system. Consumer groups expressed  concerns that à la carte service could diminish diversity and local aspects  of existing programming if lower demand networks cease operation  because of a lack of subscribers. Some experts with whom we spoke also  questioned whether consumers would necessarily be better off with à la  carte pricing of channels, given the potential for reduced quantity and  quality, and higher prices for individual channels.
Some MVPDs are providing increased service options to consumers. For  example, some MVPDs are making content available through TV  Everywhere services. These services allow MVPD subscribers to view  some content on mobile devices, typically smartphones or tablet  computers, and from various locations within and, depending on the  service, outside the residence. Some MVPDs charge for these additional  features as a stand-alone service or include them as part of a digital  package, and some require that the customer subscribe to both the  company’s MVPD and broadband services. In addition, some MVPDs are  bundling telephone, Internet, and video services. These bundles have a  higher aggregate price, but the consumer’s total cost can be less than if  the consumer purchased these services separately. For example, one  MVPD included in our zip code analysis provided a tier of channels for  $39.95, Internet service for $39.95 per month, and telephone service for  $34.95 per month. Alternately, a consumer could receive these three  services in a bundle for a monthly price of $84.95, a savings of $29.90.  Such bundling appears to be widespread; of the 20 zip codes in our  analysis, consumers in all 20 had access to one or more bundles. FCC  reported that as the number of video subscribers has fallen, cable  companies have prospered by increasing sales of other services, such as  phone and Internet access, to their remaining customers.
section_title: New Entrants Are Providing Increased Choices
paragraphs: OVDs and related companies provide consumers with increased flexibility  in selecting content. Services like Hulu and Netflix allow consumers to  select content based on a program, or even an episode basis. Some  experts and consumer groups with whom we spoke said that these new  online options constituted a programmatic à la carte, rendering debates  over whether or not consumers should have the ability to purchase  specific channels less relevant. OVDs’ libraries are limited, however, and  OVDs do not have the rights to display certain television programs and  movies. To maximize the return on investment from producing video  content, where costs can be quite high, content owners generally  distribute content through a series of outlets over time, through a process  known as windowing. Content is distributed in the most lucrative outlets  first, and depending on the type of content, the windowing process can  take months or years to fully play out. Distribution of content through an  OVD is often last in the series of outlets, as content providers first  distribute television programs through broadcast or cable networks and  feature films through movie theatres. Because of this, OVDs typically are  not able to obtain first run television programs and movies; for example, a  television program may have to finish its entire season before a single  episode becomes available online. Thus, although the same content is  available in earlier windows through other outlets, windowing can limit the  value of OVDs’ services for some consumers. As such, most of the  industry representatives and experts with whom we spoke stated that, at  this time, OVD services are generally seen as a complement to MVPD  services, rather than a substitute.
Nonetheless, some content companies are providing content directly to  consumers online. Sports leagues are one such example. Major League  Baseball provides its MLB.TV service, where subscribers can watch  baseball games live online or at a later time, as well as recaps and other  baseball news. The National Basketball Association provides a League  Pass service where subscribers can watch some games live, have  access to live game statistics, and review an archive of content for the  season. In addition, other content aggregators, like cable networks, have  made content available online. For example, AMC has an online service  where viewers can watch shows such as Mad Men. In another example,  HBO has an online version of its network, HBOGO, where viewers can  watch all of the movies and other content on this premium network.  Much of this and other online content can also be accessed through  electronic portable devices. Indeed, some of the aforementioned sport  content services provide mobile options for subscribers.
These prices are for a basic Internet connection; some MVPDs provide higher-speed  options for a higher price. These prices also do not include satellite companies, which do  not provide a stand-alone Internet service. option where a consumer can pay a set amount (usually $1.99 to $4.99)  to view a movie in a 30-day window. Services like Netflix are subscription- based with recurring, monthly fees for continued access to their content  library. Content viewed directly from content companies also generally  requires a monthly or yearly fee. For example, the price for Major League  Baseball’s MLB.TV services is $94.99 for a year or $19.99 per month.
section_title: Prices for Traditional MVPD Services Continue to Increase
paragraphs: Despite entrants providing new choices, the price of MVPD video service  continues to increase. In its most recent annual report on cable rates,  FCC reported that over the course of 2010, cable rates rose 5.4  percent.  From 2005 through 2011, cable rates rose more than 33.5  percent for both basic and expanded service tiers (see table 1). This  increase outpaced inflation captured in the Consumer Price Index, which  rose 15.5 percent over the same period. Besides cable service, other  MVPDs’ prices have increased faster than inflation. For example, in  January 2013, Dish Network raised the price for its services between 7 to  20 percent; this included a price increase of $5 for its basic service  package—from $24.99 to $29.99 per month. DirecTV also increased its  prices in February 2013, raising its average price by 4.5 percent.
Representatives from MVPDs and content companies, consumer groups,  and other stakeholders identified a variety of causes for continued rate  increases. MVPD and content companies cited the cost of content  production as one factor. The cost of acquiring “must have” content— content that is very much in demand by consumers, such as live sports— has become increasingly expensive. Sport leagues, such as the National  Football League and Major League Baseball, are seeking higher fees  from broadcast and cable networks to carry their sporting events. For  example, in its latest contract with ESPN, Major League Baseball will  receive approximately $5.6 billion for the years 2014 through 2021; this  represents a 100 percent increase above the previous agreement.  Broadcast and cable networks may in turn pass along these higher prices  to MVPDs, which ultimately contribute to higher consumer prices for  MVPD service. Infrastructure investment costs, such as cable companies  continuing to roll out broadband Internet service to new communities and  locations, may also play a role. For example, NCTA reported that the  cable industry’s capital expenditures for 2011 were $12.9 billion.
section_title: Although Technology Will Likely Continue to Spur New Services and Products, a Variety of Factors May Hinder Future Competition in the Video Marketplace
subsections: section_title: Technological Advances and Increased Spectrum for Wireless Services Could Spur New Services, Products, and Competition
paragraphs: Advances in digital technologies and increased Internet capacity could  help lower the cost to develop and distribute some video content. Some  high-quality digital video cameras and editing equipment can be  purchased for less than a thousand dollars, enabling individuals and small  startups to create content at relatively low cost. As a result, individuals  and startups can produce web series of low-budget programs and  develop dedicated online channels to carry content. In addition,  crowdfunding—the practice of funding a project or venture by raising  small amounts of money from a large number of people, often online— provides a mechanism for startups to acquire the financial resources to  develop content. Furthermore, technological advances can lower the  costs to distribute content through online platforms like YouTube, which  provides free content posting. OVDs can distribute content online at  relatively lower costs than traditional MVPDs, which own physical  networks and tend to distribute more costly professionally produced  movies, sports, and television programs. For example, whereas OVDs  have limited distribution costs as consumers pay subscription fees to  access the Internet and online video, traditional MVPDs built, operate,  and maintain the networks through which Internet bandwidth and online  video is provided.
Increased spectrum for wireless broadband could facilitate greater  distribution and viewing of video content wirelessly. According to industry  stakeholders and experts with whom we spoke, today’s terrestrial  wireless networks are unable to support widespread, large-scale viewing  of video content; these networks’ capacities are much less than existing  wired and satellite networks deployed by cable, telephone, and satellite  companies. However, increased spectrum for wireless broadband,  combined with compression technologies that allow more efficient use of  spectrum, could allow for additional viewing of video content wirelessly.  According to FCC, the Commission’s 2008 auction of spectrum licenses  resulted in some mobile wireless service providers beginning to offer  mobile broadband services for laptop computers, tablets, smartphones,  and other mobile devices. FCC is planning another spectrum auction for  wireless services in 2014. According to industry stakeholders and experts  with whom we spoke, more spectrum for wireless services could spur  additional competition, with more companies entering the marketplace to  provide online video services accessible via smartphones and tablets.  However, as we have previously reported, most spectrum has already  been allocated and assigned to other users, including federal agencies  such as the Department of Defense, and reallocating spectrum from other  uses can be time-consuming, costly, and contentious.
section_title: A Variety of Factors May Hinder Future Competition
subsections: section_title: Availability and Licensing of Professionally Produced Content
paragraphs: The high costs to license professionally produced content could hinder  the competiveness of entrants and small distributors. Some professionally  produced and time-sensitive programming, like sports and popular prime  time shows, are highly valued by many viewers. As the supply of those  who are involved in the production of such popular programming—well  regarded athletes, writers, actors, and directors—is limited, their talents  command premium compensation, often in the millions of dollars. While  large MVPDs that have subscription and advertising revenues can pay  the license fees for this content, smaller MVPDs and new OVDs that are  not as established in the marketplace may not be able or willing to do so.
In addition, OVDs told us that competition could be hindered by the fact  that content providers will license their content to them, but only on similar  contractual prices and terms that they offer to traditional MVPDs. In  particular, OVDs told us that licensing contracts have “most-favored  nation” (MFN) clauses that guarantee a customer will receive prices and  terms that are at least as favorable as those provided to other customers  of the same seller. Because of MFN clauses, OVDs assert that content  providers will not enter into agreements with OVDs that are different from  agreements that they have with MVPDs. As a result, OVDs said that MFN  clauses inhibit their ability to compete, as they cannot offer consumers  different programming choices and prices than MVPDs, thus making it  difficult to attract customers. DOJ and the Federal Trade Commission  (FTC), which investigate certain proposed mergers and potential antitrust  violations, jointly sponsored a workshop in September 2012 on MFN  clauses and their benefits and risks to competition. According to DOJ’s  press release announcing the workshop, MFN clauses, though at times  employed for benign purposes, can under certain circumstances present  competitive concerns. DOJ noted that MFN clauses might, especially  when used by a dominant buyer of intermediate goods, raise other  buyers’ costs or foreclose would-be competitors from accessing the  market. While high prices and contracting terms could hinder entry, some  larger OVDs with subscription services have taken steps to overcome  these challenges. For example, Netflix signed a multiyear billion-dollar  agreement with Disney Corporation to license its content beginning in  2016. In addition, some OVDs have begun producing their own original  content. For example, Netflix created its first original series, House of  Cards, which debuted on February 1, 2013, and Amazon currently has 12  pilots in development that will be available on its Prime Instant Video  service.
Based on our discussions with an array of industry stakeholders and  experts, the prospect of any new wire-based providers entering the video  market appears unlikely. As previously discussed, the two telephone  providers that expanded their service offerings to compete with incumbent  cable companies—AT&T and Verizon—appear to be curtailing further  expansion of their video and broadband Internet services. Both  companies made very large investments to upgrade their networks—an  expected $23 billion in the case of Verizon and billions of dollars,  according to AT&T—to provide new video and broadband services,  despite the fact that the companies were established telephone  companies with existing telecommunications infrastructure in place. The  high costs to provide these services create a substantial barrier to entry.  In particular, not only are the overall costs of entry into the video  distribution market high, but many of these costs are fixed, meaning that  much of the infrastructure needs to be in place before the provider can  initiate service. High fixed costs can render entry difficult because an  established company with a large customer base will generally enjoy a  significant cost advantage over a new entrant.
The costs involved in entering the video distribution market fall into  several categories including: (1) physical infrastructure, (2) regulatory  authorizations, (3) securing access to broadcast and cable programming,  and (4) marketing.
Physical infrastructure for providing video. Providing wire-based video  service requires an extensive physical network. The provider needs to be  able to capture video signals from various sources—broadcast  transmitters, fiber optic cable, satellites—each source requiring specific  communications infrastructure. Once captured at the provider’s facilities,  video signals are transported to households. Transmission requires a  wired network from the provider’s facility travelling across highways and  byways, into neighborhoods, and ultimately linked to every subscribing  household. Installation of such a network is expensive: the provider  generally needs to dig trenches along roads and into neighborhoods in  order to install equipment and wire. This fairly extensive and expensive  network of communications reception and transmission equipment needs  to be in place before any service can be provided, so much of the video  capture infrastructure, trench digging, and wire installation costs are fixed.
Regulatory authorizations and coordination with private party facilities  owners. A new provider must work with local jurisdictions to obtain  authorizations to undertake various activities. Cable providers are  required to obtain a franchise authorization for each jurisdiction they  serve. Franchise areas vary in size, but they typically cover a town or  relatively small jurisdiction, so gaining franchise authorization to enter any  significant geographic area can be time-consuming. In addition, to  deploy cable for the network, a provider requires access to public rights- of-way. The governmental entities that grant franchises and access to  rights-of ways vary by state, which again may mean that an entrant needs to obtain a grant to access rights-of-ways from multiple jurisdictions.Once the grant is received, a video provider must work with either the  local telephone or utility companies to undertake the necessary  installation work, because these companies generally are the owners of  the poles or conduits over or through which wires are deployed along the  rights-of-way. As with the physical installation, obtaining regulatory  authorizations and coordinating installations generally needs to take place  before the provider can begin to service customers.
Acquisition of Programming. A new provider in the video market needs to  secure access to a large portfolio of broadcast and cable networks to  compete for customers. The cost of the programming itself is paid  monthly based on the number of subscribers the provider serves, and  according to providers with whom we spoke, prices for programming are  high and continue to increase. Several of the providers and experts with  whom we spoke also told us that networks generally offer significant  discounts based on the number of subscribers a provider has. Thus, a  substantial disadvantage that an entrant has relative to a large provider is  that it will likely have higher programming costs, making entry  challenging.
Marketing. A new entrant needs to make the public aware of the new  services it is offering and attempt to convince potential customers to buy  its services. This can pose many challenges for an entrant. As mentioned  earlier, over 85 percent of households already subscribe to a video  service, so most potential customers are already buying a service. Thus,  most customers need to be persuaded to switch their provider.  Additionally, many households buy a bundle of services from their  provider—video, broadband Internet, and sometimes telephone—and the  inconvenience of switching over several services to a new provider is  greater than it might be for a stand-alone service. Such challenges that  an entrant would face to gain subscribers can also act as a barrier to  entry.
While OVDs present a new and exciting venue through which consumers  can enjoy video services, we found that OVDs do not yet offer a package  of programming that is substantial enough to induce households to drop  their subscription to a traditional video service in favor of an OVD’s  services. OVD providers have a variety of business models, but  fundamentally, they are dependent on two established industries— developers of video content and providers of broadband Internet  access—and this dependence could hinder any significant maturation of  the OVD business model.
Content. OVDs purchase content from the same content providers as do  traditional MVPDs, and content providers and MVPDs have long-standing  and lucrative business relationships. As discussed above, high-valued  content, such as professionally produced movies and television  programs, is costly to produce. Therefore, even if some OVDs are  successful in developing some independent content, they will remain  largely dependent on traditional sources of content. Content providers  enjoy a stable and secure business model distributing programs on  MVPD systems. In particular, content providers benefit from MVPDs  packaging many channels because it ensures that most households  purchase a large set of channels. Similarly, MVPDs benefit from their  purchase of high-quality content, which most households value enough to  induce them to purchase a large tier of MVPD programming.there is a symbiotic benefit in the business relationship between the  content producers and MVPDs.
At the same time, content providers are also interested in selling their  programs to OVDs. In particular, representatives of several such  companies, as well as experts, said that through these new outlets,  content providers are able to monetize their products in new ways. For  example, OVDs can distribute content separate from the bundles of  content offered by broadcast and cable networks, which may have a  unique commercial appeal and attract new consumers to content  providers’ programs. However, content providers are also wary about the  extent to which they contract for OVD distribution of their programs. If  OVD offerings become attractive enough that households begin to drop  MVPD subscriptions and rely solely on online viewing, revenues earned  through traditional subscription service will decline, affecting both content  providers and MVPDs. The issue is the extent to which this happens: the  impact of a small number of households doing so may not be of concern  to content providers, but if a substantial number of households choose to  “cut the cord,” revenues of both the content providers and the MVPDs  could be reduced enough to be worrisome for these companies. Thus,  while content providers are interested in providing some content to OVDs,  their incentive to do so is somewhat constrained by the potential effect on  subscriptions to traditional MVPDs. Some stakeholders with whom we  spoke stated that the critical challenge for the OVD business model is  access to quality content and that as long as content providers do not see  OVDs as a viable outlet for the highest quality content, the growth of the  OVD business model will be limited.
Broadband. Most households with broadband purchase that service from  either a cable or a telephone company. Thus, the companies that  provide a large portion of the broadband access in the country are the  same companies that OVDs are attempting to compete against in the  video marketplace. Users who view video provided by OVDs are often  large consumers of broadband bandwidth, and heavy use may place  stress on the broadband infrastructure. Some MVPDs have created  pricing structures for bandwidth that, in one manner or another, extract  higher fees from heavy users. OVDs and other experts have expressed  concern that, because MVPD providers are also competitors of OVDs in  the video market, MVPDs may have an incentive to charge for bandwidth  in such a way as to raise the costs to consumers for using OVD service.  Some of the industry groups and experts with whom we spoke stated that  some form of usage-based pricing was probably inevitable and  reasonable based on the costs of maintaining the infrastructure, but that  they would be concerned if such pricing was used in any way that could  stall the growth of the nascent OVD market. For example, they would be  concerned if there were any differential treatment of broadband use for  accessing the content of the MVPD versus that of OVD providers.
section_title: Stakeholders Generally Noted That Laws and Regulations Have Not Kept Pace with Changes, and FCC Has Not Consistently Reported on Competition
subsections: section_title: The Majority of Stakeholders Noted that Some Laws and Regulations Are Out of Date, but Little Agreement Exists on Potential Changes
paragraphs: The 1992 Act was written over 20 years ago, and for a variety of reasons,  the majority of stakeholders with whom we spoke stated that some  provisions of the laws and associated regulations do not reflect the  current marketplace. Stakeholders told us that there have been significant  changes in competition in the video marketplace since 1992. For  example, cable companies were often the only choice of a video  distributor for most consumers in 1992. Since then, satellite and  telephone companies have entered the marketplace, and consumers  have more choices in selecting a video distributor. In addition, the 1992  Act was written before the commercialization of the Internet and other  technological advances, such as tablets and smartphones, which allow  for online video and wireless distribution. As previously discussed, online  video viewing is a small portion of overall viewership. However, experts  with whom we spoke said that the trend is for growth of online video with  the expansion of WiFi and 4G infrastructure and the greater use of tablets  and smartphones. Furthermore, since 1992, MVPDs have digitalized their  systems and the number of channels carried on these systems has risen  dramatically, an increase that has led to more content being developed  and more content options available for consumers. Due to these  marketplace changes, the majority of stakeholders we interviewed stated  that some provisions in the 1992 Act should be revisited; however, other  stakeholders disagreed, stating that given the quickly developing,  dynamic, and technology-oriented nature of the industry, it is difficult for  laws to keep up with changes. These stakeholders noted that, as was the  case in 1992, it is hard to predict what the marketplace will be like in the  future and therefore difficult to envision appropriate laws and regulations.
Most of the stakeholders who told us that some provisions of the 1992 Act  should be revisited had varying opinions, which were often based on their  position in the marketplace. In general, stakeholders identified three  issues related to the 1992 Act that they believe should be addressed: (1)  retransmission consent, (2) program access, and (3) the definition of  MVPD and OVD. In addition, stakeholders also had varying opinions on  FCC’s Open Internet regulation.
Retransmission Consent. One of the concerns expressed by stakeholders  and experts with whom we spoke was the manner in which  retransmission consent is functioning in the market today. Policies to  support localism have long been a focus of communications laws related  to television broadcasting. In 1992, Congress took action to help ensure  that the local benefits of over-the-air broadcast television stations were  protected as more households began to migrate to pay video services  over cable systems. The 1992 Act thus set forth a paradigm under which  commercial, local television stations can choose to be carried by cable  companies under a must carry status—meaning that cable companies in  their market are obliged to carry the station’s signal—or can elect to   The purpose  negotiate for carriage under retransmission consent.behind the dual policies of must carry and retransmission consent was, in  part, to support the development of local news, emergency weather  information, and other local public interest content. While a must carry  station does not receive any compensation for the carriage of its signal, a  station electing retransmission consent can negotiate with cable  companies for compensation in return for the cable company’s right to  carry the station’s signal. Thus, must carry provisions were designed to  ensure that all local commercial stations would be carried by cable  companies, which may not have occurred for some stations that do not  have a significant commercial appeal. At the same time, retransmission  consent was designed to ensure that stations choosing this status had the  ability to bargain for compensation for the value of their local television  signal.
During roughly the first decade after the 1992 Act was passed,  negotiations for retransmission consent usually did not result in cash  payments from cable companies to local television stations, but rather,  resulted in other forms of negotiated compensation, such as carriage of  fledgling cable networks owned by broadcast networks. But over the last  several years, negotiated cash fees for retransmission have increased  significantly, as we reported in 2011. Stakeholders with whom we  spoke—specifically cable and DBS companies, as well as industry  experts—told us that the rapid rise in retransmission fees is of concern  because these fees put upward pressure on subscriber rates, and the  negotiation over fees have become increasingly contentious, leading to  more “blackouts” during which local television signals are pulled from a  particular MVPD’s channel lineup. Moreover, some of those concerned  about increasing retransmission fees noted that while the concept  underlying retransmission consent was to support local television  stations, they believe that a portion of the financial compensation paid  through retransmission fees is, in fact, not going to local television  stations. Instead, critics told us that a good portion of retransmission fees  are flowing to the broadcast networks that own or have affiliation  agreements with the local stations and that ultimately a portion of these  fees flow to the copyright holders of high-valued content purchased by  broadcasters, such as sports leagues and studios producing popular  dramatic TV series.
Others with whom we spoke—from broadcast networks and an  associated trade association—told us that retransmission consent  remains an important foundation for developing programming. They noted  that without this form of compensation, broadcasters would not be able to  continue to provide high quality programming and emergency local  information. These stakeholders also said that broadcast stations have  the right to control their television signal and that any attempt to alter this  long-standing policy would be harmful to the television broadcasting  system that was developed decades ago.
Program Access Rules. The 1992 Act gave FCC the authority to establish  program access rules that require cable companies that produce content  to make that content available to other unaffiliated MVPDs. Cable  companies say these rules are no longer needed because they do not  have monopoly power and that other MVPDs have access to content.  Cable companies also note that it is their First Amendment right to  determine to whom they license their content. However, OVDs, consumer  groups, and experts state that the program access rules need to be  continued and extended to include OVDs, whom they say have difficulty  accessing content. As noted earlier, limited access to high-valued  programming is one of the factors that stakeholders told us could hinder  competition. Stakeholders told us that the program access rules allowed  satellite and telephone companies to compete and grow and that new  entrants, such as OVDs, should have the same protections. In October  2012, FCC declined to extend the exclusive contract prohibition, originally  enacted as part of the program access statutory provisions, beyond its  scheduled sunset date. FCC stated that a preemptive prohibition on  exclusive contracts was no longer necessary because a case-by-case  process under the program access rules would remain in place after the  prohibition expired to assess the impact of individual exclusive  contracts. FCC has received program access complaints, including one  from an OVD—Sky Angel—in March 2010. Sky Angel also filed lawsuits  against Discovery Communications and the National Cable Satellite  Corporation, the owner of cable channel C-SPAN, to access  programming from these two companies.
Definition of MVPD. As defined in the Communications Act, an MVPD is,  among others, a cable operator or satellite provider that makes available  for purchase multiple channels of video programming. Experts with  whom we spoke said that OVDs generally have not been regarded as  MVPDs because OVDs are not facilities-based, in that they do not own  the Internet bandwidth through which their content is distributed. FCC  staff has determined that Sky Angel—an OVD that offers channels but is  not facilities-based—failed to demonstrate that it is a MVPD entitled to  seek relief under the program access rules. However, FCC has not  conclusively decided the issue. Since OVDs may or may not be MVPDs,  it is unclear if OVDs have the same rights to program access and  obligations, such as must carry. While some OVDs like Sky Angel want to  be classified as an MVPD so that they can have program access rights,  other OVDs do not, saying that their business model differs from that of a  MVPD and that therefore they should not be treated as one. Experts  noted that complicating the distinction between OVDs and MVPDs is that  some MVPDs also provide content online and on demand. Experts with  whom we spoke said that defining OVDs as MVPDs could have negative  implications on competition in that it could discourage companies that do  not wish to be subject to MVPD regulations from entering. In response to  Sky Angel’s program access complaint, FCC initiated a proceeding in  March 2012 requesting comments from industry stakeholders on the  definition of MVPD and channel.
Open Internet. The growing use of the Internet since the 1992 Act has  raised concerns among some industry stakeholders about the  management of broadband networks. In particular, the literature we  reviewed, as well as OVDs and consumer groups with whom we spoke,  reported concerns that some companies providing broadband service that  are affiliated with MVPDs could favor their own content. According to the  literature and stakeholders, MVPD-affiliated broadband providers might  have an incentive to limit access to their programming or block or slow  consumers’ access to their competitors’ websites, thereby giving  competitive advantage to their content and restraining the growth of  rivals. As we previously mentioned, limited access to content is a factor  that could hinder competition in the video marketplace. In December  2010, FCC issued its Open Internet Order, which provides that (1) fixed  and mobile broadband providers must disclose the network management  practices, performance characteristics, and terms and conditions of their  broadband services; (2) fixed broadband providers may not block lawful  content, applications, services, or non-harmful devices; mobile broadband  providers may not block lawful websites or block applications that  compete with their voice or video telephony services; and (3) fixed  broadband providers may not unreasonably discriminate in transmitting   MVPD-affiliated broadband providers told us that  lawful network traffic.they should be able to manage their networks as they built, operate, and  maintain the networks and that Open Internet rules could make it more  difficult for them to recoup their investments. Verizon, which provides both  broadband and video services, appealed FCC’s Open Internet Order in  the U.S. Court of Appeals for the District of Columbia Circuit. Several  parties, including the National Association of State Utility Consumer  Advocates intervened in that appeal and argued, among other things, that  the Commission has authority to adopt the Open Internet rules to protect  against cable operators and their affiliates discriminating against their  video programming competitors. Panelists at a January 2013 forum on  cable and broadband law noted that any consideration of potential  legislative and regulatory changes affecting the video marketplace should  wait until the District of Columbia Circuit Court rules on FCC’s order since  the outcome could dictate how the online video marketplace evolves.
section_title: FCC Has Not Consistently Published Statutorily Required Reports
paragraphs: FCC is required by statute to report annually to Congress on both cable  industry prices and competition in the video marketplace, but has not met  this requirement every year. The 1992 Act established requirements for  the purpose of increasing competition and diversity in MVPD distribution  and required FCC to report annually on the average rates that cable  companies charge for cable service and equipment and the status of  competition in the video marketplace to measure progress toward these  goals. Since the 1992 Act, FCC has published the annual cable industry  price report 13 times, but did not publish the report in 2004, 2006, 2007,  and 2010. In the 2009 report, FCC included data from 2006 and 2007, in  addition to the 2008 data that it would have normally reported. FCC has  submitted 14 video competition reports to Congress, but did not release  the report in four years—2007, 2008, 2010, and 2011. The most recent  report, published in July 2012, covered 4 years of information.
FCC officials cited several factors that contributed to the missed reports,  and legislation introduced in the 112th Congress would have reduced the  frequency of the reports. FCC officials told us that the reports were  generally prepared on time, but the delays in the release of the reports  were due to a variety of administrative factors. In 2010, FCC initiated a  comprehensive review of the way in which it uses data, including data  used for its video competition report; ultimately, FCC altered the analytic  framework of the video competition report to be consistent with its other  competition reports. According to FCC officials, this review and change  contributed to the Commission missing the 2010 and 2011 video  competition reports. In addition, FCC officials told us that the reports are  time consuming to prepare because of the amount of industry data the  Commission reviews. While data and comments used for the video  competition report are submitted by industry participants on a voluntary  basis, the cable industry price reports impose a burden on some industry  participants. In particular, FCC estimated that the public reporting  burden for the information collection required for the cable industry price  report was 6 hours per response, including the time for reviewing  instructions, searching existing data sources, gathering and entering the  data needed, and completing and reviewing the questionnaire. Some  stakeholders told us that FCC reports are valuable, although the majority  of stakeholders that we interviewed had no opinion on them. In our review  of the video competition reports, we saw little change in the reported  findings from year to year; therefore, less frequent reporting could allow  for continued measurement of industry performance while reducing the  burden on FCC and industry participants. In the past, both Congress and  the executive branch have expressed concern about reporting  requirements; the basic concern has been that some requirements result  in reports that may be unnecessarily burdensome to produce or, in some  instances, not very useful. A bill that the House of Representatives  passed during the 112th Congress, would have required FCC to  consolidate eight currently separate congressionally mandated reports,  including the video competition reports, and issue a single report  biennially; the legislation would have eliminated the cable industry price  report. FCC officials expressed no opinion between an annual or  biennial reporting requirement and said that the Commission prepares the  reports as directed by Congress; the Commission has not communicated  an opinion on this issue to Congress.
section_title: Conclusions
paragraphs: The video marketplace consists of a complex set of interrelated and  competing industries operating under a variety of related laws and  regulations. In particular, communications and copyright law dictate how  content providers, aggregators, and distributors operate in this  marketplace. Competition has expanded in some segments of the video  marketplace, most notably, the emergence of telephone companies  providing video distribution services. In addition, technology in this arena  is changing and has facilitated the formation of entirely new businesses  and products, such as online video distribution, which have the potential  to alter existing business models. It is too soon to tell what the outcomes  of these technological and market changes will be, or whether  anticompetitive behavior would necessitate any federal action. A lack of  consensus, influenced by vested economic interests among industry  officials, consumer groups, and experts reinforces that while federal laws  and regulations may in some ways be outdated, it is not yet clear how  they should be updated to reflect 21st century technologies and market  conditions. FCC’s cable industry price and video competition reports  provide useful information. However, these reports may not be needed on  an annual basis, especially given demand on FCC staff’s time for other  monitoring and regulatory duties. FCC’s 2009 cable industry price and  2011 video competition reports covered several years of data and could  serve as models for issuing such reports on a less frequent basis. Since  these annual reports are statutorily required, Congress, with input from  FCC, would determine any new reporting frequency.
section_title: Recommendation for Executive Action
paragraphs: To ensure that the Commission’s cable industry price and video  competition reports provide timely and useful information, while  minimizing the reporting burden and meeting statutory deadlines, we  recommend that the Chairman of the Federal Communications  Commission study the advantages and disadvantages of different  reporting frequencies, including annual and biennial reporting, and  transmit the results of its analysis to Congress.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Federal Communications  Commission and the Department of Justice for review and comment. FCC  provided written comments, which are reprinted in Appendix II of this  report. In its letter, FCC said that the Commission strives to use its  resources efficiently to meet the agency’s mission and its Congressional  requirements, and the Commission is reviewing our recommendation.  DOJ provided technical comments that we incorporated as appropriate.
We are sending copies of this report to the Attorney General and  appropriate congressional committees. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me on (202) 512-2834 or goldsteinm@gao.gov. Contact points for  our offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to examine (1) how competition has  changed since 2005; (2) the increased choices that consumers have in  acquiring video programming and content; (3) the factors that can spur or  hinder competition; and (4) stakeholders’ views on how the federal  government’s regulations, reports, and other activities have kept pace  with changes in the industry.
To assess how competition has changed since 2005, we first conducted a  literature search and reviewed media articles, academic studies, industry  reports, and prior GAO reports on the structure, economics, and  technological factors affecting the development and distribution of video  content. We also reviewed relevant reports prepared by the Federal  Communications Commission (FCC), the Department of Justice (DOJ),  and the Federal Trade Commission (FTC). We verified information from  the literature review through interviews with FCC and DOJ officials,  industry participants, trade associations, consumer groups, industry  analysts, and other experts. We selected industry participants to include  producers, aggregators, and distributors of content, such as broadcast  and cable networks, multichannel video programming distributors  (MVPD)—cable, satellite, and telephone companies—and online video  distributors (OVDs).
To assess what increased choices consumers have in acquiring video  programming and content, we conducted an analysis of MVPD services in  20 randomly sampled zip codes across the United States. To ensure a  representative sample, we used the Rural/Urban Commuting Area zip  code file that includes all U.S. zip codes. We then sorted the zip code file  into four census regions—Northeast, South, Midwest, and West—and  within these regions, made five urban and rural classifications—urban,  suburban, large town, small town, or isolated rural. This process resulted  in 20 different segments—5 classifications for each of the 4 census  regions. We then randomly sorted each of the 20 segments, a process  that resulted in the identification of 20 zip codes. We identified the  community names associated with the 20 zip codes using the United  States Postal Service online zip code locator; we used FCC’s cable  franchise information to identify the MVPDs that served the communities.  We contacted these MVPDs and asked them for publicly available  information on their services and prices. The information requested and  collected included channel lineups by package name, monthly rate for  each package, broadband packages (whether provided stand-alone or  combined with video services), available broadband speeds, available  online video offerings, available out-of-household viewing options, and  available DVR options. We had a 100 percent response rate to the survey  as all 20 communities provided information. We then analyzed the data to  compare packages offered, prices, level of competition, among other  factors. Our results reflect the competition, packages, and pricing in the  20 zip codes and are not generalizable to all zip codes. To identify the  prices for traditional MVPD services, we gathered data from FCC’s  reports on cable industry prices for the years 2005 through 2012, which  represent the most recent available data. These cable rates were for  basic and expanded basic tiers. We reviewed FCC documentation and  information provided by FCC staff to assess the reliability of the cable  price data and determined that FCC’s data were sufficiently reliable for  the purposes of our report. We conducted interviews with content  producers, MVPDs, consumer groups, and experts to collect information  on reasons for the rise in cable rates.
To assess the factors that can spur or hinder competition in the video  marketplace, we conducted a literature search and reviewed relevant  articles and prior GAO reports, as discussed previously. Through a review  of DOJ’s website, we examined DOJ’s activities in the video marketplace,  including any investigations of potential relevant antitrust violations and  the agency’s review of the Comcast/NBCU proposed merger; we verified  our research with DOJ. We also conducted interviews with industry  participants, trade associations, consumer groups, industry analysts, and  other experts for their views on factors that have increased or hindered  competition. Our ability to understand some specific aspects of the  industry was limited because certain information and data are generally  not made publicly available. In particular, details of the contracts between  content providers and MVPDs—such as retransmission fees, per  subscriber fees for cable networks, and other requirements (such as tier  placement) surrounding the carriage of broadcast and cable channels— are generally covered under nondisclosure agreements. Similarly,  information on the negotiations for the purchase of programming by  OVDs is generally not publicly available. Other areas with limited publicly  available data and information include the extent to which retransmission  fees are retained by local broadcast stations or flow to broadcast  networks and copyright holders, the extent to which the access of content  through OVD providers congests broadband providers’ networks, and the  cost of producing high-valued content, such as sports and popular TV  dramas. As such, for some issues discussed in this report, our  information is largely based on the statements and opinions of industry  participants that we cannot independently corroborate.
To assess stakeholders’ views on how the federal government’s  regulations, reports, and other activities have kept pace with changes in  the industry, we analyzed the FCC Media Bureau’s activities since 2005  to determine competitive issues that the Commission has or is  addressing. To do this, we reviewed the Media Bureau’s website, which  lists its activities. We also analyzed DOJ’s investigative activities in the  video marketplace through its website. We verified information collected  from our reviews with FCC and DOJ. As part of this review, we reviewed  the relevant laws, regulations, and FCC proceedings including Notices of  Inquiry, Notices of Proposed Rulemakings, and Reports and Orders. We  also conducted interviews with industry participants, trade associations,  consumer groups, industry analysts, and other experts for their views on  how federal regulations, reports, and activities are keeping pace with the  industry. We prepared a summary analysis of all interviews that we  conducted to determine the four major issues that interviewees said that  Congress or the federal government should address. To determine FCC’s  consistency in publishing its cable industry price and video competition  reports, we analyzed all reports since they were first published. In this  analysis, we looked at when the reports were completed and submitted  for Commission approval and when the Commission approved and  published the reports. We also interviewed FCC on why the reports were  not published annually.
We conducted this performance audit from July 2012 to June 2013 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from Federal Communications Commission
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Mark Goldstein, (202) 512-2834 or goldsteinm@gao.gov.
section_title: Staff Acknowledgments
paragraphs: Other key contributors to this report were Mike Clements (Assistant  Director), Amy Abramowitz, Matt Cail, Dave Hooper, Delwen Jones,  Maureen Luna-Long, Josh Ormond, and Andrew Stavisky.