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 Policy Act, which imposed some limitations on franchising authorities’ regulation of rates. 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. 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. 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 expanded- basic service rates by March 31, 1999. However, franchising authorities can regulate the basic tier of cable service where there is no effective competition. As required by the 1992 Act, FCC annually reports on average cable rates for operators found to be subject to effective competition compared with operators not subject to effective competition. To fulfill this mandate, FCC annually surveys a sample of cable franchises regarding their cable rates. In addition to asking questions that are necessary to gather information to provide its mandated reports, FCC also typically asks questions to help the agency better understand the cable industry. For example, the 2002 survey included questions about a range of cable issues, including the cost factors underlying changes in cable rates, the percentage of subscribers purchasing other services (such as broadband Internet access and telephone service), and the specifics of the programming channels offered on each tier. Some franchise agreements were initially established on an exclusive basis, thereby preventing wire-based competition to the initial cable operator. In 1992, the Congress prohibited the awarding of exclusive franchises, and, in 1996, the Congress took steps to allow telephone companies and electric companies to enter the video market. Initially unveiled in 1994, DBS served about 18 million American households by June 2002. Today, two of the five largest subscription video service providers are DIRECTV and EchoStar—the two primary DBS operators. 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. 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 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. 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. 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.