Today, 95 percent of American households purchase local telephone service, 85 percent purchase subscription television service (usually from a cable company or a satellite provider), and about 62 percent purchase some form of access to the Internet. Of those with access to the Internet, about 39 percent have a high-speed—or broadband—connection usually through either a cable modem or a digital subscriber line provided over a telephone connection. Local telephone service has been available since the late 1800s, and, by 1950, over 60 percent of households had telephone service. Since the early 20th century, certain aspects of telephone service, such as its price, have been regulated by state public utility commissions and by the FCC. With the Telecommunications Act of 1996, the Congress sought to increase competition in the local telephone market. Today, incumbent local telephone companies face competition from a variety of types of companies. However, nearly 87 percent of residential local telephone subscribers continue to receive service from an incumbent, or traditional, local telephone company. Subscription television service has been available since the late 1940s when cable television providers first emerged, and, by the late 1980s, cable service was available to nearly 90 percent of households throughout the United States. Today, according to FCC, about 67 percent of American households purchase cable service. The 1992 Cable Television Competition and Consumer Protection Act took steps to increase competition to cable providers. The act prohibited the awarding of exclusive franchises by local franchising authorities. Also, as required by the act, FCC developed rules—commonly referred to as program access rules—that require cable operators that have affiliated cable networks to make those networks (if they are delivered to the cable operator via satellite) available to competitors. The Telecommunications Act of 1996 also took steps to allow telephone and electric companies to enter the subscription television market. In the 1990s, direct broadcast satellite providers (such as DIRECTV and EchoStar) began offering subscription television service through satellites. According to FCC, over 17 percent of American homes currently purchase satellite television service, and these providers have become the primary competitors to the cable television industry. At this time, competition in the subscription video market from wire-based providers exists in only about 2 percent of markets nationwide, according to FCC information. High-speed Internet is a relatively new service that provides a continuous, high-speed, high-capacity connection to the Internet. High-speed connections to the Internet became widely available in the late 1990s, and, as of mid-2002, nearly 15 percent of American homes had a high-speed connection to the Internet. In recent years, local telephone companies adapted their networks to provide new services, such as digital subscriber line service, which is a form of high-speed Internet service. Through their digital subscriber line service, telephone companies serve approximately 33 percent of subscribers who purchase a broadband connection. Similar to local telephone companies, many cable television companies upgraded their networks to provide high-speed Internet service through cable modem service. Cable modem service is the most widely subscribed to high-speed service with approximately 57 percent of subscribers purchasing this service. Figure 2 provides information on the extent of competition in the local telephone, subscription television, and high-speed Internet markets. Broadband service providers are a new type of telecommunications provider. Unlike local telephone and cable television companies, which are adapting their existing networks to provide additional services, and other entrants that focus on providing service in one communications market, broadband service providers focus on a core business strategy of building a new fiber-optic network over which they can provide local telephone, subscription television, and high-speed Internet services. A fiber-optic network requires a long-term commitment to build. According to the BSPA, companies must first obtain a local franchise that authorizes them to begin construction. They then must obtain the rights-of- ways to build the network and work with utility companies to make sure that they do not disrupt other services. Once the BSP begins building its network, construction usually takes between 2.5 to 4 years if the company (1) has steady access to capital and has no difficulties in obtaining the necessary local government accommodations and (2) is able to receive needed information from utility companies. According to the BSPA, the time it takes to build a network varies with the size of the market and whether the BSP can string its cable on poles or if it must bury the cable in the ground. Because it takes 4 to 5 times longer for a BSP to build a network if it must bury the cable, some BSPs target communities that allow them to string their cable on poles according to the BSPA. A BSPA document indicates that BSPs have spent over $6 billion in capital investments to build 32,000 miles of fiber network. BSPs’ networks currently expand across areas that would enable them to service up to 4 million homes as of June 2003; of this possible subscriber base, these companies have gained over 1 million subscribers. A representative of the BSPA said that most BSPs have specific targets regarding the minimum threshold of the potential customers in an area they need to attract in order to ensure that the large financial investment is profitable. Additionally, a common goal is to have most of their subscribers purchase more than one of the three offered services. Finally, we were told that the target average revenue per subscriber each month is about $100. In order to be able to achieve these goals, BSPs use several marketing strategies. First, part of the BSP business strategy is to enter markets that do not have any wire-based providers other than the incumbent cable and telephone providers. That is, BSPs look to become the second major wire- based provider of subscription television and local telephone service in each of the markets they enter. Second, BSP officials told us that they attempt to entice customers to stay with their company in the long term by building the most modern network in the market, thus enabling the BSPs to upgrade services as new technologies become marketable. Third, and most central to the BSP business strategy, the 6 BSPs we interviewed offer pricing discounts to encourage the purchase of multiple services. This business focus allows the BSPs to capitalize on network efficiencies by generating more marginal revenue on the second or third service that the subscriber purchases. In order to illustrate the savings available to consumers from BSPs’ bundled telecommunications offerings, we compared the packaged price of a certain bundle of communications services offered by BSPs with the prices that these companies would charge for the same set of services individually. While some of the BSPs offered packaged deals on a relatively low end package of services, we found that to compare a similar package of services across the 6 BSPs we interviewed, we needed to examine the price for a higher end package of services that included such items as digital tiers of video service, premium channels, and higher end speeds of Internet access. For the 6 markets with BSPs that we interviewed, figure 3 shows the average savings a consumer can receive by purchasing this particular set of telecommunications services in a bundle versus purchasing them individually. The average monthly BSP à la carte prices for this bundle of telecommunications services in the 6 markets is $136.63. If purchased as a bundle, the subscriber is able to receive a discount that would bring the cost for this bundle of services down to $117.28. That is, a BSP customer will save, on average, about $20, or 14 percent, if they select three services as a bundle package rather than buy them individually from the BSP. Across the 6 markets with BSPs that we interviewed, the additional savings a consumer could receive by purchasing this basket of services as a bundle ranged from $11.66 to $28.74 per month. In the 12 markets we reviewed, the entry of a BSP appears to induce incumbent cable operators to respond by providing more and better services and by reducing rates and offering special deals. Incumbent telephone providers have not shown as much of a competitive response to BSP entry. The ultimate result of the BSP operations, along with incumbents’ response, is substantially lower prices for consumers. In the 6 markets we reviewed that had a BSP providing service, incumbent cable operators appear to respond competitively to the presence of the BSP. Although cable operators told us they generally viewed satellite providers as their primary competitors, they indicated that BSP competition in individual markets can be a significant factor when they develop their business strategies for that market. In particular, incumbent cable providers facing competition from a BSP told us that they responded to the BSP activity by lowering rates or offering special deals or packages and, in some cases by providing more local content and advanced services. For example: Almost all of the incumbent cable operators we contacted said they lowered their cable and high-speed Internet prices in the markets where a BSP was operating in order to be more competitive. Moreover, we found that one incumbent cable provider in a BSP market chose to offer discounts to subscribers who purchased both cable and high-speed Internet service, thus enabling it to compete directly with the BSP’s packaged offerings. In this market, the incumbent cable operator priced a package combining cable and high-speed Internet services at a 45 percent discount when compared with the same package that the cable operator offered in the non-BSP matched market. Two incumbent cable operators also said that exclusive programming helps them to differentiate themselves from the BSP. For example, one incumbent cable operator said that they respond to BSP entry in a number of ways, including providing more local programming and advanced services. Another cable operator told us that its provision of local high school sports games, a community-focused talk show, and city council meetings provides an advantage over the BSP. However, the incumbent cable provider said that it provided this programming before the BSP’s entry into the market. Some incumbent cable providers also responded to BSP competition by improving their customer service. For example, one cable operator noted that its company initiated door-to-door visits to customers to ensure good picture reception and answer customer questions.