*Pages 1--129 from C:\Pdf2Text\Ready4Text_in\pdf\44029.pdf* CHAIRMAN Federal Communications Commission Washington, D. C. November 18,2004 The Honorable Joe Barton Chairman Committee on Energy and Commerce U. S. House of Representatives 21 25 Rayburn House Office Building Washington, D. C. 205 15 Dear Chairman Barton: In response to your May 18,2004 request, I am pleased to provide the Committee on Energy and Commerce the enclosed Report concerning the packaging and sale of video programming services by cable and satellite television providers. The Report was prepared by the Commission’s Media Bureau. To assist in the preparation of the Report, the Bureau issued a Public Notice seeking public comment and information on the technical, economic and legal issues identified in your request. The Bureau also conducted a symposium last summer to explore first- hand the advantages and disadvantages of an a la carte marketing scheme, including its potential implications for the prevalent economic model in the pay television industry, as well as its possible effects on retail prices and new entrants in the video programming market. The specific questions outlined in your letter are addressed in Appendix F to the Report. If you or other Committee members have any questions concerning the Media Bureau’s Report, please do not hesitate to contact me. Sincerely, *& Michael K. Powell Enclosure 1 THE REPORT < > Report On the Packaging and Sale of Video Programming Services To the Public November 18,2004 2 THE REPORT 2 TABLE OF CONTENTS Page I . INTRODUCTION AND SUMMARY .......................................................................................... 3 IT . THE RETAIL MARKET FOR VIDEO PROGRAMMING .................................................... 8 A . Background .............................................................................................................................. 8 B . Historical Overview ................................................................................................................. 8 D . Current Requirements and Obligations .............................................................................. 15 C . Current Cable Services and Program Options ................................................................... 12 1 . Tier Placement Requirements ........................................................................................ 15 2 . Tier Buy Through Requirements ................................................................................... 18 3 . Commercial Availability of Navigation Devices and Equipment Compatibility ....... 19 E . Analysis of Current Packaging Practices at the Retail Level ............................................ 20 1 . Benefits and Harms of Bundling at the Retail Level .................................................... 20 F . Feasibility of A La Carte and Themed Tiers ....................................................................... 26 1 . Alleged Harms and Benefits ........................................................................................... 26 2 . Implementation ................................................................................................................ 27 3 . Consequences ................................................................................................................... 38 4 . Experiences With A La Carte ........................................................................................ 56 G . New Models ........................................................................................................................... 59 H . Recommendations for the Retail Market ............................................................................ 62 111 . THE WHOLESALE MARKET FOR VIDEO PROGRAMMING ....................................... 66 B . Requirements and Remedies ................................................................................................ 66 1 . Broadcast Signal Carriage Requirements ..................................................................... 66 2 . Retransmission Consent .................................................................................................. 68 3 . Network Nonduplication and Syndicated Exclusivity .................................................. 70 4 . Antitrust ........................................................................................................................... 71 C . Historical Practices and Outcomes ...................................................................................... 72 D . Current Broadcast Signal Carriage Arrangements ........................................................... 74 1 . Benefits of Retransmission Consent ............................................................................... 74 E . Affiliation Agreements and Contractual Terms of Program Networks ........................... 77 F . Recommendations for the Wholesale Market ..................................................................... 80 A . Industry Overview ................................................................................................................ 66 2 . Harms of Retransmission Consent and Other Requirements ..................................... 75 Economic Appendix I . IT . Analysis of Booz Allen Hamilton Economic Study The Economics of Bundling in the MWD and Video Programming Markets General Appendices Appendix A: Letters From Congress Appendix B: Media Bureau Public Notices Appendix C: List of Leading Commenters and Reply Commenters Appendix D: List of Economic Analyses Appendix E: A La Carte in Canada Appendix F: Summary of Responses to Congressional Inquiry 3 THE REPORT 3 \ , I. INTRODUCTION AND SUMMARY Earlier this year, several members of the U. S House of Representatives’ Committee on Energy and Commerce wrote to Federal Communications Commission Chairman Michael Powell asking for Commission insight on the “efficacy of providing a la carte and themed- tier services to cable and satellite subscribers.” ’ Separately, Senator John McCain, Chairman of the United States Senate, Committee on Commerce, Science, and Transportation, asked Chairman Powell to “explore all available options . . . to promote a la carte and satellite offerings as soon as possible where such offerings would benefit consumers .’72 At the heart of these Congressional requests for the Commission to study a la carte and themed- tier services for cable and satellite subscribers is our nation’s long- standing public policy goal of making available communications and media technologies to all Americans at affordable rates. Although it is undeniable that the last decade has brought the public a wealth of new benefits and value stemming both from the introduction and continued growth of direct broadcast satellite systems (“ DBS” or “satellite carriers”) as strong, nationwide competitors to cable in the multichannel video programming distributor (“ MVPD”) marketplace, and the cable industry’s collective $85 billion investment to upgrade its distribution platform and product offerings, it is equally undeniable that many Americans are frustrated with year over year increases in their pay- television bills. In a desire to empower consumers and to bring them more choice, and in hopes of stemming the tide of rising MVPD retail rates, some have turned to a la carte and themed- tier services as a potential solution. Others believe that a la carte and themed- tier services may serve as an effective means for the public to address another issue of concern to millions of Americans- the growing coarseness of programming on television. As the explosion of channel capacity and new program networks have brought some of history’s best television to living rooms across the country- from educational and children’s programming to news, public affairs and sports programming- it also has provided a significant amount of coarse programming. Many view a la carte and/ or themed- tier services (such as a packaged tier of family programming) as a way to give adults, especially parents of young children, an ability to prevent objectionable programming from entering their homes or to more easily find family- friendly programming. A third, albeit less pronounced, catalyst behind the interest in exploring the feasibility and impact on the public of a la carte or themed- tier services is the impact of the tying of cablekatellite program networks to the carriage of large broadcast network affiliates through retransmission consent. Some argue that the use of retransmission consent by some of our nation’s largest broadcast networks has hindered the development of independent program networks, threatening diversity, and view a la carte and theme- tier services as a potential vehicle to limit these perceived effects of retransmission consent. These core communications policy goals-- consumer choice, universal and affordable access to communications and media technologies, diversity and parental control over the media that enter their The House members asked the Commission to address questions in seven general areas and submit a Report to the Committee by November 18,2004. Letter from the Hons. Joe Barton, John D. Dingell, Fred Upton, Edward Markey, and Nathan Deal, U. S. House of Representatives, to the Hon. Michael K. Powell, Chairman, Federal Communications Commission, May 18, 2004. (“ House Letter”) The letter is attached as part of Appendix A. A concise issue- response summary to the House Letter is found in Appendix F. Letter from the Hon. John McCain, Chairman, United States Senate, Committee on Commerce, Science, and Transportation, to the Hon. Michael K. Powell, Chairman, Federal Communications Commission, May 19, 2004. (“ McCain Letter”) The Letter is attached as part of Appendix A. I 2 4 THE REPORT 4 homes- have been guideposts for Congress and the Commission since the advent of broadcast radio and throughout the development and growth of broadcast television, cable television, DBS and other electronic mass media platforms. These goals are shared by those who advocate an a la carte or themed- tier services regime for cable and satellite subscribers. During these early stages of the a la carte discussion in Congress, however, many raised concerns of whether an a la carte or themed- tier services regime would be the most effective means of achieving our shared policy objectives. Others went further to suggest that a government mandated a la carte or themed- tier services regime would only thwart some of these policy goals by increasing retail rates for the vast majority of cable and satellite subscribers and not enhancing, but diminishing (and in several cases, eliminating) the progress made by new, niche program networks and their contribution to diversity on television. It is with these goals, worries, and questions in mind that several Members of Congress asked the Commission to study the facts and economics of a la carte or themed- tier services on cable and satellite subscribers. This Report is the result of that inquiry. Although this Report should not be viewed as providing definitive answers to all of the questions surrounding the impact of a la carte, themed- tier services or retransmission consent on the public, it should serve as a useful starting point for discussion as Congress, the Commission, the public interest community, and the industry continue to strive to bring the public the benefits of the most diverse and competitive media marketplace in the world. In response to the Congressional inquiries, the Media Bureau (“ Bureau”) issued a Public Notice (‘‘ Phi” or “A La Carte PN”) requesting comment on factual and legal questions regarding the provision of a la carte and themed- tier services on cable television and DBS. 3 The Bureau also sponsored a See Public Notice, Comment Requested on A La Carte and Themed Tier Programming and Pricing Options for Programming Distribution on Cable Television and Direct Broadcast Satellite Systems, 19 FCC Rcd 9291 (MB, May 25, 2004). The Public Notice is attached in Appendix B. In the past two years, a la carte pricing for MVPD service has received considerable attention from Congress, the Commission, and other government agencies. For example, On March 25, 2004, the Senate Committee on Commerce, Science, and Transportation, held a hearing entitled, “Escalating Cable Rates: Causes and Solutions” and on July 14, 2004, the House of Representatives Committee on Energy and Commerce and Subcommittee on Telecommunications and the Internet held a hearing entitled, “Competition and Consumer Choice in the MVPD Marketplace- Including an Examination of Proposals to Expand Consumer Choice, Such as A La Carte and Themed- Based Tiers.” See also General Accounting Office, Issues Related to Competition and Subscriber Rates in the Cable Television Industry, GAO- 04- 8, Report to the Chairman, Committee on Commerce, Science, and Transportation, U. S. Senate (October 24, 2003) at 5- 6, 30- 39 (finding that, while an a la carte system might provide greater consumer choice, it would impose additional costs on subscribers and alter the current economic structure of the cable industry). The Commission has also sought information and received comment regarding the packaging and marketing of programming services. See Annual Assessment of the Status of Competition in the Market f o r the Delivery of Video Programming, 19 FCC Rcd 1606, 1705- 06 (2004) (“ 2003 Video Competition Report” or “2003 Report”) (finding that bundling program networks into packages allows greater penetration of individual channels, which lowers the per subscriber price MVPDs pay to programmers, and creates subscriber awareness of new networks). See also Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, Notice of Inquiry, 19 FCC Rcd 10909, 10915 (2004) (“ 2004 NOI”). 5 THE REPORT 5 < > symposium to further examine a la carte and themed- tier proposal^.^ The Bureau received nearly 400 comments, reply comments, ex parte communications, testimony, and letters in this pr~ ceeding.~ This Report provides an overview of the law and economic theories relevant to the discussion concerning a la carte. The Report summarizes the comments and analysis submitted by interested parties in this proceeding. It also incorporates, by reference, statements made by expert witnesses at the a la carte symposium sponsored by the Media Bureau. First, the Report discusses the retail market for video programming by MVPDs, primarily, cable operators and DBS providers. This section provides a historical overview of cable’s delivery of programming services to the public and the current programming options available to consumers, including premium networks and other a la carte offerings, over cable and satellite. In addition, this section discusses current retail regulatory requirements, including tier placement and tier buy through requirements. This section then analyzes current cable and satellite retail programming packaging practices with a focus on the harms and benefits to the public of bundling programming at the retail level. Included in the discussion of potential harms associated with bundling is the fact that under the current bundling regime, cable prices have increased by an average of 4.6 YO per year and in excess of 7 YO per year for the expanded basic program tier over the past five years. Some commenters allege that as cable rates have increased at nearly three times the rate of inflation, the industry’s practice of making most networks available as part of a bundle or tier has contributed to the rise in retail rates. In addition, some commenters suggest that the industry’s current bundling practices effectively limit consumer choice and force upon them channels that they do not watch or wish to receive, including objectionable content. The record reflects that along with harms, bundling also produces several benefits for cable and satellite households. For example, commenters suggest that the bundling of distinct program networks lowers transaction costs, helps programmers reach economies of scale and enhances the attractiveness or convenience of the product to consumers. Indeed, the Report discusses how tiering allows a video programmer to recover a large percentage of its costs from consumers that value its programming highly and a smaller percentage from consumers that value its programming less highly. In this way, consumers of different program networks are able to, in a sense, cross- subsidize each others’ viewing habits, allowing new and diverse programming to survive in the marketplace. Additionally, bundling may actually enhance consumer sovereignty by creating a mechanism for consumers to have access to a wide variety of viewing choices serving many diverse, niche viewer interests. Next, this section discusses the feasibility of a la carte and themed tiers, including the alleged harms and benefits of such a regime, the steps the industry would need to take to implement it, the likely consequences for the public, and historical experiences with a la carte. Proponents of a la carte or themed- tier services suggest these retail programming options (in addition to offerings in existing tiers) would provide consumers with additional choice and act as a strong check on cable rate increases. They suggest that consumer response to individual channel prices would instill competitive discipline among See Public Notice, Media Bureau Announces Speakers for Symposium on “a la carte” MVPD Pricing, 2004 WL 1562950, (MB July 13, 2004). The Public Notice is also attached in Appendix B. The Bureau received testimony addressing the feasibility of a la carte as well as the economics of bundling and tiering. Testimony was incorporated into the record of this proceeding. Several large and small cable operators, DBS providers, and dozens of program networks filed lengthy comments. See Appendix C for a list of commenters. Some pleadings were filed jointly by several groups, and the individual participants in those groups are listed in Appendix C. 6 THE REPORT 6 < > program networks and restrain excessive growth in programming costs. Still others argue that a la carte would provide a solution to the growing public concern about violent and objectionable programming. Despite these benefits, the majority of commenters contend that a la carte or themed- tier services would impose significant costs on consumers. For starters, these commenters state that consumers would need to pay more than they do today for far fewer channels, unless they selected a small number of channels, far below the national average of channels currently watched by MVPD households. Most program networks suggest that the number, quality and diversity of program networks would all be severely diminished under an a la carte regime. Furthermore, commenters state that there are significant structural impediments, most notably for cable operators, who would be forced to offer a la carte by using traps and hybrid set- top boxes, simulcasting all basic and expanded basic channels in analog and digital format, or spending billions of dollars to convert systems to all- digital distribution. Finally, commenters cite operational impediments (including marketing, billing and other operational expenses that would drive up retail rates), conceptual impediments (consumer confusion and difficulty of determining which networks qualify for any particular programming tier) and legal impediments (raising First and Fifth Amendment issues) to an a la carte or themed- tier mandate. Although the Commission shares the public’s concern about rising MVPD rates and the growing coarseness of programming on television and strongly believes in providing the public with greater choice in how they consume television, the Report finds that many of the harms suggested by opponents of a la carte or themed- tier services have merit, although not necessarily to the degree advocated by its most vocal critics. The Report concludes that a la carte regulation will likely increase operational expenses for MVPDs in three main areas: (1) equipment and infrastructure; (2) customer service operations; and (3) billing and back office support. Unless constrained by regulation, many of these increased costs would likely be passed on to subscribers, resulting in higher subscriber fees. In addition, the MVPD cost increases would be most detrimental to smaller cable operators, who often have more limited and more costly options when it comes to obtaining capital to support investment in their operations. The Report discusses how this would have an adverse impact on competition as smaller cable operators would have a difficult time competing with the industry’s primary competitors- the DBS providers. The Report also finds legitimacy to programmers’ concerns about an a la carte regime. Existing networks sold on an a la carte basis spend a significant amount of their revenue marketing themselves to consumers. Under an a la carte mandate, networks formerly sold in tiers would need to significantly increase their marketing expenses to induce consumers to affirmatively select the network. Moreover, any type of a la carte requirement would have a significant negative effect on a program network’s advertising revenues and license fee structure. The loss of cost savings, combined with the loss in advertising revenue and the likely rise in license fees to compensate such losses, may cause many program networks to fail, thus adversely affecting diversity. The most likely to feel the brunt of such a mandate would be networks serving small niche interests, such as religious programming, programming aimed at minority interests, arts programming and independently owned networks. The impact on program networks seems likely under either a mandatory or voluntary a la carte regime. Moreover, it is unclear that an a la carte regime would produce the desired result of lower MVPD prices for many pay- television households. The Report’s economic analysis estimates that the impact on retail rates of pure or mandatory a la carte sales indicates that only those consumers who would purchase fewer than 9 program networks may see a reduction in their monthly cable bill. Consumers that purchase at least 9 networks would likely face an increase in their monthly bills. The average cable household watches approximately 17 channels, including broadcast stations. If the average household purchased each of these channels under an a la carte regime, it would likely face an increase in their monthly bill under a la carte sales of between 14% and 30%. 7 THE REPORT 7 < > The Report also describes some new a la carte models that may help mitigate some of the harms associated with a pure a la carte or themed- tier services, including “mixed bundling” or voluntary a la carte where cable operators and satellite carriers offer programming on tiers and individual channels on an a la carte basis. Although the impact of such a regime is less clear than a pure a la carte system, many of the increased operational expenses discussed in the Report would apply to either pure or voluntary a la carte. Recognizing the need to pursue our traditional public interest policy goals of enhancing consumer choice, fostering MVPD competition and programming diversity, and providing our citizens with the tools to prevent objectionable programming from entering their homes, the Report discusses several policy recommendations for the retail MVPD market that the Congress and Commission should pursue irrespective of whether or not Congress pursues a la carte or themed- tier services legislation. First, the success of DBS as a competitor to cable suggests that policymakers should provide incentives for more MVPD competition in the marketplace. Marketplace forces and technological advances are poised to bring more competition and choices to the public. For example, two separate entities plan to use over- the- air broadcast spectrum to provide subscribers with a low- cost alternative to cable and DBS. One of those entities, USDTV is already competing in three markets. In addition, recent announcements suggest that several telephone companies are planning large scale entry into the residential video programming market. These entrants may not only drive price and innovation competition, but they also may force upon the industry the need to create new programming models, including new, specialized tiers that would bring much of the choice sought by a la carte advocates. Second, policymakers should provide incentives for operators to offer more control over programming choices to the public. Here, too, technological advances are already putting the power over programming in the hands of consumers. The continued roll- out of video- on- demand (“ VOD”) and digital video recorders (“ DVRs”) is presenting the public with more control over what they watch and when they watch than at any time in history. Third, policymakers should continue to pursue aggressive policies to provide incentives for broadband deployment. Video over internet protocol is in its infancy, yet is bringing a la carte choices over the Internet to many Americans. Programmers such as Major League Baseball, who offers individual baseball games on an a la carte basis, are showing the potential of using the Internet and its lower distribution costs to make a la carte a reality. Fourth, policymakers should continue to encourage blocking technologies and consumer awareness of these technologies over cable and satellite to ensure that the public can block any unwanted programming from entering their homes. The Report also addresses concerns about the acquisition of programming by MVPDs at the wholesale level. In negotiations for programming, including broadcast programming that must be obtained through retransmission consent negotiations, the acquisition of rights to an attractive popular program network is sometimes contractually tied to the purchase and carriage of a less attractive or less desired network. The Report concludes that the manner in which this takes place raises questions as to whether the carriage of less popular programming is in the public interest because it takes away channel capacity that MVPDs could devote to other, better uses. The Report suggests, however, that if this practice is anti- competitive and it is causing consumer harm (both of which are currently far from clear and would benefit from further study), the antitrust authorities are best positioned to remedy the situation. 8 THE REPORT 8 < > 11. THE RETAIL MARKET FOR VIDEO PROGRAMMING A. Background This section discusses how cable operators and other multichannel video programming distributors distribute and sell programming to consumers. Cable operators deliver MVPD services to millions of U. S. households. Ten years ago, cable operators served almost 100% of the nation’s MVPD subscribers. Today, cable’s share has fallen to approximately 75% of all MVPD subscribers. DBS, cable’s main competitor, has grown rapidly in the last five years and now serves the second largest share of MVPD subscribers. 6 The PN asked whether cable operators and DBS may purchase program networks on a stand- alone basis and offer programming to their subscribers on an a la carte or themed- tier basis. The PN inquired whether there are any limitations on their flexibility to do so and whether MVPDs can currently offer a la carte and themed- tier service in addition to the packages currently offered to subscribers. ’ The questions raised in the PN are, in part, directed at the practice of “tiering.” Tiering involves the bundling (packaging) and sale of channels of programming for separate or incremental charges. 8 Cable systems and virtually all other MVPDs offer video programming services in tiers. Tiering permits subscribers to easily choose a bundle of video programming services at different price points. B. Historical Overview More than half a century ago, cable television was a simple technology for retransmitting local and distant broadcast stations to areas unserved or underserved by over- the- air signals. ’ Cable systems, generally, were equipped to provide no more than 12 channels of programming, which were transmitted by coaxial cable on the same 12 VHF frequencies used by over- the- air broadcast stations. Subscribers simply attached the cable to their sets in lieu of an over- the- air antenna and tuned to the 12 channels on their television sets to receive all the signals being delivered by the cable system. Even in those days before the advent of satellite- delivered cable programming, cable operators began offering premium movie and sports programming on an optional per- channel charge basis. To accommodate new satellite- delivered programming services, such as HBO, that began to appear in 1975 and thereafter, cable operators upgraded the channel capacity of their systems. While most of the cable program networks added to cable systems during this period of expansion were included in the basic service tier or expanded basic tier,” a number of new networks were launched as a la carte, Currently, four operators hold licenses to provide DBS service: EchoStar (marketed as the DISH Network), DirecTV, Dominion Video Satellite, Inc. (marketed as Sky Angel), and Cablevision’s Rainbow DBS (marketed as Voom). 6 PN, 19 FCC Rcd at 9291- 92. The Act does not specifically define the term “tiering” but the phrase, “service tier,” is defined “as a category of cable service or other services provided by a cable operator and for which a separate rate is charged by the cable operator.” See 47 U. S. C. 9 522( 17). 8 At that time, cable was known as Community Antenna Television Systems (“ CATV”). 9 In this Report, the term, “Expanded Basic Tier,” is used to describe that tier of cable service above the basic I O service tier. The expanded basic tier is sometimes referred to as the cable programming service tier or “CPST.” 9 THE REPORT 9 premium channels. Some of these premium channels primarily showed uncut, recently released movies and others offered regional sports programming. Most of these premium channels, such as Encore and Bravo, carried no commercials and were offered to consumers for approximately ten dollars per month.” In 1984, Title VI of the Communications Act was added by the Cable Communications Policy Act of 1984 (“ 1984 Act”). ’* The 1984 Act was largely “de- regulatory” legislation, whose purposes were to, inter alia: (1) establish a national policy concerning cable communications, (2) assure that cable communications provide diverse programming to the public; and (3) promote competition in cable communications while minimizing “unnecessary regulation.” By establishing a clear regulatory framework, the 1984 Act provided an impetus for the cable industry’s continued growth throughout the 198Os. I3 In the period between the 1984 Cable Act and 1992, the cable industry grew larger and began to exert its market power as the dominant provider of multichannel video service. 14 In 1992, Congress enacted the Cable Television Consumer Protection and Competition Act (“ 1992 Cable Act”). 15 This Act substantially re- regulated the cable industry and contained a host of requirements affecting nearly every facet of the cable business. Mandatory access for broadcasters (must carry and retransmission consent provisions) were codified, pricing and marketing restrictions (rate regulation, basic service tier, and customer service obligations) were imposed, ownership limits (both horizontal and vertical restrictions) were established, and program carriage, program access, and other requirements were included in the Act. The core of Section 623 of the Act, as amended by the 1992 Cable Act, is dedicated to cable television rate regulation. I6 In 1993, the Commission issued its First Rate Report and Order setting forth NCTA Comments at 19. I I I * Cable Communications Policy Act of 1984, Pub. Law 98- 549, 98 Stat. 2779 (1984). At about the same time the Commission began implementing the 1984 Act, the United States Court of Appeals struck down the Commission’s existing must carry requirements for cable operators on First Amendment grounds. See Quincy Cable TV, Inc. v. FCC, 786 F. 2d 1434 (D. C. Cir. 1985) (striking down the first Commission set of must carry rules); Century Communications Corp. v. FCC, 835 F. 2d 292 (D. C. Cir. 1987) (striking down the Commission’s second attempt at establishing must carry rules). For a period of about five years, the cable industry had no mandatory obligation to carry local broadcast stations, although most cable systems continued to carry stations on a voluntary basis. 13 See 47 U. S. C. 9 521 nt (a). 14 Cable Television Consumer Protection and Competition Act of 1992, Pub. Law 102- 385, 106 Stat. 1460 (1992). 47 U. S. C. 0 543( b) and (c). Basic service tiers rates are regulated, in the absence of effective competition, by local franchising authorities (“ LFAs”). Expanded basic rates were, at one time, regulated by the Commission. Cable systems demonstrating that they face effective competition, under one of the statutory tests, are not regulated under Section 623. See 47 U. S. C. 0 543( 1)( 1); 47 C. F. R. 0 76.905. 16 10 THE REPORT 10 < > methodologies for cable operators to calculate rates at regulated levels.” The Commission additionally held, in accordance with the relevant statutory provisions, that channels offered on an a la carte basis would not be rate regulated if certain conditions were met.” In 1994, the Commission, inter alia, imposed a 7.5 percent cap on the permissible mark- up of costs for adding new program services.” In that same year, the Bureau also issued a series of rulings and waivers to facilitate new program service launches. According to some in the cable industry, the Commission’s rate regulations had a number of unintended consequences. First, it reduced investment in cable system upgrades and had a particularly harsh impact on small operators. Second, it reduced incentives for cable operators to add new program services and, consequently, led to a reduction in program diversity. Finally, it reduced programming quality and led to unique hardships for programming targeted to specific groups, such as minorities. 20 The Commission recognized these disincentives and adopted the “going forward” rules in late 1994, to encourage the carriage of new program services. 21 As an alternative to the 7.5 percent cap, the rules allowed cable operators to add new channels to the expanded basic tier at a price of not more than $. 20 per channel plus license fees (with a total increase over two years not to exceed $1.50). The Commission also created a new type of program package, called the New Product Tier (‘“ PT”). Cable operators were permitted to offer NPTs on an unregulated basis. In the Going Forward Order, the Commission also reversed its previous decision that channels sold on an a la carte basis would be unregulated, and instead held that a collection of program networks sold a la carte were to be regulated as cable programming service tiers. 22 l7 Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, 8 FCC Rcd 5631, 5644 (1993) (“ First Rate Report and Order”). The rate rules, when adopted, were primarily based on a benchmark and price cap approach to setting rates for regulated cable service whereby existing rates for cable service were compared to a benchmark that reflected the rates charged by cable systems subject to effective competition. Once initial rates were determined, rates were governed on a going- forward basis by a price cap mechanism that permitted periodic adjustments for inflation, changes in the number of regulated channels, and changes in external costs, including programming costs, franchise requirements, state and local taxes on cable service, and franchise fees. In addition to the benchmark approach, the Commission provided a cost of service option for cable operators unable to recover costs after calculating a maximum rate based on the benchmark process. First Rate Report and Order, 8 FCC Rcd at 5836. The Commission held that collective offerings of a la carte channels would not be regulated if: (1) the price for the combined package did not exceed the sum of the individual charges for each component service and (2) the cable operator continued to provide the component parts of the package to subscriber separately in addition to the collective offering. Id. at 5836- 37. In support of its policy, the Commission stated that Congress excluded per channel or per program premium services from rate regulation on the basis of a determination that “greater unbundling of offerings leads to more subscriber choice and greater competition among program services.” The Commission applied the same rationale to non- premium channels. Id. at 5836, n. 803. The Commission later set out 15 interpretive guidelines to enable cable operators to better determine what collective offerings of a la carte channels would be considered “realistic service offerings.” Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, 9 FCC Rcd 18 4119,4213- 16 (1994). l 9 Id., 9 FCC Rcd at 4 166,4242. *‘ See Comcast Comments at 12; A& E Comments at 28. 21 Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, 10 FCC Rcd 1226,1232,1248 (1994) (“ Going Forward Order”). 22 Id. at 1241- 44. 11 THE REPORT 11 < > Section 623 of the 1992 Cable Act also required the Commission to adopt standards and guidelines to prevent evasions, “including evasions that result from retie~ ing.”~~ In the First Rate Order, the Commission defined evasion as “any practice or action which avoids the rate regulation provisions of the Cable Act or Commission rules contrary to the intent of the Act or its underlying policies. 24 In 1994, the Bureau released several decisions, exonerating many cable operators who offered a la carte channels of evasion charges, due not only to the small number of channels offered on such a basis, but also because of the uncertainty created by the constant changes in the Commission’s rate policy and rules at that time. Even though the Bureau found there were no rate evasions by these operators, it nonetheless suggested that a take- rate of a la carte program networks by subscribers of less that 2 percent proved that they were not “realistic service offerings” for the purposes of the retierindevasion analysis. 25 After years of regulation resulting from the 1992 Cable Act, Congress enacted the Telecommunications Act of 1996 (“ 1996 Act”). 26 As part of the 1996 Act, Congress repealed the authority of the Commission to regulate cable programming service tier rates after March 31, 1999.27 The price deregulation measures, and other generally deregulatory provisions affecting other parts of the Act, are credited with increasing investment in the cable industry. As a result, cable operators embarked on major rebuilds of their cable systems to increase channel capacity. 28 The result has been a substantial increase in the number of program networks and tiers, as well as the emergence of new digital technologies. Comcast and Charter frame this period of government action in the following way. For four years, the government enacted a complex statutory regulation scheme, adopted implementing regulations, adopted new regulations to overcome the unintended consequences of the first regulations, and then eliminated the regulations in their entirety. The Commission issued over 20 separate rate orders and hundreds of regulations, fact sheets, notices of inquiry, and notices of proposed rulemaking. And the results of these efforts were: (1) severe cutbacks in programming and infrastructure investment; (2) reduced program diversity; (3) a nearly decade- long delay in the digital transition; and (4) no improvement in consumer welfare. Comcast argues that the government should not “go down that road again” with a la carte or any other restrictions on packaging or pricing. 29 Charter submits that a federally- 23 47 U. S. C. § 543( d). 24 First Rate Report and Order, 8 FCC Rcd at 59 15. 25 See, e. g., Comcast Cablevision City of Tallahassee, Florida, Letter of Inquiry, 9 FCC Rcd 7773 (1994) (offering a few channels on an a la carte basis not an evasion given the totality of the circumstances), u r d , 11 FCC Rcd 1246 (1995). 26 Pub. L. No. 104- 104, 6 301( b), 110 Stat. 56, 115 (1996). 27 47 U. S. C. 9 543( c)( 4). The Commission implemented Congress’ directives in later rulemakings. See generally Implementation of Cable Act Reform Provisions of the Telecommunications Act of 1996, 14 FCC Rcd 5296 (1999). The Commission is conducting a review of its current rate requirements in an effort to harmonize and modernize the rules in light of the sunset of CPST regulation. See Revisions to Cable Television Rate Regulations, 17 FCC Rcd 11550 (2002), revised, 17 FCC Rcd 15974 (2002). ** Since 1996, the cable industry states it has invested over $85 billion in system upgrades -- roughly $1,200 for every cable customer -- and over $69 billion in programming. National Cable & Telecommunications Association, 2004 Mid Year Industry Overview 3, 12 (2004), available at h~: llwww. ncta. com/ pdf files/ Overview. pdf. 29 Comcast Comments at 15. 12 THE REPORT 12 mandated a la carte regime today would be even more detrimental to the cable industry’s ongoing operations than the experience with cable rate regulation in the 1 9 9 0 ~~’ Consumers Union and Consumer Federation of America (“ CU/ CFA” or “CU”) believes that an a la carte requirement is not akin to rate regulation and, in any event, will discipline rates more effectively than past government attempts to do so. CU asserts that the 1992 Cable Act gave regulators “a weak set of tools and the rules were badly crafted.” CU states that a la carte “rests on a much more powerful force, consumer sovereignty in the marketplace.” CU suggests that a la carte offers consumers more control, choice, and freed~ m.~ ’ C. Current Cable Services and Program Options Analog to Digital. Since their inception over 50 years ago, cable systems have carried programming in an analog format. Cable operators continue to distribute programming in this format because virtually all television sets in U. S. households are analog. 32 Cable operators generally allocate two- thirds of their systems’ channel capacity to transmit 80 channels of analog programming on analog tiers of service. The other one- third of channel capacity is used for digital services, including more channels of video programming. Cable operators control access to services in the analog tier through addressable or non- addressable technologies and control access to digital programming on the digital tier by using digital set top boxes. Older analog systems that have not been upgraded to digital technology, generally use passive traps (fkequency selective non- addressable set top boxes (descramblers), or analog addressable set top boxes, to block out signals. Analog subscribers in systems which use traps do not need set top boxes. Newer cable systems have the capability to communicate electronically from their headends to those subscribers who have addressable analog or digital set- top boxes. Many cable systems employ a hybrid of addressable and non- addressable technologies to control subscribers’ access to different tiers of cable services. Basic and expanded basic services offered by cable operators typically consist entirely of analog channels offered in the clear. This allows the entire package to be received by any subscriber with a cable- ready set without installing a set- top box. Because expanded basic channels are typically offered in Charter Comments at 2- 3 30 CU\ CFA Reply Comments at 32- 33. 31 Analog video signals transmit video information using analog waveforms. In North America, the National Television Systems Committee (“ NTSC”) signals are an example. The NTSC signal primarily contains synchronization, picture, and sound information in channels spaced 6 MHz apart. There are different digital formats currently used by the electronic media. For example, broadcast stations use vestigial sideband (“ VSB”) while cable systems use quadrature amplitude modulation (“ QAM”). 32 A trap is an inexpensive filter, generally located in or near a subscriber’s home, designed to remove one or more signals (frequencies) and is used to control the delivery of cable services. The cable industry has generally employed three kinds of traps: positive traps, negative traps, and band pass or band stop filters. Positive traps are designed to remove interfering (scrambling) signals inserted at the cable headend that secure the channel. Installing a positive trap enables the subscriber to view the channel. In systems that do not scramble their signals, negative traps are used to remove the actual signals of one or more television channels. Removing the negative trap-- or not installing it-- enables the subscriber to view the channel. Band pass or band stop filters are designed either to pass or block a specific band of frequencies (signals), thus controlling the delivery of an entire block of video channels to the subscriber. Traps can have a degrading effect on signal quality, limiting their use. See Cable Television Technical and Operational RequirementdReview of the Technical and Operational Requirements of Part 76, 7 FCC Rcd 202 1,2027 (1992), clarzjied, 7 FCC Rcd 8676,8681 (1992). 33 13 THE REPORT 13 < > a contiguous frequency block, they can be secured from delivery to basic- only subscribers using a band stop filter. Existing technology does not allow each individual channel on the expanded basic tier to be offered on an a la carte basis. Several cable operators began to provide digital tiers, in addition to existing analog tiers, over their cable systems starting in 1997. Today, all major cable operators offer digitally- compressed video channels to cable subscribers on digital tiers. The digital cable services may be viewed on analog television receivers through use of a digital cable set- top box. Digital compression technologies allow anywhere from four to 12 video channels to be compressed into the capacity previously used to provide just one standard six MHz analog channel. 34 The programming available on digital tiers includes a variety of genres, such as sports, movies, children’s, and foreign- language programming. At the end of June 2003, digital cable service was available to approximately 90 percent of all cable subscribers and the number of subscribers to digital video service grew to 20.6 million. 35 The migration to digital transmission has enabled cable operators to transmit high- quality video signals to their customers and to offer such additional enhancements as high definition television (“ HDTV”). Digital technology also has furthered the ability of cable operators to offer more service options, including advanced two- way services such as high- speed Internet access, cable telephony, and video- on- demand. Current A La Carte Offerings. Premium networks, such as HBO, Showtime, Cinemax, STARZ! and The Movie Channel, have been available for over 30 years on analog systems. Premium networks generally derive revenue from a single source - subscription fees paid by subscribers. These networks are distributed a la carte by MVPDS.~~ Premium networks charge subscription rates generally in the range of $10 - $15 per month. High subscription charges are necessary to support a premium network’s expenditures for high- value content, which is costly to produce or acquire, and to allow the network to operate on a single revenue stream. The high subscription charges also are necessary because a la carte networks historically have had low subscribership levels. For instance, STARZ! has only 12 million subscribers, and even HBO, the largest premium service provider, has just 39 million subscribers, or less than half the subscribers of the largest niche networks3’ Premium networks display a distinct programming format. They deliver general- interest “high- value” content (i. e., either original content or recent- release movies), presented advertising- free. This programming is designed to have broad appeal among viewers, rather than target a niche audience. A sub- The digital tier offers programming that is digitally compressed for efficient delivery. The programming is then demodulated from digital to analog format for display on subscribers’ analog television sets. 34 See 2003 Competition Report, 19 FCC Rcd at 1637. According to newer data from the NCTA, there were 22.9 35 million digital subscribers as of March 2004. See http:// www. ncta. com/ Docs/ PageContent. cfm? pageID= 86. 36 The typical distribution agreement between an MVPD and a premium network will specify a narrow range of distribution options available to the MVPD because these networks are designed expressly for a la carte distribution. A typical distribution agreement between an MVPD and a premium network entails a “revenue split,” with each party receiving a negotiated percentage of the subscription fees paid by subscribers for the network, which are channeled through the MVPD. This is in contrast to the generally fixed- rate “per subscriber” license fee arrangement between MVPDs and niche networks, discussed below. Thus, while premium networks commonly are marketed as “purely” a la carte or as mini- tiers of premium networks, they almost never are distributed in a tier with numerous advertiser- supported program networks. See Joint Programmers Comments at 15. 37 14 THE REPORT 14 category of premium networks consists of those that serve a micro- niche ethnic group or foreign- language speakers. Pricing for these networks is similar to, or even higher than, other premium networks. Indeed, for many viewers of these networks, particularly those with limited English- language skills, the network may be their only practical television programming option. 38 Cable operators are slowly migrating premium services from analog service to digital service, mainly because the digital environment is more secure rendering theft of service more difficult. In addition, a number of premium networks are now available in a high definition format. Pay- per- view programming is another type of video service that is offered by MVPDs on an a la carte basis. Rather than paying for a channel of programming, like HBO, a subscriber pays for a specific program. With pay- per- view, cable and DBS subscribers can order hundreds of recently released movies or current sport events on a per- program basis. However, pay- per- view is not instantaneous, as subscribers must wait to view a selected program at a prescribed time. Many new digital services offered by cable operators enable subscribers to maintain more control over what, when, and how they receive information, but the most important service for this discussion is video- on- demand. This service permits subscribers to instantaneously access video programming content on a program- by- program basis. VOD subscribers are able to pause, fast- forward, or rewind programming in the same manner as permitted by a VCR or by a digital video recorder. 39 Cable operators offer a mix of free and pay VOD. With regard to the latter, certain operators are offering subscription video- on- demand (“ SVOD”) which functions like VOD, but has a different marketing structure. Rather than paying for each event viewed, the subscriber pays a monthly fee to access certain programming on an at- will basis. For example, a subscriber would pay an additional $3.00 more per month for HBO which would allow him to access a catalog of programming for instantaneous viewing. The VOD choices provided by cable operators continue to grow as they further upgrade their systems and offer digital services. With the tier buy through rule4’ and VOD, cable subscribers are able to access hundreds of programming options without having to purchase a tier of service other than the basic service tier. Picking programming. Television viewers find programming to watch on cable systems and DBS in many different ways. They can purchase print guides, such as TV Guide, or read the local television listings in the daily newspaper to find out what programming is available. Another way MVPD subscribers find programming is through an electronic program guide (“ EPG”). EPGs are on- screen directories of programming delivered through various means, including cable, satellite, and over- the- air broadcast signals. EPGs come in two types: Original- generation and Interactive. Original- generation EPGs continually scroll programming listings. These EPGs are generally delivered as discrete video programming channels. Interactive EPGs, (“ IPGs”) allow users to sort and search programming, give program descriptions, provide reminders of upcoming programming, and take users to programming they select. Cable operators and satellite carriers currently provide EPGs to their subscribers. Viewers who do not have access to a print guide or an EPG often rely on their remote controls to select programs to watch. Cable operators and satellite carriers offer service that corresponds to the way in which most viewers watch television. When, as is often the case, a viewer has not selected a specific program in advance, he or she is likely to “browse” or “surf” the channels until something interesting j8 Id. To offer VOD, a cable operator must install high- capacity video servers at its headend, and possibly in its hubs, as 39 well as a digital set top box in the subscriber’s home. See infra. 40 15 THE REPORT 15 I < > turns up. 41 Many viewers may not even be aware of the name of the channel on which they stop to take a closer look. The phenomenon known as “channel surfing” is now an integral part of the modern viewing experience, something that subscribers find to be very valuable. 42 The practice of channel surfing is supported by market research showing that consumers often will not be aware of the name of a channel unless it appears before them, yet a substantial proportion of viewers will describe particular programs on the channel as being important to their overall enjoyment of cable as a service. According to a study from Knowledge Networks Statistical Research, of 2000 survey respondents, only 9 percent knew what was on television when they turned on their sets. 43 In contrast, 33 percent used an electronic programming guide to find out what was on television, while 23 percent “just flipped channels.” These results are buttressed by a recent study commissioned by the Cable and Telecommunications Association for Marketing (“ CTAM”), which found that viewers who start watching a new channel are most likely to find it by “just flipping through the channels.” 44 Overall, 45 percent of the study’s respondents indicated that they found new channels in this manner, and the percentage rises to 49 percent in digital cable homes. 45 D. Current Requirements and Obligations There are several statutory provisions and Commission rules that dictate the carriage and placement of certain types of video programming, including the basic service tier provisions and the channel availability provisions. Federal law also dictates, to a certain extent, a cable operator’s technical obligations and its relationship with subscribers. These statutory provisions and Commission rules sometimes limit a cable operator’s ability to freely offer a wide array of program packages. 1. Tier Placement Requirements Under Section 614 of the Act, local commercial television station signals must be provided to every subscriber of a cable system. 46 These signals must be viewable via cable on all television receivers of a subscriber which are connected to a cable system by a cable operator or for which a cable operator provides a connection. If a cable operator authorizes subscribers to install additional receiver connections, but does not provide the subscriber with such connections, or with the equipment and materials for such One recent study found that about half of all cable and satellite TV viewers frequently flip through channels until they find something to watch. Research Alert, How TV Viewers View TV, Cable and Telecommunications Association for Marketing (Dec. 6, 2002). 42 For example, 63 percent of analog tier subscribers and 65 percent of digital tier subscribers use channel surfing as the most used source to find out what is on television. Moreover, nearly 50 percent of cable customers rely on channel surfing to decide what to watch. See Cable Television Administration & Marketing Society, Video Consumer Research Study, September 2002. See Scripps Comments at 20. 41 Knowledge Networks Statistical Research, How People Use Television, 2004, available at 43 ht~:// www. onetvworld. org/? module= dis~ la~ sto~& stor~ id= 968& format= html. 44 Lieberman Research Worldwide, Tracking the Evolving Use of Television and Its Content, March 2004, at 15. 45 While channel surfing was the most common method for finding new channels by a significant margin, the next three most common methods were: (1) starting to watch a specific show on the channel (cited by 30 percent of respondents); (2) advertising on another channel (cited by 27 percent of respondents); (3) and word- of- mouth from friends or relatives (cited by 26 percent of respondents). Id. See Viacom Comments at 9. 46 47 U. S. C. 8 534( b)( 7); 47 C. F. R. 9 76.56( d). 16 THE REPORT 16 < > connections, the operator must notify such subscribers of all broadcast stations carried on the cable system which cannot be viewed via cable without a set top box and must offer to sell or lease such a set top box to its subscribers at regulated rates. The signals of noncommercial television stations must be available to every subscriber as part of the cable system’s lowest priced service tier that includes the retransmission of local commercial television broadcast signal^.^ ' Under Section 623 of the Act, a cable operator must also provide its subscribers a separately available basic service tier to which subscription is required for access to any other tier of service. 48 The basic service tier must, at a minimum, consist of the following: (1) all signals carried in fulfillment of the must carry requirements of Sections 614 and 615; (2) any public, educational, and governmental access programming required by the franchise of the cable system to be provided to s~ bscribers~~; and (3) any signal of any television broadcast station that is provided by the cable operator to any subscriber, except a signal which is secondarily transmitted by a satellite carrier beyond the local service area of such ~tation.~ ’ A cable operator may add additional video programming signals or services to the basic service tier. 5’ Satellite carriers are not required to have a basic service tier. 47 47 U. S. C. 9 535( h); 47 C. F. R. 0 76.56( d)( 2). “ 47 U. S. C. 9 543( b)( 7). 49 Pursuant to Section 61 1 of the Act, local franchising authorities may require cable operators to set aside channels for public (“ P”), educational (“ E’), or governmental (“ G’) use (“ PEG”). 47 U. S. C. 5 531. Public access channels are available for use by the general public. Educational access channels are used by educational institutions for educational programming. Governmental access channels are used for programming by organs of local government. PEG channels are not mandated by federal law, and the Commission has no jurisdiction over them, rather they are a right given to the local franchising authority, which it may choose to exercise. PEG channels provide an important source of local and diverse information for cable subscribers. See H. R. Rep. No. 98- 934, 98* Cong., 2d Sess., at 30 (1984) (“ Public access channels are often the video equivalent of the speaker’s soap box or the electronic parallel to the printed leaflet.”). Satellite carriers do not have any PEG obligations because they are not franchlsed like cable operators, but they are required by the Act and the Commission’s rules to reserve four percent of their channel capacity for access by qualified programmers for “noncommercial programming of an educational or informational nature.” 47 U. S. C. 4 335. Access to the reserved capacity on each DBS system must be offered at reduced rates and is limited to one channel per qualified program supplier. 47 C. F. R. 0 25.701. Cable systems retransmit broadcast signals pursuant to the statutory copyright license, under which the cable industry carries thousands of broadcast stations and currently pays approximately $120 million in royalties to copyright owners each year. The statutory license requires cable systems to pay royalties based on a percentage of revenues associated with the tiers of service they offer that include broadcast station retransmissions. See 17 U. S. C. 0 11 l( d); 37 C. F. R. 4 201.17( b)( 1). The cable statutory license and the specific royalty rates mandated by the license were enacted under the assumption that broadcast stations and program networks would be bundled in service tiers. A la carte regulation, in the context of the basic service tier, may raise several substantial questions about the manner in which cable systems would compensate copyright owners for the use of their copyrighted works. See Sports Leagues Comments at 1 1. 5’ Id. The Commission generally prohibits cable operators from scrambling the basic service tier. 47 C. F. R. 3 76.630( a). This requirement ensures that all subscribers are able to receive basic service tier channels in the clear and that basic- only subscribers with cable- ready television sets will not need set- top boxes. 50 17 THE REPORT 17 < > Digital Basic Service Tiers. It has been the Commission’s view that the Act contemplates a single basic service tier. 52 When analyzing the basic service tier requirement in the context of a cable operators’ digital broadcast signal carriage obligations, the Commission held that it is consistent with the statutory language to require that a broadcaster’s digital signal must be available on a basic tier such that all broadcast signals are available to all cable subscribers at the lowest priced tier of service. The Commission opined that the basic service tier, including any broadcast signals carried, will continue to be under the jurisdiction of the local franchising authority, and as such, will be rate regulated if the local franchising authority has been certified under Section 623 of the The Commission noted, however, that if a cable system faces effective competition under one of the four statutory tests, 54 and is deregulated pursuant to a Commission order, the cable operator is free to place a broadcaster’s digital signal on upper tiers of service or on a separate digital service tier. Commercial Leased Access. Section 612 of the Act requires cable operators to reserve channel capacity for non- affiliated video program networks under a leased channel ~aradigm.~ ’ The Commission has adopted rules, pursuant to Section 612, for leased access channels addressing maximum reasonable rates, reasonable terms and conditions of use, minority and educational programming, and procedures for resolution of disputes. ’6 The Commission’s rules require cable operators to place leased access program networks on any tier that has a subscriber penetration of more than 50 percent, unless there are technical or other compelling reasons for denying access to such tier^.^ ' Cable operators are permitted to make reasonable selections when placing leased access channels at specific channel locations. Cable operators may use the highest implicit fee formula, as set forth in the Commission’s rules, to set maximum See Carriage of Digital Television Broadcast Signals, 16 FCC Rcd 2598, 2643 (2001) (“ DTV Must Carry Order”). In its First Rate Report and Order, the Commission, citing provisions in the 1992 Cable Act that consistently refer to “basic tier” in the singular, concluded that the Act contemplates that each cable operator must offer only one basic tier. See First Rate Report and Order, 8 FCC Rcd at 5744. The U. S. Court of Appeals for the District of Columbia Circuit found that the Commission’s single basic tier requirement constituted a permissible interpretation of Section 623( b)( 7). See Time Warner v. FCC, 56 F. 3d 151, 199 (D. C. Cir. 1995). 5 3 ~e e 47 U. S. C. Q 543( a)( 3). 54See 47 U. S. C. 5 543( 1)( 1). 55 47 U. S. C. Q 532. Commercial leased access set- aside requirements were established by Congress in proportion to a system’s total activated channel capacity. Cable systems with 36 or more activated channels are required to comply with these set- aside requirements. See 47 U. S. C. 0 532( b)( l). Section 612 permits cable operators to use any unused leased access channel capacity for their own purposes until a written agreement for the use of such leased access capacity is obtained. Each system operator subject to this requirement must establish, consistent with the rules prescribed by the Commission, ”the price, terms, and conditions of such use which are at least sufficient that such use will not adversely affect the operation, financial condition, or market development of the cable system.” 47 U. S. C. 5 532( c)( 1). The 1992 Cable Act amended Section 612 and broadened the statutory purpose to include “the promotion of competition in the delivery of diverse sources of video programming,” and expanded the Commission’s authority over leased access. 47 U. S. C. 5 532( a). 56 See 47 C. F. R. $9 76.701, 76.970, 76.971, 76.975 and 76.977. 52 ” 47 C. F. R. Q 76.971( a)( l). According to the legislative history of the 1992 Cable Act amendments to the leased access requirements in Section 612, “If programmers using these channels are placed on tiers that few subscribers access, the purpose of this provision [to promote competition in the delivery of diverse sources of video programming and to assure the widest possible diversity of information sources are made available to the public from cable systems] is defeated. The FCC should ensure that these programmers are carried on channel locations that most subscribers actually use ... to ensure that these channels are a genuine outlet for programmers.” See S. Rep. No. 102- 92, at 79 (1991). 18 THE REPORT 18 < > reasonable rates for leased access programming that is carried as an a la carte service. 58 The Commission evaluates disputes involving channel placement on a case- by- case basis and will consider any evidence that an operator has acted unreasonably in this regard. 59 DBS. The broadcast station availability requirements for satellite carriers, pursuant to the carry- one- carry- all requirement of the Satellite Home Viewer Improvement Act of 1999 (“ SHVIA”) 60 and under Section 338 of the Act, 61 differ from those of cable operators. The Commission held that satellite carriers do not need to sell all local television stations as one package to subscribers, as is required of cable operators. Specifically, the Commission noted that Congress did not intend to establish a basic service tier- type requirement for satellite carriers when it implemented Section 338. Nor did Congress explicitly prohibit the sale of local television station signals on an a la carte basis. Rather, the Commission stated that Section 33 8’s anti- discrimination language prohibits satellite carriers from implementing pricing schemes that effectively deter subscribers from purchasing some, but not all, local television station signals. The Commission therefore found that a satellite carrier must offer local television signals, as a package or a la carte, at comparable rates. 62 The broadcast industry specifically sought review of the Commission’s a la carte rule. The United States Court of Appeals for the Fourth Circuit, in SBCA v. FCC, held inter alia, that the satellite carriage a la carte policy was not arbitrary, capricious, or contrary to 2. Tier Buy- Through Requirements Section 623( b)( 8) of the Act provides that a cable operator may not require the subscription to any tier other than the basic service tier as a condition of access to video programming offered on a per channel or per program basis. 64 Under the tier buy through requirement, a cable operator may not 58 47 C. F. R. 9 76.970. National Religious Broadcasters (“ NRB”) state that a significant number of religious program networks secure NRB believes that leased access should be 59 carriage on cable television through commercial leased access. maintained in its current state and not be subject to any type of a la carte requirement. See NRB Comments at 3. Pub. L. No. 106- 113, 113 Stat. 1501, 1501A- 526 to 1501A- 545 (1999). The provisions contained in the Satellite 60 Home Viewer Improvement Act expire at the end of 2004. Seegenerally, 47 U. S. C. 0 338; 47 C. F. R. 9 76.66. 61 See Implementation of the Satellite Home Viewer Improvement Act of 1999: Broadcast Signal Carriage Issues; 62 Retransmission Consent Issues, 16 FCC Rcd 191 8, 1960 (2000) (“ DBS Broadcast Carriage Report & Order”). SBCA v. FCC, 275 F. 3d 337 (4’h Cir. 2002). Based on this precedent, Echostar notes that the Commission’s rules do not appear to stand as an obstacle to carriage of local channels on an a la carte basis, at least for satellite carriers. Echostar Comments at 10. 63 47 U. S. C. 0 543( b)( 8). See Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992: Buy- through Prohibition (“ Tier Buy- through Order’’), 8 FCC Rcd 2274 (1993); 47 C. F. R. 76.921. In response to the U. S. Court of Appeals for the District of Columbia Circuit’s 1995 decision, Time Warner v. FCC, 56 F. 3d at 199, the Commission modified its rules to state that the tier buy- through requirement, like other requirements under Section 623, does not apply to cable systems subject to effective competition. Zd. There is no Federal requirement that cable operators inform their customers about the tier buy through rule. However, certain states are attempting to impose tier buy through notification requirements. See TR’s State Newswire, Bill Requires Cable Companies to Notif) Customers About Plans, October 1, 2004 (Legislation is pending in New Jersey that would require operators to notify subscribers of their buy- through rights). 64 19 THE REPORT 19 - / discriminate between subscribers to the basic service tier and other subscribers with regard to the rates charged for video programming offered on a per channel or per program basis. 65 In adopting rules to implement the tier buy- through prohibition, the Commission determined that multiplexed services (i. e., multiple screens of a single premium service such as HBO East, HBO West, HBO Signature, etc.) are to be treated as per channel services. 66 Thus, a subscriber is not required to purchase any intervening tier or tiers of programming in order to subscribe to a multiplexed programming service. Moreover, a cable operator may require the subscription to one or more tiers of cable programming services as a condition of access to one or more tiers of cable programming services. The tier buy- through provision does not prohibit the use of a set- top box in order to receive per program or per channel services on an a la carte basis. The tier buy through rules do not apply to DBS. 3. Commercial Availability of Navigation Devices and Equipment Compatibility Section 629 of the Act directs the Commission to adopt rules that would allow consumers the opportunity to obtain “navigation devices,” such as cable set- top boxes and other equipment, from commercial sources other than their MVPD service provider^.^^ Pursuant to Section 629, the Commission required MVPDs to unbundle security from other functions of the navigation device and to make available modular security components, called point- of- deployment modules (“ PODS” or “Cablecards”), to separately perform the conditional access function. 68 Thus, an MVPD subscriber would be able to obtain a set- top box or other navigation device without the security features from a retailer, and the MVPD would provide a card- sized POD module for security functions. Section 624A of the Act directs the Commission to “issue such regulations as are necessary” to assure the compatibility between cable systems and consumer electronics equipment such as television receivers and video cassette recorder^.^^ Section 624A( d) further directs the Commission to review and modify its compatibility regulations “to reflect improvements and changes in cable systems, television receivers, video cassette recorders, and similar techn~ logy.”~~ The 1996 Act amended Section 624A to include the finding that “compatibility among television sets, video cassette recorders, and cable systems can be assured with narrow technical standards that mandate a minimum degree of common design and 47 U. S. C. 5 543( b)( 8)( A). If, in a proceeding initiated at the request of a cable operator, the Commission determines that compliance with the tier buy- through requirements would require the cable operator to increase its rates, the Commission may, to the extent consistent with the public interest, grant such cable operator a waiver from the requirements for a specified period as the Commission determines to be reasonable. Id. Q 543( b)( 8)( C). 65 Tier Buy- through Order, 8 FCC Rcd at 2275 n. 9. 66 47 U. S. C. Q 549. The Commission defines navigation devices as “converter boxes, interactive equipment, and other equipment used by consumers within their premises to receive multichannel video programming and other services offered over multichannel video programming systems.” 47 C. F. R. 5 76.1201( c). 67 Implementation of Section 304 of the Telecommunications Act of 1996: Commercial Availability of Navigation 68 Devices, 13 FCC Rcd 14775,14776 (1998); 47 C. F. R. 5 76.1204. 47 U. S. C. 9 544A. The analog equipment compatibility rules were developed ten years ago. See Compatibility Between Cable Systems and Consumer Electronics Equipment, 9 FCC Rcd 1981 (1994) (“ Compatibility Report and Order”). 69 ’O 47 U. S. C. Q 544A( d). 20 THE REPORT 20 < > operations, leaving all features, functions and protocols, and other product and service options for selection through open competition in the market.” ’l Pursuant to its authority under Section 629, the Commission has adopted rules to require television sets to be built with “plug- and- play” functionality, i. e., the ability for a consumer to attach a “digital cable ready” digital television receiver directly to the cable system using a POD and receive one- way cable television services, without the need for a set- top Since July 1, 2004, cable operators have been required to support unidirectional digital cable products (“ UDCPs”) by providing a Cablecard to any subscriber who purchases a digital cable ready product and requests connection to the cable system without a set- top At this time, consumers will still need a set- top box to receive two- way (ie., interactive) services, such as video on demand, pay- per- view, and cable operator- enhanced electronic programming guides. The cable and consumer electronics industries continue to work on the development of an agreement for two- way “plug- and- play’’ receiver^. '^ Charter comments that an a la carte mandate would likely require more set- top boxes in subscribers’ homes, a move which it believes would contradict all plug and play efforts that permit subscribers to access digital cable service without additional equipment. 75 E. Analysis of Current Packaging Practices at the Retail Level The attraction of introducing price discipline and additional choice into the retail market for video programming is obvious. Over the past five years, cable prices have increased by an average of 4.6% per year according to the Bureau of Labor Statistics. The FCC’s “Report on Cable Industry Prices” shows dramatic annual increases, in excess of 7%, for the expanded basic program tier over the past five years. Accompanying these rate increases have been increases in the number of channels contained within the expanded basic package, though the size of the package has not kept pace with the rate increases. As the price and size of the expanded basic tier rises, consumers have begun to ask themselves if the additional channels are actually worth the additional costs. Consumers have reason to question whether current packaging practices contribute to the problem. This section will examine whether there are any benefits to the current method of selling video programming and the extent to which current practices are the root cause of many of the problems in the retail market. In the sections that follow, a la carte and themed tiers are examined to determine if they can provide a check on rate increases, provide additional choice to consumers, and give them more control over the content that enters their homes. 1. Benefits and Harms of Bundling at the Retail Level a. Consumer Choice and Rates ” 47 U. S. C. 0 544A( a)( 4). 72 Compatibility Between Cable Systems and Consumer Electronics Equipment, 15 FCC Rcd 17568 (2000) (“ Digital Compatibility Report and Order”); compatibility Between Cable Systems and Consumer Electronics Equipment, 18 FCC Rcd 20885 (2003) (“ Digital Compatibility Second Report and Order”); 47 C. F. R. 80 15.123, 76.640,76.190 et. seq. 73 47 C. F. R. 6 76.640( b). The PN specifically sought comment on the impact an a la carte and themed- tier requirement would have on the uni- directional plug- and- play regulations, and on the ongoing discussions regarding potential bi- directional plug- and- play regulations. PN, 19 FCC Rcd at 9293. Very few parties mentioned this topic in their pleadings. 75 See Charter Comments at 1 1. 74 21 THE REPORT 21 Consumers Union and the Consumer Federation of America, among others, state that cable rates have increased at nearly three times the rate of inflation. They argue that the industry’s practice of making most networks available only as part of a bundle or tier has contributed to the rise in rates. They argue that the size of these bundles far exceed the number of channels that the average household regularly watches. This has resulted in consumers paying for channels that they do not watch. By exposing the underlying demand for an individual channel, rather than hiding it in the bundle, they contend that cable operators will be forced to offer programming that consumers are willing to purchase. They maintain that offering channels on an individual basis, as well as in existing tiers, will provide consumers with additional choice and act as a strong check on cable rate increases. 76 Some individual consumers also filed comments supporting the argument that they are paying for channels they do not watch and that their rates would be lower if they were able to purchase channels on an individual basis. 77 Rural Telephone Companies (“ RTCs”) state that a la carte and tiering can exist side- by- side and actually increase consumer choice and reduce programming costs at the same time. They use the current premium services business model to explain their position. Twenty- five years ago, premium services were single channel services offered strictly on an a la carte basis. Today, those same services are offered in multiplex packages as well as in packages with additional premium services (i. e., themed- tiers) at rates equal to or less than what the individual services cost when they were offered alone. RTCs state that, in real dollars, the rate for each premium service has gone down while the diversity of services has gone up. Yet, those same premium services are still available on an a la carte basis should a subscriber wish to purchase them that way. RTCs conclude that while subscriber choice and diversity has increased, programming costs to the consumer have decreased. 78 Cable operators and program networks disagree that bundling practices in the MVPD market have limited consumer choice. Furthermore, many argue that any move away from the current system will not lower rates, but will increase them. 79 The impact of a shift to a la carte or themed- tiers on rates is extensively examined below and illustrates many of the benefits of bundling that would be lost. Among these benefits are the cost savings that bundling engenders. Joint Programmers state that some groups appear to believe that subscribers would be able to purchase a limited number of networks a la carte from a broad bundle of networks, and that those networks could be purchased at a price “per network” that is roughly proportionate to each network’s CU/ CFA Comments and Reply Comments, passim. 76 One individual claims that “[ iln an a la carte world, we would actually see some value for the money we spend on cable. As it is now, we do not. Cable companies argue there will be less choice. I disagree strongly. A choice between options you don’t want is no choice at all!” See Comment of Margot Durrett, Cloverdale, CA. 77 RTC Comments at 14. 78 Several individual commenters opposing a la carte focus on the potential problem of increased rates. One commenter asserts that “options for a la carte channels . . . would needlessly raise rates for programming which . . . are outrageous to begin with.” See Comment of Wanda McDaniel, Powder Springs, GA. Another commenter states that “we would pay the same amount for a few channels that we pay for a lot - we [would] lose the volume discount.” See Comment of Shandle Green, Pasadena, CA. Several individuals conclude that ‘[ tlo require cable programmers to tailor their product to every last subscriber would raise prices through the roof, and limit channel selections to only the lowest common denominator of broadly popular channels.” See Comments of Karen Gonzales, Fallon, NV. See also Comments of Charles Cooper, Chesterhill, OH, Gerald Zellar, Lakefield, MN, Frances Turner, Galena, OH, Randy Gordon, Gastonia, NC, J. J. Harmon, Jr., Bluefield, VA. 79 22 THE REPORT 22 \ / share of the overall price of the bundle. 80 Under this theory, if consumers currently subscribe to a tiered offering of 40 networks for $30, they instead should be able to subscribe to only their favorite networks for 75$ each. Joint Programmers state that this perception ignores the fundamental nature of video programming, but it does much to explain the appeal of a la carte distribution among a part of the public .” Potentially distinct products are often bundled in order to lower transaction costs, realize economies of scale, and enhance the attractiveness or convenience of the product to consumers. Many commenters, including Charter and Courtroom Television, state that the benefits of bundling are perhaps best illustrated by considering the daily newspaper. In the sale of newspapers, for example, the various sections and columns are bundled into a single product, even though few people read all parts of the paper. But a newspaper is sold as a bundled product because: (1) of the economies of having all sections delivered at once rather than having separate distribution mechanisms for each section; (2) of the value to subscribers of having the option to look at all of the sections, even if they do not read all sections every day; and (3) of the efficiencies for advertisers who prefer paying a single price to reach all of the newspaper’s readers with a single advertisement.** Bundling also simplifies consumer decision- making. Comcast states that a la carte, the opposite of bundling, likely would provide tens of thousands of possible program combinations that would not be attractive to consumers. 83 Comcast states, for example, that a restaurant with a menu of over 10,000 items would be so extensive and complex that it would leave consumers confused and frustrated. The same is true of a la carte. 84 According to the Progress and Freedom Foundation (“ P& FF”>, tiering accomplishes a number of purposes, one of which is to provide viewers with “option value.” When viewers purchase a bundle of programs, they have the option of watching programming that they might not have purchased separately.” According to Comcast, the benefits of retail bundling are readily apparent in the cable industry. Tiers lower distribution costs because the distribution cost entailed in serving a subscriber is the same regardless of the number of channels delivered, so the more channels subscribed to, the lower the average cost of distributing a channel. 86 In a similar fashion, Charter asserts that if relatively few customers subscribe to relatively few cable services, the delivery plant is under- utilized. As a result, the average fixed cost per unit of channel delivery is relatively high. In contrast, if many customers subscribe to large numbers of cable services, the average fixed costs per unit of channel delivery is relatively low. As the Joint Programmers Comments at 36. 80 8’ Id. 82 See Courtroom Television Comments at 14: Charter Comments at 6. Comcast Comments at 11. 83 84 Research suggests that most consumers prefer simplified choices when there are a large number of alternatives to consider. See Ravi Dhar, Consumer Preference for a No- Choice Option, Journal of Consumer Research, September 1997, Vol. 24, No. 2, at 215. P& FF Comments at 9. 85 86 Comcast Comments at 7. 23 THE REPORT 23 < > price per unit of channel delivery declines, the customer benefits, because a greater percentage of the customer’s subscription fees is available for pr~ gramming.~ ’ Turner states that households effectively cross- subsidize each other so that the price for the networks they want is less than the price they would have to pay if they were only buying the program networks they valued most highly. Turner states that the correct way of looking at this market is that network users collectively support the joint costs of creating video services. Different users pay for different uses of the network, but no consumer pays more for the expanded basic tier than the value of the service they receive.” It is this explanation which has motivated much of the economic research on the benefits of bundling in the video programming ind~ stry. ’~ Research suggests that video programming has one characteristic that leads to the unusual results with respect to bundling. Regardless of how many persons view, or consume, such programming the costs of production do not change. Because of this characteristic, social welfare is maximized when distribution of programming is maximized. However, a product with this characteristic that is sold on an individual basis with a uniform price may not be able to recover its fixed production costs, even though the total value consumers place on the good is greater than those production costs. In short, bundling by MVPDs allows program networks to recover a large share of the production costs from consumers who value the programming the most, while obtaining a smaller contribution from consumers that do not value the programming as highly. Bundling does not force consumers to pay for programming they do not want, but it does force them to pay more for programming that they value highly than the amount another consumer who values that programming less highly pays. In the end, this result ensures the production of programming that consumers value by spreading those costs over a broad segment of society. In addition to the benefit bundling confers on the diversity of programming, it also appears to promote fiercer competition between MVPDs. Economic research indicates that two firms that compete with each other by selling bundles have lower prices than firms that compete through a la carte sales.” b. Objectionable Content CU states that giving consumers the choice to select only those program networks they want, on an a la carte basis, provides a solution to the “growing public concern” about violent and indecent programming. It states that rather than putting the government in the untenable position of trying to curtail objectionable content, a la carte consumers could select desired programming and reject offensive programming .9’ The Commission does not have specific statutory authority to regulate the content of non- broadcast program networks. The cable and DBS subscription business model, and its ability to provide tools to block unwanted programming, differentiate these distributors from traditional television Charter Comments at 9. 87 Turner Reply Comments at 4, 9. Section I of the Economic Appendix discusses economic research in this field. Yannis Bakos and Erik Brynjolfsson, Bundling and Competition on the Internet,” Marketing Science, 19( l), 88 89 90 Winter 2000, at 63- 82. CU Comments at 4. 91 24 THE REPORT 24 . 7 br~ adcasting.~~ The Act provides cable subscribers with a variety of measures to block unwanted programming. First, under Section 624, cable operators must provide “lockbox” technology to cable subscribers upon request to prevent the viewing of any channel on which objectionable programming may appear. Cable operators are required to make lockboxes available for sale or lease to customers who request them. 93 Second, under Section 640, a cable operator is required to fully scramble or block the audio and video portions of programming services not specifically subscribed to by a household. The cable operator must fully scramble or block the programming in question upon the request of the subscriber and at no charge to the ~u b s c r i b e r .~~ Finally, subscribers may purchase television sets equipped with V- Chips that enable individuals to block television programs assigned a particular rating by the video p r ~g r a m m e r .~~ While the latter mandate applies to all MVPD homes with television sets, the first two subscriber protections do not apply to DBS because they are not subject to the provisions of Title VI, although as discussed below, DBS has created its own subscriber protection tools. Earlier this year, a group of cable operators, representing about eighty- five percent of all cable subscribers, launched a campaign to educate cable subscribers on parental tools and consumer rights, including explanations of the TV ratings system, V- chip, and program blocking t e ~h n o l o g y .~~ This campaign includes public service announcements, media literacy workshops, technical assistance with program blockers, and a ~e b s i t e .~’ See, e. g., Cruz v. Ferre, 755 F. 2d 1415, 1419 (1 lth Cir. 1985) (“ Unlike broadcast television, which send over- the- air signals, cable television operates by transmitting programs to subscribers through coaxial cables or wires.”); Applications for Consent to the Transfer of Control of Licenses from Comcast Corporation and AT& T Corp., Transferors, to AT& T Comcast Corporation, Transferee, 17 FCC Rcd 23246, 23328 (2002) (cable services “are not broadcast services, but are subscription- based services, which do not call into play the issue of indecency”). See also, Litigation Recovery Trust, 17 FCC Rcd 21852, 21856 (2002) (broadcast indecency restrictions not applicable to satellite programming provided to hotels); Harriscope of Chicago, Inc., 3 FCC Rcd 757, 760 (1988) (“ Consistent with existing case law, the Commission does not impose regulations regarding indecency on services lacking the indiscriminate access to children that characterizes broadcasting.”). However, Sections 639 of the Act and 18 U. S. C. Q1468( a) respectively prohibit the transmission of obscene material over a cable system and the knowing utterance or distribution of obscene matter by means of a cable television system or subscription service. 47 U. S. C. 5 559; 18 U. S. C. Q 1468. Only the latter provision applies to DBS. 93 47 U. S. C. § 544( d)( 2). 94 47 U. S. C. Q 560. 92 See 1996 Act, Section 551- Parental Choice in Television Programming. See also 47 U. S. C. Q 544( d)( 3) (when a cable operator provides access to premium channels without charge to subscribers (as a free preview or promotion) the operator must (1) give notification to subscribers of the impending free access, (2) inform subscribers that they have the right to request that the premium channels be blocked, and (3) block the premium channel upon request.) 9s NCTA White Paper, Cable Industv Efforts to Empower Television Viewers: Choice, Control, and Education, February 2004; NCTA Press Release, Cable Puts You in Control: Cable Industry Launches Consumer Education Initiative, March 2,2004; NCTA Press Release, ControlYourTV. Org Website Launched as Cable Operators Commit to Offering Blocking Technology at no Additional Charge; Networks Reaffirm Use of TV Ratings, March 23, 2004; NCTA Press Release, Families Should Develop Media Plan to Take Control of Media Usage, April 2,2004. 96 See Steve Donohue, Cox Wants to Help Parents ‘Take Charge!, Multichannel News Online, August 26, 2004, available at littr,:~/ w~~. multichannel. comiarticleiCA447950. html? displav+ Breakin~+ News& refe~ al+ su~~ (“ Cox Communications, Inc. launched a new public- affairs program designed to help parents control the content their kids see on television and the Internet.”). 91 25 THE REPORT 25 \ , Commenters generally state that an a la carte requirement, for the purposes of blocking objectionable content, is unjustified and unnecessary in light of the Act’s consumer protection provisions and the advanced technical tools provided by MVPDs. For example, Joint Programmers argue that it is unfair and inappropriate to burden the majority of program networks who do not present indecent programming, with an “overkill” solution apparently targeted at only a handful of networks, especially when parents already have the complete ability to block any objectionable programming or networks at no cost. 98 Religious Voices in Broadcasting (“ RVB”) states that the flexibility of having access to all cable channels, combined with the control to limit access to specific channels deemed inappropriate for certain household viewers, gives subscribers the power to regulate the indecent programming entering their homes without sacrificing the diversity of available pr~ gramming.~~ LeSEA and Christian Television Network (“ CTN”) advocate content blocking technology, or “simple refusal to watch television,” as a more effective means of avoiding undesired programming than a la carte.” ’ Comcast states that far more powerful and flexible tools are available to customers who choose to purchase digital cable service. Comcast’s “Parental Control” feature on digital cable boxes, accessed by remote control through the menu of the electronic program guide, allows parents to block what their children can watch based on various criteria: by channel, program title, TV or MPAA rating, or time of day. Comcast asserts that parents can effectively create a “family tier” by using the “favorites” feature to select the channels they want their families to watch and by using parental controls to block the channels and programs they do not want their families to watch.” ’ Comcast further states that, starting in June of this year, it has made it a condition of any new carriage agreement with any program network that the network provide ratings for all of its programming. Also in June, Comcast began requiring any program network over which it exercises management control to either confirm that it currently provides television ratings information for its programming or start providing ratings information. Io2 DirecTV states that since it launched service 10 years ago, it has offered a free parental viewing “locks and limits” control feature on all DirecTV receivers, enabling parents to restrict access to channels. This feature is available on every DirecTV system receiver and is easily accessed via the DirecTV system remote control. According to DirecTV, all of its customers can avoid unwanted networks “quite easily.” ’03 The Parents Television Council (“ PTC”) complains that parents have to pay for program networks that they do not want their children to view in order to access program networks for ~hi1dren. I’~ In response, Comcast states that “neither economic logic nor market facts” support the view that tiers force consumers to pay for programming they do not want. lo5 Comcast, as well as Time Warner, assert that a la carte will lead to higher prices for fewer program networks; thus, there are no cost savings in Joint Programmers at 70- 7 1. 98 RVB Comments at 7. 99 loo LeSEA and CTN Comments at 8. Comcast Reply Comments at 14. 101 IO2 Id. at 15. DirecTV Comments at 2- 3. 103 PTC Comments at 1. I04 Comcast Reply Comments at 16. I05 26 THE REPORT 26 < > return. ’06 A& E states that “The fact that the very bundling that a la carte advocates rail against is what keeps per- channel prices low means that unbundling MVPD programming will require consumers to pay a premium for avoiding unwanted content that they can block now for fiee.” ’07 As a tool to allow subscribers to block objectionable content from reaching their homes, an a la carte requirement seems to be a particularly blunt instrument. Technical solutions that block unwanted content exist today at a lesser cost than a mandated a la carte requirement. F. Feasibility of A La Carte and Themed- Tiers In this section, the focus is on the impediments to mandatory a la carte, as well as the harms such a requirement would likely impose on MVPDs, as well as program networks. 1. Alleged Harms and Benefits Studies and analyses. Several commenters submitted economic analyses noting the harms and costs associated with a la carte regulation. One such study is provided by Booz Allen and Hamilton on behalf of NCTA. ’” The highlights of the Booz Allen study are summarized below. The Bureau performed an independent analysis and critique of the Booz Allen study, the results of which are found in Part I1 of the Economic Appendix. Booz Allen Hamilton examined three prototypical scenarios: (1) a “pure” a la carte approach under which all networks currently available on basic and expanded basic tiers were available only on a per- channel, a la carte basis; (2) an “optional” (“ voluntary”) a la carte approach, under which networks could continue to be packaged and offered on their current tiered basis, but would also be available on an a la carte basis to those customers who wanted to purchase fewer than all tiered networks; and (3) a themed tier approach under which cable operators were required to offer one or more smaller packages of programming based on content, in addition to the more inclusive currently available basic and expanded basic tiers. According to NCTA, Booz Allen confirmed that “[ ulnder each of the scenarios evaluated, consumers would be worse off than today. Consumers would either pay more than today for far fewer channels, or would need to select as few as six channels to reduce their monthly bill below current levels.” NCTA states that the Booz Allen study also shows that because of the costs associated with offering an a la carte or themed tier option, even those cable customers who chose to continue to purchase the existing tiers would have to pay significantly more than they do today. Io9 NCTA also states that the Booz Allen study projects that the number, quality and diversity of program networks would all be severely diminished under a la carte. According to NCTA, Booz Allen concludes that “[ als many as half to three- quarters of emerging networks could fail under each of the scenarios, including a growing number of targeted niche and ethnic programming networks, and new network launches would become extremely unlikely.” Furthermore, “even the most established networks would likely have to reduce their expenditures on programming, leading to lower viewing and lost Id. at 17; Time Warner Reply Comments at 6 . I06 lo’ A& E Reply Comments at 20. IO8 NCTA Comments, passim. See Appendix D, for a complete list of studies submitted by commenters. NCTA Comments at 1 1. I09 27 THE REPORT 27 advertising." In the end, this would not only diminish the number of available program networks but also "would likely lead to further industry consolidation into fewer network group^.""^ Disney asserts that because a la carte would decrease revenues and add increased costs, the retail price for individual a la carte channels would be very high. The reality that even a few a la carte channels would cost the customer as much or more than the expanded basic bundle, would create a backlash against programmers, MVPDs, and the government. According to Disney, the result would be inevitable pressure on the government to intervene even further in the form of attempted price controls." ' 2. Implementation a. Structural Impediments Technical. The PN asked whether an addressable set top box would be required for every television set on which a subscriber views programming offered on an a la carte or themed- tier basis. The PN specifically inquired whether an addressable set top box would be required for every television set on which a consumer might wish to view digital programming. The PN sought comment on whether a la carte or themed- tier services can only be offered on a digital basis. It also sought comment on the number of television sets that are not currently connected to addressable set top boxes and the costs to consumers of buying or leasing these boxes. The PN sought comment on the percentage of cable and satellite distributors that offer digital programming to their subscribers as well as how many consumers currently subscribe to digital programming packages."* There appear to be several technical obstacles preventing cable operators from offering all programming on an a la carte basis, especially since virtually all operators still offer program networks in an analog format. According to Insight, a mandatory a la carte requirement that affects the expanded basic tier would force it to select one of the following four costly options to enable the delivery of a customized mix of program networks to each subscriber: (1) use a series of customized traps capable of blocking each of the channels on the analog expanded basic tier; (2) deploy hybrid set- top boxes to each subscriber that can descramble both analog and digital channels; (3) simulcast all of the basic and expanded basic channels in analog and digital format; or (4) convert to an all- digital ~latform."~ As for the first option, Insight states that traps have significant technical limitations. For example, it is difficult to restrict the impact of traps to just one channel because of the rudimentary nature of the technology. According to Insight, it is not uncommon, particularly as traps age, for the lower adjacent channel's audio signal to be attenuated, causing problems with stereo reception, or in more severe cases, monaural audio reception. Depending on where particular channels are located and which particular channels are selected by an a la carte customer, Insight asserts that it may be impossible to adequately deliver selective individual channels when those channels are interlaced with unwanted channels on the system's channel line~ p."~ Second, there is a physical and technological limit on the number of traps that can be used in any given situation. Insight states, for example, that attaching more Id. Disney Comments at 27 I l l PN, 19 FCC Rcd at 9293. Insight Comments at 5 . I I3 Id. at 6. 1 I4 28 THE REPORT 28 < > than four or five traps on a single aerial installation can cause safety, mechanical and electrical problems, including signal leakage issues. Third, the use of traps raises unacceptable signal quality issues. Fourth, the customer service and installation costs involved with the trap approach would be enormous. Finally, the widespread use of traps is unacceptable because it is perhaps the least effective signal security te~ hnique.”~ Moreover, trapping cannot be done from the headend, but rather requires a visit by a technician to the customer’s premises. According to Smaller Operators, implementation of changes in a subscriber’s selection of a la carte programming through traps would require technicians to make repeated truck rolls to the customer Blonder Tongue suggests that traps are not necessary to provide subscribers access to channels on an individualized basis; rather, cable operators may use an interdiction device (“ addressable tap”) that is placed on the cable plant outside a customer’s home. Here, a signal is sent over the cable system with instructions to block a particular program service so that it does not enter the customer’s home.” ’ Recognizing that most addressable taps are only capable of controlling access to a limited group of channels at a time, Blonder Tongue states that it has a product, known as the TV Channel Blocker (“ TVCB”), which can control up to 80 individual channels without adjacent channel degradation.” ’ Comcast asserts that these types of interdiction devices are expensive, require cable operators to send a cable technician to every home for installation, can create a theft of service risk, and may not have the capacity to handle the dozens of analog channels delivered by cable systems today.” ’ The second alternative to offer expanded basic channels on an a la carte basis would be to deploy hybrid analog and digital addressable set- top boxes that allow a la carte customers the ability to receive only those specific analog expanded basic channels they have selected, while at the same time allowing them to continue to have the ability to receive digital services. This would require all expanded basic channels to be encrypted, and the use of set- top boxes with analog descrambling technology to deliver only those specific analog channels requested by a particular subscriber. Insight comments, however, that Id. at 7- 10. Traps can easily be tampered with by those trying to steal cable services. Widespread deployment of traps would exacerbate existing theft of service incidences and make it even more challenging for cable operators to prevent such activity. 1 I5 Smaller Operators Comments at 6. Interdiction is a technique cable operators use to block access to a channel by altering the horizontal sync pulses in the video signal to make the picture unwatchable. In order to view the picture, “instructions” are needed on how to reverse the alteration of the sync pulses. Systems using addressable taps typically send their signals in the clear; the signals that are not paid for are scrambled as they pass through the tap (the electronic circuitry in the tap performs interdiction on those signals), while the signals that are paid for are allowed to pass through the tap. These taps are addressable and can be controlled at the headend, thus eliminating the need to dispatch a technician for any programming changes. Like traps, interdiction devices eliminate the need for set- top boxes as the signals are controlled before entering the house. However, each TV, VCR, and similar device in the home will receive the same channel line- up. I I6 1 I7 The TVCB, like other addressable taps, must be installed throughout the cable plant and at the customers’ premises. A control system and software must be installed to allow the operator to remotely control the functions of all the addressable taps in the system. There must be an interface to link the billing system with the control system. The addressable taps are active devices, meaning that they need power to operate, so additional power would need to be supplied on the coaxial cable for the taps to function. Interdiction devices are only viable for analog deployments as they take advantage of the analog components of a video signal (the alteration of the sync pulse). The TVCB can only block 6 MHz analog channels; it is not capable of blocking out an individual digital stream. 118 Comcast Reply Comments at 25. I I9 29 29 THE REPORT < > because analog descrambling technology is becoming obsolete and security is readily compromised, set- top boxes with analog descrambling technology of any sort are no longer manufactured by, or available from, major set- top box manufacturers. According to Insight, the most important component, the integrated circuit devices used to segregate and descramble analog signals, have been discontinued by all major suppliers. Thus, the deployment of this approach would require further design, investment and manufacturing commitments in an obsolete technology. Insight states that even if such boxes were readily available, the cost to install them would also be prohibitive as each customer ordering a la carte service would require both a box on each television set within its residence and an installation truck roll by a service technician each time a television set and set- top box is connected to the system. '* ' Smaller Operators state that hybrid addressable boxes similarly would not work as a means of implementing a la carte or themed tier service offerings because cable operators would need to scramble all networks in order to implement such programming options. I2' The third approach described by Insight would be to allow non- a la carte Customers the option to continue to receive analog only basic and expanded basic service tiers, while at the same time implementing a digital simulcast of those same signals, allowing customers to elect to receive expanded basic program services digitally on an a la carte basis so that those customers who choose a la carte would have to subscribe to the digital tier. Every customer electing a la carte would then need a digital addressable set- top box for every television in his or her home. The set- top box costs associated with such a solution would ultimately depend on the number of customers electing to receive their services a la carte, but would cost Insight a minimum of $200 per box, and would result in an increase in the subscriber's bill of approximately $8 per month, per box -- and about $13 per month for boxes with high definition and digital video recorder capabilities. Additionally, Insight states that band pass traps would need to be installed to block out the analog expanded basic tier channels for customers subscribing to a la carte services. 122 Insight asserts that a simulcast approach would also constitute a massive waste of bandwidth, limiting a cable operator's ability to offer innovative non- basic services. In order to duplicate the analog basic tier on a digital tier, it would have to allocate additional spectrum on each of its systems. Insight generally uses this spectrum for other services including digital programming, HDTV, video- on- demand, high- speed cable Internet, circuit- switched telephony, and is actively exploring future uses, such as I2O Insight Comments at 1 1 . 12' Smaller Operators Comments at 6. "* Insight Comments at 14. Notwithstanding its investment of approximately $420 million to upgrade its network to enable its cable systems to offer a wide range of digital services, Insight states that all of its systems still currently deliver the basic and expanded basic tier channels via analog transmission. For many reasons, including the desire not to have to use any set- top equipment or buy a digital cable- ready TV set, the remainder of Insight's subscribers continue to choose to t