III.Market structure and conditions affecting competition

1.Competitive Issues in the Retail Market for the Distribution of Video Programming to Consumers

144. 
     In the past year, incumbent cable operators’ share of all MVPD subscribers continued to decline. As of June 30, 2005, cable operators served 69.4 percent of the 94.2 million MVPD subscribers, compared to 71.6 percent of the 92.3 million MVPD subscribers a year earlier.⁵²⁵ DBS, the major wireless MVPD technology that is available to subscribers nationwide, saw its share of MVPD subscribers increase between June 2004 and June 2005, from 25.1 percent of the market to 27.7 percent. Relatively few consumers, however, have a second wireline alternative, such as an overbuild cable system, as indicated by the small number of subscribers to BSPs and the limited entry by LEC thus far.⁵²⁶ Several other MVPD technologies, such as private cable systems and wireless cable systems, offer consumers alternatives to incumbent cable services, but only in limited areas, and their overall share of the MVPD market has declined from 3.29 percent to 2.88 percent over the last year.
     
145. 
     The Commission recently opened a proceeding to investigate whether the current local franchising process inhibits competitive entry in the retail market for the distribution of video programming.⁵²⁷ The Franchising NPRM seeks comment on issues relating to the implementation of Section 621(a)(1) of the Communications Act. Specifically, the Commission asks how it can ensure that local franchising authorities (LFAs) do not unreasonably refuse to award cable franchises to competitive entrants. The Franchising NPRM tentatively concludes that the mandate of Section 621(a)(1) should be interpreted to prohibit not just the ultimate refusal to award a franchise, but also a broader range of behaviors, including the establishment of procedures and other requirements that unreasonably interfere with the ability of would-be new entrants to introduce their competitive offerings quickly.
     
146. 
     In the Notice, we asked about the impact of the local franchising process on new entrants into local markets.⁵²⁸ In their comments in response to the Notice of Inquiry in this docket, a number of parties addressed this issue. LECs described the local franchising process as an impediment to entry into the market.⁵²⁹ SBC maintains that cable franchise requirements are unnecessary given existing local authority to manage telephone company rights of way.⁵³⁰ Verizon and others note that franchise negotiation gives notice of entry to the incumbent, delays entry, and allows LFAs to demand unrelated concessions from the entrant.⁵³¹ Verizon alleges that a “level playing field” approach to regulation is harmful to competition, and urges congressional action and Commission action pursuant to Section 621(a) of the Communications Act to alleviate these concerns.⁵³² Broadband service provider RCN reports that local franchise requirements have not prevented competitors like RCN from entering the market, but argues that RCN should receive equivalent relief if other competitors are relieved from franchise obligations.⁵³³
     
147. 
     BSPA indicates that franchise build-out requirements are anachronistic and a barrier to entry and it supports a national policy to eliminate them.⁵³⁴ BSPA argues that most incumbent cable operators have had decades to build out to current service boundaries with limited or no competition, and did not have to rely on capital markets for funding as current entrants do.⁵³⁵ Verizon also objects to build-out requirements.⁵³⁶ NCTA argues that existing franchise regulations and build-out requirements are appropriate for all providers in the multichannel video industry, and that they should not pose a “significant barrier” to competitive entry.⁵³⁷
     
148. 
     In addition to franchising requirements, commenters assert that there are other factors that also may inhibit entry and competition. For example, Verizon raises the issue of open and competitively neutral technical standards.⁵³⁸ BSPA states that discrimination in access to, and pricing of, video programming and other digital content constitutes a threat to BSP entry and competition.⁵³⁹ SBC also stresses the importance of access to programming, particularly programming affiliated with incumbent cable operators and terrestrially delivered regional sports networks.⁵⁴⁰
     
149. 
     BSPA also identifies exclusive long-term MDU access contracts as a barrier to entry and notes that difficulties remain for BSPs and other wireline MVPDs gaining access to utility poles at reasonable rates.⁵⁴¹ Verizon also raises the issues of access to residents of MDUs.⁵⁴²
     
150. 
     NTCA and BSPA allege that incumbent cable operators faced with competitive entry have engaged in “targeted” or “predatory” pricing practices.⁵⁴³ BSPA recommends that the Commission require cable operators to disclose all rates and promotions offered to any customer in a local franchise area, and to consider whether, even in areas in which a finding of effective competition has been granted, the Commission may continue to require uniform pricing; BSPA adds that, if necessary, the Commission should recommend that Congress amend the Communications Act to allow the Commission to require uniform pricing under the circumstances BSPA describes.⁵⁴⁴ Comcast disagrees, stating that cable pricing practices are lawful and are indicative of a competitive marketplace.⁵⁴⁵
     

2.Competitive Issues in the Program Supply Market

151. 
     Buyers in the market for the purchase of video programming are MVPDs, including cable operators and other video programming providers. The sellers are primarily nonbroadcast programming networks. This market tends to be regional or national because programmers seek to reach a much broader audience than could be provided by a local franchise area. For example, some programming services are intended for nationwide audiences (e.g., CNN, USA), while others seek a regional audience (e.g., New England Sports Network).
     
152. 
     Cable and DBS operators are the primary purchasers of multichannel video programming targeted to a national audience.⁵⁴⁶ As shown in Table 9, in 2005, the four MVPDs with the largest subscribership served 63 percent of all MVPD subscribers,⁵⁴⁷ while in 2004, the top four served 58 percent of all subscribers.⁵⁴⁸ The share of subscribers served by the top ten MVPDs also increased from approximately 85 percent in 2004 to 88 percent in 2005.⁵⁴⁹
     

TABLE 9: MVPD Competition and Concentration

Percentage of MVPD Subscribers Served by Technology
	2004	2005
Cable	71.6	69.4
DBS	25.1	27.7
Other	3.3	2.9
Percentage of MVPD Subscribers Served by Largest Providers
	2004	2005
Top 4	58	63
Top 10	85	88
Top 25	90	94

153. 
     To compare market concentration for the purchase of programming over a period of time, we have traditionally used the Herfindahl-Hirschman Index (HHI) to measure horizontal concentration.⁵⁵⁰ We recognize that the HHI is not an indicator of “competition” in the market for the purchase of video programming, and that it is not being used in the same way that it would be for purposes of antitrust analysis. For purposes of this report, however, the HHI is a useful tool to follow trends in the concentration of MVPD size from year to year. We use the reported MVPD subscriber shares to calculate HHI figures. In June 2005, the HHI for the national market for the purchase of programming was 1201. This represents a marked increase from the March 2004 MVPD HHI of 1097.⁵⁵¹ This increasing HHI reflects the fact that the DBS providers grew very quickly, while virtually every cable operator, most especially smaller ones, shrank, thereby increasing the share of the industry served by the largest providers.
     
154. 
     Consolidation Among Cable Operators. Cable operators continue to pursue a regional strategy of “clustering” their systems. The effect of clustering has drawn significant comment in the license transfer proceeding relating to the sale of Adelphia’s systems to Comcast and Time Warner, in which the transfer of systems will enlarge or consolidate various clusters owned by Comcast and Time Warner. The applicants assert that these transactions will enable Comcast and Time Warner to compete on more equal terms with DBS providers and ILECs.⁵⁵² BellSouth argues that consolidation and clustering in the cable industry increases the ability of cable operators to gain exclusive contracts with unaffiliated cable networks.⁵⁵³
     
155. 
     Between July 2004 and June 2005, a total of 22 transactions were announced. Together these transactions were valued at approximately $48.7 billion and affected 12,719,387 subscribers.⁵⁵⁴ At the end of 2004, there were 118 clusters with approximately 51.5 million subscribers compared to 108 clusters and approximately 53.6 million subscribers at the end of 2003 (although due to a change in methodology, these figures are not directly comparable).⁵⁵⁵ In the largest cluster size category (over 500,000 subscribers), the number of clusters remained constant at 29 between 2003 and 2004.⁵⁵⁶
     

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