Federal Communications Commission FCC 12-81 Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming ) ) ) ) MB Docket No. 07-269 FOURTEENTH REPORT Adopted: July 18, 2012 Released: July 20, 2012 By the Commission: Commissioners McDowell and Pai issuing separate statements. TABLE OF CONTENTS Heading Paragraph # I. EXECUTIVE SUMMARY .................................................................................................................... 1 II. INTRODUCTION................................................................................................................................ 12 A. Scope of the Report........................................................................................................................ 12 B. Analytic Framework ...................................................................................................................... 15 C. Data Sources .................................................................................................................................. 16 III. PROVIDERS OF DELIVERED VIDEO PROGRAMMING.............................................................. 18 A. Multichannel Video Programming Distributors............................................................................. 18 1. Introduction ............................................................................................................................. 18 2. MVPD Structure...................................................................................................................... 25 3. MVPD Conduct ....................................................................................................................... 85 4. MVPD Performance .............................................................................................................. 134 B. Broadcast Television Stations...................................................................................................... 155 1. Introduction ........................................................................................................................... 155 2. Broadcast Television Industry Structure ............................................................................... 158 3. Broadcast Television Industry Conduct ................................................................................ 188 4. Broadcast Television Industry Performance.......................................................................... 206 C. Online Video Distributors............................................................................................................ 237 1. Introduction ........................................................................................................................... 237 2. OVD Structure....................................................................................................................... 241 3. OVD Conduct........................................................................................................................ 285 4. OVD Performance ................................................................................................................. 314 5. Consumer Behavior ............................................................................................................... 336 IV. RURAL VERSUS URBAN COMPARISONS.................................................................................. 343 A. MVPDs ........................................................................................................................................ 345 B. Broadcast Stations........................................................................................................................ 356 C. OVDs ........................................................................................................................................... 357 V. KEY INDUSTRY INPUTS................................................................................................................ 359 A. Content Creation and Aggregation of Video Programming......................................................... 360 1. Overview ............................................................................................................................... 360 2. Distribution Strategies ........................................................................................................... 377 B. Consumer Premises Equipment ................................................................................................... 388 1. CPE Used to Access MVPD Services. .................................................................................. 389 2. CPE Used to Access OVD Services ...................................................................................... 399 Federal Communications Commission FCC 12-81 2 3. Handheld and Mobile Video Devices.................................................................................... 401 VI. PROCEDURAL MATTERS.............................................................................................................. 405 APPENDIX A: List of Commenters APPENDIX B: National Video Programming Services APPENDIX C: Regional Video Programming Services APPENDIX D: Regional Sports Networks I. EXECUTIVE SUMMARY 1. This is the fourteenth report (“14th Report” or “Report”) submitted by the Federal Communications Commission to the United States Congress on the status of competition in the market for the delivery of video programming as required by Section 628(g) of the Communications Act of 1934, as amended (the “Act”).1 In this Report, we focus on developments in the video marketplace in 2007, 2008, 2009, and 2010.2 As described below, the most significant trends since the last report relate to the increased deployment of digital technology, consumers’ rising demands for access to video programming anywhere and anytime, and the evolution of online video from a niche service into a thriving industry. 2. For the first time, we present information and data under a new analytical framework, which is consistent with the framework we have used in the recent wireless and satellite competition reports.3 For this Report, we categorize entities into one of three strategic groups – multichannel video programming distributors (“MVPDs”),4 broadcast television stations,5 and online video distributors 1 47 U.S.C. § 548(g). 2 While we focus on these four years, in many instances we find it useful also to recognize some more recent developments based on data that we have collected from third-party sources. See infra, ¶ 17. 3 See Implementation of Section 6002(b) of the Omnibus Budget Reconciliation Act of 1993 and Annual Report and Analysis of Competitive Market Conditions With Respect to Mobile Wireless, Including Commercial Mobile Services, WT Docket No. 09-66, Fourteenth Report, 25 FCC Rcd 11407 (2010) (“14th Mobile Wireless Report”); Implementation of Section 6002(b) of the Omnibus Budget Reconciliation Act of 1993 and Annual Report and Analysis of Competitive Market Conditions With Respect to Mobile Wireless, Including Commercial Mobile Services, WT Docket No. 10-133, Fifteenth Report, 26 FCC Rcd 9664 (2011) (“15th Mobile Wireless Report”); Third Report and Analysis of Competitive Market Conditions with Respect to Domestic and International Satellite Communications Services, Report and Analysis of Competitive Market Conditions with Respect to Domestic and International Satellite Communications Services, IB Docket Nos. 09-16 and 10-99, 26 FCC Rcd 17284 (2011) (“Third Satellite Competition Report”). 4 For purposes of this report, MVPDs are companies that offer multiple channels of video programming to consumers for a subscription fee. The term “MVPD” is defined more fully below in Sec. III.A.1. 5 We consider broadcast television stations separately for the 14th Report, as we have done in previous reports. Although broadcasters have transitioned to digital transmission and have the capability to offer additional linear channels, they still offer far fewer programs than are available from MVPDs and do not provide a subscription service. The Commission has previously held that broadcast television alone is not sufficiently substitutable with the services provided by MVPDs to constrain attempted MVPD price increases, and hence declined to broaden the MVPD product market. Accordingly, we treat broadcasters as part of a separate group. See 47 U.S.C. § 521(1); S. REP. NO. 102-92, at 8-12 (1991). See also General Motors Corporation and Hughes Electronics Corporation, Transferors, and The News Corporation Limited, Transferee for Authority to Transfer Control, MB Docket No. 03- 124, Memorandum Opinion and Order, 19 FCC Rcd 473, 509, ¶ 75 (2004) (citing Competition, Rate Deregulation, and the Commission’s Policies Relating to the Provision of Cable Television Services, MM Docket No. 89-600, Report, 5 FCC Rcd 4962, 5003, ¶ 69 (1990)); Application of EchoStar Communications Corporation, General Motors Corporation, and Hughes Electronics Corporation (Transferors) and EchoStar Communications (continued….) Federal Communications Commission FCC 12-81 3 (“OVDs”).6 For each of these categories we examine industry structure, conduct, and performance. The following is an overview of our findings. 3. MVPDs. Cable MVPDs accounted for almost 60 percent of all MVPD subscribers at the end of 2010. This represents a decline in cable’s share of the MVPD group since the last report. In 2006, cable MVPDs accounted for over 65 percent of all MVPD subscribers. Although the number of cable video subscribers has been falling, cable MVPDs have done well financially by increasing sales of advanced services (e.g., digital cable, Internet access, and telephone) to the remaining customers. 4. The two DBS MVPDs, DIRECTV and DISH Network, accounted for over 33 percent of MVPD subscribers in 2010. This represents an increase in DBS’s share of the MVPD group since 2006 when DBS MVPDs accounted for just over 29 percent of MVPD subscribers. 5. In the MVPD group, the most significant change in the status of competition has been the entry of AT&T and Verizon. These two telephone companies have upgraded their networks to provide video services that compete directly with cable and DBS. At the end of 2010, the video services of Verizon FiOS and AT&T U-verse were available to one-third of U.S. homes and accounted for approximately seven percent of all MVPD subscribers. In 2006, Verizon’s service was available to approximately three percent of all U.S. households.7 6. Another significant development within the MVPD category has been the “TV Everywhere” initiative,8 which allows subscribers of certain MVPD services to access MVPD video programming on stationary and mobile Internet-connected devices including: televisions, computers, tablets, and smartphones. 7. Broadcast Television Stations. Since the last report, full-power television stations completed their transition from analog to digital service. Digital broadcasting gives broadcast stations greater flexibility, allowing them to offer high definition (“HD”) programming, multiple streams of programming of standard definition (“SD”) programming, and/or programming delivered to mobile (Continued from previous page) Corporation (Transferee), CS Docket No. 01-348, Hearing Designation Order, 17 FCC Rcd 20559, 20607-09, ¶¶ 109-115 (2002) (“EchoStar-DIRECTV HDO”). 6 An “OVD” is any entity that offers video content by means of the Internet or other Internet Protocol (IP)-based transmission path provided by a person or entity other than the OVD. An OVD does not include an MVPD inside its MVPD footprint or an MVPD to the extent it is offering online video content as a component of an MVPD subscription to customers whose homes are inside its MVPD footprint. See Applications of Comcast Corporation, General Electric Company and NBC Universal, Inc. for Consent to Assign Licenses and Transfer Control of Licensees, MB Docket No. 10-56, Memorandum Opinion and Order, 26 FCC Rcd 4238, 4357, App. A (2011) (“Comcast-NBCU Order”). Consumers need a broadband connection to receive video content from OVDs. The issue of whether a certain type of OVD also qualifies as an MVPD under the Act and our regulations has been raised in pending program access complaint proceedings. See, e.g., VDC Corp. v. Turner Network Sales, Inc., et al., Program Access Complaint (Jan. 18, 2007); and Sky Angel U.S., LLC v. Discovery Communications LLC, et al., Program Access Complaint, MB Docket No. 12-80, CSR-8605-P (Mar. 24, 2010). Nothing in this Report should be read to state or imply our determination on that issue. The Media Bureau though is currently seeking comment on the interpretation of the terms “MVPD” and “channel.” See Media Bureau Seeks Comment On Interpretation of the Terms “Multichannel Video Programming Distributor” and “Channel” as Raised in Pending Program Access Complaint Proceeding, MB Docket No. 12-83, Public Notice, 27 FCC Rcd 3079 (MB 2012). 7 AT&T began its U-verse service in late 2006 and did not report data for that year. 8 “TV Everywhere” refers to an MVPD initiative, which allows subscribers of certain services to access video programming on stationary and mobile Internet-connected devices, including television sets, computers, tablets, and smartphones. MVPDs market their TV Everywhere initiatives under a variety of brand names (e.g., Verizon’s FlexView). See also infra, nn. 30 & 31. Federal Communications Commission FCC 12-81 4 devices. With multicasting,9 stations can cater to niche audiences with programming from newer networks or can affiliate their multicast streams with established networks to give viewers in smaller markets more over-the-air viewing options. 8. Several major patterns of consumer behavior have emerged which impact broadcast stations. The first is the dramatic increase in the number of households with HD television sets, from 25 percent during the 2007-2008 television seasons to 64 percent during the 2010-2011 television season. The second is the doubling of penetration of digital video recorders (DVRs), from 19 percent during the 2007-2008 television season to 38 percent during the 2010-2011 television season. The availability of DVRs and of broadband and mobile devices has spurred consumers’ desire to watch video on a time- shifted basis either on television sets or on other screens. In recent years, broadcast networks have started to explore and develop a variety of alternative outlets and business models for the distribution of their programming, including video-on-demand (“VOD”), online video distribution, and electronic sell- through.10 9. OVDs. Since the last report, OVDs have emerged as significant providers of video content. The OVD marketplace has expanded considerably, with all of the major providers either entering the market over the last few years or dramatically retooling their approach during that time. Today’s growing list of OVD providers includes programmers, content owners/producers, and affiliates of online services, manufacturers, retailers, and other businesses. 10. Providers have continued to develop business models for the provision of OVD services. Current business models, which providers often use in combination, include free (often ad supported), subscription, pay-per-program (rental), and electronic sell-through. 11. The amount of professionally produced content available online has expanded considerably since the last report. Today, online viewers can watch television shows (including recently aired episodes); newly released and older movies; sporting events; and other content, including high- quality content produced specifically for online distribution. Online video, like the Internet itself, has migrated beyond the computer to a wide variety of devices since the last report. Consumers now can access OVD service via computers, smartphones, tablets, gaming consoles, smart television sets, Blu-ray players, and a host of consumer electronics products. II. INTRODUCTION A. Scope of the Report 12. Section 19 of the Cable Television Consumer Protection and Competition Act of 1992 (“1992 Cable Act”)11 amended the Act and established regulations for the purpose of increasing competition and diversity in multichannel video programming distribution, increasing the availability of satellite delivered programming, and spurring the development of communications technologies.12 To 9 See infra, n. 541. 10 See infra, ¶ 290 & n. 929. 11 1992 Cable Act, Pub. L. No. 102-385, § 19, 106 Stat 1460, 1494 (1992) (“The purpose of this section is to promote the public interest, convenience, and necessity by increasing competition and diversity in the multichannel video programming market, to increase the availability of satellite cable programming and satellite broadcast programming to persons in rural and other areas not currently able to receive such programming, and to spur the development of communications technologies.”). 12 Video programming is defined as: “Programming provided by, or generally considered comparable to programming provided by, a television broadcast station that is distributed and is exhibited for residential use.” 47 U.S.C. § 522(20); 47 C.F.R. § 79.1(a)(1). Federal Communications Commission FCC 12-81 5 measure progress toward these goals, Congress required the Commission to report annually on “the status of competition in the market for the delivery of video programming.”13 13. In 2009, the Commission solicited 2007, 2008, and 2009 data, information, and comment for the period 2007, 2008, and 2009 similar to what the Commission requested for previous reports.14 Thereafter, the Commission initiated a comprehensive review of the way in which it uses data, including data used for its statutory competition reports.15 In the course of that review, the Commission determined that the data submitted in response to the 2009 notices of inquiry should be supplemented. Thus, on April 21, 2011, the Commission released a Further Notice of Inquiry, requesting additional data for 2009, seeking data for 2010, and encouraging the submission of comparable historical data for 2007 and 2008.16 14. To present the most useful information concerning competition in the video programming market, this report alters the analytic framework of earlier reports.17 Importantly, this new framework will also allow the Commission to present competitive data in a uniform manner that is consistent in format with the other Commission competition reports.18 13 See Section 628(g) of the Communications Act of 1934, as amended, 47 U.S.C. § 548(g). The Commission’s previous reports appear at: Implementation of Section 19 of the 1992 Cable Act and Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, 9 FCC Rcd 7442 (1994) (“First Report”); 11 FCC Rcd 2060 (1995) (“Second Report”); 12 FCC Rcd 4358 (1997) (“Third Report”); 13 FCC Rcd 1034 (1998) (“Fourth Report”); 13 FCC Rcd 24284 (1998) (“Fifth Report”); 15 FCC Rcd 978 (2000) (“Sixth Report”); 16 FCC Rcd 6005 (2001) (“Seventh Report”); 17 FCC Rcd 1244 (2002) (“Eighth Report”); 17 FCC Rcd 26901 (2002) (“Ninth Report”); 19 FCC Rcd 1606 (2004) (“Tenth Report”); 20 FCC Rcd 2755 (2005) (“11th Report”); 21 FCC Rcd 2503 (2006) (“12th Report”); and 24 FCC Rcd 542 (2009) (“13th Report”). 14 See Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 07-269, Notice of Inquiry, 24 FCC Rcd 750 (2009) (“Notice of Inquiry”) (requesting data as of June 2007). The Commission subsequently adopted a Supplemental Notice of Inquiry requesting data as of June 2008 and June 2009. See Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 07-269, Supplemental Notice of Inquiry, 24 FCC Rcd 4401 (2009) (“Supplemental Notice of Inquiry”). See also Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 07-269, Order, 24 FCC Rcd 2524 (2009) (announcing, inter alia, that the Commission would issue a single report for 2007, 2008, and 2009 to bring its reporting up to date). 15 See FCC Launches Data Innovation Initiative (news release), June 29, 2010, http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-299269A1.pdf. The Data Innovation Initiative was launched to modernize and streamline how the FCC collects, uses, and disseminates data. As part of the Data Innovation Initiative, the Commission’s Wireline, Wireless, and Media Bureaus released public notices seeking input on what current data collections should be eliminated, what new ones should be added, and how existing collections can be improved. See, e.g., Pleading Cycle Established for Comments on Review of Media Bureau Data Practices, MB Docket No. 10-103, Public Notice, 25 FCC Rcd 8236 (2010). The public notices grew out of an FCC-wide review of FCC systems and processes for data collection, analysis and dissemination led by the Office of Strategic Planning and Policy Analysis. See FCC Agency Reform, presentation before the Commission (Aug. 27, 2009), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-293108A1.pdf; FCC Advances Data Innovation Initiative (news release), Feb. 8, 2011, http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-304518A1.pdf. 16 Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 07-269, Further Notice of Inquiry, 26 FCC Rcd 14091 (2011) (“Further Notice”). 17 See id. at 14094-96, ¶¶ 4-5. 18 See 14th Mobile Wireless Report; 15th Mobile Wireless Report; Third Satellite Competition Report, supra, n. 3. Federal Communications Commission FCC 12-81 6 B. Analytic Framework 15. Under our new analytic framework, we first categorize entities that deliver video programming into one of three groups:19 MVPDs, broadcast television stations, and OVDs. This is the first time that the Commission has considered OVDs separately in its analysis.20 Second, we examine industry structure, conduct, and performance, considering factors such as: · Structure: The number and size of firms in each group, horizontal and vertical integration, merger and acquisition activity, and conditions affecting entry and the ability to compete. · Conduct: The business models and competitive strategies used by firms that directly compete as video programming distributors, including product differentiation, advertising and marketing, and pricing. · Performance: The quantity and picture quality of programming, prices charged for delivered video programming, financial indicators (e.g., revenue and profit margins), and investment and innovation activities. Third, we look upstream and downstream to examine the influence of industry inputs and consumer behavior on the delivery of video programming. We discuss two key industry inputs: video content creators and aggregators and consumer premises equipment.21 Figure 1 below displays the scope of the 14th Report. 19 We assign entities that deliver video content to one of three groups based on the “strategic group” concept used in strategic management that groups companies within an industry that have similar business models or similar combinations of strategies. See Michael E. Porter, COMPETITIVE STRATEGY: TECHNIQUES FOR ANALYZING INDUSTRIES AND COMPETITORS 129-155 (Free Press) (1980) (“Porter”). The three groups also may be said to represent the historical development of delivered video where consumers initially had access to over-the-air broadcast television, then a growing number of MVPDs, and most recently the Internet. Our placement of delivered video providers into one of three groups is an organizational convenience to facilitate discussion. 20 We note that, in the past, we reported on web-based Internet video, focusing on the content available over the Internet for downloading and streaming. In this Report, we treat OVDs as a separate group because we have concluded that for most consumers they are not a substitute for MVPD service today, but rather an additional method for viewing video content. See Comcast-NBCU Order, 26 FCC Rcd at 4269-72, ¶¶ 79-85. 21 As described more fully below in Section V, content creators are firms that produce video programming and content aggregators are entities that assemble packages of video programming for distribution. Federal Communications Commission FCC 12-81 7 Figure 1: Scope of 14th Report C. Data Sources 16. The information and data presented in this Report are based, in part, on comments we received from interested parties in response to the notices of inquiry in this proceeding.22 In addition, we also rely on a variety of publicly available sources of industry information and data including: Securities and Exchange Commission filings; data from trade association and government entities; data from securities analysts and other research companies and consultants; company news releases and websites; newspaper and periodical articles; scholarly publications; vendor product releases; white papers; and various public Commission filings, decisions, reports, and data. 17. As we have done for previous reports on the status of competition for the delivery of video programming, we requested data as of June 30 of the relevant year to monitor trends on an annual basis.23 To continue our time-series analysis, and to the extent possible, we report as of June 30, 2007, June 30, 2008, June 30, 2009, and June 30, 2010. However, because a significant amount of information and data are reported on a calendar year basis we provide year-end data when June 30 information is not readily available. In addition, to the extent we find more recent Commission decisions and industry developments relevant, we include this information. 22 See supra, nn. 14 & 16. Appendix A contains a list of commenters. 23 See, e.g., Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 06-189, Notice of Inquiry, 21 FCC Rcd 12229, 12230, ¶ 2 (2006); Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 05-255, Notice of Inquiry, 20 FCC Rcd 14117, 14118, ¶ 2 (2005). INDUSTRY INPUTS Video Content Creators Video Content Aggregators Consumer Premises Equipment Suppliers PROVIDERS OF DELIVERED VIDEO PROGRAMMING Multichannel Video Programming Distributors Broadcast Television Stations Online Video Distributors CONSUMERS OF DELIVERED VIDEO PROGRAMMING Consumer Behavior Federal Communications Commission FCC 12-81 8 III. PROVIDERS OF DELIVERED VIDEO PROGRAMMING A. Multichannel Video Programming Distributors 1. Introduction 18. As noted above, for purposes of this Report we have categorized entities that deliver video programming into one of three groups.24 We focus in this section on the MVPD group. As defined by statute, an MVPD is an entity that makes available for purchase multiple channels of video programming.25 Thus, the MVPD group includes cable operators,26 DBS operators, and telephone companies that offer multiple channels of video programming. For purposes of this Report, we also include in the MVPD group other entities that sell multiple channels of video programming to consumers, including, home satellite dishes (“HSD”), open video systems (“OVS”), electric and gas utilities, wireless cable systems,27 private cable operators (“PCO”),28 commercial mobile radio services (“CMRS”), and other wireless providers. Inclusion of an entity in the MVPD group is based on the similarity of the video service provided to the consumer, not on the technology used (e.g., coaxial cable, fiber, spectrum) or the identity of the parent company (e.g., cable operator, telephone company), or any regulatory classification (e.g., cable service, open video system). In most cases, the entities we include in the MVPD group represent themselves publicly, in reports to their shareholders and press releases to the news media, as retailers of video packages that include a large number of channels. In total, the MVPD group is comprised of 42 cable MVPDs with over 20,000 subscribers each and over 1,000 cable MVPDs with less than 20,000 subscribers each, two DBS MVPDs (DIRECTV and DISH Network), two large telephone company MVPDs (AT&T and Verizon) and numerous smaller telephone company MVPDs.29 19. Today, the major MVPDs offer hundreds of linear television channels, which are streams of programming that offer video programs on a specific channel at a specific time of day. Many MVPDs also offer thousands of non-linear video-on-demand (“VOD”) programs, including pay-per-view (“PPV”) programs, which allow consumers to select and watch video programs whenever they request them. In this Report, we discuss a broad range of video programming that includes both linear and non-linear video programs. 20. An MVPD may offer services other than delivered video services using the same network infrastructure or through cooperative arrangements with other companies. For example, some MVPDs also offer high-speed Internet access service and telephone service. Although the focus of this Report is delivered video services, these non-video services are important to the business strategies of some 24 See supra, ¶ 2 & n. 6. 25 Specifically, Section 602 (13) of the Act, as amended, defines MVPD as “a person such as, but not limited to, a cable operator, a multichannel multipoint distribution service, a direct broadcast satellite service (“DBS”), or a television receive-only satellite program distributor, who makes available for purchase, by subscribers or customers, multiple channels of video programming.” 47 U.S.C § 522(13). This Report does not address the extent to which wireless providers of video programming other than DBS, wireless cable system operators, home satellite dishes, and private cable operators should be classified as MVPDs under the Act. As previously noted, the Media Bureau is currently seeking comment on the interpretation of the terms “MVPD” and “channel.” See supra, n. 6. 26 Large and medium-size cable companies that serve many homes in multiple geographic areas by operating multiple cable systems are often referred to as multiple system operators (“MSOs”). 27 Wireless cable systems use the Broadband Radio Service (“BRS”) and Educational Broadband Service (“EBS”) to transmit video programming to subscribers. 28 Private cable operators were formerly known as satellite master antenna (“SMATV”) systems. 29 See infra, n. 32. Federal Communications Commission FCC 12-81 9 MVPDs and may shift the focus of competition from standalone delivered video services to bundles of video, Internet, and telephone services. 21. Although MVPDs have traditionally delivered video programming to television sets, some MVPDs are moving beyond the television and delivering video programming to computer screens, tablets, and smartphones. The expansion of MVPD’s delivered video programming from television to other stationary and mobile devices – generally known as TV Everywhere30 – represents a new opportunity for MVPDs that may affect their business models and competitive strategies.31 22. When available, this Report uses information and data directly from the MVPDs as reported to the Commission and/or a company’s shareholders. For privately held companies we primarily rely on data from SNL Kagan.32 The MVPD group also includes two DBS MVPDs, DIRECTV and DISH Network, and two large telephone company MVPDs, Verizon FiOS and AT&T U-verse. For those four companies we primarily use data found in reports to shareholders. 23. On the other hand, with respect to some other types of MVPDs, including HSD, OVS, PCO, there is little or no publicly or commercially available data. Comments filed for this Report provide limited data on those entities. Considering that the combined market share of these other types of MVPDs represents less than one percent of MVPD subscribers, their relevance to competition in the market for the delivery of video programming is limited.33 Thus, we do not believe that a lack of data regarding these types of MVPDs will significantly hinder our analysis of competition in the market for delivered video services. 24. Consumers shop for MVPD alternatives in the areas where they live. However, determining which MVPDs offer video service in which geographic areas is difficult as a result of the wide variation in the geographic footprints of MVPDs and the lack of available data that would allow comparison of the geographic coverage of one type of MVPD with another type of MVPD.34 For 30 TV Everywhere is an authentication system whereby certain movies and television shows are accessible online via a variety of display devices including personal computer, mobile, and television – but only if you can prove (or “authenticate”) that you have a subscription to an MVPD. See definition of TV Everywhere, The Interactive TV Institute, http://www.itvdictionary.com/definitions/tv_everywhere_initiative_definition.html (visited Feb. 24, 2012). 31 Different MVPDs use different terms to market video services to other stationary and mobile devices. In this Report, we use the term “TV Everywhere” as a generic term for these video services. 32 Over the period 2006 to 2010, Cox Communications Inc., Bright House Networks, LLC, Cequel Communications Holdings I, LLC d/b/a Suddenlink Communications (“Suddenlink”), and Insight Communications Company, Inc. were privately held cable MVPDs. These companies represented four of the ten largest cable MVPDs at the end of 2010. SNL Kagan, http://www.snl.com/InteractiveX/TopCableMSOs.aspx?period=2010Q4&sortcol=subscribersbasic&sortorder=desc (visited Feb 24, 2012). 33 SNL Kagan estimates that at the end of 2011 there are a total of 101.2 million MVPD subscriptions. Of these, cable MVPDs account for 58.3 million subscriptions, DBS accounts for 33.9 million subscriptions, and telephone MVPDs account for 8.3 million subscriptions. Thus, the remaining types of MVPDs account for approximately 0.7 million subscriptions and almost all of these are PCO subscriptions. SNL Kagan, Cable TV Investor: Deals & Finance, Sept. 30, 2011, at 2-3. 34 The Commission’s Mobile Wireless Report collects data on a census block basis and the Commission’s Broadband Report collects data on a census block basis. For video services, however, we do not collect data on a census block basis. Fifteenth Mobile Wireless Report, 26 FCC Rcd 9668, ¶ 2 (2011); Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, (continued….) Federal Communications Commission FCC 12-81 10 instance, DBS MVPDs provide a nationwide footprint. Cable MVPDs, however, operate in discrete geographic areas defined by the boundaries of their individual systems and provide data to the Commission on a “cable system” basis.35 Similarly, the Commission collects data related to telephone MVPDs only to the extent that they operate under cable franchises, and thus on a cable system basis. As a result, there is no reliable method to match DBS MVPD data with cable MVPD or telephone MVPD data on a common geographic basis. We do not have the data necessary to systematically identifying with respect to any specific geographic area which MVPDs compete for the delivery of video services. 2. MVPD Structure 25. A key element of our analysis of video competition is an examination of the MVPD industry structure, including the various types of companies within the MVPD group and their place in the market for the delivery of video programming. In this section of the Report, we describe the structure of cable, DBS, telephone, and other MVPDs. We then examine horizontal concentration and vertical integration in the market. Next, we describe conditions effecting market entry during the relevant period, including an overview of existing regulations and market conditions that might influence entry decisions. Finally, we describe recent entry in the market. a. Cable, DBS, Telephone, and Other Providers 26. The major MVPDs now offer hundreds of television channels as well as thousands of video programs through VOD services, many are offered in high-definition (“HD”). The major MVPDs offer delivered video programming as a standalone service or in combination with Internet access and telephone services. Cable MVPDs typically offer video, Internet access, and telephone services using their own facilities. DBS MVPDs offer video services using their own facilities and typically enter into cooperative arrangements with other entities to offer Internet access and telephone services.36 Telephone MVPDs offer video, Internet access, and telephone services using their own facilities where they have upgraded systems. Where they have not upgraded systems, telephone MVPDs usually offer video through cooperative arrangements with DBS MVPDs. 27. Cable MVPDs. Historically, cable companies rarely competed with one another in the same geographic area. In some locations, cable operators built cable systems where cable MVPDs already provided video service, but this is the exception, not the rule. The introduction of DBS MVPDs with national footprints in the 1990s changed the competitive landscape and increased competition in the market for the delivery of video programming. In geographic areas that did not have access to cable MVPDs, the DBS companies competed with one another. In geographic areas with access to cable (Continued from previous page) Amended by the Broadband Data Improvement Act, GN Docket No. 10-159, Seventh Broadband Progress Report and Order on Reconsideration, 26 FCC Rcd 8008, 8022-23, ¶¶ 23-24 (2011). 35 A large cable MVPD will operate many cable systems of varying sizes. The geographic configuration of a cable system is determined by its physical system, which consists of a cable system technically integrated to a principal headend. The Commission collects cable system data in its Annual Report of Cable Television Systems (FCC Form 325). Only a limited number of cable systems provide data to the Commission. All cable systems with more than 20,000 subscribers are subject to the reporting requirement. The Commission also collects information on a random sample of cable systems with between 5,000 and 20,000 subscribers and a random sample of cable systems with fewer than 5,000 subscribers. Specifically for the filing year 2010, the FCC Form 325 collected data from all 613 cable systems with more than 20,000 subscribers, 279 of the 499 cable systems with 5,000 to 20,000 subscribers, and 170 of the 4,427 cable systems with less than 5,000 subscribers. 36 For example, DISH Network has cooperative arrangements with Verizon, AT&T, CenturyLink, Frontier, and other telephone companies to offer a combination of video, Internet, and telephone services. DISH Network, http://direct.digitallanding.com/default.aspx?PromoID=5003072&campaign=Online&SID=6c4aed07-a7e0-4135- 95fe-be624de06eb6 (visited Jan. 20, 2012). Federal Communications Commission FCC 12-81 11 MVPDs, the DBS companies competed with one another and with the incumbent cable MVPDs. The level of competition increased again with the entry of Verizon in 2005 and AT&T in 2006, two large facilities-based telephone MVPDs, which began offering video service in geographic areas already served by cable MVPDs.37 Today, a small number of geographic areas have as many as five MVPDs (i.e., two cable MVPDs, two DBS MVPDs, and a telephone MVPD) directly competing with one another in the delivery of video programming. At the other end of the spectrum, some geographic areas (e.g., rural areas) have only two MVPDs (i.e., the two DBS MVPDs) directly competing with one another. 28. At the end of 2011, 1,157 cable companies provide MVPD service to 34,005 communities.38 Depending on the number of homes and the geographic size of the community, cable operators use one or more cable systems to provide video service to the community.39 A cable system is a physical system integrated to a principal headend.40 Currently there are 5,312 cable systems.41 In pursuit of efficiencies, cable MVPDs may operate a group of cable systems in a metropolitan area or region. Small cable companies that serve few homes in a single geographic area often operate only one cable system. 29. The geographic reach of cable MVPDs varies from company to company. No cable operator provides nationwide coverage or statewide coverage. There are always geographic areas or populations within a state not served by the cable operator. The largest MVPD, Comcast, offers video programming in parts of 39 states and the District of Columbia.42 Some cable MVPDs focus their provision of video programming on a regional basis. For example, Mediacom focuses on serving the smaller cities in 22 states, primarily in the Midwestern and Southeastern regions of the United States.43 BendBroadband, the 38th largest cable MVPD, serves 12 communities in Central Oregon. Sweetwater Cable, the 52nd largest cable MVPD, serves two communities in Wyoming. The majority of cable MVPDs are smaller companies offering video programming to a few communities or a single town.44 37 AT&T U-verse service launched commercially in San Antonio, TX on June 26, 2006. AT&T, AT&T U-verse Timeline, http://www.att.com/Common/merger/files/pdf/U-verse%20Timeline41907.pdf (visited Feb. 24, 2012). Verizon FiOS service launched in September 2005. Mari Sibley, Timeline: The Evolution of FiOS Tv, MediaExperiences2Go, http://connectedhome2go.com/2010/08/19/timeline-the-evolution-of-fios-tv (visited Feb. 24, 2012). 38 FCC staff analysis of the Cable Operations and Licensing System (COALS) database on Dec. 16, 2011. 39 A cable system is a physical system integrated to a principal headend. Often cable systems are clustered together using some of the same infrastructure to provide cable service to a larger geographic area (e.g., metropolitan area). See 47 U.S.C. § 522(7). 40 See id. 41 The Cable Operations and Licensing System (COALS) database shows 5,312 active, registered cable systems on Dec. 14, 2011. This number includes cable systems operated by Verizon. 42 Comcast Corp., SEC Form 10-K for the Year Ended December 31, 2010, at 1 (“Comcast 2010 Form 10-K”). 43 Mediacom Communciations Corp., SEC Form 10-K for the Year Ended December 31, 2010, at 4 (“Mediacom 2010 Form 10-K”). 44 FCC staff analysis of the COALS database on Dec. 16, 2011 shows that of the 1,157 cable operators, 756 cable operators have one cable system, 135 cable operators have two cable systems, and 67 cable operators have three cable systems. For additional information regarding the characteristics of small and medium-sized cable MVPDs, see American Cable Association, http://www.americancable.org/about_us (visited Feb. 24, 2012). Federal Communications Commission FCC 12-81 12 30. The five largest cable MVPDs in 2006 were Comcast, Time Warner Cable, Cox Communications, Charter Communications, and Cablevision Systems.45 These same companies were also the five largest cable MVPDs in 2010.46 In 2006, the five largest cable MVPDs accounted for approximately 79 percent of all cable MVPD subscribers.47 In 2010, these companies accounted for approximately 80 percent of all cable MVPD subscribers.48 The ten largest cable MVPDs in 2006 included the top five and Bright House Networks, Suddenlink Communications, Mediacom, Insight Communications,49 and Cable One.50 These same companies were also the ten largest MVPDs in 2010.51 In 2006, the ten largest cable MVPDs accounted for approximately 90 percent of all cable MVPD subscribers.52 In 2010, these companies accounted for approximately 89 percent of all cable MVPD subscribers.53 The combined shares of all cable MVPDs accounted for approximately 68 percent of MVPD subscribers at the end of 2006.54 This fell to approximately 60 percent of MVPD subscribers at the end of 2010.55 45 SNL Kagan, Broadband Cable Financial Databook, 2007 Edition, at 20. 46 SNL Kagan, Broadband Cable Financial Databook, 2011 Edition, at 25. 47 At the end of 2006, there were approximately 65.4 million basic cable subscribers and the top five cable MVPDs accounted for approximately 51.5 million subscribers. SNL Kagan, Broadband Cable Financial Databook, 2007 Edition, at 11 & 20. 48 At the end of 2010, there were approximately 59.8 million basic cable subscribers and the top five cable MVPDs accounted for approximately 47.9 million subscribers. SNL Kagan, Broadband Cable Financial Databook, 2011 Edition, at 12 & 25. 49 Time Warner Cable recently purchased Insight Communications. See Applications Filed for the Transfer of Control of Insight Communications Company, Inc. to Time Warner Cable Inc., WC Docket No. 11-148, Memorandum Opinion and Order, 27 FCC Rcd 497 (IB, WCB, WTB 2012). See also Time Warner Cable, Inc., Time Warner Cable Completes Acquisition of Insight Communications (press release), Feb. 29, 2012. 50 SNL Kagan, Broadband Cable Financial Databook, 2007 Edition, at 20. 51 SNL Kagan, Broadband Cable Financial Databook, 2011 Edition, at 25. 52 At the end of 2006, there were approximately 65.4 million basic cable subscribers and the top ten cable MVPDs accounted for approximately 58.6 million subscribers. SNL Kagan, Broadband Cable Financial Databook, 2007 Edition, at 11 & 20. 53 At the end of 2010, there were approximately 59.8 million basic cable subscribers and the top ten cable MVPDs accounted for approximately 53.3 million subscribers. SNL Kagan, Broadband Cable Financial Databook, 2011 Edition, at 12 & 25. 54 At the end of 2006, there were approximately 95.8 million MVPD subscribers and cable MVPDs accounted for approximately 65.4 million subscribers. SNL Kagan, U.S. Multichannel Industry Benchmarks, http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx?startYear=2006&endYear=2006 (visited Apr. 30, 2012). 55 At the end of 2010, there were approximately 100.1 million MVPD subscribers and cable MVPDs accounted for approximately 59.8 million subscribers. SNL Kagan, Special Report, U.S. Multichannel Subscriber Update and Geographic Analysis, June 2011, at 1. Federal Communications Commission FCC 12-81 13 31. DBS MVPDs. The two DBS MVPDs, DIRECTV and DISH Network,56 offer video service to most of the land area and population of the United States.57 DIRECTV is the second largest MVPD in the United States with over 19 million subscribers.58 DISH Network is the third largest MVPD with over 14 million subscribers.59 The combined shares of the two DBS MVPDs account for approximately 34 percent of MVPD subscribers.60 32. Telephone MVPDs. The two largest telephone MVPDs, AT&T and Verizon, have constructed systems for delivering video services in some of the areas where they have offered traditional landline telephone services. Verizon FiOS has registered with the Commission as a cable system whereas AT&T U-verse has not. The geographic footprints for Verizon FiOS and AT&T U-verse do not overlap. It is almost always the case, however, that the geographic footprints for AT&T U-verse and Verizon FiOS overlap areas already served by incumbent cable MVPDs. At the end of 2010, telephone MVPDs had 6.9 million video subscribers and AT&T and Verizon accounted for nearly 6.5 million,61 Verizon FiOS being the seventh largest MVPD with approximately 3.5 million subscribers and AT&T U-verse the ninth largest with approximately 3.0 million subscribers.62 We estimate that telephone MVPDs accounted for approximately seven percent of all MVPD subscribers. 33. The remaining telephone MVPDs are small by comparison with AT&T and Verizon. SureWest Communications is the third largest telephone MVPD with 61,800 video subscribers.63 Consolidated Communications is fourth with 29,200 video subscribers. Cincinnati Bell is the fifth with 24,000 video subscribers. Hickory Technology is the sixth with 10,600 video subscribers. The remaining telephone MVPDs account for approximately 335,800 video subscribers.64 CenturyLink offers video service through cooperative arrangements with DBS MVPDs, but recently began offering video service in limited geographic areas using its own upgraded facilities. Similar to the largest telephone MVPDs, some smaller telephone MVPDs register with the Commission as cable systems while others do not. Cincinnati Bell and SureWest have registered with the Commission while CenturyLink has not. 56 Sky Angel, a DBS MVPD, ceased its DBS operations on April 1, 2008, and began offering its subscription video content online. 57 We recognize that some homes are not able to receive DBS signals and DBS does not provide coverage to some land areas in Alaska. 58 DIRECTV, SEC Form 10-K for the Year Ended December 31, 2010, at 2 (“DIRECTV 2010 Form 10-K”). 59 DISH Network, SEC Form 10-K for the Year Ended December 31, 2010, at 1 (“DISH Network 2010 Form 10- K”). 60 At the end of 2010, there were approximately 100.1 million MVPD subscribers and DBS MVPDs accounted for approximately 33.4 million subscribers. SNL Kagan, Special Report, U.S. Multichannel Subscriber Update and Geographic Analysis, June 2011, at 1. 61 Id. 62 Verizon 6/8/11 Comments at 5-6; AT&T 6/8/11 Comments at 2-3. 63 On February 6, 2012, Consolidated Communications Holdings, Inc. and SureWest Communications entered into a definitive agreement under which Consolidated will acquire all the outstanding shares of SureWest in a cash and stock transaction. See SureWest, Consolidated Communications to Acquire SureWest Communications (press release), Feb. 6, 2012. Consolidated and SureWest consummated the deal on July 2, 2012. See Consolidated Communications Holdings, Inc., Consolidated Communications Completes Acquisition of SureWest Communications (press release), July 2, 2012. 64 SNL Kagan, Broadband Cable Financial Databook, 2011 Edition, at 42. Federal Communications Commission FCC 12-81 14 34. Little data exists regarding other telephone MVPDs. A recent survey conducted by the National Telecommunications Cooperative Association, (“NTCA”), however, estimates that in 2010, 252 NTCA members offered MVPD service using legacy coaxial cable technology. This is down from 2007, when 276 provided the service. Cooperative arrangements that bundle Internet access and telephone services offered by NTCA members with the video services of DBS MVPDs have also declined from 106 in 2007 to 66 in 2010. In contrast, MVPD service using Internet Protocol Television (“IPTV”) technology has grown from 61 rural telephone companies in 2007 to 159 in 2010. Rural Associations state that the ability to offer a quality MVPD service is viewed as a key driver of broadband deployment in rural areas.65 35. Other MVPDs. We received few comments and there is little or no publically available data for home satellite dishes (“HSD”), open video systems (“OVS”), electric and gas utilities, wireless cable systems, PCO, CMRS and other wireless providers. With the exception of CMRS,66 most of these other types of MVPDs serve few subscribers and their subscriber base is declining.67 Data for September 2011, suggest that these other types of MVPDs collectively account for approximately 0.7 percent of all MVPD subscribers.68 PCO’s accounts for the overwhelming bulk of the alternative MVPD subscribers, with approximately 650,000 subscribers.69 This represents a decline from 900,000 subscribers in 2006.70 The HSD, or large dish, segment of the satellite industry is the original satellite-to-home service offered to consumers. In the last report, we estimated that there were approximately 110,000 HSD subscribers in June 2006.71 Today, there are fewer entities offering HSD subscription service. In December 2010, National Programming Service, LLC, a provider of HSD programming, announced that it would cease providing HSD programming at the end of 2010. A company called Skyvision currently appears to offer HSD service during limited hours of each day.72 However, according to SNL Kagan, there are currently no reported HSD subscribers.73 65 Rural Associations 6/8/11 Comments at 2-3. NTCA states, “As video delivery moves to an IP format, video demand will spur broadband deployment and broadband availability will increase video demand. The two are intrinsically linked.” NTCA 5/19/2009 Comments at 2. 66 We do not discuss CMRS in this Report because all aspects of CMRS and the larger mobile wireless industry are covered in the Fifteenth Mobile Wireless Report. Here we simply note that subscribers to a mobile wireless data plan may receive delivered video programming for viewing on some mobile wireless devices. 67 SNL Kagan states, “Alternative multichannel providers, which include multichannel multipoint distribution service and wireless cable services, count a negligible 0.7% of the total multichannel universe. The outlook for the segment calls for a steady and gradual decline in subscribers, which should reduce the number of customers relying on those services to about 300,000 by the end of 2021.” SNL Kagan, Cable TV Investor: Deals & Finance, Sept. 30, 2011, at 5. 68 Id. 69 Id. at 2. 70 13th Report, 24 FCC Rcd at 609, ¶ 140. 71 Id. at 589, ¶ 94. We previously measured the number of HSD subscribers in terms of the number of households subscribing to a programming service, although we recognized that some HSD households simply relied on unscrambled programming that was available without a subscription to a program service. 72 Skyvision, http://www.skyvision.com/ (visited Nov. 30, 2011). 73 SNL Kagan, Cable TV Investor: Deals & Finance, Sept. 30, 2011, at 2. Federal Communications Commission FCC 12-81 15 36. With respect to OVS, we recognized in the last report that new OVS activity has been limited.74 Although some entities have subsequently filed for certifications to operate OVS systems, we suspect that most OVS subscribers are included in cable MVPD subscriber data and we have no way to count them separately. Although there may be some companies still offering wireless cable service, SNL Kagan data show that there are not any subscribers.75 Because the alternative MVPDs account for such a small and shrinking share of the market for the delivery of video programming, and because data for these alternative MVPDs are not available, we focus our MVPD discussion on cable, DBS, and telephone MVPDs. 37. Table 1 shows estimates of the number of homes passed by cable, DBS, and telephone MVPDs for year-end 2006, 2007, 2008, 2009, and 2010. Cable MVPDs have built out and to a large extent upgraded their systems.76 In 2006, cable MVPD service was available to 121.6 million homes (96.0 percent of the 126.7 million U.S. homes). By 2010, cable MVPD service was available to 128.8 million homes (98.5 percent out of 130.8 million U.S. homes). We assume that DBS MVPDs are available to all homes, but recognize that this slightly overstates the actual availability of DBS.77 Telephone MVPDs greatly expanded their reach between 2006 and 2010. In 2006, facilities-based telephone MVPD service was available to approximately six million homes (4.7 percent). By 2010, telephone MVPD service had become available to 42.9 million homes (32.8 percent). 74 13th Report, 24 FCC Rcd at 607, ¶ 135. 75 Watch Communications is a wireless cable system that serves 10,000 homes in Northwest Ohio. See Watch Communications, http://www.watchtv.net/?p=about (visited Jan. 13, 2012). See also W.A.T.C.H. TV 5/20/2009 Comments; W.A.T.C.H TV 7/29/2009 Comments. See also SNL Kagan, Cable TV Investor: Deals & Finance, Sept. 30, 2011, at 2; NCTA 5/20/2009 Comments at 8. 76 The upgrading of cable systems often includes increasing bandwidth capacity to provide additional channels, more HD channels, and faster Internet service. In addition, in their upgrades, cable MVPDs have included the use of data over cable service interface specifications (“DOCSIS”), which is a standard interface for cable modems that handle incoming and outgoing data signals between cable MVPDs and computers or television sets. See SearchNetworking, http://searchnetworking.techtarget.com/definition/DOCSIS (visited Feb. 24, 2012). 77 We recognize that physical features (e.g., tall buildings, cliffs, trees) can prevent some homes from receiving DBS signals. Federal Communications Commission FCC 12-81 16 Table 1: Homes Passed by MVPDs (in millions) Year 2006 2007 2008 2009 2010 Cable78 121.6 123.9 125.6 127.1 128.8 Comcast 47.4 48.5 50.6 51.2 51.9 Time Warner 26.1 26.5 26.8 27.1 27.5 Cox 9.3 9.5 9.7 9.8 9.9 Charter 11.8 11.7 11.9 11.9 11.8 Cablevision 4.6 4.7 4.7 4.8 5.5 Bright House 4.0 4.1 4.1 4.2 4.2 Suddenlink 2.8 2.6 2.6 2.6 2.7 Mediacom 2.8 2.8 2.8 2.8 2.8 All Other Cable79 12.8 10.9 12.3 12.5 12.5 DBS80 126.7 128.6 129.4 130.6 130.8 DIRECTV 126.7 128.6 129.4 130.6 130.8 DISH Network 126.7 128.6 129.4 130.6 130.8 Telephone81 6.0 17.3 29.7 38.2 42.9 AT&T U-verse82 N/A83 8.0 17.0 22.8 27.3 Verizon FiOS84 6.0 9.3 12.7 15.4 15.6 78 Cable homes passed excludes overlap from overbuilders (defined as companies that build additional cable systems “over” one that already exists and offer customers a competitive alternative). Data for cable and cable companies come from SNL Kagan, U.S. Multichannel Industry Benchmarks, http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx (visited Dec. 16, 2011). 79 We estimate cable homes passed by all other cable operators by subtracting the number of cable homes passed by the eight largest cable operators from total cable homes passed. 80 For simplification, we assume that DBS is available to every housing unit. The number of housing units is from U.S. Census Bureau and SNL Kagan estimates. SNL Kagan, U.S. Multichannel Industry Benchmarks, http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx (visited Dec. 16, 2011). A housing unit is a house, an apartment, a mobile home or trailer, a group of rooms, or a single room that is occupied, or, if vacant, is intended for occupancy as separate living quarters. Both occupied and vacant housing units are included in the housing unit inventory, except recreational vehicles, boats, vans, tents, railroad cars, etc. are included only if occupied as a usual place of residence. Vacant mobile homes are included if intended for occupancy on site. Vacant mobile homes on dealer sales lots, at the factory, or in storage yards are excluded from the housing unit inventory. 81 For telephone, we simply add the estimates for AT&T U-verse and Verizon FiOS. We do not have reliable estimates for the number of homes passed by other telephone companies offering their own facilities-based video services. 82 AT&T, Inc., 2006 Annual Report at 31; 2007 Annual Report at 38; 2008 Annual Report at 35; 2009 Annual Report at 43; 2010 Annual Report at 42. 83 At year-end 2006, AT&T was providing U-verse services, including U-verse TV (IPTV) video, in limited parts of 11 markets. AT&T, 2006 Annual Report at 31. 84 Verizon Communications, 2006 Annual Report at 19; 2007 Annual Report at 18; 2008 Annual Report at 14; 2009 Annual Report at 14; 2010 Annual Report at 15. Federal Communications Commission FCC 12-81 17 b. Horizontal Concentration 38. High market concentration may suggest the potential for competitive concerns. However, an analysis of other factors, such as entry conditions and the degree of price and non-price rivalry, may suggest that even a highly concentrated market does not raise competitive concerns. As noted above, the Commission does not collect data for cable, DBS, and telephone MVPDs on a uniform geographic basis and, therefore, cannot compare the availability of one type of MVPD with another in a particular geographic area.85 Instead, we estimate here the number of homes on a nationwide basis that have access to two, three, or four MVPDs. 39. As a general rule, the geographic footprint of a cable MVPD rarely overlaps the geographic footprint of another cable MVPD. As such, cable MVPDs rarely compete with one another for the same video subscriber. The situation is similar for telephone MVPDs. The geographic footprint of one telephone MVPD rarely overlaps the geographic footprint of another telephone MVPD, so telephone MVPDs rarely compete with one another for the same video subscriber. In contrast, the geographic footprints of both DBS MVPDs are national and they almost always compete with one another for the same video subscriber. We also assume that a cable MVPD or a telephone MVPD almost always competes with both DBS MVPDs for the same subscriber. Finally, we assume that the two largest telephone MVPDs offer video service in geographic areas already served by incumbent cable companies and, therefore, almost always compete with a cable MVPD for the same subscriber. We have little data on additional telephone MVPDs and other types of MVPDs, and we have no means of determining the geographic footprints of these entities and, therefore, no means of determining whether they do or do not compete with incumbent cable systems. We do not include these other MVPDs in our estimates and recognize that their absence may marginally understate access to MVPDs.86 40. Using our assumptions and the data from Table 1 above, we estimate MVPD concentration nationwide – specifically, the number of homes that have access to two, three, or four MVPDs. Our estimates are shown in Table 2. In 2006, o There were 126.7 million homes in the United States. o Approximately 5.1 million homes had access to the two DBS MVPDs only.87 o Approximately 115.6 million homes had access to three MVPDs only (i.e., a cable MVPD and two DBS MVPDs, but not a telephone MVPD).88 o Approximately 6.0 million homes had access to at least four MVPDs (i.e., a cable MVPD, two DBS MVPDs, and a telephone MVPD).89 In 2010, o There were 130.8 million homes in the United States. o Approximately 2.0 million homes had access to the two DBS MVPDs only. 85 See supra, ¶ 24. 86 For example, the presence of RCN (a cable overbuilder) in Montgomery County, Maryland, provides some households with access to five MVPDs. Montgomery County 7/8/11 Reply at 10. 87 We assume that all homes have access to the DBS MVPDs. Our estimate is derived by subtracting the number of homes that have access to cable MVPDs from the number of homes that have access to the DBS MVPDs. 88 We assume that homes that have access to a cable MVPD also have access to DBS MVPDs. 89 We assume that homes that have access to one of the two largest telephone MVPDs also have access to a cable MVPD and the DBS MVPDs. Federal Communications Commission FCC 12-81 18 o Approximately 85.9 million homes had access to three MVPDs only (i.e., a cable MVPD and two DBS MVPDs, but not a telephone MVPD). o Approximately 42.9 million homes had access to at least four MVPDs (i.e., a cable MVPD, two DBS MVPDs, and a telephone MVPD). These estimates are only approximations due to the limits of available data, but they highlight the fact that with the entry of large telephone MVPDs into the market for video services, almost 43 million homes have access to four MVPDs. This entry represents a significant increase in competition in the market for the delivery of video programming. Specifically, between 2006 and 2010, we transitioned from a market structure where only 4.7 percent of homes had access to a fourth MVPD, to a market structure where one- third of U.S. homes have access to a fourth MVPD. Table 2: Access to Multiple MVPDs Homes 2006 Percent of Homes 2006 Homes 2010 Percent of Homes 2010 Access to Two MVPDs Only 5.1 million 4.0% 2.0 million 1.5% Access to Three MVPDs Only 115.6 million 91.2% 85.9 million 65.7% Access to at Least Four MVPDs 6.0 million 4.7% 42.9 million 32.8% 41. Because we do not have geographic data for all MVPDs on any common geographic basis, we cannot calculate a Herfindahl-Hirschman Index (“HHI”), the traditional metric for measuring horizontal concentration.90 We, however, can state with some degree of confidence that in geographic 90 The HHI is calculated by summing the squares of the individual market shares of all the participants. For example, a market consisting of four firms with market shares of 30 percent, 30 percent, 20 percent and 20 percent has an HHI of 2600 (30² + 30² + 20² + 20² = 2600). The HHI ranges from 10,000 (in the case of a pure monopoly) to a number approaching zero (in the case of an atomistic market). Lack of information about small firms is not critical to the calculation because such firms do not affect the HHI significantly. See Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission, August 19, 2010, http://www.justice.gov/atr/public/guidelines/hmg-2010.pdf, at 18-19 (“Horizontal Merger Guidelines”). The Commission has applied an HHI screen in its analysis of transactions involving MVPDs. See, e.g., EchoStar- DIRECTV HDO, 17 FCC Rcd at 20614-16, ¶¶ 133-39 (2002). See also Applications for Consent to the Assignment and/or Transfer of Control of Licenses Adelphia Communications Corporation, (and subsidiaries, debtors-in- possession), Assignors, to Time Warner Cable Inc. (subsidiaries), Assignees; Adelphia Communications Corporation, (and subsidiaries, debtors-in-possession), Assignors and Transferors, to Comcast Corporation (subsidiaries), Assignees and Transferees; Comcast Corporation, Transferor, to Time Warner Inc., Transferee; Time Warner Inc., Transferor, to Comcast Corporation, Transferee, MB Docket No. 05-192, Memorandum Opinion and Order, 21 FCC Rcd 8203, 8239-43, ¶¶ 75-83 (2006) (“2006 Adelphia, Comcast, Time Warner Cable MO&O”). In addition, in past reports, we have estimated a national MVPD HHI for purposes of analyzing concentration in the market for the purchase of video programming. See, e.g., 13th Report, 24 FCC Rcd at 627-28, ¶ 179; id. at 689, Table B-4. In the market for the purchase of video programming, our economic concern was one of monopsony power where few or large buyers could drive down the prices received by the owners of video programming. In this Report, our focus is the market for the delivery of video programming and our economic concern is one of monopoly power where few sellers of MVPD video services could drive up the prices paid by subscribers. Federal Communications Commission FCC 12-81 19 areas where homes have access to four MVPDs, the HHI is over 2500.91 Likewise, in geographic areas where homes have access to three MVPDs, the HHI is over 3333, and in geographic areas where homes have access to two MVPDs, the HHI is over 5000. Although these HHI may appear high, the entry of DBS in the 1990s and the more recent entry of telephone MVPDs have resulted in an ongoing reduction in MVPD market concentration. Stated differently, since the Commission’s first report on the status of competition in the market for the delivery of video programming in 1995, almost no subscriber has fewer MVPD choices and most subscribers have more MVPD choices. c. Vertical Integration 42. Our examination of vertical integration in the MVPD industry focuses on common ownership of entities that deliver video programming and entities that supply video programming. Vertical relationships may have beneficial effects,92 or they may deter competitive entry in the video marketplace or limit the diversity of video programming.93 In 1992, Congress enacted various provisions related to vertical integration between cable operators and programming networks (e.g., program access, channel occupancy limit).94 In 1992, a large number of the most popular cable programming networks were owned by cable operators. Congress was concerned that cable operators had the ability and incentive to thwart the competitive development of additional programming networks by refusing to carry unaffiliated networks, by insisting on an ownership stake in return for carriage, or by withholding their most popular programming networks from competing MVPDs.95 43. In the last report, for 2006, the Commission identified 565 satellite-delivered national programming networks and found that 84 were affiliated with at least one cable MVPD.96 Five of the top seven cable operators – Comcast, Time Warner, Cox, Cablevision, and Advance/Newhouse – held ownership interests in 84 satellite-delivered national programming networks. Time Warner had ownership interests in 39 national networks, Cox had ownership interests in 26 national networks, Advance/Newhouse (owner of cable operator Bright House) had ownership interests in 24 national 91 For a given number of firms, the value of the HHI increases as the inequality in subscriber shares increases. For example, if four firms are identified as participants in the relevant markets and each firm accounts for 25 percent of total sales, the value of HHI would be 2500 [(25)2 x 4]. If there are still only four firms but the top firm has a 40 percent subscriber share while each of the remaining three firms has 20 percent, the value of HHI increases from 2500 to 2800 [(40)2 + ((20)2 x 3)]. 92 Beneficial effects can include efficiencies in the production, distribution, and marketing of video programming, as well as the incentive to expand channel capacity and create new programming by lowering the risks associated with program production ventures. See, e.g., H.R. REP. NO. 862, 102nd Congress, 2d Sess. (1992), at 41-43. 93 Possible detrimental effects can include unfair methods of competition, discriminatory conduct, and exclusive contracts that are the result of coercive activity. See Second Report, 11 FCC Rcd at 2135, ¶ 157; Implementation of Section 11(c) of the Cable Television Consumer Protection and Competition Act of 1992 Vertical Ownership Limits, MB Docket No. 92-264, 10 FCC Rcd 7364, 7365, ¶ 4 (1995). 94 See 47 U.S.C. §§ 533, 548. 95 See 47 U.S.C § 521(5). 96 13th Report, 24 FCC Rcd at 629-30, ¶ 184. Because of the difficulty we find in identifying all networks, we are not providing this information in our 14th Report. However, we believe the number of networks is approximately 800. See Revision of the Commission’s Program Access Rules, News Corporation and The DIRECTV Group, Inc., Transferors, and Liberty Media Corporation, Transferee, for Authority to Transfer Control, Applications for Consent to the Assignment and/or Transfer of Control of Licenses, Adelphia Communications Corporations (and Subsidiaries, debtor-in-possession), Assignors, to Time Warner Cable Inc. (subsidiaries), Assignees, et al., MB Docket Nos. 12-68, 07-18, and 05-192, Notice of Proposed Rulemaking, 27 FCC Rcd 3413 (2012) (“Program Access NPRM”). Federal Communications Commission FCC 12-81 20 networks, Comcast had ownership interests in 18 national networks, and Cablevision had ownership interests in 26 national networks.97 In addition, the report identified 23 national networks without any ownership interest by a cable operator that were affiliated with a DBS provider (e.g., News Corp. and Dominion Video Satellite).98 44. Our review of vertical integration in early 2012 identified 127 national networks (49 of these are HD networks) affiliated with the top five cable MVPDs. Comcast has ownership interests in 78 national networks (30 are HD), Time Warner Cable has ownership interests in 12 national networks (four are HD), Cox has ownership interests in seven national networks (three are HD), Cablevision has ownership interests in five national networks (two are HD), and Bright House has ownership interests in 25 national networks (10 are HD).99 In addition, our most recent review identifies 54 national networks that are affiliated with a DBS MVPD (21 are HD).100 45. In addition to the creation of new networks between 2006 and 2010, especially HD networks, a couple of transactions had a significant impact on vertical integration. Between 2006 and 2010, News Corporation sold its interests in DIRECTV101 and Time Warner Inc. spun off Time Warner Cable.102 Both of these transactions severed ties between a number of networks and MVPDs.103 In 2011, 97 13th Report, 24 FCC Rcd at 630-31, ¶ 186. 98 Id. at 629-30, ¶ 184. In addition, in 2006, another 24 national networks without any attributable cable ownership were affiliated with a company that had interests in a DBS provider (e.g., Liberty Media). On February 21, 2008, the Commission approved the transfer of license and authorization that resulted in Liberty Media Corporation (“Liberty”) acquiring a de facto controlling interest in DIRECTV. On November 19, 2009, Liberty, through a series of transactions, transferred its interest in DIRECTV, three RSNs and GSN to a wholly owned subsidiary called DIRECTV Group, Inc. We list these networks as affiliated with this media company since Liberty and DIRECTV share common ownership, officers, and directors. 99 For a list of the national networks owned by each of the top five cable MVPDs, see Appendix B, Table B-1. 100 For a list of the national networks owned by DBS MVPDs, see Appendix B, Table B-1. Most of these networks we list as affiliated with Liberty Media. On February 21, 2008, the Commission approved the transfer of license and authorization that resulted in Liberty Media Corporation (“Liberty”) acquiring a de facto controlling interest in DIRECTV. On November 19, 2009, Liberty through a series of transactions transferred its interest in DIRECTV, three RSNs and GSN to a wholly owned subsidiary called DIRECTV Group, Inc. 101 See News Corporation and The DirecTV Group, Inc., Transferors, and Liberty Media Corporation, Transferee, for Authority to Transfer Control, MB Docket No. 07-18, Memorandum Opinion and Order, 23 FCC Rcd 3265 (2008) (“News Corp-DirecTV Order”). 102 See Applications for Consent to Assignment and/or Transfer of Control of Licenses, Time Warner Inc., and its subsidiaries, Assignor/Transferor, to Time Warner Cable Inc., and its subsidiaries, Assignee/Transferee, MB Docket No. 08-120, WC Docket No. 08-157, Memorandum Opinion and Order, 24 FCC Rcd 879 (MB, WC 2009). See also Time Warner Inc., Time Warner and Time Warner Cable Agree to Separation (press release), May 21, 2008; Time Warner Inc., Time Warner Inc. Distributes Time Warner Cable Shares to Its Stockholders of Record and Effects One-for-Three Reverse Stock Split (press release), Mar. 27, 2009. 103 The News Corp. sale of DIRECTV separated the following national networks from DIRECTV: Big Ten Network, BTN HD, FOX Business Network, FOX Business Network HD, FOX College Sports, FOX College Sports HD, FOX Deportes, FOX Movie Channel, FOX News Channel, FOX News Channel HD, FOX Soccer Channel, FOX Soccer Channel HD, FOX Soccer Plus, FOX Sports Net, FOX Sports Net HD, FUEL TV, FUEL TV HD, FX Network, FX Network HD, Nat Geo WILD, Nat Geo WILD HD, National Geographic Channel, National Geographic Channel HD, SPEED Channel, SPEED HD, TV Guide Network. In addition, the News Corp. sale of DIRECTV separated the following regional networks from DIRECTV: FOX Sports Arizona, FOX Sports Arizona HD, FOX Sports Carolinas, FOX Sports Carolinas HD, FOX Sports Detroit, , (continued….) Federal Communications Commission FCC 12-81 21 however, Comcast consummated a joint venture with General Electric, which joined a number of networks with that MVPD.104 These three transactions had a significant impact on vertical integration.105 A summary of MVPD ownership of programming networks is included in Appendix B, Table B-1; Appendix C, Table C-1; and Appendix D at the end of this Report. d. Entry Conditions 46. MVPD entry decisions are determined primarily by entry conditions and expected profitability.106 Entry conditions are important in understanding the degree to which incumbent firms may or may not possess market power.107 Entry occurs in the context of underlying market and regulatory conditions that directly influence the total number of firms that can compete successfully in a market. Such conditions are relevant for determining if, and when, actual entry will occur. Both market conditions and regulatory conditions are important for facilitating competition in the marketplace. (Continued from previous page) FOX Sports Detroit HD, FOX Sports Florida, FOX Sports Florida HD, FOX Sports Houston, FOX Sports Houston HD, FOX Sports Indiana, FOX Sports Indiana HD, FOX Sports Kansas City, FOX Sports Kansas City HD, FOX Sports Midwest, FOX Sports Midwest HD, FOX Sports North, FOX Sports North HD, FOX Sports Ohio, FOX Sports Ohio, HD, FOX Sports Oklahoma, FOX Sports Oklahoma HD, FOX Sports South, FOX Sports South HD, FOX Sports Southwest, FOX Sports Southwest HD, FOX Sports Tennessee, FOX Sports Tennessee HD, FOX Sports West, FOX Sports West HD, FOX Sports Wisconsin, FOX Sports Wisconsin HD, Sun Sports, Sun Sports HD. Time Warner Cable’s spinoff from Time Warner, Inc. separated the following national networks from Time Warner Cable: @Max, @Max HD, 5 Star Max, 5 Star Max HD, Action Max, Action Max HD, Boomerang, Cartoon Network/Adult Swim, Adult Swim HD, Cinemax, Cinemax HD, CNN, CNN HD, CNN Airport, CNN Headline News, CNN International, HBO, HBO HD, HBO2, HBO2HD, HBO Comedy, HBO comedy HD, HBO Family, HBO Family HD, HBO Signature, HBO Signature HD, HBO Zone, HBO Zone HD, More Max, More Max HD, NBA, NBA HD, Outer Max, Outer Max HD, TBS, TBS HD, TMC, TMC HD, Thriller Max, Thriller Max HD, TNT, TNT HD, Tru TV, Tru TV HD, WMAX, WMAX HD. 104 See Comcast-NBCU Order, supra, n. 6. Comcast’s transaction with General Electric added the following cable programming networks to Comcast: A&E, A&E HD, Bravo, Bravo HD, Chiller, Chiller HD, CNBC, CNBC HD, CNBC World, CNBC World HD, MSNBC, MSNBC HD, MUN2, Oxygen, Oxygen HD, ShopNBC, Sleuth, SyFy, SyFy HD, The Weather Channel, The Weather Channel HD, Universal HD, Universal Sports, USA, and USA HD. Comcast-NBCU Order, 26 FCC Rcd at 4410-13, Appendix D. See also infra, Apprendix B, Table B-1. Letter from Michael H. Hammer, Counsel for Comcast Corp., to Marlene H. Dortch, Secretary, FCC (Feb. 1, 2011). Comcast Corp., Comcast and GE to Create Leading Entertainment Company (press release), Dec. 3, 2009; Comcast Corp., Comcast and GE Complete Transaction to Form NBCUniversal, LLC (press release), Jan. 29, 2011. 105 We recognize that there were other transactions that involved MVPDs buying, selling, or creating networks during the period. Collectively, however, these other transactions did not have a substantive impact on vertical integration, relative to the three “big” transactions. 106 High economic profits encourage entry to the market, low economic profits discourage entry, and prolonged negative economic profits induce exit from the market. See Hal R. Varian, INTERMEDIATE MICROECONOMICS: A MODERN APPROACH 394-95, 503 (W. W. Norton and Company) (1999) (“Intermediate Microeconomics”); Dennis W. Carlton & Jeffrey M. Perloff, MODERN INDUSTRIAL ORGANIZATION 61 76 (Addison, Wesley, Longman, Inc.) (4th ed. 2005). 107 Market power for a seller is the ability profitably to maintain prices above competitive levels for a significant period of time. Sellers with market power also may lessen competition on dimensions other than price, such as product quality, service, or innovation. For a discussion of market power, see Horizontal Merger Guidelines, supra, n. 90. Federal Communications Commission FCC 12-81 22 Because the Commission oversees the regulatory conditions potentially affecting entry, we discuss these first.108 We then discuss some of the market (“non-regulatory”) conditions potentially affecting entry. (i) Regulations Influencing Entry 47. Franchising and Licensing. MVPDs must obtain the proper regulatory authority before providing video services. Section 621(a)(1) of the Act gives local governments the authority to control the entry of cable operators into their respective markets through franchise agreements, but prevents them from granting an exclusive franchise or unreasonably refusing to award competitive franchises.109 Each state determines which political jurisdiction (e.g., state, county, city, or town) has the authority to grant local franchises for cable service. In 2007 though, the Commission released a Report and Order adopting rules under its Section 621(a)(1) authority to eliminate the unreasonable entry barriers for competitive franchises imposed by local franchising authorities (“LFAs”) and to encourage the investment in broadband facilities.110 In addition, as we previously reported, 20 states have enacted video franchising laws revoking the ability of local governments to grant franchises.111 Instead, these states have allowed cable operators and other MVPDs to receive statewide franchises in an effort to streamline the delivery of video services.112 In addition to franchise agreements, cable operators may need licenses or authorizations from the Commission to deliver their programming to consumers.113 108 The regulatory process, itself, may hinder entry if the process is characterized by unnecessary delay. One example of a regulatory delay would be the time a cable franchising authority may take to make a decision regarding an application. Economists argue that some operating licenses and other legal restrictions that serve to limit access to the market are barriers to entry, i.e., they create positive economic profits for incumbents that are not bid away by new entry. See Jean Tirole, THE THEORY OF INDUSTRIAL ORGANIZATION 305 (MIT Press) (1988). See also Intermediate Microeconomics at 395. 109 47 U.S.C. §§ 522(10), 541(a)(1). 110 See Implementation of Section 621(a)(1) of the Cable Communications Policy Act of 1984 as amended by the Cable Television Consumer Protection and Competition Act of 1992, MB Docket No. 05-311, Report and Order and Further Notice of Proposed Rulemaking, 22 FCC Rcd 5101 (2007), aff’d sub nom. Alliance for Community Media v. FCC, 529 F.3d 763 (6th Cir. 2008). See also Implementation of Section 621(a)(1) of the Cable Communications Policy Act of 1984 as amended by the Cable Television Consumer Protection and Competition Act of 1992, MB Docket No. 05-311, Second Report and Order, 22 FCC Rcd 19633 (2007). 111 See Charles B. Goldfarb, Cong. Research Serv., Public, Educational, and Governmental (PEG) Access Cable Television Channels: Issues for Congress 2 (Oct. 7, 2011) (“PEG CRS Report”). See also 13th Report, 24 FCC Rcd at 660, ¶ 249, n.837. The states that have adopted statewide video franchise are: California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Michigan, Missouri, Nevada, New Jersey, North Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia, and Wisconsin. See PEG CRS Report at 2, n.10. The United States Court of Appeals for the Fifth Circuit recently concluded that the provisions in Texas’s video franchising law barring the state’s incumbent cable operators from obtaining a state franchise until the expiration of their municipal licenses violated the First Amendment. See Time Warner Cable, Inc. v. Paul Hudson, 667 F.3d 630 (5th Cir. 2012). 112 See PEG CRS Report at 2. 113 For example, many cable operators hold licenses under Part 78 of the Commission’s rules for CARS stations, which enable them to distribute programming to microwave hubs where it is impossible and too expensive to run cables and cover live events. See Amendment of Part 101 of the Commission’s Rules to Facilitate the Use of Microwave for Wireless Backhaul and Other Uses and to Provide Additional Flexibility to Broadcast Auxiliary Service and Operational Fixed Microwave Licenses, WT Docket No. 10-153, Report and Order, Further Notice of Proposed Rulemaking, and Memorandum Opinion and Order, 26 FCC Rcd 11614, 11620, ¶ 10 (2011). See also Revisions to Broadcast Auxiliary Service Rules in Part 74 and Conforming Technical Rules for Broadcast Auxiliary Service, Cable Television Relay Service and Fixed Services in Parts 74, 78 and 101 of the Commission's Rules, ET Docket No. 01-75, Report and Order, 17 FCC Rcd 22979, 22980, n.1 (2002). Federal Communications Commission FCC 12-81 23 48. Satellite carriers must obtain Commission authorizations to operate their satellites and earth stations prior to offering video services.114 Similarly, LECs providing video services through the OVS framework must secure certification from the Commission prior to initiating service.115 Wireless cable systems and other wireless providers using spectrum to transmit video programming must comply with the Commission’s spectrum licensing policies, as well as the appropriate interference and technical rules.116 The Commission also maintains the authority to review any business arrangements involving the transfer and control of its licenses or authorizations.117 49. Effective Competition. Under Section 623(a) of the Act, cable operators subject to effective competition in the communities they serve are exempt from regulation of their basic cable service.118 LFAs therefore are permitted to regulate cable operators’ basic cable service rates unless the Commission has granted a petition for effective competition.119 A cable operator is subject to effective competition in a local community when one of four tests are met: (1) fewer than 30 percent of the households subscribe to the operator’s cable programming service; (2) the operator and at least one other MVPD provide comparable services to at least 50 percent of the households in the community and at least 15 percent of households subscribe to service of MVPDs other than the largest one; (3) a municipality offers MVPD service to at least 50 percent of households; or (4) an LEC or its affiliate, or an entity using the facilities of an LEC or its affiliate, offers MVPD service by means other than DBS service in an area that an unaffiliated cable operator also serves.120 50. Program Access. Without access to video program content, new entrants cannot successfully enter into the marketplace. Sections 628(b), 628(c)(1), and 628(d) grant the Commission broad authority to prevent cable operators from engaging in unfair acts that have the purpose or effect of significantly hindering or preventing an MVPD from providing satellite-delivered programming to consumers.121 Section 628(c)(2) of the Act ensures that competitive MVPDs obtain access to satellite programming affiliated with a cable operator.122 Specifically, the Commission’s program access rules prevent a cable operator with an attributable interest in a satellite-delivered programming vendor from improperly influencing the vendor in the sale or delivery of its programming to a competing MVPD. In addition, a cable-affiliated satellite-programming vendor may not discriminate in the price, terms, and conditions of sale for its programming among competing MVPDs. Cable operators also are generally 114 47 C.F.R. § 25.102(a). 115 47 U.S.C. § 573(a)(1); 47 C.F.R. § 76.1502. It is left to the discretion of the LFA whether to require an OVS operator to negotiate a franchise for the service area or to impose no franchise obligation on the OVS operator. See City of Dallas Texas v. FCC, 165 F.3d 341 (5th Cir. 1999). 116 See 15th Mobile Wireless Report, 26 FCC Rcd at 9714, ¶ 57. 117 47 U.S.C. § 310(d). 118 47 U.S.C. § 543(a)(2). 119 47 U.S.C. § 543(a)(2)(A); 47 C.F.R. §§ 76.905(a), 76.907. LFAs, though, must obtain certification from the Commission prior to regulating the basic service tier. 47 U.S.C. § 543(a)(3)-(4); 47 C.F.R. § 76.910. The basic level of cable service the Act requires for cable operators subject to rate regulation includes at a minimum: (1) all commercial and noncommercial local broadcast stations entitled to carriage under the Act’s must-carry provisions; (2) any public, educational, and governmental access channels the LFA requires; and (3) any other local broadcast station provided to any subscriber. 47 U.S.C. § 543(b)(7)(A). 120 47 C.F.R. § 76.905(b). 121 47 U.S.C. § 548(b), (c)(1), (d). 122 47 U.S.C. § 548(c)(2). Federal Communications Commission FCC 12-81 24 prohibited from entering into exclusive programming agreements with cable-affiliated satellite- programming vendors. MVPDs may allege violations of the program access rules by initiating an adjudicatory proceeding with the Commission through the filing of a program access complaint.123 51. In 2007, the Commission released a Report and Order extending the prohibition on exclusive contracts between cable operators and cable-affiliated satellite-programming vendors until October 5, 2012.124 The 2007 Program Access Order also modified the program access complaint procedures and included a Notice of Proposed Rulemaking.125 Among other revisions, the current program access rules provide for party-to-party discovery and permit the parties in a program access dispute to engage in voluntary arbitration during the pendency of the complaint.126 52. Pursuant to Section 628(b), in 2010, the Commission adopted rules preventing cable operators from engaging in unfair acts with respect to affiliated programming that is terrestrially delivered.127 The United States Court of Appeals for the District of Columbia (“D.C. Circuit”) later upheld substantially all of this order.128 In 2011, the Commission found that MSG and Cablevision violated both Section 628(b) and the Commission’s rules when they denied AT&T and Verizon access to the terrestrially delivered HD version of the MSG and MSG+ networks.129 According to some commenters, access to programming remains a concern in the MVPD marketplace and is a key driver in 123 47 C.F.R. §§ 76.1001-04. 124 See Review of the Commission’s Program Access Rules and Examination of Programming Tying Arrangements, MB Docket No. 07-29, MB Docket No. 07-198, Report and Order and Notice of Proposed Rulemaking, 22 FCC Rcd 17791, 17792-93, ¶ 1 (2007) (“2007 Program Access Order”), aff’d sub nom. Cablevision Sys. Corp. v. FCC, 597 F.3d 1306 (D.C. Cir. 2010). In March 2012, the Commission adopted a Notice of Proposed Rulemaking seeking comment on proposed revisions to both its exclusive contracts prohibition for satellite-delivered, cable-affiliated programming and its program access rules in order to better remedy alleged rule violations, including possible discriminatory volume discounts and uniform price increases. See Program Access NPRM, 27 FCC Rcd at 3414-15, ¶ 1. 125 See 2007 Program Access Order, 22 FCC Rcd at 17793-94, ¶¶ 1-2. 126 47 C.F.R. § 76.1003(i)-(j). See also 2007 Program Access Order, 22 FCC Rcd at 17847-59, ¶¶ 83-113. The program access rules also allow a complainant seeking renewal of an existing program contract to request that the terms and conditions of its existing contract remain in place pending resolution of the complaint. 47 C.F.R. § 76.1003(l). 127 See Review of the Commission’s Program Access Rules and Examination of Programming Tying Arrangements, MB Docket No. 07-198, First Report and Order, 25 FCC Rcd 746, 792-93, ¶¶ 69-70 (2010) (“2010 Program Access Order”), aff’d in part and vacated in part sub nom. Cablevision Systems Corp. et al. v. FCC, 649 F.3d 695 (D.C. Cir. 2011). 128 See id. at 699. The court vacated one part of the 2010 Program Access Order – the Commission’s decision to treat certain acts involving terrestrially delivered, cable-affiliated programming as categorically “unfair.” See id. at 719-23. Despite this holding, the court did not prevent the Commission from addressing on a case-by-case basis whether certain acts are “unfair.” See id. at 723. 129 See Verizon Tel. Cos. et al., Order, 26 FCC Rcd 13145 (MB 2011) (concluding that withholding the MSG HD and MSG+ HD Regional Sports Networks from Verizon is an “unfair act” that has the “effect” of “significantly hindering” Verizon from providing satellite cable programming and satellite broadcast programming to subscribers and consumers in New York and Buffalo), aff’d Verizon Tel. Cos. et al., Memorandum Opinion and Order, 26 FCC Rcd 15849 (2011), appeal pending sub nom. Cablevision Sys. Corp. et al. v. FCC, No. 11-4780 (2d Cir.). See also AT&T Servs. Inc. et al., Order, 26 FCC Rcd 13206 (MB 2011) (reaching the same conclusion with respect to AT&T in the State of Connecticut), aff’d AT&T Servs. Inc. et al., Memorandum Opinion and Order, 26 FCC Rcd 15871 (2011), appeal pending sub nom. Cablevision Sys. Corp. et al. v. FCC, No. 11-4780 (2d Cir.). Federal Communications Commission FCC 12-81 25 creating a competitive environment.130 Other commenters maintain, however, that the competitiveness of the MVPD marketplace has removed the need for program access regulations.131 53. Program Carriage. MVPDs must be able to reach carriage agreements with video programming vendors in order to provide a competitive video service product. As a means to foster competition, Congress adopted Section 616 of the Act, which required the Commission to establish rules governing the program carriage agreements and related practices between cable operators or other MVPDs and video programming vendors.132 The Commission’s rules prohibit cable operators or other MVPDs from requiring a financial interest in a video programming vendor or obtaining exclusive rights to programming as conditions for carriage.133 MVPDs also are prevented from discriminating against video programming vendors on the basis of affiliation in the selection, terms, or conditions of carriage to the extent the effect of such conduct is to unreasonably restrain the ability of an unaffiliated video programming vendor to compete fairly.134 An aggrieved MVPD or video programming vendor may file a complaint for alleged violations.135 54. The Commission in 2011 released a Second Report and Order clarifying the program carriage complaint process. In particular, this order codified the requirements for establishing a prima facie program carriage violation; established deadlines for action by the Media Bureau and Administrative Law Judges in response to a complaint; extended the deadline for a defendant to respond to a complaint; and implemented procedures for the Media Bureau to consider requests seeking a temporary standstill of an existing programming contract pending the resolution of a complaint.136 The Commission also issued a Notice of Proposed Rulemaking seeking comment on further revisions to the procedural and substantive program carriage rules in order to assist the resolution of carriage disputes.137 130 See, e.g., AT&T 7/8/11 Reply at 1-2; DIRECTV 7/8/11 Reply at 2-3; AT&T 6/8/11 Comments at 7; Verizon 6/8/11 Comments at 16; Consumer Union 7/29/09 Comments at 3-4; AT&T 6/20/09 Reply at 2-4; DIRECTV 5/20/09 Comments at 17. Small and rural MVPDs also indicate that they face difficulties in obtaining access to video content under competitive prices and terms. These concerns are raised in Section IV of this Report. 131 See, e.g., NCTA 6/8/11 Comments at 16-17; Comcast 6/8/11 Comments at 36-39. 132 47 U.S.C. § 536. Congress enacted Section 616 after finding that some cable operators were requiring non- affiliated programmers to grant them exclusive rights to programming or provide them with a financial interest in it as a condition for carriage. See 13th Report, 24 FCC Rcd at 639, ¶ 202. 133 47 C.F.R. § 76.1301(a)-(b). 134 47 C.F.R. § 76.1301(c). 135 47 C.F.R. § 76.1302(a). In October 2011, the Game Show Network (“GSN”) filed a program carriage complaint against Cablevision alleging that the cable operator violated the anti-discrimination provision of the program carriage rules when it repositioned GSN from an expanded basic tier to a sports tier. GSN argues that this move separates it from its primarily female audience and is advantageous for WE tv and Wedding Central, two networks affiliated with Cablevision. See Game Show Network, LLC v. Cablevision Systems Corp., Program Carriage Complaint, CSR-8529-P (filed Oct. 12, 2011). The Media Bureau issued a Hearing Designation Order for the complaint in May 2012. See Game Show Network, LLC v. Cablevision Systems Corp., MB Docket No. 12-122, Hearing Designation Order and Notice of Opportunity for Hearing for Forfeiture, 27 FCC Rcd 5113 (MB 2012). 136 See Revision of the Commission’s Program Carriage Rules; Leased Commercial Access; Development of Competition and Diversity in Video Programming Distribution and Carriage, MB Docket No. 11-131, MB Docket No. 07-42, Second Report and Order and Notice of Proposed Rulemaking, 26 FCC Rcd 11494, 11495-96, 11500-01, ¶¶ 2, 8 (2011) (“2011 Program Carriage Order and NPRM”). This order is currently on appeal in the Second Circuit. See Time Warner Cable Inc. v. FCC, No. 11-4138 (2d Cir.). 137 See 2011 Program Carriage Order and NPRM, 26 FCC Rcd at 11496-97, 11521-22, ¶¶ 3, 37. Federal Communications Commission FCC 12-81 26 55. Several commenters indicate that independent programmers have difficulty obtaining carriage on video distribution systems at reasonable terms because of increasing vertical integration in the video market.138 Commenters suggest this increasing vertical integration has forced out independent programmers, especially those programmers who are minority-owned or offer minority-targeted programming, because vertically integrated MVPDs want to promote their own programming in order to increase revenues.139 These commenters encourage the Commission to continue to reform the program carriage complaint process to create a “level playing field.”140 Some MVPDs, on the other hand, allege that the Commission’s program carriage provisions no longer serve a useful purpose. They contend that only a small number of channels on a cable operator’s channel lineup are owned by that operator or any other cable operator. In addition, these MVPDs argue that non-affiliation is no longer the reason why independent programmers are not gaining carriage on their respective systems. Instead, the more likely reason is that the non-affiliated network is perceived by the MVPD to add little value or diversity.141 56. Retransmission Consent and Must Carry. The ability of an MVPD to offer its subscribers local broadcast programming affects its entry into the video services marketplace.142 In 1992, Congress enacted Sections 325, 614, and 615 of the Act to facilitate cable operators’ carriage of local broadcast television stations143 and subsequently adopted a similar carriage regime for DBS providers in 1999.144 Pursuant to Section 325 of the Act, MVPDs may not retransmit a local broadcaster’s signal without their express permission.145 Cable operators are required to carry local television stations in every market they serve. DBS operators need not carry any local television signals, but where a DBS operator chooses to carry such stations, it must carry all stations in that market (“carry one, carry all”).146 Under this regime, broadcasters maintain control over their signals and commercial broadcasters may request compensation from MVPDs for the carriage of their signals.147 57. In local television markets, as defined by The Nielsen Company’s (“Nielsen’s”) designated market areas (“DMAs”),148 commercial television stations must elect every three years between the right 138 See Free Press 8/28/09 Reply at 9-10; Written Ex Parte Submission of WealthTV (filed July 23, 2009) at 1 (“WealthTV 7/23/09 Ex Parte”); HDNet 6/20/09 Reply at 1-2. 139 See Free Press 8/28/09 Reply at 9-10; WealthTV 7/23/09 Ex Parte at 4-6. 140 See Consumers Union 7/29/09 Comments at 5; WealthTV 7/23/09 Ex Parte at 1-4. 141 See NCTA 6/8/11 Comments at 17-18. 142 For a complete description of the retransmission consent and must-carry provisions, see In-State Broadcast Programming: Report to Congress Pursuant to Section 304 of the Satellite Television Extension and Localism Act of 2010, MB Docket No. 10-238, Report, 26 FCC Rcd 11919 (MB 2011) (“STELA Report”); Retransmission Consent and Exclusivity Rules: Report to Congress Pursuant to Section 208 of the Satellite Home Viewer Extension and Reauthorization Act of 2004, MB Docket No. 05-28 (Sept. 8, 2005), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-260936A1.doc (“SHVERA Report”). 143 47 U.S.C. §§ 325(b), 534, 535. 144 The Satellite Home Viewer Improvement Act of 1999, Pub. L. No. 106-113, 113 Stat. 1501, 1501A-526 to 1501A-545 (1999) (“SHVIA”). 145 47 U.S.C. § 325(b). 146 47 C.F.R. § 338(a)(1); 47 C.F.R. § 76.66. 147 See STELA Report, 26 FCC Rcd at 11922-23, ¶ 7. 148 A DMA is a Nielsen-defined television market consisting of a unique group of counties. The U.S. is divided into 210 DMA markets. Nielsen identifies television markets by placing each U.S. county (except for certain counties in Alaska) in a market based on measured viewing patterns and by MVPD distribution. Typically, each U.S. county is (continued….) Federal Communications Commission FCC 12-81 27 to grant retransmission consent or the right to mandatory carriage.149 If a station elects retransmission consent, the broadcaster and an MVPD negotiate a carriage agreement, which may include monetary or other types of compensation in return for the right to carry the broadcast signal.150 Where a station elects must carry, it is generally entitled to carriage but it is prohibited from receiving compensation.151 Qualified local noncommercial educational (“NCE”) stations have a right to mandatory carriage within the same must-carry market, but do not have retransmission consent rights.152 Cable operators also are permitted to negotiate for retransmission consent with any other broadcast station they seek to carry irrespective of the station’s television market.153 58. In recent years, some MVPDs’ and broadcasters’ negotiations have resulted in public retransmission consent disputes, leading a coalition of MVPDs and consumer groups to file a rulemaking petition with the Commission in 2010.154 The petitioners argue that the Commission’s retransmission consent regulations are outdated and harmful to consumers.155 The Commission issued a Notice of Proposed Rulemaking in 2011 seeking comment on several proposed revisions to its retransmission consent regime.156 Among other things, the Commission sought comment on modifying the good faith negotiation standards to include additional negotiation violations, revising the “totality of the circumstances” standard used to determine whether actions in the negotiation process are undertaken in good faith, and altering the consumer notice requirements for retransmission consent disputes.157 59. Several commenters indicate that securing access to local and network broadcast programming is a critical component of a competitive MVPD market.158 In particular, some commenters argue that the current retransmission consent regime provides each network-affiliated station with a monopoly over network programming within its local market.159 This market power, commenters claim, allows broadcasters to exact substantial retransmission consent fees and to withhold such programming (Continued from previous page) assigned to only one market according to the market whose stations receive the preponderance of the audience in that county. Yet in a few cases where a county is large and viewing patterns differ significantly between parts of the county, a portion of the county is assigned to one television market and another portion of the county is assigned to another market. Several counties in Alaska, however, are not assigned to any DMA. See STELA Report, 26 FCC Rcd at 11921, ¶ 5 & n.10. 149 47 U.S.C. § 325(b)(3)(B); 47 C.F.R. §§ 76.56(b), 76.64. 150 47 U.S.C. § 325(b)(3)(C); 47 C.F.R. § 76.64. See also STELA Report, 26 FCC Rcd at 11923, ¶ 8. 151 47 C.F.R. § 76.60. 152 47 U.S.C. § 325(b)(2)(A). 153 47 U.S.C. § 325(b); 47 C.F.R. § 76.64. These carriage arrangements might be limited though by other contractual restrictions, such as network affiliation arrangements. See STELA Report, 26 FCC Rcd at 11923, n. 22. 154 See Amendment of the Commission’s Rules Related to Retransmission Consent, MB Docket No. 10-71, Notice of Proposed Rulemaking, 26 FCC Rcd 2718, 2725-27, ¶¶ 13-16 (2011) (“Retransmission Consent NPRM”). 155 See id. at 2725, ¶ 13. 156 See id. at 2719, ¶ 1. 157 See id. at 2729-38, ¶¶ 20-37. 158 See DISH Network 6/8/11 Comments at 8; AT&T 6/8/11 Comments 8-9; DIRECTV 6/8/11 Comments at 25-26; RCN 8/28/09 Reply at 6-7; DIRECTV 5/20/09 Comments at 17-18. Small and rural carriers also raised retransmission consent concerns, which we address in Section IV. 159 See DIRECTV 6/8/11 Comments at 26; DISH Network 6/8/11 Comments at 8-9; New Jersey 7/8/11 Reply at 9; DIRECTV 5/20/09 Comments at 18. Federal Communications Commission FCC 12-81 28 when their terms and conditions are not met.160 Consequently, they welcome the Commission’s review of its retransmission consent regime and encourage the Commission to reform its regulatory framework for retransmission consent.161 60. NAB and broadcast station licensees urge the Commission to refrain from adopting substantial changes to the existing retransmission consent rules,162 or repealing any broadcasting-related exclusivity rules.163 They argue that retransmission consent fees are necessary to help broadcasters sustain their ability to offer programming, particularly news that is relevant to their communities.164 Furthermore, they state that historically broadcasters have not received cash compensation for their signals,165 and even the fees paid by MVPDs today are significantly lower than the fees paid to cable networks with comparable or lower ratings.166 NAB states that retransmission consent fees represent only a small fraction of MVPD programming costs.167 61. Exclusivity Rules. MVPDs carry local broadcast stations pursuant to the Commission’s rules protecting a broadcast station’s exclusive distribution rights in its respective market.168 With respect to cable operators, the Commission’s network non-duplication rules allow a local broadcast station to request that the duplicated programming be blacked out when carried on another station imported by the 160 See DISH Network 6/8/11 Comments at 8-9; AT&T 6/8/11 Comments 8-9; DIRECTV 6/8/11 Comments at 26- 27; Verizon 6/8/11 Comments at 18; RCN 8/28/09 Reply at 7; DIRECTV 5/20/09 Comments at 18-19. 161 See DIRECTV 6/8/11 Comments at 27; DISH Network 6/8/11 Comments at 9; Verizon 6/8/11 Comments at 18- 20; AT&T 6/8/11 Comments at 8. 162 See NAB 6/8/11 Comments at 17-18; NAB 7/8/11 Reply, Attachment A at iii (resubmitting its comments filed in MB Docket No. 10-71). See also, e.g., CBS Television Network Affiliates Association Comments, MB Docket No. 10-71 (filed May 27, 2011) (“CBS Affiliates 10-71 Comments”); Sinclair Broadcast Group, Inc. Comments, MB Docket No. 10-71 (filed May 27, 2011) (“Sinclair 10-71 Comments”); Belo Corp. Comments, MB Docket No. 10- 71 (filed May 27, 2011) (“Belo 10-71 Comments”). 163 See NAB 7/8/11 Reply, Attachment B at 53-61; CBS Affiliates 10-71 Comments at 2-3; Gilmore Comments, MB Docket No. 10-71 (filed May 27, 2011) at 16; Joint Comments of Barrington Broadcasting Group, LLC, Bonten Media Group, LLC, Dispatch Broadcast Group, Gannett Co., Inc., Newport Television, LLC, Post-Newsweek Stations, Inc., and Raycom Media, Inc., MB Docket No. 10-71 (filed May 27, 2011) at 3-4; Belo 10-71 Comments at 2, 29-30. 164 See, e.g., NAB 7/8/11 Reply, Attachment A at 7-10; CBS Affiliates 10-71 Comments at 1; CBS Corporation Comments, MB Docket 10-71 at 11 (filed May 27, 2011) (“CBS Corp. 10-71 Comments”); Sinclair 10-71 Comments at 14; Belo 10-71 Comments at 6. 165 See, e.g., NAB 7/8/11 Reply, Attachment B at 16-17; Joint Comments of Gilmore Broadcasting Corp., Landmark Television, LLC, and Rockfleet Broadcasting, Inc., MB Docket No. 10-71 (filed May 27, 2011) at 6; CBS Affiliates 10-71 Comments at 15; Nexstar Broadcasting, Inc. Comments, MB Docket No.10-71 (filed May 27, 2011) at 4; The Walt Disney Company Comments, MB Docket No. 10-71 (filed May 27, 2011) at 8-9; Allbritton Communications Corporation Comments, MB Docket No. 10-71 (filed May 27, 2011) at 2. 166 See NAB 7/8/11 Reply, Attachment A at 15-18; Sinclair 10-71 Comments at 11 (citing Dr. Michael G. Baumann, Proposal for Reform of the Retransmission Consent Good Faith Bargaining Rules: An Economic Analysis; Economists Incorporated, May 27, 2011, at 7, attached as Exhibit 1 to the Sinclair Comments); CBS Affiliates 10-71 Comments at 14. 167 See NAB 7/8/11 Reply, Attachment B at 2. 168 See generally SHVERA Report, supra, n. 142, for a more detailed description of these rules. Federal Communications Commission FCC 12-81 29 system into the local station’s zone of protection.169 Similarly, the Commission’s syndicated exclusivity rules allow a broadcaster to assert its right to black out syndicated programming for which it holds exclusive rights when carried by a cable operator within its zone of protection.170 The Commission’s sports blackout rule protects a sports team’s or sports league’s distribution rights to a live sporting event occurring in a local market. The rule prevents a cable operator from providing the live sporting event on a distant signal to a market where the game is blacked out on the local broadcast station.171 As mandated by Congress, the Commission’s network non-duplication and syndicated exclusivity rules and the sports blackout rule apply to satellite carriers.172 The Commission has sought comment on the elimination of the network non-duplication and syndicated exclusivity rules as they apply to cable173 and on a Petition for Rulemaking requesting the Commission to eliminate the sports blackout rule.174 62. Ownership Limits. Section 613(f) of the Act requires the Commission to establish reasonable limits on the number of subscribers a cable operator may serve nationwide (“horizontal” limit) and the number of channels a cable operator may dedicate to its affiliated programming networks (“vertical” limit).175 Although the Commission adopted rules placing limitations on the horizontal and vertical ownership of cable operators,176 these rules were struck down by the D.C. Circuit.177 63. Public Interest Programming. Pursuant to Sections 611 and 621 of the Communications Act, local franchising authorities may require cable operators to dedicate a portion of their channel capacity and provide financial support to public, educational, and governmental (“PEG”) channels.178 169 47 C.F.R. § 76.92. For purposes of this rule, a broadcast station’s zone of protection is 35 miles (or 55 miles in smaller markets). 47 C.F.R. § 73.685(m). 170 47 C.F.R. § 76.101. For purposes of this rule, a broadcast station has a 35-mile geographic zone of protection. 47 C.F.R. § 73.685(m). 171 47 C.F.R. § 76.111. 172 47 U.S.C. § 339(b); 47 C.F.R. §§ 76.122-23, 76.127. In 1999, Congress directed the Commission to extend the network non-duplication and syndicated exclusivity rules to satellite carriers, but only with respect to the retransmission of nationally distributed superstations. It also required the Commission to extend the sports blackout rules to the carriage of nationally distributed superstations and network stations. See SHVIA, P.L. No. 106-113, 113 Stat. 1501A-534. 173 See Retransmission Consent NPRM, 26 FCC Rcd at 2740-43, ¶¶ 42-45. 174 See Commission Seeks Comment on Petition for Rulemaking Seeking Elimination of the Sports Blackout Rule, MB Docket No. 12-3, Public Notice, 27 FCC Rcd 260 (MB 2012). 175 47 U.S.C. § 533(f). 176 See Implementation of Sections 11 and 13 of the Cable Television Consumer Protection and Competition Act of 1992 Horizontal and Vertical Ownership Limits, MM Docket No. 92-264, Second Report and Order, 8 FCC Rcd 8565, 8567, ¶¶ 3-4 (1993). See also 47 C.F.R. §§ 76.503(a), 76.504(a)-(b). 177 See Time Warner Entm’t Co. v. FCC, 240 F.3d 1126, 1136, 1139 (D.C. Cir. 2001). In 2008, the Commission once again adopted a horizontal limit preventing an individual cable operator from serving more than 30 percent of MVPD subscribers nationwide, using more recent empirical data to reach the result. See The Commission’s Cable Horizontal and Vertical Ownership Limits, MM Docket No. 92-264, Fourth Report and Order and Further Notice of Proposed Rulemaking, 23 FCC Rcd 2134, 2135, ¶ 1 (2008). The Commission also sought additional comment on its vertical ownership limit. See id. at 2187-96, ¶¶ 125-45. Despite the inclusion of more recent data, the D.C. Circuit struck down the revised horizontal ownership limit in 2009 for being arbitrary and capricious. See Comcast Corp. v. FCC, 579 F.3d 1, 10 (D.C. Cir. 2009). 178 47 U.S.C. §§ 531(a)-(b), 541(a)(4)(B). Comcast is subject to heightened PEG requirements after its merger with NBCU. In the Comcast-NBCU Order, the Commission reaffirmed the importance of PEG programming and (continued….) Federal Communications Commission FCC 12-81 30 The statute further requires cable operators to carry any PEG channels on their basic service tier.179 In spite of these statutory requirements, some state video franchising laws have removed or reduced the PEG requirements provided in local franchising agreements, which has led to a reduction in PEG funding and support.180 64. Commenters express concern with the state of public interest programming. They indicate that PEG channels have suffered in recent years due to state franchising laws, anti-competitive conduct by cable and wireless companies, and the Commission’s recent changes to its franchising rules.181 Montgomery County, Maryland (“Montgomery County”) contends that cable operators have not used advances in technology and service delivery to benefit PEG programming and that the required number of PEG channels has not kept pace with the increase in channel capacity on cable systems.182 65. The Alliance for Community Media (“ACM”) submits a study with its comments finding that, among other things, PEG Access Centers in at least 100 communities have closed since 2005.183 In addition, the study indicates that new state franchising laws and/or decisions by local governments are the primary reasons for reductions in funding and in-kind resources for PEG Access Centers.184 Based on the study, ACM argues that PEG channels will disappear without increased regulatory support.185 66. Some commenters therefore encourage the Commission to issue a declaratory ruling concerning the Cable Act’s carriage rules for PEG channels.186 In 2009, the Commission received two petitions seeking a declaratory ruling clarifying the statutory rules and responsibilities of MVPDs with respect to the carriage of PEG channels. These petitions argue that AT&T’s delivery of PEG programming on its U-verse system violates the Act. In particular, the petitioners’ claim that AT&T’s placement of PEG programming on a singular channel in its U-verse system is a violation of the Act (Continued from previous page) imposed requirements on Comcast to protect the public interest as well as preserve diversity and localism in the video services marketplace. See Comcast-NBCU Order, 26 FCC Rcd at 4326, ¶ 213. The conditions prohibit Comcast from migrating PEG channels to a digital tier until all channels are converted to a digital format. They require carriage of all PEG channels on Comcast’s digital starter tier. Comcast may not change the method by which it delivers PEG channels if the change would result in the material degradation of signal quality or impair viewer reception of PEG channels. See id. at 4326-27, 4376-77, ¶ 214 & App. A, § XIV. Comcast further agreed to develop a platform for hosting PEG content On Demand and On Demand Online within three years of closing the transaction. See id. at 4327, 4376-77, ¶ 215 & App. A, § XIV. 179 47 U.S.C. § 543(b)(7)(A)(ii); 47 C.F.R. § 76.901(a). 180 See PEG CRS Report at 2-3. 181 See ACM 6/8/11 Comments at 3; Anne Arundel 6/8/11 Comments at 12; Ohio Community Board 6/8/11 Comments at 2; Marin 6/8/11 Comments at 2; Oxnard Elementary 6/8/11 Comments at 2-3; Oxnard College 6/8/11 Comments at 1-2. 182 See Montgomery County 7/8/11 Reply at 33; Montgomery County 5/20/09 Comments at 24. 183 See Analysis of Recent PEG Access Center Closures, Funding Cutbacks and Related Threats at 2, submitted with ACM 6/8/11 Comments. 184 See id. 185 See ACM 6/8/11 Comments at 3. 186 See Anne Arundel 6/8/11 Comments at 12-13; New Orleans 5/20/09 Comments at 16-17. Federal Communications Commission FCC 12-81 31 because it results in inferior PEG channel accessibility, functionality, and signal quality in comparison to other basic and non-basic channels on AT&T’s U-verse system.187 67. In response, AT&T encourages the Commission not to establish federal requirements for PEG programming. It argues that the Act provides the Commission with narrow authority with respect to PEG programming. AT&T also asserts that the Act does not require the provision of PEG programming, but simply permits franchising authorities to require cable operators to set aside capacity for PEG programming.188 68. With regard to DBS MVPD carriage of public interest programming, in 1992, Congress established a public interest programming requirement that requires DBS operators to dedicate between four and seven percent of their capacity to public interest programming.189 Under the Commission’s rules, DBS operators must reserve four percent of their channel capacity for qualified programmers providing “noncommercial programming of an educational or informational nature.”190 DISH Network reports providing 24 channels of public interest programming.191 DIRECTV carries several channels of public interest programming.192 69. Leased Access. Section 612 of the Communications Act requires cable operators to designate a portion of their channel capacity for commercial use by unaffiliated parties.193 The requirement is intended to provide competition and diversity in the delivery of video programming.194 187 See Petition for Declaratory Ruling that AT&T’s Method of Delivering Public, Educational and Government Access Channels over its U-verse System is Contrary to the Communications Act of 1934, as amended, and Applicable Commission Rules, MB Docket No. 09-13, Petition of ACM et al. (filed Jan. 30, 2009); Petition for Declaratory Ruling on Requirements for a Basic Service Tier and for PEG Channel Capacity Under Sections 543(b)(7), 531(a) and the Commission’s Ancillary Jurisdiction Under Title I, MB Docket No. 09-13, Petition of the City of Lansing, MI (filed Jan. 27, 2009). See also Entities File Petitions for Declaratory Ruling Regarding Public, Educational, and Governmental Programming, MB Docket 09-13, Public Notice, 24 FCC Rcd 1340 (MB 2009). These petitions remain pending before the Commission. 188 See AT&T 6/20/11 Reply at 9-10. 189 47 U.S.C. § 335(b)(1)(A). Qualified DBS providers may alter dedicated capacity to between 3.5 and 7 percent if they provide state public affairs networks to their subscribers in at least 15 states. 47 U.S.C. § 335(b)(1)(B). 190 47 C.F.R. § 25.701(f). In order to qualify, programmers need to be: (1) organized for a noncommercial, nonprofit purpose; (2) a national educational programming supplier; and (3) responsible for 50 percent of the direct costs the DBS provider occurs in making the programming available. See id. See also 13th Report, 24 FCC Rcd at 652, ¶ 231. 191 DISH Network carries the following public interest programming channels: 3ABN, Almavision, Baby First, Brigham Young University, C-SPAN, Christian Television Network, Classic Arts Showcase, EWTN, Free Speech TV, HITN, Impact Network, Kids & Teens Television, KBS World, Link Media Inc., NASA Channel, Pentagon Channel, Trinity Broadcasting Network, and V-ME. See DISH Network 7/29/09 Comments at 4, n. 3. DISH Network provided updated information to Media Bureau staff on Feb. 27, 2012. 192 Among others, DIRECTV offers the following channels: World Harvest Television, C-SPAN 1 and 2, Daystar, Trinity Broadcasting Network, the WORD Network, BYU TV, LINK TV, NASA TV, TCT, Once Mexico, EWTN, HITN, NRB, MHz, V-Me, CTN, Gem Net, Hope Channel, JLTV, Enlace, Golden Eagle Broadcasting, Free Speech TV, GOD TV, and numerous local PBS channels. See DIRECTV 6/8/11 Comments at 13. 193 47 U.S.C. § 532(b). 194 47 U.S.C. § 532(a). Federal Communications Commission FCC 12-81 32 The Commission regulates the prices, terms, and conditions for access to these channels and reviews petitions for relief from aggrieved parties.195 70. Section 612 also provides that: (1) “at such time as cable systems with 36 or more activated channels are available to 70 percent of households within the United States” and (2) “are subscribed to by 70 percent of the households to which such systems are available, the Commission may promulgate any additional rules necessary to provide diversity of information sources.”196 In previous reports, the Commission examined whether the “70-70 benchmark” had been met.197 While the Commission did find in the 13th Report that the first prong of the benchmark had been met, based on the data collected for that report, the Commission held it was less clear whether the second prong had been met.198 Thus, the Commission, at that time, required cable operators to submit data to determine whether the 70-70 benchmark had been met.199 In particular, the Commission stated that it would require each cable operator to submit certain information for each cable system on a zip code basis for 2006 and 2007.200 To implement this new data collection requirement, the Media Bureau sought comment on a proposed new form.201 Although the Commission did initiate the Office of Management and Budget (“OMB”) approval process for that form, it did not ultimately submit the matter to OMB.202 We now find, using data that is currently available to us, that incumbent cable systems’ penetration (that is, the percentage of homes passed that subscribe to cable) is declining. Specifically, the 2010 data from the Annual Report of Cable Television Systems (FCC Form 325) indicate that incumbent cable systems pass well over 70 percent of households. The FCC Form 325 data, however, also indicate that only 45.3 percent of households passed by incumbent cable systems subscribe to these systems, compared to 56.3 percent reported in the 13th Report.203 Thus, we conclude that because the available data indicate that the second prong of the 70-70 benchmark is not met, it is not necessary to impose a new data collection 195 47 C.F.R. §§ 76.970-78. In 2008, the Commission released a Report and Order modifying the leased access rules. See Leased Commercial Access, MB Docket No. 07-42, Report and Order and Further Notice of Proposed Rulemaking, 23 FCC Rcd 2909 (2008). The Report and Order was stayed by the U.S. Court of Appeals for the Sixth Circuit. See Order, United Church of Christ Office of Communications, Inc. v. FCC, No. 08-3245 (6th Cir. 2008). The Report and Order included rule changes requiring approval by the Office of Management and Budget which was denied on July 9, 2008. No further action has been taken by the Commission to date and the rule changes remain in abeyance. 196 47 U.S.C. § 532(g). This provision was added to the Communications Act by the Cable Communications Policy Act of 1984, Pub. L. No. 98-549, 98 Stat. 2779 (1984). 197 See, e.g., 13th Report, 24 FCC Rcd at 557-61, ¶¶ 33-43; 12th Report, 21 FCC Rcd at 2512-15, ¶¶ 31-36. 198 See 13th Report, 24 FCC Rcd 559-60, ¶¶ 40-41. 199 See id. at 560-61, ¶ 43. 200 Specifically, the 13th Report identified the following information: (1) the total number of homes the cable operator currently passes; (2) the total number of homes the cable operator currently passes with 36 or more activated channels; (3) the total number of actual subscribers, including all subscribers in MDUs; and (4) the total number of subscribers with 36 or more activated channels. See 13th Report, 24 FCC Rcd at 560-61, ¶ 43. 201 See Media Bureau Seeks Comment on a Cable Subscribership Survey for the Collection of Information Pursuant to Section 612(g) of the Communications Act, MB Docket No. 07-269, Public Notice, 24 FCC Rcd 217 (MB 2009). 202 See FCC, Notice of Public Information Collection(s) Being Reviewed by the Federal Communications Commission, Comments Requested, 74 Fed. Reg. 4437 (2009). Before formally submitting an information collection to OMB for approval, the Commission is required to seek comments on its proposal under the Paperwork Reduction Act of 1995, P.L. 104-13 (44 U.S.C. 3506(c)(4)). 203 See also infra, ¶ 142 & Table 6 (showing a similar decline based on SNL Kagan data). Federal Communications Commission FCC 12-81 33 requirement on all cable operators regarding this subject. Accordingly, we will not require cable operators to provide the data requested in the 13th Report or pursue approval of this proposed reporting requirement.204 71. Access to Multiple Dwelling Units. At one time, competitive MVPDs faced difficulty obtaining access to multiple dwelling units (“MDUs”) due to long-term exclusive contracts between building owners and incumbent providers.205 The Commission addressed this concern in 2007 by adopting rules to prevent the use of exclusive contracts for the provision of video services to MDUs and other centrally managed residential real estate developments.206 In particular, the Commission prohibited the enforcement of existing exclusivity clauses and the execution of new ones by cable operators, common carriers, and OVSs.207 The Commission found that exclusivity clauses were a barrier to both new entry into the MVPD marketplace and to broadband deployment, as well as an unfair act under Section 628(b).208 72. Inside Wiring. Pursuant to Section 624(i) of the Act, the Commission promulgated rules providing subscribers with the opportunity to purchase the wiring inside their homes after the termination of cable service and before the removal of such wiring.209 The Commission later adopted rules which (1) provided for the sale, or transfer, of “home run” wiring in an MDU by an incumbent provider who is ceasing provision of service; (2) gave competitive MVPDs access to molding in an MDU that contains wiring of an incumbent provider for installation of the competitive MVPD’s inside wiring; and (3) gave subscribers access to existing inside wiring prior to the termination of service in order to avoid interruptions in service.210 In 2007, the Commission issued a Report and Order and a Declaratory Ruling 204 This decision does not affect the data collection requirements of FCC Form 325, to which cable operators remain subject. 205 See, e.g., 13th Report, 24 FCC Rcd at 660-62, ¶¶ 250-54; 12th Report, 21 FCC Rcd at 2597, ¶¶ 207-08. These long-term exclusive contracts were especially harmful to competition given that 30 percent of Americans lived in MDUs in 2007, with that figure predicted to increase over time. See Exclusive Service Contracts for Provision of Video Services in Multiple Dwelling Units and Other Real Estate Developments, MB Docket No. 07-51, Report and Order and Further Notice of Proposed Rulemaking, 22 FCC Rcd 20235, 20235-36, ¶ 1 (2007) (“MDU Order and FNPRM”), aff’d sub nom. Nat’l Cable & Television Ass’n v. FCC, 567 F.3d 659 (2009). 206 See MDU Order and FNPRM, 22 FCC Rcd at 20235-36, 20238, ¶¶ 1-2, 7. See also 47 C.F.R. § 76.2000. In 2010, the Commission released a Second Report and Order building on its MDU Order and FNPRM. See Exclusive Service Contracts for Provision of Video Services in Multiple Dwelling Units and Other Real Estate Developments, MB Docket No. 07-51, Second Report and Order, 25 FCC Rcd 2460 (2010). In this Second Report and Order, the Commission determined that MVPDs are permitted to use bulk billing arrangements – those arrangements in which one MVPD offers video service to every resident of an MVPD at a substantial discount than what each individual resident would pay if he or she contracted with the MVPD individually. See id. at 2463-71, ¶¶ 10-28. In addition, the Commission determined that MVPDs are allowed to enter exclusive marketing agreements with MDU owners. See id. at 2471-73, ¶¶ 29-37. 207 See MDU Order and FNPRM, 22 FCC Rcd at 20251, ¶ 30. 208 See id. at 20248-49, ¶¶ 26-27. The pending Further Notice of Proposed Rulemaking seeks comment on extending the MDU exclusivity ban to DBS providers, private cable operators, and other MVPDs not subject to Section 628. See id. at 20264, ¶¶ 61-62. 209 47 U.S.C. § 544(i); 47 C.F.R. §§ 76.801-02. See also Implementation of the Cable Television Consumer Protection and Competition Act of 1992: Cable Home Wiring, MM Docket No. 92-260, Report and Order, 8 FCC Rcd 1435 (1993). 210 47 C.F.R. §§ 76.804-06. See also Telecommunications Services Inside Wiring; Implementation of the Cable Television Consumer Protection and Competition Act of 1992: Cable Home Wiring; CS Docket No. 95-184; MM (continued….) Federal Communications Commission FCC 12-81 34 that classified inside wiring behind sheet rock as physically inaccessible given the significant cost and physical damage to accessing wiring behind sheet rock, thereby facilitating the transfer of the ownership of that wiring when an incumbent provider is ceasing service.211 73. Over-the-Air Reception Devices. Pursuant to the Act, the Commission has adopted a rule preempting restrictions that impair viewers from receiving video services using over-the-air reception devices (“OTARD”).212 The rule applies to direct broadcast satellite antennas that are one meter or less in diameter, or any size in Alaska; antennas that are one meter or less in diameter or diagonal measurement and are designed to receive or transmit either video programming services through multipoint distribution services, including multichannel multipoint distribution services, instructional television fixed services, and local multipoint distribution services, or fixed wireless signals other than via satellite; and antennas designed to receive television broadcast signals.213 For the rule to apply, the antenna must be installed “on property within the exclusive use or control of the antenna user where the user has a direct or indirect ownership or leasehold interest in the property.”214 The rule prohibits restrictions impairing the installation, maintenance, or use of antennas to receive video programming on property within the exclusive control of the antenna user.215 The rule bars restrictions that: (1) unreasonably delay or prevent installation, maintenance, or use; (2) unreasonably increase the cost of installation, maintenance, or use; and (3) preclude reception or transmission of an acceptable quality signal.216 DBS operators maintain that continued enforcement of this rule is critical to ensuring their competitiveness in the video market.217 (ii) Market Conditions Influencing Entry 74. In addition to regulatory conditions, a number of market conditions may also influence if, and when, entry occurs. Economies of scale, capital requirements, and the reaction of competitors to new entrants all affect a firm’s ability to enter into a market. Economies of scale appear to produce cost advantages, especially with respect to the cost of acquiring programming and consumer premise equipment,218 and thus may play a major role in profitability and the willingness to enter the MVPD (Continued from previous page) Docket No. 92-260, Report and Order and Second Further Notice of Proposed Rulemaking, 13 FCC Rcd 3659 (1997). “Home run” wiring is the wiring which runs from just outside an MDU resident’s unit back to that point where the provider’s wiring becomes devoted to that resident. 47 C.F.R. § 76.800(d). 211 See Telecommunications Services Inside Wiring Customer Premises Equipment; Implementation of the Cable Television Consumer Protection and Competition Act of 1992: Cable Home Wiring; Clarification of the Commission’s Rules and Policies Regarding Unbundled Access to Incumbent Local Exchange Carriers’ Inside Wire Subloop, CS Docket No. 95-184, MM Docket No. 92-260, WC Docket No. 01-338, Report and Order and Declaratory Ruling, 22 FCC Rcd 10640, 10646-61, ¶¶ 12-47 (2007), aff’d sub nom. Nat’l Cable & Television Ass’n v. FCC, No. 07-1356, 2008 WL 4808911 (D.C. Cir. Oct. 23, 2008). 212 47 U.S.C. § 303 note. See also Telecommunications Act of 1996, Pub. L. No. 104-04, § 207, 110 Stat. 56, 114 (1996) (“1996 Act”). 213 47 C.F.R. § 1.4000(a)(1)(i)-(iii). 214 47 C.F.R. § 1.4000(a)(1). 215 Id. The antenna user must have a direct or indirect ownership interest, or leasehold interest, in the property. Id. 216 47 C.F.R. § 1.4000(a)(3). 217 See DISH Network 6/20/09 Reply at 9-10; DIRECTV 5/20/09 Comments at 23-24. DIRECTV and DISH Network have petitioned the Commission for a declaratory ruling on the legitimacy of a Philadelphia ordinance restricting the placement of satellite dishes. See Media Bureau Seeks Comment on Petition for Declaratory Ruling That An Ordinance of the City of Philadelphia, Pennsylvania is Preempted By The Commission’s Over-The-Air Reception Device Rule, CSR-8541-O, Public Notice, 26 FCC Rcd 16074 (MB 2011). 218 For a discussion of market-based conditions that influence entry, see Porter, supra, n. 19, at 7-17. Federal Communications Commission FCC 12-81 35 industry. Capital requirements, especially large fixed costs, and first-mover advantages, may also influence if and when MVPD entry takes place. The expected reaction from existing competitors, especially in terms of price competition, also influences entry.219 Each of these elements is discussed in turn below. 75. Economies of Scale. The term “economies of scale” refers to the situation where there is a decline in unit costs as the total number of units per period increases. Economies of scale may deter entry if new MVPDs must enter the market at a large scale in order to obtain cost advantages similar to incumbent MVPDs.220 Statements from MVPDs suggest that scale economies affect the cost of acquiring programming and consumer premise equipment, such as set-top boxes. In their reports to shareholders, some MVPDs emphasize the value of scale economies. For example, Comcast stressed the importance of achieving scale in both content and distribution in its transaction with NBC-Universal.221 When discussing the rising cost of video programming, DIRECTV explained that the company would manage increasing costs of programming by continuing to use its considerable scale to leverage fair deals for programming at the negotiating table.222 On the other hand, the American Cable Association (“ACA”) calls attention to the higher prices paid for video programming by small cable operators that lack scale economies.223 76. Capital Requirements. The need to invest large financial resources in order to compete may also influence MVPD entry, especially in a mature market where most customers wanting MVPD service already subscribe to an MVPD. Large fixed costs and an entrant’s recognition that most of its subscribers would need to switch from an incumbent MVPDs may delay the entrance of a new MVPD. For example, Verizon explained that it expected to invest $23 billion from 2004 to 2010 deploying its FiOS network.224 77. First Mover Advantages. First mover advantages may represent another condition influencing entry.225 Years of advertising and customer relationships may provide incumbents with a degree of brand identification and customer loyalty.226 Entrants must often spend heavily to win customers from incumbents, which often involves start-up losses and takes an extended period of time.227 Given the maturity of the MVPD market, new MVPDs recognize that they must win customers from incumbents.228 If it costs more to get a subscriber to switch than it costs the incumbent to get the customer initially, this constitutes a first-mover advantage that deters entry. 219 Id. at 17-23. 220 Id. at 7-9. 221 Comcast, 2010 Annual Review, Letter to Shareholders at 1. 222 DIRECTV, 2010 Annual Report, Message to Shareholders. 223 ACA 7/29/09 Comments at 2, 11-12. 224 Verizon 5/20/2009 Comments at 6. 225 For a discussion of first-mover advantages, see David Montgomery & Marvin Lieberman, First-Mover Advantages, STRATEGIC MANAGEMENT JOURNAL, Summer 1988, at 41-58. 226 Porter at 9. 227 Id. 228 DISH Network says that “as the pay-TV industry matures, we and our competitors increasingly must seek to attract a greater proportion of new subscribers from each other’s existing subscriber bases rather than from first-time purchasers of pay-TV services.” DISH Network 2010 Form 10-K at 42. Federal Communications Commission FCC 12-81 36 78. Reaction from Existing Competitors. A potential entrant’s expectations regarding the reaction from incumbent MVPDs may influence entry. For instance, the possibility of “predatory pricing,” where an incumbent lowers price in an effort to discourage entry or drive an entrant from the market before it can establish itself, may inhibit market entry.229 Statements from analysts in the MVPD industry suggest, however, that incumbents and entrants prefer to avoid price wars and compete on other features of the MVPD service.230 e. Recent Entry 79. There are different types of entry in the MVPD market and each has a potentially different impact on competition in market for the delivery of video programming. Meaningful entry that substantially increases competition requires bringing new capacity, upgraded capacity, or efficiencies into the market with a desire to gain market share.231 The deployment of video delivery systems by new MVPDs has had the most impact on competition in the MVPD market. The deployment of new video delivery systems by AT&T U-verse and Verizon FiOS are recent examples of this type of entry. Another type of entry involves the acquisition of an existing video delivery system followed by investment to upgrade the system. Although this type of entry does not, by itself, increase the number of competitors, investments to upgrade an existing video system contributes to a strengthening of competition by adding capacity and changing the technology to provide more channels and advanced video services, such as digital television, HD, VOD, and DVR. The acquisition of Adelphia by Comcast and Time Warner Cable in 2005 is an example of this type of entry.232 Entry that involves buying an existing video system but not investing in new capacity or changing the way the company operates will have the least impact on competition. This type of entry does not increase the number of competitors or otherwise strengthen competition. The various types of entry highlight the view that it is investment in new capacity, upgrading existing capacity, or elevating efficiency that provides meaningful entry. 229 For a discussion of predatory pricing, see, Patrick Bolton, Joseph F. Brodley & Michael H. Riordan, Predatory Pricing: Strategic Theory and Legal Policy, 88 GEO. L.J. 2239 (2000), http://www0.gsb.columbia.edu/faculty/pbolton/PDFS/BBRPrincetonDP.pdf (visited Jan. 17, 2012). 230 See, e.g., David Roisen, Investor Concerns of Pay-TV Price Wars are Overblown, Say Analysts, SNL Kagan, Oct. 16, 2008, http://www.snl.com/interactivex/article.aspx?id=8538777&KPLT=6 (visited Jan. 17, 2012). In the article, Sanford C. Bernstein analyst Craig Moffett said, “I’ve been hearing about the probability of price wars in this sector forever and ever and ever,” and Insight Research Corp. analyst and president Bob Rosenberg, said “Price wars are always possible, but it’s not clear what the precipitating event would be . . .”. Mr. Rosenberg expressed his belief that price is unlikely to become the main point of contention among pay-TV competitors anytime soon. See also, John Eggerton, Whitacre Sees No Video Price War, BROADCASTING & CABLE, June 2, 2006, http://www.broadcastingcable.com/article/104399-Whitacre_Sees_No_Video_Price_War.php (visited Jan. 17, 2012). In the article, AT&T Chairman Edward Whitacre tried to assure Wall Street that “the entry of telcos into the video space would not lead to price cuts in video service.” Mr. Whitacre said “I don’t think there’s going to be a price war. I think it’s going to be a war of value and of services.” 231 Porter at 7. 232 Comcast and Time Warner Cable claimed that they would upgrade Adelphia’s systems to enable the delivery of new or improved advanced services and to speed and expand the rollout of advanced services that already have been introduced. 2006 Adelphia, Comcast, Time Warner Cable MO&O, 21 FCC Rcd at 8310-16, ¶¶ 246-262. Adelphia’s cable systems are being upgraded but the process has taken longer than Comcast executives hoped, according to Marc Goodman, a Comcast spokesman. See Jon Chesto, Comcast’s Adelphia Conversion is Taking Longer than Expected to Complete, THE PATRIOT LEDGER, Sept. 4, 2010, http://blogs.wickedlocal.com/massmarkets/2010/09/04/comcasts-adelphia-conversion-is-taking-longer-than- expected-to-complete/#axzz1nc2ejUMN (visited Feb. 27, 2012). Federal Communications Commission FCC 12-81 37 80. Since the last report, the deployment of MVPD systems by AT&T and Verizon had the most significant impact on competition in the MVPD market.233 This type of entry, however, is rare when compared to the number of transactions involving the buying and selling of existing MVPD systems. Although most transactions do not change the number of competitors, some have resulted in MVPD system upgrades. In addition, a number of acquisitions stem from cable MVPD efforts to shed geographically disparate systems and grow regional clusters of systems.234 81. Cable MVPD Transactions. In previous reports, we have provided information regarding cable transactions.235 Although the buying and selling of MVPD properties does not necessarily affect competition, transactions provide useful information regarding the value of different MVPD properties. According to SNL Kagan, cable mergers and acquisitions reveal that the marketplace places a premium on larger-sized cable systems, on systems with dense footprints, systems that have been upgraded, and systems with a high penetration of Internet access services.236 82. In 2006, cable merger and acquisition activity was the slowest since 1990. The cable systems sold in 2006 involved approximately 500,000 subscribers and the total value of the transactions was $1.6 billion – only five percent of the 2005 total.237 Most of the transactions in 2006 involved small rural cable systems.238 These systems sold at prices that reflected 9.3 times cash flow and the average value per subscriber was $2,794.239 83. The cable systems sold in 2010 involved approximately almost 1.6 million subscribers and the total value of the transactions was $5.4 billion.240 Merger and acquisitions among smaller rural cable systems continued to make up the majority of the transactions in 2010.241 Almost two-thirds of these transactions involved cable systems with fewer than 5,000 subscribers and these systems sold at an average price of $1,762 per subscriber, which was down from 2006 but up from the 2009 low of $635.242 Transactions involving cable systems with 5,000 to 10,000 subscribers sold at an average price of $2,538 per subscriber, transactions involving systems with 50,000 to 100,000 subscribers sold at an average price of $3,068 per subscriber, and transactions involving systems with 100,000 to 500,000 subscribers sold at an average price of $3,904 per subscriber. 233 SNL Kagan, Cable TV Investor: Deals & Finance, Oct. 31, 2011, at 7-8. 234 SNL Kagan, Broadband Cable Financial Databook, 2011 Edition at 91. 235 See, e.g., 13th Report, 24 FCC Rcd at 565-66, ¶ 49 & Table 6. 236 For example, SNL Kagan data show that, over the 10-year period from 2000 to 2010, cable transactions for systems with fewer than 100,000 subscribers sold for prices that reflect 8.9 to 9.9 times cash flow while cable transactions for systems larger than 100,000 subscribers sold for prices that reflect 12.6 to 15 times cash flow. Similarly, the average value per subscriber for systems with fewer than 100,000 subscribers ranged from $1,700 to $2,800 while the average value per subscriber for systems with between 100,000 and 500,000 subscribers averaged $3,842 and the average value per subscriber for systems with over 500,000 averaged $4,214. SNL Kagan, Broadband Cable Financial Databook, 2011 Edition, at 91. 237 SNL Kagan, Broadband Cable Financial Databook, 2007 Edition, at 150. 238 Id. 239 Id. 240 SNL Kagan, Broadband Cable Financial Databook, 2011 Edition, at 91. 241 Id. 242 Id. Federal Communications Commission FCC 12-81 38 84. SNL Kagan explains that there has been a steady increase in cable system values as cable MVPDs have transitioned from video services to a combination of video, Internet, and telephone services, which provide a diversified revenue stream and higher revenue per subscriber.243 Other SNL Kagan data, however, show that the average price per subscriber in all cable MVPD mergers and acquisitions has been erratic.244 One explanation for the variance in the average price per subscriber is that the metric is sensitive to the inclusion or the absence of mergers and acquisitions of large cable systems. Stated differently, in years where no large cable systems are traded, the average price per subscriber reflects the value of smaller cable systems. And in years where large cable systems are traded, the average price per subscriber reflects the value of large systems. In short, the buying and selling of large cable systems in any given year heavily influences the average price per subscriber and, as noted above, large cable systems trade at a premium, relative to small cable systems. 3. MVPD Conduct 85. In addition to industry structure, a second key element of our analysis of MVPD competition is an examination of the conduct of MVPDs – in particular, the business models and competitive strategies of MVPDs. MVPDs choose from a variety of business models and competitive strategies to attract and retain subscribers and generate profits. In this section of the Report, we discuss MVPD competition in terms of both price and non-price rivalry. We then provide an overview of the current business models and competitive strategies of a sample of MVPDs. a. Price Rivalry 86. Pricing represents one component of every MVPDs’ competitive strategy. Some MVPDs market themselves as “premium” services while others market themselves as “value” services. In recent years, MVPDs have offered low introductory or promotional prices for delivered video services or bundles of video, Internet access, and voice services to attract new subscribers. Over time, MVPDs have altered their pricing in response to changes in the competitive landscape. For example, with a maturing MVPD market, some of the largest MVPDs have begun experimenting with both higher-priced and lower-priced video packages.245 87. Today, the largest and most mid-sized MVPDs offer one or more high-end pricing plans that include hundreds of channels and a complement of HD, DVR, VOD services, and some mix of premium channels. In addition, these MVPDs offer one or more mid-priced video service plan that includes fewer channels and a smaller complement of video services. MVPDs offer, but are less likely to market, lower-priced video service plans with fewer channels and few, if any, additional video services.246 An MVPD may charge different prices in the different cities and towns it serves. These differences may reflect system upgrades or differences in the number of channels or advanced video services offered from one city to the next. They also may reflect differences in the number of competitors or differences in the competitive strategies used by competitors from one city to the next. 243 SNL Kagan, Broadband Cable Financial Databook, 2007 Edition, at 150. 244 The average price per subscriber for all cable merger and acquisition activity was $2,811 in 2006, $3,378 in 2007, $1,593 in 2008, $1,981 in 2009, and $3,451 in 2010. SNL Kagan, Broadband Cable Financial Databook, 2011 Edition at 93. 245 Time Warner Cable in 2010 began targeting higher-end demographics with an enhanced bundle of video, Internet access, and telephone services; and a video-only service targeting budget-conscious homes. Time Warner Cable, SEC Form 10-K for the Year Ended December 31, 2010, at 6 (“Time Warner Cable 2010 Form 10-K”). 246 Marketing includes the information prominently displayed on the MVPD’s website. Our review of the websites of a number of MVPDs suggests that it is often much easier to find the higher-priced video service plans than it is to find the lowest price video service plan offered by the MVPD. Federal Communications Commission FCC 12-81 39 88. Discounts for New Subscribers. One of the most common pricing strategies among MVPDs takes the form of discounts for new subscribers. For example, DISH Network explains that it often offers free programming and/or promotional pricing during introductory periods for new subscribers.247 Typically, these new subscriber discounts are for a limited time (e.g., six months or a year) and often include additional video services (e.g., premium channels) or bundles of video, Internet access, and telephone service. At the end of introductory period, promotional materials usually indicate that prices will rise to the “normal” price. Similarly, DIRECTV offers five video packages ranging from $29.99 per month to $89.99 per month for 12 months after rebate with a 24-month agreement.248 According to DIRECTV, the offer is available only to new customers and represents a savings of $35 per month for the first year and $20 per month in the second year.249 A promotion by Verizon offers FiOS TV Prime HD, Internet (15/5 Mbps), and unlimited calling for $89.99 per month with a two-year contract.250 According to Verizon, the offer is available only to new customers and represents a savings of $600 over the two-year period.251 Cox offers new customers who order online a bundle of video, Internet access, and telephone services for $90 per month for 12 months.252 The offer is available only to new customers and the regular price of $147.97 per month applies after the 12 month promotional period. According to Cox, this offer represents a first-year savings of $695.64. The above examples are snapshots and may not reflect current service offerings and prices available to new subscribers. MVPD advertisements typically state that prices rise at the end of the promotional period. For example, a Cox advertisement offers new customers a video service for $39 for six months. The advertisement states, “After six months, then current rates apply.”253 Although cable MVPDs show their current rates and prices, some existing subscribers may be paying less than those shown. In statements to shareholders, DISH Network states that it has incurred significant costs to retain existing customers, mostly by upgrading their equipment to HD and DVR receivers.254 In certain circumstances, DISH Network also has offered free programming and/or promotional pricing for limited periods for existing customers in exchange for a contractual commitment.255 b. Non-Price Rivalry 89. Central to every MVPD business model is its selection of the technology the company will use to deliver video programming. As described below, in the MVPD industry, the primary technologies available are coaxial cable, spectrum, and most recently xDSL and fiber. Within these parameters MVPDs have adopted various competitive strategies that include transition to digital service, 247 DISH Network 2010 Form 10-K at 4. 248 DIRECTV, http://www.directv.com/DTVAPP/new_customer/base_packages.jsp?footernavtype=-1 (visited Feb. 10, 2012). 249 Id. 250 Verizon, http://program.verizon.com/offers/mlp.aspx?pattern=fiosTv_Triple&CMP=KNC- CON_Z_ZZ_FT_Z_Z_R_Z353&bkw=verizon+fios+and+tv&se=Bing&009=e&004=383370664&005=9618581188 &011=verizon+fios+tv&006=1059372363&002=2181541 (visited Feb. 10, 2012). 251 Id. 252 Cox, https://secure.cox.com/Service/Store/OrderNow.aspx?campcode=tile-bundle_1_browse (visited Feb. 10, 2012). 253 Cox, http://ww2.cox.com/residential/northernvirginia/pricing-and-special-offers/tv- deal.cox?campcode=rl_tv_tv_tv-deal_splash_010312_btn_nva_1#promo-terms (visited Feb. 26, 2012). 254 DISH Network 2010 Form 10-K at 4. 255 Id. Data on DISH Network’s free programming or promotional prices for existing customers is not available. Federal Communications Commission FCC 12-81 40 product differentiation, delivery of video to diverse geographic locations, delivery of video to a variety of in-home or mobile devices, and implementation of marketing tactics. 90. Each specific technology has its own set of incumbent advantages and disadvantages. Moreover, technologies change over time and the competitive advantages of one technology may fade as new technologies are introduced. Originally, the MVPD market was defined by coaxial cable. When DIRECTV and DISH Network began offering MVPD service in the 1990s, the digital DBS systems provided significantly greater channel capacity compared to existing analog cable systems.256 Cable MVPDs responded to DBS’s technology lead by upgrading their cable systems.257 These upgrades included incorporating more optic fiber into their coaxial network and transitioning from analog to digital technology.258 More recently, Verizon built a fiber-to-the-home system and transitioned to all digital technology.259 DBS technology continues to successfully deliver linear video programming, but the DBS MVPDs acknowledge that their systems cannot deliver VOD services and other two-way services like Internet access and telephone services that play an ever larger role in the business models of MVPDs.260 91. As a significant competitive strategy, cable MVPDs are replacing their analog video services and transitioning to all-digital video services. Comcast, for example, has been reclaiming bandwidth from analog video services to deliver more digital channels and more HD channels. By June 2011, Comcast had transitioned its expanded basic tier analog channels to digital in 85 percent of its footprint.261 Subscribers with analog televisions use a set-top box with a digital terminal adapter to convert digital signals to analog signals. 92. Some cable operators are implementing another competitive strategy, the deployment of switched digital video (“SDV”) as a solution for near-term capacity concerns.262 Rather than broadcasting all available channels to viewers at once, SDV combines the bandwidth efficiencies of compressed digital content with switching to enable content to be streamed to viewers only upon request.263 Time Warner Cable explains that this technology expands network capacity by transmitting only those digital video channels that are being watched within a given grouping of homes at any given moment.264 According to Time Warner Cable, it is unlikely that all channels are being watched at all times within a given group of 256 NCTA 6/8/11 Comments at 3. 257 Id. 258 Id. at 3-4. 259 Verizon began offering FiOS services using both analog and digital technologies but transitioned to all-digital technology in 2008. Verizon 5/20/09 Comments at 7. 260 DIRECTV discusses the risk factors associated with competing in the MVPD industry against cable and telephone MVPDs and other land-based systems that have the ability to offer video, Internet, telephone, and other two-way services. DIRECTV 2010 Form 10-K at 17. DIRECTV and DISH Network have cooperative arrangements with telephone and broadband companies to provide Internet access and telephone service. These arrangements, however, are typically with telephone and broadband companies that do not offer video services in the same geographic area. For example, DIRECTV typically has cooperative arrangements with Verizon to provide Internet access and telephone service where Verizon offers DSL and not in areas where Verizon offers FiOS TV. Verizon, http://www22.verizon.com/home/directv/#packages (visited Feb. 26, 2012). 261 Although the expanded basic tier is being converted from analog to digital, the basic tier remains analog. Comcast 6/8/11 Comments at 9, 17. 262 NCTA 5/20/09 Comments at 37. 263 Cox 8/28/09 Reply at 12. 264 Id. Federal Communications Commission FCC 12-81 41 homes, so SDV technology can free up capacity for other uses, including additional channels, more VOD offerings, and faster Internet connections.265 The cable industry and TiVo collaborated in the development of a tuning adaptor to enable the two-way tuning of switched digital video signals for a “one-way” TiVo device.266 93. Industry sources predict that SDV may pass 90 million homes by the end of 2012.267 Time Warner Cable has deployed switched digital video in all of its service areas268 and BrightHouse has deployed SDV across some of their systems.269 SDV was available in 68 percent of Charter’s footprint as of June 2011.270 The Commission has required cable operators to support SDV reception on retail devices.271 In Northern Virginia, Cox has implemented SDV technology adding 24 new high-definition channels and 27 additional standard-definition channels.272 Comcast, however, has conducted some tests but recently decided to put further SDV deployments on hold.273 265 Id. 266 NCTA 8/28/09 Reply at 12-14. 267 Jeff Baumgartner, Cable SDV Makes Bid for a Tech Renaissance, LR Cable News Analysis, Oct. 12, 2010, http://www.lightreading.com/document.asp?doc_id=198361&site=lr_cable (visited Oct. 25, 2011). 268 BigBand Networks, BigBand’s SDV Reaches More than 39 Million Households (press release), May 18, 2011. 269 Time Warner Cable 2010 Form 10-K at 2. 270 Charter Loses More Video Subs, Widens Loss in Q2, CED NEWS, Aug. 2, 2011, http://www.cedmagazine.com/news/2011/08/charter-loses-more-video-subs,-widens-loss-in-q2 (visited Nov. 10, 2011). 271 See Implementation of Section 304 of the Telecommunications Act of 1996: Commercial Availability of Navigation Devices; Compatibility Between Cable Systems and Consumer Electronics Equipment; Oceanic Time Warner Cable, A subsidiary of Time Warner Cable, Inc.; Oceanic Time Warner Cable, a division of Time Warner Cable, Inc. Oceanic Kauai Cable System; Oceanic Time Warner Cable, a division of Time Warner Cable, Inc. Oceanic Oahu Central Cable System; Cox Communications, Inc. Fairfax County, Virginia Cable System; Cable One, Inc.’s Request for Waiver of Section 76.1204(a)(1) of the Commission’s Rules, CS Docket No. 97-80; PP Docket No. 00-67; File Nos. EB-07-SE-351, EB-07-SE-352; NAL/Acct. Nos. 200832100074, 200932100001, 200932100002, 200932100003, 200932100008, 200932100022, and 200932100023; FRN Nos. 0018049841, 0016034050; CSR-8080-Z, Third Report and Order and Order on Reconsideration, 25 FCC Rcd 14657, 14665-66, ¶¶ 14-15 (2010) (“Navigation Devices Third Report and Order”). Early issues centered on compatibility with third- party, unidirectional CableCARD devices needed to perform the signaling required to enable SDV. NCTA 8/28/09 Reply at 12-14. In June 2009, the Commission vacated Notices of Liability relating to Time Warner’s and Cox’s SDV implementation of programming previously delivered using CableCARD equipped unidirectional digital cable products (UDCPs). See Oceanic Time Warner Cable, A subsidiary of Time Warner Cable, Inc.; Oceanic Time Warner Cable, a division of Time Warner Cable, Inc. Oceanic Kauai Cable System; Oceanic Time Warner Cable, a division of Time Warner Cable, Inc. Oceanic Oahu Central Cable System; Cox Communications, Inc. Fairfax County, Virginia Cable System, File Nos. EB-07-SE-351, EB-07-SE-352; NAL/Acct. Nos. 200832100074, 200932100001, 200932100002, 200932100003, 200932100008, 200932100022, and 200932100023; FRN Nos. 0018049841, 0016034050; Order on Review, 24 FCC Rcd 8716 (2009) (vacating forfeiture orders). 272 Cox 8/28/09 Reply at 12-13. 273 Jeff Baumgartner, Comcast Back-Burners SDV (Again), LIGHT READING CABLE, Feb. 1, 2011, http://www.lightreading.com/document.asp?doc_id=203902&site=lr_cable (visited Jan. 15, 2012). Comcast did not elaborate on its reasons or what other bandwidth management technologies it may be considering. Id. Federal Communications Commission FCC 12-81 42 94. Corporate annual reports suggest that product differentiation has been, and remains, a key factor for competing in the market for delivered video programming.274 For instance, an MVPD might offer a unique video product that a rival MVPD cannot or does not provide. DIRECTV offers the NFL Sunday Ticket where subscribers can watch every out-of-market professional football game in HD. In its advertising, DIRECTV states that, “You won’t find anything like it with DISH Network or cable … It’s available only on DIRECTV.”275 Some MVPDs highlight better-value or low-price video packages. DISH Network maintains that it offers better value, and claims that, “DIRECTV can’t compare with DISH Network’s everyday low price.”276 Argent Communications, a cable operator in New Hampshire with 2,500 subscribers, highlights cable at “affordable rates” with lifeline and basic video service listed before higher-priced digital video service.277 Commonly, an MVPD claims to offer more channels or more channels of a specific type than its rivals. For example, DIRECTV claims to offer the most full- time HD channels.278 Verizon, on the other hand, claims that FiOS TV offers more children’s, sports, and premium movie channels than cable.279 MVPDs further attempt to differentiate their products by claiming their products have superior quality. For example, Verizon FiOS claims that it offers brilliant HD picture quality in almost any kind of weather: “Simply put, it’s the best HDTV experience you can get.”280 Some MVPDs highlight bundles of video, Internet access, and telephone services while other MVPDs focus their marketing on video packages. The two DBS MVPDs focus their marketing on video services, in part, because the satellite technology they use for delivering video programming limits their ability to provide non-video (i.e., Internet and telephone) services. The major cable and telephone MVPDs focus their marketing on bundled video, Internet access, and telephone. Their emphasis usually is that bundles offer better prices for consumers, relative to individual service offerings. 95. Another component of a MVPD’s business model is the choice of where the company will offer delivered video programming. The two DBS MVPDs offer delivered video programming nationwide.281 In contrast, cable and telephone MVPDs vary widely in the geographic areas and populations covered by their systems. Some offer delivered video programming in multiple states and multiple large cities. For example, at the end of 2010, Verizon offered FiOS video services to approximately 60 percent of its wireline footprint.282 Other MVPDs specialize in a region of the country 274 MVPDs typically refer to the importance of product differentiation in their business strategies. See, e.g., DIRECTV 2010 Form 10-K at 4; DISH Network 2010 Form 10-K at 1. 275 DIRECTV, http://www.directv.com/DTVAPP/content/sports/nfl?footernavtype=-1&lpos=header (visited Oct. 24, 2011). 276 DISH Network, http://www.dishnetwork.com/compare/ (visited Oct. 24, 2011). 277 Argent Communications, http://www.argentcommunications.com/ (visited Oct. 24, 2011). 278 DIRECTV, http://www.directv.com/DTVAPP/content/directv/programming (visited Oct. 24, 2011). 279 Verizon, http://www22.verizon.com/home/fiostv/ (visited Jan. 15, 2012). 280 Verizon, http://www22.verizon.com/Residential/FiOSTV/Overview.htm#features (visited Oct. 26, 2011). 281 DIRECTV explains that it provides the same programming packages, at the same rates, in Alaska and Hawaii as it provides in the contiguous 48 states. However, subscribers in Alaska and Hawaii must use slightly larger dishes than customers in the contiguous 48 states. DIRECTV 6/8/2011 Comments at 13-14. DISH Network offers local broadcast stations in all 210 markets, including Alaska and Hawaii. DISH Network 7/29/2009 Comments at 6; DISH Network 6/8/2011 Comments at 2. See also DishNow, http://www.dishnow.com/alaska.html; http://www.dishnow.com/hawaii.html (visited Mar. 14, 2012). 282 Verizon 6/8/11 Comments at 6. According to the company’s FCC Form 477 for December 31, 2010, Verizon’s wireline footprint includes households in 13 states and the District of Columbia. Federal Communications Commission FCC 12-81 43 or an even smaller geographic area. For example, BendBroadband, a cable MVPD, provides delivered video programming to 12 communities in Central Oregon.283 96. One of the newest forms of product differentiation is known as the “TV Everywhere” initiative, which allows consumers to access both linear video programming and VOD programs on a variety of in-home and mobile Internet-connected devices. At its inception, TV Everywhere embodied the MVPD industry’s attempt to compete with online video offered by others.284 TV Everywhere is evolving, however, into a competitive strategy that MVPDs use to differentiate themselves from their rivals.285 Some MVPDs, such as Comcast, Cox, and AT&T, permit non-subscribers to access a subset of video content online. Other MVPDs, such as Time Warner Cable and Verizon, permit only their MVPD subscribers to access their TV Everywhere content.286 Both DBS MVPDs also have TV Everywhere strategies. In 2010, DIRECTV began offering the “NFL Sunday Ticket To-Go” for the first time on the iPad.287 TV Everywhere is new, and the amount of MVPD content available and the number of devices that can receive TV Everywhere content are rapidly increasing.288 For example, some MVPDs recently began offering streaming of live programs to iPads while devices are in subscribers’ homes.289 97. VOD and DVR services represent another noticeable difference in the marketing of MVPDs. With respect to VOD, some highlight thousands of VOD movies and television shows in their libraries while others simply mention that they offer VOD. With respect to DVR service, some MVPDs call attention to their whole-home DVR, which allows subscribers to view recorded video programs on multiple televisions throughout a house. For example, AT&T U-verse offers a DVR that can record up to 65 hours of HD content, record and play back programs from any room, pause a recorded show in one room and pick it up in another, and can be programmed remotely from a computer or wireless phone.290 Time Warner Cable offers a DVR that enables subscribers to restart a program already in progress.291 Cablevision offers a DVR service that enables subscribers to record programs that are stored on Cablevision’s servers instead of storing the programs on the hard drive within the DVR cable box.292 98. The language an MVPD uses to market its delivered video programming suggests the identity of the other MVPDs it perceives to be its closest rivals. For example, in its marketing, DIRECTV 283 BendBroadband, http://www.bendbroadband.com/residential/abb_company_info.asp?pageID=abbb&subID=aci (visited Nov. 2, 2011). 284 SNL Kagan, Cable TV Investor: Deals & Finance, Oct. 31, 2011, at 3 & 5. 285 Id. at 5. 286 MVPDs that wish to restrict access to their online TV Everywhere video programming use an authentication process that requires MVPD subscribers to provide a user ID and password. 287 DIRECTV, 2010 Annual Report, Message to Shareholders. 288 SNL Kagan, Cable TV Investor: Deals & Finance, Oct. 31, 2011, at 3-6. 289 See, e.g., DIRECTV, http://www.directv.com/DTVAPP/content/technology/mobile_apps/ipad (visited Mar. 2, 2012); Cablevision, http://optimum.custhelp.com/app/answers/detail/a_id/2694/kw/ipad%20streaming (visited Mar. 2, 2012). 290 AT&T, http://www.att.com/shop/tv/#fbid=h2tVPdbUKLw (visited Jan. 20, 2012). 291 Time Warner Cable, http://www.timewarnercable.com/nynj/learn/cable/startover.html (visited Mar. 2, 2012). 292 Cablevision, http://optimum.custhelp.com/app/answers/detail/a_id/2580/kw/DVR%20Plus/session/L3RpbWUvMTMzMDcwOD YzMC9zaWQvZ0xFQzE1U2s%3D (visited Mar. 2, 2012). Federal Communications Commission FCC 12-81 44 often names DISH Network and contrasts its video services to those offered by DISH Network.293 Similarly, DISH Network often compares its services with those offered by DIRECTV.294 Verizon FiOS and AT&T U-verse, on the other hand, tend to compare themselves to cable MVPDs, perhaps because they consider their bundle offerings as more similar to those offered by cable MVPDs and less similar to the bundles offered by DBS MVPDs.295 99. Consumers need information to make informed choices regarding MVPD services and MVPD providers. To provide this information, MVPDs use print, radio, television, and Internet media to motivate new and existing customers to call the MVPD, visit the MVPD’s website, or contact independent third party retailers.296 Some MVPDs also use telemarketing and door-to-door sales.297 Customers looking to switch MVPD providers or purchase MVPD service for the first time receive and obtain information on services and promotional prices during introductory periods.298 Existing customers looking to change their services, but not necessarily their MVPD provider, receive and obtain information on upgrading HD and DVR receivers, free programming, and promotional prices for existing customers, possibly in exchange for a contractual commitment.299 Some MVPDs seek to retain subscribers that move to a new location by offering free installation of equipment at the new address.300 100. Because subscribers of MVPD services watch video programming daily and for many years, they value customer service. MVPDs recognize the importance of customer service as a critical component in customer acquisition and retention and explain their investment and efforts to improve customer service in communications with shareholders. For example, DIRECTV has 36 customer service centers that employ 17,000 customer service representatives.301 Time Warner Cable explains that it continues to upgrade its customer care processes and infrastructure.302 Time Warner Cable is upgrading its call center platforms and utilizing online approaches to give customers another alternative for engaging with the company.303 As another example, Charter explains that its strategy for customer retention is to enhance the customer experience by providing customer care, making it easier for customers to use Charter’s service, and exceeding customer expectations.304 Periodic surveys of MVPD subscribers by 293 DIRECTV, http://www.directv.com/DTVAPP/content/directv/directv-vs-dish-network (visited Jan. 20, 2012). 294 DISH Network, http://www.dishnetwork.com/compare/index.aspx?WT.ac=ACQ_MKTG_DISH_STATIC_0112_getMoreForLess (visited Jan 25, 2012). 295 Verizon FiOS has mailed marketing materials containing messages such as: “Say good-by to the cable company”; “FiOS vs. Cable or should we say the future vs. the past”; and “You’re paying all that for cable and not getting all this?” 296 See, e.g., DISH Network 2010 Form 10-K at 4; Time Warner Cable 2010 Form 10-K at 6. 297 See, e.g., Time Warner Cable 2010 Form 10-K at 6. 298 Id. 299 Id. 300 See, e.g., DIRECTV 2010 Form 10-K at 39. 301 DIRECTV 2010 Form 10-K at 7. 302 Time Warner Cable 2010 Form 10-K at 6. 303 Id. 304 Charter Communications, 2010 Annual Report, Letter to Shareholders at 4. Federal Communications Commission FCC 12-81 45 Consumer Reports and others provide information on which MVPDs are doing well meeting consumer expectations.305 101. Customer satisfaction can be influenced by more than products, prices, and customer service. For example, Comcast maintains that upgrading to an all-digital platform has enhanced its reputation for technical innovation.306 Comcast explains that this reputation, as well as the recent rebranding of products as Xfinity, has driven improved perceptions and customer satisfaction.307 Similarly, in 2010, Time Warner Cable refreshed its logo “to better convey the image of an innovative, dynamic company.”308 Time Warner Cable maintains that its name and logo “carry tremendous brand equity and high consumer recognition.”309 c. Business Models and Competitive Strategies of Select MVPDs 102. The MVPD group is comprised of 1,157 cable MVPDs, two DBS MVPDs, two large telephone MVPDs and many smaller telephone MVPDs.310 Although each MVPD has its own business model and competitive strategy, there may be some similarities within types of MVPDs. Below, we provide an overview of the business models and competitive strategies focusing on the two largest cable MVPDs (Comcast and Time Warner Cable) and a few selected mid-sized and smaller cable MVPDs (Buckeye Cable System, BendBroadband, Adams Cable Service, Sweetwater Cable). We also provide an overview of the business models and competitive strategies of the two DBS MVPDs (DIRECTV and DISH Network). Finally, we provide an overview of the business models and competitive strategies of the two largest telephone MVPDs (AT&T and Verizon) and a new telephone MVPD (CenturyLink). (i) Cable MVPD Business Models and Competitive Strategies 103. Pursuant to statutory requirements, cable operators offer a basic service tier that includes broadcast television signals, PEG channels, and a few other national, regional, or local video programming services.311 Cable MVPDs also offer one or more cable programming service tiers which include additional national, regional, and local cable entertainment, news and other networks, such as CNN, USA, and ESPN. In addition to providing an analog tier, cable operators also offer a digital tier or digital tiers, which enable digital video subscribers to receive additional cable networks. Some cable MVPDs are all digital and no longer offer an analog tier. Cable MVPDs also offer genre-based programming tiers, such as a movie tier or a sports tier, and premium services, such as HBO and Showtime. 104. Large Incumbent Cable MVPDs. In this category, we focus primarily on the business models and competitive strategies of the two largest cable MVPDs: Comcast and Time Warner Cable. Comcast is the largest cable MVPD and the largest MVPD, with 22.8 million video subscribers clustered in the mid-Atlantic, Chicago, Denver, and Northern California. Comcast has ownership interests in 305 See, e.g., DSL Reports, http://www.dslreports.com/shownews/Consumer-Reports-FiOS-UVerse-Tops-113561 (visited Mar. 2, 2012). 306 Comcast, 2010 Annual Review, Letter to Shareholders at 2. 307 Id. 308 Time Warner Cable, 2010 Annual Report, Letter to Shareholders at 2. 309 Id. 310 See supra, ¶¶ 18, 28 & n. 33. 311 47 U.S.C. § 543(b)(7). Federal Communications Commission FCC 12-81 46 approximately one out of every seven channels carried on its cable systems.312 Comcast has interests in numerous national networks including E!, Golf Channel, Versus, Style, G4, A&E, Bravo, Chiller, CNBC, MSNBC, Oxygen, Sleuth, SyFy, and The Weather Channel.313 Comcast also has ownership interests in numerous regional sports networks (“RSNs”).314 In addition Comcast has ownership interests in the NBC network and its owned and operated (“O&O”) NBC affiliated local television stations, the Telemundo network and its O&O Telemundo affiliated local television stations, and Universal Pictures.315 105. Time Warner Cable is the second largest cable MVPD and the fourth largest MVPD, with over 12 million video subscribers clustered in five geographic areas – New York State (including New York City), the Carolinas, Ohio, Southern California (including Los Angeles), and Texas.316 Time Warner Cable has ownership interests in national networks including MLB, MLS Direct Kick, NBA League Pass, NHL Center Ice, and Team HD, and numerous regional news networks and RSNs.317 106. Programming Tiers. Comcast video services range from a limited basic package with 20 to 40 channels of linear programming to digital packages that may include over 300 linear channels and more than 100 HD channels.318 Similarly, Time Warner Cable offers hundreds of video channels and HD channels throughout its footprint.319 107. Technology and Advanced Video Services. Comcast and Time Warner Cable use a hybrid fiber optic and coaxial network that provides at least 750 MHz capacity and two-way transmission, which is essential to providing interactive services like VOD, Internet access, and telephone.320 Comcast offers more than 25,000 VOD titles with approximately 6,000 VOD HD titles each month and a 3D channel that aggregates 3D movies, sports, and other video programming.321 In some markets, Comcast also offers “AnyRoom DVR,” which allows subscribers to share recorded programs with any television in 312 Comcast 6/8/11 Comments at 7. In approving the Comcast’s joint venture with General Electric, the Commission concluded that the transaction would give the joint venture the incentive and ability to block – temporarily or permanently – Comcast’s video distribution rivals from accessing programming owned by the joint venture and to raise the programming costs of its video distribution rivals. Comcast-NBCU Order, 26 FCC Rcd at 4250, ¶ 29. Given the findings, the Commission adopted an arbitration remedy applicable to all Comcast-NBCU affiliated programming, including regional sports networks, to prevent these potential harms. Id. at 4364-70, App. A, § VII. With respect to program carriage, the Commission found that the vertical integration of Comcast’s distribution network with NBCU’s programming assets increased Comcast’s ability and incentive to discriminate against or foreclose unaffiliated programming. Id. at 4282, ¶ 110. To remedy these harms, the Commission adopted a program carriage condition prohibiting Comcast from discriminating against programming vendors, including regional sports networks, on the basis of affiliation or nonaffiliation in the selection, price, terms or conditions of carriage. Id. at 4287, ¶ 121; see also id. at 4358, App. A, § III.1. 313 For a list of Comcast’s national programming interests, see Appendix B, Table B-1. 314 For a list of Comcast’s regional programming interests, see Appendix C, Table C-1. 315 Comcast 2010 Form 10-K at 2. 316 Time Warner Cable 2010 Form 10-K at 1. 317 For a list of Time Warner Cable’s programming interests, see Appendix B, Table B-1 and Appendix C, Table C- 1. 318 Comcast 2010 Form 10-K at 3; Comcast 6/8/11 Comments at 9. 319 Time Warner Cable, https://www.timewarnercableoffers.com/ (visited Mar. 3, 2012). 320 Time Warner Cable 2010 Form 10-K at 6. 321 Comcast 6/8/11 Comments at 8-9, 11. Federal Communications Commission FCC 12-81 47 the house.322 Similarly, in some markets, Time Warner Cable offers multi-room DVR service with 80 hours of storage for video programs and thousands of VOD titles to digital video subscribers.323 Time Warner Cable also offers Start Over, a feature that enables customers that have missed the beginning of a live program to watch it from the beginning.324 108. Large cable MVPDs have been transitioning to all-digital systems.325 Most large cable MVPDs currently provide some digital channels in all or nearly all systems and they are continuing to migrate analog channels to digital.326 Comcast and Cablevision appear to have made the most progress turning off analog channels. For example, 20 percent of Comcast’s footprint is currently all-digital. And Cablevision is all-digital in its New York City and Connecticut markets.327 According to reports, Time Warner Cable, Cox, Charter, and Suddenlink are transitioning to digital more gradually.328 109. Comcast’s TV Everywhere initiative offers digital subscribers 150,000 online video choices, including on-demand television shows, movies, and video clips, but little or no linear video programming.329 For subscribers with mobile devices, Comcast’s TV Everywhere offers almost 6,000 hours of on-demand video content to subscribers with smart devices.330 As part of its TV Everywhere service, Time Warner Cable offers subscribers online sports programming from ESPN, ESPN2, ESPN3, to customers who subscribe to a video tier that includes those networks.331 110. Bundling. Like most cable MVPDs, Comcast and Time Warner Cable sell video services separately and in bundled packages of video, Internet access, and telephone services. Each of these services is provided over their own two-way cable systems. Comcast and Time Warner Cable explain that their primary competition for bundles comes from AT&T and Verizon, which overlap some of their service areas and offer video, Internet access, and telephone services with features and functions comparable to those offered by Comcast and Time Warner Cable.332 111. Marketing. Comcast now markets its services under the Xfinity brand, which includes Xfinity TV, Xfinity Internet, and Xfinity Voice. In marketing its services, Comcast compares its offerings with those of DBS and telephone MVPDs.333 Time Warner Cable has begun targeting higher- end demographics with its SignatureHome service that offers an enhanced bundle of video, Internet 322 Id. at 10. 323 Time Warner Cable, http://www.timewarnercable.com/nynj/learn/cable/ (visited Mar. 2, 2012). 324 Id. See also Time Warner Cable 2010 Form 10-K at 3. 325 Katie Ardmore, Cable Operators Progressing Slowly Toward All-Digital Systems, COMM. DAILY, Feb. 22, 2012, at 8-10. 326 Id. 327 Id. 328 Id. 329 Comcast 6/8/11 Comments at 12-13. 330 Id. at 13. 331 Time Warner Cable 2010 Form 10-K at 3. 332 Comcast 2010 Form 10-K at 6; Time Warner Cable 2010 Form 10-K at 8, 9, 20, 38. 333 See Comcast, http://www.comcast.com/Corporate/Learn/Compare/comcast-vs-att-U-verse.html?Processed=true (visited Feb. 28, 2012). Federal Communications Commission FCC 12-81 48 access, and telephone services, and budget-conscious customers with its TV Essentials service that offers video only.334 112. Small and Midsized Incumbent Cable MVPDs. In this category, we consider four cable MVPDs: (i) Buckeye CableSystem (“Buckeye”), the 22nd largest cable MVPD, with approximately 135,000 subscribers in Northwest Ohio; Southeast Michigan; and Erie County, Ohio;335 (ii) BendBroadband, the 38th largest cable MVPD, with approximately 35,000 subscribers in 12 communities in Central Oregon;336 (iii) Adams Cable Service (“Adams”), the 42nd largest cable MVPD with approximately 22,000 subscribers in Carbondale, Pennsylvania;337 and (iv) Sweetwater Cable, the 52nd largest cable MVPD, with approximately 7,000 subscribers in Rock Springs and Green River, Wyoming.338 113. Programming Tiers. Buckeye offers 250 digital channels and HD channels.339 BendBroadband offers a range of digital video packages.340 At the low end is a limited video package with 27 channels and 12 HD channels. At the high end is a preferred video package with 92 channels and 59 HD channels, with the option of adding four genre-based programming tiers (i.e., Variety, with 26 channels and eight HD channels; Sports with 17 channels and six HD channels; Movies, with 19 channels and two HD channels; and Discovery/MTV, with 13 channels). In addition, BendBroadband offers premium channels: HBO, Cinemax, Showtime, and Starz. Adams offers analog and digital video service ranging from a basic package with 17 channels to a digital package with an additional 120 channels and 48 HD channels.341 Sweetwater Cable offers a basic video service and an expanded basic video service.342 Prior to 2011, Sweetwater offered only analog video services.343 Currently, Sweetwater offers 22 channels on its basic service, 48 channels on its expanded basic service and 41 channels on its digital service.344 114. Technology and Advanced Video Services. Of the four systems studied, two offer comparable HD channels, DVR service, and VOD programming to the largest operators, one offers similar HD offerings but less robust DVR service and VOD programming, and the fourth offers DVR, 334 Time Warner Cable 2010 Form 10-K at 6. 335 Buckeye CableSystem, http://www.buckeyecablesystem.com/index.html (visited Oct. 31, 2011). 336 Communities in Central Oregon served by BendBroadband include: Bend, Black Butte, Culver, LaPine, Madras, Metolius, Prineville, Powell Butte, Redmond, Sisters, Sunriver, and Terrebonne. The company changed its name from Bend Cable to BendBroadband in 2003 in recognition that its services had expanded beyond cable television. See BendBroadband, http://www.bendbroadband.com/residential/abb_company_info.asp?pageID=abbb&subID=aci (visited Nov. 2, 2011). 337 Adams Cable Service, http://www.adamscable.com/cable.html (visited Nov. 2, 2011). 338 Sweetwater Cable, http://www2.sweetwaterhsa.com/ (visited Feb. 13, 2012). 339 Buckeye CableSystem, http://www.buckeyecablesystem.com/digital/index.html (visited Oct. 31, 2011). 340 BendBroadband, http://www.bendbroadband.com/residential/dc_index.asp?pageID=dc&adct=3 (visited Feb. 26, 2012). 341 Adams Cable Service, http://www.adamscable.com/cable.html (visited Nov. 2, 2011). 342 Sweetwater Cable, http://www2.sweetwaterhsa.com/ (visited Feb. 13, 2012). 343 Id. 344 Sweetwater Cable, http://www2.sweetwaterhsa.com/digitalcable.html (visited Feb. 13, 2012). Federal Communications Commission FCC 12-81 49 VOD and limited HD service.345 Some of these systems are offering innovative services. For example, Buckeye recently introduced Whole Home VOD, which allows subscribers to access VOD programs on any television in the home.346 BendBroadband offers a service called Alpha, which combines a set-top receiver, cable modem, and wireless router into a single box that can record six video programs simultaneously.347 Adams offers pay-per-view movies and special events, but appears to offer a more limited selection of free VOD content than that found on the larger cable MVPDs.348 In addition, the company’s DVR service is limited to a single room. 115. Overall, small and mid-sized cable MVPDs are also transitioning to all-digital systems. In a recent survey by the American Cable Association, 50 percent of the 107 cable MVPDs respondents indicate that they plan to either operate an all-digital system, or will be upgrading to all-digital within three years.349 116. Bundling. Each of the small cable systems we studied now offers Internet access and telephone services.350 Buckeye offers Internet access and telephone services and “money-saving” bundles similar to large cable MVPDs. BendBroadband offers Internet access (both wireline and wireless) and telephone service, separately and in bundles. Adams offers Internet access and telephone service, separately and in bundles, that appear to be comparable to those offered by larger cable MVPDs. In 2011, Sweetwater upgraded its cable systems to offer digital video service, as well as Internet access and telephone services.351 117. Marketing. Buckeye’s marketing is focused on winning subscribers from DBS MVPDs.352 The company offers current DBS subscribers $200 to convert to Buckeye’s video service. As added incentives to subscribe to its bundle of services, Buckeye will remove the DBS satellite dish and provide a free month of Internet access and telephone service. 345 Buckeye offers 250 digital channels, HD channels, DVR service, and thousands of hours of VOD programming. Buckeye CableSystem, http://www.buckeyecablesystem.com/digital/index.html (visited Oct. 31, 2011); BendBroadband offers a total of 108 HD channels, DVR service, and VOD. BendBroadband, http://www.bendbroadband.com/residential/alpha_index.asp?pageID=al&adct=1 (visited Nov. 2, 2011); Adams video services are comparable to those offered by the largest cable MVPDs, but it offers fewer VOD programs and its DVR service does not deliver programs to other televisions throughout the house. Adams Cable Service, http://www.adamscable.com/index.html (visited Nov. 2, 2011). According to Sweetwater Cable’s website, it offers the Salt Lake City broadcast stations and a number of national cable networks in HD, with plans to add additional HD channels upon availability and system capacity. Sweetwater Cable, http://www2.sweetwaterhsa.com/digitalcable.html (visited July 10, 2012). 346 Buckeye CableSystem, http://www.buckeyecablesystem.com/vod/index.html (visited Oct. 31, 2011). 347 BendBroadband, http://www.bendbroadband.com/residential/alpha_index.asp?pageID=al&adct=1 (visited Nov. 2, 2011). 348 Adams Cable Service, http://www.adamscable.com/cable.html (visited Nov. 2, 2011). 349 See Letter from Barbara S. Esbin, Counsel to the American Cable Association, to Marlene Dortch, Secretary, FCC, MB Docket No. 11-169, PP Docket No. 00-67 (Feb. 27, 2012). 350 We note that not all of the smallest cable systems offer Internet access or telephone services. FCC staff analysis shows that 160 cable systems, each with less than 5,000 subscribers, filed a Form 325 for 2010. Of these, five cable systems offered neither Internet access nor telephone service. 351 Sweetwater Cable, http://www2.sweetwaterhsa.com/ (visited Feb. 13, 2012). 352 Buckeye CableSystem, http://www.buckeyecablesystem.com/nodish/index.html (visited Oct. 31, 2011). Federal Communications Commission FCC 12-81 50 (ii) DBS MVPD Business Models and Competitive Strategies 118. DIRECTV is the second largest MVPD, with approximately 19 million subscribers in the United States.353 The company is organized into two operating segments: DIRECTV U.S. and DIRECTV Latin America.354 DIRECTV has ownership interests in Root Sports, a group of RSNs, and a 65 percent interest in Game Show Network, a cable television network dedicated to game-related programming and Internet interactive game playing.355 DISH Network is the third largest MVPD, with approximately 14 million subscribers.356 The company does not have significant ownership interests in programming networks. DISH Network recently acquired Blockbuster, Inc. and now offers DVDs and online streaming of video programming.357 119. Programming Tiers. At the end of 2010, DIRECTV offered over 285 all-digital channels, 160 national HD channels, and four 3D channels.358 At the end of 2010, DIRECTV offered local broadcast television stations (also called local-into-local service) in 172 television markets and local broadcast television HD channels in 155 television markets.359 DIRECTV also has exclusive rights to offer the NFL SUNDAY TICKET, which allows subscribers to view the largest selection of NFL games during the regular season.360 At the end of 2010, DISH Network offered 280 video channels and 215 national HD channels.361 At the end of 2010, DISH Network offered local broadcast television stations in all 210 television markets and local broadcast television HD channels in more than 160 markets.362 In 2010, DISH Network also offered 250 Latino and international channels, 30 premium movie channels, 35 regional and specialty sports channels, and 55 channels of pay-per-view content.363 120. Technology and Advanced Video Services. DIRECTV and DISH Network use an all- digital, one-way technology to deliver video programming to set-top receivers. Subscribers receive programming through a small satellite dish. DIRECTV uses 12 geosynchronous satellites (eleven owned and one leased).364 DISH Network uses 13 satellites (six owned, five leased from EchoStar, and two 353 DIRECTV 2010 Form 10-K at 2. 354 In this Report, we focus only on the DIRECTV U.S. segment. 355 DIRECTV 2010 Form 10-K at 2. 356 DISH Network 6/8/11 Comments at 2. 357 DISH Network, Dish Network Agrees to Acquire Blockbuster Assets (press release), Apr. 6, 2011; DISH Network, http://www.dishnetwork.com/blockbuster/ (visited Jan. 25, 2012). 358 DIRECTV 6/8/2011 Comments at 10. 359 Id. DIRECTV has been expanding its local-into-local service and currently offers local broadcast television stations in 194 television markets and local broadcast television HD channels in 181 markets. DIRECTV, http://www.directv.com/DTVAPP/content/hd/hd_locals (visited Apr. 6, 2012). 360 DIRECTV, http://www.directv.com/DTVAPP/content/about_us/our_company (visited Feb. 26, 2012). 361 DISH Network 2010 Form 10-K at 1-2. 362 Id. 363 Id. 364 DIRECTV 2010 Form 10-K at 6. Federal Communications Commission FCC 12-81 51 leased from third parties).365 The satellites used by DIRECTV and DISH Network provide a nationwide footprint, such that almost every home has access to DBS MVPD service.366 121. DIRECTV offers a “whole home” DVR, which distributes video content to multiple televisions throughout the house from a single DVR.367 DISH Network says that its whole home DVR is coming soon.368 Because DBS technology is a one-way transmission service, DIRECTV and DISH Network provide their VOD service over the Internet. Thus, DBS subscribers must also subscribe to Internet access service to receive DBS VOD service. Both DIRECTV’s and DISH Network’s VOD service offer thousands of movies and television programs.369 122. In 2010, DIRECTV stated that its TV Everywhere strategy was to deliver the best anytime, anywhere video experience, in and out of the home.370 DIRECTV now offers shows, movies, sports, and NFL SUNDAY TICKET To-Go, which is available on the iPad.371 DIRECTV also offers movies and television shows from HBO and Cinemax on cell phones, iPads, or online.372 In 2010, DISH Network promoted a suite of products designed to make it convenient and easy to watch television anytime and anywhere.373 DISH Network’s TV Everywhere uses online access and Slingbox placeshifting technology.374 The service enables customers to watch live television on computers, iPads, iPhones, or Android devices; or access thousands of on-demand movies and shows from a computer at Dish Online or on an iPad using a DISH remote access application.375 123. DIRECTV notes that its advertising revenue per subscriber trails many of its competitors because it does not have the ability to target advertising at the local level due to its national satellite infrastructure.376 Using new technology, DIRECTV anticipates being able to insert advertisements into individual DVR set-top receivers. This will enable advertisers to target subscribers in local regions and 365 DISH Network 6/8/11 Comments at 5. 366 In addition to the contiguous 48 states, DIRECTV states that it provides the same programming packages for the same prices to customers in Alaska and Hawaii. DIRECTV 6/8/2011 Comments at 13-14. DISH Network also appears to offer the same programming packages to the contiguous 48 states and Alaska and Hawaii. See SatelliteSales.com, http://www.satellitesales.com/ak-fairbanks-dish-network.html; D&M Satellite Solutions, http://www.dishtvhawaii.com/ (visited Mar. 14, 2012). 367 DIRECTV 6/8/2011 Comments at 4. 368 DISH Network, http://www.dish.com/technology/receivers-dvrs/ (visited Feb. 29, 2012). 369 DIRECTV 6/8/2011 Comments at 2; DISH Network, http://www.dish.com/entertainment/vod/ (visited Feb. 29, 2012). 370 DIRECTV, 2010 Annual Report, Message to Shareholders. 371 Id. See also DIRECTV, http://www.directv.com/DTVAPP/content/technology/mobile_apps?footernavtype=- 1&lpos=header (visited Mar. 2, 2012). 372 DIRECTV, http://www.directv.com/entertainment/watch_online/ (visited Mar. 5, 2010). 373 DISH Network, 2010 Annual Report, Letter to Shareholders. 374 Id. 375 DISH Network, http://www.dish.com/testdrive/ and http://www.dish.com/technology/tv-everywhere/ (visited Mar. 2, 2010). 376 DIRECTV 2010 Form 10-K at 5-6. Federal Communications Commission FCC 12-81 52 eventually in the individual home. With this new technology, DIRECTV expects to increase its advertising revenues significantly.377 124. Bundling. DBS MVPDs rely on cooperative arrangements with telephone companies to offer a “synthetic bundle” of video, Internet access, and telephone service.378 DIRECTV explains that cable and telephone MVPDs have advantages over it because they have been able to upgrade their facilities to bundle their video service with two-way high-speed Internet access and telephone service over the same wire, which DIRECTV cannot do.379 DIRECTV also expresses concern that telephone companies that upgrade their networks with fiber optic technology to provide their own MVPD service have less incentive to bundle with DIRECTV.380 DISH also partners with telephone companies to bundle DISH Network video programming with Internet access and telephone service on a single bill.381 125. Marketing. The marketing of DIRECTV and DISH Network is focused on delivered video programming, with less emphasis on bundles.382 DISH Network markets its video programming packages as providing better “price-to-value” than those available from other MVPDs.383 DIRECTV compares its video services with those offered by DISH Network and also with those offered by cable and telephone MVPDs.384 DISH Network takes a similar approach, stating that it competes directly with DIRECTV in the market for the delivery of video programming, but also faces competition from cable and telephone MVPDs.385 Both DIRECTV and DISH Network assert that cable and telephone MVPDs have a competitive advantage in the provision of video, Internet access, and telephone service bundles. (iii) Telephone MVPD Business Models and Competitive Strategies 126. In the last report, we explained that some telephone companies offered video service through cooperative arrangements with DBS MVPDs, although Verizon and AT&T were upgrading their networks to provide their own, facilities-based, wireline video service.386 At the time, some analysts were skeptical of Verizon and AT&T’s plans to build their own facilities-based video service and pointed to the 377 Id. 378 DIRECTV 6/8/11 Comments at 16; DISH Network 2010 Form 10-K at 3. 379 DIRECTV 2010 Form 10-K at 17. 380 Id. DIRECTV has cooperative arrangements with telephone companies that use DSL technology to offer Internet access and telephone services. When telephone companies (e.g., AT&T and Verizon) upgrade their systems and begin offering their own MVPD service, they may end their cooperative arrangements with DIRECTV. One analyst explains that DBS MVPDs remain “enormously dependent” on the telephone companies’ legacy DSL as their partner for broadband. Craig Moffett, The Long View: Cord Cutting, Household Formation, and the Long Road to a New Pay TV Video Equilibrium, BERNSTEIN RESEARCH, Nov. 10, 2011, at 15. 381 DISH Network 2010 Form 10-K at 3. 382 DIRECTV’s and DISH Network’s main websites market video programming, with no mention of Internet access or telephone services. DIRECTV, http://www.directv.com/DTVAPP/index.jsp (visited Feb. 29, 2012); DISH Network, http://www.dishnetwork.com/ (visited Jan. 25, 2012). See also DIRECTV 6/8/11 Comments at 3. 383 DISH Network 2010 Form 10-K at 1. 384 DIRECTV, http://www.directv.com/DTVAPP/content/directv/competition?footernavtype=-1&lpos=header (visited Feb. 29, 2012). 385 DISH Network 2010 Form 10-K at 3. 386 13th Report, 24 FCC Rcd at 604-5, ¶ 131. Federal Communications Commission FCC 12-81 53 slower-than-projected rollout, the high capital costs, and the lack of differentiation from cable MVPD video and bundle offerings.387 Much has changed in the intervening years, and by the end of 2010, Verizon and AT&T were the seventh and ninth largest MVPDs. More recently, CenturyLink began upgrading its systems and offering its own MVPD service. 127. Verizon began offering video on its FiOS network in 2005. By the end of 2006, Verizon passed 2.4 million homes with 207,000 subscribers.388 By the end of 2010, Verizon passed 15.6 million homes with approximately 3.5 million video subscribers.389 Verizon recently stated that it plans to reach 18 million homes, but has no current plans to build out further.390 AT&T U-verse entered the market in late 2006 and by 2010 passed approximately 27 million homes and had approximately three million video subscribers.391 In 2010, CenturyLink began offering Prism TV video service in Fort Myers, Florida, and Las Vegas, Nevada.392 Subsequently, CenturyLink extended its Prism TV video service to Jefferson City, Missouri; Columbia, Missouri; La Crosse, Wisconsin; Tallahassee, Florida; Central Florida; and Raleigh, North Carolina.393 Prism TV service is now available to one million homes.394 Verizon, AT&T, and CenturyLink have no significant ownership interests in video programming networks. 128. Programming Tiers. Verizon’s FiOS TV offers 530 all-digital video channels, 130 HD channels, and claims to offer more children’s sports, and premium movie channels than cable MVPDs.395 AT&T’s U-Verse TV offers a basic package with local channels only, a range of additional channel packages with anywhere from 130 to 470 video channels, and 170 HD channels.396 Prism TV offers over 230 channels and HD channels.397 129. Technology and Advanced Video Services. Verizon has deployed an all-digital fiber-to- the-premises network, which offers FiOS TV and FiOS Internet.398 FiOS offers 35,000 VOD titles each 387 Kagan Research, LLC., Cable TV Investor: Deals & Finance, Sept. 30, 2006, at 1, 6. 388 Verizon, 2006 Annual Report at 19. The 207,000 subscribers in 2006 included both video and Internet subscribers. Verizon is organized into a Domestic Wireless and Wireline segment. FiOS is included in the Wireline segment. Verizon, 2010 Annual Report at 14, 22. 389 Verizon 6/8/11 Comments at 5-6; Verizon, 2010 Annual Report at 14-15. 390 In an interview with UBS analyst John Hodulik, Lowell McAdam, Verizon President & CEO, stated, “With FiOS we are about 16 million POPs at this point and we want to get to about 18 million. If we built out the whole footprint, we would be more in the 21 million, maybe a little bit more, range . . . But for now the bottom line is we are going to build out what we said and not any more.” See VZ-Verizon Communications Inc at UBS Media and Communications Conference, Final Transcript, THOMSON STREETEVENTS, Dec. 7, 2011, http://www22.verizon.com/idc/groups/public/documents/adacct/event_1012_trans.pdf (visited Feb. 10, 2012). 391 AT&T 6/8/11 Comments at 2-3. AT&T has four operating segments: Wireless, Wireline, Advertising Solutions, and Other. U-verse is included in the Wireline segment. AT&T, 2010 Annual Report, at 33. 392 CenturyLink, http://www.centurylink.com/home/ (visited Jan. 26, 2012). 393 CenturyLink, http://www.centurylink.com/prismtv/#prismChannelLineup.html (visited Nov. 15, 2011). 394 CenturyLink, Inc., CenturyLink Reports Strong Third Quarter 2011 Earnings (press release), Nov. 2, 2011. 395 Verizon, http://www22.verizon.com/home/fiosTV/ (visited Jan. 26, 2012). 396 AT&T, http://www.att.com/u-verse/explore/tv-landing.jsp?wtSlotClick=1-0069UB-0-1&WT.svl=calltoaction (visited Oct. 26, 2011). 397 CenturyLink, http://www.centurylink.com/prismtv/#index.html (visited Nov. 15, 2011). 398 Verizon, 2010 Annual Report, at 46. Federal Communications Commission FCC 12-81 54 month and a multi-room DVR receiver.399 AT&T’s U-verse uses an all-digital fiber-to-the-premises technology, which includes fiber-optic cable all the way to the home, or fiber-to-the-node technology, which includes fiber-optic cable to the node and copper wire from the node to the home.400 AT&T’s IP technology sends only the video program selected by the subscriber to the set-top receiver.401 AT&T U- verse offers a large library of VOD titles and a “Total Home” DVR receiver.402 CenturyLink is in the process of deploying additional fiber and transitioning to an all-digital IP-based network.403 CenturyLink’s Prism TV offers VOD and a whole home DVR that records four programs at once and holds 230 hours of video programming.404 130. For TV Everywhere, Verizon’s states that its FlexView service is a “go-everywhere, watch-anywhere, mobile entertainment technology” that enables customers to view over 10,000 video titles.405 FiOS FlexView gives customers streaming video to televisions, computers, tablets, and smartphones.406 Verizon says customers can start watching a movie on one device and finish watching it on another device.407 With respect to TV Everywhere, AT&T stated in 2010 that it was increasingly focused on delivering video across networks and platforms so that customers could simply and seamlessly access video programming without giving a thought to whether they happened to be on a wired or a wireless network.408 131. Bundling. Although FiOS TV and U-verse TV can be purchased on a stand-alone basis, both Verizon and AT&T typically market video services in a bundle that includes video, Internet access, and telephone service.409 Verizon marketing focuses on bundles and states that its bundled pricing strategy allows it to provide competitive offerings to subscribers and potential subscribers.410 AT&T states it uses a bundling strategy that “rewards customers who consolidate their services (e.g., local and long-distance telephone, high-speed Internet, wireless and video).”411 Verizon and AT&T contend that their most significant competitors are the incumbent cable operators that offer bundles of video, Internet 399 Verizon, http://www22.verizon.com/home/fiosTV/ (visited Jan. 26, 2012). 400 AT&T, http://www.att.com/Common/about_us/files/pdf/HowUverseIsDelivered_2-22.pdf (visited Oct. 26, 2011). A node is a communications control unit in a video system that interconnects traditional coaxial cable and fiber-optics. It is the place where an optical signal is converted to a radio frequency (RF) signal, or vice versa. 401 AT&T, http://www.att.com/Common/about_us/files/pdf/IPTV_background.pdf (visited Jan. 26, 2012). 402 AT&T, http://www.att.com/shop/tv/index.jsp?wtSlotClick=1-0056C5-0-4#fbid=dEBRF88Fm3S (visited Jan. 26, 2012). 403 CenturyLink, 2010 Review and CEO’s Message, at 4, http://ir.centurylink.com/phoenix.zhtml?c=112635&p=irol-reportsannual (visited Nov. 15, 2011). 404 CenturyLink, http://www.centurylink.com/prismtv/#index.html (visited Nov. 15, 2011). 405 Verizon, http://www22.verizon.com/home/fiosTV/#connect (visited Mar. 2, 2012). 406 Verizon, 2010 Annual Report, at 6. 407 Id. 408 AT&T, 2010 Annual Report, at 4. 409 Verizon, 2010 Annual Report, at 25; AT&T, http://www.att.com/shop/u-verse/#fbid=dEBRF88Fm3S (visited Jan. 26, 2012). 410 Verizon, 2010 Annual Report, at 25. 411 AT&T, 2010 Annual Report, at 44. Federal Communications Commission FCC 12-81 55 access, and voice services in virtually every area that they provide service.412 Verizon and AT&T also state that their MVPD services experience significant video competition from DBS MVPDs.413 CenturyLink states that 70 percent of Prism TV customers subscribe to a video, Internet access, and telephone services bundle.414 132. Although bundling by cable MVPDs has generally involved triple-play offerings of video, Internet access, and telephone service, MVPDs have also added wireless telephone service through partnerships.415 For example, Verizon Wireless and SpectrumCo, which is a joint venture among subsidiaries of Comcast, Time Warner Cable, and Bright House, have requested consent to assign 122 Advanced Wireless Services licenses to Verizon Wireless from SpectrumCo.416 In a second application, Verizon Wireless and Cox have requested consent to assign 30 Advanced Wireless Services Licenses to Verizon Wireless from Cox.417 The Commission consolidated consideration of the applications and issued a Public Notice.418 In addition to acquiring spectrum from the cable companies, Verizon Wireless and the Applicants report that they have entered into agreements under which the cable companies and Verizon Wireless will sell one another’s products and services.419 133. Marketing. Verizon describes its all-fiber FiOS network as the fastest, highest-quality broadband network in the country.420 Verizon asserts that its networks differentiate it from its competitors.421 Verizon markets FiOS TV as a premium service, although it also offers a less-promoted low-price, basic video service.422 AT&T maintains that “U-verse uses fiber optic technology and computer networking to bring you better digital television, faster Internet, and a smarter phone.”423 412 Verizon 6/8/11 Comments at 7; AT&T 6/8/11 Comments at 4; AT&T, 2010 Annual Report, at 43-44. 413 Verizon 6/8/11 Comments at 5; AT&T 6/8/11 Comments at 5. 414 CenturyLink, http://www.centurylink.com/prismtv/#index.html (visited Nov. 15, 2011). 415 See 13th Report, 24 FCC Rcd at 578, ¶ 69. 416 See Application and Public Interest Statement of SpectrumCo., LLC, transferor, to Cellco Partnership d/b/a Verizon Wireless, transferer (Dec. 16, 2011) (“Verizon Wireless-SpectrumCo- Application”). See also Verizon, Comcast, Time Warner Cable, and Bright House Networks Sell Advanced Wireless Spectrum to Verizon Wireless for $3.6 Billion (press release), Dec. 2, 2011. 417 See Application and Public Interest Statement of Cox TMI Wireless, LLC, transferor, to Cellco Partnership d/b/a Verizon Wireless, transferer (Dec. 21, 2011) (“Verizon Wireless-Cox Application”). See also Verizon, Cox Communications Announces Agreement to Sell Advanced Wireless Spectrum to Verizon Wireless (press release), Dec. 16, 2011. 418 See Cellco Partnership D/B/A Verizon Wireless, SpectrumCo, LLC and Cox TMI Wireless, LLC Seek FCC Consent to the Assignment of AWS-1 Licenses, WT Docket No. 12-4, Public Notice, 27 FCC Rcd 360 (WT 2012). 419 Verizon Wireless-SpectrumCo Application, Public Interest Statement, at 1; Verizon Wireless-Cox Application, Public Interest Statement, at 1. 420 Verizon, 2010 Annual Report, at 2-3. 421 Id. at 8, 15. Verizon states that “Current and potential competitors for network services include other telephone companies, cable companies, wireless service providers, foreign telecommunications providers, satellite providers, electric utilities, Internet service providers, providers of VoIP services, and other companies that offer network services using a variety of technologies.” Id. at 37. 422 See Verizon, http://www22.verizon.com/home/aboutfios/?CMP=DMC-CVS_ZZ_ZZ_E_TV_N_X001 (visited Jan. 26, 2012). 423 AT&T, http://www.att.com/shop/u-verse/#fbid=QmA4InkA_TN (visited Mar. 5, 2012). Federal Communications Commission FCC 12-81 56 CenturyLink markets Prism TV as “TV worth switching for,” and “one of the most advanced TV services in the world,” which “will change the way you experience TV forever.”424 4. MVPD Performance 134. The structural and behavioral characteristics of a competitive market are desirable not as ends in themselves, but rather as a means of bringing tangible benefits to consumers such as lower prices, higher quality, and greater choice of services. To determine if the market for the delivery of video programming is producing these kinds of positive outcomes, we look at video prices and provide current prices for a sample of video packages offered by some MVPDs. We also examine competition in the market for the delivery of video programming from an investor perspective, including how the various types of MVPDs are doing relative to one another. As such, we report on video subscribers and penetration, revenue, investment, and profitability. a. Video Programming Pricing 135. Section 623(k) of the Act of 1934, as amended by the Cable Act,425 requires the Commission to publish annually a statistical report on the average rates that cable operators charge for basic service, other cable programming, and cable equipment.426 Table 3 uses data from the Commission’s most recent report on cable industry prices to show prices for basic service, expanded basic service, and the next most popular service (plus equipment) for the years 2006 to 2010.427 Table 3 shows that prices for basic service, expanded basic service, and the next most popular service (plus equipment) increased over the period 2006 to 2010.428 424 CenturyLink, http://www.centurylink.com/prismtv/#index.html (visited Mar. 2, 2012). 425 See 47 U.S.C. § 543(k). 426 The 1992 Cable Act requires operators to offer an entry-level basic service, which must include, at a minimum, all commercial and noncommercial local broadcast stations entitled to carriage under the must-carry provisions of the Communications Act of 1934, 47 U.S.C. §§ 534-35. Basic service must also offer any other local broadcast station provided to any subscriber, as well as public, educational, and governmental access channels that the local franchise authority (LFA) may require the operator to carry. See 47 U.S.C. § 543(b)(7). Cable programming refers to a tier of video channels for which the operator charges a separate rate, other than the basic service channels and channels for which per-channel or per-program charges apply. See 47 U.S.C. § 543(k)(l)(2). Cable equipment refers to a converter box and other customer premises equipment for accessing cable services. See 47 U.S.C. § 543(b)(3). 427 See Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, Statistical Report on Average Rates for Basic Service, Cable Programming Service, and Equipment, MM Docket No. 92-266, Report on Cable Industry Prices, 27 FCC Rcd 2427, 2435, Table 3 (MB 2012) (“2010 Cable Price Survey Report”). 428 The next most popular service package generally includes all the programming channels included in the expanded basic service package and at least seven additional cable network channels. Id. 2432, at ¶ 10. Federal Communications Commission FCC 12-81 57 Table 3: Historical Average Monthly Prices Year Basic Service Price Expanded Basic Service Price Next Most Popular Service & Equipment Price 2006 $14.59 $45.26 $59.09 2007 $15.33 $47.27 $60.27 2008 $16.11 $49.65 $63.66 2009 $17.65 $52.37 $67.92 2010 $17.93 $54.44 $71.39 136. Table 4 provides examples of prominently displayed video packages from MVPD websites. Table 4 does not show all of the video packages offered by the MVPDs. For example, the cable MVPDs included in Table 4 offer basic and expanded basic video packages. These video packages, however, were not prominently displayed on their websites. Table 4 shows the name of the video package, the advertised price, and the number of channels.429 The advertised video packages are often promotional prices for new customers. At the end of the promotional time period, the price for services rises to the “normal” price. It is important to note that some of the video packages shown in Table 4 include advanced video services (e.g., DVR service), some include equipment (e.g., an HD/DVR set-top receiver), and some include premium channels (e.g., HBO). Even where the number of channels is the same, each package contains a different mix of channels.430 Many services and features that affect the value of a video package are not shown in Table 4. Therefore, at best, this information provides only a starting point for comparing video packages since there is no standard video package for making direct price comparisons. For these reasons, Table 4 contains only a sample of advertised prices for prominently displayed video package offerings. 429 When MVPDs advertise the number of channels, they usually include both video channels and music channels. The video channels in Table 4 include those found on the basic and expanded basic service and a range of digital channels. 430 For example, some MVPDs include all of the premium movie channels in their most expensive advertised video package while other MVPDs include fewer premium movie channels in their most expensive advertised video package. Federal Communications Commission FCC 12-81 58 Table 4: Examples of MVPD Video Package Prices Cable Comcast431 Digital Starter $29.99 (80 channels) Digital Preferred $39.99 (160 channels) Digital Premier $84.99 (200 channels) Cox432 TV Essential $57.99 (95 channels) Advanced TV Preferred $67.99 (236 channels) Advanced TV Premier $76.99 (270 channels) BendBroadband433 Essentials $46.99 (159 channels) Preferred $54.99 (196 channels) Gold Package $98.47 (295 channels) DBS DIRECTV434 Choice $29.99 (150 channels) Choice Extra $34.99 (210 channels) Choice Ultimate $39.99 (225 channels) Premier $83.99 (285 channels) DISH Network435 America’s Top 120 $29.99 (120 channels) America’s Top 200 $39.99 (200 channels) America’s Top 250 $44.99 (250 channels) America’s “Everything” Pak $79.99 (315 channels) Telephone AT&T U-verse436 U100 TV $34 (210 channels) U200 TV $44 (270 channels) U300 TV $59 (360 channels) U450 TV $92 (430 channels) Verizon FiOS437 Prime HD $64.99 (195 channels) Extreme HD $74.99 (285 channels) Ultimate HD $89.99 (350 channels) 431 Comcast, http://www.comcast.com/Corporate/Learn/DigitalCable/digitalcable.html (visited Nov. 9, 2011). 432 Cox Communications, https://secure.cox.com/Service/Store/OrderNow.aspx?SO=W&campcode=sa- tv_1_special-offers (visited Nov. 9, 2011). 433 BendBroadband, http://www.bendbroadband.com/residential/dc_index.asp?pageID=dc#Essentials (visited Nov. 9, 2011). 434 DIRECTV, http://www.directv.com/DTVAPP/new_customer/base_packages.jsp?footernavtype=-1 (visited Nov. 9, 2011). 435 DISH Network, http://www.dishnetwork.com/packages/programming/default.aspx (visited Nov. 9, 2011). 436 AT&T, http://www.att.com/u-verse/shop/index.jsp?shopFilterId=100004&wtSlotClick=2-005THH-903422-2- 2&rel=nofollow#fbid=wqVQ02ViVNz (visited Nov. 9, 2011). 437 Verizon, http://www22.verizon.com/Residential/FiOSTV/Overview#plans (visited Nov. 9, 2011). Federal Communications Commission FCC 12-81 59 b. Video Subscribers and Penetration 137. Video Subscribers. Table 5 shows the number of video subscribers for cable, DBS, and telephone MVPDs. Between 2006 and 2010, the number of subscribers to MVPD video service has grown from 95.8 million in 2006 to 100.8 in 2010, a net increase of five million subscribers.438 Over that period, however, cable MVPDs lost video subscribers and market share. At the end of 2006, cable MVPDs had 65.4 million video subscribers (68.3 percent of the 95.8 million MVPD video subscribers).439 By year-end 2010, the number of cable MVPD subscribers had declined to 59.8 million (59.3 percent of the MVPD subscribers), a loss of 5.6 million subscribers.440 Table 5 shows that from 2006 to 2010, large cable MVPDs accounted for the majority of the cable MVPD video subscriber losses. For example, Comcast lost 1.4 million video subscribers, Time Warner Cable lost one million video subscribers, Cox lost 500,000 video subscribers, and Charter lost 900,000 video subscribers. 138. SNL Kagan explains that competition continues to reduce cable’s share of the U.S. video market and that cable MVPDs are expected to continue losing basic video subscribers to competing MVPDs.441 According to SNL Kagan, cable video subscriptions have been eroded by competition from new telephone MVPDs and established DBS MVPDs.442 Another analyst says that a weak economy is a contributing factor but increased competition from DBS and telephone MVPDs is the main reason that cable MVPDs are losing video subscribers.443 139. Table 5 shows that DBS MVPDs and telephone MVPDs gained video subscribers and market share during the period 2006 to 2010. In 2006, DBS MVPDs had 29.1 million video subscribers (30.4 percent).444 By 2010, the number of DBS MVPD video subscribers had increased to 33.4 million (33.1 percent), a gain of 4.3 million subscribers.445 DIRECTV credits its increase in subscribers and market share to taking customers primarily from cable.446 Similarly, in 2006, telephone MVPDs had approximately 300,000 video subscribers (0.3 percent).447 Five years later, the number of telephone MVPD video subscribers had increased to 6.9 million (6.8 percent of MVPD video subscribers), a gain of 6.6 million subscribers. According to SNL Kagan, the subscriber gains of telephone MVPDs come at the 438 SNL Kagan, U.S. Multichannel Industry Benchmarks, http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx (visited Dec. 21, 2011). 439 Id. 440 Id. 441 SNL Kagan, Broadband Cable Financial Databook, 2010 Edition, at 6. 442 SNL Kagan, Cable TV Investor: Deals & Finance, Jan. 29, 2010, at 10. 443 Marguerite Reardon, Competition and a Weak Economy Plague Cable TV, CNET NEWS, Nov. 3, 2011, http://news.cnet.com/8301-30686_3-57316511-266/competition-and-a-weak-economy-plague-cable-tv/ (visited Apr. 6, 2012). The article cites statements from Craig Moffett, an analyst with Sanford Bernstein. 444 SNL Kagan, U.S. Multichannel Industry Benchmarks, http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx (visited Dec. 21, 2011). 445 Id. 446 DIRECTV, 2010 Annual Report, Message to Shareholders. 447 SNL Kagan, U.S. Multichannel Industry Benchmarks, http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx (visited Dec. 21, 2011). Federal Communications Commission FCC 12-81 60 expense of cable and DBS MVPDs, rather than from a larger percentage of homes subscribing to MVPD video services.448 Table 5: MVPD Video Subscribers (in millions) Year 2006 2007 2008 2009 2010 MVPD Total449 95.8 97.7 98.9 100.7 100.8 Cable450 65.4 64.9 63.7 62.1 59.8 Comcast 24.2 24.1 24.2 23.6 22.8 Time Warner 13.4 13.3 13.1 12.9 12.4 Cox 5.4 5.4 5.3 5.2 4.9 Charter 5.4 5.2 5.0 4.8 4.5 Cablevision 3.1 3.1 3.1 3.1 3.3 Bright House 2.3 2.3 2.3 2.3 2.2 Suddenlink 1.4 1.3 1.3 1.2 1.2 Mediacom 1.4 1.3 1.3 1.2 1.2 All Other Cable451 8.8 8.9 8.1 7.8 7.3 DBS452 29.1 30.6 31.3 32.6 33.3 DIRECTV453 16.0 16.8 17.6 18.5 19.2 DISH Network454 13.1 13.8 13.7 14.1 14.1 448 SNL Kagan, Broadband Technology, June 19, 2009, at 1. 449 SNL Kagan, U.S. Multichannel Industry Benchmarks, http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx (visited Dec. 21, 2011). Table 5 does not include subscribers to PCO, HSD, OVS, and wireless cable MVPDs, which had fewer than one million subscribers between 2006 and 2010. In addition, the number of video subscribers for individual companies in Table 5 is rounded to the nearest 100,000. Because some types of MVPDs are not included and because of rounding, the sum of the individual entries does not equal the MVPD totals. 450 Id. Individual cable company data come from SNL Kagan, Top Cable MSOs, http://www.snl.com/interactivex/TopCableMSOs.aspx (visited Dec. 21, 2011). 451 All other cable subscribers are estimated by subtracting the subscribers of the eight largest cable MVPDs from total cable subscribers. 452 SNL Kagan, U.S. Multichannel Industry Benchmarks, http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx (visited Dec. 21, 2011). 453 DIRECTV subscriber numbers come from DIRECTV, SEC Form 10-K for the Year Ended December 31, 2006, at 3 (“DIRECTV 2006 Form 10-K”); DIRECTV, SEC Form 10-K for the Year Ended December 31, 2007, at 3 (“DIRECTV 2007 Form 10-K”); DIRECTV, SEC Form 10-K for the Year Ended December 31, 2008, at 3 (“DIRECTV 2008 Form 10-K”); DIRECTV, SEC Form 10-K for the Year Ended December 31, 2009, at 3 (“DIRECTV 2009 Form 10-K”); DIRECTV 2010 Form 10-K at 2. 454 DISH Network subscriber numbers come from EchoStar, SEC Form 10-K/A for the Year Ended December 31 2006, at 1; DISH Network, SEC Form 10-K for the Year Ended December 31, 2007, at 1; DISH Network, SEC Form 10-K for the Year Ended December 31, 2008, at 1 (“DISH Network 2008 Form 10-K”); DISH Network, SEC Form 10-K for the Year Ended December 31, 2009, at 1; DISH Network 2010 Form 10-K at 1. Federal Communications Commission FCC 12-81 61 Table 5: MVPD Video Subscribers (in millions) (continued) Year 2006 2007 2008 2009 2010 Telephone455 0.3 1.3 3.1 5.1 6.9 AT&T U-verse 0 0.2 1.0 2.1 3.0 Verizon FiOS 0.2 0.9 1.9 2.9 3.5 All Other Telephone456 0.1 0.1 0.2 0.1 0.4 140. Consumers watch delivered video programming that appeals to them even when the programming is not provided by MVPDs.457 From 2006 to 2010, an increasing number of consumers streamed an increasing amount of video content directly from the Internet to computers, television sets, tablets, and smartphones.458 Although some consumers may consider online video to be a substitute for MVPD video, other consumers may consider online video to be a complement to MVPD video. According to Nielsen, during the second quarter of 2011, Americans watched each week on average 32 hours and 47 minutes of traditional television, two hours and 21 minutes of time-shifted television, 27 minutes of Internet video, and seven minutes of smart phone video.459 Reports suggest that some consumers are dropping their MVPD video services (“cutting-the-cord”) or eliminating subscriptions for some video services such as premium channels (“cord-shaving”) in favor of video services delivered over the Internet.460 According to one estimate, 13 percent of consumers with a broadband connection “cord- shaved” in the past year.461 However, there are also indications that increased viewing of video 455 SNL Kagan, U.S. Multichannel Industry Benchmarks, http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx (visited Dec. 21, 2011). Individual telephone company data come from SNL Kagan, Broadband Cable Financial Databook, 2008 Edition, at 48; 2009 Edition, at 50; 2010 Edition, at 44: 2011 Edition, at 42. 456 All other telephone MVPD subscribers are estimated by subtracting the subscribers of the two largest telephone MVPDs from total telephone MVPD subscribers. 457 NCTA 6/8/11 Comments at 19-21. 458 We discuss online video distributors in Section III. C. of this Report. 459 Nielsen, The Cross-Platform Report, Quarter 2, 2011, at 5. 460 See Ian Olgeirson & Deana Myers, Over-the-top Substitution Forecast to Erode Multichannel Penetrations, SNL Kagan, July 15, 2011, http://www.snl.com/interactivex/article.aspx?id=13029656&KPLT=6 (estimating that nearly 4 percent of occupied U.S. households will employ Internet video in lieu of subscribing to a multichannel video package at year-end 2011); Terrence O’Brien, Netflix Users More Likely to Cut the Cord, SWITCHED, Jan. 5, 2011, http://www.switched.com/2011/01/05/netflix-users-more-likely-to-cut-the-cable-cord/ (citing a JP Morgan survey that 28 percent of cable subscribers would consider cutting the cord, but that 47 percent of Netflix customers would do so); Andy Plesser, Roku Owners are “Cutting the Cord” in Substantial Numbers, Beet.TV, May 10, 2011, http://www.beet.tv/2011/05/roku-owners -are-cutting-dcord-in-substantial-numbers-.html (citing interview with Jim Funk of Roku that “[s]ome 15-20 percent of Roku owners are cancelling their cable or satellite services agreement and are relying solely on a broadband connection to get their television programming”). 461 High-speed BroadbandMay Accelerate Cord Cutting, Parks Associates, Aug. 24, 2011, http://www.parksassociates.com/blog/article/high-speed-broadband-may-accelerate-cord-cutting. One commenter explains that viewing Internet content on a television set can be relatively simple, as “simple as connecting a cable between the HDMI output of a computer and the HDMI input of a television set” though not many consumers may be inclined to view television programming in this manner. Nonetheless, such direct PC-to-TV connections are deemed infrequent and restricted to tech-savvy consumers, with approximately one-third of broadband users connecting a PC to their TV specifically to enjoy PC or online video on “the big screen” at least once a year. See NCTA 6/8/2011 Comments at 24 (citing The Diffusion Group, PC-to-TV Connectivity More Widespread Than (continued….) Federal Communications Commission FCC 12-81 62 programming delivered over the Internet does not necessarily translate into decreased MVPD subscriptions.462 141. Video Penetration. Because a large part of all MVPD video delivery systems represents fixed costs (costs that do not vary with the number of subscribers), higher levels of video penetration (the number of video subscribers divided by the number of homes passed by the MVPD) typically translate into lower costs per subscriber and increased profit.463 Comparing the video penetration of one type of MVPD with the video penetration of another type of MVPD can be problematic, however, because the different types of MVPDs have different fixed costs.464 For instance, the fixed costs of offering cable MVPD service to every home in the United States is much higher than the fixed costs of offering DBS MVPD service to every home in the United States.465 As such, a DBS MVPD may be on solid financial footing with lower video penetration, relative to a cable MVPD with higher video penetration. Regardless of technology, however, every MVPD seeks higher levels of video penetration. 142. Table 6 shows MVPD video penetration for the years 2006 through 2010. Over the five- year period, cable MVPD video penetration decreased from 53.8 percent of all homes passed by cable MVPDs to 46.5 percent. This is consistent with our finding that cable MVPDs lost subscribers over the same period. In contrast, DBS MVPD video penetration increased from 22.9 percent of all homes in 2006 to 25.5 percent in 2010. Over the same period, telephone MVPDs built new video delivery systems and signed subscribers, increasing their video penetration from 3.3 percent to 15.2 percent of all homes. To the extent that telephone MVPDs incur fixed and operating costs similar to those incurred by cable MVPDs, telephone MVPDs will have to increase video penetration to realize financial returns similar to those earned by cable MVPDs.466 (Continued from previous page) Perceived, Mar. 1, 2011, http://tdgresearch.com/blogs/press-releases/archive/2011/03/01/pc-to-tv-connectivity- more-widespread-than-perceived.aspx). 462 Frank N. Magid Associates, Inc., Magid Study: Consumers More Connected to TV Sets Than Ever – TV Purchase Intentions Climb to Pre-Recession Levels, Demand for Smart TVs Impressive (press release), Nov. 22, 2011. 463 Harold L. Vogel, ENTERTAINMENT INDUSTRY ECONOMICS 339-43 (Cambridge University Press) (8th ed. 2011) (“Vogel”). 464 Id. at 344-46. 465 DIRECTV explains that its satellite-based service provides many advantages over ground-based cable television services including the ability to distribute video programming to millions of recipients nationwide with minimal incremental infrastructure cost per additional subscriber. Satellites also provide comprehensive coverage to areas with low population density. DIRECTV 2010 Form 10-K at 4. 466 Hazlett on Verizon FiOS Project, George Mason University School of Law, http://www.law.gmu.edu/news/2010/hazlett_fios (visited Jan. 16, 2012). Federal Communications Commission FCC 12-81 63 Table 6: MVPD Video Penetration Year 2006 2007 2008 2009 2010 Cable467 53.8% 52.4% 50.7% 48.9% 46.5% Comcast 51.0% 49.8% 47.8% 45.5% 43.9% Time Warner 51.4% 50.0% 48.8% 47.0% 45.2% Cox 58.3% 57.1% 54.8% 52.5% 49.5% Charter 46.3% 44.8% 43.1% 40.4% 38.4% Cablevision 68.5% 66.7% 65.7% 63.4% 59.9% Bright House 57.8% 57.4% 56.1% 54.1% 51.6% Suddenlink 49.7% 49.5% 48.8% 46.4% 45.4% Mediacom 48.8% 46.7% 46.3% 44.1% 42.4% DBS468 22.9% 23.8% 24.2% 25.0% 25.5% DIRECTV 12.6% 13.1% 13.6% 14.2% 14.7% DISH Network 10.3% 10.7% 10.6% 10.8% 10.8% Telephone469 3.3% 6.4% 9.8% 13.2% 15.2% AT&T U-verse N/A 2.5% 5.9% 9.3% 11.0% Verizon FiOS 3.3% 9.7% 15.0% 18.8% 22.4% 143. Digital Video, Internet, and Telephone Subscription and Penetration. SNL Kagan reports that cable MVPDs have been losing video subscribers at an increasing rate over the last five years. At the same time, however, the remaining cable customers added subscriptions to digital video service or 467 Estimates are derived by dividing all cable basic subscribers by all cable homes passed. Because cable MVPDs rarely offer video service in the same geographic areas, video penetration for all cable MVPDs is a weighted average of the video penetration of all cable MVPDs. SNL Kagan, U.S. Multichannel Industry Benchmarks, http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx (visited Dec. 23, 2011). Individual cable company data come from SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition, at 5. 468 Estimates are derived by dividing all DBS MVPD subscribers by the number of homes in the United States. Because DIRECTV and DISH Network offer MVPD service to all homes in the United States, DBS video penetration can also be derived by summing the video penetration of DIRECTV and DISH Network. SNL Kagan, U.S. Multichannel Industry Benchmarks, http://www.snl.com/interactivex/MultichannelIndustryBenchmarks.aspx (visited Dec. 23, 2011). Individual DBS company estimates are derived by dividing the company’s subscribers (as reported in their annual reports) by the number of homes in the United States. 469 Estimates are derived by summing Verizon and AT&T MVPD subscribers and dividing by the number of Verizon FiOS and AT&T U-verse homes passed. Because Verizon and AT&T do not offer MVPD service in the same geographic area, video penetration is a weighted average of the video penetration of these two telephone MVPDs. Verizon and AT&T estimates are derived by dividing a company’s MVPD subscribers (as reported in their annual reports) by the number of homes passed by the company’s MVPD system (as reported in their annual reports). Federal Communications Commission FCC 12-81 64 subscribed to cable bundles that include video, Internet access, and telephone services.470 While cable MVPD video subscribers decreased from 65.4 million in 2006 to 59.8 million in 2010, the number of cable customers that subscribed to digital video service grew from 32.6 million to 44.7 million, and digital video penetration rose from 49.8 percent to 74.8 (i.e., the number of digital video subscribers divided by the number of basic cable subscribers).471 In addition, the number of cable Internet access subscribers grew from 31.1 million in 2006 to 44.4 million in 2010, increasing Internet penetration (i.e., the number of Internet subscribers divided by the number of cable homes passed) from 25.0 percent to 34.8 percent.472 In addition, the number of telephone subscribers grew from 9.4 million in 2006 to 23.9 million in 2010, with telephone penetration (i.e., the number of telephone subscribers divided by the number of homes passed) increasing from 11.1 percent to 19.2 percent.473 c. Revenue 144. The varied business models of the different types of MVPDs complicate any discussion of revenue. Specifically, cable and telephone MVPDs, which have two-way systems, offer video, Internet, and telephone services and earn revenue from each of these services. Thus, data regarding total revenue for cable and telephone MVPDs reflect an aggregation of revenue from multiple services. In contrast, DBS MVPDs, have one-way systems and earn almost all of their revenue from delivered video services. Although we report MVPD total revenue, because the focus of this Report is the delivery of video programming when data are available we also report the revenue earned from video services. Providing both total revenue and video revenue facilitates a comparison regarding how much of a specific MVPD’s business is related to the delivery of video services. 145. Table 7 shows MVPD total revenue. Total revenue for cable MVPDs derives from video, Internet access, and telephone services sold to both residential units and businesses. Total revenue for cable MVPDs increased from $71.9 billion in 2006 to $93.8 billion in 2010. Revenue from video accounted for 63 percent of cable MVPD total operating revenue in 2010, Internet access accounted for 21 percent, telephone accounted for approximately 10 percent, and commercial services accounted for approximately 6 percent.474 Table 7 also provides total revenue for a sample of cable MVPDs.475 Each of the large cable MVPDs in our sample increased total revenue over the period 2006 to 2010. Total revenue for DBS MVPDs increased from $24.6 billion in 2006 to $36.7 billion in 2010, and almost all of the revenue comes from the video services.476 Table 7 shows total revenue for AT&T and Verizon. Total 470 SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition, at 2. 471 Id. at 7. 472 Id. at 8. 473 Id. at 10. 474 SNL Kagan, Broadband Cable Financial Databook, 2011 Edition, at 8. We include local advertising revenue and “miscellaneous” revenue in our estimates of video revenue. Miscellaneous revenue includes installation fees, home shopping, equipment charges, home networking, pay-per-view and VOD, DVRs, and HD. 475 Total revenue estimates for individual cable MVPDs comes from SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition, at 13. 476 For DISH Network, subscriber-related revenue accounted for over 99 percent of total operating revenue in 2010. DISH explains that subscriber-related revenue consists of revenue from basic, premium movie, local, HD and pay- per-view programming, as well as Latino and international subscription television services, equipment rental fees and other hardware related fees, including fees for DVRs, equipment upgrade fees and additional outlet fees from subscribers with multiple receivers, advertising services, fees earned from in-home service operations, and other subscriber revenue. DISH Network 2010 Form 10-K at 45, 48. DIRECTV explains that it earns revenues mostly from the monthly fees it charges subscribers for subscriptions to basic and premium channel programming, HD (continued….) Federal Communications Commission FCC 12-81 65 revenue for AT&T combines revenue from its wireless segment, which accounted for 47 percent of its total operating revenue in 2010; its wireline segment (that includes U-verse), which accounted for 49 percent of its total operating revenue in 2010; and two other segments, which together accounted for four percent of its total operating revenue.477 Total revenue for Verizon combines revenue from its domestic wireless segment and its wireline segment (that includes FiOS). The wireless segment contributed approximately 60 percent of Verizon’s total operating revenue in 2010 and the wireline segment contributed approximately 40 percent.478 Table 7: MVPD Total Revenue (in billions) Year 2006 2007 2008 2009 2010 Cable479 $71.9 $78.9 $85.2 $89.5 $93.8 Comcast $26.5 $30.3 $32.6 $33.9 $35.4 Time Warner $14.8 $16.0 $17.2 $17.9 $18.9 Charter $5.5 $6.0 $6.4 $6.7 $7.0 Cablevision $4.1 $4.5 $5.0 $5.2 $5.5 Suddenlink $0.9 $1.3 $1.5 $1.6 $1.7 Mediacom $1.2 $1.3 $1.4 $1.5 $1.5 DBS480 $24.6 $28.3 $31.3 $33.3 $36.7 DIRECTV481 $14.8 $17.2 $19.7 $21.6 $24.1 DISH Network482 $9.8 $11.1 $11.6 $11.7 $12.6 Telephone483 $150.7 $211.8 $220.8 $230.3 $230.9 AT&T484 $62.5 $118.3 $123.4 $122.5 $124.3 Verizon485 $88.2 $93.5 $97.4 $107.8 $106.6 (Continued from previous page) programming and access fees, pay-per-view programming, and seasonal and live sporting events. DIRECTV also earns revenues from monthly fees that it charges subscribers for leased set-top receivers and DVR service. DIRECTV 2010 Form 10-K at 38. 477 AT&T, 2010 Annual Report, at 33. 478 Verizon, 2010 Annual Report, at 13. 479 SNL Kagan, Broadband Cable Financial Databook, 2011 Edition, at 8. The estimates shown are based on all cable MVPDs, not just the cable MVPDs listed in Table 7. 480 Total revenue for DBS is the sum of total revenue for DIRECTV and DISH Network. 481 DIRECTV 2010 Form 10-K at 30. 482 DISH Network 2010 Form 10-K at 41. 483 The estimates shown are the sum of total revenue for AT&T and Verizon and do not include other telephone companies that offer MVPD service. As such, the estimates understate total revenue for telephone MVPDs. 484 AT&T, 2010 Annual Report, at 30. 485 Verizon, 2010 Annual Report, at 13. Federal Communications Commission FCC 12-81 66 146. Table 8 shows available data on MVPD revenue from video services alone. Cable MVPD video revenue increased from $51.8 billion in 2006 to $59.0 billion in 2010.486 Although the number of basic cable MVPD subscribers decreased from 2006 to 2010, the remaining subscribers purchased an increasing number of subscriptions to advanced video services (e.g., digital programming tiers and HD and DVR services). The increased number of subscriptions to advanced video services and increases in the prices charged for cable MVPD services resulted in an increase in cable MVPD revenue during the period 2006 to 2010.487 DBS MVPD video revenue increased from $23.5 billion to $32.9 billion. Table 8 also shows video revenue for a select number of publicly-traded cable MVPDs. AT&T and Verizon do not report video revenue separately.488 486 SNL Kagan, Broadband Cable Financial Databook, 2011 Edition, at 8. Estimates for cable MVPD video revenue were derived by summing basic cable revenue, total pay revenue, total digital tier revenue, net local advertising revenue, and miscellaneous revenue (which include revenues from installation and equipment rentals, VOD, DVR, and HD). 487 Id. at 2, 12. 488 Within AT&T’s wireline segment, the company aggregates video revenue into “Data” revenue, which includes video service, Internet access service from both U-verse and DSL, and VoIP telephone service from U-verse. AT&T asserts that it expects revenue from U-verse to expand as revenue from traditional, circuit-based services continues to decline. AT&T, 2010 Annual Report, at 37-38. Within Verizon’s wireline segment, video revenue is aggregated into “Mass Markets” revenue, which includes video service, Internet access service from both FiOS and DSL, and traditional landline and VoIP telephone service. Verizon explains that increases in Mass Markets revenue from 2009 to 2010 are driven by the expansion of consumer and business FiOS services, which is partially offset by a decline of local exchange revenue stemming from a decline in legacy landline telephone service. Verizon, 2010 Annual Report, at 25. Federal Communications Commission FCC 12-81 67 Table 8: Video Revenue (in billions) Year 2006 2007 2008 2009 2010 Cable $51.8 $54.3 $56.6 $57.4 $59.0 Comcast489 $15.1 $17.7 $19.2 $19.4 $19.5 Time Warner490 $7.6 $10.2 $10.5 $10.8 $11.0 Charter491 $3.3 $3.4 $3.7 $3.7 $3.7 Cablevision492 $2.6 $2.8 $3.0 $3.1 $3.2 DBS493 $23.5 $26.6 $28.9 $30.4 $32.9 DIRECTV494 $13.7 $15.5 $17.3 $18.7 $20.3 DISH Network495 $9.8 $11.1 $11.6 $11.7 $12.6 147. Average Revenue Per Unit. Average revenue per unit (“ARPU”) is a performance metric that estimates the value of a single unit by dividing a company’s total revenue by the total number of units. In this case a unit is a single subscriber. The metric includes revenue from all services. Therefore, for those MVPDs that provide video, Internet access, and telephone service, this metric includes revenue from all of these services and associated equipment such as set-top boxes and modems. Since this Report, however, is focused on video, when data are available, we also report ARPU for video services alone, which is estimated by dividing video revenue by the total number of video subscribers. 148. Table 9 shows monthly ARPU for all services for the five-year period from 2006 to 2010. Cable MVPDs’ per-subscriber monthly revenue has risen steadily over this period due to a combination of growth in the number of subscribers to cable bundles, growth in the number of subscribers to advanced services, and price rate increases.496 Monthly ARPU for cable MVPDs was $87.70 in 2006, and increased to $122.20 in 2010. DBS MVPDs generally receive smaller ARPU compared to cable MVPDs.497 489 Comcast 2010 Form 10-K at 39; Comcast, SEC Form 10-K for the Year Ended December 31, 2007, at 24. 490 Time Warner Cable, 2010 Annual Report, at 69; Time Warner Cable, SEC Form 10-K for the Year Ended December 31, 2007, at 89. 491 Charter, SEC Form 10-K for the Year Ended December 31, 2010, at 43; Charter, SEC Form 10-K for the Year Ended December 31, 2007, at 24. 492 Cablevision, SEC Form 10-K for the Year Ended December 31, 2010, at 68; Cablevision, SEC Form 10-K for the Year Ended December 31, 2008, at 67; Cablevision, SEC Form 10-K for the Year Ended December 31, 2007, at 63. 493 DBS MVPD video revenue is the sum of DIRECTV U.S. and DISH Network video revenue. 494 DIRECTV video revenue is less than total revenue because we report video revenue from DIRECTV U.S. and exclude video revenue from DIRECTV Latin America. DIRECTV 2010 Form 10-K at 35; DIRECTV 2007 Form 10-K at 40. 495 DISH Network 2010 Form 10-K at 41. 496 SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition, at 14. 497 Whereas cable MVPDs receive revenue from video, Internet access, and telephone services, DBS relies almost exclusively on revenue from video services. Federal Communications Commission FCC 12-81 68 Although AT&T and Verizon estimate ARPU for their Wireless segments, they do not make similar estimates for their Wireline segments, which include their video services, so data are not available to calculate this performance metric.498 Table 9: Monthly ARPU for All MVPD Services Year 2006 2007 2008 2009 2010 Cable499 $87.70 $95.30 $105.40 $113.70 $122.20 Comcast $91.30 $101.60 $111.10 $118.20 $127.10 Time Warner Cable $91.70 $94.10 $102.50 $110.30 $118.60 Charter $84.60 $94.10 $105.10 $114.70 $125.70 Cablevision $110.40 $121.20 $132.70 $140.40 $143.00 Suddenlink $78.00 $81.80 $93.20 $103.20 $114.40 Mediacom $72.00 $79.70 $88.40 $95.20 $102.80 DBS DIRECTV500 $73.70 $79.10 $83.90 $85.50 $89.70 DISH Network501 $62.80 $65.80 $69.30 $70.00 $73.30 149. Table 10 shows monthly ARPU for video services alone. Despite losses in cable subscribers, cable MVPDs achieved increased ARPU for video services from 2006 to 2010 by raising prices and increasing subscriptions from the remaining customers for advanced video services (e.g., digital video, DVR, VOD, and HD).502 Video ARPU for cable MVPDs increased from $52.20 in 2006 to $66.40 in 2010. Table 10 also includes video ARPU estimates for a sample of cable companies. The results show consistent growth in video ARPU for each of these cable companies. Because DBS MVPDs earn almost all of their operating revenue from subscription video services, we estimate monthly ARPU for video services to be the same as monthly ARPU for all services. As noted above, AT&T and Verizon do not provide estimates of ARPU for their Wireline segments, which include their video services, so data are not available to calculate this performance metric. 498 One reason for telephone MVPDs not providing ARPU estimates for their wireline segments may be that the wireline segment contains an amalgamation of two systems (an older system using traditional copper wire and circuit switches and the newer using fiber and IP technology) with a migration of customers and services from one system to the other. 499 Monthly ARPU data for cable MVPDs and individual cable companies come from SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition, at 14. 500 ARPU data are for DIRECTV’s U.S. Segment (i.e., excluding the Latin America Segment). DIRECTV 2006 Form 10-K at 48; DIRECTV 2007 Form 10-K at 47; DIRECTV 2008 Form 10-K at 49; DIRECTV 2009 Form 10-K at 55; DIRECTV 2010 Form 10-K at 42. 501 DISH Network 2010 Form 10-K at 41. 502 SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition at 14. Federal Communications Commission FCC 12-81 69 Table 10: Monthly ARPU for Video Services Year 2006 2007 2008 2009 2010 Cable503 $52.20 $57.20 $61.40 $64.10 $66.40 Comcast $60.10 $65.60 $68.40 $71.00 $73.20 Time Warner Cable $47.40 $63.60 $66.20 $68.90 $72.30 Charter $50.20 $55.40 $63.20 $65.90 $69.20 Cablevision $69.80 $74.00 $79.20 $83.20 $84.60 Suddenlink $33.10 $45.20 $51.70 $54.50 $57.20 Mediacom $52.40 $55.00 $58.70 $61.40 $62.90 DBS DIRECTV504 $73.70 $79.10 $83.90 $85.50 $89.70 DISH Network505 $62.80 $65.80 $69.30 $70.00 $73.30 d. Investment 150. For the five-year period from 2006 to 2010, cable MVPDs invested $67.3 billion in infrastructure.506 For cable MVPDs, capital expenditures peaked from 2000 to 2002 when many cable MVPD system upgrades occurred.507 Cable MVPD capital spending has fallen since then and has fluctuated within the $10 billion to $12 billion range over the past five years as capital investments have shifted from upgrades to capital tied to increased revenue streams (e.g., providing upgraded set-top receivers to new subscribers of advanced services) and capital tied to expansion of MVPD services to businesses.508 According to NCTA, cable MVPD infrastructure expenditures were $12.4 billion in 2006, $14.6 billion in 2007, $14.6 billion in 2008, $13.3 billion in 2009, and $12.4 billion in 2010.509 DBS MVPDs needed to construct and launch new satellites to expand their offerings of new programming and services.510 DISH Network expanded its channel capacity by launching two more satellites in 2010.511 503 Monthly video ARPU data for cable MVPDs and individual cable companies come from SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition, at 14. 504 ARPU data are for DIRECTV’s U.S. Segment (i.e., excluding the Latin America Segment). DIRECTV 2006 Form 10-K at 48; DIRECTV 2007 Form 10-K at 47; DIRECTV 2008 Form 10-K at 49; DIRECTV 2009 Form 10-K at 55; DIRECTV 2010 Form 10-K at 42. 505 DISH Network 2010 Form 10-K at 41. 506 NCTA 6/8/11 Comments at 10. 507 SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition, at 16. 508 Id. at 12, 16; SNL Kagan, Broadband Cable Financial Databook, 2011 Edition, at 83. 509 NCTA 6/8/11 Comments at 10. 510 DIRECTV 2010 Form 10-K at 21. 511 DISH Network, 2010 Annual Report, Letter to Shareholders. Federal Communications Commission FCC 12-81 70 Between 2006 and 2010, Verizon and AT&T invested billion of dollars upgrading their systems enabling them to provide MVPD video service. Verizon expected to invest $23 billion from 2004 to 2010 deploying its FiOS network.512 e. Profitability 151. In reporting profitability, MVPDs often combine revenues and costs from multiple services.513 For example, cable MVPDs that offer video, Internet access, and telephone services often combine the revenues and costs of these services to estimate profitability. As such, for cable MVPDs we are not able to separate out profitability metrics for video services only. In contrast, DBS MVPDs focus on video services and derive the vast majority of their revenue and profits from video services. Thus, estimates of DBS profitability can be interpreted as profits from video services. Telephone MVPDs, especially the two largest telephone MVPDs that account for the overwhelming majority of telephone MVPD video subscribers, combine revenues and costs from video, Internet access, and telephone services from both their upgraded wireline systems and their legacy wireline systems.514 Because they combine a range of services from two systems, we cannot estimate any meaningful metric for telephone MVPD profits that relate to video services only. 152. SNL Kagan reports that, despite cable MVPDs continued losses in video subscribers, all the advanced service segments (e.g., digital cable, Internet, and telephone) continue to grow.515 The result, according to SNL Kagan, has been higher per-subscriber revenues and strong overall financial results for cable MVPDs over the past five years from 2006 to 2010.516 Comcast reports that it has had “terrific momentum in our operating and financial performance. In 2010, we had solid growth in consolidated revenue, operating cash flow, and operating income.”517 Comcast explains that its free cash flow climbed 22 percent – its third straight year of 20 percent-plus free cash flow growth.518 DIRECTV states, “We had a terrific year in 2010, as we excelled in every important category, beating our plans for subscriber growth, revenue and cash flow.”519 DIRECTV explains that it is now a $24 billion business with free cash flow for the full year at $2.8 billion, growing at 18 percent, and its operating profit before depreciation and amortization grew 20 percent, finishing 2010 at $6.4 billion.520 153. The conventional measure of financial performance for cable MVPDs has been operating cash flow, defined as earnings before interest, taxes, and depreciation and amortization expense (EBITDA).521 Estimates of operating cash flow for a sample of MVPDs are shown in Table 11. SNL 512 Verizon 5/20/09 Comments at 6. 513 Profit is defined as revenue minus costs, although its measurement may vary in different contexts. See Donald S. Watson & Mary A. Holman, PRICE THEORY AND ITS USES 144 (Houghton Mifflin Company) (4th ed. 1977). See also Brian Butler, A DICTIONARY OF FINANCE AND BANKING 280-81 (Oxford University Press) (2nd ed. 1997) (stating that it is not always possible to derive one single figure for profit for an organization from an accepted set of data). See also Vogel at 336, Table 8.3 (showing select cable MVPD operating revenues and expenses). 514 Verizon, 2010 Annual Report, at 25. 515 SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition, at 2. 516 Id. 517 Comcast, 2010 Annual Review, Letter to Shareholders. 518 Id. 519 DIRECTV, 2010 Annual Report, Message to Shareholders. 520 Id. 521 Vogel at 339-43. See also SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition, at 12. Federal Communications Commission FCC 12-81 71 Kagan explains that from 2006 to 2010, despite basic video subscriber losses and weaker subscriber trends during the housing downturn, a combination of price increases and growth in subscriptions to digital video services and Internet access and telephone services have enabled cable MVPDs to maintain operating margins (defined as operating cash flow divided by revenue) in the upper 30 percent range.522 According to SNL Kagan, Cablevision and Comcast have led their peers with operating margins averaging about 40 percent from 2006 to 2010.523 Over the same period, Verizon reported for its Wireline segment an operating margin (EBITDA margin) averaging about 22 percent.524 Although DIRECTV exhibited steady growth in operating cash flow from 2006 to 2010, DISH Network’s numbers grew from 2006 to 2008, declined in 2009, then rebounded in 2010. AT&T did not report EBITDA and Verizon only reported EBITDA for its Wireline segment for 2008, 2009, and 2010. Table 11: MVPD Operating Cash Flow (in billions) Year 2006 2007 2008 2009 2010 Cable525 Comcast $10.6 $12.2 $13.2 $13.7 $14.6 Time Warner $5.2 $5.8 $6.2 $6.5 $6.9 Charter $1.9 $2.1 $2.3 $2.5 $2.6 Cablevision $1.6 $1.8 $2.0 $2.1 $2.2 Suddenlink $0.3 $0.4 $0.5 $0.6 $0.6 Mediacom $0.4 $0.5 $0.5 $0.5 $0.5 DBS DIRECTV526 $3.2 $3.6 $3.9 $4.4 $5.2 DISH Network527 $2.4 $2.8 $2.9 $2.3 $3.0 Telephone Verizon528 NA NA $11.3 $9.8 $9.2 522 SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition, at 12. 523 Id. 524 Verizon reported a wireline segment EBITDA margin of 25.4 percent in 2008, 23.1 percent in 2009, and 22.4 percent in 2010. Verizon, 2010 Annual Report, at 27. 525 EBITDA estimates for individual cable companies come from SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition, at 13. 526 DIRECTV does not provide EBITDA estimates, so we report net cash provided by operating activities. DIRECTV 2010 Form 10-K at 33; DIRECTV 2008 Form 10-K at 41. Estimates for DIRECTV include both DIRECTV U.S. and DIRECTV Latin America. 527 EBITDA estimates for DISH Network come from DISH Network 2010 Form 10-K at 48, 53; DISH Network 2008 Form 10-K at 44, 50. 528 Verizon reported EBITDA for its wireline segment in 2008, 2009, and 2010, but did not report EBITDA in 2006 and 2007. Verizon, 2010 Annual Report, at 27. Federal Communications Commission FCC 12-81 72 154. In recent years, however, analysts have favored estimating free cash flow, i.e., the cash that is available to the company for purposes other than new system construction.529 Free cash flow has emerged as an increasingly relevant metric for financial health as the capital investments of cable MVPDs have shifted from system upgrades to capital expenditures (e.g., set-top boxes with HD and DVR features) tied to increased revenue streams.530 Table 12 shows free cash flow for a sample of MVPDs. AT&T did not report free cash flow. Verizon reported free cash flow for 2008, 2009, and 2010 but its estimates include both its wireless and wireline segments, so the numbers shed little light on the financial performance of its FiOS video services. Table 12: MVPD Free Cash Flow (in billions) Year 2006 2007 2008 2009 2010 Cable531 Comcast $2.6 $2.3 $3.7 $4.4 $4.9 Time Warner $0.7 $1.0 $1.7 $1.9 $2.3 Charter ($0.8) ($0.9) ($0.9) ($0.6) $0.7 Cablevision $0.0 $0.2 $0.5 $0.8 $0.9 Suddenlink ($0.1) $0.0 $0.1 $0.1 $0.0 Mediacom $0.0 $0.0 $0.0 $0.1 $0.1 DBS DIRECTV532 $1.2 $1.0 $1.7 $2.4 $2.8 DISH Network533 $0.9 $1.2 $1.2 $1.2 $0.9 Telephone Verizon534 NA NA $10.3 $14.5 $16.9 529 Vogel at 340. SNL Kagan defines free cash flow as EBITDA less capital expenditures, cash paid for interest and taxes, and changes in working capital. SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition, at 12. 530 Id. 531 Free cash flow estimates for individual cable companies come from SNL Kagan, Benchmarking Cable MSO Financial Statistics, 2011 Edition, at 13. 532 Free cash flow estimates for DIRECTV come from DIRECTV 2010 Form 10-K at 33; DIRECTV 2008 Form 10- K at 41. Estimates for DIRECTV include both DIRECTV U.S. and DIRECTV Latin America. 533 Free cash flow estimates for DISH Network come from DISH Network 2010 Form 10-K at 58; DISH Network 2008 Form 10-K at 54. 534 Verizon reported free cash flow for 2008, 2009, and 2010, but did not report free cash flow for 2006 and 2007. Verizon’s free cash flow estimates include all segments (i.e., both wireless and wireline). Verizon, 2010 Annual Report, at 31. Federal Communications Commission FCC 12-81 73 B. Broadcast Television Stations 1. Introduction 155. This Report considers broadcast television stations as a separate group. Broadcast stations package video programming and deliver it directly over the air to those consumers who do not subscribe to an MVPD as well as MVPD subscribers who own television sets that are not connected to an MVPD service. Broadcast television station programming is also an input for MVPD services. 156. Broadcast stations cater to two distinct sets of customers: audiences and advertisers.535 They seek to provide desirable content to attract and maximize their audiences. In turn, they primarily derive revenues by selling time during their broadcasts to advertisers based on the size and demographic characteristics of the audiences they reach.536 Individual commercial stations compete primarily with other commercial broadcast stations within their local markets (DMAs)537 for audiences and advertising revenue. Noncommercial stations, while not relying on advertising revenues, compete with commercial stations for viewers. Other media, including daily newspapers, local and national cable networks, and the Internet earn advertising revenues by attracting audiences within the geographic areas they serve.538 Broadcast stations’ advertising revenues depend on viewership of their television programs, whether received by consumers over the air or via an MVPD. Today, broadcast stations are turning to additional revenue sources, including retransmission consent fees, ancillary digital television revenues, and advertising sold on their web sites.539 Noncommercial broadcast stations rely on underwriters, viewer donations, and government funding for their operations, and also seek to attract audiences as a way to increase their revenues from these sources. 157. On June 12, 2009, full-power television stations completed a transition from analog to digital service pursuant to a statutory mandate.540 Digital broadcasting gives broadcast stations greater flexibility. Instead of sending one analog program signal, broadcast stations can use digital technology to offer high definition (“HD”) programming, provide multiple streams of programming, and/or distribute 535 Advertisers and audiences are mutually dependent. Television stations need to attract audiences in order to earn money from advertising. They need advertising revenues in order to make investments in programming that will attract audiences. See David S. Evans & Richard Schmalensee, The Industrial Organization of Markets with Two- Sided Platforms, COMPETITION POL’Y INT’L 151, 155-56 (2007) (discussing the economics of two-sided platforms and its application to competition policy issues especially as it relates to advertising-supported media). 536 “[B]roadcasting in any and all of its forms is an audience aggregation business.” See Vogel, supra, n. 463, at 288. 537 Under Commission rules, broadcast television stations serve a community of license. See supra, n. 148. 538 See, e.g., Nexstar Broadcasting Group, Inc., SEC Form 10-K for the Year Ended December 31, 2010, at 1, 5 (“Nexstar 2010 Form 10-K”); Sinclair Broadcast Group, Inc., SEC Form 10-K for the Year Ended December 31, 2010, at 4, 21 (“Sinclair 2010 Form 10-K”). 539 Gray Television, Inc., SEC Form 10-K for the Year Ended December 31, 2010, at 3-4 (“Gray 2010 Form 10-K”); Sinclair 2010 Form 10-K at 4-5; LIN Television Corp., SEC Form 10-K for the Year Ended December 31, 2010, at 8-10 (“LIN 2010 Form 10-K”). 540 47 U.S.C. §309(j)(14)(A). Full-power analog television service therefore has terminated. See, e.g., Pending Applications and Pleadings Related to Proceedings for New Analog Full-Power Television Stations for Communities in Several States, Order, 26 FCC Rcd 14301, ¶ 1 (Video Div., MB 2011). Low-power stations are not required to complete their digital conversion until September 1, 2015. See Amendment of Parts 73 and 74 of the Commission's Rules to Establish Rules for Digital Low Power Television, Television Translator, and Television Booster Stations and to Amend Rules for Digital Class A Television Stations, MB Docket No. 03-185, Second Report and Order, 26 FCC Rcd 10732, 10733, ¶ 2 (2011). Federal Communications Commission FCC 12-81 74 programming to mobile devices. With multicasting,541 stations can provide a diverse array of programming to the audience within a DMA.542 In addition, stations may affiliate their multicast streams with established networks to give viewers in smaller markets more over-the-air viewing options. 2. Broadcast Television Industry Structure 158. Consistent with our discussion of the MVPD industry, a key element of our analysis of video competition in the broadcast television industry includes industry structure. In this section of the Report, we describe critical elements of the broadcast television industry. We then explain horizontal concentration and vertical integration in the market. Next, we describe conditions effecting market entry during the relevant period, including an overview of existing regulations and market conditions that might influence entry decisions. Finally, we describe recent entry in the market. 159. The broadcast television station group consists of commercial and noncommercial, full- power, Class A, and low-power stations.543 The Commission licenses broadcast television stations to both individual and group owners to serve local communities within DMAs. 160. Nationally, the number of broadcast stations has changed little since the last report, although the relative mix of VHF and UHF stations has changed due in large part to the transition to digital television. As of December 31, 2010, there were 1,022 commercial UHF stations and 368 commercial VHF stations in the United States. In addition, there were 284 noncommercial educational UHF stations and 107 noncommercial educational VHF stations. There were also 7,240 television translators, Class A stations, and low power television stations.544 541 Multicasting allows broadcast stations to offer digital streams or channels (i.e., digital multicast signals) of programming simultaneously, using the same amount of spectrum previously required for analog programming. See FCC, DTV.gov: What is DTV?, http://www.dtv.gov/whatisdtv.html. 542 For example, Bounce TV is a network targeting African Americans and Retro Television features classic television programs. See Bounce Media, LLC, FAQs: What is Bounce TV?, http://www.bouncetv.com/faq/bounce- tv/what-is-bounce-tv.html (visited Feb. 27, 2012); Retro Television, Inc., RTV Shows, http://myretrotv.com/shows.html (visited Feb. 27, 2012). Under Commission rules, digital stations asserting must- carry rights are entitled to carriage only of a single programming stream and other programming-related content on that stream. See Carriage of Digital Television Broadcast Signals, CS Docket No. 98-120, First Report and Order and Further Notice of Proposed Rulemaking, 16 FCC Rcd 2598, 2622, ¶ 57 (2001). 543 In this Report, we focus on commercial, full-power broadcast stations because of their impact on competition in the market for the delivery of video programming and the limitations on available data for other types of stations. 544 A television translator station rebroadcasts the programs of a full-power television broadcast station. Television translator stations typically serve communities that cannot receive the signals of free over-the-air television stations because they are too far away from a full-power television station or because of geographic limitations. See, e.g., FCC Consumer Advisory: The DTV Transition and LPTV/Class A and Translator Stations, http://www.fcc.gov/cgb/consumerfacts/DTVandLPTV.html. In 2000, the Commission established the Class A television service to implement the Community Broadcasters Protection Act of 1999. See Community Broadcasters Protection Act of 1999, Pub. L. No. 106-113, § 5008, 113 Stat. 1501, 1501A-594-98 (1999) (codified as amended at 47 U.S.C. § 336(f)). Thus, certain qualifying low-power television (LPTV) stations are accorded Class A status, which indicates that these stations have “primary” status as television broadcasters and have a measure of interference protection from full service television stations. Pursuant to Commission rules, stations eligible for this status must provide locally originated programming, often to rural and certain urban communities that have little or no access to such programming. See Establishment of a Class A Television Service, MM Docket No. 00-10, Report and Order, 15 FCC Rcd 6355, 6357, ¶ 1 (2000). Created by the Commission in 1982, low-power television service has been a secondary spectrum priority. See Inquiry Into the Future Role of Low-power Television Broadcasting and Television Translators in the National Telecommunications System, Report and Order, BC Docket No. 78-253, (continued….) Federal Communications Commission FCC 12-81 75 Table 13: Total Full Power Broadcast Television Stations by Year545 Date Station Type 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 UHF Commercial 789 796 796 1,019 1,022 VHF Commercial 587 583 582 373 368 Total 1,375 1,379 1,378 1,392 1,390 UHF Noncommercial 252 252 252 283 284 VHF Noncommercial 128 128 129 107 107 Total 380 380 381 390 391 Grand Total 3,512 3,518 3,518 3,564 3,562 161. Since the last report, the broadcast television industry completed its transition to digital service in 2009. Broadcast television stations have begun offering more programming than ever before, including both HD signals and standard-definition (SD) multicast signals.546 NAB states that at the end of 2008, about one-third of broadcast television stations delivered programming on a secondary channel.547 After the switch to digital television in 2009, the majority of full-power stations were multicasting – more than 60 percent.548 As of December 2010, about 71 percent of the 1,196 total commercial stations SNL Kagan surveyed were multicasting, representing an increase of 1,240 multicast signals since 2009, for a total of 2,518 multicast signals as of 2010.549 In addition, SNL Kagan analyzed 349 noncommercial stations and found that approximately 83 percent were multicasting as of December 2010.550 To continue to receive over-the-air broadcasting, viewers had to obtain a digital converter box for their analog television set or purchase a digital television set. Nielsen estimates that as of August 2009, about 0.6 percent of U.S. households with television sets were unable to receive digital television signals, either over-the-air or via MVPD service.551 162. The geographic area applicable for competition among broadcast television stations is the DMA because consumers view alternative stations that are available to them in the areas where they live. The level of broadcast television station competition within a DMA varies. While the size of television markets and number of stations that Nielsen assigns to each DMA are not directly correlated, larger (Continued from previous page) 51 Rad. Reg. 2d (P & F) 476, 486 (1982), aff’d sub nom. Neighborhood TV Co. v. FCC, 742 F.2d 629 (D.C. Cir. 1984). 545 See FCC, Licensed Broadcast Station Totals, http://transition.fcc.gov/mb/audio/BroadcastStationTotals.html. 546 See, e.g., Comcast 6/8/11 Comments at 3; NAB 6/8/11 Comments at 5. 547 NAB 6/8/11 Comments at 21 (citing SNL Kagan). See also SNL Kagan, TV Stations Deals Databook, 2011 Edition, at 7 (2011) (“2011 SNL Kagan TV Stations Databook”). 548 2011 SNL Kagan TV Stations Databook at 7. 549 Id. at 6-7. See also Justin Nielson, TV Stations Multiplatform Analysis ’11 Update: Multicasting Expands Programming Options, Mobile TV Goes Live, SNL Kagan, Jan. 28, 2011, at 3-4. Moreover, as of year-end 2010, 60 commercial mobile digital television (“mobile DTV”) stations were broadcasting more than 80 live video channels in several major cities. For a more detailed discussion of mobile DTV, see infra, Sec. III.B.3.b. 550 See also 2011 SNL Kagan TV Stations Databook at 7. Of those total digital noncommercial stations covered, 262 are affiliated with PBS. Id. 551 The Digital Transition: Update on the Digital Readiness of U.S. Households, Nielsen, Sept. 8, 2009, at 1. Nielsen stopped tracking the readiness of U.S. television households after the digital transition was completed. Federal Communications Commission FCC 12-81 76 markets tend to have more full-power stations than smaller markets. For example, Los Angeles, the number-two ranked DMA by number of television households, has 23 full-power television stations, more than any other market.552 Nine television markets, including Harrisonburg, Virginia, ranked 177, have only one full-power television station.553 163. Programming is a critical input for broadcast television stations to effectively compete in the industry. Stations combine local programming, either produced in-house or acquired from independent sources, syndicated programming and/or network programming. The mix of programming varies by station, and depends on whether the station is affiliated with a network or operates as an independent station.554 Whether or not a station is affiliated with one of the four major networks (ABC, CBS, FOX, or NBC) has a significant impact on the composition of the stations’ revenues, expenses, and operations.555 164. In 2011, most full-power commercial stations (about 1,145 out of 1,196 total full-power commercial stations) got at least some of their programming from broadcast networks on their primary signals.556 Commercial broadcast networks generally fall into five main categories: English-language (e.g., ABC, CBS, FOX, NBC, The CW, and MyNetworkTV); Spanish-language (e.g., Univision, Telemundo, and TeleFutura); shopping (e.g., HSN), religious (e.g., TBN and CTN), and regional specialty networks (e.g., Memorable Entertainment Television). Three of the major networks (ABC, CBS, and NBC) generally provide their affiliates with about 22 hours per week of prime time programming.557 FOX, MyNetworkTV, and The CW supply affiliates with up to 15 hours per week of prime time programming.558 In addition, these networks may supply affiliates with daytime programming, e.g., morning news programs, game shows, talk shows (including Sunday public affairs), 552 BIA Financial Network, Inc. (“BIA”), Broadcast Television Station database. The Los Angeles DMA had 5.7 million television households as of the 2010-2011 television season. See Local Television Market Universe Estimates, Nielsen, Sept. 25, 2010 (“Nielsen 2010-11 Local Market Estimates”). Estimates were effective as of January 1, 2011, and used throughout the 2010-2011 television season. Nielsen estimates several measurements, including the number of television households within each DMA, by broadcast television seasons, which run from September through August. 553 BIA, Broadcast Television Station database. The Harrisonburg DMA had 94,700 television households as of the 2010-2011 television season. See Nielsen 2010-11 Local Market Estimates. The other eight markets with one full- power television station are: Alpena, Michigan; Glendive, Montana; Lafayette, Indiana; Mankato, Minnesota; North Platte, Nebraska; Parkersburg, West Virginia; Presque Isle, Maine; and Zanesville, Ohio. 554 The Commission defines broadcast television networks as “any person, entity, or corporation which offers an interconnected program service on a regular basis for 15 or more hours per week to at least 25 affiliated television licensees in 10 or more states; and/or any person, entity, or corporation controlling, controlled by, or under common control with such person, entity, or corporation.” 47 C.F.R. § 73.3613(a)(1). Stations affiliated with a network may be owned and operated by the network (O&Os) or owned by other entities that have agreements with a network for distribution of the network’s programming. 555 Nexstar 2010 Form 10-K at 5; Gray 2010 Form 10-K at 7. Station groups differ in the importance they ascribe to network affiliation contracts with respect to their broadcast licenses. See infra, n. 601. 556 FCC staff analysis based on 2011 data from BIA, Broadcast Television Station database. 557 Nexstar 2010 Form 10-K at 14. 558 Id. Federal Communications Commission FCC 12-81 77 and late night programs. Spanish language and religious networks provide nearly round-the-clock programming for affiliates.559 165. Broadcast stations also acquire programming from television syndicators that distribute original (“first-run syndication”), such as Jeopardy! and Judge Judy, or reruns of network television series (“off-net” syndication), such as reruns of Seinfeld and The Simpsons, to television stations.560 In addition, local broadcast stations produce programming in-house, such as local newscasts, public affairs shows, and coverage of regional and local sporting events.561 a. Horizontal Concentration 166. National Group Ownership. The Act imposes a cap that limits the percentage of television households that one television station group owner can serve at 39 percent of U.S. television households.562 Standard & Poor’s estimates that nearly a third of the commercial television stations are owned by and/or affiliated with the top 10 television station groups.563 As of 2010, the largest group owners, by coverage total of U.S. television households, include ION Media Networks (Avenue Capital, Black Diamond Capital, and Trilogy Capital), Univision Communications (Broadcast Media Partners Inc.), Trinity Broadcasting (Paul F. Crouch Sr. and Jan Crouch), CBS Television Stations (CBS Corp.), FOX Television Stations (News Corp.), NBC Universal Stations (Comcast Corp. and General Electric), Tribune Broadcasting (owned by an Employee Stock Ownership Plan), ABC Owned Television Stations (The Walt Disney Company), and Gannett Broadcasting (Gannett Company).564 In 2011, Sinclair increased its coverage of U.S. households when it purchased eight broadcast television stations from Freedom Communications, and five full power stations from Four Point Media.565 Disney decreased its coverage when in April 2011 it closed the sale of its two smallest stations owned and operated by the 559 See, e.g., Entravision Communications Corp., SEC Form 10-K for the Year Ended December 31, 2010, at 6-7 (“Entravision 2010 Form 10-K”); Trinity Broadcasting Network, Watch Us: Broadcast Schedule, http://www.tbn.org/watch-us/broadcast-schedule (visited Mar. 20, 2012). 560 Some firms specialize in one of these functions and form partnerships. For example, Harpo Studios and Sony Pictures Television (“SPT”) co-produce The Dr. Oz Show and The Nate Berkus Show first-run syndicated series, and SPT licenses them for distribution to television stations. See Harpo Productions, Inc., Sony Pictures Television to Distribute the Dr. Oz Show (press release), Oct. 15, 2009; Harpo Productions, Inc., Harpo, Sony Pictures Television, NBC Local Media to Launch The Nate Berkus Show (press release), Feb. 1, 2010. Financial arrangements between syndicators and stations vary. Some syndication rights are acquired for a per episode or series fee, but others involve sharing advertising time or barter. Vogel at 212-15. Under a barter agreement, a national program distributor retains a fixed amount of advertising time within the program in exchange for the programming its supplies. The television station may pay a fixed fee for such programming. Gray 2010 Form 10-K at 7; LIN 2010 Form 10-K at 12. 561 Nexstar 2010 Form 10-K at 7; Gray 2010 Form 10-K at 8. 562 1996 Act, § 202(c); 47 C.F.R. §73.3555(e). See also infra, ¶ 178. 563 Tuna N. Amobi & Erik B. Kolb, Industry Surveys: Broadcasting, Cable & Satellite, STANDARD & POOR’S, Feb. 18, 2010, at 9. 564 Kim McAvoy, TV Group Ranking Could See Shake-Up in ’11, TVNEWSCHECK, Mar. 30, 2011, http://www.tvnewscheck.com/article/2011/03/30/50206/tv-group-ranking-could-see-shakeup-in-11#group-19 (visited Jan. 10, 2012). 565 Tony Lenoir, Top 50 Station Groups by U.S. TVHH Coverage: Sinclair up 6 Percentage Points Through Acquisitions, SNL Kagan, Jan. 31, 2012, at 12. Federal Communications Commission FCC 12-81 78 ABC network (“O&Os”) to SJL Broadcast Management Corporation.566 The top ten station groups remained the same. 167. Local Duopolies. Commission rules limit the number of broadcast television stations that a single entity can own within a DMA based on the number of independently owned stations in the market.567 The local television ownership limit permits a single entity to own two television stations in the same local market if (1) the so-called “Grade B” contours of the stations do not overlap; or (2) at least one of the stations in the combination is not ranked among the top four stations in terms of audience share and at least eight independently owned and operating commercial or noncommercial full-power broadcast television stations would remain in the market after the combination. 168. Using BIA data and counting stations in the same market with a common parent, we find that as of 2012, there are about 124 duopolies among commonly owned stations in the United States and an additional 59 duopolies among stations operating pursuant to local marketing agreements.568 Broadcast stations owned-and-operated by parents of multiple broadcast networks are generally more likely than other stations to participate in duopolies. Through the dual network rule, the Commission limits the extent to which broadcast television licensees can affiliate with broadcast networks under common ownership.569 The dual network rule effectively permits common ownership of multiple broadcast networks, but prohibits a merger of two out of the “top four” networks (i.e., ABC, CBS, FOX, and NBC). Univision Corporation, Inc., which owns the Univision and TeleFutura broadcast networks, operates 13 duopolies; CBS Corp., which has ownership interests in the CBS and The CW networks, has 10 duopolies; News Corp., which owns the FOX and MyNetwork TV networks, has nine duopolies; Comcast/NBCUniversal (“Comcast/NBCU”), which owns the NBC and Telemundo broadcast networks, operate six duopolies. In contrast, Disney Corp., whose sole broadcast network is ABC, does not operate any duopolies. 169. Large television group owners with major broadcast network affiliates are also more likely to operate duopolies. Sinclair which owns 59 full-power stations as of 2012 is involved in more duopolies than any other station group, with 12 co-owned duopolies and ten LMAs. LIN operates nine duopolies of co-owned stations and is involved in two LMAs. Belo Corp. and Newport Television LLC operate five duopolies each. Cox Media Group, Hearst Television Inc., and the Tribune Company each operate four duopolies. 566 Ch. 13’s New Owners Cut 20-Plus Jobs, TOLEDOBLADE.COM, Apr. 12, 2011, http://www.toledoblade.com/TV- Radio/2011/04/12/Ch-13-s-new-owners-cut-20-plus-jobs.html (visited Apr. 26, 2012). 567 See 47 C.F.R. §73.3555(b). See also infra, ¶ 178. In the context of the Media Ownership proceeding, the Commission is considering revising this rule. See 2010 Quadrennial Regulatory Review – Review of the Commission’s Broadcast Ownership Rules and Other Rules Adopted Pursuant to Section 202 of the Telecommunications Act of 1996; Promoting Diversification of Ownership In the Broadcasting Services, MB Docket Nos. 09-182, 07-294, Notice of Proposed Rulemaking, 26 FCC Rcd 17489, 17493, 17498-511, ¶¶ 8, 25-59 (2011) (“Media Ownership NPRM”). 568 Commission staff estimates based on BIA, Broadcast Television Station database. For purposes of this FCC staff estimate, we count full-power stations within a DMA that have a common parent company (i.e., co-owned) as a duopoly. We also count local marketing agreements (LMAs), if the programmer under its ownership limits provides more than 15 percent of a station’s weekly broadcast programming. See 47 C.F.R § 73.3555 note 2(j). For the purposes of this Report, the Commission has not verified the BIA data. 569 47 C.F.R. § 73.658(g). Federal Communications Commission FCC 12-81 79 170. There is at least one duopoly in 71 markets as of 2012.570 While larger DMAs tend to have a greater number of duopolies, smaller DMAs have duopolies as well. Three top ranked markets have four duopoly combinations: Los Angeles, Dallas-Ft. Worth, and San Francisco-Oakland-San Jose.571 Smaller markets are more likely to have LMAs than co-owned stations. Six markets ranked below 100 have co-owned duopolies, while 25 markets ranked below 100 have LMAs. The smallest market with a duopoly is Victoria, Texas, ranked 204. b. Vertical Integration 171. Some stations are vertically integrated upstream, with suppliers of programming, as well as downstream, with distributors of programming. For instance, the stations’ parent company may have ownership interests in television production studios, movie studios, sports teams, broadcast television networks, cable networks, or syndicators. 172. The parent companies of six of the top seven station groups—ION Media Networks, Univision Communications, Inc., CBS Television Stations, FOX Television Stations, NBC Universal Stations, and ABC Owned Television Stations, representing 185 owned and operated local broadcast stations (“O&Os”), own all or part of at least one broadcast television network. Broadcast networks typically own and operate their own stations in the largest television markets. Spanish-language broadcast networks, e.g., Univision and Telemundo, own and operate television stations in the largest Spanish-speaking markets. 173. In addition to ownership of broadcast networks, a number of owners of local broadcast stations have affiliations with cable networks.572 Through its NBC Universal joint venture with the General Electric Company, Comcast has ownership interests in 31 cable networks. Other broadcast station owners with affiliated cable networks are: The Walt Disney Company with interests in 21 cable networks; News Corp. with interests in 12 cable networks; Univision with interests in six affiliated cable networks; and CBS Corporation with interests in three cable networks.573 Several broadcast television groups owners, while not vertically integrated with broadcast networks, also have ownership interests in cable networks. These owners include Hearst Television Inc. (17 cable networks) and InterMedia Partners (three cable networks). In addition, Tribune Company, Cox Communications Inc., and Hubbard Broadcasting Corp. have ownership interests in two cable networks each. Combined, Hearst, InterMedia, Tribune, Cox, and Hubbard, own 83 stations. Other broadcast station groups operate local and regional cable news channels. For example, Belo Corp. owns 20 television stations, two local and two regional cable news channels, and holds ownership interests in two other cable news channels while Allbritton own eight television stations and one regional cable news network.574 570 BIA, Broadcast Television Station database. In addition, San Juan, Puerto Rico, which is not part of any DMA, has six television station combinations. 571 These markets are ranked one, two, five, six, and twelve respectively as of the 2010-2011 television season. 572 This is not the case with syndicators. Columbia/Tristar (Sony), the only major syndicator unaffiliated with a broadcast network, does not own television stations. 573 Comcast, Viacom, News Corp., and The Walt Disney Company also control production studios, which are the primary source of programming for their networks, and hold ultimate distribution rights for their programming, subject to contractual negotiations. See infra, Sec. V.A. 574 Belo Corp., SEC Form 10-K for the Year Ended December 31, 2010, at 3 (“Belo 2010 Form 10-K”); Allbritton Communications Co., TBD: About Us, http://www.tbd.com/about/ (visited Mar. 20, 2012). See also infra, Appendix C, Table C-2. Federal Communications Commission FCC 12-81 80 174. Both Viacom and E.W. Scripps have split their broadcast television station groups and cable network holdings into separate corporate entities.575 Because their station groups and cable networks have common corporate directors, however, we consider them to be affiliated.576 Counting Viacom’s 24 cable networks and CBS’s three cable networks, these affiliated companies have interests in 27 cable networks. Including Scripps Networks Interactive, E.W. Scripps has interests in six cable networks. 175. Since the last report, Comcast became the only distributor of video programming with ownership interests in each mode of video distribution covered by this Report; it is an MVPD that owns and operates 25 full-power television stations and maintains an ownership interest in Hulu, an OVD.577 News Corp., which also has an ownership interest in Hulu and 27 broadcast television stations, no longer is an MVPD; it divested its interest in DIRECTV in 2008.578 Besides Comcast, Cox Media Holdings is the only MVPD that owns broadcast stations, an ABC affiliate serving a DMA where it also owns a cable system.579 c. Entry and Exit Conditions 176. Entry and exit in the broadcast television industry occurs within the broadcast television allocation and licensing regime: ownership of television station properties can change hands, licensees may go out of business and return broadcast licenses for reissue by the Commission, or the Commission may auction channels for new broadcast stations. The amount of spectrum authorized exclusively for broadcast television use by the Commission and the allocation of that spectrum across the United States limits the number of entities that can enter and exit the industry. Besides spectrum, programming is another critical input for broadcast television stations. Both regulatory and non-regulatory conditions affecting the availability of programming may impact stations’ entry and exit decisions. Stations also require access to capital in order to remain competitive and operational. Below, we first discuss the regulatory conditions potentially affecting entry. Thereafter, we describe the market (“non-regulatory”) conditions that may influence entry decisions. We then describe recent entry and exit from the market. (i) Regulatory Conditions 177. Licensing of Broadcast Spectrum. A broadcast station may not operate in the United States without first receiving Commission authorization.580 The Commission is thus responsible for 575 See Viacom Inc., CBS Separation, http://www.viacom.com/investorrelations/Pages/separationfromcbs.aspx (visited Feb. 14, 2012); E.W. Scripps Co., Scripps Controlling Class of Shareholders Approves Company’s Planned Separation (press release), June 13, 2008. 576 Scripps Networks Interactive (owner of cable networks) has 10 members of the board of directors and E.W. Scripps (owner of broadcast stations) has nine members. Of those, three directors on the boards of both companies: Nackey E. Scagliotti (Chairman of E.W. Scripps), John H. Burlingame, and Mary McCabe Peirce. Likewise, Viacom Inc. has 11 board members and CBS Corporation has 14 members. Their boards share three members: Sumner Redstone (Chairman of both boards), Shari E. Redstone (Vice Chairman of both boards), and Frederic V. Salerno. 577 Comcast’s cable systems overlap with NBC Universal’s stations in six markets: San Francisco, Philadelphia, Chicago, Miami, Hartford, and Washington, DC. Comcast-NBCU Order, 26 FCC Rcd at 4289, ¶ 126 n. 302. 578 See News Corp-DirecTV Order, supra, n. 101. 579 In the Orlando-Daytona Beach-Melbourne DMA, Cox owns television stations WFTV and WRDQ, as well as a cable system serving Ocala, Florida. See Cox Media Group, Orlando, http://www.coxmediagroup.com/orlando/ (visited Jan. 11, 2012); Cox Communications, Inc., Welcome, http://ww2.cox.com/ (visited Jan. 11, 2012). 580 47 U.S.C. § 301. Federal Communications Commission FCC 12-81 81 licensing broadcast spectrum to respective applicants and ensuring that the spectrum is used to serve the public interest. 581 Courts have consistently held that the Commission retains significant discretion under its public interest standard to approve applications for broadcast spectrum licenses.582 The Act prohibits broadcast stations from transferring control of their licenses without obtaining Commission approval.583 Certain obligations are imposed on licensees during each license term, which is generally eight years.584 178. Ownership Limits. The Commission has adopted several rules limiting the ownership interests of broadcasters.585 These rules were adopted to further the Act’s goals of competition, localism, and diversity.586 The Commission’s broadcast ownership rules limit local television ownership, local radio ownership, newspaper/broadcast cross-ownership, radio/television cross-ownership, and dual network ownership.587 The local television ownership rule permits a single entity to own two television stations in the same market only if certain conditions are met.588 The newspaper/broadcast cross- ownership rule prevents the common ownership of a radio or television broadcast station and a daily newspaper where the station’s broadcast signal encompasses the entire community where the newspaper is published. 589 The radio/television cross-ownership rule restricts the common ownership of radio and television broadcast stations in a single market after factoring in the size of the relevant market. 590 Congress mandates that the Commission review its media ownership rules every four years to determine 581 47 U.S.C. §§ 303(c), 308(a), 309(a). 582 See, e.g., FCC v. RCA Communications, Inc., 346 U.S. 86, 90 (1953) (“In choosing among applicants, the Commission was to be guided by the ‘public interest, convenience, or necessity[.]’ . . . The statutory standard no doubt leaves wide discretion and calls for imaginative interpretation.”); FCC v. Pottsville Broadcasting Co., 309 U.S. 134, 137-38 (1940) (“In granting or withholding permits for the construction of stations, and in granting, denying modifying or revoking licenses for the operation of stations, ‘public convenience, interest, or necessity’ was the touchstone for the exercise of the Commission's authority. While this criterion is as concrete as the complicated factors for judgment in such a field of delegated authority permit, it serves as a supple instrument for the exercise of discretion by the expert body which Congress has charged to carry out its legislative policy.”). 583 47 U.S.C. § 310(d). 584 47 U.S.C § 307(c); 47 C.F.R. § 73.1020. Among other things, each licensee is required to maintain a main studio in its communities of license (47 C.F.R § 73.1125(a)), maintain and carry out an equal opportunity program (47 C.F.R. § 73.2080), and maintain an accessible public inspection file (47 C.F.R §§ 73.3526-27). 585 47 C.F.R. §§ 73.3555(a)-(e), 73.658(g). The Commission also has developed rules to attribute both direct and indirect ownership in broadcast licenses, cable television systems, and daily newspapers in order to enforce its media ownership rules. Among other parties, these rules apply to investment companies; limited partnerships; officers and directors of a broadcast licensee, cable television system or daily newspaper; and entities participating in local marketing agreements. 47 C.F.R. § 73.3555 notes 1-2. Moreover, the Communications Act limits the extent on non-U.S. ownership of companies that own U.S. broadcast stations. Under this restriction, a U.S. broadcast company may have no more than 25 percent non-U.S. ownership (by vote and equity). 47 U.S.C. § 310(b)(4). 586 Media Ownership NPRM, 26 FCC Rcd at 17494-96, ¶¶ 10-17. 587 See supra, n. 585. 588 47 C.F.R. § 73.3555(b). Similarly, the local radio ownership rule limits the number of commercial radio stations one entity may own in a local market. 47 C.F.R. § 73.3555(a). 589 47 C.F.R. § 73.3555(d). In the Media Ownership NPRM, the Commission proposed relaxing this rule for the top 20 DMAs, provided that the television station is not ranked among the top four, and eight independenly owned major media voices remain with the DMA. See Media Ownership NPRM, 26 FCC Rcd at 17525-32, ¶¶ 99-116. 590 47 C.F.R. § 73.3555(c). Federal Communications Commission FCC 12-81 82 whether they “are necessary in the public interest as a result of competition.”591 The Commission is currently conducting such a review.592 179. Territorial Exclusivity. The territorial exclusivity rules restrict the geographic area in which a television broadcast station may obtain exclusive rights to video programming. Under the network territorial exclusivity rule, a broadcast station may not have an agreement with a network preventing another station located in a different community from broadcasting any of the network’s programming or preventing another station located in the same community from broadcasting the network’s programs not purchased by the broadcast station.593 Under the non-network territorial exclusivity rule, a broadcast station may not enter into an agreement with a non-network programming distributor that prevents another station located in a community more than 35 miles away from broadcasting the same programming.594 180. Incentive Spectrum Auctions. On February 22, 2012, President Obama signed legislation providing the Commission with the authority to conduct incentive auctions by which television broadcast licensees could voluntarily relinquished their licensed spectrum or modify their spectrum usage in exchange for a portion of the spectrum auction proceeds.595 This legislation provides new financial opportunities for broadcast television station licensees, including relinquishing all usage rights with respect to a particular channel, moving from a UHF to a VHF channel, or sharing a channel with another licensee.596 In addition, voluntary channel sharing may provide existing small and minority-owned stations, as well as other niche stations, an opportunity to use the capital infusion they receive from the incentive auction as well as provide operating-cost savings from sharing a transmission facility to enhance or preserve their local program offerings.597 (ii) Non-regulatory Conditions 181. The primary means of entering the television broadcast industry is to purchase broadcast properties from licensees who are already operating stations rather then constructing new broadcast station infrastructure and obtaining a new license. Once a licensee takes over operations of an existing station, the new owner may decide to change programming by affiliating with a different network, purchasing new syndicated programming, or changing on-air talent for local programming, such as newscasts, subject to the terms of their contracts. 182. Access to Capital. Entities seeking to enter the broadcasting industry either by purchasing properties or launching a new station, require access to capital, which may come in the form of debt or equity financing. In determining whether to lend money or invest in a licensee, banks or other firms look at expected revenues and expenses, especially whether new owners could increase profits by 591 1996 Act, § 202(h). 592 Media Ownership NPRM, supra, n. 567. 593 47 C.F.R. § 73.658(b). 594 47 C.F.R. §§ 73.658(m), 76.53. An exception is made, however, for communities located in hyphenated markets, i.e., television markets that include more than one city (e.g., Dallas-Fort Worth, TX). 47 C.F.R. §§ 73.658(m), 76.51. 595 See Middle Class Tax Relief and Job Creation Act of 2012, Pub. L. No. 112-96, §§ 6401-05, 126 Stat. 156, 222- 30 (2012). 596 Id. at 225. 597 Innovation in the Broadcast Television Bands: Allocations, Channel Sharing and Improvements to VHF, ET Docket No. 10-235, Report and Order, 27 FCC Rcd 4616, 4622 ¶ 12 (2012). Federal Communications Commission FCC 12-81 83 changing programming or reducing expenses. Structural changes in the media industry, combined with the strong correlation of their revenues and profits to economic cycles, indicate that financing media transactions with debt entails some risk.598 In particular, high interest rates may lead station owners to file for bankruptcy and transfer control to lenders or sell their stations,599 while reducing the number of potential station buyers who can obtain loans and service debt without strain.600 183. Programming. Access to programming also affects the ability of licensees to enter and remain in the industry.601 Network affiliation agreements and syndication contracts often last several years. For example, if a station loses its network affiliation, it may not be able to affiliate with an alternative network, because that alternative network is likely to already have a distribution agreement in place with another station in the market. The loss of this programming could require the station to obtain replacement programming at a higher cost, and that may be less attractive to its target audience, thereby causing it to lose advertising revenues while potentially increasing expenses. Similarly, popular syndicated programming may not be available for a new station due to exclusive distribution arrangements with competing stations or cable networks.602 As an alternative to contracting for expensive third-party programming, stations may produce their own programming in-house or lease time to other parties (e.g., producers of infomercials) willing to pay stations. (iii) Recent Entry and Exit 184. Overall, between December 31, 2006, and December 31, 2010, the number of full-power commercial television stations on the air increase by 14, bringing the total to 1,390.603 During this period, the total number of full-power noncommercial television stations increased by eleven, going from 380 to 598 “The broadcast sector historically has been highly levered. It’s the recession’s impact on revenues and cash flow that has magnified financial strain.” Price Colman, TV Groups Cope with Leverage Troubles, TVNEWSCHECK, Mar. 4, 2009, http://www.tvnewscheck.com/article/2009/03/04/30075/tv-groups-cope-with-leverage-troubles (visited Jan. 12, 2012). Lenders impose restrictions (covenants) on the ratio of debt to equity and earnings before interest and taxes (EBIT) to interest. LIN 2010 Form 10-K at 23-24; Sinclair 2010 Form 10-K at 23-24; Nexstar 2010 Form 10-K at 12-13; Gray 2010 Form 10-K at 16-17. 599 LIN 2010 Form 10-K at 23-24; Sinclair 2010 Form 10-K at 23-24; Nexstar 2010 Form 10-K at 12-13; Gray 2010 Form 10-K at 16-17. 600 “[W]hen credit markets froze in 2007, a big no-exit sign was hung over TV broadcasting. The gap between bid and ask is more like a gulf.” Price Colman, Hot Trend: Outsourcing Management, TVNEWSCHECK, Aug. 25, 2010, http://www.tvnewscheck.com/article/2010/08/25/44718/hot-trend-outsourcing-station-management (visited Jan. 12, 2012). 601 Broadcasters differ in the value they place on programming with respect to a station’s purchase price. For example, Gray and LIN believe that the value of a television station is derived primarily from the attributes of its broadcast license, rather than its type of programming, i.e., whether or not it is an affiliate of one of the major four broadcast networks. Gray 2010 Form 10-K at 53-54; LIN 2010 Form 10-K at 38. LIN notes that other companies ascribe a belief that network affiliations are the most important component of a station’s value. LIN 2010 Form 10- K at 38. 602 Stations compete against in-market broadcast stations for exclusive access to syndicated programming within their markets. In addition, cable networks occasionally acquire programs that might otherwise be offered to stations, and some programs are available via OVDs. Nexstar 2010 Form 10-K at 7; LIN 2010 Form 10-K at 12. Stations usually purchase syndicated programming two to three years in advance, and sometimes must make multi-year commitments. Gray 2010 Form 10-K at 20; Sinclair 2010 Form 10-K at 25. 603 See FCC, Licensed Broadcast Stations Totals, http://transition.fcc.gov/mb/audio/BroadcastStationTotals.html. Federal Communications Commission FCC 12-81 84 391. In 2009, six stations did not complete the transition to digital television and as a result the Commission canceled their licenses.604 185. Furthermore, between 2007 and 2010, the number of television station transactions declined in number and dollar value.605 During 2007, 218 full-power television stations traded hands, for a total of $10.158 billion, or about $46.6 million per station, with an average 12.5 times the station’s cash flow. In 2010, 23 full-power stations traded hands, totaling $171 million, or $7.43 million per station, with an average cash flow multiple of 9.3, marking the first time since 1995 that cash flow multiples were in the single digits.606 In terms of the dollar value of station transactions, 2010 marked the smallest amount of station transaction activity since 1982. 186. Since the last report, several major group owners have exited the television broadcasting business by selling stations, while private equity and other investment firms have entered. Clear Channel Communications sold all of its television assets, 60 full-power stations, in 2008 to new entrant Newport Television (a holding company formed by private equity firm Providence Equity Partners).607 In addition, the New York Times Company exited the broadcast television business in May 2007 when it sold its nine full-power stations to private equity firm Oak Hill Capital Partners. Comcast entered the broadcast television business in 2010 when, as part of its joint venture with General Electric, it purchased majority ownership interests in the NBC and Telemundo O&Os. 187. Since 2006, several broadcaster station groups filed for bankruptcy, primarily impacting stations in smaller and medium-sized markets.608 These include Young Broadcasting, the Tribune Company, Pappas Broadcasting, Equity Media, Multicultural Broadcasting, and Johnson Broadcasting. In some cases, banks and financing organizations took control over their stations. For example, in 2009, Young Broadcasting Lenders took over the 14 stations of Young Broadcasting, and New Vision Lenders took over 15 stations from New Vision Television. Station groups that file for bankruptcy do not necessarily exit the industry or cease broadcasting. Some station groups have reorganized and emerged from Chapter 11 proceedings. For example, Freedom Communications, an operator of broadcast television stations, print publications, and interactive businesses, filed for protection in September 2009, and completed its restructuring eight months later.609 604 WDCP, University Center, MI, did not obtain a construction permit for digital operation; the Commission canceled its analog license. In November 2009, KOFT, Farmington, NM, returned its analog license to the Commission. In February 2008, KBGH, Filer, ID, notified the Commission that it would not transition to digital. In July 2009, after Equity Broadcast Holdings, LLC filed for bankruptcy and failed to find a buyer for the stations KLMN, Great Falls, MT, KMMF, Missoula, MT, and KBTZ, Butte, MT, it returned the licenses for the stations to the Commission. 605 See Volker Moerbitz, Freedom Buy Catapults Sinclair to No. 2 in Stations Owned, SNL Kagan, Nov. 25, 2011, at 6-7. 606 2011 SNL Kagan TV Stations Databook at 13. 607 Newport Television, About Us, http://www.newporttv.com/content/aboutus.aspx (visited Mar. 5, 2012). See also Reuters, Clear Channel Sale Complete, MEDIAPOST NEWS, Mar. 17, 2008, http://www.mediapost.com/publications/article/78604/clear-channel-tv-station-sale-complete.html (visited Mar. 5, 2012). 608 NAB 6/8/11 Comments at 29-30. 609 Freedom Communications, Freedom Communications Emerges from Chapter 11 (press release), Apr. 30, 2010. Federal Communications Commission FCC 12-81 85 3. Broadcast Television Industry Conduct 188. In addition to industry structure, a second key element of our analysis of broadcast television station competition is an examination of the conduct of industry participants – in particular, the business models and competitive strategies of these entities. Broadcast stations derive most of their revenue from local and national advertising by selling on-air time to reach viewers.610 They differentiate themselves primarily by investing in the purchase and production of programming, as well as making it available to viewers at their convenience. In this section of the Report, we discuss broadcast television station competition in terms of both price and non-price rivalry. a. Price Rivalry 189. Price to Consumers. Because broadcast television stations do not charge consumers directly for the delivery of their signals, they do not compete on price in the traditional sense. Broadcast television is free to consumers who receive it over-the-air. Nevertheless, since about 90 percent of all television households receive broadcast stations from an MVPD, most consumers pay for broadcast stations as part of their MVPD service.611 In the case of cable, broadcast television stations are part of the basic service package, which is generally a low price offering.612 As of January 1, 2010, the average cable system charged $17.93 per month, for its basic service tier, which includes 41 channels on average.613 As of January 2012, AT&T U-Verse changes $19 per month for a basic television service including only local channels.614 As of January 2012, Verizon offers 72 channels as part of its FiOS TV Local Digital plan for $12.99 per month.615 DBS providers may charge subscribers an additional fee to receive broadcast television stations. As of January 2012, DIRECTV generally offers local channels at no additional charge as part of its local packages, but eligibility for this offer is based on a customer’s service area.616 As of January 2012, DISH includes local television station services as part of some packages, but charges an additional $5.99 per month to subscribers opting for local television stations in other packages.617 610 We discuss additional sources of revenue further, infra, Sec. III.B.4. 611 National Universe Estimates -- Market Breaks, Nielsen, Jan. 1, 2012. See also infra, Table 15. 612 47 U.S.C. § 543(b)(7), 47 C.F.R. § 76.901(a). 613 2010 Cable Price Survey Report, 27 FCC Rcd at 2433, 2436, ¶¶ 13, 17. 614 This plan only includes local channels; AT&T does not specify the number. See AT&T Inc., Shop: Compare TV Packages, http://www.att.com/u-verse/explore/tv-landing.jsp (visited Jan. 12, 2012). 615 This plan includes 72 channels, excluding HD. In addition to the broadcast stations’ primary signals, this package includes broadcast multicast signals and PEG, as well as WGN America and the Weather Channel. Additional national networks are available to households that bundle video services with broadband or voice service from Verizon. See Verizon Communications Inc., FiOS TV, Local Channel Plan (using 22201 zip code in Arlington, VA), http://www22.verizon.com/home/FiOSTV/Plans (visited Jan. 12, 2012). 616 DIRECTV, English Packages (using 22314 zip code in Alexandria, VA), http://www.directv.com/DTVAPP/new_customer/base_packages.jsp?footernavtype=-1&lpos=header (visited Jan. 12, 2012). 617 DISH Network, Entertainment: Channels, Washington, DC/Hagerstown (using 22314 zip code in Alexandria, VA), http://www.dishnetwork.com/packages/local/default.aspx (visited Jan. 12, 2012). Federal Communications Commission FCC 12-81 86 190. Price to Advertisers. Television broadcast stations get about 90 percent of their revenue through the sale of advertising time during their programs.618 In the broadcasting industry, competition for advertising revenue occurs primarily within individual markets.619 Generally, advertising rates are determined by a station’s overall ability to attract viewers in its market area and a station’s ability to attract viewers generally and among particular demographic groups that an advertiser may be targeting.620 Specifically, advertising rates depend upon: (1) the size of a station’s market; (2) a station’s overall ratings; (3) a program’s popularity among targeted viewers; (4) the number of advertisers competing for available time; (5) the demographic makeup of the station’s market; (6) the availability of alternative advertising media in the market; (7) the presence of effective sales forces; (8) the development of projects, features and programs that tie advertiser messages to programming; and (9) the level of spending commitment made by the advertiser.621 Within network shows, stations are generally permitted to sell a fixed amount of advertising time, about 2.5 to three minutes per hour. Any remaining advertising time is sold by the network, which retains those revenues and includes the advertising in the network programming time. In the alternative, stations can use their allotted 2.5 to three minutes of time during network shows to promote their own programming. In newscasts or during other non-network shows, stations may sell approximately nine minutes of advertising time per hour.622 191. Local advertisers purchase time directly from a station’s local sales staff. Such advertisers typically include car dealerships, retail stores, and restaurants.623 National advertisers that wish to reach a particular region or local audience buy advertising time through national advertising sales representative firms.624 Such advertisers typically include automobile manufacturers and dealer groups, telecommunications companies, fast food franchisers, and national retailers.625 Stations compete for advertising revenue with other stations in their respective markets; advertisers may also place advertisements with other media including newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, local cable systems, DBS systems, and web sites online, as well as telephone and/or wireless companies.626 192. While individual stations do not make their advertising rates publicly available, prices for a composite group of television stations is available.627 Local advertisers typically use the cost per rating 618 SNL Kagan, Media Sector Forecast: Total TV Station Industry Revenue Projections Through 2015, Jan. 25, 2012 (tables, Document ID 14075490); Robin Flynn, The Complete Picture of TV Station Industry Revenues, 2006 to 2015, SNL Kagan, Jan. 31, 2012, at 1-2. See also infra, Sec. III.B.4.b. 619 Nexstar 2010 Form at 7; Gray 2010 Form 10-K at 9; Sinclair 2010 Form 10-K at 21. 620 Nexstar 2010 Form 10-K at 5; Gray 2010 Form 10-K at 4; Sinclair 2010 Form 10-K at 21. 621 Nexstar 2010 Form 10-K at 5-6; Gray 2010 Form 10-K at 9; LIN 2010 Form 10-K at 9; Sinclair 2010 Form 10-K at 21. 622 Vogel at 317, n. 29. In September 2010, ABC announced that it would launch its Inventory Exchange System, or IES, during the election season, making extra inventory available during periods of high demand, such as election and holiday season, for its affiliates, who have the option to buy additional advertising units to sell within their local markets. 2011 SNL Kagan TV Stations Databook at 6. 623 Nexstar 2010 Form 10-K at 6. 624 Nexstar 2010 Form 10-K at 5; Entravision 2010 Form 10-K at 11. 625 Nexstar 2010 Form 10-K at 6. 626 Nexstar 2010 Form 10-K at 7; Gray 2010 Form 10-K at 9; Belo 2010 Form 10-K at 5. 627 See TVB, Trends: TV Cost & CPM Trends, http://www.tvb.org/trends/4718 (visited Jan. 16, 2012). Federal Communications Commission FCC 12-81 87 point (“CPP”) measure to value advertising time, which represents the percentage of households in a local market with television sets watching a station or show at a given time.628 CPPs vary by the time of day, with prime time (8 p.m.-11 p.m., Eastern and Pacific Time; 7 p.m.-10 p.m., Central and Mountain Time), being the most expensive. For the top 100 television markets, on average, a station’s CPP for a 30-second advertisement during prime time in 2006 was $26,430. That is, on average, a station within the top 100 markets charged advertisers $26,430 to reach one percent of the television households within its DMA with a 30-second commercial. The average prime time CPP for a station rose in 2007 to $32,663, but had dropped to $26,343 by 2010. During the late newscasts (11 p.m. Eastern and Pacific Time; 10 p.m., Central and Mountain Time), on average, stations charged lower prices. In 2006, on average, the CPP for a 30-second advertisement during this time slot was $15,630. This average price dropped to $14,934 by 2010.629 Advertisers assess the relative expense and efficiency of delivering a message via different media, e.g., a broadcast network compared with a group of broadcast television stations, on the basis of cost per thousand households (“CPM”).630 We include CPM figures here in charts 14 and 14 b to provide another basis for comparing prices charged to advertisers since 2006. Table 14: Top 100 Television Markets: Average Price of a 30-Second Commercial631 Prime Time Late News Year CPP CPM CPP CPM 2006 $26,430 $28.08 $15,630 $16.61 2007 $32,663 $34.48 $16,606 $17.53 2008 $26,484 $27.67 $15,122 $15.80 2009 $29,434 $30.33 $17,440 $17.97 2010 $26,343 $26.76 $14,934 $15.17 193. Price to MVPDs. As discussed above, broadcast television stations are entitled to carriage on MVPDs’ systems.632 Commercial stations are entitled to decide whether to seek mandatory carriage or negotiate for compensation of their signals. As noted above, the Commission has opened a proceeding on issues related to retransmission consent.633 Broadcasters claim that the prices they charge MVPDs today are significantly lower than the fees paid to cable networks with comparable or lower ratings.634 In the 628 See The Museum of Broadcast Communications, Cost-Per-Thousand (CPM) and Cost-Per-Point (CPP), http://www.museum.tv/eotvsection.php?entrycode=cost-per-thou (visited Mar. 21, 2012); Vogel at 290-91, 574-75. For example, if 100,000 households in a DMA own television sets, and 20,000 of those households are tuned to a particular broadcast television station, then a station’s rating is 20. If it charges $25,000 per point during a particular program, then it can earn $500,000. 629 Other non-advertising sources of revenue for broadcast television stations include retransmission consent fees, network compensation, DTV revenue, online revenue, and mobile revenue. These sources of revenue are discussed further, infra, Sec. III.B.4.b. 630 Vogel at 292. 631 TVB, Trends: TV Cost & CPM Trends, http://www.tvb.org/trends/4718 (visited Jan. 16, 2012) (citing SQAD Media Market Guide 1st Quarter Projections (Fall books)). 632 See supra, ¶¶ 56-60, for further discussion of retransmission consent. 633 See Retransmission Consent NPRM, supra, n. 154. 634 See, e.g., NAB 7/8/11 Reply, Attachment A at 43-44; Sinclair 10-71 Comments at 11-12 (citing Michael G. Baumann, Proposals for Reform of the Retransmission Consent Good Faith Bargaining Rules: An Economic (continued….) Federal Communications Commission FCC 12-81 88 Retransmission Consent NPRM, the Commission sought comment on whether it should be a per se violation of the good faith standard for a station to grant another station (or station group) the right to negotiate its retransmission consent agreement(s) when the stations are not commonly owned (“Joint Negotiations”).635 In previous proceedings, MVPDs have claimed that economic theory and evidence suggests that such joint negotiations lead to broadcast stations charging higher prices to MVPDs.636 NAB claims that Joint Negotiations help lower the transactions costs of negotiating retransmission consent agreements, and help level the playing field between broadcasters and MVPDs.637 b. Non-Price Rivalry 194. Broadcast stations compete with each other for viewers and advertisers on two major non-price criteria: (1) programming;638 and (2) the type of viewing experience.639 Each of these items is described below in turn. 195. Programming. The largest point of differentiation among broadcast stations is the type of programming they offer and when such programming is offered. Consumers watch multiple broadcast stations and switch stations based on the type of programming carried. When choosing the type of programming to air, stations weigh the cost of acquiring programming, the number of viewers they can expect to attract, the amount of advertising they can sell, and the prices they can charge to advertisers. 196. As noted above, the digital transition completed in 2009 introduced a dramatic increase in the use of multicasting among broadcast television station. Commercial stations use these multicast streams to offer consumers additional programming choices, such as new networks This TV (with 129 digital multicast affiliates), Bounce TV (with 52 digital multicast affiliates), and Retro TV (with 46 digital multicasting affiliates). 640 In addition, multicasting enables stations in smaller markets to affiliate with multiple established networks. For example, The CW (with 108 digital multicast outlets) and My Network TV (87 outlets) are additional examples of established networks that enhance their coverage with multicasting.641 197. Network affiliates typically market themselves based on their broadcast network affiliation and channel position (e.g., FOX 5) and their on-air news talent. Programming from broadcast networks can attract large audiences and provides network affiliates with popular entertainment (Continued from previous page) Analysis, Economists Inc., May 27, 2011, at 7, attached as Exhibit 1 to the Sinclair Comments); CBS Affiliates 10- 71 Comments at 13-15. 635 See Retransmission Consent NPRM, 26 FCC Rcd at 2731-32, ¶ 23 (noting that consent for Joint Negotiations “might be reflected in local marketing agreements (“LMAs”), Joint Sales Agreements (“JSAs”), shared services agreements, or other similar agreements.”). 636 See, e.g., Time Warner Cable Comments, MB Docket No. 09-182, at 7 (filed July 12, 2010) (citing an economist who believes that it is “very likely” that retransmission consent is jointly negotiated where stations are involved in some sort of sharing agreement); ACA Comments, MB Docket No. 09-182, at 2, 13-17 (filed July 12, 2010) (arguing that “available evidence . . . suggests” that higher rates are being paid by cable operators where one broadcast station negotiates retransmission consent on behalf of another station in the same market). 637 NAB 7/8/11 Reply, Attachment A at 27-32. 638 Nexstar 2010 Form 10-K at 7; Gray 2010 Form 10-K at 8-9; Sinclair 2010 Form 10-K at 22. 639 Signal coverage and assigned frequency also impact a television station’s competitive position. Gray 2010 Form 10-K at 21. 640 SNL Kagan, TV Station Deals Databook, 2012 Edition, at 6-7. 641 Id. Federal Communications Commission FCC 12-81 89 programming and sporting events, such as the Olympics, National Football League games, Major League Baseball games, and the Academy Awards, that are extremely popular with both viewers and advertisers.642 Networks also tend to schedule their most popular programming during the months of the year when Nielsen measures television audiences for all 210 markets (February, May, July, and November) to determine local advertising rates.643 198. Local news programming is another source of product differentiation for broadcast television stations, in their competition for both advertisers and viewers.644 This programming, which stations produce, is typically the largest source of their income, accounting for 35-40 percent of their advertising base.645 Some stations seek to increase their local advertising revenues in part by producing programming with local advertising appeal and sponsoring or co-promoting local events and activities.646 To attract audiences, stations also strive to provide exclusive news stories, unique features such as investigative reporting, coverage of community events and to secure broadcast rights to regional and local sporting events.647 Between 2006 and 2007, the average number of hours of news aired on weekdays by local television stations remained steady at 4.1 hours, increased to 4.6 hours in 2008, and 5.0 hours in 642 Nexstar 2010 Form 10-K at 3; Sinclair 2010 Form 10-K at 11. The network affiliation agreements, generally exclusive for each of the 210 television markets, provide affiliates with the right to air network programming first. The contracts may run from two to 10 or more years. The Commission’s right-to-reject rule grants an affiliate the right to (1) reject or refuse network programs which the station reasonably believes to be unsatisfactory, unsuitable, or contrary to the public interest and (2) substitute a program which, in the station’s opinion, is of greater local or national importance. 47 C.F.R. § 73.658(e). The financial arrangements between networks and their affiliated stations regarding payments for programming are evolving. See infra, Sec. III.B.4.b. 643 While networks and stations consider May to be the most important measuring period of the year, they also compete intensely in February and November, when audiences are likely to stay at home. Vogel at 291. See also Nielsen Media Research, Glossary of Media Terms, http://www.nielsenmedia.com/glossary/ (visited Mar. 22, 2012). Nielsen refers to these months as “sweep months.” Nielsen excludes the Honolulu, Fairbanks, and Juneau DMAs from its July measurement period. 644 Gray 2010 Form 10-K at 7; LIN 2010 Form 10-K at 7-8; Sinclair 2010 Form 10-K at 9. 645 Vogel at 304. See also Robert Papper, Part I: More Jobs, Higher Profits in TV News, Hofstra University, 2011, http://www.rtdna.org/pages/media_items/2011-tv-and-radio-news-staffing-and-profitability- survey2033.php?id=2033 (“RTNDA/Hofstra 2011 Survey”) (visited Mar. 22, 2012). 646 See, e.g., Nexstar 2010 Form at 6; LIN 2010 Form 10-K at 8. Nexstar states that each of the stations it owns, operates, programs, or provides sales and other services to create a highly recognizable brand, primarily through the quality of news programming and community presence. Nexstar asserts that strong local news typically generates higher ratings among attractive demographic groups and enhances audience loyalty, potentially resulting in higher ratings for programs preceding and following the newscasts. Nexstar claim that high ratings and strong community identities also makes stations attractive to advertisers. In 2010, Nexstar earned approximately one third of its advertising revenues from spots aired during local news programming. Nexstar’s stations produce between 10 to 15 hours per week of local news programming. Nexstar 2010 Form 10-K at 3. 647 Nexstar 2010 Form 10-K at 7; Gray 2010 Form 10-K at 8-9. Federal Communications Commission FCC 12-81 90 2009.648 In 2010, the average television station aired 5.3 hours of weekday news.649 NAB contends that operating agreements among non-commonly owned broadcasters enable stations to maintain and sometimes expand news on stations, despite a difficult economic climate.650 199. Stations also air syndicated programming, such as original series Judge Judy, off-network programs such as Friends, or sporting events such as the NCAA basketball and football games from the Southeastern Conference.651 Competition for programming involves negotiating with national program distributors or syndicators that sell first-run and rerun packages of programming in their respective markets.652 Stations compete against in-market broadcast stations for exclusive access to syndicated programming within their markets. In addition, cable networks occasionally acquire programs that might otherwise be offered to stations.653 Syndicated programming can be expensive for stations, and may represent long-term financial commitments.654 Stations usually purchase syndicated programming two to three years in advance, and sometimes must make multi-year commitments.655 An average broadcast station spends about 24.3 percent of its expenses on acquiring syndicated programming.656 Expenses may range, however, from about eight percent of revenues for a Spanish-language station, which tends to rely on network programming for a majority of its schedule to nearly two-thirds of revenues for an 648 Steven Waldman and the Working Group on Information Needs of Communities, The Information Needs of Communities, FCC, July 2011, at 77, http://transition.fcc.gov/osp/inc- report/The_Information_Needs_of_Communities.pdf . The data are based on the RTNDA/Hofstra University Annual Survey, conducted by Robert Papper for the Radio Television Digital News Association and Hofstra University. See RTNDA/Hofstra 2011 Survey. Note that surveys from 2007-2009 are unavailable on the website as of March 2012. 649 RTNDA/Hofstra 2011 Survey, Part II: Record Amount of Local News Produced on TV. Note that while RTNDA/Hofstra released survey results in 2011, Professor Robert Papper conducted the survey during the fourth quarter of 2010. 650 NAB 6/8/11 Comments at 29-31. Such arrangements include joint sales agreements, shared services agreements, and local marketing agreements. Our attribution rules currently make attributable certain LMAs, also referred to as time brokerage agreements (“TBAs”), in which a broker purchases discrete blocks of time from a licensee and supplies programming and sells advertising for the purchased time. According to commenters, a local news service (“LNS”) agreement is as an agreement in which multiple local broadcast television stations contribute certain news staff and equipment to a joint news gathering effort coordinated by a single managing editor. According to commenters in the ownership proceeding, a shared service agreement (“SSA”) is an agreement, or series of agreements, in which one in-market station provides operational support and programming for another in-market station. We are currently seeking comment on LNS agreements and SSAs in the Media Ownership proceeding. See Media Ownership NPRM, 26 FCC Rcd at 17564-70, ¶¶ 195-208. 651 ESPN Inc., WDCW-TV/DC50 Named SEC Network Affiliate in Washington DC – DC50 to Air Men’s SEC Basketball and Football Through ESPN Regional Television’s Syndicated Network (press release), Jan. 4, 2012. ESPN, a cable network, has a division called ESPN Regional Television that produces and syndicates collegiate sporting events. See also Sinclair 2010 Form 10-K at 11. 652 Nexstar 2010 Form 10-K at 7. 653 Id.; Gray 2010 Form 10-K at 9; Sinclair 2010 Form 10-K at 22. 654 Syndicated programming can impose financial risks on stations. Broadcast stations cannot predict whether a particular show will be sufficiently popular to enable it to sell enough related advertising time to cover the costs of the program. A station may have to replace a poorly performing program before it has recovered the costs of obtaining it. Sinclair 2010 Form 10-K at 25; Gray 2010 Form 10-K at 20; Belo 2010 Form 10-K at 11. In 2010, Gray wrote down the value of its programming contract assets by $0.4 million. Gray 2010 Form 10-K at 20. 655 Gray 2010 Form 10-K at 20; Belo 2010 Form 10-K at 11. 656 NAB, Television Financial Report, 2011, at 3 (“2011 NAB Television Financial Report”). Federal Communications Commission FCC 12-81 91 independent station, which relies primarily on syndicated programming.657 For example, syndication rights for the series The Big Bang Theory and Modern Family cost stations about $2.5 million per episode in barter and cash.658 200. Despite its price tag, a popular program may be a profitable investment for a station, if it provides a lead-in audience for a station’s local newscasts, differentiating it from competing stations, and increasing audience and revenues. Other factors may help to reduce the costs of syndicated programming for stations. For example, large group owners can use economies of scale to negotiate favorable contractual terms with program suppliers.659 201. Viewing Experience. Since the last report, several major patterns of consumer behavior have emerged which impact broadcast stations’ non-price rivalry. The first is the dramatic increase in the number of television households with sets capable of displaying and/or receiving digital signals, including HD television signals. The number of households equipped with an HD television set and HD tuner who received at least one HD network or station increased from 15.4 million, or 13.6 percent of all television households, in 2007, to 68.8 million, or 59.4 percent in 2010, and again in 2011 to 80.3 million, or 70 percent of all television households.660 The second is the doubling of penetration of digital video recorders (DVRs), which rose from 20.4 million or 18.6 percent of television households in 2007, to 42.5 million, or 36.8 percent in 2010, and 46.3 million, or 40.4 percent of television households in 2011.661 The availability of DVRs coupled with other technological developments has spurred consumers’ desire to watch video on a time-shifted basis on television sets, personal computers, and mobile devices. As digital video recorders have gained popularity, Nielsen begam reporting “live-plus-same-day playback,” or “LSD” viewing as the currency for buying and selling local television time, where such ratings are available.662 In August 2010, it found that while the total effect of DVR playback on ratings was small, the audience composition changed.663 657 FCC staff analysis of data. See NAB, Television Financial Report, 2009 (“2009 NAB Television Financial Report”). 658 Deana Myers, What is a Sitcom’s Chance of Success, SNL Kagan, Feb. 9, 2012. 659 Nexstar 2010 Form 10-K at 3. 660 National Universe Estimates – Market Breaks, Nielsen, Jan. 1, 2007 – Jan. 1, 2011; National Media Related Universe Estimates – Media UE Trends, Nielsen, Feb. 2011; Nielsen, TELEVISION AUDIENCE 2010 & 2011, 2011, at 4 (“Nielsen 2010 & 2011 Television Audience Report”). MVPD households with HD television sets wishing to receive HD service must have HD service included in their subscriptions. 661 National Universe Estimates – Market Breaks, Nielsen, Jan. 1, 2007 – Jan. 1, 2011; National Media Related Universe Estimates – Media UE Trends, Nielsen, Feb. 2011; Nielsen 2010 & 2011 Television Audience Report at 4. 662 Katy Bachman, Nielsen Returns ‘Live’ to the Ratings, ADWEEK, July 1, 2010, http://www.adweek.com/news/advertising-branding/nielsen-returns-live-ratings-102743 (visited July 10, 2012). See also The Nielsen Company, Measurement, Television Measurement, 2011-12 Sweeps Dates, http://www.nielsen.com/us/en/measurement/television-measurement.html (visited July 10, 2012). 663 Katy Bachman, Nielsen Releases Analysis of LSD Data, ADWEEK, Aug. 5, 2010, http://www.adweek.com/news/advertising-branding/nielsen-releases-analysis-lsd-data-115873 (visited July 10, 2012). LSD viewers tended to be younger and higher-income than live viewers generally. As described in Section III.B.4, infra, advertisers buy time on broadcast and cable networks on the basis of viewership of commercials. Federal Communications Commission FCC 12-81 92 Table 15: Television Households and Media Usage Estimates (in thousands)664 2006 2007 2008 2009 2010 2011 Total U.S. Households 113,673 114,890 115,760 116,170 117,220 118,590 U.S. TV HHs 111,400 112,800 114,500 114,900 115,900 114,700 Broadcast Only 15,660 14,340 13,600 11,830 11,080 10,970 MVPD 95,740 98,460 100,900 103,070 104,820 103,730 DVR Owner665 N/A 20,970 27,950 36,160 42,540 46,320 HD TV Households666 N/A 15,350 29,010 49,640 68,810 80,290 202. In response to these consumer trends, stations have taken a number of steps to enhance consumers’ viewing experience. First, stations are increasingly distributing their programming in HD. At the end of 2010, about 1,036, or almost 87 percent of the 1,196 commercial television stations surveyed by SNL Kagan, broadcast in HD, up from 957 commercial television stations as of August 31, 2009 (or about 79 percent of the 1,010 commercial stations surveyed by SNL Kagan).667 Stations have also invested in building new sets and on-air graphics in order to accommodate their HD broadcasts. The deployment of newscasts in HD, at least from station studios, slowed in 2008 and 2009 as broadcast stations tried to hold costs down, but began to accelerate in 2010.668 According to a survey conducted by consulting firm Positive Flux, as of 2010, about 63 percent of large market stations (which the firm categorizes as stations in DMAs 1-79) had begun broadcasting fully in HD. On the other hand, 90 percent of stations in small markets (i.e., stations in DMAs 140-210) were not broadcasting fully in HD at that time.669 664 National Universe Estimates – Market Breaks, Nielsen, Jan. 1, 2007 – Jan. 1, 2011; National Media Related Universe Estimates – Media UE Trends, Nielsen, Feb. 2011; Nielsen 2010 & 2011 Television Audience Report at 4. Nielsen estimates are as of January 1. We use Nielsen’s January 1 estimates for December 31 of the previous year (e.g., we report Nielsen’s January 1, 2007 estimate as our 2006 data in this chart). 665 Nielsen began tracking DVR penetration in May 2007. 666 Nielsen began tracking HD penetration in February 2008. HD data as of February and reported here for the previous year, except for 2011 when the data are based on November 2011 estimates. We report the number of households with an HD television with an HD tuner that receives at least one HD network or station. 667 2011 SNL Kagan TV Stations Databook at 10; Justin Nielson, TV Stations Multiplatform Analysis: Digital Conversion Creates Opportunities for Multicasting, SNL Kagan, Jan. 22, 2010. The 1,196 commercial stations surveyed by SNL Kagan in 2010 represents 86 percent of the 1,390 commercial stations counted by the Commission at the end of 2010. The 1,010 commercial stations surveyed by SNL represent 72 percent of the 1,394 commercial stations counted by the Commission at the end of the third quarter of 2009. See 2011 SNL Kagan TV Stations Databook at 7. 668 Harry A. Jessell, Tracking TV’s Top Tech Trends of 2010, TVNEWSCHECK, Dec. 23, 2010, http://www.tvnewscheck.com/article/2010/12/23/47961/tracking-tvs-top-tech-trends-of-2010?ref=search (visited Jan. 13, 2012). 669 Positive Flux, Executive Summary, U.S. TV Stations Infrastructure 2011, April 4, 2011, at 4, http://positiveflux.com/store#Stations%20Full (visited Feb. 27, 2012). Federal Communications Commission FCC 12-81 93 203. To respond to viewers’ desire to view video programming in more places at more times, broadcast station owners have developed online and mobile media platforms, using their websites as extensions of their local brands, and offered advertisers online promotions coordinated with the on-air advertisements. SNL Kagan estimates that at the end of 2010, 95.4 percent of full-power commercial television stations operated a website and about 88.6 percent streamed video content.670 Local news and weather updates were provided by 78.8 percent of broadcast television station websites and 64.5 percent provided local classified advertisements.671 About 74.1 percent of websites contained links to articles via Facebook, and 68 percent had links via Twitter.672 Nearly 40 percent of station websites had mobile app downloads for smartphones.673 A study by the Radio Television Digital News Association (“RTNDA”) and Hofstra University found that two-thirds of television stations surveyed distributed news programming online and via mobile devices, as well as over-the-air i.e., they are taking a “three-screen approach.” 674 The larger the news department, the more likely the station was to use the three-screen approach. While most stations with a three-screen approach were broadcast network affiliates, the size of their markets did not appear to impact their decision to utilize this approach.675 204. NAB states that the roll-out of mobile DTV will enable viewers to receive live, local broadcast television programming on a mobile basis, on any mobile DTV capable device.676 In 2007, eight major broadcast station groups, including Belo Corp.; FOX Television Stations; Gannett Broadcasting; Gray Television; ION Media Networks; NBC & Telemundo Television Stations; Sinclair Broadcast Group; and Tribune Broadcasting Company formed the Open Mobile Video Coalition (“OMVC”) to promote the development of industry technical standards, technical requirements, conditions, protocols, reference implementations, test suites, and best practices related to enabling mobile digital television.677 The first rollout of live mobile broadcast channels began in 2010.678 OMVC worked with the Advanced Television Systems Committee (ATSC) to develop a comprehensive standard and to develop field trials. The first ATSC – Mobile/Handheld (ATSC-M/H), or mobile DTV stations, went live in three OMVC consumer test markets, Washington, D.C., Seattle, and Atlanta.679 Participants 670 2011 SNL Kagan TV Stations Databook at 10. 671 Id. 672 Id. at 11. 673 Id. 674 RTNDA/Hofstra 2011 Survey, Part III: Stations Sharing Content, Resources at 4-5. This study also found that that between 2009 and 2010 stations shifted from primarily using social media as a promotional tool to using it as a tool for conversations with their audiences. Belo notes that the websites of its television stations provide consumers with news and information as well as a variety of other products and services. Belo obtains immediate feedback through online communication with its audience, which allows the Belo to tailor the way in which it delivers news and information to serve the needs of its audience. Belo 2010 Form 10-K at 4. 675 RTNDA/Hofstra 2011 Survey, Part III: Stations Sharing Content, Resources at 4-5. 676 NAB 6/8/11 Comments at 22. 677 Open Mobile Video Coalition (“OMVC”), Open Mobile Video Coalition to Promote Mobile Digital Broadcast TV in U.S. (press release), Apr. 13, 2007. 678 OVMC, Open Mobile Video Coalition Launching Comprehensive Mobile Digital Television Consumer Showcase During First Quarter of 2010 (press release), Jan. 5, 2010. OMVC opened its membership to equipment manufacturers, application developers, and service providers in 2011. OMVC Comments, ET Docket No. 10-235, at 1 (filed Mar. 18, 2011). 679 2011 SNL Kagan TV Stations Databook at 6. Federal Communications Commission FCC 12-81 94 announced successful trial results in September 2010. Television station groups have formed coalitions to develop applications. At the end of 2010, 60 operating commercial mobile DTV stations broadcast more than 80 live mobile video channels in major markets.680 This number increased to 105 live mobile DTV stations at the end of 2011.681 205. In April 2010, twelve major broadcast groups created a joint venture, Mobile Content Venture (“MCV”), to develop a national mobile content service.682 MCV is working with original equipment and device manufacturers to develop devices capable of receiving ATSC-MH, encrypted with standards-based conditional access.683 Under the brand name Dyle Mobile TV, MCV plans to deliver live mobile television from twelve major broadcast television group owners in 2012.684 In January 2012, MCV and MetroPCS Communications, Inc. announced that they are partnering to enable MetroPCS customers to watch live, local broadcast television on their mobile phones, making MetroPCS the first wireless service provider to offer Dyle Mobile TV on devices pre-loaded with the Dyle application.685 Likewise, the Mobile500 Alliance is a group of 50 member companies, including two public broadcasters, holding licenses to 437 televisions stations, reaching 94 percent of U.S. households, incorporated in December 2010 to develop Mobile DTV.686 The Mobile500 Alliance plan calls for launching 15-20 Mobile DTV channels in markets across the country. The proposed service will provide mobile device users with a mix of free and subscription channels along with video-on-demand content and data services delivered via mobile DTV and through 3G/4G and Wi-Fi networks.687 4. Broadcast Television Industry Performance 206. In this section of the Report, we examine broadcast stations’ performance in terms of their audiences, revenue, and profitability as well as their investment and innovation. We also review the interplay between the trends in broadcasters’ sources of revenues and expenses, their strategies for distributing video programming, and other factors influencing broadcasters’ performance. The majority 680 Justin Nielson, TV Stations Multiplatform Analysis ’11 Update: Multicasting Expands Programming Options, Mobile DTV Goes Live, SNL Kagan, Jan. 28, 2011, at 8. As of 2012, OMVC’s members own and operate more than 900 commercial and noncommercial television stations nationwide, reaching 103 million households in 96 of the top 100 DMAs. OMVC, About OMVC: Overview, http://www.openmobilevideo.com/about%2Domvc/ (visited Jan. 19, 2012). 681 Justin Nielson, TV Stations Multiplatform Analysis ’12 Update: New Digital Networks and Mobile TV Channels Expand Content Options, SNL Kagan, Jan. 31, 2012, at 10. 682 The twelve founding broadcast groups of Mobil Content Venture (“MVC”) are O&O groups FOX, NBC (including the Telemundo stations), and ION and nine affiliate groups – Belo Corp., Cox Media Group, E.W. Scripps, Gannett Broadcasting, Hearst, Media General, Meredith Corp., Post-Newsweek Stations, Inc., and Raycom Media – that separately formed Pearl Mobile DTV Company LLC, as a vehicle for their involvement in MCV. MVC, Twelve Major Broadcast Groups to Form Joint Venture to Develop National Mobile Content Service (press release), Apr. 13, 2010. 683 MVC, About MVC, http://www.themcv.com/about-mcv (visited Jan. 13, 2012). 684 These group owners include the original twelve founders described above, as well as Bahakel and Univision. See Samsung Electronics Co., Samsung Mobile to Supply First Live Mobile TV-Enabled Smartphone with Dyle™ Mobile TV (press release), Jan. 4, 2012. 685 Samsung Telecommunications America (Samsung Mobile) will provide the first smartphone with Dyle, and Android device, using ATSC-Mobile technology. Id. 686 The Mobile 500 Alliance, About, http://www.mobile500alliance.com/aboutus.html (visited Jan. 13, 2012). 687 Id. Federal Communications Commission FCC 12-81 95 of broadcast televisions station licensees are part of parent companies that are involved in other industries. To provide context, in the evaluation of the performance of the broadcast television station industry as a whole, we examine a select group of companies that are only involved in this industry, i.e., “pure play” broadcast television station group owners. As publicly traded pure-play companies, they provide detailed information about their performance in the broadcast industry. Throughout this section, we examine the performances of the five companies used by research firm SNL Kagan in its tracking index for the broadcast television station industry as of December 31, 2010: Belo Corporation, Gray Television Inc., LIN TV Corporation, Nexstar Broadcasting Group, and Sinclair Broadcasting Group.688 207. Because of its dependence on advertising revenues, which are highly correlated with overall economic conditions, broadcasting is a highly cyclical industry.689 This is in part because marketers often view advertising as a discretionary expense and cut back when the economy declines.690 In addition, some categories of advertisers, especially the automobile sector, are responsible for a large proportion of stations’ advertising revenues. Automobile dealers can account for 25 percent of a typical television station’s revenues in good times.691 In 2009, the automobile sectors’ share of station groups’ overall advertising fell to teen levels in the first quarter.692 Station revenues tend to be higher in even years, due to political advertising, which tends to peak immediately before elections.693 In addition, NBC affiliates can charge higher rates during the Olympic Games, which air in even years.694 208. Moreover, broadcast television stations face changing technology. Industry participants note that information delivery and programming alternatives such as MVPDs, the Internet, mobile devices, DVRs, and home video entertainment systems have fractionalized television viewing and audiences, expanded the number of outlets for advertisers, and increased competition for the acquisition of programming.695 Belo adds that these trends, combined with rising production and programming costs, may impair broadcast stations’ ability to acquire and develop programming.696 Industry participants also 688 While Sinclair has invested in non-broadcast businesses in order to diversify its risks, these only represent a small portion of its overall operating results. Sinclair 2010 Form 10-K at 11. We exclude Belo in our analysis of profits and investment trends between 2006 and 2010, since Belo operated newspapers as well as television stations until February 2008, when it spun off its newspaper businesses and related assets into a separately traded company, A. H. Belo Corporation. Belo 2010 Form 10-K at 5. 689 Vogel at 301-03. “We [are dependent] on advertising revenues, which are seasonal and cyclical . . . .” Gray 2010 Form 10-K at 15. See also Nexstar 2010 Form 10-K at 12; LIN 2010 Form 10-K at 21; Sinclair 2010 Form 10-K at 23. 690 “Advertisers generally reduce their spending during economic downturns . . . .” Belo 2010 Form 10-K at 10. See also Nexstar 2010 Form 10-K at 18. 691 Vogel at 309. 692 Robin Flynn, Broadcasters’ Auto Revenues Down 52% in First-Quarter 2009, SNL Kagan, May 14, 2009. Gray TV states that in 2010 and 2009, approximately 17 percent of its total revenues came from the automotive category. Gray 2010 Form 10-K at 4. Belo, which in 2010 generated 19.8 percent of all of its advertising from the automotive industry, notes that the success of automotive manufacturers and dealers in meeting the economic challenges of the automotive industry will continue to affect the amount of their advertising spending, which in turn will impact Belo’s revenues and operations. Belo 2010 Form 10-K at 10. See also LIN 2010 Form 10-K at 21. 693 Nexstar 2010 Form 10-K at 6; Gray 2010 Form 10-K at 8. 694 Belo 2010 Form 10-K at 10. 695 Belo 2010 Form 10-K at 9; Nexstar 2010 Form 10-K at 19; Gray 2010 Form 10-K at 21; Sinclair 2010 Form 10- K at 30-31; LIN 2010 Form 10-K at 26. 696 Belo 2010 Form 10-K at 9. Federal Communications Commission FCC 12-81 96 note that video compression techniques enable MVPDs’ and competing television stations to carry more programming (e.g., via multicasting), potentially fractionalizing audiences and advertisers even further.697 209. In the short run, most of a station’s operating costs are fixed.698 Regardless of the amount of advertising inventory it sells, a station must pay for the cost of operating its facilities as well as the costs of programming rights. Therefore, when economic conditions are favorable and a station is able to charge high prices for its commercial inventory, it can be profitable. Conversely, because stations remain dependent on advertising revenues, when they decline, aside from laying off employees and reducing sales commissions, stations usually are unable to reduce expenses, and thus profits can decline sharply. Other sources of stations’ revenues include retransmission consent fees, ancillary DTV services, and online advertising.699 a. Audiences 210. The industry relies on Nielsen data to measure broadcast television station audiences. Nielsen measures television ratings as a percentage of households with television sets who view a program.700 Nielsen estimates that between 2006 and 2010, the total number of U.S. households grew from 113.7 million to 117.2 million. As of 2011, Nielsen estimates that there were 118.6 million total households. Nielsen estimates that the percentage of households with television sets remained steady at 98 percent for thirty years between 1980 and 2010, but then increased to 99 percent in 2010 or about 115.9 million total television households.701 For 2011, however, Nielsen adjusted its estimates of television penetration downward to 97 percent, or about 114.7 million households.702 Nielsen believes the factors that may have contributed to this downward trend include the digital transition, the economic downturn leading rural and lower-income households to conclude that the price of acquiring television sets is too high, and younger, urban consumers who may substitute online viewing for traditional television viewing.703 211. After a steady decline over the last few years, the percentage of television households relying exclusively on over-the-air broadcast service (as opposed to access to broadcast stations via an MVPD) has remained stable since 2010, although the absolute number continued to decline as the number of television households declined. At the end of 2006, about 14.1 percent of all U.S. television households, or 15.66 million households, were broadcast only.704 This figure declined to 12.7 percent of all U.S. television households, or 14.34 million households, at the end of 2007. This figure dropped further to 11.9 percent (13.60 million households) at the end of 2008, 10.3 percent (11.83 million 697 Nexstar 2010 Form 10-K at 19; Sinclair 2010 Form 10-K at 31. 698 Vogel at 304. 699 See infra, Sec. III.B.4.b. 700 Nielsen, News & Insights: Top Tens & Trends, Television, http://www.nielsen.com/us/en/insights/top10s/television.html (visited Mar. 23, 2012). 701 Nielsen 2010 & 2011 Television Audience Report at 4-5. 702 Nielsen, Advance/Preliminary 2012 National Universe Estimates (client communication), May 2, 2011. Nielsen data suggest that television penetration had actually begun to decline in late 2008 or early 2009, but waited for additional information to confirm whether this trend was temporary due to the digital television transition. 703 Other studies indicate that college students are watching video content on computers and laptops in lieu of television sets. See College-Age TV Watchers Have No Cords to Cut, eMarketer, Dec. 15, 2011, http://www.emarketer.com/Article.aspx?id=1008735&R=1008735 (visited Mar. 5, 2012). 704 See supra, Table 15. Federal Communications Commission FCC 12-81 97 households) at the end of 2009 and again at the end of 2010 to 9.6 percent (11.08 million households), remaining steady at 9.6 percent (10.97 million households) at the end of 2011.705 212. While viewing shares of broadcast network affiliates declined between the 2005-2006 and 2010-2011 television seasons, viewing shares of independent and non-commercial broadcast television stations, whose shares are relatively low, fluctuated, but generally held steady. In contrast, the combined viewing shares of advertising-supported cable networks increased during this period. As shown in Table 16, the total day share of viewing for broadcast network affiliates declined from 36 percent in the 2005-2006 television season to 28 percent in the 2010-2011 television season.706 During prime time,707 their share fell from 40 percent to 33 percent between the 2005-2006 and 2010-2011 television seasons. Independent stations’ total share was three percent in both the 2005-2006 season and 2010-2011 seasons. During prime time, their share was two percent in the 2005-2006 season and 2010- 2011 seasons. Noncommercial stations’ total and prime time shares were two percent in the 2005-2006 and 2010-2011 seasons.708 705 Nielsen, National Universe Estimates, Jan. 1, 2008-Jan. 1, 2012. For the purposes of this Report, we use Nielsen’s January 1 estimates for our December 31 estimates of the prior year. For 2006, we use Nielsen’s estimates from its 2007 Television Audience Report. See Nielsen, Television Audience 2007 (2008), at 3. 706 Nielsen 2010 & 2011 Television Audience Report at 18. Total day viewing includes viewing Monday-Sunday, 6 a.m.-6 a.m. A share is the percentage of television households watching television who are watching a particular programming source. Due to simultaneous multiple-set viewing, Nielsen reports audience shares that exceed 100 percent when totaled. We have normalized the audience shares by recalculating them on a base (or denominator) equaling 100 percent and adjusting the numerators accordingly. 707 Monday-Saturday, 8-11 p.m. Eastern and Pacific Time (7-10 p.m. Central and Mountain Time), Sunday 7-11 p.m. Eastern and Pacific Time (6-10 p.m. Central and Mountain Time). 708 Since the last report, Nielsen has altered its methodology of measuring television viewing to include viewing on a time-shifted basis. For the 2009-2010 television season, Nielsen began releasing “C3” ratings data for television viewing, which measures the commercials watched both live and for three days via DVR playback. This is the metric under which much of broadcast and cable network advertising is bought and sold. See Nielsen, “C3” TV Ratings Show Impact of DVR Ad Viewing, Oct. 14, 2009, http://blog.nielsen.com/nielsenwire/media_ entertainment/c3-tv-ratings-show-impact-of-dvr-ad-viewing/ (visited Mar. 23, 2012). To include VOD, and online viewing in their ratings, networks must include the same set of commercials that appear in the initial live telecast. This measurement does not apply to local ratings. Federal Communications Commission FCC 12-81 98 Table 16: Audience Shares Total Day 2005- 2006 2006- 2007 2007- 2008 2008- 2009 2009- 2010 2010- 2011 Viewing Source: Network Affiliates 36 34 32 30 29 28 Independents 3 2 2 2 2 3 Non-Commercial Networks 2 2 2 1 2 2 Ad Supported Cable 50 49 50 52 52 53 Premium Pay Networks 4 4 4 4 4 4 All Other Cable Networks 5 5 5 5 5 5 All Other Tuning709 1 4 6 6 6 5 Total Day Total: 100 100 100 100 100 100 Prime Time 2005- 2006 2006- 2007 2007- 2008 2008- 2009 2009- 2010 2010- 2011 Viewing Source: Network Affiliates 40 39 37 35 34 33 Independents 2 2 2 2 2 2 Non-Commercial Networks 2 2 2 2 2 2 Ad Supported Cable 46 47 48 49 50 51 Premium Pay Networks 4 3 3 4 3 4 All Other Cable Networks 5 4 4 4 4 4 All Other Tuning 1 3 5 5 5 4 Prime Time Total: 100 100 100 100 100 100 213. In addition, stations are attracting audiences on their digital multicast signals. For example, WVUE in New Orleans, after launching Bounce TV on a digital multicast channel in November 2011, earned higher ratings than several basic cable networks and is competing strongly with several broadcast outlets.710 Stations also are attracting consumers to their websites. In this regard, one report citing a Fall 2010 survey indicates that out of 80 markets measured, television websites attracted more 709 “All other tuning” refers to tuning where the source was not encoded and Nielsen was not able to measure what was watched. Bill Gorman, Where Did the Primetime Broadcast TV Audiences Go?, TV by the Numbers, April 12, 2010, http://tvbythenumbers.zap2it.com/2010/04/12/where-did-the-primetime-broadcast-tv-audience-go/47976/ (visited July 10, 2012). 710 Bounce TV Powers Ratings on WVUE, TVNEWSCHECK, Jan. 13, 2012, http://www.tvnewscheck.com/article/2012/01/13/56717/bounce-tv-powers-ratings-on-wvue (visited Jan. 13, 2012). In December 2011, WVUE reported that its Bounce TV signal earned a 0.4 total day local market rating, tying CNN’s Headline News (0.4) and outranking cable networks TV One (0.2), Oxygen (0.2), BBC America (0.2) and CNBC (0.1). Federal Communications Commission FCC 12-81 99 visitors than newspaper websites in 22 markets (or 27 percent), while the major daily newspapers’ websites led in the amount of traffic attracted in the remaining markets.711 b. Revenue 214. This section of the Report describes broadcast television stations revenue from advertising during the relevant period. It then considers other sources of broadcast television station revenue during the period, including network compensation, retransmission consent fees, revenues from non-broadcast ancillary services, online revenues, and other revenues. 215. Overall, broadcast television station revenues began dropping after 2000, when they reached a high of $26.30 billion.712 By contrast, in 2006, broadcast stations earned $24.62 billion in revenues. In 2007, industry revenues declined by seven percent to $22.84 billion; in 2008, they declined by one percent to $22.60 billion. In 2009, industry revenues dropped by 20 percent, to $18.13 billion. In 2010, industry revenues showed some recovery and, rose by 23 percent to $22.22 billion. Thus, while the broadcast television station industry lost about $4.5 billion between 2008 and 2009, it regained about $4.1 billion between 2009 and 2010. Table 17: Broadcast Television Station Industry Revenue Trends (in millions)713 Revenue Sources 2006 2007 2008 2009 2010 Advertising $23,574.7 $21,575.5 $21,062.1 $16,337.2 $19,943.7 Network Compensation $246.7 $170.0 $133.6 $81.6 $48.2 Retransmission Consent $214.6 $313.5 $500.1 $757.8 $931.8 Online $586.9 $775.9 $903.6 $948.8 $1,086.6 Total $24,623 $22,835 $22,599 $18,125 $22,010 Percentage Change 7% 1% 20% 21% 216. Advertising Revenue. On-air advertising is by far the most significant source of revenue for televisions stations, although its share of overall broadcast television station industry revenues is declining. It represented about 96 percent of broadcast television station industry net revenues in 2006 and 91 percent of industry revenues in 2010.714 Advertising sold by broadcast televisions stations falls into two categories: local spot and national spot. 711 Borrell Associates Inc., Benchmarking TV’s Local Online Sales, February 2011, at 19, http://www.tvb.org/media/file/Borrell_2010_TV_Internet_Growth_Feb2011.pdf (“Borrell Study”). Citing data from the Media Audit, Borrell measured the number of visitors who logged onto a major newspaper website during a month within the Fall of 2010 and compared it with the number of visitors who had logged onto individual television stations’ sites. 712 Tony Lenoir, Negative Growth Outlook for TV Station Revenue in ’11 but Double-Digit Gains Seen in ’12, SNL Kagan, Oct. 3, 2011. As noted above, revenues tend to be higher in even years. 713 Id. 714 Net revenues equal all advertising, online revenues, and network compensation received by stations, plus retransmission consent revenues received from MVPDs, minus retransmission consent revenues network affiliates pay networks. Federal Communications Commission FCC 12-81 100 217. Local advertisers purchase local spot advertising to reach viewers within a station’s market. They may work with local advertising agencies or directly with a station’s sales staff.715 Local advertising is more sensitive to the economic climate of a station’s geographic market. For example, even if a station is attracting large audiences, if the local economy is suffering, local businesses may choose not to advertise or to limit their advertising.716 Based on our analysis of SNL Kagan data, local advertising represented about 53.3 percent or $12.2 billion of broadcast television station industry revenues in 2007, and 50.7 percent or $11.3 billion of industry revenues in 2010.717 NAB estimates that, in 2007, on average, about 61.6 percent of a station’s gross advertising revenues were from local advertising,718 compared with 56.1 percent in 2010.719 The percentages may vary depending on the station and the DMA a station serves. Local advertisers may choose to advertise using local broadcast television or radio stations, newspapers, regional cable networks, geographically-targeted websites, or other local media. Between 2007 and 2010, broadcast stations’ share of local advertising revenue increased from 12.7 percent to 15.8 percent. During that same period, however, total advertising spending across all local media dropped from $96.2 billion nationwide to $71.3 billion, and broadcast television stations’ collective local advertising revenues declined from $12.2 billion to $11.3 billion. 715 Nexstar 2010 Form 10-K at 28. 716 Smaller local businesses generally feel a recession’s impact more immediately than a large national business, and would be more likely to curtail local television advertising spending. Vogel at 303. 717 Some broadcast station groups cite higher percentages. Nexstar states that local advertising, excluding political, represented 52.9 percent of it stations’ gross revenues (that is, revenues before subtracting agency commissions) in 2010, 60.6 percent in 2009, and 57.0 percent in 2008. Nexstar 2010 Form 10-K at 30. Gray’s percentages were nearly identical: 52.9 percent in 2010, 63.2 percent in 2009, and 57.0 percent in 2008. Gray 2010 Form 10-K at 33. LIN’s percentages were: 55.1 percent in 2010, 63.2 percent in 2009, and 61.6 percent in 2008. LIN 2010 Form 10- K at 41-42. 718 NAB, Television Financial Report, 2008, at 2 (“2008 NAB Television Financial Report”). 719 2011 NAB Television Financial Report at iv. Nexstar states that national advertising represented 18.8 percent of its stations’ gross revenues (that is, revenues before subtracting agency commissions) in 2010, 21.2 percent in 2009, and 22.0 percent in 2008. Nexstar 2010 Form 10-K at 30. Gray TV’s percentages were nearly identical: 16.7 percent in 2010, 19.9 percent in 2009, and 20.9 percent in 2008. Gray 2010 Form 10-K at 33. LIN’s percentages were: 30.6 percent in 2010, 29.9 percent in 2009, and 30.6 percent in 2008. LIN 2010 Form 10-K at 41-42. Federal Communications Commission FCC 12-81 101 Table 18: Local Advertising Revenue by Sector (in millions)720 Revenue 2006 2007 2008 2009 2010 Broadcast TV Stations $12,944 $12,167 $11,936 $9,310 $11,265 Cable TV $4,293 $4,213 $4,258 $3,464 $4,336 Radio $15,478 $15,133 $13,607 $10,842 $11,300 Internet $5,871 $7,576 $9,023 $9,233 $11,146 Daily Newspaper $39,124 $35,204 $28,744 $20,397 $18,574 Regional Sports Networks $628 $718 $731 $685 $759 Mobile $0 $13 $42 $81 $184 Telco $1 $10 $52 $60 $105 Other721 $21,379 $21,131 $19,187 $15,210 $13,612 Total Local $99,718 $96,165 $87,580 $69,282 $71,281 218. National advertising time is sold through national sales representative firms (reps) working with advertising agencies, whose clients typically include automobile manufacturers and dealer groups, telecommunications companies, fast food franchisers, and national retailers.722 In exchange for representing the stations, the rep firms typically earn commissions of about seven to eight percent of net billings, defined as dollars paid for advertising minus ad agency commissions.723 National advertising is generally bought through advertising agencies. The advertising agencies generally receive commissions of 15 percent of the gross advertising rates paid for advertising they place.724 National spot advertising represented about 41.2 percent of total broadcast television station industry revenues, or $9.4 billion, in 2007, and about 39.1 percent, or $8.7 billion, of industry revenues in 2010.725 In its television financial reports, NAB estimates that as of 2007, about 36.0 percent of an average station’s revenues come from national and regional advertising,726 compared with about 32.0 percent in 2010.727 National advertisers may choose to advertise on broadcast stations but are more likely to utilize arrangements with broadcast networks, cable networks, television syndicators, or DBS. National sales tend to represent a larger proportion of revenues for stations in larger markets.728 Broadcast television stations’ share of the 720 SNL Kagan, Advertising Forecasts: U.S. Market Trends & Data for All Major Media, 2011 Edition, at 23 (“2011 SNL Kagan Advertising Forecasts”). 721 “Other” includes the combined advertising revenue totals for the yellow pages, outdoor/out of home, and weekly newspapers for each year. 722 Nexstar 2010 Form 10-K at 6. 723 Vogel at 312-13, n. 7. Gross advertising revenues refer to the total amount spent by advertisers, while net revenues refer to amount of advertising revenues received by stations. 724 Nexstar 2010 Form 10-K at 28. 725 Tony Lenoir, Negative Growth Outlook for TV Station Revenue in ’11 but Double-Digit Gains Seen in ’12, SNL Kagan, Oct. 3, 2011. 726 2008 NAB Television Financial Report at 2. 727 2011 NAB Television Financial Report at 2. 728 Vogel at 312-13, n. 7. Sinclair states that it has focused on decreasing its dependence on national advertising, as overall spending by national advertisers has declined, and other outlets have merged. Sinclair 2010 Form 10-K at 38. Federal Communications Commission FCC 12-81 102 national advertising market dropped from 6.8 percent in 2006 to 5.9 percent in 2007. Between 2007 and 2010, broadcast television stations’ share of national advertising remained relatively flat, increasing from 5.9 percent to 6.1 percent. Once again, the figures declined during this period from $9.4 billion (out of $154.6 billion nationwide) in 2007 to $8.7 billion (out of $141.4 billion nationwide) in 2010. In 2006 and 2007, broadcast television networks outranked cable networks and VOD in their collective share of national advertising revenue. In 2008, cable networks and VOD surpassed broadcast television networks in their share. Broadcast television network advertising increased between 2006 and 2008, from $19.4 billion to $19.7 billion, fell in 2009 to $18.1 billion, and rose again in 2010 to $19.1 billion. Table 19: National Advertising Revenue by Sector (in millions)729 Revenue 2006 2007 2008 2009 2010 Broadcast TV Stations $10,631 $9,408 $9,126 $7,027 $8,678 Broadcast Networks $19,386 $19,495 $19,686 $18,127 $19,128 Cable & VOD Networks $17,728 $19,228 $20,629 $20,452 $22,372 DBS $524 $691 $901 $901 $842 Internet $11,008 $13,371 $14,081 $13,302 $15,747 Radio $3,553 $3,343 $2,930 $2,361 $2,881 Satellite Radio $89 $98 $82 $61 $76 Radio Network $1,112 $1,153 $1,150 $1,048 $1,102 Daily Newspaper $7,495 $7,005 $5,996 $4,424 $4,221 Barter Syndication $2,902 $2,823 $3,015 $2,878 $2,819 Mobile $0 $238 $486 $727 $1,347 Other730 $81,281 $83,640 $76,479 $61,706 $62,187 National Total $155,709 $160,493 $154,561 $133,014 $141,400 219. Political advertising can be both local and national.731 For example, a mayoral candidate may only need to purchase advertising in one DMA in order to reach potential voters, in which case the advertising is local.732 Candidates running for statewide offices, however, or presidential candidates seeking to reach audiences in swing states, will frequently purchase time within multiple DMAs, in which case a national rep firm may purchase time on behalf of the candidates. To get a sense of the trends of political advertising, we examine the historical political revenues of four pure play companies: Gray, LIN, Nexstar, and Sinclair. In 2006, these stations groups collectively earned $211 million in political advertising, representing nine percent of their net revenues.733 In 2008, this figure climbed to $226 million, again representing nine percent of their net revenues. In 2010, it rose to $244 million, representing ten percent of their revenues. SNL Kagan estimates that, in 2010, broadcast television 729 2011 SNL Kagan Advertising Forecasts at 23. 730 “Other” includes the combined advertising revenue totals for direct mail, magazines, outdoor/out of home, business publications, yellow pages and farm publications for each year. 731 See, e.g., Sinclair 2010 Form 10-K at 42. 732 Kate Brady, Political Ads: Final Tips From the Rep, TVNEWSCHECK, Oct. 1, 2010, http://www.tvnewscheck.com/article/2010/10/01/45773/political-ads-final-tips-from-the-rep (visited Mar. 3, 2012). 733 Tony Lenoir, Broadcast TV Guide to the 2012 Elections, SNL Kagan, Aug. 24, 2011, at 14. Federal Communications Commission FCC 12-81 103 stations received 75 percent of political advertising revenues.734 NAB estimates that for an average station, political advertising represented 9.0 percent of revenues in 2006,735 10.1 percent of revenues in 2008,736 and 11.9 percent of its revenues in 2010.737 220. The ability of advertisers to switch among media depends on how they plan their media budgets. Broadcast television media can be purchased in several ways: by flight (e.g., for a one- week period, such as for movie openings or sales), monthly, quarterly, or annually, i.e., the entire media plan at once.738 Annual buys give media buyers leverage to negotiate the best rates. The closer the media buyer is to the beginning of the schedule when placing the buy, the higher the rates will likely be. If the media is sold out, the rates may need to be high enough to bump another advertiser’s spots. At times, it may be so close to the flight that the station does not have any space available to sell. On the other hand, buyers who plan annually run the risk of unexpected scheduling changes. For example, a buyer may have purchased advertising time on an NBC affiliate on a Thursday evening, but reached fewer people than expected when a program turned out to be less popular than expected, or a competing network schedules a more popular program during the same time period. 221. Network Compensation. Compensation from broadcast networks previously was the second largest revenue stream for network-affiliated broadcast stations. Traditionally networks have compensated affiliates with cash payments closely related to affiliates’ local market ratings performances. Since the late 1990s, however, broadcast networks began to phase out these payments. SNL Kagan estimates that between 2006 and 2010, total network affiliate compensation dropped from about $246.7 million, or 1.0 percent of the total $24.6 billion in broadcast television station industry revenues, to $48.2 million, or 0.2 percent of the total $22.2 billion in industry revenues.739 Belo and Sinclair note that as a condition of renewing their network affiliation agreements, they are required to make cash payments to the networks.740 222. Retransmission Consent Fees. Retransmission consent fees have replaced network compensation as the second largest source of revenue for broadcast television stations.741 Like cable networks, broadcast stations are negotiating per subscriber fees from MVPDs in exchange for carriage rights. According to NAB, broadcasters typically offer a menu of options in return for carriage of their stations, among them cash payment, MVPD promotion of the station, purchase of additional advertising 734 Id. at 10. 735 NAB, Television Financial Report, 2007, at 2. 736 2009 NAB Television Financial Report at 2. 737 2011 NAB Television Financial Report at 2. 738 Kerri Byrd, What to Know About an Annual Media Buy, Ev?k Advertising, Dec. 21, 2010, http://www.evokad.com/2010/12/what-to-know-about-an-annual-media-buy/ (visited Dec. 2, 2011). 739 SNL Kagan, TV Station Deals Databook, 2009 Edition, at 9; Tony Lenoir, A Look at the Evolution of the Networks/Affiliates Relationship, SNL Kagan, Jan. 3, 2011, at 9-10. 740 Belo states that in 2010 it renewed its network agreements with ABC in four DMAs and CBS in three DMAs. Belo 2010 Form 10-K at 5. Sinclair specifies that it pays an annual license fee to ABC and a programming fee to FOX. Sinclair 2010 Form 10-K at 26. Likewise, Nexstar, referring to affiliation agreements with ABC and FOX, notes that as its network affiliation agreements come up for renewal,it may be required to make cash payments to the networks or accept other material modifications of existing affiliation agreements. Nexstar 2010 Form 10-K at 14. See also LIN 2010 Form 10-K at 27. As of 2011, NAB began reporting network programming as an expense rather than a revenue source. See 2011 NAB Television Financial Report at ii. 741 2011 SNL Kagan TV Stations Databook at 5. Federal Communications Commission FCC 12-81 104 by the MVPD, payment by the MVPD for video-on-demand rights, and carriage of other commonly owned stations, other program services, or digital multicast streams.742 Since the last report, retransmission consent fees have increased in dollar terms and as a share of industry revenues. Based on Commission staff analysis of data from SNL Kagan, retransmission consent fees represented about 0.9 percent, or $214.6 million in broadcast television station industry revenues in 2006, and about 4.2 percent, or $ 931.8 million in 2010.743 223. NAB estimates that in 2009 affiliates of the four major broadcast networks received on average about $0.14 per subscriber per month in retransmission consent fees, which it contends are less than fees earned by cable networks.744 Broadcast television networks have asserted to their affiliates that they, as owners or licensees of programming that the affiliates broadcast and offer for retransmission, are entitled to a portion of the compensation under the retransmission consent agreements. Networks have proposed to include a requirement to share retransmission consent fees in their network affiliation agreements.745 224. In recent years, the broadcast networks have streamed their content on the Internet and other distribution platforms, and in some cases, in close proximity to network programming broadcast on local television stations.746 In addition, in January 2010 FOX reportedly reached an agreement with Time Warner Cable to provide a direct feed of its network programming for up to one year in the event of a retransmission consent standoff with an affiliate group. Concerns about the potential of Comcast to bypass NBC affiliates with a direct network feed to Comcast systems led the Commission to impose an “affiliate integrity” condition when it approved the Comcast-NBC Universal transaction.747 The provision 742 NAB 7/8/11 Reply Comments, Attachment B at 38. 743 Tony Lenoir, Negative Growth Outlook for TV Station Revenue in ’11 but Double-Digit Gains Seen in ’12, SNL Kagan, Oct. 3, 2011. See also supra, Table 17. For Nexstar, retransmission consent revenues (consisting of a per- subscriber-based compensatory fee and excluding advertising revenue) represented 4.8 percent of net revenues in 2008, 9.3 percent in 2009, and 9.1 percent in 2010. Nexstar 2010 Form 10-K at 30. Nexstar explains that the increases are due to renegotiated contracts providing for higher rates per subscriber, as well as the addition of another television station in 2009. Similarly, Gray’s retransmission consent revenues increased due to improved terms of renegotiated contracts, representing 0.9 percent of revenues in 2008, 5.8 percent in 2009, and 5.4 percent in 2010. Gray 2010 Form 10-K at 33. Neither LIN nor Sinclair break out retransmission consent revenues separately. See 2010 Form LIN 10-K at 41-42; Sinclair 2010 Form 10-K at 42. 744 NAB 7/8/11 Reply Comments, Attachment A at 43-44. Nexstar CEO Perry Sook has noted that MVPDs may be less willing to pay for broadcast stations than cable networks, because they are unable to sell advertising time during broadcast network programming, while cable networks give MVPDs a fixed amount of inventory to sell. Robin Flynn, Network, Affiliates Defend Retrans Stance at SNL Kagan Event, SNL Kagan, June 22, 2011, at 10. 745 According to CBS CEO Leslie Moonves, “[a]s each new affiliate agreement comes up, there will be a sharing of [retransmission consent] fees; it’s in the very early stages. There’s a realization that . . . [affiliates are] getting [retransmission consent fees] because of [a] network providing NFL, 60 Minutes, and Letterman.” Claire Atkinson, CBS Retrans Fees Expected to Double in 2010, BROADCASTING & CABLE, Nov. 5, 2009, http://www.broadcastingcable.com/article/383011-CBS_Retrans_Fees_Expected_to_Double_in_2010.php (visited Jan. 20, 2012). In the Fall of 2011, Moonves predicted that the combined O&O retransmission consent revenues and fees the network will collect from affiliates will represent a total of $600 million to $700 million “over the next three to five years . . . .” CBS Corp., 2Q Earnings Call, Corrected Transcript, Aug. 2, 2011, at 11-12. 746 LIN 2010 Form 10-K at 27; Belo 2010 Form 10-K at 10. See also infra, Sec. V.A. 747 The Commission made this determination based on its belief that “once Comcast obtains a controlling interest in NBCU, it will have an even greater incentive and ability to bypass the NBC affiliates to advantage its cable systems in retransmission consent disputes. Moreover, since the News Corp-Hughes Order, the retransmission consent process has become more contentious. In this heated negotiating atmosphere, we believe that Comcast, as the (continued….) Federal Communications Commission FCC 12-81 105 bans NBC from sending a direct feed of its network to Comcast cable systems until 2021 (ten years from the order’s adoption) or until one of NBC’s major competitors – ABC, CBS, or FOX – opts to authorize a same-day linear feed to one or more major cable system operators, whichever is later.748 225. Station groups vertically integrated with broadcast networks, such as CBS and ABC, and those affiliated with cable networks, may have more leverage than other station owners, since they can integrate retransmission consent negotiations with carriage of their networks. Group owners may be able to earn more than individual station owners because they have more experience and leverage with MVPDs.749 Stations in smaller markets may not earn as much in total dollars from retransmission consent fees because there are not as many subscribers, but they may earn the same per-subscriber fees as stations in larger markets.750 226. Ancillary DTV Revenues. DTV allows broadcasters to use part of their licensed spectrum to provide non-broadcast “ancillary or supplementary” services (e.g., subscription video, data transfer, or audio signals), provided they pay the Commission a five percent fee of gross revenues received from such services. 751 Compared with other revenue sources, revenues from ancillary services are nascent, but growing. Commercial and noncommercial educational DTV broadcast station licensees report annually whether they have provided ancillary services at any time during the 12 month period preceding September 30. Licensees that earn revenues from such services are required to pay fees to the Commission. As of the 2011, gross revenues from feeable services are modest.752 Yearly numbers are as follows: (Continued from previous page) nation’s largest cable operator with control of a broadcast network, would have an increased incentive to engage in affiliate bypass.” Comcast-NBCU Order, 26 FCC Rcd at 4311, ¶ 174. 748 The Commission decided to sunset this condition given that “the video marketplace is changing.” “[I]n light of [this] evolution,” the Commission was “reluctant to impose indefinite terms for [a] condition[] based upon the contractual provisions with fixed terms negotiated by the parties.” Id. at 4312, ¶ 178. 749 Nexstar Broadcasting President and CEO Perry Sook states that “size matters . . . when dealing with networks and MVPD[s] . . . .” Nexstar Broadcasting Group, Inc., 4Q Earnings Call, Transcript, Mar. 10, 2011, http://seekingalpha.com/article/257622-nexstar-broadcasting-group-s-ceo-discusses-q4-2010-results-earnings-call- transcript?part=qanda (visited Jan. 12, 2012). 750 Titan Broadcast Management, Titan Marches to a Different Drummer, Aug. 11, 2010, http://www.titanbroadcast.com/story/12962571/titan-marches-to-a-different-drummer (visited Jan. 12, 2012). 751 Filing of FCC Annual DTV Ancillary/ Supplementary Services Report, Public Notice, 18 FCC Rcd 23972, 23973 (MB 2003). See also 47 U.S.C. § 336(a)(2), (e). 752 FCC Form 317. Fees are reported in the year received, although they may be for services rendered in past years, in future years, or both. This occurs very few times and involves small sums of money. The 2006 numbers are higher than those provided in the 13th Report because of late filers. Starting in 2009, some licensees reported that they provided some ancillary and supplemental services that generate fees and some services that do not generate fees. As broadcast stations decide to use DTV for broadcasting rather than ancillary services, e.g., to launch a new network such as Bounce TV, fluctuations in the reported figures for non-broadcast ancillary services may occur. Federal Communications Commission FCC 12-81 106 Table 20: Ancillary DTV Revenues Predominant Year Number of DTV Licensees That Reported Feeable Services Gross Revenues From Feeable Services Fees Collect From Feeable Services 1999 0 $0 $0 2000 4 $570,000 $28,500 2001 2 $390,000 $19,500 2002 6 $148,280 $7,414 2003 3 $45,000 $2,250 2004 10 $78,625 $3,931 2005 11 $176,777 $8,839 2006 38 $798,153 $39,888 2007 35 $417,649 $20,868 2008 54 $337,857 $16,897 2009 57 $2,044,454 $102,223 2010 99 $7,125,374 $356,268 2011 85 $841,177 $42,059 227. Online Revenues. In addition to selling advertising time over-the-air, stations sell advertising on their websites. While estimates of the percentage of revenue broadcast television stations earn from online advertising vary, they all indicate that such revenue has grown since the last report. SNL Kagan estimates that online revenues represented about $586.9 million, or 2.4 percent of $24.6 billion in the total broadcast station industry revenues in 2006, and 4.9 percent, or $1.1 billion of the $22.0 billion in total broadcast television station industry revenues in 2010.753 Other sources have slightly higher or lower estimates. For example, Borrell estimates that, based on its survey of a select number of television stations, online revenues were six percent of total broadcast television station revenues in 2010, compared with 3.5 percent in 2007.754 In its TV Financial Reports, NAB estimates that in 2010, online advertising represented about $353,145, or 0.2 percent of an average station’s $16.175 million in net revenues,755 compared with $226,892, or 0.3 percent of an average station’s $16.148 million in net revenues in 2007.756 228. Borrell also estimated the total amount of money advertisers spent on local online advertising nationwide, and the share represented by broadcast television station websites. Borrell considers broadcast televisions stations sites to primarily compete with the websites of other local media, such as newspapers’ websites as well as online sites unaffiliated with a media entity, e.g., Craigslist and 753 Tony Lenoir, Negative Growth Outlook for TV Station Revenue in ’11 but Double-Digit Gains Seen in ’12, SNL Kagan, Oct. 3, 2011. According to NAB, in 2010, Internet revenues represented 2.2 percent of an average station’s net revenues. 2011 NAB Television Financial Report at 2. 754 Borrell Study at 6. 755 2011 NAB Television Financial Report at 2. NAB calculates online revenue as a percentage of a broadcast station’s net revenue (i.e., the amount spent by advertisers on a station (gross advertising revenues) – advertising agency commission – national and regional sales rep firm commission = all other sources of station revenue). 756 2008 NAB Television Financial Report at 2. Federal Communications Commission FCC 12-81 107 Patch.757 According to Borrell, between 2009 and 2010, broadcast television stations increased their market share of local online advertising. Borrell estimates that television broadcasters accounted for 10.4 percent, or about $1.4 billion of the $13.5 billion spent on local online advertising in 2010, up from 9.3 percent, or $1.2 billion in 2009.758 It states that the average station’s market share depended on market size, with the stations in the smallest markets averaging 2.2 percent of local online advertising and larger- market stations averaging 0.5 percent of local online advertising, due to heavy competition from stand- alone sites and other local media. Borrell posits that a performance gulf has emerged between stations that have invested heavily in their websites and those that have not.759 One percent of television station websites surveyed made more than $5 million in 2010, while 52 percent of station sites surveyed by Borrell made less than $500,000. 229. Other Revenues. Advertising revenues from mobile services and applications are still nascent for most stations. NAB estimates that mobile revenues represented $7,089, less than 0.05 percent of an average station’s total $16,175,476 in net revenues in 2010.760 In Borrell’s survey, few stations reported any advertising revenue from mobile applications in 2010, and of those that did, mobile advertising represented on average 2.5 percent of total revenues, with the typical station getting between $20,000 and $50,000.761 NAB estimates that in 2010 advertising revenues from multicast channels represented about 0.4 percent of an average station’s total net revenues.762 c. Profitability 230. To assess profitability trends in the broadcast television station sector between 2006 and 2010, we consider data on a station-level basis, using benchmarks in NAB’s Television Financial Reports and, on a company-level basis, examining companies that have been pure-play broadcast television companies throughout the relevant period. When entering the broadcast television station industry, companies often buy or sell individual stations or the portfolio of assets of a broadcast television station group owner based on a multiple of profitability.763 757 Borrell Study at 14. 758 Id. at 6, 8. For its calculations, Borrell relied on two databases: one that estimated online advertising spending by more than 15 million U.S. and Canadian companies, and one that estimates online advertising receipts by more than 4,400 U.S. and Canadian online media companies that participate in its surveys. Id. at 32. 759 Id. at 6. For example, LIN has invested heavily in websites, mobile applications, and other digital technologies. It states that since the launch of its digital businesses in 2007, digital revenues, including retransmission consent revenues, have grown nearly 309 percent and as of 2010 comprised 15 percent of its total net revenues. LIN 2010 Form 10-K at 8. In addition to paying LIN retransmission consent revenues for carriage of its broadcast signals, MVPDs pay LIN for online and advertising media services through its subsidiary online Red McCombs Media, LP. See id. 760 2011 NAB Television Financial Report at 2. NAB defines mobile revenue as any revenue derived directly from streaming to mobile devices. Id. at 164. 761 Borrell Study at 22. Borrell defines mobile advertising as advertising derived from mobile applications. Id. at 5- 7. Borrell states that “[b]y 2015, most forecasters agree, the majority of all ‘online’ advertising will become untethered from desktops and delivered to mobile devices such as iPads, smart phones, and GPS-enabled laptops.” Id. at 7. 762 2011 NAB Television Financial Report at 2. To calculate total net revenues, NAB subtracts agency and rep firm commission for gross advertising revenues, and adds all other forms of revenue. 763 Vogel at 307-10. See also Price Colman, For Sale: Young Broadcasting for Just $350M, TVNEWSCHECK, June 30, 2011, http://www.tvnewscheck.com/article/2011/06/30/52237/for-sale-young-broadcasting-for-just-350m (visited Mar. 25, 2012). Federal Communications Commission FCC 12-81 108 Table 21: Broadcast Television Station Industry Profitability764 a. Net Operating Revenue (in thousands) 2006 2007 2008 2009 2010 Nexstar $265,169 $266,801 $284,919 $251,979 $313,350 Gray $332,137 $304,288 $327,176 $270,374 $346,058 LIN $420,468 $395,910 $399,814 $339,474 $420,047 Sinclair $706,222 $718,100 $754,474 $656.477 $767,186 Average NAB Station $16,850 $16,147 $15,837 $13,454 $16,175 b. (Recurring) EBITDA (in thousands) 2006 2007 2008 2009 2010 Nexstar $88,710 $84,443 $95,741 $59,958 $112,656 Gray $125,538 $92,511 $113,507 $68,623 $136,160 LIN $133,348 $120,297 $122,619 $81,091 $141,806 Sinclair $244,853 $221,083 $232,905 $199,550 $295,696 Average NAB Station $6,290 $5,258 $4,704 $3,072 $5,498 c. Net Income before Taxes (in thousands) 765 2006 2007 2008 2009 2010 Nexstar ($5,173) ($13,966) ($83,375) ($12,414) $4,926 Gray $21,534 ($35,694) ($313,027) ($34,307) $36,610 LIN ($300,748) $46,755 ($1,052,552) $23,400 $56,724 Sinclair $55,091 $39,215 ($369,884) ($170,460) $113,851 Average NAB Station $4,210 $3,321 $2,686 $1,126 $3,863 231. We use NAB average station financial statistics as an indicator of profitability: station EBITDA (which NAB calls “cash flow”) and station pre-tax profits. NAB calculates an average broadcast television station’s cash flow by subtracting station operational expenses (expenses from all of the station’s departments: engineering, programming, production, news, sales, advertising and promotions, and general administrative expenses) from total net revenues, which are gross advertising revenues minus agency commissions and national and regional rep firm commissions. Similarly, we can examine the recurring EBITDA766 of a select group of broadcast television station group owners (Nexstar, 764 FCC staff estimates based on data from NAB Financial Reports and SNL Kagan. 765 Each of the station groups incurred non-cash expenses by writing down the values of, among other assets, their broadcast licenses, including Nexstar in 2008 and 2009, Gray in 2008, LIN in 2008 and 2009, and Sinclair in 2008, 2009, and 2010. 766 Recurring earnings before interest, taxes, depreciation and amortization. SNL Kagan, Nexstar EBIDTA and FCF (Free Cash Flow) Analysis. Free cash flow is a measure of financial performance calculated as operating cash flow minus capital expenditures. It represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Investopedia, Dictionary: Free Cash Flow, http://www.investopedia.com/terms/f/freecashflow.asp#axzz1qAPFGRjM (visited Mar. 25, 2012). Federal Communications Commission FCC 12-81 109 Gray, LIN, and Sinclair) that have been pure-play broadcast television station companies between 2006 and 2010. Recurring EBITDA excludes earnings or losses from nonrecurring events, such as the gain or sale of assets, early retirement of debt, restructuring, or asset write-downs, and facilitates consideration prior to widely varying debt-financing arrangements.767 For the purpose of this Report, we believe recurring EBITDA and EBIDTA are better indicators of profitability within the broadcast television industry than pre-tax income, which incorporates revenues and expenses from extraordinary events, as well as interest payments on debt. 232. To better compare trends among a single station and select station groups, we can calculate the profit margins, i.e., EBITDA (or recurring EBITDA) divided by net operating revenues, (i.e., revenues earned by the station or station group, minus commissions from advertising agencies and rep firms). Generally, the broadcast station groups performed in the range of the NAB figures. As measured by recurring EBITDA/net operating revenues, profit margins in 2007 ranged from 30.1 percent for Gray, to 31.7 percent for Nexstar, slightly lower than NAB’s average of 32.6 percent. In 2008, the station groups’ profit margins were higher than NAB’s average of 29.7 percent, ranging from 30.7 percent for LIN, to 34.7 percent for Nexstar. In 2009, the NAB average station and the station groups all recorded a marked decline in profitability. The average NAB station was at the low end, with a 22.8 percent margin. For the station groups, profit margins ranged from 23.8 percent for Nexstar to 30.4 percent for Sinclair. Profitability bounced back in 2010, with the NAB average station’s profitability in the middle. The NAB average station had a profit margin of 34.0 percent, while the margins for the station groups ranged from 33.8 percent (LIN) to 38.5 percent (Sinclair). 233. As noted above, broadcast station revenues tend to be higher in even-numbered years, primarily due to the influx of political advertising, but NBC affiliates also earn additional revenues during NBC’s coverage of the Olympics. Additional reasons for the improvement in 2010 include an overall upswing in economic conditions, recovery in advertising spending by the top advertising categories, strong political spending, rapid growth and high incremental margins in both station website revenues, and retransmission consent revenues.768 In addition, some stations have increased profit margins by decreasing expenses.769 Several station groups incurred non-cash expenses by writing down the values of, among other assets their broadcast licenses, including Nexstar in 2008 and 2009, Gray in 2008, LIN in 2008 and 2009, and Sinclair in 2008, 2009, and 2010. 770 d. Investment and Innovation 234. As in our analysis of profitability, we analyze broadcast station industry investment trends by examining (1) an average television station’s average capital expenditures divided by net operating income and (2) a sample of pure-play television broadcasting companies’ capital expenditures divided by net income. 767 Vogel at 308-09. 768 Nexstar 2010 Form 10-K at 29. 769 For example, in 2009, Nexstar began regionalizing certain accounting and traffic functions, resulting in layoff of 93 employees. Nexstar estimates that the restructuring saves the company about $2.2 million per year. Nexstar 2010 Form 10-K at 34. 770 Nexstar 2010 Form 10-K at 34; Gray 2010 Form 10-K at 39; LIN at 43; Sinclair 2010 Form 10-K at 38-39. Federal Communications Commission FCC 12-81 110 Table 22: Broadcast Television Station Industry Investment771 a. Capital Expenditures (in thousands) 2006 2007 2008 2009 2010 Nexstar $26,345 $18,541 $30,793 $19,028 $13,799 Gray $41,139 $24,605 $15,019 $17,756 $19,395 LIN TV $22,294 $25,290 $28,537 $10,247 $17,648 Sinclair $16,923 $23,226 $25,169 $7,693 $11,694 Average NAB Station $785 $826 $970 $495 $541 b. Net Operating Revenue (in thousands) 2006 2007 2008 2009 2010 Nexstar $265,169 $266,801 $284,919 $251,979 $313,350 Gray $332,137 $304,288 $327,176 $270,374 $346,058 LIN $420,468 $395,910 $399,814 $339,474 $420,047 Sinclair $706,222 $718,100 $754,474 $656.477 $767,186 Average NAB Station $16,850 $16,147 $15,837 $13,454 $16,175 235. The capital expenditure ratio for the NAB average station tended to fall in the mid-range of the ratios of the television station groups. Sinclair consistently spent the lowest proportion of net revenues on capital expenditures, in part because Sinclair’s net revenues are nearly twice as large as the revenues of the other station groups we examined.772 The average NAB station spent 5.1 percent of net revenues on capital expenditures in 2007. This compares with a range of 3.2 percent for Sinclair to 8.0 percent for Gray. In 2008, the average NAB station spent 6.1 percent of net revenues on capital expenditure, compared with a range of 3.3 percent for Sinclair Broadcasting to 10.8 percent for Nexstar. In 2009, these figures fell to 3.7 percent for the NAB average station, and a range of 1.2 percent for Sinclair Broadcasting to 7.6 percent for Nexstar. In 2010, these figures fell to 3.3 percent for the NAB average station, and a range of 1.5 percent for Sinclair to 5.6 percent for Gray Television. 236. Between 2006 and 2008, the majority of Nexstar’s capital expenditures went towards preparing for the transition from analog to digital television.773 Nexstar attributes its decline in capital expenditures between 2008 and 2010 primarily to the completion of the digital conversions in 2009 and early 2010.774 Station groups have also been upgrading their newscasts to HD format, purchasing new studio equipment, and adding programming to their digital multicast channels.775 Stations also are investing in creating multimedia products to attract new audiences and increase loyalty to their stations.776 For example, in 2009, LIN purchased an online advertising and media services company to expand its 771 FCC staff estimates based on data from NAB Financial Reports and SNL Kagan. 772 Sinclair also claims that duopolies and LMAs enable it to realize significant economies of scale in capital expenditures. Sinclair 2010 Form 10-K at 10. 773 Nexstar 2010 Form 10-K at 36. 774 Id. 775 Gray 2010 Form 10-K at 22, 46. 776 LIN 2010 Form 10-K at 7-8. Federal Communications Commission FCC 12-81 111 online and mobile offerings; it also has developed iPhone, BlackBerry, Droid, and iPad applications for each of its television stations. In addition, LIN has launched a website called onPolitix.com, that provides local, regional, and national political coverage. C. Online Video Distributors 1. Introduction 237. For the purposes of assessing the OVD industry in this Report, we define OVDs as entities that distribute video content to consumers over the Internet.777 This section of the Report examines the structure, conduct, and performance of OVDs. Internet-based distribution of video content has increased substantially since the last report, evolving from a niche service into a thriving industry.778 Today, online video reaches consumers via multiple devices, including computers, smartphones, tablets, gaming consoles, television sets, and other equipment connected to the Internet. According to Nielsen, approximately 48 percent of Americans now watch video online, and 10 percent watch mobile video.779 Consumers stream or download video content at home, as well as at libraries, work, airports, Wi-Fi hotspots, and other locations. The number and diversity of OVD industry participants also have grown, and now include stand-alone distributors, programmers, content producers/owners (including broadcasters), and subsidiaries of the largest hardware, software, and online delivery companies. 238. For the purposes of assessing the OVD industry in this Report, we examine entities that offer video content that is similar to the professional programming traditionally exhibited by broadcast stations, or broadcast and cable networks, and which is usually created or produced by media and entertainment companies using professional-grade equipment, talent, and production crews that hold or maintain the rights for distribution. We distinguish professionally-produced content from both (1) semi-professionally produced video, which refers to consumer or user-generated content that has professional or industrial qualities (e.g., shot with professional-grade equipment, using professional talent), and which may be produced exclusively for online audiences; and (2) user-generated content that is publicly available, created or produced by end users, often with little to no brand equity or brand recognition.780 239. As discussed in more detail below, the OVD marketplace is continuing to grow and develop. Indeed, as the Commission noted in the recent Comcast-NBCU Order, “[b]y all accounts, OVD services have just begun” and “[n]ew OVD services and new deals are announced seemingly daily.”781 Businesses continue to enter and exit the marketplace, as well as change their approaches to providing OVD service. As a result, while this section covers several of the major players in the OVD space, it does not attempt to address all, or even most, of the providers currently in the market. 777 See supra, n. 6; Further Notice, 26 FCC Rcd at 14112, ¶ 52. To the extent that MVPDs also provide video to their subscribers online, for example as part of triple-play or TV Everywhere service, those offerings are discussed supra, Sec. III.A. We note, however, that, in the future, some MVPDs may distribute video content online to non- subscribers as well. See, e.g., infra, ¶ 281. 778 See, e.g., Comcast 6/8/11 Comments at 31-36; NCTA 6/8/11 Comments at 19-21; DIRECTV 6/8/11 Comments at 22-24; Google 6/8/11 Comments at 5-6. 779 See Nielsen, The Cross-Platform Report, Quarter 2, 2011, at 1. 780 See, e.g., Comcast-NBCU Order, 26 FCC Rcd at 4298-99, ¶¶ 144-46 & n. 365; Letter from William T. Lake, Chief, Media Bureau, to Michael H. Hammer, Counsel, Comcast Corporation, et al., MB Docket No. 10-56, Attach. at 3-6, 8-9, 14 (May 21, 2010). 781 Comcast-NBCU Order, 26 FCC Rcd at 4268-69, ¶¶ 78-80. Federal Communications Commission FCC 12-81 112 240. In the Comcast-NBCU Order, the Commission found that, while the amount of online viewing is growing, cord-cutting of traditional video programming service is relatively infrequent, and most consumers consider OVD service to be a complement to, rather than a substitute for, their MVPD service.782 While recognizing that the Internet has evolved into a powerful method of video content distribution, the Commission did not determine whether or not online video competes with MVPD services.783 Instead, the order concluded that, regardless of whether online video currently is a complement to or a substitute for MVPD service, it is potentially a substitute product.784 The state of the current market suggests no reason to revisit this conclusion for purposes of this Report. 2. OVD Structure 241. We begin our consideration of OVDs with an examination of the industry structure. This discussion will address some of the major players in today’s OVD marketplace, including programmers and content producers/owners, affiliates of online services and affiliates of manufacturers, retailers and other businesses. We then explain horizontal concentration and vertical integration in the market. Next we describe conditions affecting market entry during the relevant period, including an overview of existing regulations and market conditions that might influence entry decisions. Finally, we describe recent entry into and exit from the OVD market. 242. Since the last report, the OVD marketplace has expanded tremendously, with the industry’s structure and operations continuing to develop. Most notably, there has been an increase in the number and type of OVDs, the amount of online video content available, and the devices used for delivery of that programming.785 243. While the structure of the OVD industry is still evolving, a few trends have emerged. To begin with, unlike an MVPD, whose market typically is tied to the provider’s own facilities-based infrastructure, or a broadcaster, whose market typically is defined by the station’s signal coverage area and DMA, an OVD’s market generally covers the entire national broadband footprint. Also, much of the OVD industry does not provide stand-alone, unaffiliated delivery of video content. Rather, as discussed below, many OVD providers are affiliated with other video content owners or programmers (including broadcasters); online services; or manufacturers, retailers, or other businesses. 244. Programmers and Content Producers/Owners. Individual content owners or programming networks make their programming available online on their websites, sometimes referred to as “verticals” or “portals.”786 The websites may be brand extensions of existing media properties and/or contain content unique to the Internet. Mobile applications, which often provide access to video content, 782 Id. at 4269, ¶ 79. 783 Id. at 4256, ¶ 41. 784 Id. Some commenters in this proceeding argue that OVDs already are becoming true substitutes for traditional MVPD service or that consumers may well see OVDs as substitutes for MVPD service in the future. See, e.g., DIRECTV 6/8/11 Comments at 22-25; Digital Broadcasting 6/8/11 Comments at 32. 785 See OVD viewership information, infra, Sec. III.C.4.a. 786 See, e.g., ABC, http://abc.go.com/watch (visited Feb. 13, 2012) (“ABC Network Portal”); NBC, http://www.nbc.com/ (visited Feb. 13, 2012) (“NBC Network Portal”); CBS, http://www.cbs.com/ (visited Feb. 13, 2012) (“CBS Network Portal”); FOX, http://www.fox.com/ (visited Feb. 13, 2012) (“FOX Network Portal”). In addition, local television stations often act as OVDs by making video content, for example clips from their own newscasts, available online. See, e.g., KLAS-TV, http://www.8newsnow.com/category/28259/8-news-now-video (visited Feb. 13, 2012); WFAA-TV, http://www.wfaa.com/video/ (visited Feb. 13, 2012). See also NAB 6/8/2011 Comments at 27-29 (noting extensive efforts of local television stations to make news content available online). Federal Communications Commission FCC 12-81 113 also are an integral part of the user interface strategy for many content producers and programming networks.787 245. Portals take different approaches to making content available online, often reflecting concern that online strategies may undercut revenues for the portal’s traditional mode of distribution or due to contract restrictions. For example, Comedy Central distributes the most recent episodes of The Daily Show and The Colbert Report online right after those programs initially air.788 FOX, on the other hand, limits free next-day streaming of its shows to subscribers of approved cable and satellite distributors (currently, only DISH Network) and subscribers of the Hulu Plus OVD; all others must wait eight days.789 Similarly, HBO Go – HBO’s mechanism for making its content available online – is available only to those who already subscribe to HBO via an MVPD.790 246. Hulu, which is owned by News Corporation, NBCUniversal, The Walt Disney Company, and Providence Equity Partners, brings together content from over 260 content companies, including its joint venture participants.791 Hulu began as a free service, with programming available only via computer and only in standard definition.792 In June 2010, Hulu added a subscription service, Hulu Plus, which allows consumers to view programming in 720p high definition (where available) on Internet-connected televisions and other devices, and includes additional content with limited advertisements.793 247. Sports leagues participate in the OVD marketplace as well. The four largest U.S. professional sports leagues – Major League Baseball, the National Football League, the National Basketball Association, and the National Hockey League – make a large amount of their programming 787 See, e.g., TBS, TBS Mobile, http://www.tbs.com/mobileapp.jsp (visited Feb. 13, 2012) (providing a TBS mobile app with access to some TBS shows, including Conan, Meet the Browns, and The Office); NBC, Apps & Mobile, http://www.nbc.com/mobile/ (visited Feb. 13, 2012) (featuring link to NBC app, which allows mobile users to watch full episodes of NBC shows); Vlad Savov, HBO Go App Set to Stream its Way to iPhones, iPads and Android Devices, Engadget, Apr. 19, 2011, http://www.engadget.com/2011/04/19/hbo-go-app-set-to-stream-its-way-to- iphones-ipads-and-android-d/ (visited Feb. 13, 2012) (discussing apps for viewing HBO content on mobile devices). 788 See Comedy Central, The Daily Show, http://www.thedailyshow.com/ (visited Feb. 13, 2012); Comedy Central, Colbert Nation, http://www.colbertnation.com/ (visited Feb. 13, 2012). 789 Brian Stetler, FOX to Limit Next-Day Streaming on Hulu to Paying Cable Customers, N.Y. TIMES, July 26, 2011, http://www.nytimes.com/2011/07/27/business/media/fox-to-limit-next-day-streaming-on-hulu.html?_r=1 (visited Feb. 13, 2012). 790 John Paul Titlow, HBO Go Expands, But Cord Cutters Are Still Out of Luck, ReadWriteWeb, Dec. 19, 2011, http://www.readwriteweb.com/archives/hbo_go_not_without_cable.php (visited Feb. 13, 2012); Jeff Roberts, HBO To Cord Cutters: You’ll Never See Our Shows, PaidContent.org, Nov. 30, 2011, http://paidcontent.org/article/419- hbo-to-cord-cutters-youll-never-see-our-shows/ (visited Feb. 13, 2012). 791 Hulu, About, http://www.hulu.com/about (visited Feb. 13, 2012) (“About Hulu”). Hulu began in March 2007 as a joint venture between News Corp., NBC Universal and Providence Equity Partners, with Disney joining the fold in April 2009. See Hulu, Company Timeline, http://www.hulu.com/about/company_timeline (visited Feb. 13, 2012) (“Hulu Timeline”); Hulu, Disney to Join NBC Universal, News Corporation and Providence Equity Partners as an Equity Owner of Hulu (press release), Apr. 30, 2009. 792 See Hulu Timeline; Hulu, Hulu Blog, Introducing Hulu Plus: More Wherever. More Whenever. Than Ever., June 29, 2010, http://blog.hulu.com/2010/06/29/introducing-hulu-plus-more-wherever-more-whenever-than-ever/ (visited Feb. 24, 2012) (“Introducing Hulu Plus”). 793 See id.; Hulu Timeline; Introducing Hulu Plus; Robert Briel, Hulu Launches Premium Service Hulu Plus, Broadband TV News, June 29, 2010, http://www.broadbandtvnews.com/2010/06/29/hulu-launches-subscription- service-hulu-plus/ (visited Feb. 13, 2012); David Einstein, Going Mobile With Internet, TV, S.F. CHRONICLE, May 23, 2011, http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/05/22/BU221JHC9S.DTL (visited Feb. 13, 2012). Federal Communications Commission FCC 12-81 114 available online through paid subscription services.794 Collegiate sports leagues are following a similar path. For example, the Atlantic Coast Conference recently announced the launch of the ACC Digital Network, a fully programmed video network designed, produced, and distributed exclusively for audiences watching on connected devices such as laptops and smartphones.795 The ACC Digital Network is a joint venture between Raycom Sports, the conference’s long-standing broadcast and marketing partner, and Silver Chalice Ventures, a digital media company.796 The content is available without charge, supported by sponsorship and advertising.797 Similarly, the Big Ten recently unveiled a new Internet offering, BTN2Go, which provides streams of Big Ten games, as well as original and studio programming, to consumers who subscribe to the Big Ten Network on Time Warner Cable, Charter Communications, DIRECTV or DISH Network.798 The league makes the content available via the web, smartphones, and tablets. 799 Content is available for free to consumers who already subscribe separately to the Big Ten Network.800 248. Sony is, among other things, a producer and owner of video content. Sony’s Crackle OVD service, which launched in Summer 2007, offers a wide variety of free, streaming online content, including movies, television shows, and original programming, much of which comes from Sony’s own content library.801 794 See Major League Baseball, MLB.tv, http://mlb.mlb.com/mlb/subscriptions/index.jsp?product=mlbtv&affiliateId=MLBTVREDIRECT (visited Feb. 13, 2012); National Basketball Association, NBA League Pass, http://www.nba.com/leaguepass/index.html (visited Feb. 13, 2012); DIRECTV, NFL Sunday Ticket, http://www.directv.com/DTVAPP/content/sports/nfl (visited Feb. 13, 2012) (“NFL Sunday Ticket”); National Hockey League, NHL Gamecenter Live, https://gamecenter.nhl.com/nhlgc/secure/gclsignup (visited Feb. 13, 2012). NFL Sunday Ticket is available through DIRECTV, which makes games available via multiple platforms, including smartphones, tablets, and the Sony Playstation 3. See NFL Sunday Ticket; Playstation, NFL Sunday Ticket, http://us.playstation.com/psn/nfl/ (visited Feb. 13, 2012). A customer who subscribes to NFL Sunday Ticket via the PlayStation Network need not be a DIRECTV subscriber. See Scott Stein, NFL Sunday Ticket Comes to the PlayStation 3, CNET, Aug. 17, 2011, http://news.cnet.com/8301-17938_105-20093727-1/nfl-sunday-ticket-comes-to-the-playstation-3/ (visited Feb. 29, 2012) (“NFL To PlayStation”). NBA, MLB, and NHL games are also available via Apple’s digital media receiver, Apple TV. See Dan Frommer, Apple TV Now Has MLB.TV And NBA Live Game Streaming, Business Insider, Mar. 9, 2011, http://articles.businessinsider.com/2011-03-09/tech/30032181_1_boxee-roku-mlb-tv (visited Feb. 13, 2012); Jonathan Seff, Apple TV 4.4 Update Adds Photo Stream, NHL, and More, MACWORLD, Oct. 12, 2011, http://www.macworld.com/article/162974/2011/10/apple_tv_4_4_update_adds_photo_stream_nhl_and_more.html (visited Feb. 13, 2012). 795 See Atlantic Coast Conference, ACC Launches Digital Network (press release), Oct. 17, 2011 (“ACC Launches”). 796 See id. 797 See id. 798 Mike Reynolds, BTN2GO Kicks Off With Four Distributors, MULTICHANNEL NEWS, Sept. 1, 2011, http://www.multichannel.com/article/473187-BTN2GO_Kicks_Off_With_Four_Distributors.php (visited Feb. 13, 2012) (“BTN2GO Kicks Off”). 799 See id.; BTN2GO, What is BTN2GO?, http://www.btn2go.com/btn2go/FAQ.jsp (visited Feb. 13, 2012) (“BTN2Go FAQ”). 800 See id. 801 See Crackle, About Crackle, http://www.crackle.com/about/ (visited Feb. 13, 2012) (“About Crackle”); Crackle, Crackle FAQ: General Questions, http://www.crackle.com/outreach/faq#general_questions (visited Feb. 14, 2012) (“Crackle FAQ”); Daniel Frankel, Sony’s Crackle Launches On Xbox Live, PaidContent.org, Jan. 31, 2012, (continued….) Federal Communications Commission FCC 12-81 115 249. Affiliates of Online Services. YouTube launched in February 2005, primarily as a portal for niche, user-generated-content.802 In its early years, much of the professional content on YouTube was posted by individual users without the permission of the relevant rights holders.803 Since Google purchased YouTube for $1.65 billion in 2006,804 however, the service has evolved into a destination for a wide variety of free content, produced by both amateur and professional content creators.805 YouTube began renting movies to users in January 2012,806 and currently boasts an extensive catalog of online movie rental content.807 250. In 2011, Facebook entered the OVD market and began offering online movie rentals for a fee. In March 2011, Warner Brothers announced that “The Dark Knight” would be the first Warner Brothers movie to be made available for purchase or rental on Facebook.808 Since then, Warner Brothers has made several additional movies, as well as an original series, available via Facebook.809 In July 2011, Facebook began to offer a limited selection of movies from Paramount,810 and in August 2011 the service (Continued from previous page) http://paidcontent.org/article/419-sonys-crackle-launches-on-xbox-live/ (visited Feb. 14, 2012) (“Crackle on Xbox”). 802 See, e.g., Tony Long, Feb. 15, 2005: YouTube and Your 15 Minutes of Fame, WIRED, Feb. 15, 2012, http://www.wired.com/thisdayintech/2011/02/0215youtube-launched/ (visited Feb. 14, 2012) (“YouTube 15 Mins.”). 803 See, e.g., id.; Kenneth Li & Richard Waters, YouTube “Knew of Copyright Violations,” FINANCIAL TIMES, Mar. 19, 2010, http://www.ft.com/cms/s/2/56cacfc0-32c2-11df-a767-00144feabdc0.html#axzz1j5CtASMq (visited Feb. 14, 2012). 804 See, e.g., YouTube 15 Mins. 805 See, e.g., YouTube, Partner Showcase, http://www.youtube.com/t/partnerships_showcase (visited Feb. 14, 2012); NPR, A War To Watch: YouTube Takes On Television, Jan. 12, 2012, http://www.npr.org/2012/01/12/145099987/a-war-to-watch-youtube-takes-on-television (visited Feb. 14, 2012); Graeme McMillan, YouTube Confirms New Professionally-Created Channels, TIME, Oct. 29, 2011, http://techland.time.com/2011/10/29/youtube-confirms-new-professionally-created-channels/ (visited Feb. 14, 2012). 806 Adam Ostrow, YouTube Debuts Movie Rentals, Mashable, Jan. 20, 2010, http://mashable.com/2010/01/20/youtube-movie-rentals-2/ (visited Feb. 27, 2012). 807 YouTube, Movies, http://www.youtube.com/movies (visited Feb. 27, 2012) (“YouTube Movies”). 808 Time Warner, Warner Bros. Entertainment Becomes First Hollywood Studio To Offer Movies Directly On Facebook (press release), Mar. 8, 2011. 809 Emil Protalinski, Warner Bros. Offers Five More Movies on Facebook, ZDNet, Mar. 28, 2011, http://www.zdnet.com/blog/facebook/warner-bros-offers-five-more-movies-on-facebook/1003?tag=content;siu- container (visited Feb. 14, 2012); Emil Protalinski, Warner Bros. Announces the First Facebook Show, ZDNet, Sept. 29, 2011, http://www.zdnet.com/blog/facebook/warner-bros-announces-the-first-facebook-show/4254 (visited Feb. 14, 2012); Facebook, Aim High, http://www.facebook.com/AimHighSeries (visited Feb. 14, 2012). 810 Erik Gruenwedel, Paramount Posts Entire “Jackass” Catalog on Facebook, HOME MEDIA MAGAZINE, July 28, 2011, http://www.homemediamagazine.com/paramount/paramount-posts-entire-jackass-catalog-facebook-24627 (visited Feb. 14, 2012); Kurt Orzeck, Paramount Places “Mission: Impossible” for Rent on Facebook, TheWrap.com, Nov. 22, 2011, http://www.thewrap.com/movies/article/mission-impossible-flicks-coming-facebook- 32993 (visited Feb. 14, 2012). Federal Communications Commission FCC 12-81 116 added movie content from Universal Studios811 and Miramax.812 251. In October 2011, Yahoo launched Yahoo Screen, a revamped portal for its television shows and premium video content.813 Yahoo Screen content includes original shows as well as content secured through licensing deals with entities, such as Hulu, CBS, ABC News, Ultimate Fighting Championship, and special interest video network Revision3.814 Yahoo Screen provides “multiple channels filled with thousands of videos and television shows” and boasts an interface that looks “very similar to Hulu.”815 252. Affiliates of Manufacturers, Retailers, and Other Businesses. A variety of other businesses also operate OVDs as well. Netflix launched in 1999 as an Internet-based DVD rental service.816 In 2007, Netflix added its Watch Instantly service (originally called “Watch Now”).817 Watch Instantly, a subscription service, allows consumers to stream video content to computers, mobile devices, and televisions connected to a Netflix-enabled device.818 By the end of 2010, a majority of Netflix subscribers viewed more of Netflix’s television shows and movies via streaming than from its DVD rental service.819 253. Similarly, Apple is a designer, manufacturer, and marketer of electronic hardware and software, with online video representing only a small portion of its revenues.820 In 2005, Apple 811 Cooper Smith, Facebook: “The Big Lebowski” Now Available To Watch Via Social Theater App, HUFFINGTON POST, Aug. 19, 2011, http://www.huffingtonpost.com/2011/08/19/facebook-the-big-lebowski-watch_n_931350.html (visited Feb. 14, 2012). 812 Bianca Bosker, Miramax Brings More Movies To Facebook: A Look At The Movie Rental App, HUFFINGTON POST, Aug. 22, 2011, http://www.huffingtonpost.com/2011/08/22/watch-movies-on-facebook-miramax-movie- rental-app_n_933058.html#s335352 (visited Feb. 14, 2012). 813 Ben Parr, Yahoo Launches Revamped Premium Video Portal, Mashable, Oct. 4, 2011, http://mashable.com/2011/10/04/yahoo-screen/ (visited Feb. 14, 2012). 814 See id.; Revision 3, Inside Revision3: About Us, http://revision3.com/about (visited Feb. 14, 2012). Revision3 is an Internet television network that produces original content, including lifestyle and technology video shows geared to 13-34 year old males. See Andy Plesser, Revision3 Is “Biggest” Internet TV Network With 70 Million Monthly Video Views, Business Insider, May 19, 2011, http://articles.businessinsider.com/2011-05- 19/tech/30038978_1_revision3-video-views-network (visited Feb. 27, 2012). According to figures provided by Revision3’s CEO in May 2011, the network had 17 million monthly unique viewers who watched 70 million video views. See id. 815 Graeme McMillan, Yahoo! Screen: Your New TV on the Internet, TIME, Oct. 4, 2011, http://techland.time.com/2011/10/04/yahoo-screen-your-new-tv-on-the-Internet/ (visited Feb. 14, 2012). 816 Netflix, Company Timeline, https://signup.netflix.com/MediaCenter/Timeline (visited Feb. 14, 2012). 817 See id.; Bumpershine, Netflix “Watch Instantly” Goes Unlimited, Dec. 17, 2007, http://www.bumpershine.com/2007/12/17/netflix-watch-instantly-goes-unlimited.html (visited Feb. 14, 2012). 818 Netflix, Signup, https://signup.netflix.com/home?country=1&rdirfdc=true (visited Feb. 14, 2012) (“Netflix Signup”); Netflix, How It Works, https://signup.netflix.com/HowItWorks (visited Feb. 14, 2012) (“Netflix How It Works”). 819 See Netflix Inc., SEC Form 10-K for the Fiscal Year Ended December 31, 2010, at 22 (“Netflix 2010 Form 10- K”). 820 For example, Apple’s revenue from “net sales of other music related products and services” – which includes, among other things, online video and music sales – accounted for just nine percent of the company’s 2009 net sales, eight percent of the company’s 2010 net sales, and six percent of the company’s 2011 net sales. See Apple Inc., SEC Form 10-K for the Period Ended September 24, 2011, at 30-32 (“Apple 2011 Form 10-K”). Federal Communications Commission FCC 12-81 117 announced that it would begin offering certain movies and television episodes for download on a per movie or per program fee basis.821 In January 2008, Apple announced the introduction of its iTunes Movie Rentals service, which allows users to rent movies from all the major studios and watch them on their computers, Apple mobile devices, or Apple TV.822 Consumers also can now buy television shows and movies via iTunes.823 Some analysts have noted that for Apple, providing worthwhile online video content is not merely an end in itself, but is also a tool to promote the company’s digital devices.824 254. In 2006, online retailer Amazon.com launched its Unbox service, which allowed consumers to download television and movie content for rental or purchase, on a pay-per-download basis.825 Two years later, Amazon announced that consumers could stream movies and television programs on their computers, without advertisements, through its Amazon Video on Demand streaming service.826 In 2011, Amazon announced that customers who pay an annual fee for the company’s Amazon Prime service will receive commercial-free, instant streaming of thousands of movies and television shows at no extra charge.827 OVD content provided by Amazon can be viewed on multiple devices.828 255. In addition to being a producer of content, Sony also manufactures consumer electronics equipment. As discussed in more detail below, Sony’s Crackle OVD service is available on numerous devices, many of which are manufactured by Sony. Indeed, the ability to use Crackle to access Sony’s library of movies, television shows, and original programming829 is a potential selling point for these electronics products. 821 Apple Inc., Apple Announces iTunes 6 With 2,000 Music Videos, Pixar Short Films & Hit TV Shows (press release), Oct. 12, 2005. 822 Apple Inc., Apple Premieres iTunes Movie Rentals With All Major Film Studios (press release), Jan. 15, 2008. 823 Apple, iTunes, What’s On iTunes, http://www.apple.com/itunes/whats-on/ (visited Feb. 14, 2012) (“What’s On iTunes”). 824 See, e.g., Geoffrey A. Fowler & Sam Schechner, A New Digital Battlefield, WALL ST. J., Sept. 2, 2010, http://online.wsj.com/article/SB10001424052748703431604575468051468814036.html#articleTabs%3Darticle (visited Feb. 14, 2012) (“Fowler & Schechner”). 825 Marshall Kirkpatrick, Amazon Unbox Goes Live, Tech Crunch, Sept. 7, 2006, http://techcrunch.com/2006/09/07/amazon-unbox-goes-live/ (visited Feb. 14, 2012). 826 See Amazon.com, Amazon Instant Video Compatible Devices, http://www.amazon.com/gp/video/ontv/devices (visited Feb. 29, 2012) (“Amazon Devices”). 827 Amazon Devices: Amazon.com, Inc., Amazon Prime Members Now Get Unlimited, Commercial-free, Instant Streaming of More Than 5,000 Movies and TV Shows at No Additional Cost (press release), Feb. 22, 2011. The company’s Amazon Prime service provides other, non-video benefits, including for instance two-day shipping on some purchases. See Amazon.com, Amazon Prime, http://www.amazon.com/gp/help/customer/display.html?nodeId=13819211 (visited Feb. 14, 2012) (“Amazon Prime”). 828 See Amazon.com, Watch Anywhere, http://www.amazon.com/gp/feature.html?ie=UTF8&docId=1000663511 (visited Feb. 14, 2012); Amazon.com, Help, Watching Amazon Instant Videos, http://www.amazon.com/gp/help/customer/display.html/ref=hp_3757_watchfaq?nodeId=200238920 (visited Feb. 14, 2012); Amazon.com, Help, Amazon Instant Video Support, http://www.amazon.com/gp/help/customer/display.html/ref=hp_13819211_aiv?nodeId=3757 (visited Feb. 14, 2012). 829 See About Crackle; Crackle FAQ; Crackle on Xbox. Federal Communications Commission FCC 12-81 118 256. In 2007, Vudu launched a service that provided consumers with a television set-top box that enabled instant viewing of movies via rent or purchase.830 Wal-Mart purchased the company in February 2010.831 Today, Vudu offers its movie store and interactive services as a feature that consumer electronics manufacturers can build into their devices,832 many of which are available for sale at Wal- Mart. 257. Consumer electronics retailer Best Buy’s CinemaNow service allows users to rent or purchase movie and television show content.833 CinemaNow, a non-subscription service, provides customers with same-day instant access to new release movies and television shows.834 Users can access CinemaNow content via a variety of devices, some of which can be purchased at Best Buy, including computers and certain Internet-connectable televisions and Blu-ray players.835 a. Horizontal Concentration and Vertical Integration 258. Horizontal Concentration. It is difficult to measure horizontal concentration in the OVD marketplace. To begin with, it is hard to get a handle on the number and identity of players in the market. As described in the examples above, all of the major providers in this industry segment have either entered the market, or dramatically retooled their approach to the distribution of video content, during the last few years. Players continue to enter and exit the OVD marketplace, and business models appear to be evolving. 259. Even if it were possible to get a firm handle on the players in the OVD marketplace, it is difficult to obtain the revenue or ratings/viewing information required for a horizontal concentration analysis. As discussed above, many OVDs are parts of companies with multiple non-OVD business lines. This often makes it difficult or impossible to obtain useful OVD revenue figures. As noted above, for example, Apple reports revenue from a category called “net sales of other music related products and services,” which includes, among other things, online video and music sales, but does not break out what portion of that revenue comes from OVD services.836 Similarly, while revenues for Netflix are available, the company’s most recent SEC Form 10-K filing notes that because Netflix subscribers were able to receive both streaming and DVDs-by-mail under a single hybrid plan prior to the fourth quarter of 2011, 830 See Brad Stone, Wal-Mart Adds Its Clout to Movie Streaming, N.Y. TIMES, Feb. 23, 2010, http://www.nytimes.com/2010/02/23/technology/23video.html?partner=rss&emc=rss (visited Feb. 15, 2012) (“Wal- Mart Clout”); Azadeh Ensha, Vudu, Roku, Boxee: What’s the Difference?, N.Y. TIMES, Mar. 24, 2009, http://gadgetwise.blogs.nytimes.com/2009/03/24/vudu-roku-boxee-whats-the-difference/ (visited Feb. 15, 2012); Brad Stone, Vudu Casts Its Spell on Hollywood, N.Y. TIMES, Apr. 29, 2007, http://www.nytimes.com/2007/04/29/business/yourmoney/29vudu.html (visited Feb. 15, 2012). 831 See Wal-Mart Clout. 832 See Vudu, VUDU is Available on Virtually Every Internet-Connected Blu-ray Player and HDTV on the Market, http://www.vudu.com/devices.html (visited Feb. 15, 2012) (“Vudu Devices”); Vudu, VUDU Expands Distribution to HDTVs and Blu-ray Players from LG, Mitsubishi, Samsung, SANYO, Sharp, Toshiba and VIZIO (press release), Jan. 8, 2010. 833 CinemaNow, About Us, http://www.cinemanow.com/AboutUs-BBYCinemaNow.aspx (visited Feb. 15, 2012) (“About CinemaNow”). 834 See id.; Best Buy Co. Inc., Best Buy Provides Customers Same-Day Instant Access to New Release Movies and TV Shows with Launch of CinemaNow (press release), May 18, 2010. 835 See id.; About CinemaNow. 836 See supra, ¶ 253 & n. 820; Apple 2011 Form 10-K at 30-32. Federal Communications Commission FCC 12-81 119 it is not possible to allocate domestic revenues from prior to that time between the company’s streaming and DVD rental segments.837 260. Moreover, while metrics exist to assess MVPD subscribership or broadcast viewership, measuring online video viewership raises unique challenges. Entities like Nielsen and comScore measure hits/views for online video websites, but they use different methodologies and, therefore, achieve different results. Importantly, services that measure online video viewership generally do not separate professional and non-professional video content. For example, entities such as Google/YouTube and Facebook rank high in analyses by comScore and Nielsen,838 but this is almost certainly due in large part to the non-professional video content hosted on both sites.839 Hence, these viewership figures cannot be used to measure horizontal concentration in the market for online delivery of professional video content. 261. Vertical Integration. As discussed above, many OVDs are vertically integrated. For example, some OVDs are integrated with content producers and owners, which view online video as another distribution outlet for their programming. In other cases, OVDs are affiliated with online services for which video content is an additional product to offer consumers or with retailers of consumer electronics equipment used to access OVD-delivered content. 262. In addition, OVDs, including those not affiliated with traditional programmers or content owners, are becoming increasingly involved in the creation of original content. For example, Netflix launched an original show, Lilyhammer, in February 2012.840 In addition, it is developing three additional original series (House of Cards, Orange is the New Black, and Hemlock Grove), and plans to air exclusive new episodes of Arrested Development in 2013.841 Hulu launched its first original series, Battleground, in 837 See Netflix Inc., SEC Form 10-K for the Fiscal Year Ended December 31, 2011, at 26. On September 1, 2011, Netflix ended its hybrid plan, which, for $9.99, provided unlimited access to the Netflix streaming video library and allowed customers to rent one DVD at a time. See Greg Sandoval, Netflix Users, Time to Pick a Plan, CNET, Aug. 29, 2011, http://news.cnet.com/8301-31001_3-20098921-261/netflix-users-time-to-pick-a-plan/ (visited Mar. 5, 2012); Eric Savitz, Netflix Jacking Up Prices On Hybrid DVD/Streaming Plans, FORBES, July 13, 2011, http://sg.news.yahoo.com/netflix-jacking-prices-hybrid-dvd-streaming-plans-172634671.html (visited Mar. 5, 2012). As of March 2012, Netflix customers pay $7.99 per month for unlimited streaming and must pay an additional $7.99 per month for the DVD rental service ($9.99 for access to Blu-ray discs). See id.; Netflix Signup; Netflix How It Works. Netflix announced plans to split its DVD-rental business from its streaming business in September 2011, but reversed that decision the next month. Bianca Bosker, Qwikster Is Dead: Netflix Kills DVD-Only Service Weeks After Unveiling It, HUFFINGTON POST, Oct. 10, 2011, http://www.huffingtonpost.com/2011/10/10/qwikster-dead- netflix-kills_n_1003098.html (visited Mar. 5, 2012). 838 See infra, ¶¶ 320-21. 839 See supra, ¶ 249; Facebook, Help Center, Video: Uploading and Viewing Videos, http://www.facebook.com/help/?page=157734877627482 (visited Feb. 16, 2012). 840 See Lesley Goldberg, Netflix to Bow Original Series “Lilyhammer” on Feb. 6, THE HOLLYWOOD REPORTER, Jan. 3, 2012, http://www.hollywoodreporter.com/live-feed/netflix-bow-original-series-lilyhammer-277530 (visited Feb. 28, 2012). 841 See id.; Chloe Albanesius, Netflix Original Series, Lilyhammer, to Debut Feb. 6, PC MAGAZINE, Jan. 3, 2012, http://www.pcmag.com/article2/0,2817,2398304,00.asp (visited Feb. 15, 2012); Janko Roettgers, Netflix, Hulu and the Golden Age of Content, Gagaom, Jan. 16, 2012, http://gigaom.com/video/netflix-hulu-exclusive-content/ (visited Feb. 15, 2012) (“Golden Age”). Netflix paid $100 million, outbidding cable networks, for rights to air 26 episodes of original series House of Cards. Paul Bond, Hollywood’s Feelings About Netflix’s $100 Million “House of Cards” Deal, THE HOLLYWOOD REPORTER, Mar. 23, 2011, http://www.hollywoodreporter.com/news/hollywoods- feelings-netflixs-100-million-170651 (visited Feb. 28, 2012). According to recent industry reports, CBS has held discussions with Netflix about producing original programming for airing on Netflix as well. See COMM. DAILY (Feb. 17, 2012) at 16-17. Federal Communications Commission FCC 12-81 120 February 2012.842 Similarly, in late 2011, Yahoo announced eight original shows targeted at women and featuring Hollywood talent.843 YouTube continues to invest in original content, offering multiple channels from Hollywood celebrities and other content partners.844 b. Entry and Exit Conditions 263. Some commenters state that the online video marketplace is relatively open with low barriers to entry.845 OVDs generally rely on third-party owned infrastructure for data transport, instead of needing to build their own.846 On the other hand, one industry analyst states, “there are huge and very real infrastructure costs associated with massive server farms, transport costs, and hosting fees associated with a large-scale video-over-the Internet model. . . . For a large scale start-up, the cost could run into the billions.”847 Moreover, while niche material often can find an audience, in order to compete, an OVD must secure rights to a wide range of compelling content, which can be difficult and quite expensive.848 While the extent of these costs will vary depending on an OVD’s business model, it is clear that there are real costs and hurdles involved in entering into, and competing in, the OVD market. 264. Below, we discuss the regulatory conditions potentially affecting entry in this market. Thereafter, we describe the market, or non-regulatory, conditions that may influence entry decisions, including the need for OVDs to acquire rights to content and to secure sufficient, reasonably priced Internet access for transmission of OVD content. We then describe recent entry and exit from the market. (i) Regulatory Conditions 265. Open Internet. OVDs need broadband Internet speeds and capacity in order to transmit video content to their customers. In 2010, the Commission adopted an order seeking to protect the openness of the Internet.849 The Commission’s open Internet rules require transparency from fixed and 842 See Golden Age; Meg James, Hulu Introduces “Battleground,” its First Original Scripted Show, L.A. TIMES, Jan. 15, 2012, http://latimesblogs.latimes.com/entertainmentnewsbuzz/2012/01/hulu-introduces-battleground-first- original-scripted-show.html (visited Feb. 15, 2012). 843 Georg Szalai; Yahoo Launches Original Web Shows Targeting Women With Judy Greer, Morgan Spurlock, Niecy Nash, THE HOLLYWOOD REPORTER, Oct. 4, 2011, http://www.hollywoodreporter.com/news/yahoo-launches- original-web-shows-243610 (visited Feb. 15, 2012). 844 See Golden Age; Ben Sisario, New Layer of Content Amid Chaos on YouTube, N. Y. TIMES, Mar. 11, 2012, http://www.nytimes.com/2012/03/12/technology/youtube-channels-seek-advertisers-and- audiences.html?pagewanted=all (visited Mar. 12, 2012); Janko Roettgers, It’sTtrue: YouTube to Take on Cable With A-list Celebs, Gigaom, Oct. 28, 2011, http://gigaom.com/video/youtube-premium-content/ (visited Feb. 15, 2012); See also infra, ¶¶ 304-05. 845 See, e.g., Google 6/8/11 Comments at 1-4. 846 See infra, ¶¶ 271-75. 847 See Craig Moffett, Weekend Media Blast: Why Haven’t We Seen a Virtual MSO Yet?, Bernstein Research, Jan. 27, 2012, at 3 (“Virtual MSO”). 848 See Comcast-NBCU Order, 26 FCC Rcd at 4273, ¶ 86; infra, ¶¶ 268-70, ¶¶ 287-89. 849 See Preserving the Open Internet; Broadband Industry Practices, GN Docket No. 09-191, WC Docket No. 07- 52, Report and Order, 25 FCC Rcd 17905, 17906, ¶ 1 (2010) (“Open Internet Order”). This order is currently on appeal in the D.C. Circuit. See, e.g., Notice of Appeal, Verizon v. FCC, No. 11-1355 (filed Sept. 30, 2011, D.C. Cir.). In addition, Southern Company Services recently filed a petition for clarification or reconsideration with the Commission concerning one aspect of the Open Internet Order. See Southern Company Services, Petition for Clarification or Reconsideration, GN Docket No. 09-191, WC Docket No. 07-52 (filed Oct. 24, 2011). Federal Communications Commission FCC 12-81 121 mobile broadband providers.850 In addition, fixed broadband providers cannot block access to lawful content, applications, and services; mobile broadband providers cannot block access to lawful websites and applications competing with their voice or video telephony services.851 Fixed broadband providers must also allow access to non-harmful devices and cannot unreasonably discriminate in transmitting lawful network traffic.852 266. Closed Captioning. In January 2012, the Commission adopted rules placing closed captioning obligations on the owners, providers, and distributors of video programming delivered using Internet protocol (IP).853 The rules were adopted pursuant to the Twenty-First Century Communicatins and Video Accessibility Act of 2010 (CVAA), which directed the Commission to revise its regulations to require closed captioning of IP-delivered video programming that is published or exhibited on television with captions after the effective date of the new regulations.854 An entity intending to enter the OVD marketplace will need to take steps to comply with these requirements. (ii) Non-regulatory Conditions 267. An OVD entrant faces several non-regulatory costs and challenges to introducing its video content services that influence its decision to enter the market, including program acquisition and the need for sufficient Internet capacity at a reasonable cost. 268. Program Acquisition. Just as OVD subscriber growth creates the ability to obtain more content, which in turn drives usage and subscriber growth, lack of compelling content to offer potential customers is a significant deterrent to entry. An entity attempting to enter the OVD marketplace must obtain a robust, if not comprehensive, programming library to offer consumers.855 269. One potential barrier to such content acquisition is cost. For example, Netflix recently signed a deal with The CW network, which gives Netflix the streaming rights to repeats of current and future The CW network series. While the cost is undisclosed, and reportedly depends on the performance of certain shows, analysts estimate that it is close to $1 billion, including approximately $600,000 an episode for established shows like Gossip Girl.856 This is a significant cost for what will amount to a 850 See Open Internet Order, 25 FCC Rcd at 17906, ¶ 1. 851 See id. 852 See id. 853 See Closed Captioning of Internet Protocol-Delivered Video Programming: Implementation of the Twenty-First Century Communications and Video Accessibility Act of 2010, MB Docket No. 11-154, Report and Order, 27 FCC Rcd 787 (2012). Petitions for reconsideration are currently pending before the Commission. 854 47 U.S.C. § 613(c)(2). 855 See Comcast-NBCU Order, 26 FCC Rcd at 4273, ¶ 86 (“If an OVD is to fully compete against a traditional MVPD, it must have a similar array of programming.”); Will Richmond, This Holiday Season, Video Apps’ Purpose is to Sell Devices, VideoNuze, Nov. 10, 2011, http://www.videonuze.com/article/this-holiday-season-video-apps- purpose-is-to-sell-devices (visited Feb. 15, 2012) (“In short, premium video is more valuable than ever, with new players in the ecosystem recognizing that they can’t accomplish their goals without it. Another reminder that content is king.”); Dan Rayburn, Veoh Should Be A Reminder That Execution & Focus Are More Important Than Vision, StreamingMediaBlog.com, Feb. 12, 2010, http://blog.streamingmedia.com/the_business_of_online_vi/2010/02/veoh-should-be-a-reminder-that-execution-and- focus-are-more-important-than-vision.html (visited Fed. 15, 2012) (discussing demise of OVD Veoh and noting that it is difficult for an ad-supported OVD to survive without a broad content library). 856 Joe Flint & Ben Fritz, Netflix Deal Makes CW Pay Off for CBS and Warner Bros., L.A. TIMES, Oct. 13, 2011, http://latimesblogs.latimes.com/entertainmentnewsbuzz/2011/10/netflix-cw-deal-cbs-warner-bros.html (visited Feb. 15, 2012) (“Netflix CW Deal”). Federal Communications Commission FCC 12-81 122 small part of Netflix’s overall content library. Alternatively, Microsoft put its plans to start an online subscription service for television shows and movies on hold after determining that constant licensing costs would be too high for the company’s envisioned business model.857 Given the costs faced by established companies, it is even more difficult for new entrants with less capital to enter into the many high-priced content deals required to build an adequate content library. 270. Content acquisition difficulties for OVDs can be exacerbated by vertical integration and pre-existing business relationships in the marketplace. For example, vertical integration or exclusivity arrangements between content producers/owners and cable networks, broadcast networks, or MVPDs can make it difficult for unaffiliated OVDs to obtain content rights.858 OVD content acquisition also can be difficult when content owners are vertically integrated with, or enjoy exclusive relationships with, other OVDs.859 271. Internet Capacity and Cost. Unlike MVPDs such as cable and DBS, which generally own and/or control the infrastructure they use to distribute video content to their customers, as stated above, OVDs rely on high-capacity and high-speed broadband Internet services that are often owned and controlled by unaffiliated MVPDs.860 According to one analyst, services and applications such as OVD services represented 60 percent of peak downstream traffic in 2011, with Netflix alone accounting for 32.7 percent of such traffic.861 OVDs therefore must have access to sufficient, reliable, and reasonably priced broadband capacity in order to operate in the video marketplace. Prospective OVD entrants face several challenges in this regard. 272. First, consumers may lack the broadband capability that is a necessary prerequisite for OVD providers to reach their intended market. Broadband deployment has increased in recent years, but, as the Commission has repeatedly recognized, it is far from ubiquitous. The Commission recently estimated that 26.2 million Americans living in more than 9.2 million households do not have access to 857 Yinka Adegoke, Exclusive: Microsoft Web TV Subscription Plan on Hold, Reuters, Jan. 11, 2012, http://www.reuters.com/article/2012/01/11/us-microsoft-video-idUSTRE80A1KL20120111 (visited Feb. 15, 2012). 858 See, e.g., Netflix 2010 Form 10-K, at 7 (noting that HBO’s license with Warner Brothers provides HBO with the exclusive right to such content against other subscription services, including OVDs like Netflix); Comcast-NBCU Order 26 FCC Rcd at 4273, ¶ 86 & 4359-62, Online Conditions IV.A-IV.C (listing Commission-imposed conditions designed to prevent Comcast/NBCU from withholding online rights to programming from unaffiliated OVDs); Rural Associations 6/8/11 Comments at 9; Netflix 6/8/11 Comments at 6-7. 859 See, e.g., The Economics of Online Video (White Paper), ADVERTISING AGE, June 19, 2010, at 10 (“AD AGE White Paper”); Emma Barnett, Joost ex-CEO Holds Broadcasters Responsible for Demise of Company, THE TELEGRAPH, July 7, 2009, http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/digital- media/5771174/Joost-ex-CEO-blames-broadcasters-for-demise-of-company.html (visited Fed. 15, 2012) (discussing belief of former CEO of OVD Joost that broadcasters’ decision to create their own online video services hindered Joost’s ability to acquire the content rights necessary to be competitive). 860 See Rovi 6/8/11 Comments at 2. The record indicates that cable operators continue to invest billions of dollars in infrastructure and facility rebuilds and upgrades to improve their video service offerings, as well as to offer more robust Internet and digital telephone services. Since 1996, cable companies have invested over $170 billion in infrastructure, including $12 billion in 2010 alone. See NCTA 6/8/11 Comments at 9-10. Telephone companies, including those that are not MVPDs, also provide the broadband Internet services that OVDs require. 861 Sandvine, Global Internet Phenomena Report, Fall 2011 at 2, 5-8. The analyst defined peak period as the time during which aggregate network traffic is within 95 percent of its highest value. Id. at 5. Federal Communications Commission FCC 12-81 123 broadband service at or above the Commission’s 4 Mbps downstream/1 Mbps upstream broadband speed benchmark.862 273. Second, even where the physical capacity exists to provide broadband service, some of the leading Internet Service Providers (“ISPs”) have begun to impose data caps or shift to usage-based billing. Specifically, in 2008 Comcast imposed a data cap of 250 gigabytes per month, disconnecting users who exceeded the cap twice in a six-month period.863 In May 2011, AT&T imposed a cap of 150 GB per month for its DSL service and 250 GB for its U-verse service; if a user exceeds the data limit AT&T will send certain notifications, and then charge an additional $10 per month for each 50 GB beyond the limit.864 Cox imposes monthly usage limits from 30 GB up to 400 GB, depending on the package.865 Major wireless providers also have begun to impose data caps.866 Broadband providers assert that data caps and usage based billing are mechanisms to manage ISP traffic, address excessive use, alleviate network congestion, ensure that users can access their networks, and provide adequate data speeds to all of their customers.867 Some commenters identify moves by broadband ISPs to usage-based billing as being potentially discriminatory against OVDs,868 and some claim that this behavior is intended to retard OVD growth to sustain the traditional MVPD subscription model.869 In contrast, ISPs indicate 862 See Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act, GN Docket No. 10-159, Seventh Broadband Progress Report and Order on Reconsideration, 26 FCC Rcd 8008, 8018, 8022, ¶¶ 14, 23 (2011). The Commission is in the process of reforming and modernizing its Form 477 data collection in order to obtain more accurate information about broadband deployment. See id. at 8016, ¶ 11; see generally Modernizing the FCC Form 477 Data Program; Development of Nationwide Broadband Data to Evaluate Reasonable and Timely Deployment of Advanced Services to All Americans, Improvement of Wireless Broadband Subscribership Data, and Development of Data on Interconnected Voice over Internet Protocol (VoIP) Subscribership; Service Quality, Customer Satisfaction, Infrastructure and Operating Data Gathering; Review of Wireline Competition Bureau Data Practices, WC Docket Nos. 07-38, 08-190, 01-132, and 11-10, Notice of Proposed Rulemaking, 26 FCC Rcd 1508 (2011). 863 Editorial, To Cap, or Not, N.Y. TIMES, July 21, 2011, http://www.nytimes.com/2011/07/22/opinion/22fri2.html (visited Feb. 17, 2012) (“To Cap or Not”); Chloe Albanesius, Comcast to Cap Data Transfers at 250 GB in Oct., PC MAGAZINE, July 22, 2011, http://www.pcmag.com/article2/0,2817,2329170,00.asp (visited Feb. 17, 2012) (“Comcast to Cap”). 864 See AT&T, High Speed Internet Support: Broadband Usage FAQs, http://www.att.com/esupport/article.jsp?sid=KB409045&cv=801&ct=9000106&pv=3&title=Broadband+Usage+FA Qs#fbid=xw2lZFJ5WmM (visited Feb. 17, 2012) (“AT&T Broadband Usage”). 865 See Cox, e.g., Speeds and Allowances Information for High Speed Internet Service in Rhode Island, http://ww2.cox.com/aboutus/rhodeisland/policies/speedsusage.cox (visited Feb. 17, 2012). 866 See, e.g., AT&T, An Update for Our Smartphone Customers With Unlimited Data Plans (press release), July 29, 2011 (announcing reduction in speeds for smartphone customers with unlimited data plans who exceed certain bandwidth thresholds) (“Smartphone Update”); Julianne Pepitone, AT&T Raises Limit for Smartphone Data Slowdown, CNNMoney, Mar. 1, 2012, http://money.cnn.com/2012/03/01/technology/att_data_slowdown/index.htm?hpt=hp_t2 (visited Mar. 2, 2012) (“Smartphone Data Slowdown”); Trefis Team, Crowded Pipes Prompt Verizon To Nix Unlimited Data Plans, FORBES, May 31, 2011, http://www.forbes.com/sites/greatspeculations/2011/05/31/crowded-pipes-prompt-verizon- to-nix-unlimited-data-plans/ (visited Feb. 17, 2012). 867 See, e.g., To Cap, or Not; Comcast to Cap; AT&T Broadband Usage; Smartphone Update; Smartphone Data Slowdown; Chloe Albanesius, Comcast Weighs 250 GB/Month Download Limit, PC MAGAZINE, May 8, 2008, http://www.pcmag.com/article2/0,2817,2301203,00.asp (visited July 16, 2012). 868 See, e.g., Netflix 6/8/11 Comments at 8; Public Knowledge 6/8/11 Comments at 4-5, 9-10. 869 See e.g., WGAW 6/8/11 Comments at 19. Federal Communications Commission FCC 12-81 124 they have not impeded the growth of OVDs. By continually upgrading their broadband facilities, ISPs argue that they have helped facilitate the growth of high-quality Internet video and its distribution by entities like Netflix.870 Comcast also notes that it offers a variety of speed tiers at different price points to accommodate the varying needs of its subscribers.871 274. Third, MVPDs have the ability and incentive to degrade the broadband service available to unaffiliated OVDs. For example, one party states that a cable provider can constrain broadband capacity available to OVDs in order to prevent them from offering full competitive substitutes for the cable company’s MVPD offerings.872 Although the Commission’s Open Internet Order prohibits broadband ISPs from blocking OVD traffic, some worry that exceptions for “reasonable network management” and “specialized services” may still allow MVPDs to have an undue negative impact on online video.873 Several MVPDs counter, however, that cable operators and other MVPDs have continually enabled the development of online video by providing faster broadband speeds and higher-bandwidth services.874 275. Finally, costs charged by ISPs to deliver online video traffic could have a negative impact on the ability of OVDs to enter the market and compete. Netflix, for example, asserts that some fees charged by MVPD/broadband network operators to terminate unaffiliated traffic on their networks can increase OVD operating costs.875 Netflix also points to a recent dispute between Comcast and Level 3 in support of its allegations that providers of MVPD service have the incentive to use traffic charges to hinder or disrupt the flow of unaffiliated broadband video services over their networks.876 MVPDs that are also ISPs dispute such assertions, arguing that while Internet backbone providers that have entered into peering arrangements typically do not charge fees when the traffic they carry for each other is roughly equal, charges are justified when the relative traffic flows are significantly out of proportion.877 870 See e.g., NCTA 7/8/11 Reply at 2-3. 871 See Comcast 6/8/11 Comments at 15. Comcast highlights the need for providing a range of speed tiers by stating that 23 percent of its residential high-speed Internet customers subscribe to higher-speed tiers (i.e., speeds above 16 Mbps). See id. at 16. 872 See Earthlink Reply, MB 10-56, at 9 (filed Aug. 19, 2010). 873 See Public Knowledge 6/8/11 Comments at 4; Rovi 6/8/11 Comments at 3. When approving the Comcast/NBCU transaction, the merged entity agreed to some voluntary commitments, and the Commission imposed conditions, designed to limit the ability of the joint venture to hinder OVD competition by restricting access to or raising the price of unaffiliated OVD content, or blocking, degrading, or otherwise violating Open Internet principles with respect to the delivery of unaffiliated online content. See, e.g., Comcast-NBCU Order, 26 FCC Rcd at 4263, 4274- 76, 4355-64, ¶ 61, ¶¶ 91-95, App. A, §§ I-IV. 874 See, e.g., Comcast 6/8/11 Comments at 5; NCTA 6/8/11 Comments at 5. 875 Netflix 6/8/11 Comments at 7. See also Netflix 2010 Form 10-K at 12 (noting that changes in how ISPs charge for access to data on their networks might adversely affect Netflix’s business). Netflix states that the ISPs’ customers already pay the ISPs to deliver the bits on their network, and requiring Netflix to pay as well, even though Netflix delivers the bits in question at the request of the ISPs’ customers, is an inappropriate reflection of their last mile exclusive control of their residential customers. See Letter from Reed Hastings, CEO of Netflix, to Chairman Fred Upton and Ranking Member Henry A. Waxman, Committee on Energy and Commerce, Apr. 6, 2011, at 1 (attached to Letter from Devendra T. Kumar, Attorney for Netflix, to Marlene H. Dortch, Secretary, FCC, GN Docket No. 09-191, WC Docket No. 07-52 (filed May 10, 2011)). 876 See Netflix 6/8/11 Comments at 1-2, 7. 877 See, e.g., Virtual MSO at 3; Spencer E. Ante & Amy Schatz, Web-Traffic Spat Over Netflix Highlights New Tensions, WALL ST. J., Nov. 30, 2010, http://online.wsj.com/article/SB10001424052748704679204575646840288688392.html (visited Feb. 17, 2012); (continued….) Federal Communications Commission FCC 12-81 125 c. Recent Entry and Exit 276. The OVD market has undergone dramatic transformation since the last report, as all of the major providers have either entered the market in the last few years or dramatically retooled their approach to the online distribution of video content in that time. On the other hand, since the OVD marketplace is still evolving, it is not surprising that several entities have exited the marketplace recently as well. 277. Entry. While YouTube has been a leading distributor of user-generated video content since it began in 2005, it has taken several steps in the last few years to evolve into an entity that offers both professional and non-professional content. YouTube implemented its “Content ID” – an advanced set of copyright policies and content management tools – in 2009, addressing in large part issues of copyright infringement that previously arose from user-uploads of third-party content and allowing media companies to monetize and manage user-uploaded videos.878 YouTube also has entered into partnerships with numerous content providers to create ad-supported channels of short- and long-form programming,879 and developed mechanisms to allow its partners to sell advertisements on YouTube more directly.880 278. Sony’s Crackle service is another example of recent entry and retooling by an OVD. In 2006, Sony bought Grouper, a website that hosted user-generated videos.881 Sony shut down Grouper and relaunched it as Crackle the next year.882 At that time, Crackle was “something of a filmmaking incubator.”883 User-uploaded videos were entered into contests and judged by editors.884 Crackle’s focus has since changed, however. Today, Crackle is an outlet for the distribution of professionally produced (Continued from previous page) Nancy Gohring, FCC Looks Into Level 3, Comcast Content Dispute, PC WORLD, Nov. 30, 2010, http://www.pcworld.com/businesscenter/article/212078/fcc_looks_into_level_3_comcast_content_dispute.html (visited Feb. 17, 2012); Joe Mullin, Verizon Chooses Sides, While Level 3 Keeps Fighting With Comcast, PaidContent.org, Jan. 14, 2011, http://paidcontent.org/article/419-verizon-chooses-sides-while-level-3-keeps- fighting-with-comcast/ (visited Feb. 29, 2012). 878 See YouTube, Content ID, http://www.youtube.com/t/contentid (visited Feb. 16, 2012); Will Richmond, Why Did Online Video Consumption Spike in 2009?, Video Nuze, Feb. 24, 2010, http://videonuze.com/blogs/?2010-02- 24/Why-Did-Online-Video-Consumption-Spike-in-2009-/&id=2446 (visited Feb. 16, 2012). 879 Ryan Nakashima, YouTube Launching 100 New Channels, USA TODAY, Oct. 29, 2011, http://www.usatoday.com/tech/news/story/2011-10-29/youtube-original-programming/50997002/1 (visited Feb. 16, 2012); Laura Lee, Welcome to YouTube, Univision!, YouTube Biz Blog, Nov. 16, 2009, http://ytbizblog.blogspot.com/2009/11/welcome-to-youtube-univision.html (visited Feb. 16, 2012); Diane Pucin, ESPN and YouTube, Together, L.A. TIMES, July 13, 2009, http://latimesblogs.latimes.com/sports_blog/2009/07/espn-and-youtube-together.html (visited Feb. 16, 2012). 880 Phil Farhi, Helping Partners Help Themselves, You Tube Biz Blog, July 27, 2009, http://ytbizblog.blogspot.com/2009/07/helping-partners-help-themselves.html (visited Feb. 16, 2012). 881 Greg Sandoval, Sony Gets Into Video Sharing with Grouper Hug, CNET, Aug. 23, 2006, http://news.cnet.com/Sony-gets-into-video-sharing-with-Grouper-hug/2100-1026_3-6108508.html (visited Feb. 16, 2012). 882 See Nilay Patel, Sony Kills Grouper: Say Hello to Crackle, Engadget, July 16, 2007, http://www.engadget.com/2007/07/16/sony-kills-grouper-say-hello-to-crackle/ (visited Feb. 16, 2012). 883 See id. 884 See id. Federal Communications Commission FCC 12-81 126 content, such as Sony’s television shows and movies, and generally does not accept user video submissions.885 279. As noted above, Hulu initiated service in 2007. Its entry into the subscription video service business was more recent however. Specifically, Hulu launched Hulu Plus in June 2010, altering its approach to delivery of online video content to consumers. The service launched as a means for Hulu’s media owners to generate new sources of revenue from Hulu without undercutting the cable contracts that have traditionally supported content creation.886 280. Providers of niche content have entered the marketplace as well. For example, Mubi, a subscription OVD founded in 2007 and devoted to international, independent, and classic films, now has 1.2 million members worldwide.887 Similarly, Fandor, which focuses on independent films, launched on March 8, 2011, charging $10 per month for access to its large library of films.888 Fandor claims that it intends to make the service accessible via multiple devices, such as smartphones, tablets, and televisions.889 281. Other competitors are entering the OVD industry as well. In February 2012, for example, Verizon announced a joint venture with Redbox operator Coinstar to launch an online streaming video service in the second half of 2012.890 Verizon operates an MVPD service (FiOS TV).891 RedBox is a video rental kiosk company.892 According to reports, the joint venture’s service, called “Project Zoetrope,” will allow users to subscribe to, download and stream movies and television shows across various devices, including televisions, web browsers, tablets, smartphones, Roku, Xbox and Google TV.893 282. In addition, the continued development of online video distribution is encouraging some established content owners to enter the video content market for the first time. For example, news entities 885 Crackle, Crackle FAQ: The Leftovers, http://www.crackle.com/outreach/faq#leftovers (visited Feb. 14, 2012). 886 Dawn C. Chmielewski, Hulu Launches a Preview of its Subscription Service, L.A. TIMES, June 29, 2010, http://latimesblogs.latimes.com/entertainmentnewsbuzz/2010/06/hulu-announces-the-launch-of-its-paid- subscription-service.html (visited Feb. 16, 2012). 887 Mubi, http://mubi.com/ (visited Feb. 16, 2012); Mubi, Mubi Press, http://mubi.com/about/press (visited Feb. 16, 2012); Paul Bond & Tim Appelo, How the Assault on Netflix Will Shake Out, THE HOLLYWOOD REPORTER, Mar. 17, 2011, http://www.hollywoodreporter.com/news/how-assault-netflix-will-shake-168562 (visited Feb. 16, 2012). 888 Fandor, http://www.fandor.com/ (visited Feb. 16, 2012); Fandor, About, http://www.fandor.com/company/about (visited Feb. 16, 2012) (“About Fandor”); Mark Hachman, Fandor Launches As “Netflix for Indie Films,” PC MAGAZINE, Mar. 9, 2011, http://www.pcmag.com/article2/0,2817,2381725,00.asp (visited Feb. 16, 2012). 889 About Fandor. 890 David Goldman, Verizon and Redbox Team Up to Battle Netflix, CNN Money, Feb. 6, 2012, http://money.cnn.com/2012/02/06/technology/verizon_redbox/index.htm (visited Feb. 28, 2012) (“Verizon and Redbox Team Up”); Verizon, Verizon and Coinstar’s Redbox Form Joint Venture to Create New Consumer Choice for Video Entertainment (news release), Feb. 6, 2012, http://newscenter.verizon.com/press- releases/verizon/2012/verizon-and-coinstars-redbox.html (visited Feb. 28, 2012). Verizon and Redbox hold, respectively, 65 and 35 percent ownership shares of the joint venture. Id. 891 See supra, ¶ 32. 892 See infra, ¶ 288. 893 Todd Haselton, Verizon and Redbox May be Plotting Movie Streaming Partnership for Early 2012, BGR.com, Dec. 9, 2011, http://www.bgr.com/2011/12/09/verizon-and-redbox-plotting-streaming-partnership-early-2012- launch-expected/ (visited Feb. 28, 2012); Verizon and Redbox Team Up. Federal Communications Commission FCC 12-81 127 and organizations like Politico, The Wall Street Journal, The Washington Post, The Los Angeles Times, The Huffington Post, and Reuters have either entered the OVD marketplace recently or intend to do so in the near future.894 For example, Politico recently added to its newsroom “a stage set with lights, microphones, an anchor desk and five high-definition cameras so that reporters and editors can produce hours of live programming for Internet viewers.”895 The New York Times produces a daily taped news show for Internet distribution, TimesCast, and in early 2012 added a morning business newscast.896 The Wall Street Journal produces five hours of live Internet video content per day, and news organizations like The Washington Post, The Los Angeles Times, and The Huffington Post are preparing to provide Internet video content in the near future.897 News organizations continue to struggle to adopt new digital business models, and the potential to generate significant advertising revenue is encouraging them to develop and expand online video offerings.898 283. Exit. Because the OVD marketplace is still developing, it is likely that several entities will exit the marketplace in the upcoming years. MeeVee is one example of a company that entered the OVD marketplace, found it difficult to compete, and, ultimately ceased service. When MeeVee launched in 2005, it claimed to be “the first online destination to bring together traditional television listings and online video from hundreds of sources.”899 MeeVee functioned like a highly interactive program guide. A user could enter information concerning the cable and other video services to which he or she subscribed, and MeeVee would sort the user’s various viewing options.900 MeeVee also provided users with personalized viewing recommendations based on their selected shows and allowed users to create channels based on their own interests.901 Through deals with content companies, MeeVee allowed users to watch previews and clips from shows.902 The service attracted a large amount of venture capital.903 As of July 2007, MeeVee’s website attracted 3.4 million unique visitors per month, although it had begun losing customers by that time.904 By the end of Summer 2007, MeeVee’s traffic had experienced a steep 894 Brian Stelter, Print News Media Go Live With Video Programming, N.Y. TIMES, February 5, 2012, http://www.nytimes.com/2012/02/06/business/media/news-organizations-plunge-into-video-production.html?_r=1 (visited Feb. 14, 2012) (“Print Media Go Live”). 895 See id. 896 See id.; New York Times, TimesCast, http://video.nytimes.com/video/playlist/timescast/1247467375115/index.html (visited Mar. 5, 2012). 897 See Wall Street Journal, Video Center, http://online.wsj.com/video-center (visited Mar. 5, 2012); Print Media Go Live. 898 See id. 899 Clayton Moulynox, Meevee Internet TV Guide: Striving to Connect Broadcast & Web TV, Web TV Wire, July 31, 2007, http://www.webtvwire.com/meevee-to-become-tv-guide-for-the-Internet/ (visited Feb. 16. 2012). 900 Matt Marshall, MeeVee Wants to be Your TV Guide: Raises $8 Million More, SiliconBeat, Aug. 14, 2006, http://www.siliconbeat.com/entries/2006/08/14/meevee_wants_to_be_your_tv_guide_raises_8_million_more.html (visited Feb. 16. 2012) (“MeeVee 8 Million”). 901 Whitney Reynolds, 2007 Top 100 Undiscovered Web Sites, Number 22, PC MAGAZINE, http://www.pcmag.com/slideshow_viewer/0,3253,l%253D213934%2526a%253D213919%2526po%253D22,00.asp ?p=n (visited Feb. 16, 2012). 902 Mark Hopkins, MeeVee Lays Off 3/4 of Staff; CEO and CTO Step Down, Mashable, Feb. 29, 2008, http://mashable.com/2008/02/29/meevee-layoff/ (visited Feb. 16, 2012) (“MeeVee Layoff”). 903 Id.; MeeVee 8 Million. 904 Id.; MeeVee Layoff; Liz Gannes, MeeVee in Tatters, Drops Staff and CEO, New Tee Vee, Mar. 3, 2008, http://gigaom.com/video/meevee-in-tatters-drops-staff-and-ceo/ (visited Feb. 16, 2012) (“MeeVee in Tatters”). Federal Communications Commission FCC 12-81 128 decline, and those numbers remained low.905 In February 2008, the company’s CEO and CTO resigned, and a large portion of MeeVee’s staff was laid off.906 MeeVee was purchased by Live Universe in May 2008907 but ultimately ceased operations in December 2011.908 284. Sezmi – which provided a hybrid of over-the-air, cable, and online video services909 – also exited the market recently. The service used a consumer-purchased set-top box with an Internet connection and DVR functionality and a modular DTV antenna to provide access to broadcast stations, cable networks, and Internet content.910 Sezmi’s antenna picked up local digital television broadcast stations off the air, and the service used digital television spectrum leased from local broadcasters, as well as the Internet, to transmit cable networks to subscribers.911 Sezmi’s broadband connection also allowed the service to provide on-demand services (e.g., rentals and sales from an extensive library of movies and television shows), as well as access to archived video and Internet content from providers like YouTube and Comedy Central.912 Sezmi offered very effective content selection. Its set-top box learned customers’ content preferences and downloaded programming automatically.913 The service provided individualized recommendations,914 and customers could set up different accounts for different individuals, so that one member of the household did not have to wade through content chosen for someone else.915 Sezmi never really caught on, however, for many reasons, including a lack of compelling content compared to its rivals.916 For example, Sezmi offered limited sports content (ESPN 905 See MeeVee Layoff. 906 See MeeVee in Tatters; MeeVee Layoff. 907 Michael Arrington, MeeVee Finds A Home, Acquired By Live Universe, Tech Crunch, May 7, 2008, http://techcrunch.com/2008/05/07/meevee-acquired-by-live-universe/ (visited Feb. 16, 2012). 908 Wendy Boswell, Use MeeVee to Find Local TV Listings, About.com, http://websearch.about.com/od/dailywebsearchtips/qt/dnt0812.htm (visited Feb. 16, 2012). 909 See Eric R. Taub, Sezmi Looks to Bring Broadcast TV to Broadband, N.Y. TIMES, June 24, 2009 http://gadgetwise.blogs.nytimes.com/2009/06/24/will-sezmi-say-it-to-you/ (visited Mar. 5, 2012) (“Sezmi Broadband”); Jon Healy, How Sezmi Stacks Up, L.A. TIMES, May 28, 2010 http://latimesblogs.latimes.com/technology/2010/05/how-sezmi-stacks-up.html (visited Mar. 5, 2012) (“How Sezmi Stacks Up”). 910 See id.; Harry McCracken, Is Sezmi a Cable TV Killer?, Technologizer, Nov. 16, 2009, http://technologizer.com/2009/11/16/sezmi/ (visited Mar. 5, 2012) (“Sezmi Cable Killer”). 911 See id.; Sezmi Broadband. 912 See Sezmi Cable Killer; Mark Hachman, New Sezmi Set-top Blows Away the TV, PC MAGAZINE, May 1, 2008, http://www.pcmag.com/article2/0,2817,2289653,00.asp (visited Mar. 5, 2012) (“Sezmi Blows Away”). 913 See Sezmi Broadband. 914 See Sezmi Blows Away. 915 See Sezmi Broadband. 916 See Richard Lawler, Sezmi’s Cable/Satellite Alternative TV Service to Shut Down Monday, Won’t Be Missed, Engadget, Sept. 24, 2011, http://www.engadget.com/2011/09/24/sezmis-cable-satellite-alternative-tv-service-to- shut-down-mo/ (visited Mar. 5, 2012) (“Sezmi to Shut Down”); Ryan Lawler, Sezmi Says Goodbye. Here’s Why., Gigaom, Sept. 26, 2011, http://gigaom.com/video/sezmi-says-goodbye-heres-why/ (visited Mar. 5, 2012) (“Sezmi Says Goodbye”). Federal Communications Commission FCC 12-81 129 and regional sports networks were unavailable),917 and did not provide access to OVD content from Hulu or Netflix.918 Ultimately, Sezmi abandoned its consumer OVD service in September 2011.919 3. OVD Conduct 285. In addition to industry structure, a second key element of our analysis of OVD competition is an examination of the conduct of industry participants – in particular, the business models and competitive strategies of these entities. In this section of the Report, we discuss OVD competition in terms of both price and non-price rivalry. 286. As the delivery of online video is in its infancy, no single business strategy has emerged as the industry standard. As several commenters recognize, technology, delivery mechanisms, content acquisition, licensing strategies, and consumer demand patterns all remain in flux.920 287. An OVD’s business model must account for the existence of broadcasters and MVPDs. MVPDs in particular have taken steps in recent years to expand the libraries of on-demand content they can provide to their customers.921 This strategy puts pressure on OVDs to continue to expand their content libraries and/or to offer unique content. Moreover, so-called TV Everywhere services allow MVPDs to compete with unaffiliated OVDs by providing free on-demand Internet video to authenticated MVPD customers.922 288. An OVD also must contend with competition from DVDs, such as the DVD rental side of Netflix’s business,923 Redbox, which allows customers to rent DVDs and Blu-ray discs from more than 28,000 kiosks nationwide,924 and Blockbuster, which provides DVD rentals by mail.925 In addition, while 917 See Sezmi to Shut Down; Sezmi Cable Killer; How Sezmi Stacks Up. 918 See id. 919 See Sezmi Says Goodbye; Sezmi to Shut Down. 920 See, e.g., Google 6/8/11 Comments at 4; NAB 6/8/11 Comments at 31 (noting variety of programming, revenue models, and distribution options in the OVD marketplace). 921 See, e.g., Heather Wilner, The Best Gets Better, and a Whole Lot Bigger: FiOS TV VOD Library Reaches 24,000, Verizon at Home, Apr. 25, 2011, http://forums.verizon.com/t5/Verizon-at-Home/The-Best-Gets-Better-and-a- Whole-Lot-Bigger-FiOS-TV-VOD-Library/ba-p/305255 (visited Feb. 16, 2012) (noting that Verizon FiOS offers more than 24,000 monthly VOD titles (movies and television shows), including 3,800 HD VOD titles per month); Todd Spangler, Comcast: VOD Movie Views In Our Markets Well Ahead Of Netflix’s, MULTICHANNEL NEWS, Apr. 14, 2011, http://www.multichannel.com/article/466818- Comcast_VOD_Movie_Views_In_Our_Markets_Well_Ahead_Of_Netflix_s.php (visited Feb. 16, 2012) (noting Comcast’s statements that the company offers more than 11,000 VOD movies in many markets and an average of more than 350 million VOD views per month overall, of which tens of millions are movies). 922 See supra, ¶¶ 21, 96; Netflix 6/8/11 Comments at 6 (“By bundling traditional MVPD services with Internet delivery of content, vertically integrated MVPDs leverage their dominant market position at the expense of competitive online offerings.”). 923 Netflix, Netflix Plans, http://www.netflix-dvd.com/netflix-plans.html (visited Feb. 16, 2012). 924 Redbox, Redbox Info, http://www.redbox.com/facts (visited Feb. 16, 2012). 925 Blockbuster, Blockbuster Total Access, https://www.blockbuster.com/signup/m/plan (visited Mar. 5, 2012). In addition to DVD rentals, the company’s “Blockbuster Total Access” service includes video games by mail, the ability to exchange discs in Blockbuster stores, and streaming of video content to the TV and PC. See id.; Wade Holden, DISH’s Timing Perfect for Blockbuster Streaming Reveal, SNL Kagan, Sept. 29, 2011. Federal Communications Commission FCC 12-81 130 DVD sales have been declining in recent years, in part due to competition from OVDs,926 DVDs still constitute a competitor to the online delivery of video content. DVDs often offer extras that appeal to consumers, such a director’s cuts, deleted scenes, commentary, and additional content,927 which often are not available via OVDs.928 289. In addition, an OVD’s business model needs to account for competition from other OVDs, bearing in mind that, while most consumers subscribe to only one MVPD, it is easy for consumers to access video content via multiple OVDs. a. Price Rivalry 290. Unlike the broadcasting or MVPD industries, the OVD industry does not have a single revenue model. Depending on the OVD, consumers can gain access to programming in several ways, including: (1) for free, usually with advertising; (2) through a subscription service, with or without advertising; (3) on a per program basis for a fee; or (4) via “electronic sell-through” (“EST”), where a consumer pays a one-time fee to download a television show, movie, or other media to be stored locally on a hard drive.929 Any OVD may implement any one or a combination of these business models. 291. Some OVDs provide video content for free. As a general rule, free OVD content is usually supported by advertisements delivered to viewers. Network portals, for example, generally provide their streams to users free of charge.930 Yahoo Screen and Sony’s Crackle service provide free content, and most of the content available on YouTube is free as well.931 292. Other OVDs use subscription-based models. For example, while Hulu’s basic service is free, Hulu Plus charges subscribers $7.99 a month for access to premium content, HD video (when available), and the ability to watch video on non-PC devices such as smartphones, tablets, gaming consoles, smart televisions, or Blu-ray players, or through set-top boxes.932 Content delivered to Hulu Plus subscribers also contains advertisements.933 For a flat monthly fee (as of February 2012, $7.99), 926 See, e.g., David Lieberman, DVD Disaster? Study Says Sales Plummeted In 2010, Contrary To Industry Report, Deadline, May 12, 2011, http://www.deadline.com/2011/05/dvd-disaster-study-says-sales-plummeted-in-2010- contrary-to-industry-report/ (visited Feb. 16, 2012); Shane Smith, Dreamworks Exec on DVD Sales Decline: “Greed Killed the Goose,” Inside Redbox, May 12, 2010, http://www.insideredbox.com/dreamworks-exec-on-dvd-sales- decline-greed-killed-the-goose/ (visited Feb. 16, 2012). 927 See, e.g., DVD Special Features & Extras, http://dvdspecialfeatures.net/ (Internet website providing “An Online Database of DVD Extras and Bonus Features” including director’s cuts, behind the scenes footage, deleted scenes, bloopers, and other content). 928 See, e.g., Liz Gannes, DVD Extras Are the Future of the Internet, Gigaom, Aug. 5, 2008, http://gigaom.com/video/dvd-extras-are-the-future-of-the-internet/ (visited Mar. 6, 2012). 929 Home Media Magazine, Digital Glossary, http://www.homemediamagazine.com/electronic-delivery/digital- glossary (visited Feb. 27, 2012) (“Digital Glossary”). When discussing EST, this particular report focuses on situations where video content “is made available to consumers on a download-to-own basis, as opposed to . . . where content is rented for a specific period of time.” Anytime On Demand, Media Centre: Glossary of Terms, http://www.anytimeondemand.com/glossary_of_terms.html#electronic (visited Feb. 27, 2012). 930 See, e.g., ABC Network Portal, NBC Network Portal, CBS Network Portal, and FOX Network Portal. 931 See, e.g., Yahoo, Yahoo Screen, http://screen.yahoo.com (visited Mar. 22, 2012); YouTube, http://www.youtube.com. See also supra, ¶ 248. 932 See Introducing Hulu Plus; Hulu, Hulu Plus > Devices, http://www.hulu.com/plus/devices (visited Feb. 29, 2012) (“Hulu Plus Devices”); Hulu, Hulu Plus, http://www.hulu.com/plus- (visited Feb. 29, 2012). 933 Hulu, Help: Why Are There Ads In Hulu Plus?, http://www.hulu.com/support/article/20356372 (visited Feb. 24, 2012) (“Ads In Hulu Plus”). Federal Communications Commission FCC 12-81 131 Netflix’s subscription streaming video service allows a subscriber to access an unlimited amount of online content, commercial free.934 Sometimes OVD subscriptions are part of a larger subscription product. One example is, Amazon Prime, a service from Amazon.com that, for payment of an annual fee, gives subscribers free two-day shipping on many items sold on its website, free book borrowing for Amazon Kindle, and unlimited, commercial-free, instant streaming of thousands of movies and television shows.935 293. As noted above, the four major U.S. professional sports leagues offer subscription-based online video services as well. These services provide live games online, each with its own variations or tiers depending on factors such as in-market availability; home equipment; and/or MVPD subscription.936 294. Some OVDs offer “rental” content on a pay-per-program basis. For example, under YouTube’s movie rental service, a user that purchases a “24 hour pass” for a movie may begin streaming that movie any time within the next 30 days, with all viewing completed within 24 hours of initiating playback.937 Other OVDs, such as Facebook, Vudu, and Amazon have similar services, allowing users to view a movie or program during a fixed period of time for a one-time fee.938 295. The EST model is also prevalent. A consumer who purchases video content via EST can watch that content as many times as he or she desires (although certain files might become unusable over time or may not be viewable using competing platforms).939 One well-known EST OVD is Apple, which provides downloadable media files, including movies and television shows, via iTunes.940 Once a file is 934 See Netflix Signup; Don Reisinger, Netflix Not Into Ads, CNET, Feb. 11, 2011, http://news.cnet.com/8301- 13506_3-20031514-17.html (visited Feb. 24, 2012). 935 See Amazon Prime. 936 See, e.g., Mark Newman, Must-have MLB.TV Features New Lower Prices, mlb.com, May 2, 2011, http://mlb.mlb.com/news/article.jsp?ymd=20110430&content_id=18432398&vkey=news_mlb&c_id=mlb (visited Feb. 24, 2012); DIRECTV, NFL Sunday Ticket, http://www.directv.com/DTVAPP/content/sports/nfl_online_mobile (visited Feb. 24, 2012) (“NFL Mobile”); Phillip Rosenberg, Kickoff the NFL Season on PS3 With the NFL SUNDAY TICKET App, Available Today on Playstation Network, PlayStation.Blog, Sept. 6, 2011, http://blog.us.playstation.com/2011/09/06/kickoff-the-nfl-season-on-ps3-with-the-nfl-sunday-ticket-app-available- today-on-playstation-network/ (visited Feb. 24, 2012); NBA.com, NBA League Pass, http://www.nba.com/leaguepass/index.html (visited Feb. 24, 2012); NBA.com, NBA League Pass Broadband, https://account.nba.com/leaguepass/broadband/ (visited Feb. 24, 2012); NBA.com, NBA League Pass Mobile, http://www.nba.com/leaguepass/mobile/ (visited Feb. 24, 2012); NHL.com, NHL GameCenter Live, https://gamecenter.nhl.com/nhlgc/secure/gclsignup (visited Feb. 24, 2012). 937 YouTube World, YouTube Movie Rental Service Streams 3000 More Movies, http://youtubeking10.blogspot.com/2011/05/youtube-movie-rental-service-streams.html (visited Feb. 24, 2012); Barb Gonzalez, YouTube Movie Rental Service – Review, About.com, http://hometheater.about.com/od/Network- Media-Player-Reviews/fr/Youtube-Movie-Rental-Service-Review.htm (visited Feb. 24, 2012). 938 See, e.g., Ben Fritz and Jessica Guynn, Facebook to Offer Movie Rentals, L.A. TIMES, Mar. 9, 2011, http://articles.latimes.com/2011/mar/09/business/la-fi-facebook-movies-20110309 (Facebook movie rental allows a user to watch a movie within a 48 hour period for $3.00) (visited Feb. 24, 2012); Vudu, Terms of Service, http://www.vudu.com/termsofservice.html (when content is rented from Vudu, a user “will typically have 30 days to initiate viewing. Once initiated, viewing must typically be completed within 24 hours or before the end of the 30th day from date of initiation, whichever occurs sooner.”) (visited Feb. 24, 2012); Amazon.com, Amazon Instant Video, http://www.amazon.com/gp/video/ontv/start/ref=sv_mov_aiv_1 (“Rentals start at $2.99. If you rent, you’ll have 30 days from when you rent to start watching, and once you’ve downloaded or start watching, most movies have a 24- hour window to finish watching.”) (visited Feb. 24, 2012). 939 Digital Glossary. 940 What’s On iTunes. Federal Communications Commission FCC 12-81 132 downloaded, users can watch it as many times as they want on their computers, televisions, iPods, iPhones, and/or iPads.941 Sales, as opposed to rentals, of movies by Vudu and Amazon follow an EST model as well.942 b. Non-Price Rivalry 296. OVDs compete with, and differentiate themselves from, one another based on several non-price factors. Key points of non-price rivalry include the content of an entity’s program library; advertising; and multi-device accessibility. 297. Content Library. The breadth and timeliness of an OVD’s video content library helps establish its identity and business strategy. Increasingly, OVD consumers expect access to a wide variety of content, including newly released movies and recently aired television shows. As discussed below, many of the major players in the OVD marketplace have worked to expand and improve their content libraries, but face challenges in doing so. 298. The degree to which broadcast and cable networks make their programming available online via their portals varies tremendously. Some networks have been aggressive in making their content libraries fully available, particularly through their applications. For example, through HBO Go, HBO subscribers can obtain unlimited access to every episode of every season of HBO original programming without additional cost.943 299. The bigger OVD players tend to provide large libraries of content to users. For example, NBC, ABC, and FOX all provide content to Hulu, including current and past episodes of television programs.944 Hulu Plus subscribers have access to all current-season episodes of many hit shows, plus classic shows, including many full-series runs.945 This content is provided in HD, where available.946 In late 2011, Hulu acquired licensing rights to make 11 sitcoms from Carsey Werner TV Distribution available to Hulu Plus subscribers, and entered into a five-year licensing agreement to stream in-season episodes of The CW network television shows to it subscribers.947 The parent companies that have invested in Hulu have made full-length movies – often library content several years or decades old – 941 Id. 942 Vudu.com, Knowledgebase Home > Billing, http://supports.vudu.com/questions/93/How+much+does+VUDU+cost%3F+ (visited Feb. 27, 2012); Amazon.com, Instant Video Terms of Use, http://www.amazon.com/gp/help/customer/display.html?nodeId=200026970 (visited Feb. 27, 2012). 943 HBO Go, What is HBO Go?, http://www.hbogo.com/#whatis/ (visited Mar. 12, 2012). 944 Hulu, Frequently Asked Questions, http://www.hulu.com/about/media_faq (visited Feb. 27, 2012). CBS still has not provided any content for Hulu in the U.S. market. Id.; Nikki Finke, SURPRISE! Holdout CBS To Deliver Content To Hulu – But Only For Japan Market, Deadline, Sept. 1, 2011, http://www.deadline.com/2011/09/surprise- cbs-to-deliver-content-to-hulu-for-japanese-subscribers/ (visited Feb. 27, 2012). 945 Introducing Hulu Plus. 946 Id. 947 Haseeb Ali, Report: Hulu Secures Licensing Rights to 11 Sitcoms, SNL Kagan, Nov. 23, 2011; Tim Kenneally, CW Strikes 5-Year Deal With Hulu for New Shows, Reuters, Oct. 28, 2011, http://www.reuters.com/article/2011/10/28/idUS190340544120111028 (visited Feb. 28, 2012). Federal Communications Commission FCC 12-81 133 available on Hulu as well.948 As of December 2011, Hulu’s website lists more than 300 content partners.949 300. In addition, Hulu has announced plans to raise capital to expand into original programs that it would make available both to free users and paid subscribers.950 Hulu may spend as much as $500 million on new television shows and films.951 Andy Forssell, chief content officer at Hulu, states that, “[w]e considered giving earlier access to [Hulu] Plus users and other benefits, but right now the aim is to get . . . [shows and films] out to as many folks as possible.”952 301. Netflix has expanded its library of streaming content in recent years as well. Netflix first began to allow viewers to watch movies and television shows on their computers in 2007 on a “metered” basis of hours. In January 2008, Netflix offered unlimited PC streaming to consumers with unlimited subscriptions.953 When Netflix first introduced its Watch Instantly streaming video service, its catalog was comprised mostly of older movies.954 On October 1, 2008, Netflix announced a partnership deal with Starz to bring 2,500 new movies and television shows to Watch Instantly.955 Netflix made a more aggressive move to distribute newer movies when it agreed in August 2010 to pay an estimated $900 million to cable channel Epix for the five-year streaming rights to films from Paramount Pictures, Lionsgate, and Metro-Goldwyn-Mayer.956 Now, Netflix has streaming deals with almost every major television content creator, including, but not limited to, NBC, ABC, CBS, FOX, The CW, and Time Warner.957 On the other hand, Starz recently ended its streaming relationship with Netflix, causing the 948 Hulu, Movies, All Universal Pictures Titles, http://www.hulu.com/studio/universal-pictures?sort=name (listing of Universal Pictures movie titles) (visited Feb. 27, 2012); Hulu, Movies, All Twentieth Century Fox Titles, http://www.hulu.com/studio/twentieth-century-fox?sort=name (listing of Twentieth Century Fox movie titles) (visited Feb. 27, 2012); Hulu, Movies, All Miramax Titles, http://www.hulu.com/studio/miramax?sort=name (listing of Miramax movie titles) (visited Feb. 27, 2012). 949 Hulu, Content, http://www.hulu.com/partners (visited Feb. 27, 2012). 950 Andy Fixmer, Hulu Plans to Raise Money to Fund Expansion into Original Shows, BLOOMBERG BUSINESSWEEK, Jan. 18, 2012, http://www.businessweek.com/news/2012-01-18/hulu-plans-to-raise-money-to-fund-expansion-into- original-shows.html (visited Feb. 28, 2012). 951 Id. 952 Id. 953 See Netflix, Press, https://signup.netflix.com/Press (visited Feb. 28, 2012); supra, ¶ 252. 954 See Saul Hansell, iTunes Movie Rentals and Netflix Online: Different Markets, N.Y. TIMES, Jan. 16, 2008, http://bits.blogs.nytimes.com/2008/01/16/itunes-movie-rentals-and-netflix-online-different-markets (visited Feb. 29, 2012). At the beginning of 2008, Watch Instantly had only 6,000 titles. Id. 955 Dawn Chmielewski, More Mainstream Movies for Netflix Online, L.A. TIMES, Oct. 1, 2008, http://latimesblogs.latimes.com/entertainmentnewsbuzz/2008/10/more-mainstream.html (visited Feb. 29, 2012). 956 Brian Stelter, Netflix to Stream Films from Paramount, Lions Gate, MGM, N.Y. TIMES, Aug. 10, 2010, http://mediadecoder.blogs.nytimes.com/2010/08/10/netflix-to-stream-films-from-paramount-lionsgate-mgm (visited Feb. 29, 2012). 957 See Paul Bond, What Hollywood Execs Privately Say About Netflix, THE HOLLYWOOD REPORTER, Jan. 14, 2011, http://www.hollywoodreporter.com/news/hollywood-execs-privately-netflix-71957 (visited Feb. 29, 2012); Paul Bond, Netflix Renews Deal With NBCUniversal for Streaming TV Shows, Movies, THE HOLLYWOOD REPORTER, July 21, 2011, http://www.hollywoodreporter.com/news/netflix-renews-deal-nbcuniversal-streaming-210792 (visited Feb. 29, 2012) (“Netflix NBC Deal”); Todd Spangler, Disney/ABC Extends Netflix Deal, Cuts One With Amazon, MULTICHANNEL NEWS, Oct. 31, 2011, http://www.multichannel.com/article/475953- Disney_ABC_Extends_Netflix_Deal_Cuts_One_With_Amazon.php (visited Feb. 29, 2012); Netflix CW Deal. Federal Communications Commission FCC 12-81 134 OVD to lose access to a major source of new movie streaming content.958 Many other studios reportedly are reluctant to allow Netflix to stream new titles for fear that doing so would harm DVD sales and video- on-demand rental revenues.959 302. In some cases, Netflix is able to stream content to users soon after it initially airs. For example, Netflix’s deal with NBC allows it to stream episodes of many shows one day after they are initially broadcast.960 In other cases, users must wait before certain content is available for streaming via Netflix. Under Netflix’s agreement with Disney/ABC, for example, episodes from the current season’s series will not be made available to the OVD until 30 days after the last episode of each season airs.961 303. Netflix provides an illustrative example of how OVDs acquire and distribute studios’ content. Netflix has provided an outlet for studios to recoup their costs for network programming.962 For example, in 2011 Netflix purchased streaming rights from Warner Brothers for FX’s Nip/Tuck (after Warner Brothers failed to sell off-network syndication rights) and from Lionsgate for AMC’s Mad Men.963 The latter was unusual because Mad Men has not aired in syndication, as have most other programs included in subscription video-on-demand (“SVOD”).964 As of 2011, 60 percent of Netflix streams were television episodes.965 Netflix has been increasing the number of television series it offers (from 477 to 1,080 between January 2011 and September 2011) faster than the number of movies it offers (from 8,950 to 9,342 during the same period).966 Moreover, as discussed above, Netflix has also commissioned several original television series.967 Netflix develops programming based on analysis of its database of its customers’ viewing patterns and quality ratings. Its intent is to attract a smaller but more dedicated cadre of viewers than network programming. Netflix offers television consumers the ability to view sequentially episodes of television series that they may have missed. Thus, Netflix may create demand for in-season viewing of network series. Netflix’s impact on movie audiences may be different, leading studios to limit delivery of streaming content.968 958 Ben Fritz, Joe Flint & Dawn C. Chmielewski, Starz to End Streaming Deal with Netflix, L.A. TIMES, Sept. 2, 2011, http://articles.latimes.com/2011/sep/02/business/la-fi-ct-netflix-starz-20110902 (visited Feb. 29, 2012). 959 Netflix CW Deal. 960 Netflix NBC Deal. 961 Netflix Inc., Netflix and Disney-ABC Television Group Announce Extension of Existing Licensing Agreement to Stream TV Shows (press release), Oct. 31, 2011. 962 Andrew Wallenstein, Digital Dollars Amp Syndie Biz, VARIETY, July 21, 2011, http://www.variety.com/article/VR1118040194 (visited Feb. 29, 2012). 963 Deana Myers, Digital Rights in Off-Network Syndication Deals, SNL Kagan, Apr. 20, 2011. 964 Andrew Wallenstein, ABC-WBTV Deal Rewrites Syndie, Digital Rights, VARIETY, Nov. 14, 2011, http://www.variety.com/article/VR1118046062Cached (visited Feb. 29, 2012). Subscription OVDs, such as Netflix and Amazon Prime, are considered subscription video-on-demand services. 965 Ben Fritz & Joe Flint, Netflix Less About Flicks, More About TV, L.A.TIMES, Feb. 4, 2012, http://articles.latimes.com/2012/feb/04/business/la-fi-ct-netflix-20120205 (visited Feb. 29, 2012); Perkin di Grazia, Netflix’s Future is In TV, SNL Kagan, Oct. 24, 2011. 966 Id. 967 See supra, ¶ 262. 968 Netflix 2010 Form 10-K at 6-7. Federal Communications Commission FCC 12-81 135 304. YouTube provides a significant amount of streaming television content. Each of the four major broadcast networks has a YouTube channel,969 as do a host of basic970 and premium971 cable networks. These channels focus on short clips, however, rather than full episodes. YouTube’s ability to acquire distribution rights to long-form broadcast television content is limited by the relationships News Corp., NBC Universal, and Disney have with Hulu.972 YouTube also partners with a wide variety of third-party content creators to provide numerous free channels to users.973 In October 2011, YouTube announced plans to launch more than 100 new video channels featuring ad-supported free original content provided by third-party partners such as The Wall Street Journal, Jay-Z, Madonna, Ashton Kutcher, and Shaquille O’Neal.974 The YouTube channels will feature videos in 20 different categories like sports, comedy, and news.975 305. In addition, YouTube allows users to rent (i.e., stream on a pay-per-movie basis) films from the Sundance Film Festival and thousands of full-length feature films from major Hollywood studios.976 In November 2011, it announced that hundreds of Walt Disney movies would be coming to 969 YouTube, NBC Network, http://www.youtube.com/user/NBC (visited Feb. 29, 2012); YouTube, ABC Television, http://www.youtube.com/user/abcnetwork?blend=2&ob=4 (visited Feb. 29, 2012); YouTube, CBS, http://www.youtube.com/user/cbs?blend=1&ob=4 (visited Feb. 29, 2012); YouTube, FOX, http://www.youtube.com/user/FoxBroadcasting (visited Feb. 29, 2012). 970 See, e.g., YouTube, TruTV, http://www.youtube.com/user/truTVnetwork (visited Feb. 29, 2012); YouTube, ESPN, http://www.youtube.com/user/espn?blend=1&ob=4 (visited Feb. 29, 2012); YouTube, Discovery Channel, http://www.youtube.com/user/discoverynetworks?blend=1&ob=4 (visited Feb. 29, 2012); YouTube, Liefetime Television, http://www.youtube.com/user/lifetime?blend=1&ob=4 (visited Feb. 29, 2012); YouTube, History, http://www.youtube.com/user/historychannel?blend=1&ob=4 (visited Feb. 29, 2012); YouTube, TLC, http://www.youtube.com/user/tlc?blend=1&ob=4 (visited Feb. 29, 2012). 971 See, e.g., YouTube, HBO’s Channel, http://www.youtube.com/user/HBO?feature=watch (visited Feb. 29, 2012); YouTube, Showtime, http://www.youtube.com/user/showtime?blend=1&ob=4 (visited Feb. 29, 2012); YouTube, Cinemax’s Channel, http://www.youtube.com/user/cinemax?blend=1&ob=4 (visited Feb. 29, 2012). 972 See, e.g., Peter Kafka, Hulu Buyers Would Get Exclusive Content, With Strings Attached, All Things D, June 27, 2011, http://allthingsd.com/20110627/hulu-buyers-would-get-exclusive-content-with-strings-attached/ (discussing Hulu’s content relationships with Disney and News Corp) (visited Feb. 29, 2012). 973 See YouTube, Add Channels, http://www.youtube.com/members?t=a&p=1&s=ms&g=0 (browsable menu of YouTube channels) (visited Feb. 29, 2012). 974 See Erik Gruenwedel, YouTube Bows Original Content Channels; Google TV Gets Reboot, HOME MEDIA MAGAZINE, Oct. 29, 2011, http://www.homemediamagazine.com/streaming/youtube-bows-original-content- channels-google-tv-gets-reboot-25503 (visited Feb. 24, 2012); Michael Grotticelli, YouTube to Launch 100 Online Channels, BROADCAST ENGINEERING, Nov, 3, 2011, http://broadcastengineering.com/news/youtube_launch_100_channels_110311/ (visited Feb. 28, 2012); YouTube to Launch 100 Channels; Madonna, Ashton Kutcher, Jay-Z to Produce Shows, INTERNATIONAL BUSINESS TIMES, Oct. 29, 2011, http://www.ibtimes.co.uk/articles/239892/20111029/youtube-launch-100-channels-madonna-ashton- kutcher.htm (visited Feb. 28, 2012). 975 See id. 976 Athima Chansanchai, Now at YouTube: 3,000 More Movie Rentals, msnbc.com, May 11, 2011, http://technolog.msnbc.msn.com/_news/2011/05/10/6617922-now-at-youtube-3000-more-movie-rentals (visited Feb. 29, 2012) (“Now at YouTube”); YouTube, Broadcasting Ourselves, the Official YouTube Blog, Get More Into Movies on YouTube, May 9, 2011, http://youtube-global.blogspot.com/2011/05/get-more-into-movies-on- youtube.html (visited Feb. 29, 2012). Federal Communications Commission FCC 12-81 136 YouTube.977 In many cases, YouTube’s movies are available for streaming simultaneously with DVD release.978 306. Amazon has 13,000 titles available on Amazon Prime,979 and over 100,000 movies and television shows available overall.980 The company has been entering into deals recently to grow its television catalog in particular. In July 2011, Amazon acquired the rights to stream thousands of CBS shows online, in a deal estimated to be worth more than $100 million.981 Amazon also obtained a license from Disney in October 2011 that will make more than 800 episodes of ABC television shows available to Amazon Prime subscribers.982 307. Vudu’s library has more than 30,000 movies and television episodes, and the company claims it has the largest catalog of HD movies available on demand.983 Almost all of its movies are available the same day that they are released on DVD.984 308. Advertisements. OVDs also compete based on the amount and type of advertising contained in the programming they provide to consumers. Often, OVD content that is provided to users free of charge will contain advertisements, and users expect this to be the case. Subscription or pay-per- program OVD content, however, generally contains fewer or no advertisements. 309. Crackle and Yahoo Screen provide free content that contains advertisements.985 Similarly, full television episodes viewed via the network portals for the four major broadcast networks contain advertisements,986 as does content provided via Hulu’s non-subscription service.987 Hulu Plus content contains advertisements as well, purportedly to keep the subscription price low and because of the 977 YouTube, Broadcasting Ourselves, the Official YouTube Blog, Welcoming Your Favorite Disney Movies to Rent on YouTube, Nov. 23, 2011, http://youtube-global.blogspot.com/2011/11/welcoming-your-favorite-disney- movies.html (visited Feb. 29, 2012). 978 Now at YouTube. 979 See Amazon.com, What is Prime Instant Video, http://www.amazon.com/gp/feature.html?ie=UTF8&docId=1000739191 (visited Feb. 29, 2012). 980 Matt Burns, Watch Out Netflix, Amazon Instant Video Reaches 100,000 On-Demand Titles, Tech Crunch, Aug. 18, 2011, http://techcrunch.com/2011/08/18/watch-out-netflix-amazon-instant-video-reaches-100000-on-demand- titles/ (visited Feb. 29, 2012). 981 CBS Licenses Shows to Amazon in Challenge to Netflix and Hulu, ADVERTISING AGE , July 20, 2011, http://adage.com/article/mediaworks/cbs-licenses-shows-amazon-challenge-netflix-hulu/228815/ (visited Feb. 29, 2012). 982 The Streaming Video Wars: Amazon Prime Adds ABC and Disney TV Shows, ADVERTISING AGE, Oct. 31, 2011, http://adage.com/article/mediaworks/streaming-war-amazon-prime-adds-abc-disney-tv-shows/230732/ (visited Feb. 29, 2012). 983 Jillian, Taking a Swing at Netflix, VUDU Expands TV Content Library, PadGadget, Sept. 22, 2011, http://www.padgadget.com/2011/09/22/taking-a-swing-at-netflix-vudu-expands-tv-content-library/ (visited Feb. 15, 2012); Vudu, The Vudu Difference, http://www.vudu.com/difference.html (visited Feb. 15, 2012). 984 See id. 985 David Jackson, Sony’s Crackle Expands Ad-Supported Video Streaming, The Stream Report, Mar. 29, 2011, http://thestreamreport.com/?p=262 (visited Feb, 29, 2012); E.B. Boyd, Yahoo Launches Video Destination Site, FAST COMPANY, Oct. 4, 2011, http://www.fastcompany.com/1784990/yahoo-launches-video-destination-site (visited Feb. 29, 2012). 986 See ABC Network Portal; NBC Network Portal; CBS Network Portal; FOX Network Portal. 987 About Hulu. Federal Communications Commission FCC 12-81 137 licensing costs associated with premium content.988 Hulu has distinguished itself from its broadcasting counterparts by showing fewer advertisements. For example, it has just two minutes of promotions in an episode of a situation comedy compared to eight minutes of advertising on broadcast television.989 Hulu also gives users some control over the advertising experience, sometimes allowing viewers to choose between one long commercial at the beginning of a show or several short ones spread throughout a program,990 and to swap out less relevant advertisements for more relevant ones.991 310. Content provided via Netflix’s subscription service is ad free,992 as is content provided to Amazon Prime customers.993 Movie rentals via Facebook, Amazon, and YouTube contain no advertisements.994 EST OVD programming provided by Vudu, Amazon, and iTunes is free of advertisements as well.995 311. Multi-Device Accessibility. Consumers increasingly wish to view content whenever they want and wherever they are. As a result, the trend in the OVD marketplace is toward making content available to users via a wide variety of devices. Many of the leading OVDs make their service available via a wide variety of consumer electronics products, including computers, Internet-connected televisions, Blu-ray disc players, home theater systems, DVRs, set-top boxes, Internet video players/boxes, and mobile devices. 988 Ads In Hulu Plus. 989 Chuck Salter, Can Hulu Save Traditional TV?, FAST COMPANY, Nov. 1, 2009, at 4, http://www.fastcompany.com/magazine/140/the-unlikely-mogul.html (visited Feb. 29, 2012). 990 Kevin Purdy, Watch Hulu Shows With Only One Commercial, Lifehacker, Feb. 23, 2009, http://lifehacker.com/5158623/watch-hulu-shows-with-only-one-commercial (visited Feb. 29, 2012). 991 Tom Cheredar, Hulu’s “Ad Swap” Puts Users in Control of What Commercials to Watch, Venturebeat, Oct. 3, 2011, http://venturebeat.com/2011/10/03/hulu-commercials/ (visited Feb. 29, 2012). 992 Sony, Crackle Is First to Offer Ad-Supported Full-Length Hollywood Movies and Television Series on Sony’s PlayStation 3, BRAVIA, Streaming Player, Blu-Ray Players and on Roku Devices (press release), Mar. 29, 2011 (“Crackle Full-Length Movies”); Kristie Bertucci , Netflix vs. Hulu Plus (Comparison), Gadget Review, Jan. 8, 2012, http://www.gadgetreview.com/2012/01/netflix-vs-hulu-plus.html (visited Feb. 29, 2012); Jeff Bertolucci, Hulu Plus vs. Netflix: Which Is Better?, PC WORLD, June 30, 2010, http://www.pcworld.com/article/200246/hulu_plus_vs_netflix_which_is_better.html (visited Feb. 29, 2012). 993 Amazon.com, Inc., Amazon Prime Members Now Get Unlimited, Commercial-free, Instant Streaming of More Than 5,000 Movies and TV Shows at No Additional Cost (press release). 994 See Facebook, Movie Rentals, http://www.facebook.com/movie.rentals (visited Mar. 21, 2012); Amazon.com, Movies & TV > Amazon Instant Video > Rental, http://www.amazon.com/s/ref=amb_link_357789482_3?ie=UTF8&bbn=2858778011&rh=n%3A2625373011%2Cn %3A%212644981011%2Cn%3A%212644982011%2Cn%3A2858778011%2Cp_drm_rights%3ARental&page=1& pf_rd_m=ATVPDKIKX0DER&pf_rd_s=center- 1&pf_rd_r=06WBFJC2JBXXCJ7F8C1E&pf_rd_t=101&pf_rd_p=1324306922&pf_rd_i=2858778011 (visited Mar. 21, 2012); YouTube Movies. 995 Simply Sight & Sound, Inc., Vudu’s PC Streaming Now Available, http://simplysightandsound.com/audio-video- installation-services/vudus-pc-streaming-now-available/ (visited Feb. 29, 2012); What’s On iTunes; Amazon.com, Movies & TV > Amazon Instant Video > Purchase, http://www.amazon.com/s/ref=amb_link_357789482_4?ie=UTF8&bbn=2858778011&rh=n%3A2625373011%2Cn %3A%212644981011%2Cn%3A%212644982011%2Cn%3A2858778011%2Cp_drm_rights%3APurchase&page=1 &pf_rd_m=ATVPDKIKX0DER&pf_rd_s=center- 1&pf_rd_r=06WEAX8VA0ZNK20GZWN9&pf_rd_t=101&pf_rd_p=1324306922&pf_rd_i=2858778011 (visited Mar. 21, 2012). Federal Communications Commission FCC 12-81 138 312. For example, more than 700 devices can stream Netflix, including video game consoles, Video Players, HDTVs, home theater systems, set-top boxes, and smartphones.996 Vudu states that its service is available on “virtually every internet-connected Blu-ray player and HDTV on the market,” as well as Xbox 360, Sony PS3, the Apple iPad, and other devices.997 While users of Hulu’s free service can view content only on their computers, Hulu Plus subscribers can access Hulu programming on a wide variety of smartphones, tablets, gaming consoles, smart TVs, Blu-ray players, and set-top boxes.998 Sony’s Crackle users can access content with their computers (via www.crackle.com, other OVD websites such as YouTube, Hulu, and TV.com, and an app for Google Chrome), Internet-connected televisions, Xbox 360, Sony PlayStation 3, various smartphones, set-top boxes and media players, and Sony HDTVs.999 Over 300 devices are compatible with Amazon’s Instant Video service, including computers, various HDTVs, set-top boxes, Blu-ray players, DVRs, and the Kindle Fire.1000 YouTube allows users to view content on computers, Android devices, some Internet-connected televisions, iPhones, and other devices with that have browsers, Adobe Flash Player 11.0+, and a broadband Internet connection of at least 1 Mbps.1001 313. Some sports leagues make content available via multiple devices as well. For example, NBA League Pass is available via computers and mobile devices.1002 NHL GameCenter Live is available via computer, iPad, iPhone, or Android devices.1003 Online NFL games are available via computer, smartphones, tablets, or PlayStation3.1004 The Big Ten makes its online content available via mobile devices,1005 and the ACC Digital Network is viewable on a variety devices, including computers, iPhones, iPads, and Android devices.1006 4. OVD Performance 314. As we have noted, the performance of OVDs is an evolving story. Virtually all OVDs entered the marketplace within the last ten years, and, because of the nature of the product and services provided, do not necessarily report their financial performance by the indicia traditionally used by other media firms. As such, the details surrounding the finances of OVDs are not readily discerned because many OVDs are divisions of larger media firms and the OVD-related activities are not reported 996 Netflix, Company Overview, https://signup.netflix.com/MediaCenter?country=1&rdirfdc=true (visited Feb. 29, 2012). 997 See Vudu Devices; Vudu, Get Vudu On Your iPad, http://www.vudu.com/setup_ipad.html (visited Feb. 29, 2012). 998 See Hulu Plus Devices; Introducing Hulu Plus. 999 Crackle, Platforms, http://www.crackle.com/outreach/platforms (visited Feb. 28, 2012); Crackle Full-Length Movies. 1000 See Amazon Devices. 1001 YouTube, YouTube Help > YouTube on Other Devices, http://support.google.com/youtube/bin/answer.py?hl=en&answer=1231722 (visited Feb. 29, 2012); eHow, How to Use YouTube on an iPhone, http://www.ehow.com/how_5935516_use-youtube-iphone.html (visited Feb. 29, 2012). 1002 NBA, NBA League Pass > Features-At-A-Glance, http://www.nba.com/leaguepass/3pp/ (visited Feb. 29, 2012). 1003 NHL, NHL GameCenter Devices, http://mobile.gamecenter.nhl.com/devices/ (visited Feb. 29, 2012). 1004 NFL Mobile; NFL To PlayStation. 1005 BTN2GO Kicks Off; BTN2Go FAQ. BTN2Go indicates that an Android application for viewing the service’s content is expected to launch in early 2012. Id. 1006 ACC Launches. Federal Communications Commission FCC 12-81 139 separately. Moreover, our analysis of OVD performance is limited to a few of the most widely recognized industry players, and is not intended to be a comprehensive assessment of the entire OVD industry. With these limitations, in this section of the Report we describe OVD viewership, revenue, investment, and profitability.1007 a. OVD Viewership 315. The most relevant indicators of the viewing of OVD content appear to be the profile of the OVD audience, the overall volume of OVD shows viewed, subscriberships, and consumer purchase transactions. 316. Audience. Available data illustrate a steady increase in the online viewing of video content. A May 2011 Pew survey indicates that 71 percent of online adults use online video sites.1008 The data reveal a considerable increase in comparison to Pew survey results from 2009, when it estimated U.S. online video viewership (e.g., television content, movies) at 32 percent of online users, up from 16 percent of online users in 2007.1009 317. Research firm eMarketer estimates that as of April 2010, 66.7 percent of U.S. Internet users, representing 147.5 million people, watch online video each month. Among adults, 18-34 year olds are most likely to watch video online.1010 In 2010, about 86.0 percent of 18-24 year olds and 84.1 percent of adults 25-34 watched online video at least once a month, compared with 43.5 percent of 55-64 year olds and 25.8 percent of adults aged 65 years or older. Among the 147.5 million people watching video online, 24.0 percent are 18-24 years old, 30.7 percent are 25-34 years old, and 26.6 percent are 35-44 years old. EMarketer notes that the availability of free long-form videos, typically videos lasting longer than 10 minutes in their entirety, on Hulu has been a factor in making viewing online video an attractive option to a wider range of demographic groups.1011 318. Recent data reveal that in 2011 online video viewing has surpassed 50 percent penetration among the total U.S. population.1012 Forty-nine percent of U.S. adult online video viewers 1007 Our overall performance analysis include data regarding OVDs that distribute professionally produced as well as user-generated video content. Research, ratings and marketing firms that conduct analyses of consumers’ use of OVDs do not generally distinguish between these types of video content provided by the OVDs. 1008 Kathleen Moore, 71% of Online Adults Now Use Video Sharing Sites, Pew Internet, July 26, 2011, http://pewinternet.org/Reports/2011/video-sharing-sites.aspx (visited Mar. 9, 2012). Pew reports that among 18-29 year olds, 92 percent have used video sharing sites; and among 30-49 year olds, 80 percent have used video sharing sites. Id. Alternatively, comScore reports that 86 percent of U.S. Internet users view online video. comScore Inc., comScore Releases July 2011 U.S. Online Video Rankings (press release), Aug. 22, 2011. 1009 Kristen Purcell, The State of Online Video, Pew Internet & American Life Project, Pew Internet, June 3, 2010, at 2 & 5, http://pewinternet.org/Reports/2010/State-of-Online-Video.aspx (visited Mar. 9, 2012). 1010 eMarketer, Online Video Goes Mainstream, Apr. 28, 2010, http://www.emarketer.com/Article.aspx?R=1007664 (visited Mar. 9, 2012). 1011 Id. The Interactive Advertising Bureau (IAB) defines long form video as video content that may be professionally produced or user generated which has a content arc with a beginning, middle and end, and which typically lasts longer than 10 minutes in its entirety. Such content may include professionally produced content from television and cinema that has migrated online, as well as personal videos shared online. See Interactive Advertising Bureau, Long Form Video Overview, Sept. 2009, at 4, http://www.iab.net/media/file/long-form-video- final.pdf (visited Mar. 9, 2012). 1012 eMarketer, Online Video Viewing Passes 50% of Total US Population, Dec. 8, 2011, http://www.public.site1.mirror2.phi.emarketer.com/Article.aspx?R=1008724 (visited Mar. 9, 2012). Federal Communications Commission FCC 12-81 140 watched full-length television shows on the Internet at least monthly according to this report. Full-length movies are popular fare for web viewing, with some 37 percent of U.S. adult online viewers streaming or downloading at least one feature film monthly in 2011.1013 319. Hits/Views.1014 ComScore Video Metrix counted 40 billion video views in September 2011,1015 compared to Nielsen VideoCensus, which measured the online video market at just over 18 billion streams based on a combination of panel and direct site measurement.1016 Among other differences, comScore includes advertising and adult content in its sampling and counts each segment of long-form segmented content as a distinct video stream. 320. Over time, the popularity of the most highly viewed online video websites has demonstrated fluctuation. In 2009, according to comScore, in terms of the number of videos viewed, Hulu was the number two site behind YouTube.1017 In 2009, Hulu’s views increased by more than 763 million from January to December, accounting for about four percent of the 18.4 billion increase in total online video views during that period.1018 ComScore estimates that 923.8 million videos were viewed on Hulu during the month of November 2009, compared with more than 12 billion for YouTube.1019 SNL Kagan estimates that in February 2010, Hulu had 39.2 million unique visitors, each watching about an estimated 23.3 videos during that month.1020 Moreover, according to comScore data, Hulu supported 166.5 million viewing sessions by 26.4 million unique viewers in August, 2011.1021 321. According to the Nielsen Video Census, during November 2011, the top five websites (for professionally produced as well as user-generated videos) based on unique U.S. viewers watching 1013 Id. 1014 Generally, a “hit” or a “page hit” is the retrieval of an item such as a web page or a graphic from a web server. Thus, if a given web page includes four pictures, images or graphics, that web page equals five hits – one hit for the page itself and four hits for the graphics. Accordingly, hits may be an imprecise measure of actual web traffic. Unique hits count the number of different individuals who have generated at least one hit. Page views are measurements often used in advertising where advertisers need to determine the number of page views a website receives in order to assess where to place their ad content. Generally, a “page view” is a web page that has been viewed by one visitor. 1015 comScore, Inc., comScore Releases September 2011 U.S. Online Video Rankings (press release), Oct. 21, 2011. 1016 Nielsen, September 2011: Top U.S. Online Destinations for Video, Nov. 3, 2011, http://blog.nielsen.com/nielsenwire/online_mobile/september-2011-top-u-s-online-destinations-for-video/ (visited Mar. 9, 2012); see also The Economics of Online Video, AD AGE White Paper at 6. 1017 Publicly available data on YouTube hits and views do not distinguish between the number of visitors to the site that view the user-generated content as compared to the site’s visitors that view other video content that may be produced professionally. Thus, any data in this Report regarding hits, views or other metrics of consumer engagement with YouTube is assumed to refer to all video content on the website, regardless of whether it is user- generated or professionally produced. 1018 Will Richmond, Why Did Online Video Consumption Spike in 2009, VideoNuze, Feb. 24, 2012, http://videonuze.com/blogs/?2010-02-24/Why-Did-Online-Video-Consumption-Spike-in-2009-/&id=2446 (visited Mar. 9, 2012) (“2009 Online Spike”). 1019 AD AGE White Paper at 1, 16-17. 1020 Liza Castaneda, With a Profitable Hulu, Why a Subscription Model?, SNL Kagan, Apr. 26, 2010, http://www.snl.com/interactivex/article.aspx?id=11082288&KPLT=6. 1021 comScore, Inc., comScore Releases August 2011 U.S. Online Video Rankings (press release), Sept. 22, 2011. Federal Communications Commission FCC 12-81 141 video content were: (1) YouTube (130.8 million unique viewers); (2) Vevo1022 (42.7 million unique viewers); (3) Yahoo! (34.4 million unique viewers); (4) Facebook (30.3 million unique viewers); and (5) MSN/WindowsLive/Bing (24.6 million unique viewers).1023 Viewers spent the most time watching online video content during the month of November 2011 with these five OVDs: (1) Netflix (10 hours, 43 minutes); (2) Hulu (3 hours, 11 minutes); (3) GorillaVid1024 (3 hours, 11 minutes); (4) YouTube (3 hours, 7 minutes); and (5) Justin.tv1025 (3 hours).1026 Data also show that during November 2011, there were 166.9 million unique U.S. video viewers who streamed 21.9 billion videos. During this same one-month period, video viewers spent on average more than five hours watching online video.1027 322. Analysts use a viewing session metric to gauge users’ engagement with the website and/or associated advertisement. A viewing session is defined as a period of time with continuous video viewing followed by a 30-minute period of video inactivity.1028 The comScore chart below illustrates, among other things, that 178 million U.S. Internet users watched online video content for an average of 16.8 hours per viewer (i.e., 1008.3 minutes/60 minutes), averaging 35 viewing sessions each (i.e., 6,255,493/178,447) in June 2011.1029 1022 Vevo is a joint venture between Sony Music Entertainment and Universal Music Group initiated in 2009. Adweek.com indicates that, as of June 2010, Vevo was delivering one billion views globally each month. The site’s growth may be attributed to its U.S. Hispanic audience, which in 2010 was estimated to be 7.4 million Hispanic users. See Mike Shields, Vevo Climbs Web Video Charts, ADWEEK, July 30, 2010, http://www.adweek.com/news/technology/vevo-climbs-web-video-charts-102944. 1023 NielsenWire, November 2011: Top U.S. Online Destinations for Video, Dec. 30, 2011, http://blog.nielsen.com/nielsenwire/online_mobile/november-2011-top-u-s-online-destinations-for-video/ (visited Mar. 9, 2012). 1024 GorillaVid is a file hosting provider that offers online storage, remote backup capacity, uploading and downloading tools. GorillaVid is particularly useful for sending files that may be too large for sending via e-mail. See GorillaVid, FAQ, http://gorillavid.com/faq.html (visited Feb. 28, 2012). 1025 Justin.tv is an online destination for watching videos and chatting with friends. See Justin.tv, Frequently Asked Questions, http://www.justin.tv/p/faq (visited Feb. 28, 2012). 1026 NielsenWire, November 2011: Top U.S. Online Destinations for Video, Dec. 30, 2011, http://blog.nielsen.com/nielsenwire/online_mobile/november-2011-top-u-s-online-destinations-for-video/ (visited Mar. 9, 2012). 1027 Id. 1028 comScore, Inc., comScore Releases June 2011 U.S. Online Video Rankings, July 15, 2011, http://www.comscore.com/Press_Events/Press_Releases/2011/7/comScore_Releases_June_2011_U.S._Online_Vide o_Rankings (visited Mar. 9, 2012). ComScore reports that the duration of the average online content video was 5.4 minutes and the average online video advertisement was 0.4 minutes long. Id. 1029 Id. Federal Communications Commission FCC 12-81 142 Table 23: Top U.S. Online Video Properties Ranked by Unique Views (June 2011)1030 Property Total Unique Viewers (in thousands) Viewing Sessions (in thousands) Minutes per Viewer Google Sites1031 149,281 2,311,116 324.1 VEVO 63,003 399,503 112.0 Yahoo! Sites 52,665 247,834 34.8 Microsoft Sites 50,663 286,892 32.8 Viacom Digital 49,493 274,933 76.8 Facebook.com 47,687 167,137 20.7 AOL, Inc. 43,915 251,987 49.3 Turner Digital 30,063 121,301 46.2 Hulu 26,701 156,939 184.8 Amazon Sites 21,247 43,193 8.3 Total: 178,447 6,255,493 1,008.3 323. Screen Digest estimated that about 11 billion television episodes were viewed via the broadcast networks’ own websites in 2010, in contrast to about 19 billion views of television episodes on AOL, MSN, Yahoo!, YouTube and Hulu.1032 One analyst estimates that YouTube’s partnerships with professional content owners, including Disney/ESPN and Univision, enabled it to more than double the number of video streams viewed on its website from 6.3 billion in January 2009 to 13.2 billion in December 2009.1033 YouTube recently announced that it “logged 1 trillion hits in 2011” and that it expects to exceed that number in 2012 as politicians and other newsmakers turn to the Internet to distribute web advertisements, speeches and videocasts.1034 Indeed, one YouTube executive predicts that soon 90 percent of web traffic will be video.1035 324. From the third quarter of 2008 to the third quarter of 2011, Nielsen reports a gain of 21.7 percent in the number of persons that watch video on the Internet and an increase of 79.5 percent in the amount of time spent watching video online.1036 Consumer behavior is also reported by age, gender, and 1030 comScore Video Metrix. These data reflect total U.S. home/work/university locations. 1031 As reflected in this chart, “Google Sites” includes the website YouTube which hosts professionally produced as well as user-generated video content. 1032 Charlie Jane Anders, How the Nielsen TV Ratings Work – and What Could Replace Them, IO9 Backgrounder, Sept. 17, 2010, http://io9.com/5636210/how-the-nielsen-tv-ratings-work--and-what-could-replace-them (visited Mar. 9, 2012). 1033 2009 Online Spike. 1034 Hayley Tsukayama, YouTube: The Future of Entertainment is on the Web, WASH. POST, Jan. 12, 2012 (citing comments of Robert Kyncl, YouTube, Vice President of Global Content Partnership, speaking at 2012 International Consumer Electronics Show in Las Vegas). 1035 Id. 1036 Nielsen State of the Media, The Cross-Platform Report Quarter 3, 2011 – US, at 4 (“Nielsen Q3 2011 Cross- Platform Report”). Federal Communications Commission FCC 12-81 143 ethnicity in Nielsen’s report. Adults aged 25-34 spend the most time each day watching video online (53 minutes).1037 Hispanics and African Americans spend 34 minutes each day watching video online.1038 325. Subscribership. According to comments filed in this proceeding, Netflix maintains that it is the largest online video subscription service in the United States, with more than 23 million subscribers as of June 2011. It doubled its subscribership from the end of 2009 through the middle of 2010.1039 According to one report, at the end of the 2011, Netflix had approximately 20 million streaming members in the United States, Canada and Latin America.1040 Hulu Plus supported only 875,000 subscribers as of the second quarter 2011.1041 Industry reports indicated that Hulu suffered a loss in subscribers as a result of changes the firm made in 2011 to pricing and other core structural changes.1042 326. Consumer Purchase Transactions. Based on a combination of movie electronic sell- through and Internet VOD revenue, IHS Screen Digest estimates that Apple maintains the lion’s share of the consumer transactional market, with Microsoft Zune Video Marketplace, Wal-Mart Vudu, Sony Playstation Store, and Amazon rounding out the top five positions in terms of market share.1043 IHS notes that iTunes’s increase of one percent contrasts with its decline of 12 points from the first half of 2009 to the first half of 2010. Apple’s iTunes garnered 64.9 percent of market share in 2010 and 65.8 percent in 2011. The next largest market share was reported by Microsoft’s Zune with 18.5 percent in 2010 and 16.2 percent market share in 2011. Wal-Mart’s Vudu had 1.0 percent of the market in 2010, and 5.3 percent market share in 2011.1044 b. Revenue 327. There are multiple potential sources of revenue for online video distribution, including subscription fees from consumers; in-video advertising; display advertising around the video; product placement; advergaming;1045 and branded entertainment.1046 We examine each of these in turn below. 1037 Id. at 7. 1038 Id. 1039 Netflix6/8/11 Comments at 2. In March 2010, Netflix reportedly had 14 million subscribers. See Ed Carson, Born in the USA: Top 5 American Stocks in IBD 100, Investors.com, May 17, 2010, http://blogs.investors.com/capitalhill/index.php/home/35-politicsinvesting/1761-born-in-the-usa-top-5-american- stocks-in-ibd-100 (visited Mar. 9, 2012). Nielsen reports that 89 percent of Hulu users watch video programming using a computer and 20 percent of Hulu users watch video programming using a computer connected to a television. Nielsen, State of the Media Report, Consumer Usage Report 2011, at 3 (“Nielsen 2011 Consumer Usage Report”). 1040 Netflix, Inc., Netflix and Disney-ABC Television Group Announce Extension of Existing Licensing Agreement to Stream TV Shows (press release), Oct. 31, 2011. 1041 Vision2mobile Special Report, New Television Viewing Models, Aug. 2011, at 20. 1042 See Christina M. Mitchell, Yahoo, Netflix a Match?, SNL Marketweek, Jan. 6, 2012. However, Netflix has reported that domestic streaming and DVD gross cancellations have steadily declined during October and November 2011. See Haseeb Ali, Netflix Provides Negative 2012 Outlook; Streaming, DVD Cancellations Decline, SNL Kagan, Nov. 23, 2011. 1043 IHS, iTunes Gains Share in Online Movies in First Half of 2011 (press release), Aug. 22, 2011. 1044 Id. 1045 Advergaming, a type of niche marketing, is the practice of inserting paid advertisements in a video game. 1046 AD AGE White Paper at 4. Federal Communications Commission FCC 12-81 144 328. Advertising. Advertising is included with a variety of online video content formats, including television shows, news, short clips, and sports content.1047 Media buyers are purchasing online video advertising often as an add-on component to traditional television ad purchases. Some experts speculate that, even though the television advertising market is still far and away the dominant media venue for advertising,1048 it is a marketplace that has likely peaked in terms of the size of the viewing audience, while the online viewing audience is expected to continue growing.1049 Additionally, advertisers value online video ads because the system allows advertisers to gather information and details about consumer engagement, time spent with the brand, and sharing that are not always readily available with other sources of advertising.1050 329. The Interactive Advertising Bureau (IAB) reports that in the 3rd quarter of 2011 Internet advertising reached $7.88 billion, a 22 percent increase over the same period in 2010.1051 EMarketer reports that total U.S. online ad spending amounted to $32 billion in 2011, and that it expects online ad spending to grow in 2012 by potentially as much as 23 percent to $39.5 billion.1052 Screen Digest estimated that the four major broadcast networks earned about 50 percent of the total $448 million in advertising-supported online video advertising dollars in the United States in 2008, and an additional 25 percent went to the websites of the cable networks.1053 330. ComScore estimates that U.S. Internet users saw 5.3 billion video advertisements in June 2011.1054 Additionally, slightly more than two billion total ad minutes were viewed during this same time period, with each unique viewer exposed to approximately 35 ads each. This online video advertising content reached 49.2 percent of the U.S. population. ComScore includes in this category streaming video advertisements only, not other types of video monetization such as overlays, branded players, matching 1047 See, e.g., Pete Barlas, Video Ad Spending Finally Getting Into the Picture, INVESTOR’S BUSINESS DAILY, May 14, 2010. 1048 In 2009, advertisers spent $908 million on U.S. online video advertising compared to the $68.9 billion spent on U.S. television advertising during that same period. See id. 1049 Advertising executive Matt Wasserlauf, of online ad agency BBE, has indicated that, “TV viewership has leveled off and viewership is growing in online video.” See id. Sports programming promises to become a growth sector in online video. NBC announced that the 2012 Super Bowl would be streamed free of charge over the Internet for the first time and would also be available on Verizon’s Mobile NFL Wireless apps. See Priya Kanwar, Watch Super Bowl XLVI 2012 and Other Sports Live Streaming Free on Mobile Phones, Technorati, Jan. 9, 2012, http://technorati.com/technology/article/watch-super-bowl-xlvi-2012-and/ (visited Mar. 9, 2012). 1050 See, e.g., Jon Erickson, Measuring the Total Economic Impact of Customer Engagement, Forrester Consulting, Sept. 2008; see also Marketing and Advertising Using New Media, Baruch New Media, Feb. 27, 2012, http://baruchnewmedia.com/wiki/Marketing_and_Advertising_using_New_Media (visited Mar. 9, 2012). 1051 Interactive Advertising Bureau, Q3 ’11 Internet Advertising Revenues Up 22% from Year Ago, Climb to Nearly $7.9 Billion, According to IAB and PwC (press release), Nov. 30, 2011. 1052 eMarketer.com, US Online Ad Spend to Close in on $40 Billion, Jan. 19, 2012, http://www.emarketerl.com/Article.aspx?id=1008783&R=1008783 (visited Mar. 9, 2012). 1053 IBE, Major US Broadcaster-Backed Online Networks Claim Lion’s Share of Free Online TV, July 9, 2009, http://www.ibeweb.com/ibe-news/major-us-broadcaster-backed-online-networks-claim-lions-share-free-online-tv (visited Mar. 9, 2012). 1054 comScore, Inc., comScore Releases June 2011 U.S. Online Video Rankings, July 15, 2011, http://www.comscore.com/Press_Events/Press_Releases/2011/7/comScore_Releases_June_2011_U.S._Online_Vide o_Rankings (visited Mar. 9, 2012). In Table 24, for example, video viewers watched 424 million minutes in the month of June 2011, according to the chart for total U. S home/work/university locations. Federal Communications Commission FCC 12-81 145 banner ads, or homepage ads.1055 The comScore data also includes several video advertising networks, such as Tremor Media Video Network, BrightRoll Video Network, Specific Media, Undertone and SpotXchange Video Ad Network as well as Adap.tv, a video advertising exchange.1056 The leading five websites and advertising networks for video ads viewed during June 2011 were: (1) Hulu, one billion ads viewed; (2) Tremor Media Video Network, 753 million ads viewed; (3) Adap.tv, 677 million ads viewed; (4) BrightRoll Video Network, 628 million ads viewed; and (5) Specific Media, 421 million ads viewed.1057 Table 24: Top U.S. Online Video Properties by Video Ads Viewed (June 2011)1058 Property Video Ads (in thousands) Total Ad Minutes (millions/month) Frequency (Ads per Viewer) Reach of Total U.S. Population (%) Hulu 1,001,736 424 38.8 8.6% Tremor Media Video Network 753,034 429 12.1 20.7% Adap.tv 677,708 386 11.0 20.5% BrightRoll Video Network 628,600 396 9.5 21.9% Specific Media 421,722 214 6.8 20.4% Undertone 332,597 171 13.2 8.3% SpotXchange Video Ad Network 281,859 171 7.8 11.9% Viacom Digital 275,230 134 10.4 8.8% Microsoft Sites 226,951 125 9.2 8.2% AOL, Inc. 217,347 85 7.3 9.9% Total: 5,286,917 2,286 35.6 49.2% 331. Although its revenues declined in the early part of the studied period, the availability of professional content has enabled YouTube to win back advertisers. YouTube has indicated that, as of January 2010, it sells ads for more than 10 percent of U.S. video streams, up from six percent in January 2009. In May 2010 it reported that it had increased the number of advertisers using display ads by a factor of ten. YouTube typically charges a CPM of $15.1059 For its music channel, Vevo, it charges a CPM ranging from $25 - $35. Branded sites, such as ESPN’s channel, can earn a CPM of $22. YouTube can earn about $400,000 per day from advertisements on its home page, and generates about $10 million per month from advertising on its home page alone.1060 332. Hulu’s free online service generates revenue from advertising sales based on the number of consumers that view ad impressions on Hulu.com; from video streams; from its distribution partners’ 1055 Id. 1056 Id. 1057 Id. 1058 comScore Video Metrix. 1059 Cost per mille (CPM), also referred to as cost per thousand impressions, is a common advertising model. See supra, ¶ 192. 1060 AD AGE White Paper at 9. Federal Communications Commission FCC 12-81 146 websites; and from the embeddable Hulu video player.1061 Hulu Plus generates revenues from advertising as well as its subscription fees. Hulu currently partners with more than 625 advertisers.1062 The process by which the networks sell inventory within the programs they distribute on Hulu, however, differs substantially from their traditional process. For example, broadcast networks typically prohibit Hulu from selling specific shows to advertisers. Instead, Hulu offers advertisers access to viewers across many shows, i.e., “run-of-schedule.”1063 Because Hulu cannot guarantee placement in specific shows, it charges lower CPMs than the broadcast network websites (e.g., an average $35 CPM versus $45 for ABC.com).1064 333. The broadcast networks, which are equity owners of Hulu, receive 70 percent of the advertising revenue sold on their programs,1065 while other program suppliers receive between 50 percent and 70 percent.1066 Press reports have estimated that Hulu sells out about 50 percent of its inventory.1067 In 2009, Hulu earned $100 million, and was profitable during the fourth quarter of 2009 as well as the first quarter of 2010.1068 c. Investment 334. As a nascent business model in the provision of video content, the OVD industry’s investment perspective is defined by new content and distribution deals and transactions. As previously discussed, OVDs are entering new partnerships and innovating in products and services in order to retain and attract consumers.1069 Whether it be the joint venture between Redbox and Verizon or YouTube’s partnership with The Wall Street Journal and others to create 100 new linear channels, these deals, transactions, and partnerships, as much as any other capital expenditures, demonstrate the investments that companies are making to foster the growth of the OVD sector. 1061 See Hulu FAQ. 1062 See About Hulu. 1063 Hulu divides its advertising into three formats. As part of its standard ad formats, Hulu sells spots in 15- and 30- second increments, which run before, during, or after an ad break. Other standard ad formats include overlay brand bars, which appear over the content at the bottom of the video, and include a logo and targeted message that enable the user to play a full ad, and overlay logo bugs, which appear in the bottom right corner of the screen that users can opt in to play the full video ad. See id. 1064 See AD AGE White Paper at 7 & Chart 7 at 12. This compares with a CPM of less than $20 for a typical broadcast network viewed on a television set via a broadcast station or MVPD. Hulu typically limits sponsorship to one advertiser per episode, which commands ad rates that are up to twice as high for the same ad per thousand viewers than broadcast rates. 1065 AD AGE White Paper at 8-9. 1066 Brian Stelter and Brad Stone, Successes (and Some Growing Pains) at Hulu, N.Y.TIMES, Mar. 31, 2010, http://www.nytimes.com/2010/04/01/technology/01hulu.html?dbk (visited Mar. 9, 2012) (“Hulu Successes”). 1067 Michael Learmonth, Hulu’s a Towering Success – Just Not Financially, ADVERTISING AGE, Mar. 29, 2010, http://adage.com/digital/article?article_id=143011 (visited Mar. 9, 2012); see also Brian Morrissey, Hulu Makes Inroads, ADWEEK DIGITAL, Oct. 15, 2009, http://www.adweek.com/aw/content_display/news/digital/e3i505f5fdeedc76b4275cd6041e29e5fcd (visited Mar. 9, 2012). 1068 Hulu Successes. 1069 See, e.g., supra, ¶ 304. Federal Communications Commission FCC 12-81 147 d. Profitability 335. Many of the prominent OVDs are subsidiaries or operations within a larger business. Because the assets, liabilities, revenues and expenses of the parent company and the subsidiaries are often presented in consolidated financial statements that are reflective of the total resources of the combined entity rather than any of its specific component parts, assessing the profitability of a subsidiary of a larger enterprise is extremely difficult. Even with respect to the standalone OVDs, we either do not have access to their financial information or, if we do, the publicly available information does not include the specifics that are necessary to analyze the OVD’s profitability. Thus, for this Report, we are unable to conduct an analysis of the profitability of OVDs. As OVDs continue to mature and evolve, we anticipate that future public reporting may include data on profitability and other metrics to assess the financial viability of this segment of the delivered video market. 5. Consumer Behavior 336. In this section of the Report, we consider how trends in consumer behavior affect the products and services of OVD providers of delivered video content and other categories of video content. Recent data illustrate which consumers are heavy OVD users and how that use affects other types of video content services. 337. Nielsen’s Cross-Platform Report indicates that, unlike the near-universality of television watching, viewership of streaming video content is highly concentrated – 83 percent of all streaming takes place among the top fifth of consumers who stream.1070 Males aged 18 – 49 years old spent the most time per month viewing Internet video content (six hours, 38 minutes per month) during the second quarter of 2011. Males aged 2 and older spent the second highest amount of time per month viewing Internet video content (five hours, 5 minutes per month) during the same quarter. Females aged 18 – 49 years old spent the third highest amount of time per month viewing Internet video content (four hours, 47 minutes per month) during the same quarter.1071 Asian Americans spent the largest amount of time during the second quarter of 2011 watching video content on the Internet (nine hours, 11 minutes per month); followed by Hispanics (six hours, 15 minutes per month); African Americans (five hours, 58 minutes per month) and Whites (three hours, 50 minutes per month).1072 Moreover, Americans are increasingly turning to mobile devices to access video content. Nielsen reports an increase of 36.9 percent in mobile video users from third quarter 2010 to third quarter 2011.1073 338. In its 2011 Consumer Usage Report, Nielsen describes the primary methods Americans use to watch television or video content. Traditional television is the dominant device for video consumption as 288 million viewers ages two and up use this method.1074 The data also show that other methods register far behind traditional television in how consumers watch video: Internet, 143 million; 1070 Nielsen State of the Media, The Cross-Platform Report Quarter 2, 2011, at 2. 1071 Id. at 6. 1072 Id. at 7. Nielsen’s 2011 annual data indicates that among consumers ages 13 and over, 232 million use a mobile phone; 211 million use online; 192 million use a personal computer or laptop at home or at work; and 116 million use mobile web. Nielsen 2011 Consumer Usage Report at 1. 1073 Nielsen Q3 2011 Cross-Platform Report at 5. 1074 Nielsen 2011 Consumer Usage Report at 2. Federal Communications Commission FCC 12-81 148 time-shifted television, 111 million;1075 and mobile phone, 30 million.1076 339. For years, viewers switched from over-the-air broadcast television to subscribe to cable (and sometimes back again), and more recently, switched between MVPDs to the extent available. The growth and availability of OVDs adds another layer of choice that can be a complement or a substitute.1077 Many consumers of video programming maintain multiple relations with providers of such services, and can easily shift their spending from one to another.1078 340. The record in this proceeding and recent data are mixed regarding the effect of OVDs on the market for the delivery of video programming. Driving the debate are competing explanations for the recent relative drop-off in MVPD video subscribership, the extent of which itself is unclear.1079 However, MVPDs increasingly acknowledge that consumers will find and watch content that appeals to them even if such content is not provided on major broadcast or cable networks or carried on cable television.1080 They recognize that the marketplace is already providing a range of alternative equipment and technology to stream content directly from the Internet or from a networked computer to television sets.1081 Many of these devices, which are used with television sets for other purposes such as gaming devices, DVRs, and Blu-ray players, enable consumers to find and stream Internet content to their sets without requiring the use of a computer.1082 And, television sets are increasingly incorporating such Internet access. Sales of such sets are rapidly increasing and are projected to exceed 118 million only a few short years after their introduction. Also, iPads and other tablets have emerged as highly popular alternatives for watching online video. Moreover, consumers now have wider choice among standalone devices dedicated to receiving Internet content on television sets. For example, VeeBeam uses a wireless USB point-to-point connection between a laptop and a television, which enables consumers to transmit anything that is on 1075 The proportion of viewers using time-shifted television grew 11 percent since the second quarter of 2010 according to Nielsen’s data. Id. 1076 Id. Regarding device ownership, Nielsen reports that 290 million people own at least one television; 253 million own a DVD player; 162 million own a video game console; 145 million have digital cable; 129 million have a DVR (digital video recorder) and 95 million have satellite television. Id. at 1. 1077 Public Knowledge 6/8/11 Comments at 6 (“in practice online video remains complementary to traditional MVPD or broadcast programming, for most viewers”); id. at 10 (“whether OVDs compete with MVPDs is a complex question. In some ways they do and in other ways they do not.”). See also John Hudson, Cable is Still King, Says Netflix CEO, The Atlantic Wire, June 1, 2011 (citing Netflix CEO Reed Hastings that “[s]tatistically, no one is dropping cable”), http://www.theatlanticwire.com/technology/2011/06/cable-still-king-says-netflix- ceo/38369/ (visited Mar. 9, 2012). 1078 See Netflix 2010 Form 10-K at 1-2. 1079 See George Szalai, Analyst: Pay TV Industry to Lose 200,000 Subscribers in 2012, THE HOLLYWOOD REPORTER, Nov. 28, 2011 (citing Credit Suisse analyst Stefan Anninger), http://www.hollywoodreporter.com/news/analyst-pay-tv-industry-lose-266589 (visited Mar. 9, 2012); see also Bloomberg News, Comcast Profit Advances 16% as Video-Subscriber Losses Slow, L.A. TIMES, Aug. 3, 2011 (citing Craig Moffett of Sanford C. Bernstein & Co.). See supra, ¶ 142 (from 2006 through 2010, cable MVPD video penetration decreased from 53.8 percent of all homes passed by cable MVPDs to 46.5 percent). 1080 NCTA 6/8/11 Comments at 20. 1081 This is sometimes referred to as over-the-top viewing. Nielsen describes over-the-top as the use of devices that piggyback on normal distribution channels (cable, satellite, etc.) to pull content directly from the Internet and deliver it to the television set. The equipment can include consumer devices such as DVD players, video game consoles and web-enabled televisions. Nielsen Cross-Platform Report Q3 2011, Glossary. 1082 NCTA 6/8/11 Comments at 24. Federal Communications Commission FCC 12-81 149 their computer screen wirelessly to their television set.1083 Likewise, other technologies, like the Google TV and Roku devices, provide direct links to major sources of Internet content (such as Hulu, Netflix and Amazon).1084 341. Some reports indicate that OVD users are beginning to “cut the cord” and drop their MVPD service in favor of OVD or a combination of OVD and over-the-air television.1085 One survey contends that nine percent of respondents have already cancelled their cable subscriptions and an additional 11 percent have stated that they are considering doing so.1086 Cord-cutters, as this group is referred to, tend to be younger consumers, 23–28 years old. Thirteen percent of GenXers indicate that they were considering cutting the cord and seven percent of baby boomers state that they have also considered it.1087 Twenty-two percent of the survey respondents indicated that they had watched their “favorite TV show” on a free online video site, and 21 percent stated that they had viewed that same show on its own video site.1088 Additionally, according to one estimate, 13 percent of consumers with a broadband connection “cord-shaved” in the past year.1089 These data notwithstanding, there are also indications that increased viewing of video content delivered over the Internet does not necessarily 1083 Id. 1084 Id. 1085 See Ian Olgeirson and Deana Myers, Over-the-top Substitution Forecast to Erode Multichannel Penetrations, SNL Kagan, July 15, 2011 (estimating that nearly 4 percent of occupied U.S. households will employ Internet video in lieu of subscribing to a multichannel video package at year-end 2011); see also Terrance O’Brien, Netflix Users More Likely to Cut the Cable Cord, Jan. 15, 2011, http://www.switched.com/2011/01/05/netflix-users-more-likely- to-cut-the-cable-cord/ (citing a JP Morgan survey that 28 percent of cable subscribers would consider cutting the cord, but that 47 percent of Netflix customers would do so) (visited Mar. 9, 2012); see also Andy Plesser, Roku Owners are ‘Cutting the Cord’ in Substantial Numbers, Beet.TV, May 10, 2011, http://www.huffingtonpost.com/andy-plesser/roku-owners-are-cutting-t_b_860280.html (citing interview with Jim Funk of Roku that “[s]ome 15-20 percent of Roku owners are cancelling their cable or satellite services agreement and are relying solely on a broadband connection to get their television programming”) (visited Mar. 9, 2012). 1086 Ryan Lawler, Deloitte: 9% Have Cut Cable, Another 11% Are Considering It, GigaOm, Jan. 4, 2012, http://gigaon.com/video/deloitte-cord-cutting/ (“GigaOn Deloitte Report”); see also State of the Media Democracy Survey, Sixth Edition, http://www.deloitte.com/view/en_US/us/Industries/media-entertainment/media-democracy- survey-sixth/index.htm?id=us_furl_tmt_somd_010312 (visited Mar. 9, 2012). 1087 GigaOn Deloitte Report. 1088 Id. 1089 Cord-shaving generally refers to a downgrading of pay video services from the subscriber’s MVPD. See Parks Associates, High-speed Broadband May Accelerate Cord Cutting, Aug. 24, 2011, http://www.parksassociates.com/blog/article/high-speed-broadband-may-accelerate-cord-cutting (visited Mar. 9, 2012). See also, e.g., Brian Santo, A Shave and a Service Cut – Two bits, CED , Oct. 26, 2011, http://www.cedmagazine.com/blogs/2011/10/a-shave-and-a-service-cut-%E2%80%93-two-bits (visited Mar. 9, 2012). One commenter explains that viewing Internet content on a television set can be relatively simple, as “simple as connecting a cable between the HDMI output of a computer and the HDMI input of a television set” though not many consumers may be inclined to view television programming in this manner. Such direct PC-to-TV connections are deemed infrequent and restricted to tech-savvy consumers, with approximately one-third of broadband users connecting a PC to their TV to enjoy PC or online video on “the big screen” at least once a year. See NCTA 6/8/11 Comments at 23-24. See also id. at 24-5 (citing The Diffusion Group, PC-to-TV Connectivity More Widespread Than Perceived, Mar.1, 2011, http://tdgresearch.com/blogs/press-releases/archive/2011/03/01/pc- to-tv-connectivity-more-widespread-than-perceived.aspx). Federal Communications Commission FCC 12-81 150 translate into decreased MVPD subscriptions.1090 In that regard, a recent survey indicates that, while more than 50 percent of online consumers watch television shows and movies online at least occasionally, there is still growth in their use of VOD, DVR, and other MVPD-provided options and that, surprisingly, the more alternative platforms consumers use, the more they tend to spend on traditional television subscription services.1091 342. Although OVDs have begun to make inroads against traditional distributors, online viewership is still dwarfed by its traditional distributors.1092 According to Nielsen, Americans watched on average 32 hours and 47 minutes a week of traditional television and two hours and 21 minutes a week of time-shifted television, compared to 27 minutes a week of video on the Internet, and only 7 minutes a week of video on a mobile phone.1093 Screen Digest estimated that all of the a la carte sales of television shows from Apple, Amazon, and other OVD competitors would amount to only $407 million in 2010, compared to what PriceWaterhouseCoopers estimates would be the $143 billion spent on television advertising and subscriptions.1094 IV. RURAL VERSUS URBAN COMPARISONS 343. In this portion of the Report, we compare video programming competition in rural and urban areas.1095 We discuss this issue for each of the three categories of video programming discussed above – MVPD, broadcast, and OVD. 344. The availability of satellite-delivered video programming in rural and underserved areas is a goal of Section 628(a) of the Act.1096 In the 15th Mobile Wireless Report, the Commission adopted a “baseline” definition of the term “rural” to mean a county with a population density of 100 persons or fewer per square mile.1097 Under this definition, roughly 61 million people, or 21 percent of the U.S. population, live in rural counties. These counties comprise 3.1 million square miles, or 86 percent of the geographic area of the United States.1098 We adopt this definition for our analysis.1099 Because data on the delivery of video programming are not generally available in a manner that enables us to aggregate 1090 Franks N. Magid Associates, Inc., Magid Study: Consumers More Connected to TV Sets Than Ever - TV Purchase Intentions Climb to Pre-Recession Levels, Demand for Smart TVs Impressive (press release), Nov. 22, 2011. Magid surveyed a nationally representative sample of 1,530 online consumers ages 12 years and older in October 2011 in order to track consumer trends in regards to television, HDTV, 3-D TV, online video and mobile video viewing for this annual survey. 1091 Id. 1092 For example, Netflix identifies its principal competitors as including MVPDs with TV Everywhere and VOD content; Internet movie and television content providers; DVD rental outlets and kiosk services; and entertainment video retailers. See Netflix 2010 10-K at 2. 1093 Nielsen Cross-Platform Report Q2 2011 at 5. 1094 Fowler & Schechner at B1. 1095 See Further Notice, 26 FCC Rcd at 14113-15, ¶¶ 56-58. 1096 47 U.S.C. § 548(a) (“The purpose of this section is . . . to increase the availability of satellite cable programming and satellite broadcast programming to persons in rural and other areas not currently able to receive such programming . . .”). 1097 15th Mobile Wireless Report, 26 FCC Rcd at 9878, ¶ 378. 1098 See id. at 9878, ¶ 379. These figures are based on 2000 Census data. See id. at 9880, n. 1126. 1099 See Further Notice, 26 FCC Rcd at 14113-14, ¶ 56. We received no comments on our proposal to use the same definition as that used in the Wireless Competition Report, supra, n. 1097. Federal Communications Commission FCC 12-81 151 county data by population density, we rely on available evidence provided in the record or from other sources to compare alternatives for the delivery of video programming between rural and urban areas. A. MVPDs 345. MVPDs serving rural and smaller markets provide a range of services to millions of households, including video via coaxial cable and Internet Protocol television (“IPTV”), digital telephony, and broadband Internet access.1100 ACA reports that its membership of nearly 900 cable operators provides these services to 7.6 million households and businesses,1101 with more than half of its members serving fewer than 1,000 subscribers.1102 Many rural MVPDs indicate that they face unique challenges in offering competitive video, voice, and broadband services due to the cost of system build- outs and upgrades in less densely populated areas with a limited consumer base.1103 For instance, NTCA, a trade association representing more than 580 rural telecommunications providers, states that 252 of its members offered cable service in 2010, a decrease from 2007 when 276 members offered this service.1104 In addition, NTCA notes a decline in the number of its members selling DBS service. In 2007, 106 of its members sold DBS service, and in 2010, the figure dropped to 66.1105 346. NTCA has, on the other hand, seen a rise in the number of its members delivering IPTV – from 61 members in 2007 to 159 in 2010.1106 NTCA and other rural associations predict this number is likely to increase as the number of members offering broadband service rises.1107 Overall, NTCA reports that its members are facing increasing competition in the delivery of video services. A 2009 informal NTCA poll indicated that 58 percent of respondents reported facing competition from a cable operator, 92 1100 See ACA 6/8/11 Comments at 1; NTCA 5/20/09 Comments at 1-2. 1101 See ACA 6/8/11 Comments at 1. 1102 See ACA 7/29/09 Comments at 3. 1103 See, e.g., ACA 6/8/11 Comments at 2. OPASTCO and NTCA also explain that many rural carriers need to share headends to provide video services given the substantial financial cost of entering the video services market. They claim that this business model is threatened, however, by the practice of some programming networks to deny cable or IPTV systems that share headends access to programming. See OPASTCO 7/29/09 Comments at 20-21; NTCA 5/20/09 Comments at 11-12. In addition, OPATSCO claims that some networks have denied rural MVPDs using an IPTV platform access to their content or imposed unnecessary expenses based on perceived security concerns. See OPASTCO 7/29/09 Comments at 21. Using U.S. Census data as of 2000, the California PUC further reports that a significantly higher percentage of California’s rural census blocks are either unserved or served by a single state video franchisee or locally franchised affiliate. In comparison, over 86 percent of California’s census blocks with two or more providers are urban. See California PUC 6/8/11 Comments at 1-4. 1104 See Rural Associations 6/8/11 Comments at 1 nn. 1 & 2. These results are based on a 2010 survey of NTCA’s membership. See id. at 2. 1105 See id. 1106 See id. 1107 See id. The Rural Associations view broadband and the provision of video service as key components to their long term viability. See id. at 2-3. An NTCA 2008 survey on the offering of broadband services (“2008 Broadband Study”) indicated that rural telcos saw video as a “must have offering” for success in a competitive market. Almost two-thirds of respondents already provided video to customers – an increase from 63 percent in 2007 and 42 percent in 2005. Almost 80 percent of rural telcos with future video plans aimed to offer IPTV service. See NTCA 5/20/09 Comments at 3. Federal Communications Commission FCC 12-81 152 percent faced competition from a satellite provider, and six percent faced competition from an IPTV provider.1108 347. Organization for the Promotion and Advancement of Small Telecommunications Companies (“OPASTCO”), a trade association representing 520 small incumbent LECs serving rural America, found in a 2009 survey of its members that 74 percent of respondents offered subscription video service.1109 Almost half of the respondents who did not offer video service indicated that they were likely to offer it in the near future.1110 Sixty-nine percent of survey respondents also indicated that they faced direct competition from one or more non-satellite video providers.1111 Among these respondents, 22 percent indicated that they competed with two or three non-satellite video providers.1112 348. Nielsen finds that rural counties tend to rely on DBS more than urban counties for MVPD services. Nielsen categorizes counties based on Census household counts and proximity to metropolitan areas. It estimates that, as of the end of 2010, the distribution of television households was as follows: 40 percent in highly urbanized counties belonging to the 21 largest Metropolitan Statistical Areas (A Counties); 31 percent in counties with more than 85,000 households that are not defined as A Counties (B Counties); and 29 percent in counties with fewer than 85,000 households (C and D Counties).1113 According to Nielsen’s 2011 estimates, in A Counties, 69 percent of television households relied on cable service and 23 percent of television households relied on DBS. Sixty-four percent of television households in B Counties subscribed to cable and 26 percent subscribed to DBS. In C and D counties, 48 percent of television households relied on cable service, compared with 42 percent who subscribed to DBS.1114 349. One of the biggest challenges small and rural MVPDs report facing is access to video content at competitive rates. These MVPDs indicate that a failure to acquire programming at competitive prices and terms reduces their ability to provide consumers with competitive and affordable video service offerings meeting the economic needs of the community.1115 For example, several small and rural MVPDs contend that, to gain carriage rights to the most popular networks, they are required by the owners of those networks to carry less-popular co-owned networks on an expanded basic tier.1116 The 1108 See NTCA 5/20/09 Comments at 3. 1109 See OPASTCO 7/29/09 Comments at 1, 3. 1110 See id. 1111 See id. at 4. 1112 See id. 1113 See Nielsen 2010 & 2011 Television Audience Report at 6. Nielsen classifies C Counties as counties not defined as A or B counties that have more than 20,000 households or are in Consolidated Metropolitan Statistical Areas or Metropolitan Statistical Areas with more than 20,000 households. Nielsen classifies D counties as all counties not classified as A, B, or C counties; they are very rural. See Nielsen Media Research, Glossary of Media Terms (defining Nielsen’s classifications of A, B, C, and D counties), http://www.nielsenmedia.com/glossary/ (visited Mar. 21, 2012). 1114 See Nielsen 2010 & 2011 Television Audience Report at 6. 1115 See, e.g., Rural Associations 6/8/11 Comments at 5-9; ACA 6/8/11 Comments at 5-10; Rural Telcos 6/8/11 Comments at 3-13; SureWest 7/8/11 Reply at 4-5; NTCA 5/20/09 Comments at 6; OPASTCO 7/29/09 Comments at 10-13. 1116 See, e.g., Rural Telcos 6/8/11 Comments at 3-4, 8; ACA 5/20/09 Comments at 9. The Rural Telcos also indicate that failure to accept such an agreement results in pricing penalties, and that some programmers now force them to carry HD and 3D channels. See Rural Telcos 6/8/11 Comments at 4, 8. Federal Communications Commission FCC 12-81 153 rural MVPDs claim that these program “tying” and tiering requirements impose on them unreasonably high wholesale costs for programming in comparison to incumbent cable operators, which they then pass on to consumers.1117 ACA suggests that small and medium-sized MVPDs pay 30 percent more for national cable network programming than major MSOs.1118 350. In addition, several small and rural MVPDs contend that some programmers condition access to traditional cable networks, such as ESPN, on payment for distribution of the online version of the network, such as ESPN3.1119 These MVPDs maintain that such programmers require the cost of the online versions of the networks to be bundled into basic broadband packages.1120 They state that the networks charge subscriber fees on the basis of the number of broadband subscribers for the online versions of the networks as well as the number of video subscribers for linear distribution.1121 These MVPDs argue that this practice forces them to either absorb the additional cost or raise end-user rates for broadband.1122 Small and rural MVPDs also report having to promote programmers’ websites to broadband customers outside of their video service territory.1123 351. Several video programmers argue that the programming market is extremely competitive, which has lead to a diverse array of programming choices for consumers.1124 In particular, these programmers suggest no program supplier has market power thereby allowing new programmers and networks to enter the market freely.1125 Additionally, Time Warner and Fox argue that bundling is a prevalent practice in the American economy and provides numerous benefits, such as lowering transaction and production costs. They also note many programmers provide MVPDs with the opportunity to purchase networks on an individual basis.1126 Similarly, Viacom claims that it does not compel any cable operator to negotiate for carriage of multiple networks nor require any cable system to 1117 See Rural Associations 6/8/11 Comments at 5-6; Rural Telcos 6/8/11 Comments at 9-11. See also SureWest 7/8/11 Reply at 5-7. The Rural Telcos also note that these practices preclude them from promoting the lowest basic service package. For example, NRTC reports that its members must sell their expanded basic packages, which at a minimum contain over 70 channels, at a retail price averaging $50-$60 per month. Comparatively, NRTC contends that incumbent rural cable systems not burdened with tying or tiering requirements may carry about 50 channels at $35 per month per subscriber. See Rural Telcos 6/8/11 Comments at 10. The Rural Telcos further argue that forced tying and tiering requirements prevent the carriage of independent channels on an expanded basic tier. See id. at 11. 1118 See ACA 6/8/11 Comments at 9. OPASTCO further asserts that rural MVPDs lack leverage in negotiating for programming due to mandatory non-disclosure agreements between video programmers and rural MVPDs since these agreements conceal the true market value for programming. See OPASTCO 7/29/09 Comments at 18-20. 1119 See Rural Telcos 6/8/11 Comments at 11-13; ACA 8/28/09 Reply at 9-11. 1120 See OPASTCO 7/29/09 Comments 13-15; NTCA 5/20/09 Comments at 5-6. 1121 See OPASTCO 7/29/09 Comments 13-15. 1122 See, e.g., Rural Telcos 6/8/11 Comments at 11-13; Rural Associations 6/8/11 Comments at 7-8; OPASTCO 7/29/09 Comments at 13-15. 1123 See Rural Association 6/8/11 Comments at 7; OPASTCO 7/29/09 Comments at 13. 1124 See, e.g., Fox Entertainment Group, Inc. & Fox Television Holdings, Inc. Comments, MB Docket No. 07-198 (filed Jan. 4, 2008) at 19-21 (“Fox 07-198 Comments”); Viacom Inc. Comments, MB Docket No. 07-198 (filed Jan. 4, 2008) at 4-8 (“Viacom 07-198 Comments”); NBC Universal, Inc. & NBC Telemundo License Co. Comments, MB Docket 07-198 (“NBC 07-198 Comments”) at 42-45. 1125 See Fox 07-198 Comments at 20; Viacom 07-198 Comments at 6-8; NBC 07-198 Comments at 42-45. 1126 See Fox 07-198 Comments at 21-22; Time Warner Inc. Reply, MB Docket No. 07-198 (filed Feb. 12, 2008) at 2-5. Federal Communications Commission FCC 12-81 154 purchase any particular network or combination of networks. Viacom further contends that it does not deny small and rural cable operators access to package deals and volume discounts. The company indicates it has adopted a flexible approach in negotiating carriage with small cable operators, including on occasion making certain programming services available to distributors with no license fee or for a nominal amount as well as paying small cable operators for carriage in certain situations.1127 352. Disney also disputes the complaints surrounding ESPN3, which it believes relate to private business negotiations. It asserts nonetheless that ESPN does not force distributors of any size to carry any of its products. Disney indicates that ESPN works collaboratively with ISPs distributing ESPN3 to acquire new high-speed data subscribers as well as retain and upgrade existing high-speed data and video customers.1128 353. Small and rural carriers also argue that they pay disproportionately higher prices for retransmission consent.1129 ACA states that small and medium-sized MVPDs pay double the retransmission consent fees of large providers.1130 ACA submits data indicating that broadcasters receive retransmission consent fees ranging from $0.14 to $0.75 per subscriber per month, with smaller and medium-sized cable operators paying the highest fees.1131 ACA contends that higher retransmission fees increase consumer costs, which negatively affects entry into the MVPD market and reduces improvements to service and networks.1132 354. ACA’s members also report facing “take-it-or leave-it” retransmission consent offers that may lead them to temporarily or permanently drop broadcast television stations.1133 For example, in the 2008 retransmission consent negotiations, 20 percent of respondents to ACA’s 2009 survey were forced to temporarily drop a broadcast television station since the parties failed to reach a new retransmission consent agreement prior to the expiration of the previous agreement.1134 Similarly, nearly half of the respondents in NTCA’s 2010 survey indicated that broadcasters issued “take it or leave it” ultimatums.1135 Sixty percent of NTCA’s survey respondents opted to take the offer for fear of losing customers; 22 1127 See Viacom 07-198 Comments at 11-13. 1128 See Disney 8/28/09 Reply at 6-7. 1129 As indicated previously, the Commission has initiated a proceeding to examine certain concerns related to retransmission consent. See Retransmission Consent NPRM, supra, n. 154. 1130 See ACA 6/8/11 Comments at 6. According to ACA, generally rural providers also must pay transport fees because they operate outside the local broadcaster’s signal contours – a cost that is typically passed on to rural consumers. ACA states these fees are as high as $0.50 per subscriber per signal per month, but are sometimes more. See id. at 14-15. In addition, in a 2009 survey of ACA’s membership, respondents indicated that retransmission consent fees were rising faster than the cost of other types of programming. According to respondents, retransmission consent fees were about 8 percent of the total video programming expenses in 2009 compared to 2.4 percent in 2008. See ACA 5/20/09 Comments at 6-7. 1131 See ACA 6/8/11 Comments at 8. ACA also contends that retransmission consent fees are even higher when two or more broadcasters in the same DMA engage in coordinated retransmission consent negotiations. See id. at 10-14. 1132 See ACA 6/8/11 Comments at 8-9; ACA 5/20/09 Comments at 15-16 (indicating that in a 2009 survey of its membership, 88 percent of respondents had or were planning to increase cable rates on their basic service packages). See also SureWest 7/8/11 Reply at 5 (arguing that higher retransmission consent costs for smaller MVPDs limit their ability to effectively compete with the incumbent cable operator, and thus negatively impacts consumer choice). 1133 See ACA 5/20/09 Comments at 13-15. 1134 See id. at 14. 1135 See Rural Associations 6/8/11 Comments at 10. Federal Communications Commission FCC 12-81 155 percent of respondents who declined the offer ultimately were barred from receiving access to the broadcast stations.1136 ACA further explains non-cash/in-kind compensation provides broadcasters with another means to obtain compensation from small MVPDs for programming. These types of concessions may include requiring cable operators to carry multicast feeds, to purchase advertising time from the broadcaster, or to participate in joint marketing campaigns with the broadcaster.1137 355. As previously indicated, broadcasters have asked the Commission to reject requests to significantly alter its retransmission consent rules.1138 With respect to smaller MVPDs, NAB argues that there is no evidence or data to support the assertion that smaller MVPDs receive less favorable retransmission fees, terms, and conditions in comparison to larger MVPDs. 1139 NAB also indicates that retransmission consent fees, terms, and conditions are based on economies of scale, which is a trademark of a competitive marketplace.1140 NAB therefore contends that even if price differentials exist in the retransmission consent fees between smaller and larger MVPDs, there is no evidence of price discrimination.1141 B. Broadcast Stations 356. Television markets serving rural populations tend to have fewer local full-power stations. Consumers may also rely more on multicasting than those in large markets for the delivery of major network signals such as ABC, CBS, FOX, and NBC. As of July 2011, 49 of the 210 television markets had three or fewer full-power commercial broadcast stations assigned to them. All of these markets are ranked below 100.1142 Combined, all 49 markets with three or fewer stations represent about 4.6 million television households, or four percent of the estimated 115.9 television households nationwide as of the 2010-2011 television season.1143 Of the 49 markets, 28 receive at least one of the four major networks via a digital multicast signal.1144 Yet Nielsen estimates for 2011 that the percentage of households relying on over-the-air distribution of broadcast stations is about the same in the three different categories of counties – 9 percent in A Counties, 11 percent in B Counties, and 10 percent in C and D Counties.1145 C. OVDs 357. As discussed earlier, consumers need high-speed Internet access in order to have access to OVDs’ video content. Unfortunately, many consumers in rural America still lack access to this 1136 See id. See also SureWest 7/8/11 Reply at 7-8 (encouraging the Commission to allow MVPDs to substitute network and syndicated broadcast programming from a station in a neighboring market in order to minimize the competitive harm from broadcasters’ withholding retransmission consent). 1137 See ACA 5/20/09 Comments at 7-10. ACA indicates requiring the carriage of multicast feeds is a particularly difficult business arrangement for smaller operators with limited bandwidth capacity. See id. at 8 &10. 1138 See supra, ¶ 60. 1139 NAB 7/8/11 Reply, Attachment A at 49. 1140 Id. at 50. 1141 Id. at 51. 1142 FCC staff estimates based on data from BIA. DMA ranks and number of stations within each DMA are not directly correlated. See supra, ¶ 162. 1143 FCC staff estimates based on data from Nielsen, Local Television Market Universe Estimates, used throughout the 2010-2011 season. 1144 FCC staff estimates based on data from BIA, July 2011. 1145 See Nielsen 2010 & 2011 Television Audience Report at 6. See also supra, n. 1113. Federal Communications Commission FCC 12-81 156 important resource. The Commission’s 2011 Rural Broadband Report found that 72.5 percent of the 26.2 million Americans that still lack access to 3 Mbps/768 kbps or faster of fixed broadband service live in rural areas, even though only 21.7 percent of all Americans reside in rural areas.1146 The report also found that close to three out of ten rural Americans – 28.2 percent – are without access to fixed broadband at 3 Mbps/768 kbps or faster, which is nine times larger than the three percent of Americans without access in non-rural areas.1147 Additional data further indicates that rural consumers have fewer options with respect to broadband technologies and providers than other consumers. 1148 358. As discussed earlier, despite these findings, NTCA finds that a significant majority of rural telcos provide broadband service to at least some portion of their service territory and that several rural telcos include a broadband connection in their service bundles.1149 NTCA’s members also report operating in an increasing competitive market for broadband service.1150 Eighty-one percent of OPASTCO’s 2009 survey respondents suggested that the increase of online video has heightened demand for faster broadband speeds – with 91 percent of respondents providing, or planning to offer, tiered broadband services.1151 V. KEY INDUSTRY INPUTS 359. In this section of the Report, we consider key inputs that may affect competition in the market for the delivery of video programming. Specifically, we discuss below creators and aggregators of video programming and consumer premises equipment. A. Content Creation and Aggregation of Video Programming 1. Overview 360. Television programs and movies are often created and licensed by major studios that are subsidiaries of entertainment conglomerates that also own broadcast and cable networks. Collectively, the broadcast and cable networks of seven companies – Disney, News Corp., NBC Universal, Time Warner Inc.; CBS; Viacom; and Discovery – account for about 95 percent of all television viewing hours in the United States.1152 Of those, only Discovery, which produces its own programming, does not own a 1146 See FCC, BRINGING BROADBAND TO RURAL AMERICA: UPDATE TO REPORT ON RURAL BROADBAND STRATEGY (2011), attached to Chairman Genachowski Releases Update to 2009 Broadband Report, GN Docket No. 11-16, Public Notice, 26 FCC Rcd 8680, 8688, ¶ 10 (2011) (noting that the analysis is based upon the State Broadband Initiative Data (formerly known as SBDD Data)). 1147 See id. 1148 See id. 1149 See NTCA 5/20/09 Comments at 2-3. 1150 See id. at 3. In the 2008 Broadband Survey, 93 percent of NTCA’s survey respondents reported facing competition from at least one service provider for at least some of their customers. The typical respondent competed with two national ISPs, two satellite broadband providers, two wireless ISPs, and one cable company. In particular, 55 percent of respondents facing competition reported that their competitors were only serving cities and towns in the respondent’s service area; 45 percent of respondents said their competitors were serving customers throughout the respondent’s service area. See id. 1151 See OPASTCO 7/29/09 Comments at 5. Tiered broadband service refers to the practice of offering a selection of broadband speeds at different price points. See id. 1152 Craig Moffett et al., Weekend Media Blast: Why We Haven’t Seen a Virtual MSO Yet, Bernstein Research, Jan. 27, 2012, at 2. Federal Communications Commission FCC 12-81 157 major television or movie studio.1153 These conglomerates may also produce programs for each other’s networks.1154 In addition, there are independent studios, such as The Weinstein Company, that create television programming and movies.1155 Movie and television studios generally produce and distribute their own programs and movies, and retain ultimate distribution rights.1156 In some cases, however, studios distribute programs and movies on behalf of third parties.1157 Industry participants claim that the production and distribution of television programming and films are inherently risky businesses.1158 While studios invest a substantial amount up front to produce video content, the revenues derived from the production, distribution and licensing of such content depend primarily on a program’s acceptance by the public, which is difficult to predict.1159 361. GAO estimates for the Fall 2009 broadcast prime time schedule, the top five program producers were the studios affiliated with ABC, CBS, FOX, NBC, and The CW (WBTVG).1160 For the individual networks, the 2010 share of in-house productions was: ABC, 60 percent; CBS, 61 percent; The CW, 90 percent; FOX, 72 percent; and NBC, 63 percent.1161 Industry observers and participants 1153 On the other hand, Sony Corporation operates a television and movie studio, but does not operate cable or broadcast networks. 1154 For example, News Corp.’s Twentieth Century Fox Television produces Modern Family for Disney’s ABC, Awake for Comcast’s NBC, How I Met Your Mother for CBS, and Futurama for Viacom’s Comedy Central. News Corp., SEC Form 10-K for the Year Ended December 31, 2010, at 9-10 (“News 2010 Form 10-K”). 1155 The Weinstein Co., About The Weinstein Company, http://weinsteinco.com/about-us/ (visited Mar. 7, 2012). 1156 For example, Warner Brothers Television Group (“WBTVG”), a subsidiary of Time Warner, develops and produces new television series (e.g., Two and a Half Men), reality-based entertainment shows and animation programs for Time Warner’s cable networks and third parties. Time Warner Inc., SEC Form 10-K for the Year Ended December 31, 2010, at 7 (“Time Warner 2010 Form 10-K”). In 2010, Warner Brothers Studios, another subsidiary of Time Warner, wholly financed the production, marketing, advertising and distribution of eight films, while distributing 15 films financed in whole or in part by other parties. Id. 1157 For example, Viacom’s Paramount Studios distributes animated feature films produced by DreamWorks Studios and CBS Films. Michael Cieply & Brooks Barnes, A Studio’s Real-Life Drama, N.Y. TIMES, Jan. 29, 2012, http://www.nytimes.com/2012/01/30/business/media/dreamworks-caught-in-a-real-life-drama.html?pagewanted=all (visited Feb. 10, 2012); Viacom Inc., SEC Form 10-K for the Year Ended December 31, 2010, at 66 (“Viacom 2010 Form 10-K”). In addition, Lionsgate has home video distribution rights to prime time series and library titles from ABC Studios, while CBS Television Distribution syndicates Harpo Studio’s Dr. Phil and Rachael Ray to television stations. See Lions Gate Entertainment Corp., SEC Form 10-K for the Year Ended December 31, 2010, at 18 (“Lionsgate 2010 Form 10-K”); Harpo, Inc., Oprah Winfrey’s Official Biography, http://www.oprah.com/pressroom/Oprah-Winfreys-Official-Biography/7 (visited Mar. 26, 2012); CBS Studios Inc., CBS Television Distribution — Featured Shows, http://www.cbstvd.com/shows_main.aspx (visited Mar. 26, 2012). 1158 Time Warner 2010 Form 10-K at 19. 1159 Id. According to Time Warner, the public acceptance of the studios’ content depends on many factors, including the availability of competing content, the availability of alternative forms of leisure and entertainment time activities, the adequacy of efforts to limit piracy, studios’ ability to develop strong brand awareness and target key audience demographics, studios’ ability to anticipate and adapt to changes in consumer tastes and behavior on a timely basis, and general economic conditions. 1160 GAO, Media Programming: Factors Influencing the Ability of Independent Programming in Television and Programming Decisions in Radio, GAO-10-369, Mar. 2010, at 13. The CW network is jointly owned by CBS and Time Warner. 1161 WGAW 6/8/11 Comments at 6. See also Deana Myers, Comedy Returns to Broadcast, SNL Kagan, May 27, 2011. To promote a more competitive media marketplace, the Writers Guild of America, West proposes that the (continued….) Federal Communications Commission FCC 12-81 158 believe that in order to retain control over the distribution of their content, including OVD and VOD distribution, networks may rely more on in-house production.1162 Time Warner asserts that despite the increasing number of networks distributed by MVPDs, access to prime time and syndicated television slots for its studio has tightened as networks and O&Os increasingly rely on programming from content producers aligned with or owned by their parent companies.1163 Time Warner, which owns studios that are not vertically integrated with a broadcast television network, states that this could lead it and similarly situated studios to launch fewer new television series and to receive lower licensing fees.1164 362. Broadcast Programming. Broadcast networks license programming from in-house production studios, third-party studios, and sports leagues.1165 Television production studios develop programs in collaboration with independent writers, producers, and creative teams.1166 Broadcast networks’ primary expense is the cost to acquire or license television programming, including sports programming and feature films.1167 Premium sports programming is the most expensive, while reality and non-fiction programming are the least expensive.1168 Broadcast networks also incur the expense of producing certain programming, most notably non-entertainment programming, such as news and public affairs, that is unlikely to be acquired from a studio. SNL Kagan estimates that programming costs for 11 (Continued from previous page) Commission require the broadcast networks devote at least 25 percent of their prime time schedule to programming that is owned and produced by independent sources. WGAW 6/8/11 Comments at 15-16. WGAW defines independent producers as studios or production companies that are not owned or affiliated with a major broadcast or cable network or an MVPD provider. Id. at 3. 1162 Spencer Wang, Shub Mukherjee, and Michael Senno, Entertainment Industry: Not All Cable Networks Are Created Equal, Credit Suisse, Jan. 31, 2012, at 34 (“Wang”) (“[W]e believe that cable networks that own more of their programming will have more control over their destiny. . . [E]ven if the total [number of MVPD subscribers] declines, networks that own the programming that they air will be able to [earn revenue from] their content by selling these rights to [OVDs].”). See also Time Warner 2010 Form 10-K at 25; Sony Kabushiki Kaisha (Sony Corporation), SEC Form 20-F for the Fiscal Year Ended March 31, 2011, at 31 (“[B]roadcast networks in the U.S. continue to produce their own shows internally.”). 1163 Time Warner 2010 Form 10-K at 10-11. Studios differ on how they assess cable and broadcast networks’ demand for television programming. Lionsgate expects to see an increase in demand for its programming. It expects key drivers to include the success of the cable industry’s bundled services, increased average revenue per user and accelerated growth in advertising. Additionally, Lionsgate claims increased capacity for channels on upgraded digital cable systems and satellite systems has led to the launch of new networks seeking programming to compete with traditional broadcast networks as well as other existing networks. Lionsgate 2010 Form 10-K at 7. 1164 Time Warner 2010 Form 10-K at 25. 1165 The Walt Disney Co., SEC Form 10-K for the Year Ended December 31, 2010, at 1 (“Disney 2010 Form 10- K”); News 2010 Form 10-K at 13, 46, 55-56; Comcast Corp., SEC Form 10-K for the Year Ended December 31, 2010, at 10 (“Comcast 2010 Form 10-K”); CBS Corp., SEC Form 10-K for the Year Ended December 31, 2010, at I- 2 (“CBS 2010 Form 10-K”). 1166 Individual studios develop half-hour comedies, one-hour dramas, television movies, mini-series, and/or non- fiction programming for cable or broadcast networks. Disney 2010 Form 10-K at 1; Lionsgate 2010 Form 10-K at 48; Time Warner 2010 Form 10-K at 7-8. 1167 Broadcast networks, including CBS, FOX, and ABC, whose television studios operate as separate divisions of their conglomerates, include in-house programming as expenses. News 2010 Form 10-K at 9; Disney 2010 Form 10-K at 30; CBS 2010 Form 10-K at I-2. In contrast, NBC Universal’s NBC and Telemundo broadcast networks and production studios operate as a single division, competing directly with other productions studios and content creators. Comcast 2010 Form 10-K at 9-10. 1168 Wang at 31. Federal Communications Commission FCC 12-81 159 nationally distributed English and Spanish-language broadcast networks stayed relatively steady from $13.1 billion in 2006 to $13.4 billion in 2010.1169 363. For a typical broadcast entertainment program, about one year ahead of the scheduled air date, each broadcast television network selects approximately two or three dozen shows to develop into a pilot or sample episode. Of the approximately 120 pilots that studios produce for the major broadcast networks, about half are selected for the start of the coming television season. The networks usually commit to funding 13 episodes of a weekly series provided that the show attracts a minimum number of viewers, with an option to order an additional nine to 11 episodes to complete the television season.1170 As of 2010, an hour-long, scripted pilot could cost a studio between $2.7 million and $3 million to produce, with some costing significantly more.1171 Broadcast networks may pay a studio about $1.5 million to license the program.1172 364. Broadcast networks derive about 99 percent of their net operating revenues1173 from the sales of advertising time for their network broadcasts.1174 The ability to sell commercial time and the rates received are primarily dependent on the size and nature of the audience that the network can deliver to the advertiser as well as overall advertiser demand for time on network broadcasts.1175 A decrease in audience ratings can lead to a reduction in pricing and advertising spending, adversely affecting a 1169 SNL Kagan, TV Network Industry Benchmarks: Broadcast (2006 – 2010) (“SNL Kagan Broadcast Benchmarks”). SNL Kagan defines programming expenses as the direct cost of creating, acquiring, and distributing content and services. For the years 2006-2010, SNL Kagan included financial data from CBS, NBC, ABC, FOX, Univision, The CW, Telemundo, TeleFutura, ION, Azteca America, and MyNetwork TV. For 2006, SNL Kagan includes figures from the networks The WB and UPN in the industry totals. For 2009 and 2010, SNL Kagan also includes figures from Estrella TV in broadcast network industry estimates. See also SNL Kagan, Media Trends, 2011 Edition, at 20-21 (“SNL Kagan 2011 Media Trends”). NBC has higher costs in even years due to the Olympics. Id. 1170 Each year, studios can lose hundreds of millions of dollars on flops. See, e.g., Meg James, TV’s Evolution Brings New Profit Squabbles, L.A. TIMES, Jan. 17, 2006, at C1. In contrast, Discovery Networks CEO David Zaslav stated that they have made a concerted effort to “trim the waste” of the development process by waiting to see how a pilot episode performs before ordering more than four episodes at time. Discovery Communications, Inc., Presentation to Deutsche Bank Media & Telecom Conference, Corrected Transcript, Feb. 28, 2012, at 5 (“Discovery Presentation Transcript”). Netflix, on the other hand, has ordered 26 episodes of an original series, House of Cards, for about $4 million per episode, without a pilot episode. Ben Fritz & Joe Flint, Netflix Less about Flicks, More about TV, L.A. TIMES, Feb. 4, 2012, at B1. 1171 See Marisa Guthrie, Is Network TV’s Model Lost?, BROADCASTING & CABLE, Apr. 26, 2010, at 10. A half-hour situation comedy costs slightly less, about $2-$3 million per episode in 2011. Paige Albiniak, Will Sheen Get Payne Treatment on New Show?, BROADCASTING & CABLE, July 25, 2011, at 29. Network reality programs are less expensive to produce, with the average cost between $1.5 million and $2 million per episode. Bill Carter, NBC to Pay Outsiders for Blocks of Programs, N.Y. TIMES, Dec. 3, 2007, at C1. 1172 See Bill Carter, NBC to Pay Outsiders for Blocks of Programs, N.Y. TIMES, Dec. 3, 2007, at C1. 1173 Net advertising revenue is the total amount networks charge advertisers to carry their commercials net of commissions charged to client companies by ad agencies to buy time on the networks, i.e., the revenues that broadcast networks actually receive. Net operating revenue includes net advertising revenue plus all other sources of revenues. See Table 25. 1174 CBS 2010 Form 10-K at I-2; Disney 2010 Form 10-K at 1; News 2010 Form 10-K at 45. 1175 Disney 2010 Form 10-K at 1. Federal Communications Commission FCC 12-81 160 broadcast network’s financial performance.1176 Between 2006 and 2008, net operating revenues for the broadcast television network industry increased from $16.6 billion to $16.8 billion. In 2009, it declined to $15.5 billion, but increased to $16.4 billion in 2010.1177 Table 25: Broadcast Television Network Industry Financial Performance1178 Revenue (in thousands) 2006 2007 2008 2009 2010 Gross Advertising $19,422,445 $19,504,124 $19,680,532 $18,134,566 $19,173,013 Net Advertising $16,509,078 $16,578,505 $16,728,452 $15,414,381 $16,297,061 Other Operating Revenue $51,278 $59,994 $48,964 $61,120 $87,006 Net Operating Revenue $16,560,356 $16,638,499 $16,777,416 $15,475,501 $16,384,067 Expenses (in thousands) 2006 2007 2008 2009 2010 Operating SG &A $2,412,129 $2,326,703 $2,319,787 $2,301,060 $2,350,880 Programming $13,054,780 $12,728,519 $13,337,526 $12,613,117 $13,414,689 Network Compensation $246,632 $170,650 $133,563 $81,467 $48,109 Total Operating Expenses $15,713,541 $15,225,872 $15,790,876 $14,995,644 $15,813,678 Cash Flow (in thousands) 2006 2007 2008 2009 2010 Cash Flow $846,814 $1,412,628 $986,540 $479,857 $570,389 Cash Flow Margin (%) 5.11% 8.49% 5.88% 3.10% 3.48% 365. Studios often do not profit from a show for several years, if ever. They hope to earn large revenues during subsequent distribution windows of the programs1179 in ancillary markets, including syndication to broadcast television stations and/or cable networks; DVD and Blu-ray release; international distribution; and online distribution. The performance of a television series in subsequent distribution 1176 News 2010 Form 10-K at 30-31. ABC was nevertheless able to increase its advertising rates between 2009 and 2010 for prime time programming despite a decline in prime time ratings. Disney 2010 Form 10-K at 29-30. 1177 SNL Kagan Broadcast Benchmarks. Increased revenues for broadcast networks in even years are due in part to the airing of the Olympics. Because most political advertising is purchased on a regional basis (e.g., on a statewide basis for gubernatorial and senate elections as well as presidential campaigns that target swing states), it tends to impact broadcast stations more than broadcast networks. In some cases, however, presidential campaigns may purchase advertising on broadcast networks. See Jim Rutenberg, Nearing Record, Obama’s Ad Effort Swamps McCain, N.Y. TIMES, Oct. 18, 2008, at A1. 1178 FCC staff estimates based on data from SNL Kagan. See SNL Kagan Broadcast Benchmarks. 1179 CBS 2010 Form 10-K at I-3; Lionsgate 2010 Form 10-K at 8. Federal Communications Commission FCC 12-81 161 windows is highly correlated with the ratings of its initial telecast.1180 Typically, a series must be broadcast for at least three to four television seasons to generate a sufficient number of episodes to make it desirable for syndication to broadcast television.1181 Moreover, not all series lend themselves to subsequent distribution. For example, with respect to the syndication market, broadcast stations and cable networks prefer series with episodes that have self-contained storylines which give them the flexibility to schedule the episodes out of sequence.1182 The most popular network television series are sold into both broadcast television station and cable network syndicaton.1183 In the past, studios primarily sold television situation comedies to broadcast television stations. As cable networks have earned more in fees from MVPDs, their programming budgets have increased, enabling them to bid for situation comedies as well as dramas.1184 Unscripted, or “reality” programming, generally has little value in the syndication after its initial airing.1185 Table 26: Television Studio Revenue Streams1186 (Revenue in millions) 2006 2007 2008 2009 2010 Broadcast Network $12,434 $12,197 $12,786 $12,048 $12,693 Syndication (Cash) $3,162 $3,303 $3,379 $3,316 $3,227 Syndication (Gross Barter) $2,902 $2,823 $3,015 $2,878 $2,813 Basic Cable Networks/RSNs (Cash) $15,197 $17,165 $18,783 $20,855 $22,460 Premium Cable TV Domestic $2,584 $2,594 $2,611 $2,696 $2,989 Total Domestic $36,280 $38,082 $40,573 $41,793 $44,182 Total International $8,666 $8,965 $9,454 $10,178 $10,555 Total TV Programming $44,946 $47,047 $50,027 $51,970 $54,737 1180 A network’s decision to cancel a program due to poor ratings may prevent a studio from recouping its production expenses, requiring the studio to immediately write-off of any unamortized production costs. Viacom 2010 Form 10-K at 65. 1181 More recently, syndication sales have occurred within the first two seasons of a show’s initial airing. One-hour dramatic series airing on broadcast networks between 2000 and 2010 only had a 17.1 percent probability of being renewed into a fourth season. Deana Myers, 1-Hours: Chance of Success, SNL Kagan, Dec. 22, 2011. 1182 Second Life; Digital $$$ Amp Syndie Biz, DAILY VARIETY, July 21, 2011, at 1. 1183 Deann Myers, “Off-Network Deals Continue to Break Records,” Economics of Networks, SNL Kagan, JULY 9, 2012. 1184 SNL Kagan, Syndication: Background, Economics of TV Programming and Syndication (2007) at 70. 1185 For this reason, rights holders for reality programming often allow entire seasons to be available online instead. Andrew Wallenstein, ABC-WBTV Deal Rewrites Syndie, Digital Rules, DAILY VARIETY, Nov. 14, 2011, http://www.variety.com/article/VR1118046062 (visited Mar. 26, 2012). 1186 FCC staff estimates based on data from SNL Kagan. See SNL Kagan 2011 Media Trends at 196 (containing the data for 2009-2011); SNL Kagan, Data Library, Worldwide TV Programming Market for U.S. Produces Programming ($Mil.), Historical, Nov. 30, 2009 (containing the data for 2006-2008). Federal Communications Commission FCC 12-81 162 366. Cable Programming. Similar to broadcast networks, cable networks also license programming from in-house production studios, third-party studios, and sports leagues. As with broadcast networks, programming represents a major expense for cable networks.1187 SNL Kagan estimates that combined, the basic cable networks’ programming expenses were $14.4 billion in 2006, representing 44.1 percent of total $32.6 billion in net industry revenues for cable networks, and rose to $20 billion in 2010, representing 44.2 percent of $45.3 billion in net industry revenues for cable networks.1188 A typical hour-long, scripted cable drama costs less to produce than a broadcast drama, approximately $2 million per episode. And cable networks generally pay lower licensing fees than broadcast networks – about $1 million per episode.1189 On the other hand, the returns for a studio on a popular cable network show may be less than a broadcast network show because the former tends to attract a fraction of audience in its original airing.1190 In addition, cable series have about 10 to 13 episodes per series per season compared with 22 to 24 episodes for a broadcast series.1191 367. Cable networks are the primary source of profit for entertainment conglomerates.1192 Cable networks earn revenues primarily from two sources, advertising and MVPD license fees paid on a per subscriber basis. Premium cable networks, described in more detail below, are generally available to subscribers for an additional fee, are commercial-free, and offer specialized programs including unedited movies, original series, and sporting events. Combined, basic cable networks earned about $15.1 billion in net advertising revenues in 2006, and $19 billion in net advertising revenues in 2010.1193 Subscriber fees rose at a much faster rate. Basic cable networks collectively earned about $16.3 billion in subscriber fees in 2006, and $24.9 billion in 2010.1194 A two-tier structure has emerged in which the established 1187 Wang at 29, 32. 1188 SNL Kagan, TV Network Industry Benchmarks: Basic Cable Networks (2006 – 2010) (“SNL Kagan Basic Cable Benchmarks”). For broadcast and cable networks, sales, general, and administrative expenses (“SGA”) represent the other major expense besides programming. We compare the profit margins of the two types of networks in our discussion of sports programming, infra, ¶¶ 371-76. See also Wang at 27-33 (indicating that programming expenses play a key role in a cable network group’s cost structure). 1189 Because they know that they will earn less money from cable networks, studios adjust their budgets accordingly. They rely on tighter budgets, smaller deficits, and investment by international markets. Bill Carter, Weighty Dramas Flourish on Cable, N.Y. TIMES, Apr. 4, 2010, at B1; SNL Kagan TV Programming Report 109. 1190 In addition, the possibilities for syndication are more limited, since cable networks fear that they might dilute their brand by running programming that originally aired on a competitor. SNL Kagan TV Programming Report at 109. 1191 Bill Carter, Embracing Cable’s Concept of Opening Night, N.Y. TIMES, Jan. 15, 2012, at B3. Cable networks generally air episodes of a series consecutively, with no pre-emptions or repeats, while broadcast networks spread the episodes out over a period of nine months. Id. 1192 For five of the entertainment conglomerates (Disney, Time Warner, Viacom, Discovery Networks, and News Corp.), cable networks contribute anywhere from 60 percent to more than 90 percent of companywide earnings before interest and taxes (“EBIT”). Wang at 2. See also Comcast Corp., Comcast and GE Announce Content Joint Venture (slide presentation), Dec. 3, 2009, at 4 (“Cable channels represent 82% of the new joint venture’s OCF [Operating Cash Flow] and drive its profitability.”), http://www.cmcsk.com/events.cfm?Year=2009 (visited Mar. 2, 2012); Meg James, Cost of Cable TV Content Soars, L.A. TIMES, Dec. 8, 2011, at B1. 1193 SNL Kagan, Economics of Basic Cable Networks, 2011 Edition, at 13 (“SNL Kagan Basic Cable Report”). See also Table 27; SNL Kagan Basic Cable Benchmarks. 1194 SNL Kagan Basic Cable Report at 13. See also SNL Kagan Basic Cable Benchmarks. Basic cable networks collectively earned about $1.3 billion in additional operating revenue in 2006 and about $1.4 billion in 2010. Depending on the structure of the cable networks’ parent company, this revenue may include ancillary revenues (continued….) Federal Communications Commission FCC 12-81 163 major-brand cable networks charge MVPDs subscriber fees, while newer networks pay MVPDs for carriage in order to launch.1195 The top networks enjoy relatively high per subscriber license fees, while less viewed cable networks, even those that are well established, might receive only a few pennies per month per subscriber. For example, in 2010 ESPN charged on average $4.39 per month per subscriber (up from $3.48 in 2007). On the other hand, TNT, the most expensive non-sports network, charged $1.06 in 2010 (up from $0.91 in 2007) and MTV Hits charged $0.01 in 2010 (the same price charged in 2007).1196 Collectively, Comcast, Discovery, News Corp., Disney, Viacom, and Time Warner earned more than 69 percent of total basic cable subscriber fees in 2010, and 84 percent of basic cable network advertising revenues.1197 For several MVPDs, subscriber fees paid for carriage of programming is a major expense, or their single largest expense item.1198 Table 27: Basic Cable Network Financial Performance1199 Revenue (in thousands) 2006 2007 2008 2009 2010 Gross Advertising $17,762,171 $19,268,379 $20,639,236 $20,459,863 $22,509,530 Net Advertising $15,097,845 $16,370,881 $17,538,855 $17,388,205 $19,113,100 Subscriber Fees $16,225,993 $18,340,322 $20,507,329 $22,732,037 $24,756,531 Other Operating Revenue $1,295,956 $1,541,676 $1,445,783 $1,267,576 $1,376,143 Net Operating Revenue $32,619,795 $36,252,879 $39,491,967 $41,387,819 $45,265,744 Expenses (in thousands) 2006 2007 2008 2009 2010 Operating SG&A $6,614,666 $6,839,323 $6,930,042 $6,572,993 $6,765,499 Programming $14,358,296 $16,156,814 $17,462,761 $18,567,669 $20,045,769 Total Expenses $20,972,961 $22,996,137 $24,392,803 $25,140,823 $26,814,919 Cash Flow (in thousands) 2006 2007 2008 2009 2010 Cash Flow $11,646,934 $13,257,188 $15,099,056 $16,247,693 $18,450,826 Cash Flow Margin (%) 35.7% 36.6% 38.2% 39.3% 41.0% (Continued from previous page) from consumer product licensing, brand licensing, home entertainment sales of programming, and syndication or international distribution. See Viacom 2010 Form 10-K at 37-38; CBS 2010 Form 10-K at II-7; Time Warner 2010 Form 10-K at 2. 1195 See Vogel supra, n. 463, at 351, n. 17. 1196 SNL Kagan, TV Network Summary: Basic Cable Network by Affiliate Revenue Per Avg Sub/Month (2006 – 2010) (“SNL Kagan Basic Cable Network Affiliate Revenue”). Other networks (e.g., FamilyNet and ReelzChannel) do not charge any monthly subscriber fees. Id. 1197 Wang at 8. 1198 See, e.g., Comcast 2010 Form 10-K at 4; Time Warner Cable 2010 Form 10-K at 23; Cablevision 2010 Form 10-K at 32; Suddenlink 2010 Annual Report at 25-26; Mediacom 2010 Form 10-K at 11; DISH Network 2010 Form 10-K at 19. MVPDs expect these costs to rise. See, e.g., Comcast 2010 Form 10-K at 41; Time Warner Cable 2010 Form 10-K at 38; Cablevision 2010 Form 10-K at 32; Charter 2010 Form 10-K at 8; Insight 2010 Form 10-K at 36; Suddenlink 2010 Annual Report at 12-13; DIRECTV 2010 Form 10-K at 19; DISH Network 2010 Form 10-K at 19. 1199 FCC staff estimates based on data from SNL Kagan. See SNL Kagan Basic Cable Benchmarks. Federal Communications Commission FCC 12-81 164 368. Movies. Similar to television production, movie production, marketing and distribution can involve significant costs over an extended period of time.1200 The production process involves decisions regarding financing a movie, development of a screenplay, assembling the artistic and technical staff, and the actual filming and post-filming editing/post-production process.1201 Studios may distribute their own movie productions or they may acquire movies for theatrical release and/or other distribution outlets from the content’s creator.1202 Feature films typically are produced or acquired for initial exhibition in theaters, followed by ancillary distribution windows. 369. A studio typically incurs losses during a movie’s theatrical exhibition, and may not realize profits until well after that time. Studios indicate that the costs of producing and marketing movies have steadily increased in recent years, outpacing domestic theater revenues.1203 In particular, Viacom states that the costs of movie production have risen faster than revenues from ancillary markets.1204 On average, six or seven out of ten major theatrical movies produced may be unprofitable, and one might break even.1205 Premium cable networks provide a sizable source of production financing for the movie studios, representing nearly 12 percent of their revenues in 2010. These networks commit to spending hundreds of millions of dollars in advance to license a specified number of airings of a studio’s movie catalog (sometimes exclusively) for up to nine years.1206 In turn, the premium networks can retain the allegiance of MVPDs, their primary customers. License fees negotiated by the studios are based on the theatrical performance of the movies in the packages. SNL Kagan estimates that in 2010 premium networks spent about 62.5 percent ($1.87 billion) of their programming budgets on movies, compared with 37.5 percent ($1.1 billion) on original programming.1207 In 2007, premium networks spent about 66 percent ($1.71 billion) of their programming budgets on movies, compared with $882 million on 1200 Viacom 2010 Form 10-K at 12-13; Lionsgate 2010 Form 10-K at 24; Time Warner 2010 Form 10-K at 25. The increasing popularity of 3D movies and the trend toward producing event and franchise films (which often entail higher talent costs for movies later in the series) could result in even higher production costs. Time Warner 2010 Form 10-K at 25. 1201 Lionsgate 2010 Form 10-K at 9-10. 1202 Id. at 13-14. According to Lionsgate, the decision to acquire a movie is based on expected critical reaction, marketability, potential for commercial success, cost to acquire the picture, estimated distribution and marketing expenses, and ancillary market potential. Id. 1203 Viacom estimates that it receives the ultimate revenues for a movie from all distribution windows within ten years of the movie’s initial release. It estimates that for acquired film libraries it receives revenues over a period within 20 years from the date of acquisition. Viacom 2010 Form 10-K at 64-65. 1204 Viacom states that revenues from subsequent markets have historically exhibited a high correlation to domestic theatrical performance. Id. 1205 Vogel at 71. 1206 Id. at 337. For example, the Disney Studio and Sony Studio license television and online viewing rights of their movie catalogs to Starz. Lionsgate, however, generally licenses its films to networks (including TV Guide Network, in which it has an ownership interest), on a film-by-film, rather than an output basis. Lionsgate notes that without multiple output agreements that typically contain guaranteed minimum payments, its revenues may be subject to greater volatility, which could have a material adverse effect on its business, financial condition, operating results, liquidity and prospects. Lionsgate 2010 Form 10-K at 28. In April 2008, Lionsgate, along with Viacom, and MGM studios, formed EPIX, a premium television channel and VOD service, for its theatrical releases after January 1, 2009. EPIX, which launched in October 2009, provides Lionsgate with an additional platform to distribute its library of motion picture titles and television episodes and programs. Lionsgate 2010 Form 10-K at 28; Studio 3 Partners, What is EPIX?, http://corp.epixhd.com/ (visited Mar. 26, 2012). 1207 SNL Kagan 2011 Media Trends at 155. Federal Communications Commission FCC 12-81 165 original programming.1208 On average, about 25 percent of the retail price MVPDs charge consumers for premium networks goes to the movie studios.1209 Table 28: Motion Picture Studio Revenue Streams1210 (Revenue in millions) 2006 2007 2008 2009 2010 Domestic: Theatrical Rentals $4,798 $5,118 $5,119 $5,672 $5,678 Home Video $12,515 $12,056 $11,384 $10,387 $9,275 PPV/VOD $621 $674 $804 $1,013 $1,443 Premium Cable TV $1,731 $1,713 $1,689 $1,820 $1,868 Digital $16 $70 $242 $503 $752 Basic Cable $2,611 $2,638 $2,690 $2,714 $2,769 Broadcast Networks $478 $444 $418 $394 $372 TV Syndication $152 $158 $163 $168 $173 Other1211 $1,285 $1,393 $1,324 $1,205 $1,226 Total Domestic: $24,209 $24,263 $23,833 $23,875 $23,557 Total International: $23,881 $25,379 $25,853 $26,184 $26,453 Total: $48,090 $49,643 $49,687 $50,058 $50,010 370. Home entertainment distribution involves the marketing, promotion and sale and/or lease of DVDs and Blu-ray discs to wholesalers and retailers who then sell or rent them to consumers.1212 Studios also distribute television programs and movies for individual rental through such companies as 1208 SNL Kagan, Media Trends, 2008 Edition, at 201. 1209 Vogel at 337-38 & 351, n. 16. 1210 Wade Holden, Distributor Revenue Should Continue Growth, SNL Kagan, Dec. 28, 2010 (containing the date for 2006-2009); Wade Holden, Home Video a Temporary Lag on Distributor Revenue, SNL Kagan, Sept. 26, 2011 (containing the data for 2010). 1211 “Other” includes hotel, airline and merchandise licensing. 1212 Lionsgate 2010 Form 10-K at 6. Studios may rely on third parties to manufacture the discs, warehouse the discs, and deliver the discs to retailers. Time Warner 2010 Form 10-K at 8. Federal Communications Commission FCC 12-81 166 Redbox and Rentrak Corporation1213 or via subscription services such as Netflix1214 and Blockbuster.1215 While the domestic home video window has accounted for the largest proportion of domestic revenues for movie studios for several years, the proportion of movie studios’ revenues attributable to this window has declined from 51.6 percent of the total $24.2 billion in revenues ($12.5 billion) in 2006 to 39.4 percent of $23.6 billion in domestic revenues ($9.3 billion) in 2010.1216 371. Sports. As noted above, rights for major sporting events are licensed to networks or stations by professional or collegiate leagues.1217 Some leagues or teams operate their own regional or national cable sports networks (e.g., the NFL Network and Mid-Atlantic Sports network, the latter operated by the Baltimore Orioles and Washington Nationals baseball teams). Many regional sports networks (“RSNs”) are affiliated with entertainment conglomerates, such as Disney or Comcast.1218 We estimate that there are 93 RSNs in operation today.1219 The networks or stations may supply their own on-air talent, cameras, and production facilities to create sports programming,1220 and sell advertising and sponsorships for the programs. Alternatively, networks can sell airtime to independent production companies for “time buys,” in which an outside producer pays production costs and finds advertisers, 1213 Rentrak Corporation is a global digital media and research company. Its Video Retailer Revenue Sharing service is a wholesale operation that provides regional and independent retailers who rent home entertainment products to customers with an opportunity to acquire new inventory from studios in the same manner as major national chains. Rentrak Corp., Home Entertainment Services: Video Retailer Revenue Sharing, http://www.rentrak.com/section/homent/video_retailers/index.html (visited Mar. 6, 2012). 1214 In addition to playing a role in the home video market for movie studios through its disc rental and streaming services, Netflix is also commissioning original television programs and acquiring distribution rights for library content in the traditional syndication window. See supra, ¶ 303. 1215 Lionsgate 2010 Form 10-K at 18. See also Time Warner, Inc., Presentation to Morgan Stanley Technology, Media & Telecom Conference, Corrected Transcript, Feb. 29, 2012, at 3 (“Time Warner Presentation Transcript”). 1216 Wade Holden, Home Video a Temporary Lag on Distributor Revenue, SNL Kagan, Sept. 26, 2011, at 3. See also Time Warner 2010 Form 10-K at 41 (noting that while DVD distribution has been one of the largest drivers of its film studio’s revenues and profits over the last several years, the industry and the company have experienced a decline in DVD sales in recent years). Home video consumption falls into three major categories: purchase, rental, and subscription, including subscription video on demand. 1217 Some networks and distributors of content own sports teams (e.g., Comcast owns the Philadelphia Flyers, a National Hockey League team and Liberty Media owns the the Atlanta Braves, a National Baseball League team). See Comcast 2010 Form 10-K at 1; Liberty Media Corp., Atlanta National League Baseball Club, http://www.libertymedia.com/assets-braves.aspx (visited Mar. 8, 2012). The National Football League, however, bars corporate ownership. See John Clayton, NFL Ownership Growing Increasingly Complicated, ESPN, July 15, 2008, http://sports.espn.go.com/nfl/columns/story?columnist=clayton_john&id=3485962 (visited Mar. 8, 2012). 1218 See The Regional Sports Network Marketplace, MB Docket No. 11-128, Report, 27 FCC Rcd 154, 160-61, ¶¶ 16- 17 (MB 2012). Comcast Corporation also owns Comcast SportsNet Philadelphia, Comcast SportsNet Mid-Atlantic, and Comcast SportsNet New England, as well as the NBC Broadcasting Network. See infra, Appendix C, Table C- 1. News Corp. also owns a number of RSNs and the Fox Broadcasting Network. See infra, Appendix C, Table C-2. 1219 See infra, Appendix D (this figure includes the HD feeds of the RSN networks). NCTA estimates that there were about 51 RSNs in standard, high-definition, or premium format as of 2010. NCTA, Organizations: Cable Networks, http://www.ncta.com/Organizations.aspx?type=orgtyp2&contentId =2907#&&CurrentPage=1 (visited May 11, 2010). 1220 See Chris Gratton & Harry Arne Solberg, THE ECONOMICS OF SPORTS BROADCASTING 83-86 (Routledge, Taylor & Francis Group) (2007) (“Gratton & Solberg”). Federal Communications Commission FCC 12-81 167 while the network supplies on-air talent and coordination.1221 The amount of financial risk incurred by a team or league, as well as its dependence on revenues from broadcasting and cable companies, depends on the sport, the market, and the team’s performance. 372. Sports programming differs from other television programs and movies in two major respects. First, audience and advertiser interest is more predictable, especially for marquis events. Major sporting events, including professional football, baseball, and basketball, the Olympics, and certain NCAA playoff series consistently generate among the highest ratings of any programming among viewers who are demographically desirable to advertisers.1222 Audiences,1223 advertisers, and MVPDs therefore regard such sporting events as “premium” programming.1224 Second, live sports programs have little value beyond their initial telecast since viewer interest drops substantially once the contest is over and the results known. With the exception of websites that provide opportunities for additional engagement of fans, ancillary markets for sports programming are limited.1225 373. The licensing of sports programming for video distribution varies by sport. For example, the National Football League (“NFL”) negotiates media rights exclusively on a national basis. In the NFL, each team receives an equal share of broadcast and licensing revenues and 40 percent of gate receipts from away games.1226 Revenues earned from licensing network television rights have been especially important to the NFL. CBS, FOX, NBC, and ESPN jointly paid nearly $25 billion for the right to air NFL games for eight years, 2006-2013, representing an increase of 42 percent from the previous eight-year agreement.1227 The combination of the financial cushion from broadcast and cable networks contracts, the NFL’s revenue sharing arrangement, and the lack of local television contracts, has means 1221 Vogel at 463, n. 6. Examples of this include the Ladies Professional Golf Association, Grand Prix auto racing, and Tour de France cycling. Id. 1222 See Wang at 15. See also Gratton & Solberg at 10 (“Sports programm[ing] almost uniquely had this ability to attract the size and characteristics of audiences most attractive to distributors, sponsors, and advertisers.”). 1223 According to Nielsen, major sporting events are appealing to advertisers because they are more likely than other programs to attract viewers in households earning $100,000 or more. See Nielsen, State of the Media: Year in Sports 2010, at 1, http://www.nielsen.com/us/en/insights/reports-downloads/2011/year-in-sports- 2010.html?status=success (visited Mar. 27, 2012). 1224 Wang at 15. When NBC announced that it would stream the Super Bowl in 2012, the American Television Alliance, a group representing MVPDs, argued that free streaming undercut the stations’ rationale for justifying retransmission consent fees. See American Television Alliance, Blog, http://www.americantelevisionalliance.org/uncategorized/new-ad-why-is-sunday%E2%80%99s-big-game-being- streamed-for-free-online-when-broadcast-networks-and-their-affiliates-demand-sky-high-fees-to-show-their- programming/ (visited Feb. 17, 2012). 1225 According to Nielsen, the mobile web audience among sports sites increased by 22 percent from November 2010 to November 2011. Nielsen, State of the Media: 2011 Year in Sports at 2, http://www.nielsen.com/us/en/insights/reports-downloads/2012/state-of-the-media--2011-year-in-sports.html (visited Mar. 27, 2012). In November 2011, the first full month of the NHL season, nearly 1.3 million people visited NHL.com and watched close to 10 million minutes of video content, which is 37 percent more video than was consumed in November 2010. Id. at 8. 1226 Vogel at 453-54, Fig. 12.2. 1227 SNL Kagan 2011 Media Trends at 19. ABC, which had aired NFL games for the previous 36 years, gave up the rights to its sister network, ESPN. ESPN’s high subscriber fees enable it to earn higher cash flow margin than the broadcast network. For example, in 2010, ABC had $2.9 billion in programming costs (primarily entertainment) and a cash flow margin of 1.7 percent, while ESPN had total programming costs (sports programming) of $4.9 billion and a 25 percent cash flow margin. Id. at 18. Federal Communications Commission FCC 12-81 168 that the most profitable NFL team usually generates only 20 percent more gross revenues than the least.1228 374. For Major League Baseball (“MLB”) and the National Basketball Association (“NBA”), revenues from licensing fees are highly correlated with the size of the market and individual team performance. The NBA and MLB allow teams to negotiate local broadcast rights contracts. For this reason, RSNs may carry professional basketball and baseball games. Traditionally, the NBA and MLB have been less dependent on television revenues than the NFL, in part because they play many more games in their home markets. 1229 In August 2010, however, the Texas Rangers signed a 20-year licensing agreement with FOX Sports Net valued at $3 billion that includes an equity stake in the network, escalator clauses, and profit participation. This transaction has set in motion a series of negotiations between baseball teams and RSNs for major television contracts, at least for many teams in larger markets.1230 Similarly, in February 2011, Time Warner Cable signed a 20-year, $3 billion licensing agreement with the Los Angeles Lakers to launch English-language and Spanish-language RSNs built around the team, and other teams have subsequently signed major contracts with RSNs as well.1231 375. While the broadcast networks generally lose money on sports, the programming attracts viewers, especially with pre- and post-game programming, enabling broadcast networks to develop their brands and promote their non-sports programming schedules.1232 Nevertheless, since sporting events are less vulnerable than other types of programming to competition, broadcast and cable networks are paying increasingly large amounts for sports rights, supported in part by subscriber fees charged to MVPDs, and/or contributions from broadcast affiliates to cover rights and production costs. One recent trend has been the migration of some major sports, including the NBA and MLB, to cable networks.1233 Cable and broadcast networks sometimes share in the bidding for sports rights. For example, in 2010 CBS and TNT jointly won a bid for the National Collegiate Athletic Association (“NCAA”) men’s basketball tournament rights, providing additional outlets for sports programming.1234 For MVPDs, sports-themed cable networks are considered “must have” programming because their programming is unique and 1228 Vogel at 453. 1229 Id. at 454-55. 1230 Bob Nightengale, Cash Flows Through MLB Cable Outlets, USA TODAY, Feb. 10, 2012, at 1C. According to Arizona Diamondbacks’ President Derrick Hall, “[i]t’s the biggest game changer a lot of us have ever seen. The landscape changed in Texas . . . You’re seeing clubs double or triple their TV value.” Id. 1231 Mike Reynolds, TWC’s Lakers Deal Changes Game, MULTICHANNEL NEWS, Feb. 21, 2011, at 8. The agreement made the Los Angeles Lakers the most valuable team within the league. Kurt Badenhausen, L.A. Lakers Top 2012 List of the NBA’s Most Valuable Teams, FORBES, Jan. 25, 2012, http://www.forbes.com/sites/kurtbadenhausen/2012/01/25/the-nbas-most-valuable-teams/ (visited Mar. 13, 2012). 1232 SNL Kagan 2011 Media Trends at 21. 1233 Deana Myers, Sports Rights: Paying Off for Broadcast?, SNL KAGAN, Feb. 7, 2012. See also Pete Toms, What Does a Drop in Cable TV Subscribers Mean for MLB?, BIZ OF BASEBALL, Nov. 29, 2010 (“Fewer and fewer games are available on local ‘over-the-air’ channels as sports continue to migrate to the more lucrative ‘dual revenue’ (sub fees and ads) model of cable TV.”), http://bizofbaseball.com/index.php?option=com_content&view=article&id=4899:lwiib-what-does-a-drop-in-cable- tv-subscribers-mean-for-mlb&catid=67:pete-toms&Itemid=155 (visited Mar. 26, 2012). 1234 A Modified Madness, DAILY VARIETY, Mar. 9, 2011, at 3. According to CBS Sports Chairman Sean McManus, “[w]e realized we couldn't bid for this just as an over-the-air broadcaster . . . . We needed a partner from a (number of) standpoints.” Beginning in 2011, for the first time, every game was available for viewing in its entirety. Id. Federal Communications Commission FCC 12-81 169 cannot be easily replicated.1235 ESPN charges the highest per subscriber license fee, $4.39 per month as of 2010, of all cable networks.1236 376. Sports cable networks earned about $2.2 billion in net advertising revenue in 2007, representing 25.9 percent of net operating revenues and $2.6 billion in 2010, representing 22.8 percent in net advertising revenues, lower percentages of net operating revenue than non-sports networks as reported above. Similar to the EBITDA and operating cash flow metrics we used to measure profitability in the previous sections,1237 broadcast and cable network cash flow margins serve as indicators of their profitability.1238 As we noted earlier, cable networks, such as ESPN, have higher cash flow margins than broadcast television networks, such as ABC.1239 Among cable networks, however, sports networks, both national and regional, have lower cash flow margins than general entertainment and other genres.1240 For instance, ESPN, which earns 15 percent of cable network industry revenues, had a cash flow margin of 25.3 percent as of 2010, while Nickelodeon had a cash flow margin of 64.6 percent.1241 Sports fees have continued to rise during the recession. Between 2000 and 2010, RSN subscriber fees quadrupled from $1 billion to $4.2 billion. As of 2010, several MVPDs attributed expected additional increases in programming costs in part to rising fees for sports programming.1242 Some analysts question whether RSNs, ESPN, and other networks will be able to pass on the increasing costs of sports programming onto MVPDs.1243 Given the potential for subscribers to substitute or cut back on their MPVD subscriptions, some MVPDs have decided to price sports programming on a separate tier, and others may follow suit.1244 1235 See, e.g., News Corp-DirecTV Order, 23 FCC Rcd at 3305, ¶ 87, supra, n. 101. For example, when Disney first considered purchasing full season NFL rights for $8.8 billion for ESPN in 1998, CEO Michael Eisner justified the acquisition after getting a guaranteed 20 percent compounded growth rate in subscriber fees from all MVPDs. James Andrew Miller & Tim Shales, ESPN: THOSE GUYS HAVE ALL THE FUN 406-412 (Back Bay Books/Little, Brown & Co.) (2011). According to Comcast CEO Brian Roberts, “Michael Eisner knew that the NFL was unlike any other programming, and he used it to impose the most dramatic rate increases ever on cable customers. ESPN raised their rates more than 20 percent for seven straight years.” Id. at 409-10. 1236 SNL Kagan Basic Cable Network Affiliate Revenue. In 2010, Comcast SportsNet Washington charged the next highest rate, an average of $3.18 per subscriber per month. 1237 See supra, Secs. III.A.4., III.B.4, and III.C.4. 1238 For networks, cash flow equals total revenues (i.e., net advertising revenue, MVPD license fee revenues, and other revenue sources) minus SG&A and programming expenses. It excludes depreciation of plant property and equipment as well as amortization of goodwill. Cash flow margin equals the percentage of revenues attributable to cash flow. See SNL Kagan, TV Network Industry Benchmarks: View Definitions. 1239 See supra, Tables 25 & 27. 1240 FCC staff analysis of SNL Kagan data. See SNL Kagan, TV Network Summary: Basic Cable Network by Net Advertising Revenue (2006 – 2010). 1241 SNL Kagan Basic Cable Report at 4, 7. 1242 Charter 2010 Form 10-K at 8; Comcast 2010 Form 10-K at 25; Insight 2010 Form 10-K at 36; Suddenlink 2010 Annual Report at 12; Mediacom 2010 Form 10-K at 11, 25. 1243 Sarah Barry James, The Danger of Specialized Sports Networks, SNL Kagan, Oct. 24, 2011. 1244 One recent example is Cox Communications’ offer of an economy package for $35 a month that includes several basic cable networks, but excludes ESPN and RSNs. Comcast and Time Warner Cable have also tested and offered similar tiers. Deborah Yao, Cox Rolling Out Economy Cable TV Tier, SNL Kagan, Jan. 24, 2012, at 1-2. DISH Network, which positions itself as a low-cost MVPD (in contrast to sports-centric DIRECTV, which offers exclusive NFL Sunday Ticket programming), has reportedly considered dropping ESPN if it does not agree to be distributed on a separate sports tier, to keep prices in check for subscribers who are non-sports fans. In New York, (continued….) Federal Communications Commission FCC 12-81 170 2. Distribution Strategies 377. As discussed elsewhere in this Report, technology continues to evolve and provide alternative methods for the distribution, storage, and consumption of video content, such as DVR and VOD.1245 Alternative distribution of video content entails an evolution of rights between the networks, affiliates, and studios as well as strategic business decisions of the parties. We now describe key examples of these evolving relationships below. 378. Broadcast Television Programming and Network Affiliates. The increasing availability of network programming through a variety of video distributors has impacted the relationship between networks and their affiliates. As described above, broadcast network programming is available both via MVPD VOD service and from OVD services such as iTunes and Hulu. For example, iTunes began selling broadcast network programming in 2005. Specifically, in October 2005, ABC struck an agreement with iTunes for EST for $1.99 per episode.1246 NBC followed with an iTunes agreement in December 2005 to distribute programs from NBC Universal broadcast and cable networks.1247 When these networks began selling programs to iTunes, they did not have formal compensation agreements concerning these types of arrangements with their broadcast television affiliates in place.1248 Many affiliates were displeased that the networks had neither apprised them nor sought their permission prior to striking the deal with iTunes.1249 NBC offered iTunes more programs than ABC, in part because its affiliation agreements allowed redistribution of more in-season programs, while ABC’s affiliation agreements limited it to redistribute only 25 percent of its prime time schedule.1250 (Continued from previous page) DISH Network has dropped three RSNs – SportsNet New York, YES, and MSG Plus. DISH Network CEO Charlie Ergen has stated that if only 15 percent of subscribers in a market actually watch sports programming, it may be a good idea for one of the MVPDs not to carry RSNs. Derek Baine, Dish to Dump ESPN?, SNL Kagan, Sept. 13, 2011, at 11. 1245 See, e.g., News Corp. 2010 Form 10-K at 33; Time Warner 2010 Form 10-K at 18. 1246 The agreement also covered series from the Disney Channel. The Walt Disney Co., Disney, ABC & Apple Announce Deal to Sell TV Shows Online; Hits to Include “Desperate Housewives,” “Lost,” and “That’s So Raven” (press release), Oct. 12, 2005. 1247 Apple Inc., NBC Universal & Apple Offer New Primetime, Cable, Late-Night & Classic TV Shows on the iTunes Music Store (press release), Dec. 6, 2005. Sales from iTunes sales breathed new life into NBC’s The Office. While the show was not a primetime hit as of January 2006, it often took up half the slots of Apple’s lists of top 20 television episodes for sale on iTunes. Josef Adalian, Peacock Preening with iTunes Presence, DAILY VARIETY, Jan. 3, 2006 at 1. 1248 Glen Dickson, Broadcasters Cut Out of Convergence, BROADCASTING & CABLE, Jan. 16, 2006, at 38. CBS, however, agreed to provide a share of revenues to affiliates when it reached a distribution agreement with Google. Id. 1249 Michele Greppi, ABC Affils Remain Uneasy; Network Does Little to Erase Concerns Raised by iPod Pact, TELEVISION WEEK, Oct. 24, 2005, at 5. ABC claimed that Disney’s non-disclosure agreement with Apple prevented it from doing so. Andrew Wallenstein & T.K. Arnold, Disney-Apple Pact Upsets Affiliates, THE HOLLYWOOD REPORTER, Oct. 13, 2005. Likewise, ABC did not believe a prior agreement it reached with affiliates to limit the amount of programming it redistributed applied to iTunes. Michele Greppi, Affils Slighted by Big 3’s VOD Deals; Stations Want Info on How Revenues Will be Split, TELEVISION WEEK, Nov. 14, 2005, at 5. 1250 Josef Adalian, Peacock Preening with iTunes Presence, DAILY VARIETY, Jan. 3, 2006 at 1. Years earlier, ABC, CBS, and FOX had reached agreements with affiliates that gave affiliates additional advertising spots in network programming and/or other revenue-sharing opportunities in exchange for allowing the networks to redistribute a limited amount of network programming in-season and on a nationwide basis. In return, the affiliates helped defray the networks’ costs for sports rights. Michele Greppi, Affils: Exclusivity is Dead, TELEVISION WEEK, Apr. 17, (continued….) Federal Communications Commission FCC 12-81 171 379. Broadcast networks subsequently reached comprehensive agreements with their affiliates that specifically addressed alternative forms of distribution, such as iTunes and MVPD VOD services.1251 In 2006, FOX and its affiliates reached a six-year agreement, allowing the network to repurpose more programming per week on alternative media, including iTunes, websites, and VOD, making it available for viewing the morning after the show originally aired on broadcast television stations.1252 Stations had the right to share in revenues.1253 This marked the first agreement between a broadcast network and its affiliates to extensively address distribution of broadcast network programming via VOD, OVDs, and FOX’s website, FOX.com. 380. Other networks followed suit. In June 2006, CBS reached an agreement with affiliates allowing it to repurpose network programming on VOD, on its CBS.com website (formerly called “Innertube”), as well as other digital outlets.1254 The agreement also provided affiliates with a share of the revenues generated by these ventures for three years. In exchange, affiliates agreed to continue to defray CBS’ costs of acquiring the rights to NFL broadcasts.1255 In September 2006, CBS and Comcast modified their VOD agreement to include eight CBS prime time programs distributed nationwide, with advertisements, at no additional cost to Comcast subscribers.1256 381. In the summer of 2006, ABC became the first broadcast network to stream full episodes of its programs, with limited commercials, on its website, ABC.com, and initially limited online distribution of its programs to its own site.1257 It allowed affiliates to incorporate ABC’s video player in their own sites, and sell advertising within the episodes.1258 In February 2008, ABC reached an (Continued from previous page) 2006, at 1. As of 2006, NBC was the only one of the four major networks that did not have a written agreement with affiliates setting forth terms of redistribution of its network programming. Id. When these agreements first became prevalent in the 1990s, NBC was decreasing its reliance on professional sports programming. Michele Greppi, Affils Slighted by Big 3’s VOD Deals; Stations Want Info on How Revenues Will Be Split, TELEVISION WEEK, Nov. 14, 2005, at 5. 1251 While broadcast stations negotiate for retransmission consent for MVPD carriage of their signals, including broadcast network programming, the networks, subject to contractual rights with content creators, negotiate with MVPDs for VOD rights. Comcast 2010 Form 10-K at 5. 1252 Michael Schneider, Fox Expands Playing Field for Content, DAILY VARIETY, Apr. 13, 2006. The amount grew from 60 percent of FOX’s prime time lineup the first year, to 80 percent the second year, to 100 percent the third year. Id. See also Michele Greppi, Sly Fox’s Win-Win Web Pact; New Media Deal Gives Net On-Demand Freedom, Affils a Cut; CBS Eyes Similar Scenario, TELEVISION WEEK, Apr. 17, 2006, at 1. 1253 The agreement was limited and only allowed affiliates to share revenues with FOX from programming made available via MVPD VOD service or on OVD sites. Michele Greppi, Sly Fox’s Win-Win Web Pact; New Media Deal Gives Net On-Demand Freedom, Affils a Cut; CBS Eyes Similar Scenario, TELEVISION WEEK, Apr. 17, 2006, at 1. See also Allison Romano, Affiliates Fight for Slice of Platform Pie, BROADCASTING & CABLE, May 15, 2006, at 17. 1254 Mass Media Notes, COMM. DAILY, June 30, 2006. 1255 Id. 1256 Comcast Corp., Comcast and CBS Introduce Free On Demand Episodes of Primetime CBS Shows for Comcast Digital Cable Customers (press release), Sept. 14, 2006. The VOD offerings excluded local commercials, which are often more time-sensitive than network commercials. Michele Greppi, Affils Slighted by Big 3’s VOD Deals; Stations Want Info on How Revenues Will Be Split, TELEVISION WEEK, Nov. 14, 2005, at 5. 1257 Chuck Salter, Brave New Mouse, FAST COMPANY, June 1, 2007, at 79. See also Abbey Klaassen, Revved-Up Video, ADVERTISING AGE, Sept. 11, 2006, at S-1. 1258 Chuck Salter, Brave New Mouse, FAST COMPANY, June 1, 2007, at 79. Federal Communications Commission FCC 12-81 172 agreement with its affiliates enabling it to distribute ABC network content anytime via VOD as well as electronic sell-through services, such as iTunes and Microsoft’s Zune service on its Xbox game consoles.1259 The agreement allowed affiliates to participate through local advertising sales opportunities.1260 In October 2008, ABC and Verizon made select ABC prime time programs available to Verizon FiOS customers nationwide.1261 382. In April 2006, NBC and its affiliates formed a joint venture, called National Broadband Company. National Broadband Company, which began operating in September 2006, was a wholesale service that distributed clips of videos produced by the affiliates, NBC Universal, and some third parties to the websites of the participating media companies.1262 In July 2007, however, NBCU announced that it would shut down the service in order to focus on Hulu.1263 In 2010, NBC reached an agreement with its affiliates to offer them branding and advertising availabilities on post-network distribution of NBC entertainment and sports programs on Hulu as well as other platforms.1264 383. Creators. The availability of network television programming also involved negotiations between networks, studios, and talent unions. Disagreement over compensation arrangements from alternative systems of distribution led to the strike of the Writers Guild of America (“WGA”) during the 2007-2008 television season.1265 For instance, with respect to the programming agreements with iTunes, the networks and studios claimed that iTunes fell into the category of “home video” rather than subscription television, and therefore entitled the unions to a lower residual rate, while the guilds felt that 1259 The Walt Disney Co., ABC and Affiliates Reach Unprecedented Arrangement to Expand (press release), Feb. 25, 2008. 1260 Each affiliate had the opportunity to insert one locally sold, 30-second commercial spot within each half-hour of programming in DMAs where ABC programming was available via VOD. Id. 1261 Verizon Communications Inc., Disney-ABC Television Group and Verizon FiOS TV Expand ABC’s Video-on- Demand Offering (press release), Oct. 28, 2008. 1262 The affiliates owned about 30 percent of the joint venture. Seth Sutel, NBC Launches Online Video Venture, Hoping to Reclaim Viewers, ASSOCIATED PRESS, Sept. 12, 2006. Third party participants included CBS’s College Sports Television and the Sundance Channel. At the time of the launch, NBC Universal Television Group executives stated that while the venture would initially distribute clips, it would be open to showing full-length episodes if demand existed. Michael Learmonth, NBC U Bows Online Service, DAILY VARIETY, Sept. 13, 2006, at 6. 1263 At the time, Hulu, still in the planning stages, had the working name “New Site.” Katy Bachman, NBCU to Affils.: NBBC to Shut Down, Fold Into New Site, MEDIA WEEK, July 5, 2007. See also Katy Bachman, Afils Wary of “New Site”: NBCU Says Alternative is Better Than Shuttered NBBC, MEDIA WEEK, July 9, 2007, at 6. 1264 The NBC affiliates reached an agreement with Comcast and NBC Universal on June 3, 2010 (the “NBC Affiliates Agreement”). A copy of the NBC Affiliates Agreement was submitted to the Commission on August 6, 2010, in the Comcast-NBC Universal transaction. See Letter from Michael H. Hammer, Counsel for Comcast and David H. Solomon, Counsel for NBC Universal, Inc., MB Docket No. 10-56, to Marlene H. Dortch, Secretary, FCC (Aug. 6, 2010). See NBC Affiliates Agreement at Section 9. 1265 Julia M. Scott, WGA Strike: Act I Both Sides Settle in for Long Battle Over Revenue, DAILY NEWS (Los Angeles), Nov. 6, 2007, at A1. See also Sarah McBride & Rebecca Dana, Scenes from Next Week…?, WALL ST. J., Nov. 1, 2007. Federal Communications Commission FCC 12-81 173 this decision violated their collective bargaining agreements.1266 Ultimately the WGA obtained higher residuals for online distribution.1267 384. Studios. Studios attribute the decline in DVD sales to several factors, including the general economic downturn, the availability of subscription services and discount kiosks, the maturation of the standard definition DVD format, piracy, and the declining popularity of catalog titles.1268 This loss in revenues is partially offset by the growing sales of Blu-ray discs and EST of movies via OVDs.1269 Moreover, revenues from MVPDs’ VOD services have grown since 2007, from $674 million, representing 2.8 percent of motion picture studios’ total domestic revenue, to $1.2 billion in 2010, representing 4.9 percent of motion picture studios’ total domestic revenues.1270 For a studio, a pay-per- view VOD transaction is about seven times more profitable than a DVD rental transaction at a discount kiosk such as Redbox or from a subscription service such as Netflix, while an electronic sell-through transaction is 20 to 30 times more profitable.1271 The decline in DVD sales has diminished the leverage of large retailers1272 over the distribution of content; they can no longer insist on a prolonged period of exclusivity for home video releases.1273 The number of movies released simultaneously on VOD and DVD tripled from 10 films in 2007 to more than 30 movies in 2008.1274 According to an SNL Kagan study, movies in 2010 were released on pay-per-view VOD an average of just four days after they were available on DVD, down from 19 days in 2009, 31 days in 2008, 34 days in 2007, and 38 days in 2006.1275 385. Recent Developments. In 2010, the Media Bureau waived the prohibition, under limited circumstances and conditions, on the use of selectable output controls for early-release films for Motion Picture Association of America (“MPAA”) member companies and their MVPD partners.1276 Since then, 1266 At the time the networks and studios began distributing content online, the guilds did not have a formal agreement in place that specifically covered these methods of distribution. Dave McNary & Ben Fritz, Download Drama: iPod Residual Battle Bubbles Up, DAILY VARIETY, Feb. 27, 2006, at 1. Rather than wait to see how the distribution of content online developed, as they did for DVD home video sales in the 1980s, the unions wanted to work out advantageous terms early. Dave McNary & Ben Fritz, The Pod Thickens: Guilds Mull Dramatic Move on Residuals, DAILY VARIETY, Feb. 27, 2006, at 5. 1267 David Carr, Who Won the Writers Strike?, N.Y. TIMES, Feb. 12, 2008, at 1. The WGA agreement was modeled after an agreement between studios and the Directors Guild of America (“DGA”). Claudia Eller & Richard Verrier, Hollywood Writers Strike Ends, L.A. TIMES, Feb. 13, 2008. 1268 Time Warner 2010 Form 10-K at 24, 41; Lionsgate 2010 Form 10-K at 7; Viacom 2010 Form 10-K at 39. 1269 Time Warner 2010 Form 10-K at 41. 1270 Wade Holden, Home Video a Temporary Lag on Distributor Revenue, SNL Kagan, Sept 26, 2011. 2010 VOD figures differ from the chart due to the inclusion of international figures by a major distributor in SNL Kagan’s initial tally. Table 26 contains corrected figures provided by SNL Kagan to Media Bureau staff. 1271 Time Warner Presentation Transcript at 4. 1272 Such DVD retailers include Wal-Mart (owner of Vudu), Best Buy (owner of CinemaNow), and Target. 1273 Julia Boorstin, Warner Brothers Starts to Collapse Movie Distribution Windows, CNBC.COM, Sept. 30, 2009, http://www.cnbc.com/id/33091887/Warner_Brothers_Starts_to_Collapse_Movie_Distribution_Windows (visited Mar. 27, 2012). 1274 Tuna N. Amobi, Industry Surveys: Movies & Entertainment, STANDARD & POOR’S, Mar. 18, 2010, at 16. 1275 Wade Holden, Video-to-PPV/VOD Window Disappears in 2011, SNL Kagan, Dec. 21, 2011. 1276 See Motion Picture Association of America, Petition for Expedited Special Relief; Petition for Waiver of the Commission’s Prohibition on the Use of Selectable Output Control, CSR-7947-Z , MB Docket No. 08-82, (continued….) Federal Communications Commission FCC 12-81 174 movie studios have experimented with releasing movies in theaters and on VOD simultaneously, in a “premium VOD” window, but their strategies vary.1277 While independent studios IFC Films and Magnolia make simultaneous VOD and theater part of their standard distribution plans, studios releasing major movies are hesitating, in part because of the concern about cannibalizing revenues from the theatrical release window, as well as resistance from theater owners.1278 Theater owners have threatened to pull movies if studios choose to release a movie in VOD too close to the theatrical release,1279 and several major theater chains have refused to book movies that are released simultaneously on VOD.1280 386. CBS and Disney have struck multi-year, comprehensive distribution agreements with Comcast that include their cable networks, broadcast networks, stations, and studios in Comcast’s TV Everywhere and VOD initiatives. CBS’s 10-year agreement with Comcast, reached in August 2010, provides for expanded VOD and online access, via Comcast’s site, to programming from the CBS broadcast network and sister cable networks.1281 Disney’s agreement with Comcast, reached in January 2012, also enables Comcast’s Xfinity customers to watch ABC shows live, on demand, and across multiple screens.1282 The agreement covers Disney’s cable networks, ABC, and ABC’s O&Os.1283 Premium networks, including HBO and Showtime, in conjunction with MVPDs offer subscribers unlimited access to television programs, movies, and sporting events on PCs and mobile devices through (Continued from previous page) Memorandum Opinion and Order, 25 FCC Rcd 4799, ¶ 1 (MB 2010). This waiver of Section 76.1903 of the Commission’s rules allows MVPDs to disable certain audiovisual outputs on set-top boxes to ensure that copy protection is available for early-release movies. The waiver terminates for a particular movie 90 days after the first activation of the selected output control, or immediately upon the retail release of the film on any prerecorded media (including Blu-ray), whichever is sooner. In addition to MPAA member companies and their MVPD partners, any other similarly situated provider of first-run theatrical content may take advantage of this waiver by filing an Election to Participate with the Commission. Id. at 4805-06, 4808, ¶¶ 13, 18. 1277 Typically, VOD revenues are 10 percent of box office revenues. Deana Myers, Premium VOD Draws Healthy Results for ‘Margin Call’, SNL Kagan, Nov. 18, 2011. In the fall of 2011, Lionsgate distributed the movie Margin Call in theaters and VOD for the price of $6.99, theorizing that audiences in smaller markets might be less inclined or able to watch it in theaters, earning $5.1 million in theatrical revenues and more than $4 million in VOD revenues. Sarah Barry James, Lionsgate Exec Opens Up About New Windows, Summit Deal, SNL Kagan, Jan. 30, 2012. See also Pat Saperstein, ‘Margin Call’ Changes VOD Picture, DAILY VARIETY, Dec. 18, 2011, http://www.variety.com/article/VR1118047677 (visited Mar. 6, 2012). Some industry executives consider the results of Lionsgate’s experiment with Margin Call to be a “game changer.” Id. 1278 Pat Saperstein, ‘Margin Call’ Changes VOD Picture, DAILY VARIETY, Dec. 18, 2011, http://www.variety.com/article/VR1118047677 (visited Mar. 6, 2012). 1279 Deana Myers, Premium VOD Draws Healthy Results for Margin Call, SNL Kagan, Nov. 30, 2011. For example, Universal Studios halted its plan to make the movie Tower Heist available via VOD three weeks after its theater debut after resistance from theater owners. David Lieberman, Universal Halts ‘Tower Heist’ VOD Plan as Exhibitors Agree to Further Talks, DEADLINE, Oct. 12, 2011, http://www.deadline.com/2011/10/universal-halts- tower-heist-vod-plan/ (visited Mar. 6, 2012). 1280 Pat Saperstein, “Margin Call” Changes VOD Picture, DAILY VARIETY, Dec. 18, 2011, http://www.variety.com/article/VR1118047677 (visited Mar. 6, 2012). 1281 CBS Corp., CBS and Comcast Sign Ten-Year Content Carriage Agreement (press release), Aug. 2, 2010. 1282 Comcast Corp., The Walt Disney Company and Comcast Corporation Announce a Long-Term, Comprehensive Distribution Agreement that Advances the Successful Multichannel Business Model (press release), Jan. 4, 2012. 1283 Id. Federal Communications Commission FCC 12-81 175 their own branded web sites and mobile applications.1284 At the same time, some cable programming networks are taking a more cautious approach. For example, as of February 2012, the Discovery Networks has chosen not to give TV Everywhere rights to any MVPD.1285 TV Everywhere initiatives have sometimes caused tensions between networks and MVPDs. For example, Time Warner Cable withdrew live streams of content from Viacom, Discovery, and News Corp. from its live television iPad app after the companies objected.1286 387. Industry observers expect that a November 2011 agreement between WBTVG and ABC may become a template for other studios and networks regarding the distribution of television programs.1287 Under this agreement, WBTVG will be able to syndicate its shows three years after they have had their first-run on the ABC network, rather than the traditional four years.1288 WBTVG also can sell distribution rights to ABC-aired shows to subscription services, such as Netflix and Hulu, after the completion of each season. In exchange, ABC has the right to simulcast the network feeds of this WBTVG programming to any device, including tablets. ABC can distribute a maximum of five of the most recently aired episodes via an MVPD’s VOD service or an OVD for a 30-day period at any time. Under this agreement, ABC retains all the revenue from advertising-supported streaming OVDs, such as Hulu. At the same time, the studio keeps revenues from in-season electronic sell-through platforms, such as iTunes, that enable consumers to own rather than rent episodes, as well as out-of-season DVD and Blu- ray disc sales.1289 In addition, ABC retains revenues from any OVD subscription service in which it has an ownership interest, such as Hulu Plus. B. Consumer Premises Equipment 388. Changes in consumer premises equipment (“CPE”) technology have an important impact on competition in the video programming market. CPE is the necessary means by which consumers access the services that broadcasters, MVPDs, and OVDs provide. Because CPE is an integral part of viewing video programming, CPE features such as recording, home networking, and user interface are factors to consumers when choosing their programming provider and which services to purchase. Further, interoperability of CPE can impact the ability to consumers to seamlessly switch providers. In this section, we report on a number of developments in this area that affect the manner and state of competition in the video marketplace. We specifically note, where possible, developments since the last report, and examine the technological, regulatory and market developments that have had an effect on or are likely in coming years to affect competition in the video market. We begin by summarizing 1284 See CBS Corp., Showtime — Apps, http://www.sho.com/sho/apps (visited Mar. 27, 2012); Time Warner Inc., What is HBO Go, http://www.hbogo.com/#whatis/ (visited Mar. 27, 2012). See also, e.g., Comcast 6/8/11 Comments at 12-14; Bright House Networks, HBO and Cinemax Now Available “On the Go” to Bright House Networks Customers (press release), Jan. 10, 2012. 1285 Discovery Presentation Transcript at 7. Discovery has indicated it may reconsider this decision at a later date. 1286 Brian McNeill, Time Warner Cable Removes Programming from iPad App Following Cable Network Complaints, SNL Kagan, Mar. 31, 2011. 1287 Andrew Wallenstein, ABC-WBTV Deal Rewrites Syndie, Digital Rules, DAILY VARIETY, Nov. 14, 2011, http://www.variety.com/article/VR1118046062 (visited Mar. 26, 2012). While trade publications may refer to Warner Brothers Television Group as “WBTV,” Time Warner, Inc. uses the acronym “WBTVG.” 1288 WBTVG Executive Vice President Craig Hunegs said that cable networks and broadcast stations have requested access to off-net syndicated programming earlier. Id. 1289 Time Warner Inc., ABC Entertainment and Warner Bros. Television Group Reach New Digital Distribution Agreement (press release), Nov. 14, 2011. Federal Communications Commission FCC 12-81 176 navigation device developments by MVPDs and by non-affiliated vendors. We then review developments in devices used to access online video and mobile video services. 1. CPE Used to Access MVPD Services. a. Leased CPE 389. MVPDs have been deploying set-top boxes that allow consumers to move content among other MVPD-provided set-top boxes in the home and incorporating cable modems into set-top gateways. MVPDs are also providing video to portable screens, such as Internet-connected smart phones and tablet computers. Cable companies continue to support CableCARD and, as described in more detail below, are working to implement an IP based recordable output.1290 390. MVPDs have widely begun deploying multi-room DVR and home networking solutions. Comcast’s “AnyRoom DVR,” AT&T’s “Total Home DVR,” and DIRECTV’s “Whole Home DVR” are current examples of MVPD-provided services that move recorded video content among MVPD-provided set-top boxes in the home. DIRECTV’s multi-room DVR provides full DVR capabilities on other DIRECTV set-top boxes connected to a central HD DVR in a consumer’s home.1291 Similarly, DISH Network’s DuoDVR receivers allow two independently controlled televisions to be connected to the same set-top box.1292 In addition, DISH Network’s TV Everywhere service streams video from a consumer’s set-top box via IP to a remote computer, mobile device, or “WiFi Monitor.”1293 The DISH Network WiFi Monitor is a portable HD monitor with built-in wi-fi and a streaming receiver. This remote viewing service works both inside and away from the consumer’s home. 391. Some MVPDs are deploying cloud-based user interfaces that take advantage of IP connectivity in leased set-top boxes. For example, Comcast’s Xfinity TV uses a cloud-based interface that allows subscribers to search content from live television, on demand, or on their DVRs, in addition to providing access to weather and traffic applications, and social networking features.1294 Comcast has also begun a trial of a more robust IP based program guide and video delivery platform that targets delivery to IP enabled devices.1295 Time Warner has started to implement a cloud-based user guide providing 1290 See infra, ¶¶ 393, 395. In 2004, the Commission adopted a requirement that cable operators provide an IEEE 1394 interface on all high definition set-top boxes as a means of enabling a market for devices which interact with the operator supplied set-top box. In 2010, the Commission relaxed this requirement to permit operators to provide the same functionality over IP. IP has overwhelming marketplace support and serves the same purpose that our IEEE 1394 connection requirement was intended to serve. See Navigation Devices Third Report and Order, 25 FCC Rcd 14677-79, ¶¶ 39-44. 1291 See DIRECTV, DIRECTV: Whole Home DVR, http://www.DIRECTV.com/DTVAPP/content/technology/wholehome?footernavtype=-1&lpos=header (visited Nov. 10, 2011). 1292 DISH Network, DISH Network Introduces TV Everywhere (press release), Jan. 6, 2010. 1293 DISH Network 7/29/09 Comments at 5. 1294 Letter from Michael Powell, NCTA President and CEO, to Julius Genachowski, Chairman, FCC, MB Docket 07-269 (July 7, 2011) at 4 (“Letter from Michael Powell”). 1295 See Jessica E. Vascellaro, Comcast Test Tech Overhaul, May 26, 2011, http://online.wsj.com/article/SB10001424052702304066504576345330554958642.html (visited Mar. 6, 2012). Federal Communications Commission FCC 12-81 177 improved search and navigation features through its set-top boxes equipped with a DOCSIS IP connection.1296 392. Additionally, MVPDs have been working on ways to expand access to their services by retail products.1297 For example, DIRECTV is a founding member of the “RVU Alliance,” which has developed open-standard technology that permits the distribution of video programming directly to televisions and other devices throughout the home from IP-enabled gateway devices. Portable media players, gaming consoles, and Internet-connected smart phones and tablet computers have become popular ways to interact with video as well. While an increasing number of these devices can access many MVPD services, the AllVid Tech Alliance asserts that few devices from non-affiliated vendors can access MVPD services.1298 b. CableCARDs and Section 629 of the Communications Act 393. Pursuant to Section 629 of the Act,1299 the Commission adopted regulations to assure the commercial availability of consumer electronics equipment that can access MVPD services.1300 In enacting the section, Congress pointed to the vigorous retail market for CPE used with the telephone network and sought to create a similarly vigorous market for devices used with MVPD services.1301 The Commission has made regulatory efforts to develop this market and continues to analyze marketplace developments. 394. In 2003, the Commission adopted CableCARD standards that make cable service compatible with consumer electronics devices.1302 These standards direct cable operators to separate the 1296 Mike Robuck, Time Warner Cable Sheds Light on Cloud-Based Guide, CED, Oct. 27, 2011, http://www.cedmagazine.com/blogs/2011/10/time-warner-cable-sheds-light-on-cloud-based-guide (visited Oct. 31, 2011). 1297 Some MVPDs have announced or demonstrated products that integrate their video content with televisions from Samsung, LG, and Sony, gaming consoles from Sony and Microsoft, and smartphones and tablets running Apple’s iOS or Google’s Android platform. See Letter from Michael Powell at 2-7. See also AT&T 7/8/11 Reply at 4-5 (regarding compatibility with Microsoft’s X-Box 360). 1298 See Letter from Robert S. Schwartz and Jeffrey L. Turner, Counsel, AllVid Tech Company Alliance et al., to Julius Genachowski, Chairman, FCC, MB Docket No. 10-91 (July 27, 2011) at 8. NCTA disputes the AllVid Tech Alliance’s assertion that contracts between MVPDs and device manufacturers “affiliate” the two parties. Letter from Neal M. Goldberg, Vice President and General Counsel, NCTA, to Sherrese Smith, Senior Counsel and Legal Advisor to the Chairman, FCC, MB Docket No. 10-91 (Aug. 10, 2011) at 3, n.8. 1299 See 47 U.S.C. § 549 (“The Commission shall, in consultation with appropriate industry standard-setting organizations, adopt regulations to assure the commercial availability, to consumers of multichannel video programming and other services offered over multichannel video programming systems, of converter boxes, interactive communications equipment, and other equipment used by consumers to access multichannel video programming and other services offered over multichannel video programming systems, from manufacturers, retailers, and other vendors not affiliated with any multichannel video programming distributor.”). 1300 47 U.S.C. § 549(a). 1301 H.R. REP. NO. 104-204, at 112-3 (1995). 1302 Implementation of Section 304 of the Telecommunications Act of 1996: Commercial Availability of Navigation Devices; Compatibility Between Cable Systems and Consumer Electronics Equipment, CS Docket No. 97-80, PP Docket No. 00-67, Second Report and Order and Second Further Notice of Proposed Rulemaking, 18 FCC Rcd 20885 (2003). Federal Communications Commission FCC 12-81 178 conditional access1303 functions of a set-top box from the box’s other functions, like tuning and guide rendering (i.e., drawing the image you see when you push the “guide” button on your remote).1304 This separation requirement is commonly referred to as the “integration ban.” CableCARDs permit the reception of digital cable programming via commercially available devices without using a cable operator supplied set-top box. Consumers, however, must obtain a CableCARD from their local cable operator to insert into digital television sets, competitive set-top boxes (e.g., TiVo) or other devices they have purchased at a retail outlet. While the CableCARD-compatible devices available at retail today are only capable of receiving one-way cable service, operator-supplied set-top boxes using CableCARDs are capable of two-way communication with the headed.1305 395. Despite the CableCARD standards, consumer adoption of retail CableCARD-compatible devices has not matched the Commission’s expectations.1306 The following table shows the reported number of CableCARD deployments for use in retail CableCARD-enabled devices since 20061307 and the deployment of operator-supplied set-top boxes with CableCARDs since the integration ban went into effect on July 1, 2007.1308 1303 “Conditional access” is the method that cable operators use to make sure that cable subscribers only receive the programming to which they subscribe. 1304 See generally 47 C.F.R. §§ 76.640, 76.1204. 1305 The Commission’s CableCARD rules standardized what was necessary to make retail devices compatible with cable system conditional access systems nationwide and to tune digital linear programming channels. The Commission deferred standardization of technology necessary for navigation devices to communicate upstream to the headend to request two-way services like video-on-demand, pay-per-view, or switched digital video, but some cable operators have negotiated with TiVo privately to provide on-demand services to retail TiVo set-top boxes. Harry McCracken, TiVo Gets Comcast’s Xfinity on Demand, TIME, Apr. 9, 2012, http://techland.time.com/2012/04/09/tivo-gets-comasts-xfinity-on-demand/ (visited May 3, 2012); Letter from Natalie G. Roisman, Counsel to Cox Enterprises, Inc., to Marlene H. Dortch, Secretary, FCC, CS Docket No. 97-80 (filed Oct. 8, 2010). 1306 Navigation Devices Third Report and Order, 25 FCC Rcd at 14660, ¶ 4. 1307 The Commission directed certain cable operators to file reports with the Commission detailing CableCARD deployments. See Implementation of Section 304 of the Telecommunications Act of 1996: Commercial Availability of Navigation Devices, CS Docket No. 97-80, Second Report and Order, 20 FCC Rcd 6794, 6814-15, ¶ 39 (2005) (“2005 Deferral Order”). 1308 Effective July 1, 2007, cable operators were required to separate security in their leased devices and rely on the same conditional access mechanism that consumer electronics manufacturers use in their commercially available devices. 47 C.F.R. § 76.1204(a)(1). See Implementation of Section 304 of the Telecommunications Act of 1996: Commercial Availability of Navigation Devices, CS Docket No. 97-80, Order and Further Notice of Proposed Rulemaking, 18 FCC Rcd 7924, 7926 ¶ 4 (2003); 2005 Deferral Order, 20 FCC Rcd at 6802-03 ¶ 13. Federal Communications Commission FCC 12-81 179 Table 29: Deployment of CableCARDS (Cumulative)1309 Year (as of June) CableCARD Deployment for Use in Retail Devices – Top 10 Cable Operators Operator-supplied Set- top Boxes With CableCARDS 2006 170, 000 2007 271,000 2008 372,000 6,232,800 2009 437,800 14,085,000 2010 520,000 21,000,000 2011 582,000 29,300,000 396. While our CableCARD rules have allowed vendors like TiVo and Hauppauge to build retail devices that connect to cable systems, the cable industry criticizes the CableCARD regime as expensive and ineffective.1310 Non-cable MVPDs insist that CableCARDs are too cable-centric, and that future standards should consider that their systems differ from cable systems.1311 According to certain public interest and local government entities, disagreement in the industry about the best mechanism to achieve a competitive retail market for CPE devices has limited the choices available to consumers.1312 397. In October 2010, the Commission adopted rules to eliminate four impediments to consumer adoption of CableCARDs, including rules that: (1) ensure that retail devices can access all video programming that is prescheduled by the programming provider; (2) increase transparency in CableCARD pricing and billing; (3) streamline CableCARD installation; and (4) streamline requirements for manufacturers who build CableCARD devices.1313 In the same order the Commission replaced the IEEE 1394 connector that was meant to be a recordable digital output from MVPD leased set-top boxes with an IP based open-standard connection with certain requirements in service discovery, video transport, and remote command pass-through for home networking. Beginning December 1, 2012, cable operators must deploy set-top boxes that meet the IP-based output requirement. Once that requirement takes effect, retail-purchased CPE will be able more effectively to network with and view content from MVPD-provided devices. 1309 See Letters from Neal M. Goldberg, Vice President and General Counsel, NCTA, to Marlene H. Dortch, Secretary, FCC, CS Docket No. 97-80 (filed June 29, 2006, June 25, 2007, June 23, 2008, June 26, 2009, June 23, 2011, June 30, 2011). 1310 See, e.g., NCTA 5/20/09 Comments at 40. 1311 Verizon 5/20/09 Comments at 29-31; DISH Network 6/20/09 Reply at 10-11. 1312 Free Press 8/28/09 Reply at 6-9; Montgomery County, MD 5/20/09 Comments at 21-23. 1313 Navigation Devices Third Report and Order, 25 FCC Rcd at 14662-14676, ¶¶ 8-38. Federal Communications Commission FCC 12-81 180 c. CableCARD Successors 398. The Commission and industry have undertaken several efforts to update, extend, or replace the CableCARD regime.1314 Most recently, the Commission has begun exploring a replacement concept referred to as “AllVid.” The AllVid NOI introduced the concept of an adapter that could act either as a small “set-back” device for connection to a single smart video device or as a gateway allowing all consumer electronics devices in the home to access multichannel video programming services in addition to any other services the devices might have access to.1315 Unlike CableCARD technology, this adapter could support the development and marketing of retail smart video devices that attach to any MVPD service anywhere in the United States. Such an approach could greatly enhance the incentives for manufacturers to enter the retail market. As conceived, an MVPD would supply an adapter that would communicate with the MVPD service, perform the tuning and security decryption functions that may be specific to that particular MVPD, and deliver video to retail devices using a common home networking protocol. In this manner, a retail smart video device would be able to integrate MVPD and non-MVPD services, perform navigation functions, including the presentation of programming guides and search functionality. The Commission is continuing to monitor and evaluate the market for devices that can access MVPD services. 2. CPE Used to Access OVD Services 399. Increased broadband speeds will allow consumers to receive IP-delivered video content within the home across multiple broadband-capable devices, game consoles, and standalone devices like those provided by Apple, Roku, Boxee, and Google.1316 These devices allow users to navigate and receive video delivered via broadband Internet and display it on a television monitor. In the OVD section of this Report, we note that many of the leading OVDs make their services available via a wide variety of consumer electronics products. The converse is also true – many consumer electronics products give consumers access to a variety of OVD services. 400. Vendors have also begun to integrate and blend linear television service from MVPDs and broadcasters with OVD services. For example, Boxee’s LiveTV is a digital television tuner peripheral that connects to Boxee’s media player, where the over-the-air broadcast television signals are presented to consumers alongside OVD services. 3. Handheld and Mobile Video Devices a. Mobile IP Devices 401. The proliferation of portable media devices with broadband IP capability has opened up new video distribution opportunities for MVPDs and OVDs alike. Devices such as laptops, netbooks, smartphones and media tablets all have IP connections and high resolution screens for consumers to watch video. Gartner, Inc. projects that over 100 million media tablets will be sold worldwide by the end 1314 One such effort undertaken by industry is called Tru2way, previously called the Open Cable Applications Platform. While consumer electronics manufacturers have been reluctant to implement tru2way in retail devices, cable operators may continue to support Tru2way for their own internal purposes. See Todd Spangler, Comcast New Way on Tru2way, MULTICHANNEL NEWS, June 14, 2010, http://www.multichannel.com/article/453729- Comcast_New_Way_on_Tru2way.php (visited Mar. 6, 2012). 1315 Video Device Competition; Implementation of Section 304 of the Telecommunications Act of 1996: Commercial Availability of Navigation Devices; Compatibility between Cable Systems and Consumer Electronics Equipment, MB Docket No. 10-91, Notice of Inquiry, 25 FCC Rcd 4275, 4281-3, ¶¶ 17-23 (2010). 1316 Comcast 7/8/11 Reply at 4-5. Federal Communications Commission FCC 12-81 181 of 2012.1317 The number of smartphones with 4G connectivity is on the rise as well, which enables video providers to potentially deliver high quality video to viewers.1318 To access the mobile IP market, MVPDs have begun making their video content accessible over a host of portable devices. For example, Comcast’s XFinity TV service provides on-demand video to laptops, smartphones, and tablets.1319 DIRECTV’s “nomad” service allows consumers to copy recordings from their HD DVR to their phones, laptops, or tablets for viewing without an active network connection. To facilitate these services, MVPDs and programmers are looking to cloud-delivery mechanisms for IP connected devices including, tablets, smartphones, televisions, laptops, and other mobile devices.1320 b. Specialty Mobile Devices 402. For the purposes of this Report, specialty mobile devices are those that include specialized hardware to receive mobile video services from the mobile provider’s network, as opposed to those that receive mobile video via the Internet. Such devices often have the advantage that they are served by a broadcast or point-to-multipoint system, so they do not consume data from a data plan, and many devices can receive content simultaneously in a crowded location such as a stadium or arena. However, the specialized hardware needed to access the mobile video services requires vendors to design devices for a specific service, potentially restricting the number of services than can be accessed by a device, and diminishing the willingness of vendors to build devices that support the service. 403. Since the last report, mobile providers have continued to experiment in ways to send broadcast video programming to mobile devices. For example, MediaFLO was an attempt by Qualcomm to broadcast video to mobile devices. MediaFLO receivers were built into a range of Verizon Wireless handsets, which Verizon utilized for its VCAST service.1321 However, with the growth of IP connected smartphones, Verizon Video is now delivered over IP, and the specialized MediaFLO reception hardware is no longer necessary or included in handsets. The MediaFLO network was shut down in late 2010, and Qualcomm sold the spectrum to AT&T. ATSC Mobile/Handheld (“ATSC M/H”) receivers have appeared in the market, mostly in the form of USB tuner peripherals that connect to personal computers.1322 These USB receivers allow consumers to view ATSC M/H broadcasts on their laptops.1323 Driven by industry groups like the Open Mobile Video Coalition (“OMVC”),1324 some smartphone manufacturers have announced plans to include the hardware needed to receive ATSC M/H broadcasts in 1317 See Gartner, Inc., Gartner Says Apple Will Have a Free Run in Tablet Market Holiday Season as Competitors Continue to Lag (press release), Sept. 22, 2011. 1318 See Zach Epstein, NPD: One in Five Smartphones Sold in Q2 Was 4G Capable, HTC Leads Market, BGR Media, LLC, Oct. 14, 2011, http://www.bgr.com/2011/10/14/npd-one-in-five-smartphones-sold-in-q2-was-4g- capable-htc-leads-market/ (visited Mar. 8, 2012). 1319 Letter from Michael Powell at 4. 1320 Id. at 2. 1321 See Verizon Wireless, Verizon Wireless Lifts Curtain on V CAST Mobile TV True Broadband Qualiy, the Best of TV (press release), Jan. 7, 2007. 1322 See WinTV Aero-m product description, Hauppauge Computer Works, Inc., http://www.hauppauge.com/site/products/data_aero-m.html (visited Mar. 2, 2012). 1323 Universal Serial Bus (“USB”) is a set of connectivity specifications that allows easy, high-speed connections of peripherals to PCs that, once plugged in, configure automatically. USB is found in over ten billion PCs, consumer electronics, and mobile devices. See USB (Universal Serial Bus), http://www.intel.com/content/www/us/en/io/universal-serial-bus/universal-serial-bus.html (visited Mar. 8, 2012). 1324 See Open Mobile Video Coalition, http://www.openmobilevideo.com/ (visited Mar. 6, 2012). Federal Communications Commission FCC 12-81 182 their products beginning in late 2012.1325 MetroPCS will offer handsets made by Samsung that include ATSC M/H reception hardware.1326 The resulting increase in specialty receiver penetration could allow mobile broadcast video services that rely on ATSC M/H specialty receivers to succeed where the previous attempts have been unsuccessful. 404. In order to compete in the mobile video marketplace by delivering video over their own networks, satellite-based providers face technical challenges such as antenna size, weight, and ability to track satellites while in motion. Because they must be larger than would typically be found in a handheld device, mobile satellite-based devices are more often are integrated into passenger vehicles. Several companies have attempted to introduce mobile video services targeted toward family-sized passenger vehicles. CruiseCast, a joint service of AT&T Inc. and RaySat Broadcasting Corp., began service in June 2009, but in November 2009 ceased activating new customers and refunded existing customers for equipment purchased.1327 ICO mim (mobile interactive media) launched its North American geosynchronous satellite in 2007. ICO had planned to provide interactive mobile video, navigation, and emergency assistance, but does not appear to have expanded beyond trials begun in 2009.1328 SiriusXM’s Backseat TV continues to operate, offering three family-oriented channels – Nickelodeon, Disney Channel, and Cartoon Network. Backseat TV can be purchased pre-installed in several vehicle models, with controls integrated into the vehicle’s audio head unit.1329 VI. PROCEDURAL MATTERS 405. This 14th Report is issued pursuant to authority contained in sections 4(i), 4(j), 403, and 628(g) of the Communications Act of 1934, as amended, 47 U.S.C. §§ 154(i), 154(j), 403, and 548(g). 406. It is ORDERED that the Office of Legislative Affairs shall send copies of the 14th Report to the appropriate committees and subcommittees of the United States House of Representatives and the United States Senate. 1325 See Joseph Palenchar, Dyle’s Mobile DTV Service to Launch on Smartphone, TWICE, Jan. 4, 2012, http://www.twice.com/article/478473-Dyle_s_Mobile_DTV_Service_To_Launch_On_Smartphone.php (visited Mar. 2, 2012). 1326 See Electronica, MetroPCS to Offer Phones with ATSC Mobile TV Tuners, MetroPCS will Launch Samsung Moble TV Phone, Jan. 4, 2012, http://www.electronista.com/articles/12/01/04/metropcs.will.launch.samsung.mobile.tv.phone/ (visited Mar. 9, 2012). 1327 Amy Gilroy, AT&T CruiseCast Ceases Activations, TWICE, Nov 2, 2009, http://www.twice.com/article/367231- AT_T_CruiseCast_Ceases_Activations.php?nid=2402&source=title&rid=6258981 (visited Nov. 10, 2011). 1328 See ICO mim website, http://www.ico.com/mim/ (visited Mar. 8, 2012). 1329 See SiriusXM Backseat TV, http://www.siriusxm.com/backseattv (visited Mar. 8, 2012). Federal Communications Commission FCC 12-81 183 407. It is FURTHER ORDERED that the proceeding in MB Docket No. 07-269 IS TERMINATED. FEDERAL COMMUNICATIONS COMMISSION Marlene H. Dortch Secretary Federal Communications Commission FCC 12-81 184 APPENDIX A List of Commenters1 2007/2008 Comments (5/20/09 Comments) American Cable Association (“ACA”) AT&T Inc. (“AT&T”) Cable and Telecommunications Committee of the New Orleans City Council (“New Orleans”) Comcast Corporation (“Comcast”) Community Broadcasters Association (“CBA”) Community Programming Board of Forest Park, Greenhills and Springfield Township, Ohio (“Ohio Community Board”) Consumer Union (“Consumers Union”) DIRECTV, Inc. (“DIRECTV”) Heritage Media Services (“Heritage”) Mathew Murphy (“Murphy”) Microcom (“Microm”) Montgomery County, Maryland (“Montgomery County”) National Association of Broadcasters (“NAB”) National Cable & Telecommunications Association (“NCTA”) National Telecommunications Cooperative Association (“NTCA”) Reynolds Media Incorporated (“RMI”) Verimatrix, Inc. (“Verimatrix”) Verizon (“Verizon”) W.A.T.C.H. TV Company (“W.A.T.C.H. TV”) 2007/2008 Reply Comments (6/20/09 Reply) AT&T Inc. (“AT&T”) Consumers Union (“Consumers Union”) Cox Communications (“Cox”) DISH Network L.L.C. (“DISH Network”) HDNet LLC (“HDNet”) National Association of Broadcasters (“NAB”) National Cable & Telecommunications Association (“NCTA”) Verizon (“Verizon”) 1 The Commission issued three notices of inquiry in this proceeding. Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 07-269, Notice of Inquiry, 24 FCC Rcd 750 (2009) (“Notice of Inquiry”); Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 07-269, Supplemental Notice of Inquiry, 24 FCC Rcd 4402 (2009) (“Supplemental Notice of Inquiry”); and Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 07-269, Further Notice of Inquiry, 26 FCC Rcd 14091 (2011) (“Further Notice”). In response to these notices, we received three sets of comments and reply comments. Comments for 2007 and 2008 were due on May 20, 2009 and reply comments were due on June 20, 2009. For 2009, comments were due on July 29, 2009; reply comments were due on August 28, 2009. Additional 2009 and new 2010 comments were due on June 8, 2011 and reply comments for those years were due on July 8, 2011. We refer to each submission by its due date and the acronym as listed in this Appendix. Federal Communications Commission FCC 12-81 185 2009 Comments (7/29/09 Comments) American Cable Association (“ACA”) AT&T Inc. (“AT&T”) Consumers Union (“Consumers Union”) DIRECTV, Inc. (“DIRECTV”) DISH Network L.L.C. (“DISH Network”) Independent Film & Television Alliance (“IFTA”) Marin Telecommunications Agency, Marin County, California (“Marin”) Montgomery County, Maryland (“Montgomery County”) National Association of Broadcasters (“NAB”) National Cable & Telecommunications Association (“NCTA”) Organization for the Promotion and Advancement of Small Telecommunications Companies (“OPASTCO”) TiVo Inc. (“TiVo”) Verizon (“Verizon”) W.A.T.C.H. TV Company (“W.A.T.C.H. TV”) WealthTV (“WealthTV”) 2009 Reply Comments (8/28/09 Reply) American Cable Association (“ACA”) Association of Public Television Stations and Public Broadcasting Service (“APTS”) Cablevision Systems Corporation (“Cablevision”) CBS Corporation (“CBS”) Comcast Corporation (“Comcast”) Community Broadcasters Association (“CBA”) Cox Communications (“Cox”) DIRECTV, Inc. (“DIRECTV”) Free Press (“Free Press”) Motion Picture Association of America, Inc (“MPAA”) National Association of Broadcasters, ABC Television Affiliates Association, CBS Television Network Affiliates Association, FBC Television Affiliates Association, and the NBC Television Affiliates (“Broadcasters Associations”) National Cable & Telecommunications Association (“NCTA”) NBC Universal, Inc. (“NBCU”) RCN Telecom Services, Inc. (“RCN”) Verizon (“Verizon”) The Walt Disney Company (“Disney”) 2009/2010 Comments (6/8/11 Comments) Alliance for Community Media (“ACM”) The Allvid Tech Company Alliance (“AllVid Alliance”) American Cable Association (“ACA”) Anne Arundel and Montgomery Counties, Maryland, and the Cities of Boston, Massachusetts, and Laredo, Texas (“Anne Arundel”) AT&T Inc. (“AT&T”) California Public Utilities Commission and the People of the State of California (“California PUC”) City & County of Denver, Colorado (“Denver”) Federal Communications Commission FCC 12-81 186 City of South Portland, Maine (“South Portland”) Comcast Corporation (“Comcast”) Community Programming Board of Forest Park, Greenhills and Springfield Township, Ohio (“Ohio Community Board”) Consumer Electronics Association and Consumer Electronics Retailers Coalition (“CEA”) Digital Broadcasting OVS (“Digital Broadcasting”) DIRECTV, Inc. (“DIRECTV”) DISH Network L.L.C. (“DISH Network”) Google Inc. (“Google”) Hiawatha Broadband Corporation Inc., National Rural Telecommunications Cooperative, Rural Broadband Alliance, and Rural Independent Competitive Alliance (“Rural Telcos”) Marin Telecommunications Agency, Marin County, California (“Marin”) National Association of Broadcasters (“NAB”) National Cable & Telecommunications Association (“NCTA”) National Telecommunications Cooperative Association; the Independent Telephone and Telecommunications Alliance; the Organization for the Promotion and Advancement of Small Telecommunications Companies; the Rural Independent Competitive Alliance; and the Western Telecommunications Alliance (“Rural Associations”) Netflix, Inc. (“Netflix”) New Jersey Division of Rate Counsel (“New Jersey”) Oxnard College Television (“Oxnard College”) Oxnard Elementary School District, Oxnard California (“Oxnard Elementary”) Public Knowledge (“Public Knowledge”) Rovi Corporation (“Rovi”) Susan Udovic (“Udovic”) Verizon (“Verizon”) Writers Guild of America, West, Inc. (“WGAW”) 2009/2010 Reply Comments (7/8/11 Reply) The Allvid Tech Company Alliance (“AllVid Alliance”) AT&T Inc. (“AT&T”) Cable and Telecommunications Committee of the New Orleans City Council (“New Orleans”) Cisco Systems, Inc. (“Cisco”) City of New York (“NYC”) Comcast Corporation (“Comcast”) DIRECTV, Inc. (“DIRECTV”) Montgomery County, Maryland (“Montgomery County”) Motorola Mobility, Inc. (“Motorola”) National Association of Broadcasters (“NAB”) National Cable & Telecommunications Association (“NCTA”) New Jersey Division of Rate Counsel (“New Jersey”) SureWest Communications (“SureWest”) Federal Communications Commission FCC 12-81 187 APPENDIX B National Video Programming Services Table B-1 National Video Programming Services Affiliated with One or More MVPDs Network Owner Networks Wholly Owned or Owned in Part Bright House Networks Animal Planet, Animal Planet HD, Discovery Channel, Discovery Channel HD, Discovery Espanol, Discovery Familia, Discovery Fit & Health, Discovery Fit & Health HD, HD Theater, Investigation Discovery, Investigation Discovery HD, Military Channel, OWN, OWN HD, Planet Green, Planet Green HD, Science Channel, Science Channel HD, The HUB, The HUB HD, TLC, TLC HD Turbo, Velocity HD, 3net Cablevision(1) (AMC Networks Inc.) AMC, AMC HD, FUSE, FUSE HD, IFC, IFC HD, Sundance Channel, WE, WE HD Comcast/NBCU A&E, A&E HD, Bio, Bio HD, Bravo, Bravo HD, Chiller, Chiller HD, Cloo, CNBC, CNBC HD, CNBC World, CNBC World HD, Crime & Investigation, Crime & Investigation HD, E! Entertainment TV, E! Entertainment TV HD, EPIX, EPIX HD, FEARnet, FEARnet HD, G4, G4 HD, Golf Channel, Golf Channel HD, History Channel, History Channel HD, History Channel en Espanol, H2, H2 HD, iN Demand, iN Demand HD, ION Life, ION TV, ION TV HD, LMN, LMN HD, Lifetime Real Women, Lifetime TV, Lifetime TV HD, Military History Channel, MLB Network, MLB Network HD, The Mtn, The Mtn HD, MSNBC, MSNBC HD, mun2, Music Choice, NBC Sports Network, NBC Sports Network HD, NHL Network, NHL Network HD, Oxygen Network, Oxygen Network HD, PBS Kids Sprout, qubo, Retirement Living TV, ShopNBC, Sleuth, SYFY, SYFY HD, Telemundo, TV One, TV One HD, Style Network, Style Network HD, The Weather Channel, The Weather Channel HD, Weatherscan, Universal HD, USA Network, USA Network HD Cox Enterprises iN Demand, iN Demand HD, MLB Network, MLB Network HD Travel Channel, Travel Channel HD DIRECTV Game Show Network, GSN HD, MLB Network, MLB Network HD Liberty Media Corporation(2) Animal Planet, Animal Planet HD, Discovery, Discovery HD, Discovery Espanol, Discovery Familia, Discovery Fit & Health, Discovery Fit & Health HD, Encore, Encore HD, Encore Action, Encore Action HD, Encore Drama, Encore Drama HD, Encore Love, Encore Mystery, Encore WAM, Encore Westerns, Game Show Network, GSN HD, GAC, HDTheater, HSN, HSN HD, HSN2, Investigation Discovery, Military Channel, MoviePlex, OWN, OWN HD, Planet Green, Planet Green HD, Movie Plex, QVC, QVC HD, Starz, Starz HD, Starz Cinema, Starz Cinema HD, Starz Comedy, Starz Comedy HD, Starz Edge, Starz Edge, HD, Starz in Black, Starz in Black HD, Starz Kids and Family, Starz Kids and Family HD Science Channel, Science Channel HD, TLC, TLC HD, The Hub, The HUB HD, 3net Federal Communications Commission FCC 12-81 188 Network Owner Networks Wholly Owned or Owned in Part Time Warner Cable Exercise TV, GameHD, Game2HD, HDPPV, iN Demand, iN Demand HD, MLB Network, MLB Network HD, MLS Direct Kick, NBA League Pass, NHL Center Ice, Team HD Notes: (1) On December 31, 2010, Cablevision System Corporation (“Cablevision”) wholly owned programming subsidiary Rainbow Media Holding LLC (“Rainbow”) transferred control of the News 12 regional programming services to Cablevision. On June 30, 2011, Cablevision spun-off Rainbow, which became an independent public company, now called AMC Networks Inc. We list these networks as affiliated with this media company since AMC and Cablevision share common ownership, officers, and directors. (2) On February 21, 2008, the Commission approved the transfer of license and authorization that resulted in Liberty Media Corporation (“Liberty”) acquiring a de facto controlling interest in DIRECTV. On November 19, 2009, Liberty through a series of transactions transferred its interest in DIRECTV, three RSNs and GSN to a wholly owned subsidiary called DIRECTV Group, Inc. We list these networks as affiliated with this media company since Liberty and DIRECTV share common ownership, officers, and directors. Sources: Application of News Corporation and The DIRECTV Group, Inc., Transferors, and Liberty Media Corporation, Transferee, For Authority To Transfer Control, Consolidated application For Authority to Transfer Control, Jan. 29, 2007, at 10-11. AMC Networks Inc., SEC Form-Q, for the Quarterly Period Ending September 30, 2010 (“AMC 10-Q”), at 7. Bright House Networks, About Us, at http://brighthouse.com/corporate/default (visited Feb. 8, 2012). Cablevision, About Cablevision, at http://www.cablevision.com/about/index.jsp (visited Feb. 8, 2012). Comcast-NBCU Order, 26 FCC Rcd at 4410-18, Appendix D; GE/Comcast /NBCU Application at 19-20, 30-31. Columbia Journalism Review, Who Owns What, at http://www.cjr.org/resources/ (visited Feb. 8, 2012). Cox Enterprises, Corporate Overview, at http://www.coxenterprises.com/about-cox/corporate-overview.aspx (visited Feb. 8, 2012). DIRECTV, About Us, at http://www.directv.com/DTVAPP/content/about_us/our_company (visited Feb. 8, 2012). Liberty Media Corporation, SEC Form 10-K, for the Fiscal Year Ending December 31, 2010 (“Liberty 2010 Form 10-K”) at I-26. Liberty Media Corporation, Company Overview, at http://www.libertymedia.com/company-overview.aspx (visited Feb. 8, 2012). NCTA, Cable Networks, at http://www.ncta.com (visited Feb. 8, 2012). SNL Kagan, Economics of Basic Cable Networks (2011 Edition). SNL Kagan, Cable Network Ownership (July 2011). Time Warner Cable Inc, TWC/Insight Application at Exhibit F. Federal Communications Commission FCC 12-81 189 Time Warner Cable Inc, SEC Form 10-K, for the Period Ending December 31, 2009 (“TWC 2010 Form 10-K”) at 5. Time Warner Cable Inc. About Us, at http://www.timewarnercable.com/nynj/about/ (visited Feb. 8, 2012). Federal Communications Commission FCC 12-81 190 Table B-2 National Networks Affiliated with a Television Network, Broadcast Television Licensee, or Other Media Company Network Owners: Networks Wholly Owned or Owned in Part CBS Corporation CBS Sports Network, CBS Sports Network HD, College Sports Television, College Sports Television HD, FLIX, FLIX HD, MountainWest Sports Network, MountainWest Sports Network HD, Showtime, Showtime HD, Showtime Beyond, Showtime Beyond HD, Showtime Extreme, Showtime Extreme HD, Showtime Family Zone, Showtime Family Zone HD, Showtime Next, Showtime Next HD, Showtime Showcase, Showtime Showcase HD, Showtime 2, Showtime 2 HD, Showtime Women, Showtime Women HD, Smithsonian Channel HD, TMC, TMC HD, TMC Xtra, TMC Xtra HD Crown Media Holdings Hallmark Channel, Hallmark Channel HD, Hallmark Movie Channel, Hallmark Movie Channel HD Daystar Television Network Daystar TV Discovery Communications(1) 3net A&E, A&E HD, Animal Planet, Animal Planet HD, Discovery, Discovery HD, Discovery Espanol, Discovery Familia, Discovery Fit & Health, Discovery Fit & Health HD, HD Theater, Investigation Discovery, Military Channel, OWN, Planet Green, Planet Green HD Science Channel, Science Channel HD TLC, TLC HD, The Hub, Velocity HD Hearst Corporation A&E, A&E HD, Bio, Bio HD, Crime & Investigation, Crime & Investigation HD, ESPN 3D, ESPN Classic, ESPN Deportes, ESPN, ESPN HD, ESPN2, EPSN2 HD, ESPNEWS, ESPNEWS HD, ESPNU, EPSNU HD, H2, History, History HD, History en Espanol, History International, Lifetime, Lifetime HD, Lifetime Real Women, Lifetime Real Women HD, LMN, LMN HD, Military History Channel Hubbard Broadcasting Corporation Reelz Channel, Reelz Channel HD, Ovation TV, Ovation TV HD InterMedia Partners Gospel Music Channel, Gospel Music Channel HD, The Sportsman Channel, The Sportsman Channel HD, WAPA-America News Corporation Big Ten Network, BTN HD, FOX Business Network, FOX Business Network HD, FOX College Sports, FOX College Sports HD, FOX Deportes, FOX Movie Channel, FOX News Channel, FOX News Channel HD, FOX Soccer Channel, FOX Soccer Channel HD, FOX Soccer Plus, FOX Sports Net, FOX Sports Net HD, FUEL TV, FUEL TV HD, FX Network, FX Network HD, Nat Geo WILD, Nat Geo WILD HD, National Geographic Channel, National Geographic Channel HD, SPEED Channel, SPEED HD, TV Guide Network Scripps Networks Interactive(2) Cooking Channel, Cooking Channel HD, DIY Network, DIY Network HD, Food Network, Food Network HD, Great American Country, HGTV, HGTV HD, Travel Channel, Travel Channel HD Federal Communications Commission FCC 12-81 191 Network Owners: Networks Wholly Owned or Owned in Part The Walt Disney Company A&E, A&E HD, ABC Family, ABC Family HD, Bio, Bio HD, Crime & Investigation Network, Crime & Investigation HD, Disney Channel, Disney Channel HD, Disney XD, Disney XD HD, ESPN 3D HD, ESPN Classic, ESPN Classic HD, ESPN Deportes, ESPN, ESPN HD, ESPN2, ESPN2 HD, ESPNews, ESPNews HD, ESPNU, ESPNU HD, H2, History Channel, History Channel HD, History International, History International HD, LMN, LMN HD, Lifetime Real Women, Lifetime TV, Lifetime TV HD, Military History Channel, SOAPnet Time Warner Inc.(3) @Max, @Max HD, 5 Star Max, 5 Star Max HD, Action Max, Action Max HD, Boomerang, Cartoon Network/Adult Swim, Adult Swim HD, Cinemax, Cinemax HD, CNN, CNN HD, CNN Airport, CNN Headline News, CNN International, HBO, HBO HD, HBO2, HBO2HD, HBO Comedy, HBO Comedy HD, HBO Family, HBO Family HD, HBO Signature, HBO Signature HD, HBO Zone, HBO Zone HD, More Max, More Max HD, NBA, NBA HD, Outer Max, Outer Max HD, TBS, TBS HD, TMC, TMC HD, Thriller Max, Thriller Max HD, TNT, TNT HD, Tru TV, Tru TV HD, WMAX WMAX HD Tribune Company WGN America, WGN America HD, Food Network, Food Network HD Viacom Inc. BET, BET HD, BET Gospel, BET Hip Hop. CENTIC, CMT, CMT HD, CMT Pure Country, CMT Pure Country HD, Comedy Central, Comedy Central HD, EPIX, EPIX HD, LOGO, MTV, MTV HD, MTV Hits, MTV Jams, MTV2, Nick 2, Nickelodeon/Nick at Nite Nickelodeon/Nick at Nite HD, HD Nicktoons Network, Palladia HD, Spike TV, Spike TV HD, TeenNick, EPIX HD, Tr3s, TV Land, VH1, VH1 HD, VH1 Classic, VH1 Soul Trinity Broadcasting Network JCTV, Smile of a Child, TBN, TBN HD, TBN Enclave, The Church Channel Univision Communications Bandamax, De Pelicula, De Pelicula Classico Ritmoson Latino, Galavision, Telehit, TeleFutura, TeleFutura HD Notes: (1) On September 17, 2008, Discovery Holding Company (“DHC”) an independent publicly traded company was formed. We list these networks as affiliated because Liberty Media and Advance/Newhouse, owner of cable system Bright House Networks, share common ownership, officers, and directors with DHC. (2) On July 1, 2008, E.W. Scripps spun-off its programming into an independent publicly traded company, Scripps Interactive Networks (“SNI”). We list these networks as affiliated since SNI and E.W. Scripps share common ownership, officers, and directors. (3) On February 11, 2008, the Commission approved the applications for the assignment and transfer of control of certain Commission licenses and authorizations that resulted in Time Warner Cable, Inc. (“TWC”) separating from Time Warner Inc. In March 2009, TWC completed its separation from Time Warner Inc. Sources: CBS Corporation, About CBS, at http://www.cbscorporation.com/index.php (visited Feb. 8, 2012). Columbia Journalism Review, Who Owns What, at http://www.cjr.org/resources/ (visited Feb. 8, 2012). Federal Communications Commission FCC 12-81 192 Crown Media Holdings, Company Overview, at http://ir.crownmedia.net/index.cfm (visited Feb. 8, 2012). Discovery Communications, Inc., SEC Form 10-K, for the Fiscal Year Ending December 31, 2010 (“Discovery 10- K), at 3. Discovery Communications, Our Company, at http://corporate.discovery.com/our-company/overview/ (visited Feb. 8, 2012). E.W. Scripps Networks Interactive, SEC Form 10-K for the Fiscal Year Ending December 31, 2010 (“E.W. Scripps 10-K) at 4. Hearst Corporation, About Hearst, at http://www.hearst.com/broadcasting/index.php (visited Feb. 8, 2012). NCTA, Cable Networks, at http://www.ncta.com (visited Feb. 8, 2012). News Corporation, Cable Network Programming, at http://www.newscorp.com/operations/cable.html (visited Feb. 8, 2012). Scripps Networks Interactive, About Us, at http://www.scrippsnetworks.com/about.aspx?code=about (visited Feb. 8, 2012). SNL Kagan, Economics of Basic Cable Networks (2011 Edition). SNL Kagan, Cable Network Ownership (July 2011). Time Warner Inc., About Us, at http://www.timewarner.com/our-company/about-us/ (visited Feb. 8, 2012). Trinity Broadcasting Network, About Us, at http://www.tbn.org/about/images/TBN_Networks_info.pdf (visited Feb. 22, 2012). Univision, Company Overview, at http://univision.com/ (visited Feb. 8, 2012). Viacom Inc., About Viacom, at http://www.viacom.com/aboutviacom/Pages/default.aspx. (visited Feb. 8, 2012). Walt Disney Corporation, Company Overview, at http://corporate.disney.go.com/corporate/overview.html (visited Feb. 8, 2012). Federal Communications Commission FCC 12-81 193 APPENDIX C Regional Video Programming Services Table C-1 Regional Video Programming Services Affiliated with One or More MVPDs Network Owners Networks Wholly or Owned in Part Bright House Networks Regional News Networks: Bay News 9, Bay News 9 HD, Bay News 9 en Espanol, CFN 13 (Central FL News) Regional Sports Networks: Bright House Sports Network, Bright House Sports Network HD Cablevision Systems Corporation(1) (Madison Square Garden) (2) Regional News Networks: News 12 CT, News 12 Bronx, News 12 Brooklyn, News 12 Hudson Valley, News 12 Long Island, News 12 NJ, News 12 Traffic & Weather – CT, News 12 Traffic & Weather – Long Island, News 12 Traffic & Weather – Hudson Valley, News 12 Traffic & Weather – NJ, News 12 Traffic & Weather – NY, News 12 Westchester Regional Sports Networks: MSG, MSG HD, MSG Plus, MSG Plus HD Charter Communications Regional Sports Networks: Comcast/Charter SportsNet Southeast Comcast/NBCU Regional News Networks: CN8, New England Cable News New England Cable News HD Regional Sports Networks: Comcast Entertainment TV (CET), Comcast SportsNet Bay Area, Comcast SportsNet California, Comcast SportsNet Chicago, Comcast SportsNet Chicago HD, Comcast SportsNet Mid-Atlantic, Comcast SportsNet Mid-Atlantic HD, Comcast SportsNet New England Comcast SportsNet New England HD, Comcast SportsNet Philadelphia Comcast SportsNet Philadelphia HD, Comcast SportsNet Northwest, Comcast SportsNet Northwest HD, Comcast SportsNet Washington, Comcast SportsNet Washington HD, Comcast SportsNet West, Comcast SportsNet West HD, Comcast SportsNet Southwest, SportsNet New York, SportsNet New York HD Cox Enterprises Regional News Networks: 24/7 News Channel, Arizona News Channel, Kansas 22 Now, Las Vegas One News Local News on Cable (Hampton), News Now 53 (Oklahoma City), News Now 53 (Tulsa), NewsWatch 15 (Louisiana), Pittsburgh Cable News Channel, Rhode Island News Channel, San Diego’s News Channel 15 Regional Sports Networks: Channel 4 San Diego, Cox Sports Television DIRECTV Regional Sports Networks: Roots Sports Northwest Roots Sports Northwest HD, Roots Sports Pittsburgh, Roots Sports Pittsburgh HD, Roots Sports Rocky Mountain, Roots Sports Rocky Mountain HD Federal Communications Commission FCC 12-81 194 Network Owners Networks Wholly or Owned in Part Time Warner Cable Regional News Networks: Antelope Valley Channel 3 (Southern CA), Bay News 9, Bay News 9 HD ,BEVOD (TX), Capital News 9 (Albany, NY), Channel 858 (Southern CA), Desert Cities TV (Southern CA), The Green Channel (HI), K-Life(HI), Metro Weather (Kansas City), NEON (OH), News 8 Austin (TX), News 8 Radar Now (TX), News 8 Traffic Now (TX), News 8 Non-Stop Weather (TX), News 10 Now (TX), News 14 Carolina (Charlotte, NC), News 14 Carolina (Raleigh, NC), News 14 Carolina (Greensboro, NC), News 14 Carolina (Wilmington, Jacksonville, Morehead city, NC), Nippon Golden Network (HI), NY1 News (NY), NY1 Road and Rail Report (NY), OC 16 (HI), Oiwi (HI), Rhode Island News Channel, SoCal1 (Southern CA), Texas Channel (Austin, Waco, San Antonio, Corpus Christi, TX), Texas Chanel (Dallas), Texas Channel (El Paso), TWC-TV (New England), YNN (Austin, TX), YNN Austin, YNN Austin Radar Now, YNN Austin Traffic Now, YNN Austin Weather, YNN Buffalo (NY), YNN Capital Region (Albany, NY), YNN Central NY, YNN Hudson Valley (NY), YNN Rochester (NY), Wichita Falls TV (TX) Regional Sports Networks: Bright House Sports Network, Bright House Sports Network HD, Comcast/Charter SportsNet Southwest Metro Sports (Kansas City), Metro Sports HD, Metro Sports (NE), Metro sports (NE) HD, Metro Sports 2 (Kansas City, MO), News 8 Non-Stop Sports (TX), SportsNet New York, SportsNet New York HD, SunSports, SunSports HD, TWC Connection/Sports (Mid-Ohio), TWC Connections/Sports (Southwest Ohio), TWC Sports (Albany, NY), TWC sports (Albany) HD, TWC Sports Central New York, TWC Sports (WI), TWC SportsNet (Buffalo), TWC Sports (Rochester), YNN Non-Stop Sports Notes: (1) On December 31, 2010, Cablevision System Corporation (“Cablevision”) wholly owned programming subsidiary Rainbow Media Holding LLC (“Rainbow”) transferred control of the News 12 regional programming services to Cablevision. On June 30, 2011, Cablevision spun-off Rainbow, which became an independent public company, now called AMC Networks Inc. We list these networks as affiliated with this media company since AMC and Cablevision share common ownership, officers, and directors. (2) On July 29, 2009, Madison Square Garden, Inc. (“MSG”) was incorporated as an indirect, wholly-owned subsidiary of Cablevision Systems Corporation. On February 9, 2010, MSG was spun off from Cablevision, becoming a separate public company. We list these networks as affiliated since MSG and Cablevision share common ownership, officers, and directors. Sources: AMC Networks Inc., SEC Form 10-Q, Quarterly Period Ending September 30, 2011 (“AMC 10-Q”) at 7. Application of News Corporation and The DIRECTV Group, Inc., Transferors, and Liberty Media Corporation, Transferee, For Authority To Transfer Control, Consolidated application For Authority to Transfer Control, Jan. 29, 2007, at 10-11. Federal Communications Commission FCC 12-81 195 Cablevision, About Cablevision, at http://www.cablevision.com/about/index.jsp (visited Feb. 8, 2012). Charter Communications, About Charter, at http://www.charter.com/footer/footerPage.jsp?tag=about (visited Feb. 8, 2012). Columbia Journalism Review, Who Owns What, at http://www.cjr.org/resources/ (visited Feb. 8, 2012). Comcast-NBCU Order, 26 FCC Rcd at 4410-18, Appendix D; GE/Comcast /NBCU Application at 19-20, 30-31. Cox Enterprises, Corporate Overview, at http://www.coxenterprises.com/about-cox/corporate-overview.aspx (visited Feb. 8, 2012). Madison Square Garden, Inc. SEC Form 10-K, for the Fiscal Year ending December 31, 2010 (“MSG” 10-K) at 3. NCTA, Cable Networks, at http://www.ncta.com (visited Feb. 8, 2012). SNL Kagan, Economics of Basic Cable Networks (2011 Edition). SNL Kagan, Cable Network Ownership (July 2011). Time Warner Cable About Us, at http://www.timewarnercable.com/nynj/about/ (visited Feb. 8, 2012). Federal Communications Commission FCC 12-81 196 Table C-2 Regional Networks Affiliated with a National Broadcast Television Network, Broadcast Television Licensee, or Other Media Company Network Owners Networks Wholly or Owned in Part Allbritton Communications Regional News Networks: NewsChannel 8, NewsChannel 8 HD Belo Corporation Regional News Networks: 24/7 News Channel (Boise, ID), Arizona News Channel, Local News on Cable (Hampton), NewsWatch 15 (Louisiana), Northwest Cable News (Washington, Oregon, Idaho), TXCN (Texas) CBS Corporation Regional Sports Networks: MountainWest Sports Network, The Mtn. HD News Corporation Regional Sports Networks: FOX Sports Arizona, FOX Sports Arizona HD, FOX Sports Carolinas, FOX Sports Carolinas HD, FOX Sports Detroit, , FOX Sports Detroit HD, FOX Sports Florida, FOX Sports Florida HD, FOX Sports Houston, FOX Sports Houston HD, FOX Sports Indiana, FOX Sports Indiana HD, FOX Sports Kansas City, FOX Sports Kansas City HD, FOX Sports Midwest, FOX Sports Midwest HD, FOX Sports North, FOX Sports North HD, FOX Sports Ohio, FOX Sports Ohio, HD, FOX Sports Oklahoma, FOX Sports Oklahoma HD, FOX Sports South, FOX Sports South HD, FOX Sports Southwest, FOX Sports Southwest HD, FOX Sports Tennessee, FOX Sports Tennessee HD, FOX Sports West, FOX Sports West HD, FOX Sports Wisconsin, FOX Sports Wisconsin HD, Sun Sports, Sun Sports HD Scripps Networks Interactive Regional Sports Networks: FOX Sports South , FOX Sports South HD Sources: Belo Corporation, Belo Companies, Cable News, at http://www.belo.com/companies/cable-news (visited Feb. 12, 2012). CBS Corporation, About CBS, at http://www.cbscorporation.com/index.php (visited Feb. 8, 2012). Columbia Journalism Review, Who Owns What, at http://www.cjr.org/resources/ (visited Feb. 8, 2012). NCTA, Cable Networks, at http://www.ncta.com (visited Feb. 8, 2012). News Corporation, Cable Network Programming, at http://www.newscorp.com/operations/cable.html (visited Feb. 8, 2012). NewsChannel 8, About Us, at http://www.tbd.com/about/ (visited Feb. 22, 2012) Scripps Networks Interactive, About Us, at http://www.scrippsnetworks.com/about.aspx?code=about (visited Feb. 8, 2012). SNL Kagan, Economics of Basic Cable Networks (2011 Edition). Federal Communications Commission FCC 12-81 197 APPENDIX D Regional Sports Networks Regional Network Name(1) MVPD Owner Other Owners Altitude Sports Network Stan Kroenke (owner of the Denver Nuggets and the Colorado Avalanche) Altitude Sports Network HD Stan Kroenke (owner of the Denver Nuggets and the Colorado Avalanche) Bright House Sports Network Time Warner Cable Bright House Sports Network HD Time Warner Cable Big Ten Network Big Ten Conference, News Corporation Big Ten Network HD Big Ten Conference, News Corporation Channel 4 San Diego(2) Cox Enterprises Channel 4 San Diego HD Cox Enterprises Comcast/Charter Sports Southeast Comcast, Charter Comcast/Charter Sports Southeast HD Comcast, Charter Comcast SportsNet Bay Area Comcast/NBCU San Francisco Giants Comcast SportsNet Bay Area HD Comcast/NBCU San Francisco Giants Comcast Sports Net California Comcast/NBCU Comcast SportsNet California HD Comcast/NBCU Comcast SportsNet Chicago Comcast/NBCU J. Joseph Ricketts (owner of the Cubs), Jerry Reinsdorf (owner of the Bulls and the White Sox), Rocky Wirtz (owner of the Blackhawks) Comcast SportsNet Chicago HD Comcast/NBCU J. Joseph Ricketts (owner of the Cubs), Jerry Reinsdorf (owner of the Bulls and the White Sox), Rocky Wirtz (owner of the Blackhawks) Comcast SportsNet Houston(3) Comcast/NBCU Houston Astros, Houston Rockets Comcast SportsNet Houston HD Comcast/NBCU Houston Astros, Houston Rockets Federal Communications Commission FCC 12-81 198 Regional Network Name(1) MVPD Owner Other Owners Comcast SportsNet New England Comcast/NBCU Comcast SportsNet New England HD Comcast/NBCU Comcast SportsNet Northwest Comcast/NBCU Comcast SportsNet Northwest HD Comcast/NBCU Comcast SportsNet Philadelphia Comcast/NBCU Philadelphia Phillies Comcast SportsNet Philadelphia HD Comcast/NBCU Philadelphia Phillies Comcast SportsNet Washington Comcast/NBCU Comcast SportsNet Washington HD Comcast/NBCU Comcast Sports Southwest Comcast/NBCU Comcast Sports Southwest HD Comcast/NBCU Cox Sports Television (New Orleans) Cox Enterprises Cox Sports Television HD (New Orleans) Cox Enterprises Fox Sports Arizona News Corporation Fox Sports Arizona HD News Corporation Fox Sports Carolinas News Corporation Fox Sports Carolinas HD News Corporation Fox Sports Detroit News Corporation Fox Sports Detroit HD News Corporation Fox Sports Florida News Corporation Fox Sports Florida HD News Corporation Fox Sports Midwest News Corporation Fox Sports Midwest HD News Corporation Fox Sports North News Corporation Fox Sports North HD News Corporation Fox Sports Ohio News Corporation Fox Sports Ohio HD News Corporation Fox Sports Prime Ticket News Corporation Fox Sports Prime Ticket HD News Corporation Fox Sports South News Corporation Fox Sports South HD News Corporation Fox Sports Southwest News Corporation Federal Communications Commission FCC 12-81 199 Regional Network Name(1) MVPD Owner Other Owners Fox Sports Southwest HD News Corporation Fox Sports Tennessee News Corporation Fox Sports Tennessee HD News Corporation Fox Sports West News Corporation Fox Sports West HD News Corporation Fox Sports Wisconsin News Corporation Fox Sports Wisconsin HD News Corporation Lakers RSN(4) Time Warner Cable Lakers RSN HD Time Warner Cable Lakers RSN (Spanish language) Time Warner Cable Lakers RSN HD (Spanish language) Time Warner Cable Longhorn Network University of Texas at Austin, Walt Disney Longhorn Network HD University of Texas at Austin, Walt Disney MASN Baltimore Orioles and the Washington Nationals MASN HD Baltimore Orioles and the Washington Nationals Metro Sports (Kansas City) Time Warner Cable Metro Sports HD (Kansas City) Time Warner Cable Metro Sports (Nebraska) Time Warner Cable MSG Cablevision MSG HD Cablevision MSG Plus Cablevision MSG Plus HD Cablevision NESN Boston Red Sox and Boston Bruins NESN HD Boston Red Sox and Boston Bruins OC Sports (Hawaii) Time Warner Cable OC Sports HD (Hawaii) Time Warner Cable PAC-12 Network PAC-12 Conference PAC-12 Network HD PAC-12 Conference SportsNet New York Comcast, TWC SportsNet New York HD Comcast, TWC Federal Communications Commission FCC 12-81 200 Regional Network Name(1) MVPD Owner Other Owners The Mtn. – Mountain West Sports Network(5) Comcast CBS The Mtn. – Mountain West Sports Network HD Comcast CBS TWC Sports (Central NY) Time Warner Cable TWC Sports HD (Central NY) Time Warner Cable TWC SportsNet (Buffalo) Time Warner Cable TWC SportsNet HD (Buffalo) Time Warner Cable TWC SportsNet (Rochester) Time Warner Cable TWC SportsNet HD (Rochester) Time Warner Cable TWC Connection/Sports (Mid-Ohio) Time Warner Cable TWC Connection/Sports (SW Ohio) Time Warner Cable TWC Sports 32 (Wisconsin) Time Warner Cable TWC Sports 32 HD (Wisconsin) Time Warner Cable Texas Channel (Texas) Time Warner Cable YNN Non-Stop Sports (Texas) Time Warner Cable Notes: (1) See SNL Kagan, Media Trends (2011 Edition), at 70-74. This list is provided for illustrative purposes only. Inclusion or exclusion of a network should not be read to state or imply any position as to whether the network qualifies as an “RSN” as defined by the Commission. (2) While press reports indicate that Channel 4 San Diego will no longer hold the rights for the Major League Baseball games of the San Diego Padres in 2012, these reports also indicate that Channel 4 San Diego carries NCAA Division I basketball games. See Cox to Layoff Baseball Programming Employees, Aug. 30, 2011, available at http://www.10news.com/news/29032885/detail.html; SDSU Men’s Hoops at Arizona to be Simulcast on 4SD, Nov. 22, 2011, available at http://goaztecs.cstv.com/sports/m-baskbl/spec-rel/112211aab.html. (3) Comcast SportsNet Houston is scheduled to launch in 2012, featuring the games of the Houston Astros (of MLB) and the Houston Rockets (of the NBA). See Go Back to the Future When the Astros and Rockets Launch Their Channel, It Likely Will Remind Viewers of HSE (Nov. 8, 2010), available at http://www.chron.com/sports/rockets/ article/Astros-Rockets-network-likely-to-resemble-old-1705389.php (4) TWC recently announced that it will launch two RSNs in 2012 featuring the games of the Los Angeles Lakers (of the NBA), including the first Spanish-language RSN. See Time Warner Cable and the Los Angeles Lakers Sign Long-Term Agreement for Lakers Games, Beginning With 2012-2013 Season (Feb. 14, 2011), available at http://ir.timewarnercable.com/phoenix.zhtml?c=207717&p=irol-newsArticle&ID=1528805&highlight. (5) The Mtn. plans to cease operation on May 31, 2012. See Frank Schwab, Mountain West TV Network Will Be Discontinued, THE GAZETTE, Colorado Springs, http://www.gazette.com/common/printer/view.php?db=colgazette&id=136348 (visited Apr. 27, 2012). Federal Communications Commission FCC 12-81 201 Sources: Altitude Sports and Entertainment, About Us, at http://www.altitude.tv/AboutUs/AboutUs/default.aspx (visited Feb. 8, 2012) Big Ten Network, About Us, at http://btn.com/about/ (visited Mar. 2, 2012) Bright House Networks, About Us, at http://www.brighthouse.com/corporate/about (visited Mar. 1, 2012). Longhorn Network, About Us, http://espn.go.com/longhornnetwork/index (visited Feb. 8, 2012). Mid-Atlantic Sports Network, About MASN, at http://www.masnsports.com/masn_news_information/ about- masn.html (visited Feb. 8, 2012). NCTA, Cable Networks, at http://www.ncta.com (visited Feb. 8, 2012). New England Sports Network, About NESN, at http://www.nesn.com/about-nesn.html (visited Feb. 8, 2012). Pacific 12 Conference, PAC-12 Official Site, at http://www.pac-12.org/ (visited Feb. 8, 2012). SNL Kagan, Economics of Basic Cable Networks (2011 Edition). SNL Kagan, Cable Network Ownership (July 2011). SNL Kagan, RSN Subscribers (August 26, 2011) SportsTime Ohio, Channel Lineup, at http://www.sportstimeohio.com/tv-schedule (visited Feb. 8, 2012). SNL Kagan, Media Trends (2011 Edition), at 70-74. Federal Communications Commission FCC 12-81 202 STATEMENT OF COMMISSIONER ROBERT M. McDOWELL Re: Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 07-269 First, I thank the incredibly hardworking and talented professionals in the Media Bureau for laboring for what must have been an uncountable number of hours to produce this comprehensive report. The report contains a wealth of information about the video market revealing just how dynamic and constructively chaotic it is. Accordingly, I would have preferred for this report to affirmatively conclude that the video programming market is competitive. It provides ample evidence for such a conclusion. For example, since our last report, which analyzed data available as of June 2006, “telephone” MVPDs have emerged as a major competitive force, the digital television transition has yielded more channels for free over-the-air, and the Internet and mobile platforms have enabled consumers to access video content from an immeasurable universe of sources. In fact, given these non-traditional players, the competition is even more robust than this report reflects. More consumers are accessing more online video content, more often. From May 2011 to May 2012, unique viewers of online video content increased by more than four million.1 The consumption per viewer during the same period increased from 15.9 to 21.9 hours per month, a staggering thirty-eight percent increase.2 The amount of content viewed has witnessed growth as well with the number of videos watched increasing by almost three billion, more than seven percent, from May 2010 to May 2012.3 Furthermore, the growth of the Internet video marketplace is underscored by the popularity of over-the-top devices,4 which allow consumers to use their televisions and mobile devices to watch online 1 Press Release, COMSCORE, comScore Releases May 2012 U.S. Online Video Rankings (June 18, 2012), http://www.comscore.com/Press_Events/Press_Releases/2012/6/comScore_Releases_May_2012_U.S._Online_Vide o_Rankings; Press Release, COMSCORE, comScore Releases May 2011 U.S. Online Video Rankings (June 17, 2011), http://www.comscore.com/Press_Events/Press_Releases/2011/6/comScore_Releases_May_2011_U.S._Online_Vide o_Rankings. 2 Press Release, COMSCORE, comScore Releases May 2012 U.S. Online Video Rankings (June 18, 2012), http://www.comscore.com/Press_Events/Press_Releases/2012/6/comScore_Releases_May_2012_U.S._Online_Vide o_Rankings; Press Release, COMSCORE, comScore Releases May 2011 U.S. Online Video Rankings (June 17, 2011), http://www.comscore.com/Press_Events/Press_Releases/2011/6/comScore_Releases_May_2011_U.S._Online_Vide o_Rankings. 3 Press Release, COMSCORE, comScore Releases May 2012 U.S. Online Video Rankings (June 18, 2012), http://www.comscore.com/Press_Events/Press_Releases/2012/6/comScore_Releases_May_2012_U.S._Online_Vide o_Rankings; Press Release, COMSCORE, comScore Releases May 2010 U.S. Online Video Rankings (June 24, 2010), http://www.comscore.com/Press_Events/Press_Releases/2010/6/comScore_Releases_May_2010_U.S._Online_Vide o_Rankings. 4 Over-the-top devices allow content to be sent to a device using a broadband connection. Over-the-top technologies include such products as Internet-enabled televisions, media tablets, gaming consoles, digital media adapters, and Blu-ray players and recorders. See Jordan Selburn, Over-the-Top Market Emerges from the Shadows, ISUPPLI, (continued….) Federal Communications Commission FCC 12-81 203 video content. Industry analysts project shipments of over-the-top devices to increase by nearly fifty percent in 2012, from 258 million to 384.8 million worldwide.5 This increase comes on the heels of a sixty-eight percent increase in 2011.6 One over-the-top video provider alone exemplifies the growth of this market, recently crossing the threshold of one billion hours viewed in one month.7 The company estimates that its twenty-four million U.S. subscribers watched an average of eighty minutes of its content everyday in June.8 Unfortunately, the report’s analysis of the Internet’s effect on the video market is generally limited to online video distributors offering professional content previously exhibited on television or theatrically. Although such content is clearly a driving force in the video market, the Internet, coupled with mobile devices, provides alternate outlets for content outside of the traditional media and entertainment structure. I hope that future reports will also explore the market effects of alternative and emerging online video distributors that are creating new and original content. I am pleased to vote in support of this report, along with the accompanying notice of inquiry to obtain data regarding the video services industry for 2011 and 2012. We have a terrific opportunity to get the Commission back on track so that we can release these reports annually as intended by Congress. (Continued from previous page) (Mar. 27, 2012), http://www.isuppli.com/Home-and-Consumer-Electronics/MarketWatch/Pages/Over-the-Top- Market-Emerges-from-the-Shadows.aspx. 5 Id. 6 Id. 7 Janko Roettgers, Netflix Just Became Cable’s Biggest TV Network, NEWTEEVEE, (JUL. 3, 2012, 10:43 AM), http://gigaom.com/video/netflix-june-one-billion-hours/. 8 Id. Federal Communications Commission FCC 12-81 204 STATEMENT OF COMMISSIONER AJIT PAI Re: Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 07-269 I would like to thank the Media Bureau staff for all of their work producing this comprehensive report, which demonstrates in detail that the video marketplace is more competitive than it ever has been. Over the four years covered by the report, the range of MVPD options expanded, broadcasters increased their number of multicast streams, distribution of video content over the Internet exploded, and the variety of devices capable of displaying video programming grew dramatically. This is all good news, because competition within and among market segments (broadcasters, MVPDs, and online video distributors) benefits consumers. Given the fast pace of change within the industry, it is vital that the Commission comply with its statutory mandate to “annually report to Congress on the status of competition in the market for the delivery of video programming.” 47 U.S.C. § 548(g). Our record on this score is a matter of public record and need not be repeated here. I am hopeful, however, that we are back on track and that we will release our next report in 2013.