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Keynote Speech by Andrew Barrett
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JUN
CAN'S
30%
1994
COMMUNICATIONS COMMISSION
the
F6 $300
ERAL Barrett to
WASHINGTON D.C. D.C. 20554 20554
OFFICIAL BUSINESS
PENALTY FOR PRIVATE USE
Andrew C.
KEYNOTE SPEECH
BY
COMMISSIONER
ANDREW C. BARRETT
FEDERAL COMMUNICATIONS COMMISSION
"THE DIGITAL MEDIA REVOLUTION"
MEDIENFORUM NORDHEINWESTFALEN 1994
COLOGNE, GERMANY
June 6, 1994
INTRODUCTION:
During the past several years, rapid changes have been
taking place in the world of digital technology. Digital
technology has the potential to redefine the telecommunications
industry. Advances in memory, system design, switching and
information transmission is transforming the framework within
which you and I are receiving various communications services.
Today, I will address media regulatory issues that should be
considered in conjunction with the evolution of digital media. I
will discuss: (1) the formation of media policy resulting from
the trend toward interactivity; (2) the impact of mergers and new
alliances on the development of the media; (3) policy objectives
that should be pursued in the next few years and the challenges
created by increased channel capacity; (4) the evolution of
individual and mass communications into an interactive digitized
media; and (5) the issues raised by the development and
deployment of technologies for the "information superhighway" in
the United States.
WHAT DOES THE DIGITAL MEDIA REVOLUTION MEAN FOR NATIONAL AND
MEDIA POLICY?
As the telecommunications industry evolves, many European
countries will be forced to grapple with policy issues similar to
those now being addressed by companies in the United States. The
interaction of the cable, broadcast and telephone industries in
the United States is generating significant regulatory issues.
The FCC must continually endeavor to balance its regulations in a
manner which will not unduly hinder any single industry's ability
to be a competitive player in the future multimedia marketplace.
In the future, I believe that digital compression will
produce additional capacity for the transmission of media
programming. To that end, consumer demand for greater
convenience and program selection should be the driving force
behind the deployment of digital services. Satellite,
broadcasting and cable companies are likely to deploy such
technology. Programming producers and distributors should
benefit as the number of media outlets are increased.
Despite these anticipated advancements in digital
technology, there is still an element of uncertainty with respect
to the implementation of the digital media. Digital transmission
should provide superior signal control, quality and security
while allowing for increased channel capacity and lower
distribution costs. Yet, the remaining stumbling blocks-
1
industry standards¹ and cost of conversion--are significant.
Thus, industry adaptation to the technology will prove to be a
significant challenge.
Media companies that deploy digital services will seek to
gain advantages in an increasingly competitive video marketplace.
Satellite-delivered services could become viable competitors to
the cable and broadcast players that have traditionally served
the video marketplace. In the U.S., cable systems will look to
deliver multiple channels of programming through their existing
wiring to subscribers' homes; in the future their channel
capacity could grow to one hundred channels or more. Moreover,
U.S. telephone companies are seeking to compete with cable
systems to provide video programming services over the telephone
infrastructure. American broadcast licensees may also attain the
capability of increasing their service offerings through multiple
digital broadcast channels. Finally, program producers should
benefit from the increased channel capacity and lower
distribution costs that digital compression will provide to its
users.
Policymakers and regulators should strive to attain a model
that will permit the proliferation of new services from various
media players, including new entrants such as DBS and the
telephone companies. At the same time, investment risks in such
new media activities should be borne by shareholders and not
captive payers.
WHAT EFFECTS DO THE MERGERS AND NEW ALLIANCES OCCURRING AT THE
PRESENT TIME HAVE ON THE DEVELOPMENT OF MEDIA?
Broadcasters in the U.S. are experiencing a resurgence in
their revenue prospects. Broadcasters have already experienced
an increase in advertising.² The renewed interest in
broadcasting stations, and in particular television stations, is
evidenced by the increase in advertising which grew by 4% in
1993. Additionally, advertising on ABC, NBC, and CBS was up 13%
in the fourth quarter of 1993. 3 Advance advertising sales for
¹The Motion Picture Experts Group, a committee of the International
Standards Organization, is expected to unveil the MPEG II standards as the
accepted standards for digital compression later this year. See, "The
Information Wave", Appliance, Spring 1994, p. 5.
2
Local TV ad revenue increased by 16% to $1.35 billion in the first
quarter and spot TV ad revenue grew by 18% to $1.34 billion. See,
Communications Daily, May 11, 1994, p. 4.
3 See, "TV Station Sales Surge", Variety, Joe Flint, March 14, 1994, p.
ABBE.
2
the 1994-1995 prime-time television season are expected to
increase by more than 11% from last year and could reach as much
as $4 billion.⁴
Broadcast conglomerates are flourishing⁵ and discussions
about potential broadcast mergers abound.⁶ Moreover, lending
institutions are now showing a renewed interest in broadcasters'
activities.⁷ Within the past two years, there has also been a
surge in sales of broadcast stations. Major group owners are
reportedly using broadcast stations as outlets for program and
production ventures that will likely be offered on other stations
and for second cable channels in the same markets for niche
programming and regional cable channels.⁹ Television stations
that were at one time sold for prices as low as seven to eight
times cash flow are trading at 9 to 10 times cash flow. 10
Fox Inc. recently announced a broadcasting alliance in which
New World Communications Group Inc. has agreed to change the
network affiliation for up to 12 VHF stations from ABC, CBS and
4see, "Rebound in Upfront TV AdSales Expected", The Wall Street, May 31,
1994, p. B8.
⁵Capital Cities/ABC has determined that the proliferation of channels
justifies its increased investment in programming--$200 million in 1993 from
$100 million in 1992 and the acquisition of European television production
companies and networks. The companies first quarter revenues nearly doubled
to $116.68 million. See, "Cap Cities Builds Media Highway for Its Own Back
Lot", Los Angeles Times, James Flanigan, February 27, 1994, D1; See also, "NBC
Ties In With Mexico's TV Azteca", Communications Daily, May 18, 1994, p. 6.
⁶For instance, some have speculated that Walt Disney Co. will purchase a
television network if prime time slots are reduced by the entry of ABC, CBS
and NBC into full-scale program production as a result of our relaxed
financial interest and syndication regulations. See, "Merger Talk Now Takes
Center Stage", David Lieberman, USA Today, March 22, 1994, p. B1.
⁷see, "Banks Giving More Attention to Acquisitions", Electronic Media,
Diane Mermigas, April 11, 1994, p. 15.
8 'In 1992, there were a total of 41 TV transactions totaling $124
million. In 1993, the FCC approved 101 TV-related transactions totaling $1.73
billion. See, "The Race is on in Hot TV Station Market", Diane Mermigas,
Electronic Media, April 11, 1994, p. 1.
⁹Recently, A.H. Belo acquired the CBS affiliate, WWL-TV in New Orleans
for $110 million while The Washington Post purchased an ABC affiliate in San
Antonio and an NBC in Houston for $250 million. Id., p. 1.
10
See, "TV Station Sales Surge", Variety, Joe Flint, March 14, 1994, p.
ABBE.
3
NBC to Fox Broadcasting Company. 11 By investing $500 million
dollars in New World, Fox acquires additional outlets for its
programming and strengthens its position as a network competitor.
Fox's interest as a non-voting shareholder allows the company to
retain its other affiliates while staying within the FCC's
national broadcast ownership constraints of twelve (12)
television stations. It also places the network in the position
of generating increased advertising revenues. Fox will no longer
be forced to give discounts to advertisers because its affiliates
are UHF stations.
The Fox-New World alliance may have significant
ramifications for the broadcast industry. First, there are
market ramifications. CBS, which lost eight (8) affiliate
stations to Fox¹², will more than likely seek to replace these
affiliates with stations that are aligned with other networks.
Reportedly, CBS may offer greater network affiliation
compensation and extend the term of affiliation agreements. ABC
and NBC would then be forced to seek ways in which to retain
their affiliates and would most likely be forced to pay increased
compensation for carriage of their network shows. Moreover, the
Fox announcement precedes the networks' sale of "upfront"
advertising time for the 1994-1995 season. CBS, ABC and NBC will
be forced to make guarantees with respect to viewership levels
without knowing with certainty what their affiliates lineups will
be. Finally, Fox's network competitors will be forced to come up
with popular quality programming that will support the
advertising rates they will command.
Second, there are regulatory issues. This recent
development with Fox-New World spurs the accelerated demise of
the financial interest and syndication rules; thus, allowing more
mergers of networks with Hollywood studios. Additionally, the
merits of the Prime Time Access Rule will come under increased
scrutiny.
The market interest in independent television stations
continues in light of Paramount and Warner Bros. decisions to
launch new networks and to sign-up new affiliates. 13 The
emergence of these new television networks are likely to
11 See, "Fox Inc., New World Communications Group Inc. Announce Largest
Affiliation Switch in Network Television History: Fox Makes $500 Million
Investment in New World", Press Release dated May 23, 1994.
12 See, "Fox Will Sign Up 12 New Stations; Takes 8 from CBS", Bill
Carter, New York Times, May 24, 1994, p. A1.
13 Moreover, now that CBS, NBC and ABC will be searching for new
affiliate stations as result of the Fox-New World deal, the competition for
independents will be fierce. Id.
4
translate into increased programming production, reduced
programming costs and improved advertising market penetration. 14
As various types of alternative network deployment scenarios
unfold in the broadcast marketplace, the FCC must determine how
to create a level playing field in an increasingly competitive
environment. For example, Bell Atlantic currently plans to
provide enhanced delivery of services to the home, including its
current plans for a $10 billion fiber-optic network. 15
Initially, this video dialtone network reportedly is expected to
include basic video services and video-on-demand, with future
capacity for home shopping and banking, remote education, and
video games.
More recently, state regulators in New York have opened the
door to local phone competition in an agreement with the
Rochester Telephone Corporation. Subject to approval from the
New York State Public Service Commission, Rochester Telephone
will gain greater freedom to explore new services and retain
profits in exchange for letting rival companies connect with its
network. 16 This agreement would enable Time Warner to offer
ordinary telephone service throughout Rochester by the end of
1995
17
This development provides Rochester with the
opportunity to offer competing television service to residential
customers.
In other developments, PacTel has announced a $16 billion
seven-year plan for wiring the California market with fiber, a
plan that would complement their proposed video dialtone service,
with construction reportedly scheduled to begin in San Diego in
June 1994. Ameritech also plans to provide interactive service
14
See, "Paramount Placing Trust in 'Voyager' to Launch Network", Thomas
Tyrer, Electronic Media, May 16, 1994, p. 53.
¹⁵The company is scheduled to reach 1.25 million homes by the end of
1994, and 8.75 million homes by 2000, in the Washington D.C. metropolitan
area, northern New Jersey, and parts of Philadelphia, Pittsburgh, and
Baltimore. "With TCI Deal History, Bell Atlantic Plans Anew", Washington Post,
February 26, 1994, at C1.
16 "A Telephone Role by Time Warner, " New York Times, May 18, 1994, at
A1.
17 Time Warner's cable television equipment in the area has already been
upgraded with fiber optic lines to reach into every neighborhood. Therefore,
the only remaining step to allow them to provide telephony services will be
the installation of switching equipment for two-way voice communications.
5
in 13 cities in its own region. 18
As these companies begin to provide cable and telephone
services, the FCC must ensure regulatory parity and flexibility
in order to encourage competition and thus progress in the
marketplace. We must make certain that the shareholders, and not
the regulated rate payer, bears the financial burden of
constructing and deploying expanded video and telephony services.
Further, we must ensure open access and sufficient channel
capacity are offered on any common carrier video dialtone
platforms authorized by the FCC. Finally, it is imperative that
consumer demand be permitted to determine the fate of these
businesses; however, we must be careful not to permit competition
to develop at the expense of ownership diversity.
WHICH OBJECTIVES SHOULD MEDIA POLICY SEEK TO PURSUE IN THE NEXT
FEW YEARS AND WHAT CHALLENGES WILL BE PRESENTED BY THE INCREASING
TRANSMISSION CAPACITIES?
In the past, the U.S. broadcast industry has been the focus
of the Commission's attention. Restrictions were placed on
broadcasters to deter certain anti-competitive market practices
that occurred in the past. However, changes in the video market
and the corresponding emergence of the cable industry have forced
the Commission to reconsider many of its ownership and
programming restrictions on the broadcast industry.
In April 1993, we significantly relaxed the financial
interest and syndication rules (fin/syn). These rules were
originally adopted in the 1970's when the Big 3 networks ABC,
CBS and NBC--dominated the program and broadcast marketplace.
Since that time, Fox has evolved and grown into a fourth network.
It's recent alliance with New World resulting in new television
affiliates and the acquisition of NFL football games makes it a
fully comparable competitor to the other networks. By November
1995, the fin/syn rules should sunset, subject to a prior
Commission review. 19 During the interim period, I expect to see
NBC, CBS and ABC become more involved in program production and
18 The City of San Diego also has initiated a request for information on
ways to establish a public-private collaboration on building a "broadband
telecommunications grid" serving city residents. See "San Diego Seeks Views
on Broadband Grid Project", Telecommunications Reports, May 9, 1994, at 34.
See also "US West Plans Video Division", New York Times, March 8, 1994 at D19.
19 See, Second Report and Order, 8 FCC Rcd 3282 (1993).
6
syndication, both domestically and in Europe. 20
In recent years, broadcasters in the U.S. have been given
the opportunity to increase their market penetration and service
offerings due to several FCC decisions. 21 The FCC relaxed its
radio ownership limits in 1992 and its network-cable cross-
ownership rules²². The Commission is likely to take action on
its television multiple ownership rules some time this year. Any
action to further relax the current ownership limits on broadcast
stations will depend, to a great extent, on the FCC's
determinations about the impact of its current ownership rules
and the ensuing impact of further broadcast ownership. Bearing
in mind the intended regulatory objective--to encourage
competition and to promote diversity--the Commission must assess
whether it is advisable to further relax television broadcast
station local and national ownership limits. 23
The FCC is currently faced with implementation challenges in
the re-regulation of cable. Since the adoption of our rules,
many parties have requested clarification of our rate
regulations, particularly with respect to investment incentives
for new programming services, a la carte program services, and
rate decisions by local authorities. The FCC must ensure that
our cable regulations, while protecting consumer, do not unduly
hinder the capability of the cable industry to provide new
programming services and to develop interactive media offerings.
Each of the European markets possess its own characteristics
and, in certain instances, regulatory obstacles. In an effort to
establish uniformity in Europe, near the end of 1991, the
European Launching Group for Digital Video Broadcasting ("ELG"),
20 CapCities/ABC has a twenty percent (20%) interest in RTL2, a new
German television general network and a twenty-four percent (24%) interest in
Scandinavian Broadcasting System SA. ESPN also owns thirty-three percent
(33%) of Eurosport, a pan-European sports network. Further, ESPN
International broadened its programming distribution 90 countries in 11
languages. See, "Capital Cities/ABC, Inc. 1993 Annual Report & 10-K"
CBS
and NBC have already indicated intentions to expand their first-run operations
in the near future. See, "Television's Turf Wars", Electronic Media, April 11,
1994, p. 1; See also, "NBC Ties In With Mexico's TV Azteca", Communications
Daily, May 18, 1994, p. 6.
21 The FCC relaxed its radio ownership limits from 12AM/12FM to
18AM/18FM. We relaxed our radio ownership duopoly rules to allow 2 AM and 2
FM in many major markets. These limits will be further relaxed in September
1994 to 20AM/20FM. See, Memorandum Opinion and Order and Further Notice of
Proposed Rulemaking, MM Docket No. 91-140, 7 FCC Rcd 6387 (1992).
22 See, Report and Order, FCC 92-262, 7 FCC Rcd 6156 (1992).
23 See, Notice of Proposed Rule Making, Docket No. 91-221, 7 FCC Rcd 4111
(1992)
7
a group of broadcasters, industrialists and government officials
met to discuss the feasibility of developing standards for the
introduction of digital terrestrial broadcasting in Europe. By
mid-1993, ELG began to discuss satellite, cable and pay-
television. 24 Shortly thereafter, the European Digital Video
Broadcasting Project (DVBP) evolved. 25 DVBP adopted a
resolution that recognized the increased use of digital
transmission systems in Europe. 26
Our own efforts to develop digital standards for high
definition television (HDTV) is constantly evolving. We are
hopeful that the HDTV standard will be established by next year.
It is my hope that our standard processes for digital media will
encourage the deployment of compatible digital technologies
throughout the world.
As U.S. companies expand into the European markets and
become more sophisticated in their delivery of media services, we
must ensure that our rules encourage the same level of
competition in the United States. Further, there must be an
efficient system for the resolution of international issues that
keeps pace with technological changes. For instance, in the
U.K., Nynex CableComms, began purchasing cable systems in 1991.27
It is now one of Britain's largest cable/telephony operators and
is scheduled to commence testing of video-on-demand services
later this year. 28 Moreover, it has formed a strategic alliance
with Viacom Inc. which will give Nynex the much-needed software
for testing and the ability to develop new entertainment services
in the United States as well as the U.K. Lessons learned in U.K.
will provide substantial benefits for future U.S. video-on-demand
customers.
Numerous U.S. companies are participants in international
programming concerns that encourages the development of diverse
voices. CapCities/ABC attributes its ability to sell programming
internationally to modification of the fin/syn rules. 29 Further,
Time Warner Entertainment Germany is one of the owners of a local
commercial channel, TV Hamburg 1, that recently was granted a ten
24 "Telecommunications", EC Commentaries, Coopers & Lybrand, 1994.
25 Id.
²⁶Resolution (OJ 1993 c209), Id.
27
See, "Across the Americas", Multichannel News, Janet Stilson, May 16,
1994, p. 9A.
28
Id.
29 See, "Capital Cities/ABC, Inc. 1993 Annual Report & 10-K"
8
year license by the Hamburg media regulator. 30 Turner
Broadcasting System Inc. ("Turner") which launched TNT and
Cartoon Network in Europe last year, has also purchased an
interest in a German TV news station. 31 Several U.S. companies³²
have established Cable Programming Partners ("CPP") to develop a
cable-exclusive sports channel, Wire TV, to compete with BSkyB's
Multichannels service in the U.K. 33
Although the effort by U.S. broadcasters to secure a
position on the information superhighway has been addressed in
pending federal legislation, 34 the additional channel capacity
that will come from digital technology will permit broadcasters
to offer a greater number of program services. The expansion of
broadcasters' provision of services will be made possible by the
allocation of an additional simulcast television channel for
advanced television services. Until the standard is established
by the FCC and HDTV television sets and equipment become readily
available, broadcasters would be permitted to use portions of
these channels for non-simulcast programming. Further, digital
compression could allow broadcasters to provide multiple channels
within one bandwidth. Given their ability to take advantage of
synergies in programming and additional channel outlets, 35 we
must make certain that other broadcasters are able to compete at
some level with other multichannel video providers, such as DBS
and cable television.
³⁰TV Hamburg 1 is scheduled to be launched in the fall and hopes to
attract 2.5 million viewers in the Hanseatic area. Advertising revenues for
the channel are projected at $14.7 million for 1994 and $25.8 million for
1995. See, "Local German TV Market Opens Up", Jack Kindred, Television
Business International, May 1994, p. 22.
31 See, "Why Is This Man Smiling?", David Greising, Business Week, May
30, 1994, p. 132.
32 Nynex CableComms, U S West, TCI, Comcast and Southwestern Bell have
teamed up as U.K. cable operators to form CPP. See, "Staking Out More U.K.
Cable Turf", Michael Taylor, Cable World, May 2, 1994, p. 15.
33 BSkyB subscribers totaled 2.4 million in June 1993-and increase of .8
million from 1992. See, Financial Report of The News Corporation Limited for
the Year ending June 30, 1993.
34 Senator Hollings is the sponsor of S.1822 which would permit
broadcasters to offer digital services with spectrum they will receive for the
implementation of high definition television (HDTV). According to S.1822,
broadcasters would also be allowed to offer nontraditional services such as
data, paging and voice services. S.1822, The Communications Act of 1994, 140
Cong. Rec. S-771-788 (2/3/94).
³⁵Donaldson, Lufkin & Jenerette, "Television Broadcasters Looking for
On-Ramp to the Superhighway", Dennis H. Leibowitz, March 18, 1994, p. 6.
9
HOW DO YOU ASSESS ASSUMPTIONS THAT INDIVIDUAL AND MASS
COMMUNICATIONS ARE GOING TO COALESCE INTO AN INTERACTIVE AND
DIGITALIZED MEDIA COMPOUND SYSTEM?
Market Trends in the United States:
Cable Television:
The cable television industry in the United States has been
the focus of much attention in recent years. Despite various
consumer complaints about high prices or customer service, cable
television's market penetration for basic service continues to
grow. 36 For example, in 1994, it is projected that consumers
will spend approximately $22 billion on cable services--nearly
two and one half times the level of expenditure in 1985.
Moreover, advertising revenues are projected to reach $4.4
billion this year, amounting to a 359% increase since 1986. It
is also projected that cable penetration will climb to 72% by the
year 2000. Finally, 95% of cable subscribers are able to receive
30 channels or more and cable homes spend an average of 19 hours
per week watching basic cable programming.³⁷
In recent months, since the adoption of the FCC's cable rate
regulations, the near term financial picture for the cable
industry has become less clear. In response to recent cable re-
regulation, some cable operators, prompted by the need to create
new unregulated revenue sources, have planned to launch
interactive television services that deliver movies on demand,
home shopping and video games. Time Warner Cable is scheduled to
launch its interactive service in Orlando, Florida by the end of
1994 38 To develop this interactive capability, Time Warner has
joined a large Regional Bell Operating Company (RBOC), US West as
an investment partner, and invested in switching technology
developed by our largest US interexchange carrier, AT&T. A new
US West division, Interactive Video Enterprises, Inc., also will
develop and distribute interactive TV services and will test
technology later this year in Omaha. 39 The companies have stated
that they will take the best data from the two trials and share
36
Cabletelevision Advertising Bureau citing Paul Kagan Associates,
Inc.
37
Id.
38 The Time Warner launch which was originally scheduled for April 1994,
announced that the launch date will be delayed at least until September. See,
"Interactive TV: Not Ready for Prime Time", Business Week, Kathy Rebello et
al., March 14, 1994, p. 30.
39 "US West Plans Video Division", New York Times, March 8, 1994 at D19.
10
the information. 40
Another U.S. cable company, Viacom, has planned a market
trial for interactive services in Castro Valley, California.
This market trial is scheduled to provide video-on-demand and on-
screen programming to 1,000 homes by late 1994, and will expand
its service to 4,000 sites within eighteen (18) months 41 FCC
approval is still required to authorize this market trial.
Investment incentives for the cable industry under our rate
regulations are likely to encourage the proliferation of
interactive and pay-per-view services rather than additional
regulated services. Consumer demand for these new interactive
services is unpredictable at this time. 42 Consequently, the
cable industry will be under pressure to continue to derive
reasonable rates of return from its regulated services.
Direct Broadcast Satellite:
The U.S. Direct Broadcast Satellite industry (DBS) is still
evolving. One entity, DIRECTV, is scheduled to offer direct-to-
home satellite entertainment services through digital compression
later this year 43 Through several strategic alliances⁴⁴, DIRECTV
is scheduled to offer 150 channels of movies, sports and
entertainment. Another entity, United States Satellite
Broadcasting Co., Inc. (USSB), will provide thirty (30) channels
of popular cable programming.
DIRECTV will provide one of the best tests for consumer
demand of the variety and number of programming options offered
by DBS. Moreover, cable and broadcast industry companies will be
able to assess the impact of digital DBS services on their
40 "Time Warner, US West Well-Connected", USA Today, May 4, 1994, at 4B.
41 Id.
42 In a random survey of 1000 cable homes performed by Broadcasting &
Cable, forty-four percent (44%) indicated that they would be willing to pay
for video-on-demand and fifty-four percent (54%) indicated that are willing to
pay an additional $5.80 per month for interactive services. See, "Cable Ready:
The High Appeal of Interactive Services", Harry A. Jessell, Broadcasting &
Cable, May 23, 1994, p. 75.
43 See, "The Information Wave", Appliance, Spring 1994, p. 5.
⁴⁴DIRECTV and USSB will share a satellite and the receiving equipment
developed by Thomson Consumer Electronics. Id.
11
various markets. If the demand is significant,⁴⁵ then cable and
broadcast companies are likely to respond by increasing channel
capacity through digital technologies.
Market Trends in Europe:
The European market has been deemed a high growth market,
owing in large part to the fact that 85% of the market has limits
on competition. 46 The European Union ("EU") has the largest
consumer market of 345 million consumers, 47 and boasts a gross
national product of approximately $6.157 trillion. 48 Four (4)
countries United Kingdom, France, Germany and Italy-- comprise
over 80% of the potential European market in terms of GNP and
income. 49
Cable Television:
Cable television in Europe has shown only moderate growth in
recent years 50 In 1993, approximately 30 million of 152 million
homes in Western Europe were connected to cable television in
Western Europe--an increase of only 26 million from 1992.
Moreover, the number of European subscribers is projected to grow
only to twenty-seven percent (27%) while revenues from cable
connections are estimated to reach $72 million in the year 2002.
Pay TV revenues from cable revenues are expected to climb from
$480 million in 1992 to $2.5 billion by 2002.
Germany hosts Europe's largest cable market with around 20
million subscribers and a total of 34 million television
⁴⁵Twenty-one percent (21%) of the cable subscribers surveyed in the
Broadcasting & Cable survey expressed a high level of interest in DBS, but
only fourteen percent (14%) indicated that they would switch to DBS if they
had to pay $600.00 for the reception gear. See, "Cable Ready: The High Appeal
of Interactive Services", Harry Jessell, Broadcasting & Cable, p. 78.
⁴⁶U.S. Congress, Office of Technology Assessment, U.S.
Telecommunications Services in Europe, OTA-TCT-548 (Washington, DC: U.S.
Government Printing Office), August 1993, p. 47.
⁴⁷Id, p. 49.
⁴⁸Id., p.47.
49 Id., p. 49.
50 See, "European Cablers Prepare to Cross The Red Line", Jean-Luc
Renaud, Television Business International, March 1994, p. 58.
12
households 51 Cable systems in Germany operate in a regulated
environment. In order to be assured carriage on the system,
cable programmers must pay the state-run German cable MSO
Deutsche Bundespost Telekom substantial fees. 52 For those
programmers that are able to afford these fees, like CNN
International, MTV Europe, NBC Super Channel and Eurosport, they
have access to Germany's nearly 20 million multichannel homes.
Securing a program spot on the German cable system is
challenging due to the limits of a thirty-two (32) channel
capacity. 53 Telekom officials have indicated that with the
introduction of digital compression, the obstacles associated
with carriage should be alleviated with the increase in channel
capacity. 54 Digital compression, which is projected to commence
in 1995, should provide additional carriage space.
In France, the demand for cable services is less developed
and the number of current cable subscribers in France is
relatively low. Some argue that it is difficult to economically
justify expansion in the French cable market where there are only
1.3 million cable subscribers. 55 Only eleven (11) national
networks exist while nearly fifteen (15) are in the planning
stages 56 Despite the fact that many of the existing French
cable channels are losing money, some are hopeful that the market
will expand to between 2.5 to 3 million subscribers by 2000 57
France looks to the prospects created by digital technology.
France Telecom would like to use digital compression on its
Telecom 2-B satellite, which is used for cable services and will
51 'Viva les Networks?", William Mahoney, Multichannel News
International, May 16, 1994, p. 20A.
52 Many United States companies refuse to pay the subscriber fees because
they are accustomed to being paid fees for the carriage of their services.
See, "Cracking the World's Toughest Pay Markets", William Mahoney,
Multichannel News, May 16, 1994, p. 13A.
53
Id.
54
Id.
55
Id.
56 Experts have speculated that most of these channels will not be
launched. See, "Viva les Networks?", William Mahoney, Multichannel News
International, May 16, 1994, p. 20A.
57
Id.
13
enable it to lower transponder costs, by 1995. 58 Additionally, a
new cable service, "La Chaine Info.", is being introduced by TF1,
one of France's most successful broadcasters. 59 TF1 is
attempting to obtain $1.23 per subscriber from cable operators
despite the $.96 that the operators are willing to pay for the
service. The price has caused some operators to question their
ability to carry the service on the basic tier for which the rate
is approximately $26.31 per month. 60 Finally, Lyonnaise
Communications, a French MSO, is lending its support to new
channels in France. 61 It is a key backer in Multivision,
France's first pay-per-view operation. Multivision was scheduled
to commence service last month in the Paris region where
Lyonnaise has 150,000 cable subscribers. 62
The United Kingdom's cable market appears to be the EU's
most competitive environment. British Telecom ("BT") is
competing against new cable television companies for telephony
customers. BT has estimated that it will loose $740 million to
North American owned cable operators over the next five years 63
The intense competition for U.K.'s 3 million cable subscribers
has benefited UK's subscribers. In recent months, BT has worked
to improve its efficiency and to research new services such as
video-on-demand. Earlier this year, BT was scheduled to start
testing its multimedia system prototype. 65
Future European Trends:
The communications industry in Europe has generally
developed in a non-competitive environment. However, in each
country, new players are seeking to take advantage of the
58 Id.
59 TF1 is also involved in a home shopping channel venture called
Teleshopping. Id., p. 21A.
60 "Viva Les Networks?", p. 21A.
61 Lyonnaise recently launched Contact Television, a classified channel,
and currently has interests in Paris Premiere, Planete, Canal Jimmy and Canal
J. Id.
62
Id.
63
Id.
64 "Viva les Networks?", William Mahoney, Multichannel News
International, May 16, 1994, p. 20A.
65 'Europeans No Longer Scoff at Interactive Multimedia", Richard L.
Hudson, The Wall Street Journal, March 2, 1994, p. B4.
14
evolving telecommunications marketplace.
Interestingly, many Europeans have some exposure to
interactive media. Some contend that the slower evolution of
interactive media in the EU, is a result of the influence of the
dominant state-run TV systems in many countries. 66 Others
contend that there is limited advertising support for such
services. Advertising support is crucial to the development of
interactive television. To date, there appears to be a moderate
level of television advertisement generally utilized throughout
Europe. 67
There are several examples of interactive services underway
in the EU. Interactive text services are provided over the
television broadcast vertical blanking interval (VBI) at no
charge to European television viewers. These service provide
access to program listings as well as news, weather, travel and
business information. These services are accessed through
televisions that are equipped with FASTEXT and can be accessed
via remote control. 68 These VBI services have been offered on
terrestrial channels for several years. More recently, VBI text
services have become standard features on many EU cable and
satellite networks. 69
France Telecom provides another example of the type of
interactive services being deployed in Europe. France Telecom
networks are highly digitized. Approximately forty percent (40%)
of French television households have been exposed to interactive
offerings particularly from play-along interactive TV games 70
Since 1991, broadcast services in France have featured in-home
interactivity such as ActivCard's Multipoints game and electronic
programs as well as Info Realite's Quizako game. France
Telecom's videotext service, Minitel, with around 6.4 million
66 See, "Probing the Interactive Puzzle", Multichannel News
International, Gary Arlen, May 16, 1994, p. 18A.
67 For public broadcasters in Europe, advertising revenues (excluding
Spain) are projected to increase by just under 20% from 1988 to 1994, and by
an additional 9% between 1994 and 1996. See, "Shots in the Arm for Public
Health", Toby Syfret, Television Business International, May 1994, p. 162.
68 Probing the Interactive Puzzle", p. 19A.
69 Examples of cable and satellite channels that use interactive text
services are CNN International, MTV Europe, TNT, Cartoon Network, Bravo and
British Sky Broadcasting. Id.
70
Id.
15
users, is paving the way for interactive home media. 71
Moreover, France Telecom is engaged in international joint
ventures and alliances. The company estimates that by the year
2000, twenty percent (20%) of its revenues will be from
international activity. 72 Other French companies are also
seeking to provide interactive media services. Internationale
des Jeux, owner of Info Realite's Quizako has licensed its
technology in Spain, where it is called Teletrebol, and in Italy,
where it is called Quizzy. 73
Activity in other European telecommunications markets are
making for a more competitive environment which, in certain
instances, has worked to the consumers' benefit. Since the mid-
80's, the UK has proven that it has the most liberalized EU
telecommunications market. U.K. regulators have sanctioned
competitive nationwide full service operators, licensed cable
communication services, interconnect carriers, and a local loop
radio operator. 74 Videotron Holdings Ltd., a British cable and
telephony company, 75 offers its customers multimedia, interactive
and two-way television services. The company differentiates
itself from competitors through such interactive services. 76
Videotron currently has 80,000 cable subscribers as well as
45,000 residential and 5,000 business telephony customers. 77
The highly competitive telecommunications market in the UK
has also led BT to form a $4.3 billion alliance for future
expansion with MCI to develop a managed network for multinational
corporations and major international companies. 78 The
71 Probing the Interactive Puzzle", Multichannel News International,
Gary Arlen, May 16, 1994, p. 18A.
72 "U.S. Telecommunication Services in European Markets", p. 51.
73 "Probing the Interactive Puzzle", p. 18A.
74 See, "The New Order", Steve Twitch and John Williamson, Ericsson
Connexion, March 1994, p. 8.
75 Videotron Holdings, Ltd. is a strategic alliance between the Montreal
based Le Group Videotron (65.5%) and Bell Canada Enterprises, Inc. (30.8%).
See, "Learning from the Deregulated British Market", Louis Brunel,
Multichannel News, May 16, 1994, p. 30A.
⁷⁶By the end of May, Videotron, which offers thirty (30) channels of
broadcasting and interactive services, is scheduled to offer transactional TV
services. Id.
77 Id.
78
"The New Order", p. 8.
16
internalization of business coupled with the example of the BT-
MCI alliance could set the stage for more "super-carrier"
alliances. 79 The BT-MCI deal remains subject to regulatory
approval from the FCC, as is undergoing review by the Justice
Department's Antitrust Division.
Another general trend in Europe is the effort to privatize
or commercialize government-owned broadcast outlets. The German
public broadcaster, ZDF, is expected to participate in a new
joint venture with Germany's Bertelemann and Kirch Group Deutsche
Telekom. Each company will have a 30% stake in this newly formed
company called Media Services which plans to develop pay
television and pay-per-view in Germany. 80 In France, France
Television, which owns two public channels, is endeavoring to
develop more commercialized media product in response to
competition from private stations and pay cable services. 81 The
Italian public broadcaster, RAI, is attempting to cut costs and
improve efficiency. RAI is hoping to partly privatize Saicis,
RAI's distribution arm, with investments from Italian and foreign
companies 82 Finally, in the U.K., a top power in British
television, Michael Green, has called for liberalization of cross
media ownership rules and further consolidation of Independent
Television (ITV) 83
IN YOUR OPINION, WHICH FUNCTION DOES THE AMERICAN DATA
SUPERHIGHWAY PROJECTS PERFORM WITH REGARD TO THE DEVELOPMENT OF
MEDIA ECONOMY?
Clearly, today's telecommunication activities in the United
States are being completed in anticipation of the companies'
participation on the information superhighway. The backbone of
the highway will embody the integration of fiber optic, satellite
and digital transmission assets to deliver video, data and voice
services to the home. It has become evident in recent months
that the United States Congress, by way of legislation, will
79 Such as the AT&T, Singapore Telecom, and Japan's international
carrier, Kokusai Denshi Denwa (KDD) have formed the World Partners Alliance.
France Telecom and Deutsche Bundespost are pooling their resources and the
Dutch, Swill and Swedish PTO's have come together as the Unisourch alliance.
Id.
80 MIP Sees Europe Public TV Business Evolving", Anna Carugati,
Electronic Media, May 2, 1994, p. 39.
81 "MIP Sees Europe Public TV Business Evolving", p. 39.
82 MIP sees European Public TV Evolving", p. 39.
83 See, "TV Chief Urges Ownership Liberalisation", Raymond Snoddy,
Financial Times, April 20, 1994, p. 6.
17
illuminate the government's expectations for the
telecommunications industry, and will define the FCC's role in
the information superhighway.
President Bill Clinton's administration, under the
leadership of Vice President Al Gore, has presented social and
economic challenges for the development of the information
superhighway. 84 It is reasonable to anticipate that the
definition of "universal access" to the information superhighway
will be defined through legislation. Indeed, President Clinton
has taken a broad view when outlining its plans for universal
access to the information superhighway. It is clear that the
administration intends to encourage private-sector development of
the highway and to avoid the creation of a society of information
rich and information poor.
Major telecommunications players have been offered the
administration's support of enticing deregulatory packages in
exchange for assurances of universal access to the highway 85
However, the economic feasibility of ensuring such a "universal"
level of access must now be contemplated in the context of
interactive media services, including those that could be offered
by regulated telephone and cable companies. The FCC's role is
likely to involve an assessment of the appropriate rates for
access to the telephone platform, in exchange for additional
service and pricing flexibility for telephone service providers.
Further, the FCC with guidance from the U.S. Congress, is likely
to be involved in assessing appropriate levels of targeted
subsidies for certain classes of information superhighway
consumers.
CONCLUSION:
In a recent article, Louis Brunel of Videotron contends that
the company has learned valuable lessons from competing in the
UK's deregulated environment. 86 Videotron, according to Brunel,
will be able to compete because its has learned the importance of
strategic alliances, customer satisfaction and product
84 Vice President Gore has indicated that the information superhighway
should be based on five (5) principles: (1) the encouragement of private
investment; (2) the promotion and protection of competition; (3) open access
to the network; (4) avoiding the creation of a society of information "haves"
and "have nots"; and (5) regulatory flexibility. See, Remarks by Vice
President Al Gore at National Press Club", December 21, 1993.
85 See, "The Information Age Isn't Just for the Elite", Business Week,
January 10, 1994, at 43.
86 See, "Learning from the Deregulated British Market", Multichannel
News, p. 30A.
18
differentiation. As the deregulated environment becomes more
dynamic, and permits greater competition between telephone, DBS,
cable and broadcasters must retain a handle on the potential
impact of alliances and mergers. Diversity of ownership over
program outlets is important. I am also concerned that the real
market risks for new interactive services is borne by
shareholders, and not captive ratepayer. Therefore, as
regulators, we must be careful not to hinder the ability of
various industries to participate in a competitive interactive
video marketplace.
To that end, I believe that regulators must balance several
considerations in order to avoid causing unintended repercussions
in the dynamic markets that will be created by digital
technology. We must recognize the significant hurdles that exist
for developing an interactive, multimedia broadband
infrastructure, such as uncertain consumer demand. As global
players adjust from regulated and deregulated markets, create
alliances and test consumer demand, some level of regulatory
parity between industries must exist to give companies the
flexibility to develop technology, to take investment risks, and
attract consumers. Finally, as digital technology begins to mold
the new global media marketplace, it is imperative that we
develop international regulatory strategies which will encourage
competition and ultimately benefit the consumer.
19
KEYNOTE ADDRESS
BY
ANDREW C. BARRETT
COMMISSIONER
FEDERAL COMMUNICATIONS COMMISSION
AT THE
BROADCAST CABLE FINANCIAL MANAGEMENT ASSOCIATION
34TH ANNUAL CONFERENCE
BCFM "MAKING WAVES '94"
MAY 24, 1994
SAN DIEGO, CA
INTRODUCTION:
Before I begin my remarks, I would like to comment on the
imminent arrival of our new colleagues, Rachelle Chong and Susan
Ness. As you know, it has been some time since there has been a
full complement of commissioners at the Federal Communications
Commission ("FCC"). As we prepare to address issues such as
reconsideration of our cable rate regulations, our broadcast
multiple ownership rules as well as the other mass media issues
now pending at the FCC, I welcome the opportunity to learning
from their experiences and sharing their views with respect to
the developments in the communications industries. I am
confident that, as we confront the many policy issues that are
now before the Commission, under Chairman Reed Hundt's
leadership, we will accomplish a great deal in the time to come.
Today I will address evolving market trends in the cable and
broadcast industries, in light of the Federal Communication
Commission's (the "FCC") most recent cable rate regulation
decisions and the relaxed rules for broadcast ownership and
program regulatory environment. I will also discuss my concerns
regarding the impact of future regulatory actions on broadcast
ownership, and diversity and cable service quality.
MARKET TRENDS:
Cable Television:
The cable television industry has been the focus of much
attention in recent years. Despite various consumer complaints
about high prices or poor customer service, cable television's
market penetration for basic service continues to grow. 1 For
example, in 1994, it is projected that consumers will spend
approximately $22 billion on cable services--nearly two and one
half times the level of expenditure in 1985. Moreover,
advertising revenues are projected to reach $4.4 billion this
year, amounting to a 359% increase since 1986. It is also
projected that cable penetration will climb to 72% by the year
2000. Finally, 95% of cable subscribers are able to receive 30
channels or more and cable homes spend an average of 19 hours per
week watching basic cable programming. 2
Since the adoption of the FCC's cable rate regulations, the
near term financial picture for some in the cable industry has
become less clear. Declining cable stock valuations have been
cited as a contributing factor in the termination of some cable-
telephone company ventures. 3 Our rate regulation decisions⁴,
including the cable rate freezes, were cited as the cause for a
$2 billion reduction in cable television industry revenues in
1
Cabletelevision Advertising Bureau citing "Cable TV Investor", Paul
Kagan Associates, Inc., March 1994.
2
Id.
3
The seven regional Bell operating companies and GTE had combined
revenues in 1992 of $102.3 billion and net income of $11.1 billion. By contrast,
the eight leading publicly held cable-TV companies reported 1992 revenues of $6
billion and net loss of $600 million. "Baby Bells 1, Cable 0", The Wall Street
Journal, Alan Gerry, February 23, 1994, p. A20.
4
See, Los Angeles Times, "Cable Rates Cut Again", February 23, 1994,
Jube Shiver, Jr. and Amy Harmon, p. B5.
2
1993 5 Some analysts now also predict that our additional cable
rate rollbacks in 1994 will cost cable companies about $600
million in annual revenue. 6
Interestingly, Wall Street's initial reaction to the recent
rollback announcement appeared to be somewhat "indifferent".
Some argue that stock declines began in September 1993 in
anticipation of the impact of rate regulation. Others speculate
that cable operators with diversified sources of income (e.g.
programming) would be able to "weather the storm" 7 Although I
agree with the initial assessment, the question then becomes-
What damage will be done while they weather the storm?
Various cable operators indicate that the financial
constraints stemming from reduced cash flow will diminish the
operators' ability to modernize plant and invest in new
technologies. Moreover, borrowing power is likely to be
negatively effected by reduced cash flow. 8
There are several recent examples of the near term effect of
5
See, Study by Paul Kagan Associates, Inc., January 1994.
6
"Cable Stock Investors Shrug Off Latest Cuts", Washington Post,
Bloomberg Business News, February 23, 1994, p. A22.
7 See, "Cable and Entertainment, Potholes in the Information Superhighway,
but Programming in the Fast Lane", Dillon Read Equity Research, May 3, 1994, p.
'7.
8
See, "Analysts See Cash Flow 'Crisis' for Cable Industry, Multichannel
News, Ted Hearn, March 14, 1994, p. 23.
3
the rate regulation decisions. Time Warner recently announced
that it was reducing its 1994 capital spending on cable
operations by $100 million and that it will institute a hiring
freeze. 9 This announcement came on the heels of TCI's decision
to temporarily suspend $500 million in capital expenditures 10
Cable operators that own cable systems only and lack additional
revenue sources may be under greater pressures to respond to
reduced cash flow and revenues in the current environment. 11
If
large diversified cable companies feel the need to trim their
expenditures, the "pure" cable operator is likely to be under
similar pressure in the near term.
Broadcast:
While cable operators are adjusting to a regulatory
environment, according to some trade publications, some
broadcasters are experiencing a resurgence in their revenue
prospects.
12 Also, some broadcasters have already experienced an
9
"Time Warner Trims Cable-TV Budget Due to Rate Cuts", Mark Robichaux,
Wall Street Journal, May 5, 1994, p. B7; See also, "Few Systems Roll Back Rates",
Kate Maddox, Electronic Media, May 16, 1994, p. 3.
10 Id.
11 Cablevision Industries Corporation (CVI) reported that 92% of its
revenues in 1993 were derived from monthly subscriber fees for basic, cable
programming and premium services, equipment rental and installation income. It
goes on to report that [t]he high level of depreciation and amortization
associated with the [CVI's] acquisitions and capital expenditures and interest
costs related to its financing activities have caused CVI to report net losses"
for 1993 and the foreseeable future. See, Cablevision Industries Corporation,
Form 10K for the fiscal year ending December 1993, p. 23.
12 The 300 stations owned by minority groups represent only 2.7% of the
11,201 stations in the U.S. and many are the weakest in their markets. See,
"Slow Gains by Minority Broadcasters", Geraldine Fabrikant, New York Times, May
4
increase in advertising. 13 The renewed interest in some
broadcasting stations, and in particular television stations, is
evidenced by the increase in advertising which grew by 4% in
1993. Additionally, advertising on ABC, NBC, and CBS was up 13%
in the fourth quarter of 1993. 14
Many broadcast conglomerates are doing well¹⁵ and
discussions about potential broadcast mergers abound. 16
Moreover, lending institutions are now showing a renewed interest
in broadcasters' activities. 17 Within the past two years, there
has also been a surge in sales of broadcast stations. 18 Major
31, 1994, D1.
13 Local TV ad revenue increased by 16% to $1.35 billion in the first
quarter and spot TV ad revenue grew by 18% to $1.34 billion. See, Communications
Daily, May 11, 1994, p. 4.
14 See, "TV Station Sales Surge", Variety, Joe Flint, March 14, 1994, p.
A24.
15 Capital Cities/ABC has determined that the proliferation of channels
justifies its increased investment in programming--$200 million in 1993 from $100
million in 1992 and the acquisition of European television production companies
and networks. The companies first quarter revenues nearly doubled to $116.68
million. See, "Cap Cities Builds Media Highway for Its Own Back Lot", Los
Angeles Times, James Flanigan, February 27, 1994, D1; See also, "NBC Ties In With
Mexico's TV Azteca", Communications Daily, May 18, 1994, p. 6.
16 For instance, some have speculated that Walt Disney Co. will purchase a
television network if prime time slots are reduced by the entry of ABC, CBS and
NBC into full-scale program production as a result of our relaxed financial
interest and syndication regulations. See, "Merger Talk Now Takes Center Stage",
David Lieberman, USA Today, March 22, 1994, p. B1.
17 See, "Banks Giving More Attention to Acquisitions", Electronic Media,
Diane Mermigas, April 11, 1994, p. 15.
18 In 1992, there were a total of 41 TV transactions totaling $124 million.
In 1993, the FCC approved 101 TV-related transactions totaling $1.73 billion.
See, "The Race is on in Hot TV Station Market", Diane Mermigas, Electronic Media,
April 11, 1994, p. 1.
5
group owners are reportedly using broadcast stations as outlets
for program and production ventures that will likely be offered
on other stations and for second cable channels in the same
markets for niche programming and regional cable channels. 19
Television stations that were at one time sold for prices as low
as seven to eight times cash flow are trading at 9 to 10 times
cash flow 20 Now, group owners for good markets rather than the
particular network affiliation of the stations.
The market interest in independent television stations
continues in light of Paramount and Warner Bros.' decisions to
launch new networks and to sign-up new affiliates. 21 The
emergence of these new television networks are likely to
translate into increased programming production, reduced
programming costs and improved advertising market penetration. 22
We are also seeing a surge of activity in the transfer of
radio stations since adoption of the FCC's revised rules
governing radio station ownership is also apparent. There were
188 radio station transactions in 1993 totalling $1.4 billion of
19 Recently, A.H. Belo acquired the CBS affiliate, WWL-TV in New Orleans for
$110 million while The Washington Post purchased an ABC affiliate in San Antonio
and an NBC in Houston for $250 million. Id., p. 1.
20
See, "TV Station Sales Surge", Variety, Joe Flint, March 14, 1994, p.
A24.
21 Id.
22
See, "Paramount Placing Trust in 'Voyager' to Launch Network", Thomas
Tyrer, Electronic Media, May 16, 1994, p. 53.
6
which the top 10 transactions accounted for $781 million in
ownership changes 23 A total of 1462 stations (14.7%) of all
commercial U.S. radio stations were participants in duopolies or
local management agreements. 24 Concerns about diversity and
concentration of ownership continue to be important factors as
the radio industry continues to consolidate its ownership
structures 25
FUTURE MARKET TRENDS:
Cable Television:
Some cable operators, prompted by the need to create new
revenue sources in a regulatory environment, have planned to
launch interactive television services that deliver movies on
demand, home shopping and video games. Time Warner Cable is
scheduled to launch its interactive service in Orlando, Florida
by the end of 1994 26 To develop this interactive capability,
Time Warner has joined US West as an investment partner, and
invested in AT&T switching technology.
Viacom has planned a market trial for interactive services
23 Radio Business Report Source and Directory: The All-Radio Yearbook,
Volume 2, 1994.
24 Id.
25 Id.
26 The Time Warner launch which was originally scheduled for April 1994,
announced that the launch date will be delayed at least until September. See,
"Interactive TV: Not Ready for Prime Time", Business Week, Kathy Rebello et al.,
March 14, 1994, p. 30.
7
in Castro Valley, California. This market trial is scheduled to
provide video-on-demand and on-screen programming to 1,000 homes
by late 1994, and will expand its service to 4,000 sites within
eighteen (18) months. 27
Notwithstanding the unpredictable demand for new interactive
services²⁸, investment incentives for the cable industry under
our rate regulations are likely to encourage the proliferation of
interactive and pay-per-view services rather than additional
regulated services.
Broadcast:
In recent years, broadcasters have been given the
opportunity to increase their market penetration and service
offerings due to several FCC decisions. We relaxed our radio
ownership limits from 12AM/12FM to 18AM/18FM.²⁹ We relaxed our
radio ownership duopoly rules to allow 2 AM and 2 FM in many
major markets. We also relaxed our network-cable cross-ownership
rules³⁰ and our financial interest and syndication rules³¹.
Finally, the Commission has been granting one-to-a-market waivers
²⁷Id.
2⁸Id.
29 These limits will be further relaxed in September 1994 to 20AM/20FM.
See, Memorandum Opinion and Order and Further Notice of Proposed Rulemaking, MM
Docket No. 91-140, 7 FCC Rcd 6387 (1992).
30 See, Report and Order, FCC 92-262, 7 FCC Rcd 6156 (1992)
31 Second Report and Order, MM Docket No. 90-162, 8 FCC 3282 (1993)
8
on a fairly routine basis. 32
In addition to our regulatory actions, the Cable Act of 1992
and pending legislation (if passed) will provide additional
support to the broadcast industry. The effort by broadcasters to
secure a position on the information superhighway has been
addressed in pending federal legislation. S.1828³³ which would
permit broadcasters to offer digital services with spectrum they
will receive for the implementation of high definition television
(HDTV). Moreover, the FCC would be required to review its radio
and television ownership rules and to eliminate those that are
not needed to promote program diversity. The FCC would also be
required to conduct a study on the statutory ban on
broadcast/cable cross-ownership in the same market. According to
S.1828, broadcasters would be allowed to offer nontraditional
services such as data, paging and voice services.
The expansion of broadcasters' provision of services is made
possible by the allocation of an additional simulcast television
channel for advanced television services. Until the standard is
established by the FCC and HDTV television sets and equipment
become readily available, broadcasters would be permitted to use
portions of these channels for non-simulcast programming.
32 See, Concurring Statement of Commissioner Andrew C. Barrett, In Re:
Assignment of Television Station License WOI-TV, Ames, Iowa, December 14, 1993.
33 1822, The Communications Act of 1994, 140 Cong. Rec. S-771-788
(2/3/94).
9
Further, digital compression could allow broadcasters to provide
multiple channels within one bandwidth. As the number of
channels increase SO does the expanded opportunity for revenues
through increased advertisement.
The implementation of the 1992 Cable Act's "must-carry" and
retransmission consent rules have worked to the advantage of the
broadcast industry as well. ABC, NBC and Fox negotiated for new
service agreements as compensation from cable systems in exchange
for the right to carry their signals. Now, these networks' new
channels have a much wider and expeditious distribution than many
other new and existing programming networks. For example, as a
result of ABC's agreements for ESPN2, an all-sports channel,
ESPN2 was available in 10 million homes on its first day in
business and is expected to reach 30 million homes by year's
end. 34 Fox is scheduled to launch its FX Channel on June 1, 1994
and NBC plans to start its "America's Talking" channel on July 4,
1994. Other retransmission consent agreements by various
broadcast station groups also have resulted in compensation
arrangements or carriage of local news channels.
While regulatory issues will be generated from the increased
number of channels operated by broadcasters, the future for
television broadcasters appears bright, given their ability to
34
See, "Networks New Cable Channels Get a Big Jump on the Competition",
New York Times, Bill Carter, March 14, 1994, p. D7.
10
take advantage of synergies in programming and additional channel
outlets. 35
REGULATORY ISSUES:
We (the FCC) must balance our regulations in a manner that
does not unduly hinder any single industry's ability to be a
competitive player in the future multimedia marketplace.
Cable Television:
While I supported our rate regulations (the Commission vote
was unanimous), I have and will continue to express concerns that
the small independent cable operator would be impacted most
severely by our revised rate regulations. The threat of economic
instability and foreclosure for the small independent operators
is being reported in the trade press. 36 These operators have
greatly suffered for two primary reasons: 1) our (FCC) mandated
cable rate freeze will likely denied these operators the ability
to raise rates to generate cash to cover loan payments and 2)
their inability to secure refinancing for existing debt stemming
from bankers' apprehension about lending in a highly regulated
environment. Lending institutions are likely to become more
reluctant to provide financing for small independent operators
35 Donaldson, Lufkin & Jenerette, "Television Broadcasters Looking for On-
Rainp to the Superhighway", Dennis H. Leibowitz, March 18, 1994, p. 6.
36 See, "A Rural Squeeze: FCC's Rate Rules Prompt Foreclosure", K.C. Neel
Cable World, April 25, 1994, 1. See also, "SCBA Tallies Its Achievements", Kate
Maddox, Electronic Media, May 16, 1994, 14; "FCC Rate Order Producing Few
Rollbacks", Kate Maddox, Electronic Media, May 16, 1994, p. 3.
11
for these reasons. For those operators that are willing to or
who can sell their systems, there may either be no purchasers.
In the alternative, some larger MSOs will be eager to offer
significantly reduced acquisition prices for the systems or will
wait until small independent operators default on loan agreements
and acquire their systems through forced sales. 37
We (FCC) are faced with implementation challenges. Since
the adoption of our rules, many parties have requested
clarification of our rate regulations, particularly with respect
to programming services. Immediate responses were necessary in
order to satisfy operators' concerns that the addition of new
programming services would not adversely affect operators'
revenues. Expeditious response from the FCC is required to
ensure that we do not hinder the launch of new programming
services, particularly those scheduled for launch before the
FCC's adoption of the revised cable rate rules. 38
The Commission has also been compelled to act expeditiously
on complaints that franchising authorities have implemented rate
orders with erroneous calculations. These miscalculations could
have serious consequences for cable operators that seek a
37 See, "Endangered Cable Firms Eye Options", Kate Maddox, Electronic Media,
May 2, 1994, p. 3.
38 See, Request for Expedited Clarification of Going-Forward Rate
Regulations to Alexandra Wilson, Acting Chief, Cable Services Bureau, dated April
15, 1994.
12
reasonable return on investments in regulated services. 39
Because the Commission's procedural rules do not specify a date
by which the FCC must make a determination in the case of rate
appeals, we must expedite our efforts in this area to avoid
unnecessary damage to existing cable businesses.
Broadcast:
In the past, the broadcast industry has been the focus of
the Commission's attention. Restrictions were placed on
broadcasters to deter certain anti-competitive market practices
that occurred in the past. However, changes in the video market
and the corresponding emergence of the cable industry have forced
the Commission to reconsider many of its ownership and
programming restrictions on the broadcast industry.
The regulatory climate for broadcasters is improving. At
the time that our Prime Time Access Rules (PTAR) 40 were
originally adopted, the Big 3 networks--ABC, NBC and CBS--
dominated the programming playing field. The emergence of the
Fox network, in addition to the Paramount and Warner Bros.
networks, has led the FCC to consider arguments regarding the on-
39 See, Order, In the Matter of TCI Cablevision of St. Louis, Docket No. DA
94-424 (April 29, 1994).
40 See, 47 C.F.R. § 73.658 (k)
13
going necessity for PTAR. 41 The Commission is accepting
comments on several petitions for rulemaking in this area. 42
Network affiliates and television stations must respond to these
petitions with respect to their concerns about diverse program
supplies in today's syndication market.
In April 1993, we significantly relaxed the financial
interest and syndication rules (fin/syn) and established a
twenty-four month period before the rules would sunset, subject
to a prior Commission review. 43 In November 1993, the United
States District Court in Los Angeles removed consent decree
restrictions from the big-three networks which allowed our
relaxed fin/syn rules to be implemented. 44 The District Court
questioned whether the fin/syn rules were even warranted, and
opined that the changes in the broadcast marketplace since their
adoption raised concerns about the need for the restrictions.
Currently, the Seventh Circuit Court is reviewing the merits of
appeals from our April 1993 fin/syn decision. Absent any
modification to our decision by the Seventh Circuit, the
41 Some of the network affiliates feel that the network programming will not
draw large audiences. Therefore, they have voiced their reluctance to
surrendering the 30 minutes leading up to prime time to the networks. See, "Big
3 Mull Impact of PTAR Repeal", Thomas Tyrer, Electronic Media, April 25, 1994,
p. 3.
42 See, Public Notice, "Petitions, Applications and Related Pleadings
Regarding the Prime Time Access Rule, Section 73.658 (k) of the Commission's
Rules", Released April 12, 1994.
43 See, Second Report and Order, 8 FCC Rcd 3282 (1993)
44 United States V. NBC, CV74-3601-R (C.CD. Cal. Nov. 10, 1993).
14
remaining fin/syn rules would be reviewed in the summer of 1995,
and subject to our prior review, are likely to sunset in November
1995. During the interim period, I expect to see NBC, CBS and
ABC become more involved in program production and syndication. 45
The Commission may take action on its television multiple
ownership rules some time this year. Any action to further relax
the current ownership limits on broadcast stations will depend,
to a great extent, on the FCC's determinations about the impact
of its current ownership rules. Bearing in mind the intended
regulatory objective--to encourage competition and to promote
diversity--the Commission must assess whether it is advisable to
further relax broadcast station local and national ownership
limits. 46 The proposed review of the current limits on
television broadcast station ownership would be of particular
interest to the larger broadcast groups and the television
networks 47
Relaxation of ownership restrictions and the ability of
radio stations to form duopolies have provided the radio industry
with an important means of increasing the market value of
45 CBS and NBC have already indicated intentions to expand their first-run
operations in the near future. See, "Television's Turf Wars", Electronic Media,
April 11, 1994, p. 1; See also, "NBC Ties In With Mexico's TV Azteca",
Communications Daily, May 18, 1994, p. 6.
46 See, Notice of Proposed Rule Making, Docket No. 91-221, 7 FCC Rcd 4111
(1992)
47 See, "Television's Turf Wars", Electronic Media, p. 15.
15
broadcast radio stations. Through the use of duopolies and local
marketing agreements (LMAs), broadcasters are able to save money
by creating economies of scale. It has been argued that
television broadcast stations could derive similar benefits from
these arrangements. Though it is difficult to predict how the
marketplace will react if television broadcasters are permitted
to own or control a larger number of stations, clearly the impact
on diversity remains a significant issue.
POLICY ISSUES:
The cable, broadcast and telephone industries are players
that will help to shape the evolving video marketplace. It has
become evident in recent months that Congress, by way of
legislation, will not only illuminate the government's
expectations for the telecommunications industry, but will also
define and formulate the FCC's role in the development of the
communications environment. Yet, whatever regulatory action is
undertaken by the government--} be it Congress or the FCC--
regulation must foster competition and promote diversity of
ownership in the marketplace.
The FCC revised cable rules establish interim cost of
service rules.⁴⁸ It is imperative that the implementation of
these regulations demonstrate sufficient flexibility SO that we
4⁸See, Report and Order and Further Notice of Proposed Rulemaking, CS
Docket No. 94-28, February 22, 1994.
16
are able to expeditiously address the concerns of franchise
authorities, and cable operators. Thus, I believe the Commission
must continue to work with franchise authorities and cable
operators to establish a definitive cost-of-service review
process and timetable.
The on-going consolidation of media ownership presents
obstacles to the entry of and possibly the survival of small and
minority-owned businesses. The financial obstacles faced by
these businesses continue to be significant. 49 It has become
increasingly apparent that to survive minority-owned broadcast
concerns must either become larger or serve a certain defined
market. Both in the television and radio businesses, minority-
owned broadcast outlets are under pressure to joint venture with
others or reduce expenses. As larger station groups evolve,
minority-owned broadcast stations are attempting to compete for
advertising against large group owners who may focus on the
minority target market as part of a diversified media approach.
Thus, far minority-owned broadcast stations are losing the
battle. 50 I am concerned that the FCC endeavor to promulgate
regulations that do not hinder the minority broadcasters' ability
to compete, on some level, with the existing players so that in
ten years minority ownership of broadcast stations will not be
49 See, Interim Report of the Federal Communications Commission Small
Business Advisory Committee, April 21, 1994, p. 64.
50 See, "Slow Gains by Minority Broadcasters", Geraldine Fabrikant, New York
Times, May 31, 1994, p. D1.
17
effectively eliminated.
CONCLUSION:
The media industry development will continue to evolve
toward an interactive, multimedia marketplace built around
digital switching technology, new programming services and
additional providers. 51 With recent cable regulation changes,
alternative revenue sources sought by cable companies, such as
pay-per-view and other interactive services, may provide future
opportunities for the industry; however, the pace of change
toward these services may be less certain.
Finally, it is important to recognize that the potential for
development and growth in the video marketplace will be
contingent upon the ability of Congress and the Commission to
foster a competitive environment to ensure benefits for the
consumer public. In broadcasting, we must ensure that a relaxed
regulatory environment does not undermine our traditional
concerns for diversity, service quality and ownership
opportunities for minorities and women.
51 See, Remarks by Commissioner Andrew C. Barrett, Federal Communications
Commission, Northern Telecom, Inc.'s Executive Marketing Symposium, June 19,
1991.
18