Market Structure of the Video Programming Industry and Emerging Public Policy Issues
CRS Report for Congress
Market Structure of the
Video Programming Industry and
Emerging Public Policy Issues
July 28, 2003
Charles B. Goldfarb
Specialist in Industrial Organization and Telecommunications
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress
Market Structure of the Video Programming Industry
and Emerging Public Policy Issues
The video programming industry has undergone fundamental structural change
in the past 15 years. About 80 percent of U.S. households subscribe to cable or
satellite systems offering multiple channels of programming. These alternatives to
broadcast television now attract more than half the total viewing audience, although
broadcast television still attracts a majority of viewers during prime-time when
popular broadcast network fare is aired. Another seismic change is that movie
producers receive more than twice as much revenue from video stores as they do
from movie theaters.
At the same time, there has been widespread vertical and horizontal integration
in the video programming industry. The industry is increasingly dominated by a
small number of firms that finance the development of new programming through a
wide variety of arrangements with content providers (including joint ventures and
direct ownership), own extensive libraries of existing programming, own a variety
of distribution channels for bringing content to the public, and also own retail
pipelines such as local broadcast stations and video store chains (and, currently
proposed, a direct broadcast satellite system).
These fundamental changes in the market structure affect the public policy
issues that Congress faces. Today, there are more pipelines into the home and more
distribution networks than ever before, but a small number of big media players
control a large portion of both programming and distribution. Questions are starting
to arise about how well the existing FCC ownership rules, which tend to focus on
horizontal relationships involving only broadcast technology, address the impact of
consolidated ownership of programming and distribution across broadcast, cable, and
satellite technologies on the public interest goals of diversity, competition, and
localism — and whether new rules that more directly recognize the new market
structure could or should be formulated that would better serve those goals.
The purpose of this report is to provide a brief description of the current video
industry market structure and to explain how the various industry segments are
interrelated. Given the successful entry of new technologies and the complex
structure of many integrated media companies, the relationships across functional and
technological segments of the industry are complex. CRS Report RL32026 explains
how and why underlying market forces (as well as some government regulations and
deregulation) have created strong pressure for vertical and horizontal integration, and
how that market consolidation could be used to benefit or to harm consumers. It also
identifies public policy issues that may arise as a result of the vertical and horizontal
In troduction ......................................................1
Overview of the Video Programming Industry Market Structure.............8
Multi-Channel (Cable and Satellite) Television.....................19
Theatrical Movies, Video Cassettes, and DVDs.....................25
Ancillary Market Players.......................................26
List of Figures
Figure 1. Structure of the Video Programming Industry....................3
List of Tables
Table 1. Availability of Video Media..................................4
Table 2. Prime-Time Ratings for Advertising-Supported Broadcast and
Cable Television Networks.....................................11
Table 3. Average Pre-Tax Profits, and Cash Flow of Commercial
Television Stations, 2000.......................................16
Table 4. End-User Expenditures on Various Video Media, 1990-2000.......19
Market Structure of the Video Programming
Industry and Emerging Public Policy Issues
The video programming industry is a major force in American society, both as
an important provider of news, information, and entertainment, and as an economic1
engine in itself. Annual industry revenues exceed $136 billion. More than $75
billion of these come from direct payments by households — approximately $687 per
household per year — and the remainder from advertisers.
As shown in Figure 1, the video programming industry consists of three major
!content providers — These are the program producers: the major
motion picture and television production studios; independent
studios, producers, writers, and editors; and also the programming
departments of local television stations (and some cable systems)
that produce their own local news programs. These providers also
include the film and television program libraries of existing content
that offer an alternative to newly created programming.
!program distributors and packagers — These are the broadcast and
cable networks, the syndicators of first-run and rerun programming,
the movie distributors that package and distribute films, and the
distributors of video cassettes and DVDs. They often perform
marketing and advertising services on a national scale that could not
be performed as efficiently by the content providers or the retail
!retail pipelines — These are the broadcast television stations, local
cable systems, direct broadcast satellite systems, movie theaters, and
1 Standard & Poor’s estimated that in 2002, U.S. consumers would spend $44 billion for
television programming (delivered via basic cable, pay cable, and satellite programming),
$9 billion for theatrical movies, and $22 billion for rental and purchase of prerecorded
videocassettes and DVDs, and that the television industry also would be supported by $61
billion in advertising expenditures, yielding total industry revenues of $136 billion. Tom
Graves, “Movies and Home Entertainment,” Standard & Poor’s Industry Surveys, November
video stores that provide video programming directly to end user
cust om ers.2
In the not too distant past, ownership tended not to cross these functional industry
boundaries. That is no longer the case.
The video programming industry has experienced two seismic changes in the
past fifteen years: (1) successful market entry by multi-channel providers of video
programming using cable and (more recently) satellite technologies, and (2)
widespread vertical and horizontal integration3 across both functional and
As shown in Table 1,4 in 2001 cable television service was available to 96.7
percent of U.S. households and 65.0 percent of households subscribed; at the same
time, 17.7 percent of households subscribed to satellite service. These cable and
satellite services offer multiple channels of video programming that expand
substantially on the technologically limited number of channels available from the
broadcast spectrum. Survey data from the FCC’s 2002 Report on Cable Industry
Prices5 show the average cable system devotes 82.5 channels to video delivery.
Direct Broadcast Satellite (DBS) systems typically offer even more video channels.
The video programming industry now must produce enough programming to fill
the schedules of hundreds of program channels, rather than just a handful. While
initially much of the programming carried by the multi-channel systems was reruns
from existing film and television program libraries, increasingly the public is
demanding original programming. As a result, the sheer volume of video production
has increased substantially.
The alternatives to broadcast television now attract more than half the viewing
audience, though broadcast television still attracts a majority of viewers during
prime-time when popular broadcast network fare is aired. According to the National
2 In each of these three functional segments, there also are small players with minimal
market impact. For example, multichannel multipoint distribution service (MMDS) systems,
sometimes referred to as “wireless cable,” transmit video programming and other services
to approximately 700,000 subscribers through 2GHz microwave frequencies, but these
systems are losing subscribers, primarily serve legacy customers, and are not significant
3 Horizontal integration occurs when firms that compete directly with one another combine.
Vertical integration occurs when firms that are in a supplier-customer relationship combine.
The supplying firm can be providing products (e.g., programming) or services (e.g.,
distribution services) that are inputs for the customer.
4 Reproduced from Jonathan Levy, Marceline Ford-Livene, and Anne Levine, “Broadcast
Television: Survivor in a Sea of Competition,” OPP Working Paper 37, Federal
Communications Commission, September 2002, Table 1, p. 4 (2010 projections omitted).
5 Implementation of Section 3 of the Cable Network Consumer Protection and Competition
Act of 1992, Statistical Report on Average Prices for Basic Service, Cable Programming
Services, and Equipment, MM Docket No. 92-266, Report on Cable Industry Prices, 17 FCC
Rcd at 6313, Table 11 (2002).
Cable & Telecommunications Association,6 basic cable networks and pay cable
services captured a 59 share of the viewing audience in 2002, while broadcast
network affiliates, independent broadcast television stations, and public television
stations captured only a 53 share.7 The FCC reports8 that the prime-time share of all
cable networks increased from 51.9 in July 2000 - July 2001 to 56.5 in July 2001 -
June 2002, while the prime-time share of all broadcast television networks fell from
6 “Viewing Shares: Broadcast Years: 1991/92-2001/02,” Cable Developments 2003,
National Cable & Telecommunications Association, at p. 16, citing data from Nielsen Media
Research and Cable Status Report Data, published by the Cablevision Advertising Bureau
in Cable TV Facts, 1993 through 2003.
7 A program’s or network’s “share” is defined as the percentage of the television
households watching television at a given time that are tuned to that particular program or
network. The sum of all shares typically exceeds 100 because in some households there will
be multiple televisions being watched at the same time.
8 Annual Assessment of the Status of Competition in the Market for the Delivery of Video
Programming, Federal Communications Commission, MB Docket No. 02-145, Ninth
Annual Report, released December 31, 2002, at pp. 5 and 6.
Table 1. Availability of Video Media
1975 1980 1985 1990 1995 2000 2001
Total Households (millions)71.581.887.694.897.5104.1107.4
TV Households (TVHH)69.679.985.993.195.9102.2105.5
Satellite 0.0 0.0 0.0 0.9 4.8 15.7 17.7
Cable + Sat. Subscr/TVHH14.124.042.756.469.682.782.7
VCR Homes/TVHH (%)0.01.027.766.179.786.185.2
DVD Homes/TVHH (%)0.00.00.00.00.08.813.0
Sources: Total HH and TVHH: Television Bureau of Advertising, “Television Households,
Trends in Television,” at [http://www.tvb.org] (citing Nielsen); Cable subscribers 1975:
Kagan World Media, Broadcast Cable Financial Databook, July 2002, at p. 7; Cable
subscribers 1980-2001: Paul Kagan Associates, Cable TV Investor, May 24, 2002, at p. 9;
Cable houses passed 1975-2001: Paul Kagan Associates, Cable TV Investor, May 24, 2002,
at p. 9; DBS and C-Band subscribers 1995-2001: Kagan World Media, Economics of Basic
Cable Networks 2002, Sept. 2001, at pp.23-27; C-Band subscribers 1990: 1995 MPVD
Competition Report at Table G-1; VCR and DVD Homes 1990-2001: Veronis Suhler,
Communications Industry Forecast, 2001, at pp. 192 and 194; VCR and DVD Homes 1980-
1985: Television Bureau of Advertising, “Cable, Pay Cable & VCR Households, Trends in
Television,” at [http://www.tvb.org].
Over the past decade, technology-driven market forces and relaxation of
government rules have led to widespread vertical and horizontal integration in the
video programming industry (and more generally in the media sector). Some of these
integrated firms are very large, with extensive holdings in multiple industry
segments, crossing both functional and technological boundaries.9 This has raised
concerns in some quarters that the firms could use their market positions to harm
competition and that media concentration reduces the diversity of independent voices
and lessens sensitivity to local needs, interests, and standards. Other policymakers
have found benefit to consumers from efficiency gains made possible by such
9 Horizontal consolidation can occur both within and across technologies. For example,
since the same programming can be, and is, used on broadcast, cable, and satellite pipelines,
acquisitions that place both a broadcast network and cable networks under the same
ownership represent horizontal consolidation in the video programming distribution market.
Similarly, acquisitions that place a satellite system and a group of local broadcast stations
under the same ownership represent horizontal consolidation in the video retail pipeline
consolidation, and have pointed to some empirical evidence that consolidation has
increased the amount and quality of local news programming.10
The video programming industry is simultaneously expanding its boundaries
and program offerings and consolidating ownership. On one hand, the emergence of
cable television, direct broadcast satellites, and video cassette and DVD rentals and
sales has expanded the video options available to viewers. Viewers clearly value
these options — they continue to increase their levels of video viewing and they have
demonstrated a willingness to pay for their additional programming.11
On the other hand, the industry is increasingly dominated by a limited number
of vertically integrated firms that finance the development of new programming
through a wide variety of arrangements with content providers (including joint
ventures and direct ownership), own extensive libraries of existing programming,
own a variety of distribution channels for bringing content to the public, and also
own retail pipelines such as local broadcast stations and video store chains (and,
currently proposed, a direct broadcast satellite system).
These fundamental changes in market structure affect the public policy issues
that Congress faces. In the 1960s, there were few programming pipelines into the
home. There were three broadcast networks and 90 percent of television viewers
watched the network programming carried by these networks’ local affiliates. There
were too few geographic markets with more than three commercial television stations
to support additional broadcast networks, and cable and satellite alternatives were not
yet technologically viable. Given the technology-driven limitation on the number of
video pipelines into the home and the number of distribution networks, various
federal rules were adopted with the intention of fostering diverse voices despite the
small number of gatekeepers.
In addition to limits on any entity’s ownership of local or national broadcast
properties, broadcast networks were required to obtain much of their programming
from independent sources and to allow those independent producers to maintain
syndication rights. Local stations were subject to news and public affairs
programming requirements and to the Fairness Doctrine, which required them to
cover issues of public importance in a “balanced” fashion.
As the number of pipelines into the home and distribution networks have
increased, the broadcast station ownership restrictions have been relaxed, the
10 See, for example, Report and Order and Notice of Proposed Rulemaking, 2002 Biennial
Regulatory Review — Review of the Commission’s Broadcast Ownership Rules and Other
Rules Adopted Pursuant to Section 202 of the Telecommunications Act of 1996, MB Docket
Rules and Policies Concerning Multiple Ownership of Radio Broadcast Stations in Local
Markets, MM Docket 01-317; Definition of Radio Markets, MM Docket 00-244; Definition
of Radio Markets for Areas Not Located in an Arbitron Survey Area, MB Docket 03-130,
adopted June 2, 2003 and released July 2, 2003, at ¶ 344.
11 A more detailed description of consumers’ video viewing and spending behavior is
presented in CRS Report RL32026.
program ownership restrictions on broadcast networks have been eliminated, and the
Fairness Doctrine and programming requirements on local stations have been
Today, there are more pipelines into the home and more distribution networks,
but a relatively few big media players control a large portion of both programming
and distribution. For example, one observer12 claims that “[f]ive companies13 own
all the broadcast television networks,14 four of the major movie studios,15 and 90
percent of the top 50 cable channels16 [and] also produce three-quarters of all prime-
time programming.”17 Figure 1 shows both the functional segments and
12 James Surowiecki, “All in the Family,” The New Yorker, June 16 & 23, 2003, at p. 76.
Footnotes have been added to provide data sources that confirm or refute Mr. Surowiecki’s
claims, for which he did not provide underlying data sources.
13 AOL-Time Warner, Disney, General Electric, News Corp., and Viacom.
14 AOL-Time Warner owns WB, Disney owns ABC, General Electric owns NBC and
partially owns Paxson, News Corp. owns Fox, and Viacom owns CBS and UPN.
15 According to the website of the Motion Picture Association of America,
[http://www.mpaa.org], there are seven major producers and distributors of motion pictures
and television programs in the U.S., four of which are owned by one of the five companiesth
— Disney (Disney), Paramount (Viacom), 20 Century Fox (News Corp.), and Warner Bros
(AOL-Time Warner) — and three of which are independent of those five companies —
Sony, M-G-M, and Universal Studios.
16 There are a number of possible ways to measure “top” cable channels: prime-time or total
day audience size or audience share, total household subscribers, total revenues, total
advertising revenues, total or average license fees per subscribing household, etc. Based on
data from “Cable Network TV Household Growth (Ranked by 2001 TV Households),”
Economics of Basic Cable Networks 2003, Kagan World Media, at pp. 34-35, of the top 50
cable networks in terms of household subscriptions, 34 are partially or fully owned by one
of the “Big Five” companies; 9 additional cable networks are partially or fully owned by
Liberty Media, about $8 billion of whose holdings are in News Corp. and AOL Time
Warner stock; one is wholly owned by Comcast, the largest multiple system operator of
local cable systems; two are C-SPAN networks co-funded by the cable and satellite industry;
and four are independently owned. Other measures of “top” cable networks yield similar
17 The available data on ownership or production of prime-time programming are
inconsistent, some supporting and some disputing this contention. According to the
Coalition for Program Diversity, an umbrella group that is advocating that the FCC adopt
a rule requiring the four major broadcast networks to purchase 25 percent of their prime-
time programming from independent producers, the following percentages of 2003-2004
prime-time programming will be produced by companies that are owned by or affiliated with
the network such that the network will retain the copyright on the programming: CBS,
Say Indie Studios,” Broadcasting & Cable, June 9, 2003, at p. 26.) According to Kagan
World Media’s The Economics of TV Programming & Syndication 2002, network ownership
of prime-time schedules, including productions and co-productions, in 2002-2003 were as
follows: CBS, 77.3%; FOX, 73.3%; ABC, 53.8%; NBC, 43.2%. In contrast, at the May 22,
2003 Senate Commerce Committee hearing, Rupert Murdoch, President and CEO of News
Corp. claimed that for this season FOX will obtain 40 percent of its programming from
technological components of the video programming industry. Several large
companies have ownership interests — sometimes extensive — in virtually each
“box” in Figure 1. This has engendered considerable debate on how well the existing
FCC ownership rules address the impact of consolidated ownership of programming
and distribution on the public interest goals of diversity, competition, and localism,
and whether new rules that re-regulate the industry could or should be formulated
that would better serve those goals.
The FCC has just completed a congressionally mandated biennial review of its
media ownership rules and adopted a number of rule changes,18 most of which
lessened ownership restrictions and are widely expected to lead to a new round of
acquisitions.19 Because of the controversial nature of these rules, a number of bills
have been introduced in the 108th Congress that reflect a range of positions on several
of these rules.20 In addition to the ownership rules, there are federal laws and rules
that directly regulate conduct in the video market, such as copyright,
nondiscriminatory access, and signal carriage requirements, that affect the relative
negotiating strength of various segments — and thus affect market structure. Given
the rapid and significant technology-induced market changes that have occurred this
past decade, some of these ownership and conduct rules apply to some competitors
but not to others, or are having impacts that were unanticipated when they were
adopted. Congress can expect individual companies or representatives of industry
segments to seek legislation to maintain, modify, or eliminate those laws and rules
in the fashion that would give them the greatest competitive advantage.
producers that are independent of FOX. The apparent discrepancy among these claims may
be due in part to the time period covered and in part to the definition used for “independent”
producer. For example, how should an independently owned company that ceded copyright
of its programming to FOX be categorized?
18 Report and Order and Notice of Proposed Rulemaking, 2002 Biennial Regulatory Review
— Review of the Commission’s Broadcast Ownership Rules and Other Rules Adopted
Pursuant to Section 202 of the Telecommunications Act of 1996, MB Docket 02-277; Cross-
Ownership of Broadcast Stations and Newspapers, MM Docket 01-235; Rules and Policies
Concerning Multiple Ownership of Radio Broadcast Stations in Local Markets, MM Docket
01-317; Definition of Radio Markets, MM Docket 00-244; Definition of Radio Markets for
Areas Not Located in an Arbitron Survey Area, MB Docket 03-130, adopted June 2, 2003
and released July 2, 2003. The rule changes, their impact on media markets, and resulting
legislative policy issues are discussed in CRS Report RL31925, FCC Media Ownership
Rules: Issues for Congress.
19 See, e.g.,Yochi J. Dreazen and Joe Flint, “FCC Eases Media-Ownership Caps, Clearing
the Way for New Mergers,” Wall Street Journal, June 3, 2003, p. A1; Alec Klein and David
A. Vise, “Media Giants Hint That They Might Be Expanding,” Washington Post, June 3,
2003, p. A6; Frank Ahrens, “FCC Eases Media Ownership Rules,” Washington Post, June
3, 2003, p. A1; David Lieberman, Paul Davidson, and Michael McCarthy, “TV station will
be bought, but probably not quickly,” USA Today, June 3, 2003, p. 1B; David Lieberman
and Paul Davidson, “Five ways FCC altered the media landscape,” USA Today, June 3,
20 See CRS Report RL31925, FCC Media Ownership Rules: Issues for Congress.
The purpose of this report is to provide a brief description of the video industry
market structure and to explain how the various industry segments21 are interrelated.
CRS Report RL32026, on the market dynamics in the video programming industry,
explains how and why underlying market forces have created strong pressure for
vertical integration across segments and horizontal mergers within segments and how
that market consolidation could be used to benefit or to harm consumers. It also
explains how certain government regulations as well as certain government
deregulation have fostered consolidation. CRS Report RL32026 identifies public
policy issues that may arise as a result of the vertical and horizontal consolidation.
Overview of the Video Programming Industry
Companies in the video programming industry are involved in the creation and
delivery of entertainment, information, and news programming for consumers. Most
of the entertainment programming — even when broadcast live — is recorded on
film, tape, or disc so that it can be seen or heard repeatedly.22 Increasingly, recorded
entertainment is being stored digitally, which can both improve the quality of images
and sounds, and make them easier to transmit and copy.
The new technologies available today tend to reduce the incremental costs
associated with making video programming available to additional viewers, but do
not reduce the large up-front costs associated with producing and marketing the
programming. Not all video programs will generate enough revenues to recover their
costs, so profits are needed from successful programming to cover the losses
associated with other programming.
Whether the final product is broadcast television, multi-channel (cable or
satellite) television, theatrical films, or rental videos, the three functional segments
— content providers, distributors and packagers, and retail pipelines — must work
cooperatively to achieve success. At the same time, there is natural market tension
among them. Each wants to get the biggest share of dollars from successful
programming and each wants to bear the smallest share of risk. Since tension and
risk make market transactions more difficult, there are strong market incentives to
bring functional transactions within the boundaries of individual companies through
vertical integration.23 The structural relationships among these functional segments
are discussed below for the various consumer products.
21 The purpose for identifying industry segments is purely descriptive. It is not intended
to suggest that an industry segment represents a product market for antitrust purposes.
22 The following industry description is drawn in part from Tom Graves, “Movies & Home
Entertainment,” Standard & Poor’s Industry Surveys, November 14, 2002.
23 These market incentives are discussed in greater detail in CRS Report RL32026.
As of March 31, 2003, there were 1,721 licensed full-power broadcast television
stations in the United States, 1,340 of which were commercial stations and 381
educational.24 Half the population can receive 13 or more broadcast television
signals; half can receive fewer.25 More than 65 percent of U.S. television households
subscribe to cable television and therefore receive their local broadcast signals over
cable, not off the air.26
Approximately 860 of the full-power commercial stations are affiliated with one
of the four major television networks — ABC, CBS, FOX, or NBC.27 Of these,
approximately 61 are owned and operated by one of the networks.28 The United
Paramount Network (UPN) and the Warner Brothers Television Network (WB), both
of which began operations in January 1995, have formed affiliation agreements with
more than 325 commercial television stations not linked to the four national
networks. There is also a smaller Paxson network.
Although their market share is eroding, the four major broadcast television
networks remain the largest force in U.S. television programming. For national
advertisers, they continue to provide household penetration and viewership levels that
are not available elsewhere.29 Table 2 shows the prime-time ratings of the network-
affiliated broadcast television stations, the non-network broadcast stations, and
advertiser-supported cable networks for the 2002-2003 season (until the start of the
24 “Broadcast Station Totals as of March 31, 2003,” Federal Communications Commission
News Release, May 5, 2003. In addition, there are more than 2,200 low power television
stations licensed to operate in the U.S.
25 Jonathan Levy, Marceline Ford-Livene, and Anne Levine, “Broadcast Television:
Survivor in a Sea of Competition,” OPP Working Paper, Federal Communications
Commission, September 2002, at p. 3.
26 According to a Television Bureau of Advertising analysis of Nielsen Media Research
data for May 2003, from May 2002 to May 2003, wired cable penetration fell from 70.6%
to 68.1%, its lowest level since April 1996, while alternate delivery service (primarily DBS)
grew from 15.1% to 17.0%. (“Wired Cable Alternatives Skyrocketing; Cable Penetration
Hits 7-Year Low, Drops 2.5 Points in 12 Months,”
[http://www.tvb.org/localnumbers/current_ads.html] viewed 7/15/23.) Other sources, such
as Kagan’s Economics of Basic Cable Networks 2003, estimate that 65% of U.S. television
households subscribe to cable television. Because of limits on capacity that do not allow
satellite systems to offer local broadcast signals to customers in certain locations and
charges to consumers to cover associated costs when the local service can be provided, some
direct satellite television subscribers either cannot receive or do not choose to receive local
broadcast stations over their satellite systems.
27 This number is expected to increase when the FCC’s recently adopted 45% National
Television Ownership cap, replacing the old 35% cap, is in place. See CRS Report
RL31925, FCC Media Ownership Rules: Issues for Congress.
28 In addition, CBS-parent Viacom owns 19 broadcast television stations affiliated with its
UPN network and NBC-parent General Electric owns 32 percent of the Paxson Television
Network, which owns 72 stations.
29 See, e.g., Harry A. Jessell, “Plenty of Nothing: As broadcasters lose more viewers, they
make more bucks,” Broadcasting & Cable, June 2, 2003, p. 75.
broadcast summer re-run season).30 The four major networks had a combined
average prime-time rating of 27.90. That is, on average, 27.9% of all U.S. television
households were viewing one of the Big Four networks at any time during prime-
time — an average viewership of about 7% per network. The smaller broadcast
networks had ratings of about 2% each. All advertising-supported cable networks,
in aggregate, had a rating of about 29, but that is divided among more than one
hundred cable networks. TNT, the highest-rated cable network, had a rating of only
Even for individual programs, broadcast television enjoys viewership levels not
approached by programming provided by any other advertiser-supported pipelines.
According to the Television Bureau of Advertising,31
In the month of April, all 100 of the top 100 primetime programs, based on HH
[household] rating, aired on the broadcast networks. At the top of the list was
CBS’s stalwart “CSI,” which delivered a 15.4 HH rating. NBC’s “Friends” came
in second, with a 13.3 HH rating, and CBS’s coverage of the NCAA Basketball
Championships delivered a 12.6 HH rating to finish in third place.
The highest ranked ad-supported cable program came in at number 146; it was Fox
News Channel’s “The O’Reilly Factor,” which delivered a 3.2 HH rating.
Table 2. Prime-Time Ratings for Advertising-Supported
Broadcast and Cable Television Networks
(2002-2003 Season to Date: 9/23/02 - 5/21/03)
4 Major Networks27.90
7 Broadcast Networks32.64
30 A program’s or network’s “rating” is the percentage of total television households
(approximately 107 million) viewing that program or network.
31 “Top 100 Programs on Broadcast & Cable: Apr-2003,” Television Bureau of
c/top100.asp?ms=Apr-2003.html], viewed 6/20/03.
Fox News Channel1.37
Top Ten Ad-Supported Cable12.32
Total Ad-Supported Cable29.08
Sources: “HH Ratings - Primetime Broadcast and Ad-Supported Cable Season-to-Date 2002-2003
v. Season-to-Date 2001-2002” and “HH Ratings - Primetime Top Ranked Ad-Supported Cable
Networks Season-to-Date 2002-2003 v. Season-to-Date 2001-2002,” Television Bureau of
2003.html], viewed 6/20/03.
According to Kagan World Media,32 the bottom 10 broadcast television shows in
the 2001-2002 season had an average rating of 3.9. Thus the biggest advertiser-
supported cable hits captured a smaller audience than the worst broadcast network
The advertiser-supported cable networks attract larger audiences, however, during
broadcast television’s traditional summer re-run period. According to Cable World,33
for the week of June 16-22, 2003, the aggregate prime-time audience for advertiser-
supported cable networks exceeded the aggregate audience of the seven broadcast
television networks by almost 10 million households. CableFAX claims that
advertiser-supported cable networks’ aggregate audience share has exceeded that of
the seven broadcast networks for twenty consecutive summer weeks,34 with the
disparity reaching 17 share points. Cable networks strategically introduce new
programs during the broadcast re-run season.
Although cable networks and systems have made significant in-roads,
broadcasting continues to capture the lion’s share of U.S. television advertising
revenues — with those revenues relatively evenly split between the networks and
local stations. According to the Television Bureau of Advertising,35 the breakout in
Big Four Network Advertising$ 15,000
National Spot Advertising (local stations)$ 10,920
Local Spot Advertising (local stations)$ 3,034
Syndication and Three Small Networks$ 13,114
Total Broadcast Television$ 42,068
Cable Network Advertising$ 12,071
Cable Non-Network Advertising$ 4,226
Total Cable Television$ 16,297
With advertiser-supported cable audience share now substantially exceeding that
of the broadcast networks, at least during the summer months, but the broadcasters
continuing to capture upwards of 75% of advertising revenues, the cable industry has
announced its intention to educate the advertising industry about what it terms a
32 Kagan World Media, The Economics of TV Programming & Syndication 2002, August
33 Shirley Brady, “Bolting Out of the Gate,” Cable World, June 30, 2003.
34 “Broadcast, Cable Television Ratings Analysis,” CableFAX, June 26, 2003.
35 “Estimated Annual U.S. Advertising Expenditures 2001-2002,” Trends in Advertising
Volume, Television Bureau of Advertising,
[http://www.tvb/rcentral/mediatrendstrack/trends/trends.asp?c=2001-2002], viewed on
“pricing disparity.”36 To successfully capture additional advertising revenues,
however, the cable industry will have to create efficient and effective ways for
advertisers to aggregate fragmented cable audiences with favorable demographics
comparable to those provided by broadcast television.
Another market threat to broadcast television comes from growing prime-time
audience erosion to premium cable networks, such as HBO and Showtime, that offer
premium programming for monthly subscriber charges. In 2003, 40,760,000 U.S.
households subscribed to pay cable channels — or 38.2% of all television
households.37 Since some households subscribe to multiple premium channels, U.S.
households subscribed in total to 66,200,000 premium cable units at the end of
2002.38 Even though no premium network is subscribed to by as many as one-third
of all television households, hit shows such as HBO’s The Sopranos and Sex and the
City regularly attain ratings of 6.0 and higher.39 For its final season premiere last
month, Sex and the City attracted 7.3 million viewers, or approximately 6.8% of all
television households.40 As networks that are only available to those households that
subscribe to them, HBO and Showtime are successfully following a strategy of
providing programming with adult themes that broadcasters cannot air without
risking offending some viewers, especially those who do not want their children to
view such programming. In addition, HBO and other premium channels package
their hit programs on DVD for sale or rental.
The differential in audience size between broadcast television and cable is
partially due to broadcast television networks enjoying large footprints that cover
almost the entire U.S. population — and offering service that is “free” to viewers.
Even though 96.7% of television households have access to (in industry jargon, are
“passed by”) cable television systems,41 only 65% of television households subscribe
to cable systems, and no cable network is carried by all cable and satellite systems,
so none has a footprint approaching those of the broadcast networks. But footprint
cannot fully explain the entire difference in audience size. Some cable networks are
carried in more than 94% of all multichannel households.42 Thus these cable
37 “Cable, Pay Cable & VCR Households,” Television Bureau of Advertising,
[http://www.tvb.org/rcentral/mediatrendstrack/tv/tv.asp?c=cable] viewed 6/20/2003.
38 Annual Assessment of the Status of Competition in the Market for the Delivery of Video
Programming, Federal Communications Commission, MB Docket No. 02-145, Ninth
Annual Report, released December 31, 2003, at ¶ 21, Table 2, citing Kagan World Media,
Cable TV Investor, May 24, 2002, and Kagan World Media, Broadband Cable Financial
Databook, July 2002.
39 See, e.g., “Ratings: Weekly Pay Cable,”
[http://www.allyourtv.com/ratingscablepay.html] viewed 7/15/2003.
40 “Weekly Numbers,” CableFAX, Vol. 14, No. 122, June 25, 2003.
41 See Table 1 above.
42 According to Kagan World Media, The Economics of TV Programming & Syndication
networks are received by almost two-thirds of all U.S. television households, either
by cable or by satellite. But with the exception of The Sopranos and Sex and the
City, their ratings do not approach two-thirds of broadcast television network ratings.
Given their on-going and unique success in capturing larger (if falling) audiences
than their cable and satellite competitors, from 1990 to 2000 the broadcast television
networks were able to increase the quantity of prime-time commercials aired by 16.4
percent (from an average of 7 minutes and 47 seconds per hour to an average of 9
minutes and 3 seconds) and also to obtain on average 3.8% annual increases in the
rates (“cost per thousand”) they charged advertisers.43
However, broadcast television suffers one technology-driven disadvantage vis-a-
vis cable and satellite television. Because it is not technologically or economically
viable to charge viewers directly for broadcast programming, broadcasters are
entirely dependent on advertising revenues. But advertising revenues are far more
cyclical — subject to downturns in the economy — than direct cable or satellite fees
on viewers, and therefore broadcasters are hurt more by a slowing economy.44
The four major networks provide their owned stations and affiliates with more
than 20 hours of programming per week; the smaller networks provide less. In
exchange, networks obtain the right to sell the bulk of the advertising time during the
periods when their shows are airing.45 Most affiliates also receive a fee, called
compensation, from the networks. That fee varies significantly depending on the
situation in the local market, and is the subject of very hard bargaining. Since
network programming attracts much larger audiences than most non-network
programming, affiliates are able to charge much more for their spot advertising
accompanying network programming than they would be able to absent that program.
This strengthens the networks’ bargaining hands. Also, where there are more local
television stations in the market than networks with which to affiliate, the networks
are in a relatively strong negotiating position vis-a-vis the local stations, and
therefore can negotiate low compensation payments or even, on occasion, require the
local station to pay them compensation to affiliate. In contrast, in markets with few
local stations, the local stations are in a stronger negotiating position than the
Another parameter in the relationship between broadcast networks and affiliates
is the degree of discretion affiliates have to preempt the broadcast feed to offer local
programming. Local affiliates may at times prefer to offer local sports or other
reaching 95.3 percent of multichannel homes, while Discovery and ESPN tied with 94.2
43 Bear Stearns, “Broadcasting/TV & Radio,” Equity Research Media, November 2001, at
44 See, e.g., written testimony of Scott Cleland, CEO, Precursor Group, Senate Judiciary
Committee Antitrust Subcommittee hearing, June 18, 2003, at p. 2, or Standard & Poor’s,
“Broadcasting & Cable,” Industry Survey, July 25, 2002, at p. 1..
45 Although costs are typically higher for shows they produce themselves, affiliates get to
sell more advertising time during such programs than during network offerings.
events of particular interest to their viewership or may not want to air programming
they believe is inconsistent with local community standards. Preemption by any
affiliate, however, reduces the network’s footprint, and therefore harms its ability to
sell national advertising. This, in turn, can harm all affiliates if the network’s “Swiss
cheese” footprint generates diminished advertising revenues needed to fund future
programming. Many network-affiliate contracts today have a “three strikes and
you’re out” clause that puts a local station’s affiliation at risk if it preempts three
network feeds in a year (though preemptions made on a local standards basis
typically do not count toward the three strikes).
Local broadcast television stations remain quite profitable. As shown in Table
3,46 both the profits and the cash flow of commercial television stations were positive
for every market size in 2000, and were especially robust for stations in large
markets. This is consistent with the testimony at recent Senate Commerce
Committee hearings in which representatives of both broadcast networks and local
broadcast stations agreed that local stations in medium and large markets enjoy
profits (as a percentage of revenues) in the range of 20 to 50 percent.47 FCC staff
compared the data for 2000 to data for 1990 and concluded that “It appears that cash
flow margins for the average station have increased over the past decade.... [I]n every
category but one, profits and profit margins are up in 2000 over 1990.”48 By
contrast, both the authors of the FCC study and the participants in the Senate hearing
agreed that broadcast television networks are not particularly profitable and the
newer networks definitely are losing money. Presumably, if this differential between
station and network profitability continues, the networks will attempt to renegotiate
their affiliation agreements, either to reduce the compensation they pay affiliates or
to increase the amount of advertising time they retain for themselves to obtain
national advertising revenues.
The broadcast networks and broadcast stations face the same competitive threat
from the multi-channel systems and share the incentive to continue to create the
popular programming needed to retain the large audiences valued by advertisers.
Moreover, although the broadcast stations are more profitable than the broadcast
networks today, all of the networks are now part of larger media companies whose
holdings include large video programming studios and multiple cable networks that
could use the cable and satellite pipelines as well as — or instead of — the broadcast
46 Reproduced from Jonathan Levy, Marceline Ford-Livene, and Anne Levine, “Broadcast
Television: Survivor in a Sea of Competition,” OPP Working Paper 37, Federal
Communications Commission, September 2002, Table 14, at p. 33.
47 See the discussion between Mel Karmazin, president and CEO of Viacom, Inc., and Jim
Goodmon, president and CEO of Capitol Broadcasting Company, Inc. at Senate Commerce
Committee Hearing on Media Ownership, May 13, 2003.
48 Jonathan Levy, Marcelino Ford-Livene, and Anne Levine, “Broadcast Television:
Survivor in a Sea of Competition,” FCC OPP Working Group Series # 37, September 2002,
at p. 31.
49 See, e.g., the written testimony of Scott Cleland, CEO, Precursor Group, Senate Judiciary
Committee Antitrust Subcommittee hearing, June 18, 2003, at p. 2, in which commenting
The broadcast network-affiliate relationship has become much more complex as
the broadcast networks have integrated into cable programming. For example, in the
fall of 2002, Disney Chairman and CEO Michael Eisner unveiled a plan to merge the
management of the Disney-owned ABC broadcast television network with the
Disney-owned cable networks, and to focus on promoting two “core brands” —
Disney and ESPN.50 Eisner stated:51
Each one of our dayparts at the ABC network will be run horizontally with the same
businesses in cable. The people that run The Disney Channel, Toon Disney and
Playhouse Disney will also run ABC broadcast Saturday morning. The people that
run daytime at ABC will run SoapNet, and the people that run the ABC prime time
schedule will run ABC Family.
Table 3. Average Pre-Tax Profits, and Cash Flow of Commercial
Television Stations, 2000
Average Pre-Profit as % ofAverage CashCash Flow
Market RankTax Profit Net RevenueFlow as % of
($ million)($ million)Net Revenue
on the proposed News Corp-DirecTV merger, he states: “This merger enables NewsCorp.
to switch horses mid-race from the tired-old over-the-air broadcast model, which is near to
being put out to pasture, to the new DBS thoroughbred, which is in its prime.”
50 For a detailed discussion of this internal Disney reorganization, see Steve McClellan and
Dan Trigoboff, “Eisner touts a ‘national’ duops; Disney chief’s turnaround plan couples
ABC, cable networks by daypart,” Broadcasting & Cable, October 7, 2002, at p. 6.
51 Id. at p. 6.
Source: National Association of Broadcasters, Television Financial Report, 2001 edition,
at pp. 2-3.
That plan did not sit well with ABC affiliates. From their perspective the plan
appeared to spell the end of ABC as a discreet business and would allow Disney to
focus on its cable networks at the expense of the ABC broadcast network. At the
time of the announcement, the affiliates had just completed negotiating a two-year
affiliate agreement that included provisions that attempted to limit Disney’s ability
to use the ABC network to promote its cable networks, with which the ABC affiliates
com p et e. 52
Until recently, the broadcast networks most frequently obtained first-run prime-
time shows from program suppliers through license agreements, which let them air
each episode of a series several times. In a licensing arrangement, the program
supplier retains ownership of a show. Typically, the license fee does not fully cover
the up-front costs of production, since the program supplier will have the opportunity
to generate additional revenues from the programming through sale or lease of
syndication rights (for reruns) and foreign rights.
However, since the repeal in the early 1990s of the Financial Interest and
Syndication (“Fin-Syn”) Rules that restricted network ownership of programming,
broadcast network companies are increasingly producing themselves, or acquiring
ownership interests in, the programming that they air. Doing so usually involves a
higher initial investment, but it can also generate greater returns if a program
becomes a hit.
Following the lifting of the Fin-Syn restrictions, two major programming
conglomerates purchased networks — Walt Disney Company purchased Capital
Cities/ABC in 1996 and Viacom purchased CBS in 2000. One independent program
supplier, Columbia, had a long-running agreement with CBS to produce programs
for the CBS prime-time schedule, but within a year of the CBS-Viacom merger, the
company closed its doors on television production, stating that a non-vertically
integrated company had little chance for survival in today’s risky television
business.53 Another non-vertically integrated company that did not survive was
52 Under the agreement, ABC was prohibited from “repurposing” more than 25% of its
prime-time schedule to cable outlets. Repurposing is the practice of showing programs on
cable networks just a matter of days or weeks after they appear on the broadcast network.
Disney also was allowed to air only two ESPN promotional spots per hour in ABC Sports
programs. It also was limited to airing 50 spots a week on ABC promoting co-owned cable
network programs, and only 10 of those could mention program day, date, and time.
Affiliates did continue to pay $34 million a year to help ABC/ESPN pay for the National
Football League contract.
53 Kagan World Media, The Economics of TV Programming & Syndication 2002, August
Artists TV Group, which in its first season, 2000-2001, had 14 pilots and five series
picked up for the season, but all the series were cancelled and the company closed
down in 2001-2002. Today, all the major broadcast networks except NBC own
major production studios, and NBC has been reported to be ready to bid for the
Universal television studios currently owned by Vivendi.54 As explained in footnote
16, there is some question about the proportion of prime-time broadcast television
programming now produced or co-produced by the networks, but it certainly exceeds
Syndicating a television program historically has meant licensing a program to
individual television stations around the U.S. on a market-by-market basis. More
recently, cable networks have become important licensees of syndicated
programming — increasing their share from 26.5 percent of total syndicated revenues
in 1992 to 42.4 percent in 2001.55 (Though as cable networks continue their current
pattern of producing more original programming, cable demand for syndicated
programming may decline.) The local broadcaster or cable network pays for the
programming and keeps all the advertising revenues it is able to generate.
It is very difficult for syndicators to break into the market for first-run
programming. With the development of FOX, UPN, and WB networks, there are
very few local broadcast stations not affiliated with a broadcast network, and
therefore the size of the market for syndicated first-run programming has shrunk.56
The traditional pre-prime-time hour, running between the network national news
programs and the start of the network prime-time schedule, is largely locked in by
longstanding syndicated programs such as Jeopardy, Wheel of Fortune, and
There is a more vibrant syndication market for reruns, known as “off-net
syndication,” since both network affiliates and non-affiliates need non-prime-time
programming. Because of the relatively smaller audiences during non-prime-time
hours, however, the focus is on low cost programming — most frequently reruns of
half-hour situation comedies, rather than reruns of hour-long dramas.
Bartering is a variation on syndication. The supplier receives at least a portion
of its revenues from selling advertising time on the stations that air its program. By
54 See, e.g., Martin Peers, Emily Nelson, and Kathryn Kranhold, “Vivendi Bid Shows NBC
Peacock’s New Hues,” Wall Street Journal, June 25, 2003, at p. B1.
55 Kagan World Media, The Economics of TV Programming & Syndication 2002, August
56 According to Kagan World Media, The Economics of TV Programming & Syndication
2002, August 2002, at p. 4, programmer-broadcast network mergers and the development
of the three new broadcast networks have cut into the syndication market and resulted in
consolidation in that market as well.
giving the syndicator advertising time, the local station is able to make lower
licensing payments. If the syndicator wants to attract national advertisers for this
advertising time, it typically must be able to provide coverage of 70 percent of U.S.
Multi-Channel (Cable and Satellite) Television
Multi-channel television is the fastest growing segment of the video programming
industry. As shown in Table 4, between 1990 and 2000, total cable and satellite
television revenues almost tripled, from $18.4 billion to $53.3 billion, and now
substantially exceed broadcast television revenues, which have grown far more
slowly. That trend continues.
Table 4. End-User Expenditures on Various Video Media,
(millions of dollars)
Total Broadcast Television$26,716$32,720$44,802
Network Advertising Revenues$9,963$11,600$15,888
Syndication Advertising Revenues$1,109$2,016$3,108
Stations’ Advertising Revenues (local + national$15,644$19,104$25,806
Total Cable Video-Related Revenues$18,401$26,870$44,808
Total Cable Television Operators’ Revenuesa$16,604$22,898$34,352
Operators’ Video Subscriptionsb$16,128$21,823$31,992
Operators’ Advertising Revenues$476$1,075$2,430
Basic Cable Network Advertising Revenues$1,797$3,972$10,456
Total DBS Revenues$0$663$8,467
DBS Video Subscriptions$0$63$8,440
DBS Advertising Revenuesc$0$0$27
Total Subscription Video-Related Revenues $18,401$27,533$53,275
Sources: Broadcast Television Revenues: Television Bureau of Advertising, “Trends in Advertising
Volume,” [http://www.tvb.org/tvfaxts/trends], visited June 26, 2002; Cable Operator Revenues: Kagan
World Media, The Economics of Basic Cable Networks (date and pages not provided); DBS
Revenues: Kagan World Media, The State of DBS 2002, Dec. 2001, at p. 16; Filmed Entertainment
Revenues: Veronis Suhler, “Communications Industry Forecast,” July 2001, at p. 203.
a. Only video-related revenues are listed here. Revenues from installations, equipment, and non-video
services like high-speed Internet access services and telephony are not included.
b. Includes home shopping commissions.
c. DBS advertising is the equivalent of cable’s “local avails,” though they are sold as national time.
d. Filmed entertainment in this table includes movie theater box office and video stores. The data
source for filmed entertainment includes expenditures on television programming as a third category.
Because programming is an input into television, cable, and DBS services, it is not listed separately
under filmed entertainment.
Multi-channel television is comprised of cable and satellite systems that provide
anywhere from a few dozen to a few hundred channels of programming to end users,
cable networks that package (and sometimes produce) the programming for those
systems, and a large number of integrated, affiliated, or independent content
providers. Cable networks are reducing their dependence on libraries of existing
movies and television programs, increasingly producing their own new programming
or contracting with other producers for new fare.
Today there are just under 10,000 local cable systems57 plus two direct broadcast
systems with footprints covering large portions of the country (DirecTV and
EchoStar). In addition, a small and declining number of households continue to be
served by systems using technologies (MMDS and home-satellite dishes) that have
not succeeded in the market. Only a small number of communities are served by
more than one cable company, and there appears to be no market support for such
“overbuilds.”58 Direct competition among multi-channel television providers
primarily occurs between the local cable system and one or both DBS systems.
Programming for these multi-channel systems is provided by more than 300 cable59
But consolidation is increasingly placing both systems and networks in fewer
ownership hands. Most households are served by local cable systems that are owned
by large multi-system operators (MSOs). The ten largest multi-system operators
serve almost 60 million of the approximately 72 million households receiving basic
57 “Industry Statistics, State Data,” National Cable and Telecommunications Association,
[http://www.ncta.com/industry], lists 9,947 cable systems, citing Warren Communications
News, Inc. (viewed on 6/11/2003).
58 There appears to be a niche in densely populated areas for companies like
RCN/StarPower to negotiate non-exclusive franchise agreements in order to compete against
traditional cable systems using the strategy of wiring large apartment buildings and offering
video service bundled with telephone service.
59 “Industry Statistics, State Data,” National Cable and Telecommunications Association,
[http://www.ncta.com/industry], lists 308 national video programming services/networks as
of December, 2003, citing the FCC (viewed on 6/11/2003).
cable service (83.3%); the five largest serve 71.2% and the two largest serve 45.2%.60
At the same time, six major media companies — AOL Time Warner, Disney,
General Electric, Liberty Media, News Corp., and Viacom — are full or partial
owners of 43 of the top 50 cable networks as measured by number of households
reached; 30 of the top 34 as measured by average prime-time ratings; and 28 of the
30 cable networks with average license fees (paid by cable systems to cable
networks) per subscriber per month of $0.14 or more.61
The largest MSOs also increasingly have full or partial ownership in the largest
cable networks. In addition to AOL’s full or partial ownership of seven of the 50
largest stations, as measured by households served, Cox Communications has an
ownership share in four, Comcast in three, and Cablevision in three. There are only
six “independent” cable networks in the top 50 — two C-SPAN networks funded by
the entire industry, the Weather Channel, two networks owned by Scripps, and one
network owned by the Tribune Company.
Given the small audience shares attained by any cable network (as shown in Table
2, the highest rated cable network has attracted only 1.56 percent of television
households, on average, during prime-time during the 2002-2003 season), cable
networks continue to depend more on revenues generated by fees paid by subscribers
than by advertising. The FCC reported estimated total 2002 video-related cable
industry revenues (i.e., excluding revenues from equipment and installation, high-
speed Internet access, cable telephony, and interactive services) of $41.3 billion.62
60 The NCTA website, [http://www.ncta.com/industry], lists 71,897,250 basic cable
customers as of May, 2003 (based on A.C. Nielsen Media Research), and lists the number
of subscribers of the largest MSOs as of September 2002 (based on data from Kagan World
Media, Cable TV Investor) as follows:
Comcast Corp. 21,625,000
Time Warner Cable10,862,000
Charter Communications 6,697,900
Cox Communications 6,263,400
Adelphia Communications 5,775,400
Cablevision Systems Corporation 2,968,500
Advance/Newhouse Communications 2,100,000
Mediacom Communications Corporation 1,588,000
Insight Communications 1,289,000
61 Data from Kagan World Media, Economics of Basic Cable Networks 2003, “Cable
Network TV Household Growth” at pp. 34-35, “Average Prime-Time Ratings” at p. 42,
“Average License Fee per Subscriber per Month by Network” at pp. 53-54, and “Cable
Network Ownership” at pp. 59-63.
62 Annual Assessment of the Status of Competition in the Market for the Delivery of Video
Programming, Federal Communications Commission, MB Docket No. 02-145, Ninth
Annual Report, released December 31, 2002, at ¶ 29, Table 4, citing data collected by Kagan
According to the Television Bureau of Advertising,63 cable television advertising
revenues totaled $16.3 billion in 2002 — $12.1 billion in cable network advertising
and $4.2 billion in cable non-network advertising. The non-advertising cable
revenues are generated by per subscriber license fees charged to cable systems, pay-
per-view charges, and home shopping revenues.
Cable system operators (and satellite systems) make their programming available
to consumers in tiers:
!the basic service tier, typically consisting of a package of local
stations (local broadcast stations and public, educational, and
governmental (PEG) access programming) plus a few advertiser-
supported cable networks that are transmitted to the local cable
system by satellite (and hence sometimes referred to as satellite
channel s ). 64
!the cable programming service tier, sometimes referred to as the
enhanced basic service tier, typically consisting of a much larger
package of advertiser-supported satellite channels than the basic
service tier. Cable operators require subscribers to purchase the
basic service tier in order to purchase the enhanced basic service tier.
Approximately 90% of subscribers purchase the enhanced service
!various “premium” tiers, typically consisting of a package of
“premium” programming, usually (but not always) without
!“pay-per-view”channels with programming that subscribers pay for
on a program-by-program basis.
Cable and satellite operators attempt to assign individual cable networks to these tiers
based on their projections of what will generate the most profits for them. In doing
so, however, they must take into account the terms and conditions under which the
programming is made available to them by the large companies that own most of the
popular cable networks. Often, there is no conflict; the profits of both the MSO and
the large programming company are maximized by the same choice of tier for a
particular cable network. But sometimes the large programming companies want the
MSOs to place certain of their cable networks in tiers that would not maximize the
MSOs’ profits, resulting in difficult negotiations or even an impasse. For example,
there have been a number of recent incidents in which the large media companies
attempted to require MSOs to offer their high-priced sports cable networks as part
of an enhanced basic package, but the MSOs resisted because only a small portion
of their enhanced basic subscribers sought that programming. The MSOs feared the
63 “Estimated Annual U.S. Advertising Expenditures 2001-2002,” Trends in Advertising
Volume, Television Bureau of Advertising,
[http://www.tvb/rcentral/mediatrack/trends.asp?c=2001-2002, viewed on 6/20/03].
64 Local cable systems are required to have a basic offering that includes the local
broadcast channels and PEG channels. See “Consumer Options for Selecting Cable
Channels and the Tier Buy-Through Prohibition,” Federal Communications Commission
Fact Sheet, February 2003, at p. 1.
high price of the sports programming would require them to raise the package rate
for all their enhanced basic subscribers. They preferred placing these sports networks
in a separate premium package.65
Given the popularity of broadcast television network programming (see Table 2)
and local news programming, local cable systems almost always want to carry the
signals of the local affiliates of the four major networks.66 To obtain this “must
have” programming, they must negotiate a retransmission consent agreement with
the local broadcast station. In recent years, some local broadcast stations have come
under the same ownership as many cable networks (the parents companies of each
broadcast television network also own local television stations and cable networks),
and in their negotiations with local cable systems frequently have required those
systems to carry all of their cable networks in order to get permission to carry their
local broadcast signals.67
At the other extreme, especially in markets with many local broadcast stations,
some of the small independent broadcast stations may not have large audience shares
and the local cable systems may not want to carry those stations. But since more than
65 percent of TV households receive their local broadcast signals via cable, and
therefore are unlikely to have antennas or other equipment needed to receive
broadcast signals over the air, if these independent stations are not carried on the
local cable system they will have a very difficult time reaching any audience.
Congress therefore has imposed a “must carry” obligation on local cable systems,
requiring them to carry the signals of all local stations who make their signals
available without a charge.68
Although most local cable (and satellite) systems now have capacity to carry 80
or more networks, with more than 300 existing cable networks it is becoming
increasingly difficult for new networks to get onto systems. As start-ups in a
business with high up-front production costs, they face even more directly than
existing networks the need to get onto as many local cable systems as possible, as
quickly as possible. One strategy that new networks have used is to offer their
programming to MSOs and local cable systems without charging any per subscriber
license fee — or even paying the cable systems to carry their programming. This
limits the cable networks’ revenues to advertising revenues, and unless they are
carried by many local systems they cannot command very much in terms of
advertising rates. As a result, start-up networks have increasingly been forced to
65 See, e.g., the testimony of Charles F. Dolan, Chairman of Cablevision Systems
Corporation, before the Senate Commerce Committee on May 6, 2003.
66 In fact, the primary market impediments to satellite television are the capacity constraints
on the ability of the satellite systems to carry local broadcast signals and the costs associated
with making those signals available to subscribers.
67 The policy issues surrounding retransmission consent are discussed in CRS Report
68 Section 614(b)(4)(B) of the 1996 Telecommunications Act, which was adopted as part
of a larger must carry/retransmission consent scheme set forth in the Cable Television
Consumer Protection and Competition Act of 1992. Pub. L. No. 102-385, 106 Stat. 1460,
codified at 47 U.S.C. § 521 et seq.
follow one of two strategies. Some new cable networks have agreed to give the
major MSOs — especially Comcast and AOL Time Warner — substantial equity
interests in their networks in exchange for being carried on their systems.69
Alternatively, some new cable networks have agreed to give “mega-programmers”
such as Viacom, Discovery Networks, or Disney, substantial equity interests in their
networks in exchange for becoming part of those companies’ line of cable channels,
taking advantage of those larger entities’ ability to negotiate carriage with the MSOs.
Data on cable network television household penetration from 1994 through 200170
show that the only new networks able to gain rapid and high levels of household
penetration during that period were owned in whole or in part by one of the major
program distributors or MSOs.
As the number of channels on cable and satellite systems grows, there is a rising
need for cable networks to develop signature programming — shows that viewers
identify with a particular channel. This is especially true for premium cable
networks. Examples include The Sopranos, Sex and the City, and Six Feet Under on
HBO, Larry King Live on CNN, and South Park on Comedy Central. Cable network
also are increasingly investing in original “one-time” programming, such as major-
league sports events and made-for-television movies. However, reruns of shows that
originally aired on broadcast networks are still being prominently scheduled on cable
channels. Theatrical films typically become available on one or more of the pay
networks about a year after they debut in theaters, after the video rental demand has
Direct broadcast satellite (DBS) is the fastest growing retail pipeline of
programming for end user customers, as shown in Table 1. For many customers
located in rural areas in which cable service is not economically feasible, satellite
represents the only viable means of multi-channel distribution — and in some
locations where broadcast signals are extremely weak, it represents the only access
to high quality television reception. Since it is a new technology, without an
embedded base of customers with old customer-premises equipment, it faces fewer
hurdles to implementation of digital television programming.
Satellite television’s primary market weakness had been its inability to offer local
broadcast signals. This was largely alleviated when Congress passed the Satellite
Home Viewer Improvement Act of 1999, which gave satellite companies the option
of providing a local broadcast station’s signals to subscribers living in the station’s
local market area. This is known as local-into-local service.71 Today, the two major
69 See, e.g.,R. Thomas Umstead, “Indie Nets Face Barren Landscape: New Programming
Ventures Find It’s Hard to Stake a Digital Claim Without Corporate Ties,” Multichannel
News, 6/9/2003. “Operators are seeking steep ownership stakes in new programming
services in return for carriage.”
70 “Cable Network TV Household Penetration,” Kagan World Media, Economics of Basic
Cable Networks 2003, September 2002, at pp. 36-37.
71 Under SHVIA, if the satellite company decides that it will not provide the local
broadcast station signals to subscribers in a geographic area, the consumers still may receive
local broadcast station signals by using an antenna or basic cable service. But subscribers
DBS services offer local-into-local service to most customers, though at an additional
charge to cover the associated costs. Frequently the satellite systems offer an
enhanced basic package with digital quality service plus local-into-local service for
a combined price that is no higher than the competitor cable system’s enhanced basic
service (which includes local broadcast signals but is only analog service) — but the
consumer sees a separate price tag on local-into-local service. To the extent that
consumers perceive the additional charge for local-into-local service as an extra
charge they do not have to pay with cable service, satellite systems have an incentive
to be able to offer local-into-local service to all customers so they can market a single
package price that includes local service for all subscribers. In some (mostly rural)
locations, however, satellite companies still cannot offer local broadcast signals
because of a lack of satellite capacity.
But satellite systems do not face certain government-imposed requirements that
cable systems do. Cable systems must pay franchise fees to the localities in which
they operate, which they typically recover through a separate franchise charge on
subscribers’ bills; satellite systems face no franchise fees. Also, as discussed earlier,
cable companies are required to make some of their channels available for public,
educational, and governmental (PEG) access programming; satellite systems are not.
Under most cable franchise agreements, the cable system also must provide or help
finance the equipment needed by the locality to provide such PEG programming.
Typically, satellite systems are not able to offer the PEG channels. Although those
channels do not attract large audiences, there are some viewers who value those
access channels highly and therefore will not subscribe to satellite service.
Theatrical Movies, Video Cassettes, and DVDs
Movies today are typically made under contract between a major distributor, a
production company, and a collection of free-lance talent. With a major theatrical
film, a distributor typically funds a movie from start to finish or provides a portion
of the financing in return for fees and a share of the proceeds. In some cases, a
producer grants theatrical distribution rights to another. In most cases (and
particularly for major films), the company handling the film’s theatrical release also
owns its distribution rights in the home video market. After arranging to have videos
manufactured, the distributor typically sells them to video retailers. It may also
distribute them through a revenue-sharing agreement, through which the distributor
and retailer share consumers’ rental fees for a video title.
Movie production costs vary widely. According to the Motion Picture
Association of America,72 in 2002 the average “negative costs” (i.e., production
costs, studio overhead, and capitalized interest) of “major” theatrical films financed
by major distributors were $58.8 million, and the average costs of advertising and
who cannot receive an over-the-air signal of Grade B intensity using a conventional,
stationary rooftop antenna are eligible to receive distant broadcast television signals
rebroadcast by the satellite system.
72 “U.S. Entertainment Industry: 2002 MPA Market Statistics,” Motion Picture Association
Worldwide Market Research, at pp. 17-20.
duplication (making multiple copies for theaters) were $31.0 million per film.73 The
distribution company typically pays these costs. Creative talent involved in a movie
may be contractually entitled to a portion of the film’s revenues or profits.
In recent years, the movie releases of six film distribution companies — Disney
(including Miramax), Viacom (Paramount), Sony, Fox (majority-owned by News
Corp.), AOL Time Warner (including New Line), and Universal Studios — typically
have accounted for at least 70 percent of domestic box office revenues.74 The only
significant new entrant in the past decade has been DreamWorks SKG.
Although movie theater revenues continue to grow, for many films movie theater
ticket sales are no longer the principal source of revenue. Today, profitability often
depends heavily on contributions from various home video and television markets.
According to Standard & Poor’s,75 for distribution of filmed entertainment, revenues
from selling videos and from licensing films to television outlets in the U.S. likely
exceeded $10 billion in 2002, compared with the approximately $4 billion received
as their share of movie theater ticket sales. Standard & Poor’s estimates that, on
average, 20 percent of distributors’ total revenues from new movies are derived from
domestic theater rentals, another 20 percent from foreign theaters, 40 percent from
domestic and international home video, and the remainder primarily from
New movies are typically released on tape and disc about four to six months after
their theatrical debut. Some movies are not shown in theaters but reach consumers
immediately through video/DVD release.
Ancillary Market Players
In addition to the three functional industry segments, there are several very
important ancillary participants in the market:
Advertisers. Since broadcast television programming is almost entirely
supported by advertising, and cable and satellite providers also receive significant
advertising revenues, advertisers are major players in the market. Standard & Poor’s
projected $61 billion in video industry revenues from advertisers in 2002.77 In the
recent “upfront” market, in which broadcast, cable, and syndication interests pre-sell
advertising for the 2003-2004 programming season, broadcast television networks
73 The average negative costs for films made by the subsidiaries of the major studios —
including studio “classics” divisions such as Sony Pictures Classics, FOX Searchlight, New
Line, and Miramax — were $34.0 million in 2002 and the average affiliate marketing costs
were $11.2 million.
74 Tom Graves, “Movies & Home Entertainment,” Standard & Poor’s Industry Surveys,
November 14, 2002, at p. 7.
75 Id., at p. 15.
76 Id., at p. 16.
77 Tom Graves, “Movies & Home Entertainment,” Standard & Poor’s Industry Surveys,
November 14, 2002, at p. 7.
booked $13.1 billion in advertising, cable networks booked $5.7 billion, and program
syndicators booked $2.3 billion (representing double-digit growth).78
The consolidation of broadcast television station ownership is also leading to
consolidation in the advertising industry. According to one industry observer:79
Thirty years ago, 27 different companies repped 650 television stations across the
country, selling their local time to national and regional advertisers. Today, just
three companies, with a total of eight TV rep divisions, serve 892 stations
What led to so few serving so many? Deregulation, consolidation of station ownership
and raw competition.
The rep business was affected by two big rounds of station consolidation, which
followed the relaxation of FCC ownership rules. The first came in the mid-1980’s and
the second after the passage of the Telecommunications Act of 1996.
International. The United States is a major exporter of video programming.
Standard & Poor’s estimates that, on average 20 percent of U.S. movie distributors’
total revenues from new movies are derived from foreign theaters and another
significant portion of revenues are derived from foreign sales and rentals of video
cassettes and DVDs.80 The Motion Picture Association of America estimates
international sales are even more important. According to MPAA,81 in 2002,
revenues generated outside the U.S. accounted for 42.6 percent of U.S. companies’
total theatrical film revenues; 36.6 percent of total television revenues; 55 percent of
total pay-tv revenues; and 38.7 percent of total home video revenues. One of the
major constraints on the latter is the difficulty in policing pirating of videos.
This report has provided an overview of the fundamental changes in the structure
of the video programming industry that have occurred over the past 15 years. It
described both the new options available to viewers thanks to technological changes
and the vertical and horizontal consolidation that has given a few big media players
control over a large portion of both video programming and video distribution. CRS
Report RL32026 explains how and why underlying market forces and government
actions have created strong pressure for vertical and horizontal integration and how
such market consolidation could be used to benefit or harm consumers. It also
identifies public policy issues that may arise as a result of the consolidation.
78 “It’s Way Upfront,” Broadcasting & Cable, June 2, 2003, p. 1.
79 Jean Bergantini Grillo, “Reps Brace For More Station Consolidation,” Broadcasting &
Cable, 3.31.03, at pp. 16-17.
80 Tom Graves, “Movies & Home Entertainment,” Standard & Poor’s Industry Surveys,
November 14, 2002, at p. 16.
81 Motion Picture Association of America, “Estimated Worldwide Revenues by Media for
All U.S. Companies, MPAA WorldWide Market Research.