SIC 4841 Cable and Other Pay Television Services

 
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SIC 4841

This industry covers establishments primarily engaged in the dissemination of visual and textual television programs on a subscription or fee basis. Included in this industry are establishments that are primarily engaged in cable casting and that also produce taped program materials. Separate establishments primarily engaged in producing taped television or motion picture program materials are classified in SIC 7812: Motion Picture and Video Tape Production.

NAICS CODE(S)

513210

Cable Networks

513220

Cable and Other Program Distribution

INDUSTRY SNAPSHOT

The cable television industry was developed in the United States in the late 1940s to serve small communities unable to receive conventional television signals due to difficult terrain or physical distance from television stations. Cable also provided improved television reception to remote areas. The original systems were centered around a collective antenna for regions with poor or nonexistent reception. Cable systems located their antennas in areas where reception was good, picked up broadcast signals, and then relayed them by cable to subscribers for a fee. In 1950 cable systems operated in only seventy communities and served 14,000 subscribers.

By 1995 there were approximately 11,800 cable systems with 62 million subscribers (65.3 percent of all television households) in the United States. The average cable system provided thirty or more channels, as well as other services such as custom programming and pay-per-view options. The average monthly fee for a cable subscription was $23.00.

By late 2002, total subscriber counts amounted to approximately 73.5 million, a household penetration rate of nearly 69 percent. Through digital compression, cable operators gained the ability to offer more than 100 channels. Between 1995 and 1999, cable fees rose faster than the rate of inflation. Even though there are thousands of cable operators, the industry has been dominated by the top twenty-five companies, which in 2001 accounted for more than 98 percent of U.S. subscribers, up from about 90 percent in 1999. Following passage of the Telecommunications Act of 1996, which removed several regulations regarding ownership, the industry experienced increased merger and acquisition activity that is likely to continue. This activity resulted in further consolidation within the cable industry.

During the late 1990s and early 2000s, satellite television services made their presence felt in the pay television industry by providing an alternative to increasingly expensive cable service. Providers dramatically reduced setup costs and eventually offered free equipment and installation to consumers who agreed to annual service contracts. Viewers received many more channels for a monthly fee that rivaled cable rates. The biggest drawback to satellite television was its inability to carry local broadcast channels, but this limitation was removed by federal legislation toward the end of 1999. Satellite services claimed only 4 percent of the market in 1996. The fastest growing segment of the satellite service industry was direct broadcast satellite (DBS), which grew from 2.3 million subscribers in 1995 to 8.2 million subscribers in 1998. By 2001 this total had mushroomed to 17.4 million, and subscriber ranks were expected to reach nearly 20.0 million in 2002.

ORGANIZATION AND STRUCTURE

Traditional underground cable lines are just one of several methods used to transmit video signals from the broadcaster to the home. Pay television companies must decide which transmission method or combination of methods is the most effective in serving their customers. Overall, there are four basic ways to broadcast a video signal:

Terrestrial: a transmission tower on the ground sends a picture directly to a television aerial. This is easy to install but reception is often poor and only a few channels can be carried. This is the method traditionally used to broadcast network channels.

Coaxial or fiber-optic cable: TV signals travel through an underground cable. Installation is time-consuming and expensive. Cable is used primarily in densely populated urban areas.

Microwave, multichannel: a multipoint distribution system (MMDS) carries signals from a television studio to a microwave transmitter, which then relays them to rooftop receivers on apartment blocks. These receivers are relatively small dishes that are easy to install and maintain. Microwave transmission is a low-cost alternative to cabling and is feasible in areas where there are large distances between transmitting stations and subscribers (e.g., South America).

Satellite: a broadcaster uplinks a signal to a transponder on a satellite, which retransmits either to home dishes or to a satellite master dish (SMATV) located on the roof of a high-rise block. Satellite transmission is common in remote rural areas. Subscribers pay hookup and access fees to the satellite owners.

Cable television operators rely primarily on four revenue streams: advertising, installation services, basic cable subscriptions, and premium channel subscriptions. In 2002 the industry earned $49.4 billion in subscriber revenues and $14.7 billion in advertising revenues. Cable operators were expected to enjoy a trend of increasing subscription and advertising revenues in the foreseeable future.

Cable Regulation

The domestic cable industry is highly regulated by the U.S. government. Regulations affect cable system ownership, rate structures, channel limits, types of programming, and permission to access programming. This involvement is due to the high fixed investment in installation, the fact that the industry lends itself to being a natural monopoly with limited competition, and the sensitive nature and importance to national security of communications technology.

Ownership in the cable television industry is fragmented because of the regulatory environment in which companies compete. The Federal Communications Commission (FCC), the government agency empowered to regulate cable TV companies, has given municipalities the authority to grant cable licensing contracts on a geographic basis. Municipalities generally bid out these contracts and then grant exclusive franchise rights to provide service in a given area in return for a commission of 3 to 5 percent of revenues.

In 1986 the FCC decided to allow cable companies to freely set monthly service rates and rate increases in any market that already provided at least three over-the-air broadcast signals to nonsubscribers. Prior to 1986, cable companies were limited to a mandated 5 percent cap on annual rate increases. Re-regulation was proposed in 1992 because various groups claimed that the cable industry abused its privilege to set monthly rates by gouging consumers. Congress, under pressure from consumer groups, haggled with President George Bush, who was against reregulation. After a failed attempt by the FCC to control the situation by redefining some rules, Congress overrode the president's veto and passed the controversial Cable Television Consumer Protection and Competition Act of 1992. This bill reversed cable companies' freedom to set rates. However, local governments were given the power to regulate rates for basic cable programming in their areas.

The act also contained programming regulations. Programming could no longer be denied to competitors and had to be offered at "fair terms." The bill required cable companies to pay royalties to over-the-air broadcasters. Networks have complained for years that cable companies were in essence charging subscribers for network-developed programming that was free to them and pocketing a subscriber fee. One other provision of this bill limited the size of multiple-system operators and the number of channels a system could devote to programming in which it had an interest.

New technologies have prompted cable companies to team with telecommunication companies in order to provide interactive services to subscribers. In August 1992 the FCC permitted Tele-Communications Inc. (TCI) and Cox Enterprises to buy Teleport Communications Group, a company that connects long distance carriers and provides large corporations with private fiber-optic communications networks. This ruling opened the door by allowing cable companies to enter the telecommunications business and vice versa.

Telephone companies were slow to react to this decision, primarily due to regulatory concerns. Not until February 1993, when Southwestern Bell Corp. announced that it agreed to purchase two cable TV systems in the Washington, D.C. area, did a telephone company move into traditional cable markets. This action led other telephone companies to search for cable acquisitions.

A regulation implemented in June 1992 allowed the television networks to buy local cable TV systems. However, a TV network's cable holdings could not exceed 10 percent of the nation's...

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