The Telecommunications Act of 1996  also took steps to allow telephone and electric companies to enter the  subscription television market. Unlike local telephone and cable television companies, which are  adapting their existing networks to provide additional services, and other  entrants that focus on providing service in one communications market,  broadband service providers focus on a core business strategy of building a  new fiber-optic network over which they can provide local telephone,  subscription television, and high-speed Internet services. Additionally, a common goal is to have most of their subscribers  purchase more than one of the three offered services. Consumers Benefited from Lower Prices for Telecommunications Services in the 6 Markets With BSPs That We Reviewed

Rates were generally lower for the subscription television, high-speed  Internet, and local telephone services in the 6 markets we examined with a  BSP present than in the 6 markets that did not have BSP competition. The extent to which  rates were lower for one local phone line in BSP markets compared to their  matched market varied considerably:  rates were 4 to 33 percent lower in 5  of the 6 markets with a BSP we reviewed, and the rates for local telephone  service were the same in 1 of the matched-pair markets we reviewed. All 6 of the BSPs we interviewed mentioned the size of the market as a key  factor that they considered in market selection. Four of the 6 BSPs we spoke with stated that the average household  income in a market was a key criterion in their decisions about what  markets to enter. Five of the 6 case study markets that do not have a BSP competitor had  companies express interest in entering their cities, but, according to local  government officials, these companies decided not to enter for several  reasons. BSPs we interviewed said that certain factors, such  as difficulty in gaining access to certain programming, can create obstacles  to their ability to compete effectively. BSPs May Have Underestimated the Level of Competition in Telecommunications Markets

One of the most significant factors that may hinder the BSP’s marketing  success is that the communications markets BSPs seek to serve may be  more competitive today than these providers envisioned when they first  developed their plans. None of the 6 BSPs we studied are aggressively  expanding their operations. The FCC provided technical comments that we  incorporated. Industry Association Comments and Our Evaluation

We also invited representatives from the Broadband Service Provider  Association (BSPA), the National Association of Telecommunications  Officers and Advisors (NATOA), the National Cable & Telecommunications  Association (NCTA), and the United States Telecom Association (USTA) to  review and comment on a draft of this report. The USTA did not provide  any comments. However, as  stated in the report, our BSP sample represents more than 20 percent of  the households nationwide that are in areas where BSPs currently offer  the three-service package. In particular, this report provides information on (1)  BSPs’ business strategy; (2) the impact of BSPs’ market entry on incumbent  cable and telephone companies’ market behavior and consumer prices of  subscription television, high-speed Internet, and local telephone services;  (3) the key factors BSPs consider when making decisions about which  local markets to enter; and (4) the success of BSPs in attaining  subscribership and any key factors that may limit their success. However, because we used a case-study method, our results are not  generalizable to all markets with such providers.
Why GAO Did This Study

One of the primary purposes of the Telecommunications Act of 1996 was to promote competition in telecommunication markets, but wire-based competition has not developed as fully as expected. However, a new kind of entrant, called broadband service providers (BSP), offers an alternative wire- based option for local telephone, subscription television, and high- speed Internet services to consumers in the markets they have chosen to enter. This report provides information on (1) BSPs' business strategy, (2) the impact of BSPs' market entry on incumbent companies' behavior and consumer prices for telecommunications services, (3) the key factors that BSPs consider when making decisions about which local markets to enter, and (4) the success of BSPs in attaining subscribership and any key factors that may limit their success. We developed a case-study approach to compare 6 cities where a BSP has been operating for at least 1 year with 6 similar cities that do not have such a competitor. The 6 markets with a BSP presently account for more than 20 percent of the households nationwide that are in areas where BSPs currently offer the three-service package, but the results of these case studies are not generalizable to all markets.

What GAO Found

BSPs' primary business strategy is to build a fiber-optic network to provide consumers with a bundle of services, including subscription television, high-speed Internet access, and local telephone. To entice consumers to purchase more than one service of the three services they offer--a key marketing goal--all of the BSPs we reviewed offer substantial savings to consumers who buy more than one service. The rates for telecommunications services were generally lower in the 6 markets with BSPs than in the 6 markets without a BSP. For example, expanded basic cable television rates were 15 to 41 percent lower in 5 of the 6 markets with a BSP when compared with their matched market. The 6 BSPs we interviewed said that demographic factors, such as city size, income, and computer use were important factors in their decision to enter a market. For example, most of the BSPs avoided entering large cities. Location of the markets to key facilities and receptivity of local government officials were also considered when deciding which markets to enter. The 6 BSPs we interviewed have gained significant market shares for the services they provide, but they have also faced a number of obstacles that may be hindering their success. For example, the BSPs we spoke with are experiencing some financial difficulties and are putting off network expansion. Two of these companies also currently lack the resources necessary to adequately market their services within their existing markets. We provided a draft of this report to the FCC and DOJ. The DOJ did not provide any comments, and FCC provided technical comments that we incorporated. We invited the Broadband Service Provider Association, the National Association of Telecommunications Officers and Administrators, the National Cable & Telecommunications Association (NCTA), and the United States Telecom Association to comment on a draft of this report. We summarize and discuss NCTA's detailed comments in the report.