In the United States, the cable television industry eclipsed broadcasting’s asset and revenue values in the late 1980s and passed broadcast TV’s prime-time-viewer market-share levels in 2002. Now the dominant multichannel provider in the United States, cable television has contributed to a substantial drop in broadcast network viewing. From 1983 to 1994, weekly broadcast audience shares dropped from 69 to 52 while basic-cable networks’ shares rose from 9 to 26, according to ACNielsen in 1995. By 2003, cable programming attracted an average prime-time audience share of 56.5 and a total day share of 58.3 as it continued to erode the networks’ hold on television viewing.

Cable television service is available to 97 percent of all television households in the United States, and about 65.3 percent of all television households (68.8 million) subscribed to it as of the end of 2002, according to FCC data. More than 36 million households subscribe to premium cable services on top of their basic subscriptions. FCC statistics indicate that average cable system capacity was 666 megahertz as of July 2001, and two-thirds had facilities for 750 megahertz or above. This translates, approximately, into more than 80 channels delivered in a mix of analog and digital signals. Even with this number of channels, however, broadcast fare carried over cable is still heavily viewed.

Cable service comprises a collection of several industries. Primary among them are the distributors of video product, which are called either “operators” or, sometimes, “multiple system operators” (MSOs). Cable operators establish and own the physical system that delivers television signals to homes using coaxial cable or optical fiber. Operators also have become Internet service providers (ISPs), offering cable-modem connections to the Internet. Programming services produce or compile programming and sell their services to cable as well as to direct broadcast satellite (DBS) and other multiple video program distributors. Other entities and institutions connected to the cable industry include investors underwriting distribution or production efforts, the creative community, and loosely coupled groups such as advertisers, local community access groups and producers, recording companies, equipment suppliers, satellite and terrestrial microwave relay companies, Internet companies, software companies designing interactive interfaces, and telephone companies (telcos).

Cable television service relies on three fundamental operations. The first is signal reception, using satellite, broadcast, microwave, and other receivers, at a “head end,” where signals are processed and combined. Second, signals are distributed from that head end to the home, using coaxial cable or optical fiber (or a blend of the two) or microwave relays, abetted by amplifiers and other electronic devices that ensure signal quality. Third, components at or near the home are necessary, including converters (now generally already in television sets) that change cable signals into tunable television images; descramblers that decode encrypted programming; modems to allow computers to communicate with the cable network; and still other equipment that allows for delivery or control of services on demand through a process called “addressability.” Cable television’s traditional tree-and-branch-system network design typifies one-way delivery services, although in the late 1990s system modifications, particularly the installation of more optical fiber throughout the network and intelligent devices at the head end, began to support two-way delivery services such as broadband Internet connections and digital video, including video-on-demand (VOD) programming. Cable television’s huge and always-growing channel capacity, or bandwidth, enables it to support a variety of programming services and leaves it favorably positioned to expand into other service areas, such as high-definition television (HDTV), compressed video, pay-per-view channels, Internet-based content, and even telephony.

Programming on cable television began with retransmitted broadcast fare but evolved to include services unique to cable, some targeted at specialized audience groups such as children, teenagers, women, or specific ethnic groups, and some providing only one type of programming, such as weather, news, or sports. Such “narrowcast” programming appeals to specific demographic groups, rather than to broadcast television’s wide audience. Therefore, it attracts advertisers who require more targeted approaches.

Traditionally, cable operators have organized their programming into “tiers,” with different subscriber charges accruing at different levels. The least expensive option is “basic tier,” which includes retransmitted broadcast channels and public access channels. Moving up the price ladder, next comes special cable-only packages of channels, often called “expanded basic.” On a more expensive tier are single-channel premium services such as HBO, Showtime, Cinemax, or Playboy, with separate fees for each premium service. Digital video and VOD programming occupy still another tier, one that requires that the household subscribe to digital services. As of 2002, some VOD services, such as reruns of older HBO movies, were available for a small monthly fee (about $5), while contemporary movies could be available for one-off charges that rival those of video rental firms.

Since the early 1970s, cable television’s surplus of channel space and low costs have helped to spawn several new formats, including infomercials, 24-hour news and weather services, music video services, home shopping channels, arts channels, children’s channels, and a host of other narrowly targeted programming. Federal regulations of the 1970s that required cable operators to support community access channels dedicated to public, educational, and governmental programming likewise led in many cases to distinctive public service programming, even if that requirement has since lapsed. (As of 2002, only about 15 percent of cable systems carry public, educational or government access programming.) Upgrading to a digital plant has enabled systems to offer VOD and Internet connectivity.

Cable systems must lay cable in the ground or string it along telephone or electric poles; therefore, they must negotiate for the use of poles and rights-of-way. This is the crux of cable television’s dependence on municipalities, since many states, cities, and towns control their own rights-of-way and sometimes also own the utility poles used by cable companies. Cable operators must negotiate franchises with municipalities that entitle them to use rights-of-way in exchange for fees (capped at 5 percent of revenues). A conventional franchise lasts 15 years. Because it uses public rights-of-way and deploys a capital-intensive network, conveys but does not create content, and bills subscribers on a monthly basis, cable television’s utility-like aspects initially encouraged communities to treat it as they do other utilities. Generally, only one cable company would be franchised in a single municipality, effectively rendering that company a monopoly. Thus, rates charged to subscribers (and sometimes even companies’ rates of return) were regulated by cities in the industry’s early years, a practice largely eliminated by this point in time. One source of long-standing friction between cities and cable companies concerns which specific services a municipality may expect a cable operator to provide (e.g., specialized channels for public, educational, or government access or numbers of ISPs linked to the cable network), or the service base on which franchise fees are calculated. These controversies are attributable, in part, to cable television’s common-carrier or utility characteristics, as well as the community’s expectation that monopoly-like services require some regulation.

Cable television, like home video, taps viewers’ willingness to pay directly for programs, a source of revenue untouched by traditional broadcasters. Subscribers pay a monthly fee for programming to the operators, and the operators in turn pay programming networks, such as ESPN or MTV, for the right to use their services. The price of the programming depends on the specific programming (for example, ESPN is usually more expensive than the Discovery Channel) and the size (subscribership) of the MSO or operator, although the very largest MSOs take advantage of their economies of scale to obtain smaller unit prices on programming. Most basic programming services carry advertisements and also allow local cable operators to insert ads (called “ad avails”) during designated programming segments. Advertising revenues, both national and local, were initially slow to develop for cable programming services, as advertisers waited for significant subscriber levels and solid ratings data that could indicate viewer levels. Over time, however, ad revenues grew steadily, and commercials have proved to be an important part of programming services’ revenues. Premium services such as HBO, Showtime, and the Disney Channel eschew ads and instead rely on higher, separate subscription fees assessed to subscribers. Cable-modem services likewise are assessed as separate fees.

Cable television’s development was very dependent on the regulatory treatment and economic models developed for predecessor systems of telephony and broadcasting. As a hybrid communications system unanticipated in the Communications Act of 1934, cable television challenged regulators’ conceptions of what it should be, how it should operate in a landscape already dominated by broadcasters, and how it might take advantage of its delivery system and capacity. The consequences of this uncertainty included some dramatic shifts in ideas of cable obligations to the public and to the communities it serves, and in the scope of cable television’s First Amendment rights.

The Four Phases of Cable’s Development

Since its origins, cable television in the United States has passed through four distinct phases. The first, from cable television’s inception through 1965, was a slow-growth period predating any major regulatory efforts. During the second phase, from 1965 to roughly 1975, the FCC attempted to restrict cable television to non-urban markets and to mold it into a local media service. In the third phase, from 1975 to 1992, a series of judicial, legislative, and regulatory acts, including the Cable Communications Policy Act of 1984, catalyzed cable television’s expansion across the United States and promoted dozens of new satellite-delivered programming services. In the fourth phase, signaled by the Telecommunications Act of 1996, most communication industries were deregulated. New competitors to cable television appeared in the form of multichannel multipoint distribution services (MMDSs), direct broadcasting satellites, new telephone company ventures into video media, and Internet-based video content. Many of the companies behind those separate services merged. Cable television infrastructure from the 1990s and into the next decade moved toward higher-capacity, fiber networks that could transmit digital signals and offer subscribers interactive services. As cable television has entered an environment in which many different delivery systems can duplicate its services, its unique identity has begun to fade. Now, very large telephone/cable/Internet/entertainment conglomerates undertake digital programming and transmission that combine voice, video, and data.

Phase One: Rural Roots and Slow Growth

Although cable television systems are now present in many regions of the globe, they began in the rural areas of North America. A product of both the ge graphic inaccessibility of terrestrial broadcast signals and a television-spectrum allocation scheme that favored urban markets, cable systems, also called “community antenna television” (CATV), grew out of simple amateur ingenuity. Retransmission apparatuses—such as extremely high antenna towers or microwave repeater stations, often erected by television repair shops or citizens groups—intercepted over-the-air signals and delivered them to households that could not receive them using regular VHF or UHF antennas. The earliest cable television systems, established in 1948, are usually credited to Astoria, Oregon, or Mahoney City, Pennsylvania, both mountainous, rural communities. Such retransmission systems spread across remote and rural parts of the United States throughout the 1950s and 1960s. According to Television Factbook 1980–81, there were 640 systems with 650,000 subscribers in 1960. By 1970 those numbers had grown to 2,490 systems with 4.5 million subscribers. The systems were generally mom-and-pop operations with 12 channels at best, although the MSO form of cable system ownership, in which one company owned several cable-distribution systems in different communities, already was spreading under the impetus of certain visionary entrepreneurs such as Bill Daniels, Monty Rifkin, Glenn Jones, and John Malone.

When cable systems began importing signals from more distant stations using microwave links, broadcasters’ objections to the new service escalated. Many broadcasters had never been happy with cable service, claiming that such systems “siphoned” their programming, since cable operators had no copyright liability and therefore never paid for the programming. In 1956 broadcasters petitioned the FCC to generate a policy regarding cable television. The commission initially declined; it did not possess clear regulatory authority over CATV (originally “community antenna television,” now often “community access television,” but more commonly, refers to cable television) because the technology did not use the airwaves. The agency reconsidered, however, and finally asserted jurisdiction over cable television in 1962 in the Carter Mountain Transmission Corporation v. FCC case. The FCC’s rationale for regulating CATV focused on cable’s impact on broadcasters: to the extent that cable television’s development proved injurious to broadcasting (an industry the FCC was obligated to sustain and promote), cable television required regulation. While this justification sustained the FCC’s position throughout the second phase of cable television’s development, it later crumbled under judicial scrutiny.

Phase Two: Restricted Expansion and Localism, 1965–75

While the Carter Mountain case addressed only the microwave and hence over-the-air portion of CATV service, the FCC eventually extended its authority to all aspects of cable television, and it issued two major policy statements: the “First Cable Television Report and Order” (1965) and the “Second Cable Television Report and Order” (1966). In these orders the FCC, hoping to prevent any deleterious effects on broadcasting, required cable operators to carry local broadcast signals under “must-carry” rules. With its ruling on “nonduplication,” the commission required cable companies to limit imported programming that duplicated anything on local broadcast. By placing ownership prohibitions or limitations on television and telephone companies and by preventing cable television from entering the top 100 markets, a set of 1969 rules deliberately kept cable television from growing toward urban markets or from attaining the capital or benefits of entrenched industries. Federal programming mandates instituted channels for local public access and created a prohibition on showing movies less than ten years old and sporting events that had been on broadcast television within the previous five years. These rules were intended to promote cable’s local identity and prevent it from obtaining programming that might interest or compete with broadcasters.

Although cable operators continued to press for limitations on the FCC’s ability to impose such program obligations, the courts rebuffed their claims. For example, when Midwest Video Corporation challenged the FCC’s requirement that the company originate local programming, the U.S. Supreme Court found in 1972 that such a rule was “reasonably ancillary” to the FCC’s broadcasting jurisdiction (U.S. v. Midwest Video Corp.).

The net effect severely constrained the programming options for cable television operators, and in particular it diminished opportunities for a pay television service that would show movies or sports. During the 1960s, the FCC conceived of cable television as an alternative to broadcasting and promulgated the must-carry, nonduplication, and other rules; with such moves, the commission aimed to enhance cable television’s community presence and possibilities and at the same time protect broadcasters from competition from the new delivery system. The agency positioned cable television as a hybrid common-carrier–broadcasting service, one limited to mandatory channels (the must-carry rules, local access channels, constrained nonlocal programming) with regulated rates. Such regulations fettered opportunities for networking, for national distribution, and for direct competition with broadcasters.

By the late 1960s and early 1970s, more public interest in cable television—fueled by a coalition of community groups, educators, cable industry representatives, and think tanks such as the Rand Corporation—heralded cable television’s potential for creating a wide variety of social, educational, political, and entertainment services beneficial to society. These constituencies objected to the FCC’s policies because they seemed to inhibit the promise of the “new technology.” Ralph Lee Smith’s 1972 book Wired Nation presented scenarios of revolutionary possibilities cable television could offer if only it were regulated in a more visionary fashion, particularly one that supported developing the two-way capabilities of cable and moving it toward more participatory applications.

In 1970 and 1971, the White House’s Office of Telecommunication Policy spearheaded a series of meetings among cable, programming, and broadcast companies that culminated in the FCC revising its cable rules. This 1972 “Cable Television Report and Order” issued new rules softening some of the restrictions on cable television’s expansion to new markets, particularly with respect to importing distant signals (“leapfrogging”). However, it continued several rules and standards that the industry found onerous, such as mandatory two-way cable service in certain markets and local-origination rules requiring operators to generate programs. Still more programming restrictions on movies and sporting events adopted in 1975 chafed at the cable industry’s desires to offer something new and appealing to subscribers.

Phase Three: Deregulation, National Networks, Rapid Development, 1975–92

Nevertheless, in the wake of the 1972 “Report and Order,” cable delivered more than just local broadcast signals to viewers by importing programs from distant markets via microwave, and its attractiveness and profitability grew. Two significant events spurred even more growth in the late 1970s. First, in 1975, HBO became a national service by using a communications satellite to distribute its signal, thereby demonstrating a way to bypass telephone companies’ expensive network-carriage fees (commercial television networks depended on AT&T’s lines for their national transmissions) and offering the possibility for many new program services to cost-effectively form national networks. Second, a series of judicial decisions sanctioned the cable industry’s rights to program as it pleased, to enter the top television markets, and to offer new services. This third phase constituted cable television’s greatest growth period.

As early as 1972, HBO had offered East Coast subscribers event programming, such as sports, on a “pay-cable” basis using a microwave relay, but with satellite feeds it could reach cable operators across the United States. HBO wanted to switch from microwave relays to the new RCA satellite Satcom I, which would take its signal across the entire country once the satellite launched in 1975. There were two major impediments to this plan. First, the FCC required each cable operator to use large, 9-meter dish antennas to receive a satellite feed, and these receiver dishes were expensive. Second, the restrictive FCC programming rules still prevented cable services from acquiring certain types of programming. HBO helped pay for the receiving dishes cable operators needed to receive its signal, and it became Satcom I’s first television customer. Just two years later, 262 systems around the nation had HBO service, yet the best programming (current movies and sporting events) was still off-limits to cable programmers. HBO then took the commission to court, claiming that the FCC had exceeded its jurisdiction in limiting programming options. Supporting HBO’s position in HBO v. FCC, the District of Columbia Court of Appeals concluded that the FCC’s broadcast protectionism was unjustifiable and, perhaps more important, that cable television service resembled newspapers more than broadcasting and consequently deserved greater First Amendment protections. This reasoning paved the way for the cable industry to argue against other government rules, which fell one by one after the strong message sent by the HBO case to the FCC.

Even as the agency stripped away federal syndicated exclusivity rules, reduced the size (and consequently the cost) of allowable satellite dishes, and eliminated remaining distant-signal importation rules, the courts underscored cable television’s rights to expand as it wished and to use any programming it desired. On the heels of the HBO case, the Supreme Court declared in its 1979 FCC v. Midwest Video Corp. decision that the FCC’s rules imposed unacceptable obligations on cable operators. This verdict undermined the earlier Midwest Video decision, as the court concluded that insofar as the commission required cable operators to function as common carriers with the access channels (operators had no control over the content of access channels and they had to carry community programs on a first-come, first-served basis), and insofar as it prescribed a minimum number of channels, the FCC violated cable operators’ First Amendment rights. The industry claimed the court decision affirmed its status as an electronic publisher, and it has continued its fight against regulatory obligations under this banner ever since. The electronic-publisher label underscores cable’s First Amendment protections: like print publishers, cable television selects and packages materials for exhibition, and, like print, it should be under no obligation to exhibit material prescribed by regulatory powers.

With the regulatory barriers to entry now reduced, cable systems experienced huge growth from the late 1970s through the early 1980s: in 1975 there were 3,506 systems serving nearly 10 million subscribers; a decade later, 6,600 systems served nearly 40 million subscribers. Programming services likewise emerged. Ted Turner’s UHF station WTCG, renamed superstation WTBS (and later just TBS), followed HBO’s lead in national satellite delivery in 1976. The Showtime movie service and the sports service Spotlight followed suit in 1978. Two other superstations (local broadcasters delivering signals nationwide), New York’s WOR and Chicago’s WGN, began around the same time. Warner launched the children’s service Nickelodeon and the Movie Channel in 1979, while Getty Oil began the Sports Programming Network (later called ESPN). Turner’s Cable News Network launched in 1980. Other programmers rushed to satellite distribution, so that by 1980 there were 28 national programming services available, according to National Cable Television Association records.

As programmers developed new channels to view, cable operators moved quickly to claim new markets in suburban and urban areas. Their systems finally had something new to offer these urban areas already used to several over-the-air broadcast signals, and cable companies sought to wire the most lucrative areas as soon as possible. MSO owners bought out many independent cable systems, even as they sought new territories to wire. The period of time between roughly 1978 and 1984, often called the “franchise war” era, saw cable companies competing head-to-head with each other in negotiating franchises with communities, often promising very high capacity, two-way cable systems in order to win contracts, only to renege on those promises later. Warner Amex’s QUBE system, a highly publicized but actually very limited two-way cable service that the company promised to develop in many of its markets, was one such casualty, as were security systems, special two-way institutional networks called I-Nets, and a host of other cost-inefficient services, including public access channels. Most large, urban markets were franchised during this time, and several were promised 100-channel systems with two-way capabilities plus extensive local access facilities. Few markets, however, ended up with such amenities. Companies such as Time’s American Television and Communications Corporation; Warner Amex; TelePrompTer; Jones Intercable; Times Mirror; Canada-based Rogers; Cablevision Systems; Cox; United; Viacom; Telecommunications, Inc. (TCI); and other large MSOs garnered many of these franchises. Many such companies have since been purchased by or merged with other media businesses.

Expanded markets and new programming services abetted by favorable judicial decisions contributed to the cable industry’s power to lobby for more favorable treatment in other domains. The industry’s pleas met favorable response within the Reagan administration, and Mark Fowler, the Reagan-appointed chair of the FCC from 1981 to 1987, supported a marketplace approach to media regulation that essentially put cable on a more equal footing with broadcasting.

The Cable Communications Policy Act of 1984 addressed the two issues that still hindered cable television’s growth and profitability: rate regulation and the relative uncertainty surrounding franchise renewals. Largely the result of extensive negotiation and compromise between the National Cable Television Association (the cable industry’s national organization) and the League of Cities representing municipalities franchising cable systems, the act provided substantial insurance regarding the future of the cable industry. Its major provisions created a standard procedure for renewing franchises that gave operators relatively certain renewal, and it deregulated rates so that operators could charge what they wanted for different service tiers as long as there was “effective competition” to the service. This was defined as the presence of three or more over-the-air signals, a standard that more than 90 percent of all cable markets could meet. The act also allowed cities to receive up to 5 percent of the operator’s revenues in an annual franchise fee and made some minor concessions in mandating “leased access” channels to be available to groups desiring to “speak” via cable television. Other portions of the act legalized signal scrambling, required operators to provide lock boxes to subscribers who wanted to keep certain programming from children, and provided subscriber privacy protections. One year after the passage of the Cable Communications Policy Act, must-carry rules were overturned in Quincy Cable TV v. FCC (1985), and the cable industry’s freedom from most obligations and regulatory restraints seemed final.

With rate deregulation and franchise renewal assured, the cable industry’s value soared, and its organization, investments, and strategies changed. MSOs consolidated, purchasing more independent systems or merging, even as they expanded into new franchises, with large MSOs getting even bigger. The growth of TCI, shepherded by John Malone to become the largest MSO for many years, garnered a great deal of criticism. Several systems changed hands as large MSOs sought to “cluster” their systems geographically so they could reap the benefits of economies of scope by having several systems under regional management. After 1984 more finances poured into the industry, since its future seemed assured, and the industry’s appetite for expansion made it a leader in the use of junk bonds and highly leveraged transactions—questionable financial apparatuses that Congress would later scrutinize. Many of the largest companies such as Time (later Time Warner), TCI, and Viacom acquired or invested in programming services, leading to a certain degree of vertical integration. The issues both of size and vertical integration became the subject of congressional inquiries in the late 1980s, but the inquiries resulted only in warnings to the industry. Investments in programming, operators argued, justified higher rates, and after 1984 rates jumped tremendously: according to Government Accounting Office surveys, an average of 25 to 30 percent from 1986 to 1988 alone, a pace far greater than the inflation rate. Subscription charges increased so quickly that a backlash among consumer groups grew. As the industry’s market penetration and control over programming escalated, its growth strategies targeted new markets, predominantly in Europe and Latin America, and also focused on thwarting new domestic competitors such as direct broadcasting satellites, terrestrial point-to-multipoint distribution service (MDS) and its offspring system, called multichannel multipoint distribution service (MMDS).

In this profitable decade, many new programming services were launched and flourished. The 28 national networks in 1980 grew to 79 in 1990. New systems were built, bringing cable television to 60 million television households by 1990; channel capacity expanded, making the 54-channel system common in about 70 percent of all systems. Although pay-service subscriptions leveled off as most U.S. households purchased videocassette recorders (VCRs), and although offerings such as pay-per-view (single programs or events subscribers could order for a premium fee on a onetime basis) did not work well technologically or economically, cable services quietly grew, so that by 1992 they were in more than 60 percent of all U.S. households.

However, several controversies simmered throughout the 1980s. One concerned the rate increases, which many consumers and policymakers felt escalated too rapidly. Another involved rural viewers who wanted to access programming at reasonable prices via their own satellite dishes. After the 1984 act legalized scrambling, such newly scrambled services were unavailable to rural customers, or were only available at what they considered very high prices (higher than those paid in cities), and this situation created an especially heated exchange in Congress and even protests in Washington by satellite dish–carrying vehicles from rural regions. As well, the size and vertical integration of several MSOs worried some policymakers, who contended that the companies had undue opportunities to exercise their power over a captive market. Broadcasters continued their cry for remuneration when cable television carried the three major network channels (ABC, CBS, and NBC): even though most cable subscribers still spent much of their viewing time with network channels, operators paid nothing for that programming. Moreover, as cable operators’ power grew, concerns rose about the convention of municipalities authorizing only one cable system for a given territory, thus creating a de facto monopoly. TCI, for example, was singled out for criticism because its systems served more than half of all television households in some states. Finally, the growing deregulation of telephone companies made cable television services a target of the telcos’ expansion desires.

A new set of regulations then slowed the cable industry’s successful expansion. With the Cable Television Consumer Protection and Competition Act of 1992, Congress attempted to reinstate some review of cable prices. The act regulated rates for basic and expanded services and required that the FCC generate a plan (called must-carry/retransmission consent) by which broadcasters would receive compensation for their channels. The retransmission-consent portion of this legislation was the culmination of years of lobbying by the broadcast industry, and it effectively forced cable operators to financially acknowledge the importance of broadcast programming on their tiers. The act called for new definitions of effective competition and for supervised costing mechanisms for other aspects of cable service, such as installation charges, and it decreed that programming services must be available to third-party distributors such as satellite systems and MMDS providers. However, portions of this legislation, the only legislation during President George H. Bush’s administration to command an override of his veto, ultimately succumbed to the considerable momentum behind reducing government regulation and promoting marketplace forces in industries such as telephony and its growing family of related services. Consequently, the 1992 law’s significance was minor compared with the major push for deregulation in the last four years of the 20th century.

Phase Four: Deregulation, a Maturing Industry, and Digital Services

In the 1990s and early 2000s, the cable industry matured in at least three major ways. First, much of the industry invested in system upgrades to allow the plant to deliver digital signals, which facilitated providing Internet connections as well as digital and interactive television (e.g., video-on-demand). Second, programming services continued to expand and innovate, and viewers migrated to cable programming from commercial television networks. Premium service HBO produced series such as The Larry Sanders Show (1992–98), Sex in the City (1998–2004), The Sopranos (1999– ), and Six Feet Under (2001– ), which received highly favorable critical and audience response. Third, major deregulation legislation opened the way for numerous mergers among cable and other communication companies, the elimination of rate regulation, and improved opportunities for cable operators to offer new services such as broadband Internet access. That legislation, however, also prompted new questions about the roles and obligations of cable operators.

In the late 1990s, personal and business use of the Internet became a powerful impetus for the evolving telephone, cable, and backbone networks crossing the United States (and, indeed, the world); it also complicated the definitions of services that various communication industries provided. The cable industry prepared its physical infrastructure for more digital and interactive services by investing extensively in hybrid fiber-coaxial cable plant in the 1990s. The goal of this upgrade was to be able to offer interactive services, including Internet connectivity and voice telephony (sometimes using Internet protocol) as well as digital television services, including video-on-demand. Compressed video allows digital cable networks to carry 4 to 12 video channels in the same channel capacity previously used to deliver just one analog channel. Transmissions from the head ends to local hubs were carried via optical fiber and then distributed in neighborhoods by cable. New set-top boxes were designed (without the benefits of an industry-wide standard) to allow digital and interactive services to be delivered to the analog televisions in most households. As the industry created more opportunities for generating revenue from existing and new programming by altering its network toward digital transmission capabilities, the entirely new service of broadband connectivity became a relatively easy service for cable television operators to provide. By 2002 about 16.8 million cable subscribers had digital plant capable of serving video, voice, and high-speed data, and a little more than seven million subscribed to cable-modem service. By 2003 cable television provided broadband Internet services to far more households than did telephone companies.

A deregulated legal and regulatory context influenced investment in new infrastructure and new programming and services. The Telecommunications Act of 1996, although primarily focused on restructuring the telephone industry, affected the cable industry and most other communication industries. The act was designed to encourage cable and telephone companies to compete in each other’s markets. In that sense, it was a logical follow-up to the federally mandated breakup of AT&T’s long-distance telephone monopoly 12 years earlier. Whereas that divestiture had created competition in the long-distance phone market, the 1996 act was supposed to create competition in the local calling market, as well as in other communication industries and services, particularly the provision of cable television. The 1996 act recognized the convergent capabilities of the many media systems that historically had been viewed as separate entities and consequently were regulated differently. By systematically reducing restrictions on company size, ownership, and types of services each medium could offer, the law (and judicial decisions subsequent to it) sought to encourage new providers and new services. For example, the 1996 law relaxed some of the 1992 Cable Act’s rules; significantly, it determined that by 1999 rate regulation once again would be eliminated for all cable services except those in the basic tier. Rate deregulation for small cable operators went into effect immediately. A product of strong industry pressure and with scant input from citizen groups, the Telecommunications Act of 1996 was landmark deregulatory legislation.

The cable industry’s move into Internet services raised new questions about where certain services, such as providing Internet access, fit within the evolving industry definitions and regulations. Providing basic Internet service (e.g., dial-up service using telephone links) had been a very competitive offering from independent ISPs during the late 1980s and early 1990s, although as that market grew, it became dominated by America Online (AOL) and Microsoft. Few ISPs owned the actual lines delivering the service, however; rather, they leased them from telephone companies. As Internet applications became more bandwidth-hungry, with music and video file sharing escalating, the desire for broadband connections with their faster line speeds made cable-provided Internet connectivity desirable.

However, having cable companies provide such connections challenged ideas about what the service actually was: was the Internet connection a cable service that would be figured in the franchise fee? Would a cable operator be an ISP, or would it allow many ISPs to use its lines, much as telephone companies had been doing for years with independent ISPs such as AOL? Would providing Internet access be deemed a phone service, a decision that might require cable services to incur certain compensation requirements common in the telephone world? Complicating matters, language in the 1996 Telecommunications Act prescribing how telephone networks would be “unbundled” in order to facilitate competitors using telephone infrastructure was held up as a model for also unbundling cable networks.

The cable industry was loath to relinquish control of its privately owned plant and anxious not to have such a common-carrier-like obligation imposed on its Internet services. This dilemma prompted lawsuits from a handful of cities that wanted competing ISPs to offer broadband services over cable. Ultimately, the FCC defined ISPs as providing “information services,” which are not subject to any regulation. Under this definition, local cable networks cannot be forced to become open-access platforms for numerous broadband vendors.

Since the passage of the 1996 Telecommunications Act, the lively, competitive marketplace for video programming anticipated by the act has not materialized. Instead, cable television in the United States dominates in urban markets, although it faces some competition in suburban and rural markets from direct broadcast satellites. The FCC concluded in its 2002 Ninth Video Competition assessment that among the 33,000 U.S. cable communities, only a very small percentage have a wire-line competitor to cable. Satellite competition rarely amounts to radically different programming offerings. The Satellite Home Viewer Improvement Act of 1999 prompted a growth spurt in DBS subscriptions when it enabled the satellite systems to distribute local broadcast television stations within local markets.

Telephone companies have not entered the video market as anticipated by the 1996 law. In the 1990s, major deregulation initiatives, legislative and judicial, enabled telcos to move into new home-information and home-entertainment services but largely failed to generate competitive video offerings. Instead, companies have simply purchased each other, resulting in a more consolidated market with fewer major companies. For example, phone company US West purchased Continental Cable in 1996 to become the third-largest cable operator in the United States at that time. AT&T purchased the largest cable company, TCI, in 1999, and it later purchased MediaOne, another large MSO. It then spun off its cable unit into AT&T Broadband. In 2002 this unit in turn merged with the third-largest MSO, Comcast, to create a company serving about 32 million subscribers. Major cable programmer and MSO Viacom (owner of MTV, BET, Nickelodeon, and Showtime, among other cable channels) purchased CBS. Such mergers led the FCC to characterize the cable industry as highly “horizontally integrated.”

The 1990s were marked by consolidation among operators, programmers, and other entertainment companies as a dominant organizational response to regulatory and technological opportunity. In light of Disney’s acquisition of Capital Cities/ABC, Viacom’s purchase of CBS, and the expansion of FOX across movie making, TV, cable services, and direct broadcast satellites, the large, vertically integrated and multifaceted company with international holdings seems to be the new industry template for survival. The cable industry remade the television world of the “Big Three” networks, upsetting their hold on programming and viewers and initiating a 24-hour, tumultuous and changeable video domain. As the larger video-media industry changes, the cable industry’s boundaries, roles, and influences will likewise be reshaped, but the historical legacy of its accomplishments will surely continue to be felt.