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Vertical integration and the must carry rules in the cable television industry: An empirical analysis
Unformatted Document Text:  Must carry rules 11 be not carried by the cable system in the carriage instance. 15 Some stations are new (on- air after 1991) and/or low-power stations. Excluding those, the final sample consists of 3,966 carriage instances, of which 259 (6.5%) are dropped ones (see Table 2). There are 1,083 individual stations in the sample, of which 104 stations (9.6%) were dropped by at least one cable system in 1991. 16 In addition, there are 3,212 individual cable systems in the final sample, of which 204 (6.4%) had dropped at least one broadcast station. 17 The independent variable of main interest in this study pertains to vertical integration. The main vertical integration measure is VI_N, the number of national cable networks with which a cable system’s owner is affiliated. An alternative measure of vertical integration is VI_TOT that includes both national and regional cable networks. 18 As stated in the hypotheses, I expect DROP to be positively correlated with the vertical integration variables. In addition to vertical integration, cable’s local signal carriage decisions are also influenced by other factors that represent the demand, cost and competitive conditions in 15 This assumes that all carriage instances in 1995 would have been qualified for must-carry in 1991. While seemingly arbitrary, this is not an unreasonable assumption. The 1992 must-carry rules required that a cable system with more than 12 activated channels devote one-third of its channels to carry commercial stations, in addition to pubic stations. This practically guaranteed that all existing local stations would be covered by the must-carry protection. 16 The average number of carriage denial experienced by each station is thus 2.5 (259 divided by 104). This is comparable to the average non-carriage incidence, 2.59, reported by the FCC in 1988 (FCC, 1988, p. 15). Note that in 1992, a local broadcast station was carried by 53 cable systems on average. 17 Chipty published a study using the same database. The summary statistics of her sample as she reported (which contained 1,919 systems) were comparable to their counterparts in my sample. Specifically, the sample mean values of penetration rate of basic services, system age (in years) and system channel capacity were 65%, 14.5 and 38 respectively in her sample, and 64%, 14 and 35 in my sample. In addition, she reported that about 34% of systems in her sample were controlled by vertically integrated MSOs and the average number of basic program services with which a system owner was vertically integrated was 2.58 (see Chipty, 2001, Table 1, p. 434). The respective statistics in the current sample are 22.8% and 2.25. 18 A cable system operator or owner was considered to be vertically integrated with a cable network if it had a five percent or greater interest in the cable network. For those interested in obtaining an appendix explaining how the vertical integration variable was constructed, please contact the author.

Authors: Yan, Zhaoxu.
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Must carry rules
11
be not carried by the cable system in the carriage instance.
15
Some stations are new (on-
air after 1991) and/or low-power stations. Excluding those, the final sample consists of
3,966 carriage instances, of which 259 (6.5%) are dropped ones (see Table 2).
There are 1,083 individual stations in the sample, of which 104 stations (9.6%)
were dropped by at least one cable system in 1991.
16
In addition, there are 3,212
individual cable systems in the final sample, of which 204 (6.4%) had dropped at least
one broadcast station.
17
The independent variable of main interest in this study pertains to vertical
integration. The main vertical integration measure is VI_N, the number of national cable
networks with which a cable system’s owner is affiliated. An alternative measure of
vertical integration is VI_TOT that includes both national and regional cable networks.
18
As stated in the hypotheses, I expect DROP to be positively correlated with the vertical
integration variables.
In addition to vertical integration, cable’s local signal carriage decisions are also
influenced by other factors that represent the demand, cost and competitive conditions in
15
This assumes that all carriage instances in 1995 would have been qualified for must-carry in 1991. While
seemingly arbitrary, this is not an unreasonable assumption. The 1992 must-carry rules required that a cable
system with more than 12 activated channels devote one-third of its channels to carry commercial stations,
in addition to pubic stations. This practically guaranteed that all existing local stations would be covered by
the must-carry protection.
16
The average number of carriage denial experienced by each station is thus 2.5 (259 divided by 104). This
is comparable to the average non-carriage incidence, 2.59, reported by the FCC in 1988 (FCC, 1988, p. 15).
Note that in 1992, a local broadcast station was carried by 53 cable systems on average.
17
Chipty published a study using the same database. The summary statistics of her sample as she reported
(which contained 1,919 systems) were comparable to their counterparts in my sample. Specifically, the
sample mean values of penetration rate of basic services, system age (in years) and system channel capacity
were 65%, 14.5 and 38 respectively in her sample, and 64%, 14 and 35 in my sample. In addition, she
reported that about 34% of systems in her sample were controlled by vertically integrated MSOs and the
average number of basic program services with which a system owner was vertically integrated was 2.58
(see Chipty, 2001, Table 1, p. 434). The respective statistics in the current sample are 22.8% and 2.25.
18
A cable system operator or owner was considered to be vertically integrated with a cable network if it
had a five percent or greater interest in the cable network. For those interested in obtaining an appendix
explaining how the vertical integration variable was constructed, please contact the author.


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