[Senate Hearing 107-248]
[From the U.S. Government Publishing Office]




                                                       S. Hrg. 107-248
 
                  CABLE AND VIDEO: COMPETITIVE CHOICES

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                    BUSINESS RIGHTS, AND COMPETITION

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 4, 2001

                               __________

                          Serial No. J-107-11

                               __________

         Printed for the use of the Committee on the Judiciary







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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona                     HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
JEFF SESSIONS, Alabama               RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas                CHARLES E. SCHUMER, New York
MITCH McCONNELL, Kentucky            RICHARD J. DURBIN, Illinois
                                     MARIA CANTWELL, Washington
                      Sharon Prost, Chief Counsel
                     Makan Delrahim, Staff Director
         Bruce Cohen, Minority Chief Counsel and Staff Director
                                 ------                                

      Subcommittee on Antitrust, Business Rights, and Competition

                      MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah                 HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania          PATRICK J. LEAHY, Vermont
STROM THURMOND, South Carolina       RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas                CHARLES E. SCHUMER, New York
                                     MARIA CANTWELL, Washington
                 Peter Levitas, Majority Chief Counsel
               Victoria Bassetti, Minority Chief Counsel









                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS



DeWine, Hon. Mike, a U.S. Senator from the State of Ohio.........     1
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     2
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     4

                               WITNESSES

Currey, Robert, Vice Chairman, RCN Corporation, Princeton, NJ....    23
Hartenstein, Eddy W., Corporate Senior Executive Vice President, 
  Consumer Sector, Hughes Electronic Corporation, and Chairman, 
  DIRECTV Global, El Segundo, CA.................................     6
Kent, Jerry, President and Chief Executive Officer, Charter 
  Communications, St. Louis, MO..................................    19
Kimmelman, Gene, Co-Director, Washington Office, Consumers Union, 
  Washington, DC.................................................    35
Sachs, Robert, President and Chief Executive Officer, National 
  Cable Television Association, Washington, DC...................    11

                         QUESTIONS AND ANSWERS

Responses of Shawn Bentley, Motion Picture Association of 
  America, to questions submitted by Senator Hatch...............    51
Responses of Shawn Bentley to questions submitted by Senator 
  Leahy..........................................................    53
Response of Shawn Bentley to a question submitted by Senator Kohl    54
Responses of National Music Publishers' Association to questions 
  submitted by Senators Hatch, Leahy and Kohl....................    56

                       SUBMISSIONS FOR THE RECORD

Comcast Corporation, statement...................................    64
Federal Communications Commission, Cable Services Bureau, 
  Washington, DC, statement......................................    67









                  CABLE AND VIDEO: COMPETITIVE CHOICES

                              ----------                              


                        WEDNESDAY, APRIL 4, 2001

                               U.S. Senate,
   Subcommittee on Antitrust, Business Rights, and 
                                       Competition,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:04 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine, 
Chairman of the Subcommittee, presiding.

OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE 
                         STATE OF OHIO

    Present: Senators DeWine, Specter, and Kohl.
    Chairman DeWine. Good morning. Let me welcome all of you to 
our hearing this morning on competitive choices in the cable 
and multichannel video industry.
    Since I became Chairman of this Subcommittee, we have 
examined the competitive status of the cable industry on 
several different occasions. We do so again today in our 
oversight role in an effort to raise questions about 
competition and other concerns that remain unresolved in the 
industry.
    We must view today's competitive conditions in the context 
of the deregulation of cable rates resulting from the 
Telecommunications Act of 1996. Under that law, rate regulation 
ended for many small cable operators, with most remaining 
services being deregulated in 1999. The results of this 
deregulation appear to me at least to be mixed.
    Deregulation appears to have done little to halt the trend 
of increasing cable rates. Understandably, many cable viewers 
are frustrated with these rates, rates that continue to rise at 
a pace of approximately three times the rate of inflation. 
Critics of the industry blame these rate increases on the lack 
of competition, and believe that the industry is taking 
advantage of consumers.
    In response, many within the industry believe that 
deregulation has been a success and that competition is, in 
fact, accelerating. These people continue to argue that rate 
increases are not a result of monopoly power, but are justified 
by higher programming costs and expensive system and equipment 
upgrades that are required to provide broadband services, as 
envisioned under the Telecommunications Act. They also, I might 
add, say that the consumer is getting more channels and getting 
more product.
    This is one issue that we will explore today. In doing so, 
I would like to hear what our witnesses believe accounts for 
the continuing increases in cable rates. Whatever the reasons, 
however, it is clear that we did not anticipate such extensive 
and ongoing rate inflation when the Congress passed the 
Telecommunications Act. As a result, we now must ask, can 
consumers expect to see cable rates decrease any time soon, or 
are they going to continue to see cable rates increase and 
increase and increase?
    Notwithstanding the rate hikes, cable competition does seem 
to be increasing to some extent, mostly due to the growing 
success of direct broadcast satellite service. In fact, some 
reports indicate that the majority of new subscribers to 
multichannel video services are choosing DBS over cable. Recent 
estimates indicate that DBS has captured close to 17 percent of 
the total multichannel video market.
    Several questions, however, remain concerning the degree of 
competition that DBS is providing to cable television. Some 
consumers can't receive DBS because of technical problems, and 
DBS does not have sufficient capacity to provide local 
broadcast channels in many areas. Finally, it is unclear to 
what extent DBS is able to provide true price competition to 
basic cable television service because of the up-front costs 
consumers must bear when switching to DBS service. I hope today 
that we can gain a better understanding of these a competitive 
issues during this hearing.
    Another area we will be discussing is the competition 
between current incumbent cable providers and the so-called 
overbuilders, companies seeking to build new cable systems to 
compete directly with the cable systems already operating in a 
given service area.
    In the areas where overbuilders have broken into the market 
and started a head-to-head competition with incumbent cable 
providers, consumers have benefited. This competition offers 
consumers more options and ultimately better service and lower 
rates. Unfortunately, it is very difficult for potential 
overbuilders to gain widespread entrance into existing cable 
markets. I would like to examine the reasons why we haven't 
seen more overbuilder companies and the kind of cable 
competition that they would bring to the market.
    In summary, consumers of cable and satellite continue to 
have questions--questions about competition, questions about 
service, questions about rates. It is my hope that through this 
hearing we can provide consumers with some answers on the state 
of the industry today and how it will serve consumers better in 
the future.
    Let me at this point turn to our ranking minority member of 
the Subcommittee, Senator Herb Kohl.
    Senator Kohl?

 STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE 
                          OF WISCONSIN

    Senator Kohl. I thank you, Mr. Chairman, for holding this 
hearing today. This is an important time for us to consider 
competition in the cable television industry. American 
consumers continue to face rising cable rates and they don't 
like it. Price hikes are almost as predictable as changes in 
the seasons.
    In 1996, we passed the Telecommunications Act in part to 
increase cable competition, but it has not lived up to its 
promise. Phone companies tried to compete with cable, but have 
since withdrawn. What is worse is that cable rates have climbed 
enormously since passage of the Telecom Act.
    We know that cable has made huge infrastructure 
investments, for which they deserve credit. We also know that 
programming costs have increased, but the cable's industry's 
cash-flow per subscriber, which is roughly the equivalent of 
profit, has increased 33 percent since the Telecom Act.
    Compare the cable price increases to the regular price 
decreases we see in consumer electronics. From televisions to 
VCRs, computers to stereos, almost every electronic device 
today is cheaper and better than it was 10 years ago. So the 
average consumer has a simple question, which is when will my 
cable rates go down?
    Today's hearing will examine how we can bring more 
competition to cable. Price and service competition is the best 
way to assure the best deal for consumers, but perhaps it is 
time to do more to open up this market to competition.
    There is some emerging competition to cable. Thanks in part 
to the Satellite Home Viewer Improvement Act that we passed 
last Congress, satellite has become a stronger competitor. By 
allowing satellite providers to offer local channels for the 
first time, satellite has become a more viable choice for many 
consumers. And in a few cities, startup head-to-head 
competitors like our witness here today, RCN, have built new 
cable systems to compete with the incumbent operators with 
encouraging results.
    Despite these developments, the competitive situation in 
the cable industry is far from ideal. Satellite services appear 
to have little effect on cable rates, since the cost of 
satellite is generally the same as expanded basic cable 
service.
    Furthermore, satellite service is often unavailable to 
consumers in densely populated urban areas, particularly those 
who live in apartment buildings. New cable companies are up and 
running, but only in a few locations, so their positive effect 
on competition has been limited.
    The best way to ensure that consumers pay the lowest prices 
possible and have the highest quality of service is to increase 
the competitive choices. Perhaps Congress can take steps to 
help level the playing field. We should consider three simple 
proposals that may increase competition.
    First, we should strongly consider extending the life of 
the program access rules beyond 2002, and maybe we can make 
them even better by closing loopholes that permit certain 
exclusive deals.
    Second, the time has come to consider building access 
legislation that will open the bottleneck blocking the last 
mile into the home.
    Finally, we need to explore the lack of competition in the 
so-called set-top box industry, the charges for which may 
account for up to 10 percent of a consumer's monthly cable 
bill. If we are serious about unleashing competition, then we 
need a plan of action and not rhetoric to do just that.
    That being said, we shouldn't ignore the real improvements 
made by the cable industry. Cable companies today offer more 
and better service than they did 10 years ago. Companies like 
Charter Communications have done a great deal to serve their 
consumers. In the third quarter of last year alone, Charter 
invested over $74 million to upgrade its cable infrastructure 
in Wisconsin. Charter serves over 250 communities in Wisconsin 
and deserves credit for doing well, and we thank Mr. Kent for 
appearing here today.
    We thank all the witnesses for appearing before this 
Subcommittee today. We look forward to hearing what our 
distinguished panel has to say about how we can bring more 
competition to the cable television market.
    Thank you, Mr. Chairman.
    Chairman DeWine. Senator Kohl, thank you very much.
    We will turn now to Senator Specter.

STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE 
                        OF PENNSYLVANIA

    Senator Specter. Thank you very much, Mr. Chairman, and I 
thank you for convening this hearing on a very important 
subject to America's consumers--television, to which America is 
addicted and a great deal of their service comes from cable or 
satellite.
    When we passed the Telecommunications Act, there were very 
forceful assurances that there would be competition. I had 
expected long ago that there would be competitive cable lines 
running to my house and to the houses of other Philadelphians 
and Pennsylvanians and Americans, and that has not happened.
    Where there is a monopoly, the practice in America is to 
have regulation, in Pennsylvania through the Public Utilities 
Commission. However, Congress relied upon the representations 
of the industry that there would be competition and it has not 
happened. In fact, it may be that there have been very direct 
efforts to thwart competition.
    I am very concerned, Mr. Chairman, that a number of 
invitees have not responded--Time Warner, Comcast and AT&T, 
according to your staff. There are ways to assure attendance 
other than by invitation which I think has to be considered by 
this Subcommittee if we are to have people present to give us 
answers to allegations which are present from those who are 
here.
    I had considered having a field hearing in Philadelphia on 
some of these issues and had deferred until the Subcommittee 
held this hearing. In anticipation of this hearing, I held an 
informal meeting in my office on March 26th, and one of the 
concerns that I had is that RCN had made an effort to provide 
cable competition in Philadelphia and in a sequence of events 
starting in June 1998 until February 14, 2001, RCN withdrew its 
proposal, citing delays in having action taken by the requisite 
authorities. That is a matter of enormous concern to me.
    I am served by Old Wade, now Time Warner, but I have real 
questions about the quality of service. I have a constituent 
who can never get the cable company on the telephone, and she 
is a very important constituent because when I come home that 
is all I hear about. I won't detail the problems that we have 
had with our cable company. I don't pay as much attention as I 
should to the bill, but I wonder about the bill in light of the 
absence of competition.
    When we had the informal hearing, officials from RCN told 
me about problems that they have in terms of getting the sports 
network, SportsNet, and they were only able to get it on a 3- 
to 5-month renewal period, which was a material handicap in 
dealing with their customers. Comcast at that meeting made the 
disclosure that they were prepared to give a long-term 
arrangement. But I wondered why that commitment had to come at 
a meeting in a Senator's office, why that commitment couldn't 
come between the parties.
    The Congress and the Senate and this Subcommittee would 
much prefer not to have these hearings and not to be involved 
in the activities of these private concerns, but that requires 
a modicum of good faith and negotiation among the parties so 
that the Senators don't have to intervene.
    We have got a lot of other issues on our plate which we 
have to take care of, and when we are called into these 
meetings we don't come with a whole lot of composure and good 
feelings about the issues, when we have had these assurances of 
competition.
    I am told by DIRECTV that because they are a satellite, 
they can't get SportsNet. You have the equivalent of SportsNet, 
Cablevision, in New York which refuses to give RCN access to 
their accommodations.
    If I may ask just one question before finishing my opening 
statement, is it true that RCN cannot get Cablevision in New 
York to give them access to sports programs?
    Mr. Currey. That is correct, and I will deal with that in 
my comments.
    Senator Specter. Well, I am sure you will and after you 
deal with it, this Subcommittee will try to deal with it. Maybe 
the whole Congress will try to deal with it.
    We are finding more of these arrangements made. We are 
about to have arrangements made in the Washington, D.C. area, 
and I find that the NFL will not give access to television so 
that viewers might be able to watch a variety of television 
games.
    Mr. Kimmelman, may it note for the record, is nodding in 
the affirmative.
    I believe the NFL owes America a little something by virtue 
of having an antitrust exemption. I have spoken about that at 
some length in this room about why Pennsylvanians are paying $1 
billion for stadium construction when the NFL has a $17.6 
billion, multi-year television contract which they are able to 
have as a result of a special exemption that Congress has given 
to them.
    These are some of the questions on my mind, Mr. Chairman. I 
am writing to the president of Comcast today about some of the 
issues which we heard about and I hate to impose another 
hearing on this Subcommittee, but it may be necessary to do 
more than invite Time Warner and Comcast and AT&T to appear.
    It is my expectation to schedule a hearing in Philadelphia 
with enough lead time to see if the invitation will be 
sufficient or whether there would have to be something more 
than an invitation. The Congress of the United States is 
entitled to answers to these questions.
    I thank you, Mr. Chairman and Senator Kohl, for pursuing 
this important subject.
    Chairman DeWine. Senator Specter, thank you very much.
    Before we start, a couple of housekeeping items. We would 
ask you to keep your opening comments to 5 minutes or less. 
Maybe as a little extra incentive, the Senate has two votes in 
a row sometime between 10:30 and 11, and once we break it will 
be at least half an hour. So if we are done at that point, you 
all can go home, and if we are not done, welcome back.
    Let me maybe follow up on what Senator Specter said. As 
chairman, I don't spend a lot of time using this podium talking 
about people who didn't come, whom we invited and who had 
``scheduling problems.'' Let me just say that I do have a long 
memory, and also state, as Senator Specter has said, there is 
always another opportunity, and we would expect that people 
would not have scheduling problems two times in a row.
    Let me turn to our panel. Mr. Hartenstein is Executive Vice 
President of Hughes Electronics, and Chairman of DIRECTV 
Global. Robert Sachs is President and Chief Executive Officer 
of the National Cable Television Association.
    Jerry Kent is President and Chief Executive Officer of 
Charter Communications, which he co-founded in 1993. Mr. Currey 
is Vice Chairman of RCN Corporation, and Gene Kimmelman is Co-
Director of the Washington, D.C., office of Consumers Union, 
and certainly a person who has appeared before this panel I 
can't tell you how many times in the last 4 years.
    We appreciate all of you being here. We appreciate your 
patience, and we will start on my left and on your right with 
Mr. Hartenstein and we will go right down the panel.
    Let me just say that the written statements which we have 
received will certainly be made a part of the record.

 STATEMENT OF EDDY W. HARTENSTEIN, CORPORATE SENIOR EXECUTIVE 
      VICE PRESIDENT, CONSUMER SECTOR, HUGHES ELECTRONICS 
    CORPORATION, AND CHAIRMAN, DIRECTV, GLOBAL, EL SEGUNDO, 
                           CALIFORNIA

    Mr. Hartenstein. Thank you, Mr. Chairman, Senator Kohl, 
Senator Specter. Thanks for the opportunity to have us here and 
hear from us today.
    The last time I appeared before this Subcommittee was in 
October 1997, when DIRECTV had been in business a little over 3 
years and we had a mere 2.9 million subscribers nationwide. 
Today, as we approach our seventh anniversary this summer, we 
have more than 9.5 million customers, and that equates to about 
1 out of every 11 households in the United States with DIRECTV. 
Seventy percent of that customer base comes from areas where 
cable is available.
    Although more than 15 million households in total for the 
DBS industry subscribe to DBS, 80 percent of all of the 
subscribers in the country that take multichannel video 
services receive their programming from a franchised cable 
operator. So there still remain a few cable customers we can 
target for conversion to satellite.
    We think that the new, enhanced products and services that 
we are offering in the interactive space--things like Wink, 
things like TIVO, things like Ultimate TV from Microsoft, and 
our new programming offerings, DIRECTV PARA TODOS, a Spanish-
language service--will help us attract new subscribers.
    Just yesterday, we completed our acquisition of Telocity. 
That is a leading nationwide provider of high-speed services 
through DSL technology. Coupled with our new satellite two-way 
high-speed service called DirecPC, which provides users with a 
nationwide high-speed broadband Internet service, we will be 
the first entity that can offer customers wherever they reside 
in the U.S. a whole-house entertainment and information 
solution.
    Certainly, our recent success, I think, is in large part 
due to the passage, Senator Kohl, as you indicated, of the 
Satellite Home Viewer Improvement Act of last year, which 
allowed us for the first time to offer local broadcast 
channels. Imagine that, having a level playing field with cable 
where we now, just a little more than a year since that 
legislation was passed was passed and signed, offer local 
network stations in some 41 major metropolitan markets, which 
represents about 61 percent of the television households in the 
country.
    Now, in some markets more than 66 percent of our customers 
are purchasing local channels. While it is difficult to 
differentiate the effect of the availability of local channels 
from other factors, overall through the end of 2000, with just 
1 year in the marketplace, our new customer growth in those 
markets where we did offer local channels was about 20 percent 
higher compared to those that we aren't yet able to deliver 
them to.
    While the ability to offer local channels has certainly 
been a major advance for us, I think several statutory and 
regulatory obstacles are inhibiting us to complete the 
competition with cable operators.
    First, the biggest impediment to offering local channels in 
additional communities above the ones that we already have is 
the ``must carry'' requirement imposed by the Satellite Home 
Viewer Improvement Act. By imposing ``must carry,'' Congress 
has decided that it is more important for us to carry all 23 
stations in Los Angeles and all 23 or 22 stations in New York, 
and have that be more important than to offer residents in 
cities such as Buffalo, Green Bay, Harrisburg, Wichita, just to 
name a few, even a single channel of local content.
    We would much rather use the almost $300 million we have 
invested to launch this new spot beam satellite later this year 
to extend our local channel offerings to additional smaller 
markets than to use it to deliver little-watched channels in 
markets where we have already substantially satisfied consumer 
demand for localism.
    But even if we are able to get relief from the ``must 
carry'' and get a ``most carry'' interpretation through the 
constitutional challenge that we have filed in Federal court, 
that would only be the first step. We would still not have 
sufficient capability and capacity to offer local channels in 
all 210 local markets across the country. For direct broadcast 
satellite to become more full-fledged competition to cable, we 
need more spectrum, and we would urge Congress to direct the 
FCC to do that.
    Second, the passage of the program access provision of the 
1992 Cable Act. I think I can say honestly I wouldn't be here 
before you today if that hadn't happened. It is going to expire 
next year, and we think it is going to still be necessary to 
provide that competition.
    I think using recent events as were mentioned by you, 
Senator Specter, we are unable to receive from Comcast the 
ability to transmit the Philadelphia sports channels to 
Philadelphia residents, and that is because Comcast owns the 
rights to that. We would like to do that, and I would urge the 
FCC to conclude that program access is important and necessary, 
and perhaps even strengthen it in a few ways so that it can't 
flaunt the interest of Congress in providing competition.
    I think, finally, the FCC has not yet taken full advantage 
of the preemptive authority Congress has intended to convey in 
1992 which has restrictive covenants and other impediments, 
including exclusive long-term cable contracts to prevent 
residents of apartment buildings and condos from subscribing to 
alternate video services such as DIRECTV and relegate them to 
second-class status.
    Finally, our efforts to bring a robust, competitive 
alternative to cable in the marketplace will be undermined if 
the primary spectrum used by DBS is allowed to be invaded by 
terrestrial wireless point-to-multipoint services such as those 
proposed by Northpoint Technology to interfere with the 
millions of consumers that are already getting DBS at home. I 
think that today's happy customers of DBS could easily become 
tomorrow's unhappy constituents if that kind of ill-considered 
Government action would be allowed to happen and create 
interruptions.
    Before I close, I realize the time, but we are trying to be 
good citizens, as well, and follow the lead of cable in going 
with a DIRECTV Goes to School public service initiative, where 
we are going to provide some 50,000 schools, public and 
private, across the country with free access, free equipment, 
to School Choice, which is a programming package we have put 
together. And we hope that schools in all 50 States and the 
District of Columbia will participate.
    As I mentioned at the outset, we have come a long way. We 
have still got a way to go before we can achieve our goal of 
being in a pure competitive position on par with cable, and in 
the Q and A I will be happy to go through the value 
propositions that we offer to consumers to be that competitive 
alternative.
    [The prepared statement of Mr. Hartenstein follows:]

   Statement of Eddy W. Hartenstein, Corporate Senior Executive Vice 
    President, Consumer Sector, Hughes Electronics Corporation and 
                        Chairman, DIRECTV Global

    Mr. Chairman, Senator Kohl, and members of the Subcommittee, thank 
you for inviting me to appear before the Subcommittee. I appreciate the 
opportunity to present our views on the competitive choices in video.
    The last time I appeared before this Subcommittee in October 1997, 
DIRECTV had been in business a little over three years and had 2.9 
million subscribers nationwide. Today, as we approach our seventh 
anniversary this summer, we have more than 9.5 million customers. One 
in every 11 households in the United States has DIRECTV'. 
And 70% of our customer base comes from areas in which cable is 
available.
    Direct broadcast satellite (``DBS'') is the principal competitor to 
cable, with more than 15 million subscribers. Nevertheless, according 
to the Federal Communications Commission, cable television still is the 
dominant technology for the delivery of video programming to consumers 
with 80 percent of all subscribers to multichannel video services 
receiving their programming from a franchised cable operator.\1\ So 
there remain quite a few cable customers we can target for conversion 
to satellite.
---------------------------------------------------------------------------
    \1\ Annual Assessment of the Status of Competition in the Market 
for the Delivery of Video Programming, Seventh Annual Report, CS Docket 
No. 00-132, FCC 01-1, at In Sec. Sec. 5, 61 (released Jan. 8, 2001).
---------------------------------------------------------------------------
    We think the new enhanced products and services we are offering, 
such as DIRECTV Interactive tm Powered by Wink, the DIRECTV 
Receiver with TiVo, and the DIRECTVtm Receiver with 
UltimateTV Service from Microsoft, as well as our Spanishlanguage 
service, DIRECTV PARA TODOStm, will help us attract new 
subscribers. And this week we are completing our acquisition of 
Telocity, a leading nationwide provider of high-speed broadband 
services through DSL technology. Coupled with our forthcoming two-way 
DirecPC' service, which provides users with nationwide high-
speed broadband Internet service via satellite, we will be able to 
offer our customers a ``whole house'' entertainment and information 
solution.
    Certainly our recent success is due in part to the passage by 
Congress of the Satellite Home Viewer Improvement Act (SHVIA). While we 
did not agree with every provision of that legislation, on balance we 
viewed it as worthy of our support. Most importantly, the legislation 
allowed satellite TV companies--for the first time--to offer local 
broadcast channels.
    We have moved quickly to bring the benefits of that legislation to 
consumers. We are offering local network stations in 41 major 
metropolitan markets, which represent more than 61 percent of the 
television households in the country. We are very pleased with the rate 
at which our subscribers are purchasing local channels. In some 
markets, more than 66 percent of customers are purchasing local 
channels. Overall, we are seeing a take rate of more than 43 percent 
for all customers. And for new subscribers, the take rate is more than 
59 percent.
    While it is difficult to differentiate the effect of the 
availability of local channels from other factors, through the end of 
2000, customer acquisition in local channel markets was up about 20 
percent compared to similar markets where local channels are not 
offered.
    The ability to deliver local content enables DIRECTV to offer 
consumers a service that is fully competitive with cable in terms of 
content and price in the markets in which we are offering local channel 
service. For example, a DIRECTV subscriber who chooses our most popular 
programming package, Total Choice', plus their local channel 
package receives 141 channels for just $37.98 per month. His next-door 
neighbor in Philadelphia who subscribes to Comcast's analog and digital 
tiers receives 124 channels for $45.95--fewer channels at a higher 
price. And his friend in Los Angeles who subscribes to Charter's analog 
and digital tiers receives 154 channels for $46.95--13 more channels, 
but at an additional cost of $8.98.\2\
---------------------------------------------------------------------------
    \2\ ``Cable Industry Outlook,'' Credit Suisse First Boston, Feb. 5, 
2001, Table 12, DBS versus Digital Cable Offering Comparisons, at 20.
---------------------------------------------------------------------------
    While the ability to offer local channels has certainly been a 
major advance for us, cable's continued market dominance requires 
ongoing oversight, and where necessary, intervention by Congress and 
the Commission to foreclose attempts by incumbent cable television 
providers to stifle competition. Moreover, several statutory and 
regulatory obstacles are inhibiting our ability to compete with local 
cable operators.
                   Expansion of Local Channel Service
    While the availability of loan guarantees may create incentives for 
some entities to explore expanded local channel offerings, our ability 
to broaden the delivery of local channels has not been limited by 
access to capital. Rather, the biggest impediment to serving additional 
communities is the ``must carry'' requirement imposed by SHVIA. Even 
absent that constraint, we are ultimately limited by the amount of 
spectrum allocated to us by the FCC. Let me explain.
    Unlike cable operators, which have the ability to increase their 
channel capacity indefinitely, DBS providers face very tangible channel 
capacity constraints. There are only three DBS orbital slot locations 
that are ``full-CONUS''--that is, capable of serving the entire 
continental United States. The FCC has licensed all of the frequencies 
at those three orbital locations to DIRECTV and EchoStar.
    The must carry provision of SHVIA requires us to carry every full-
power local broadcast station in a market in which we offer any local 
channels no later than January 1, 2002. This means that we have to use 
our limited satellite capacity to deliver stations for which, frankly, 
there is negligible consumer demand. For example, in both New York and 
Los Angeles, we could be required to carry up to 23 stations. Many of 
these stations have, based on their ratings, minuscule audiences. 
Carrying such a station is a poor use of our limited satellite 
capacity. The practical implications of this requirement are clear: by 
imposing must carry, Congress has decided that it is more important for 
us to carry all 23 stations in New York and all 23 stations in Los 
Angeles than to offer the residents of cities such as Buffalo, Dayton, 
Green Bay, Harrisburg, and Wichita even a single channel of local 
content.
    We will launch in the fourth quarter of this year a new high-power 
spot beam satellite. The spot beam satellite will enable us to make the 
most efficient use of our existing capacity in order to meet the must 
carry obligation. But I can tell you that we would much rather use that 
new $275 million satellite to extend our local channel offering to 
additional, smaller markets than to use that satellite to deliver 
little-watched channels in markets in which we have already 
substantially satisfied consumer demand for localism.
    Even if we were to get relief from the must carry obligation 
through the constitutional challenge we have filed in federal court, 
along with EchoStar and the Satellite Broadcasting & Communications 
Association (SBCA), we still would not have sufficient available 
capacity to provide local channels in all 210 television markets in the 
United States. For direct broadcast satellite to become the full-
fledged competitor to cable that Congress desires, we need more 
spectrum. To achieve this objective, we would urge Congress to direct 
the FCC to make additional spectrum available to the DBS providers, 
which could be used to bring local channels to those markets we cannot 
serve with our existing limited capacity.
                  Extension of the Program Access Law
    Without Congress' passage of the program access provision of the 
1992 Cable Act, I would not be here before you today. That provision 
allows cable's competitors to gain access to cable-affiliated 
programming, such as CNN, Headline News, TBS, TNT, and HBO. Without 
this programming, we cannot compete. The program access law is 
scheduled to expire in October of next year, unless the FCC finds, in a 
proceeding it is required to begin later this year, that the law 
continues to be necessary to ``protect competition.'' \3\ Using recent 
events as a likely indicator of future cable industry behavior, I can 
predict with some confidence that the program access provision will 
continue to be necessary to protect competition after 2002, and to 
ensure that DIRECTV's subscribers continue to receive the programming 
they've been enjoying.
---------------------------------------------------------------------------
    \3\ 47 U.S.C. Sec. 548(c)(5).
---------------------------------------------------------------------------
    In particular, Comcast, the nation's third largest cable operator, 
has refused to negotiate with DIRECTV for carriage of Comcast 
SportsNet, the Philadelphia-area regional sports network. Comcast's 
action has disenfranchised tens of thousands of Philadelphia-area 
DIRECTV subscribers and hundreds of thousands of other DIRECTV 
subscribers who enjoy out-of-market sports. Comcast has used what it 
perceives to be a ``loophole'' in the program access law, claiming that 
because it has chosen to distribute Comcast SportsNet using terrestrial 
rather than satellite facilities it does not have to make the regional 
sports network available to its DBS competitors.
    DIRECTV's experience with Comcast SportsNet is not an isolated one. 
There is every indication that other cable operators are contemplating 
similar strategies to attempt to evade the program access law, 
particularly with regard to regional sports networks. Thus, it is our 
hope that the FCC will conclude that the program access law continues 
to be necessary, and that Congress will consider tightening the law to 
ensure that cable operators cannot evade the law simply by delivering 
programming by terrestrial means instead of via satellite, as Comcast 
is attempting to do. The law should be revised to cover programming 
owned by cable operators, no matter the delivery mechanism they choose.
                   Improved Access for MDU Residents
    Our penetration rates in apartment buildings, condominiums, and 
other multiple dwelling units (MDUs) continue to lag behind our single-
family home rates. The FCC has not yet taken full advantage of the 
preemptive authority Congress intended to convey in the 1992 Cable Act 
with respect to restrictive covenants and other impediments, including 
exclusive, long-term cable contracts, that prevent both MDU owners and 
renters who do not have exclusive use of areas suitable for antenna 
installation from subscribing to alternative video services such as 
DIRECTV. For years, DIRECTV has urged the Commission to amend its rules 
to require landlords, condominium associations, and other homeowner 
groups to provide access to at least two multichannel video services to 
residents who do not have exclusive use of areas suitable for antenna 
installation. I do not believe Congress ever intended to discriminate 
against residents of multiple dwelling units (MDUs) by depriving them 
of the benefits of competition available to single-family homeowners, 
and we would ask Congress to help rectify this situation.
                 Ill-Advised Spectrum Sharing Proposals
    All of our efforts to bring a robust competitive alternative to 
cable to the marketplace will be undermined if the primary spectrum 
used by DBS operators to downlink programming to subscribers across the 
United States is invaded by terrestrial wireless point-to-multipoint 
services such as those proposed by Northpoint Technology. One of the 
top reasons consumers switch from cable to DBS is the greater service 
reliability of DBS. Millions of U.S. consumers who use and rely upon 
the DBS service will see increased interference in the form of longer 
and more frequent service outages if a mass market fixed wireless 
service is introduced into the DBS band. Today's happy customers could 
easily become tomorrow's unhappy constituents if, as a result of an 
illconsidered government action, they begin to see increased service 
interruptions.
    Let me assure you that our opposition to the deployment of a 
terrestrial service in the DBS band has nothing to do with fear of 
facing another competitor. We compete every day against the cable 
giants, so it's ridiculous to say that we're afraid of competition. And 
we will compete against these proposed terrestrial services if they're 
properly located in a different spectrum band, such as those 
specifically set aside for similar ``wireless cable'' services. Our 
only concern is protecting the level of service our customers have come 
to expect and which we have spent hundreds of millions of dollars to 
ensure. The extensive efforts Congress has undertaken to increase cable 
competition will be undermined if the FCC allows the spectrum intended 
for DBS use to be shared with terrestrial fixed wireless services.
                       Public Service Initiative
    As a company, we believe in public service. That is why last month 
we launched DIRECTV GOES TO SCHOOLtm, a public service 
initiative that will provide up to 50,000 public and private schools 
around the country with free access to our SCHOOL CHOICEtm 
programming package. Participating schools will receive more than 60 
channels of educational programming, including such networks as CNN, 
Discovery Channel, The History Channel, A&E, The Learning Channel, and 
of course, C-SPAN2, which teachers can use to enhance their lesson 
plans. In addition, we will provide freeof-charge to participating 
schools special issues of DIRECTV--The Guidetm, which will 
include feature articles on the educational programming offered in the 
SCHOOL CHOICE package. We hope that schools in all 50 states and the 
District of Columbia will participate in the program.
                               Conclusion
    As I mentioned at the outset, we've come a long way in the three 
years since I last appeared before this Subcommittee. While we still 
have a way to go before we can achieve our goal of a competitive 
position on par with local cable operators, the next time I appear 
before this Subcommittee I hope to be able to tell you we're even 
closer to that goal.
    I appreciate the opportunity to share my views.

    Chairman DeWine. Thank you very much.
    Mr. Sachs?

   STATEMENT OF ROBERT SACHS, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, NATIONAL CABLE TELEVISION ASSOCIATION, WASHINGTON, 
                              D.C.

    Mr. Sachs. Mr. Chairman, Senator Kohl, Senator Specter, 
thank you for this opportunity to testify on the state of 
competition in the multichannel video market.
    Five years ago, Congress passed the landmark 
Telecommunications Act of 1996. Some have argued that the Act 
is not working, especially when one considers the lack of local 
residential phone competition. But we should not let this 
eclipse the fact that the Act has successfully spawned 
competition in the video market.
    Moreover, as cable companies complete system upgrades, 
consumers are realizing benefits in the form of digital cable, 
high-speed Internet, and cable telephone service. And in every 
one of these businesses, cable faces real competition.
    Competition in the video market is now well-established. 
Today, consumers can choose from a variety of multichannel 
video providers. As a result of this competition, nearly 20 
million consumers, more than 22 percent of subscription 
television customers, now obtain multichannel video programming 
from some company other than their local cable operator.
    The total number of direct broadcast satellite subscribers 
jumped from 10.7 million to 15.3 million between February 2000 
and February of this year, a 43-percent annual growth rate. 
With nearly 10 million subscribers, DIRECTV now has more 
customers than all but two cable operators, AT&T broadband and 
AOL Time Warner. The number-two DBS provider, EchoStar, has 
more customers than all but the top five cable companies.
    In 38 States, satellite subscribership now exceeds 15 
percent of all television homes. In Ohio, it is over 15 
percent, in Wisconsin over 20 percent; in Utah almost 25 
percent, and in Vermont over 40 percent. Today, most consumers 
enjoy the choice of two DBS providers, in addition to cable, 
and some have other multichannel video choices as well.
    The ability to sell telephone high-speed Internet and an 
expanded number of video programming channels over a single 
broadband facility is providing new incentives for facilities-
based broadband competition. Companies like RCN, Wide Open 
West, Carolina Broadband, Grande Communications, and Western 
Integrated Networks have obtained franchises to provide 
consumers with competitive broadband services. Although 
relatively new, these companies have raised billions of 
dollars. Incumbent local exchange carriers and some electric 
utilities are also adding video to their product mix.
    Cable companies have responded by aggressively upgrading 
facilities and launching new services. Since passage of the 
1996 Act, the cable industry has invested $42 billion to deploy 
broadband plant in order to offer consumers a wide array of 
advanced services. As the 1996 turned 5 in February, cable 
added its 10 millionth digital video customer, 4 millionth 
high-speed data customer, and millionth residential phone 
customer. American consumers are realizing the benefits.
    Mr. Chairman, I would be remiss if I did not address the 
subject of cable prices. Despite escalating programming costs, 
especially higher sports rights fees, and billions spent on 
system upgrades, cable prices have remained stable on a per-
channel basis. In a recent report, the FCC found that cable 
rates stayed unchanged in the year 2000 on a cost-per-channel 
basis.
    Industry critics may point to the fact that the average 
monthly cable price increased 5.8 percent, compared to the 
inflation rate of 3.7 percent, during the 12-month period 
ending July 1, 2000. But such criticism fails to take account 
of the fact that cable customers also received an average of 
three additional channels of programming.
    As cable systems are upgraded and new satellite services 
are launched, cable operators regularly have added new 
products. Price comparisons which fail to consider the 
increased number of channels can therefore create a misleading 
picture. In fact, data from the FCC and GAO show that the 
inflation-adjusted price per channel of cable's video services 
has actually declined since 1986. Cable customers today are 
receiving more channels and better value than ever before.
    In summary, cable will continue to be a leader in providing 
consumers with choice, not only in video, but also in high-
speed Internet and telephony. At the same time, consumers will 
be able to choose from among multiple vendors. In this highly 
competitive environment, companies that succeed will be those 
who offer consumers the best quality, value and customer 
service. It is not possible to forecast precisely who will be 
most successful, but one thing is certain. American consumers 
will be the ultimate winners in this new competitive era.
    Thank you very much.
    [The prepared statement of Mr. Sachs follows:]

Statment of Robert Sachs, President and CEO, National Cable Television 
                              Association

                            1. Introduction
    Mr. Chairman, members of the Subcommittee, my name is Robert Sachs 
and I am President and CEO of the National Cable Television 
Association. NCTA represents cable companies serving more than 90 
percent of the nation's 69 million cable customers and more than 200 
cable program networks. Thank you for providing us with this 
opportunity to testify before your subcommittee. In my testimony today, 
I will describe the state of competition in the multichannel video 
market and highlight what cable operators are doing to provide 
consumers with new products and services over advanced broadband 
facilities.
    Five years ago, Congress passed the landmark Telecommunications Act 
of 1996. The goals of this Act were to: (1) bring competition to 
telecommunications and video; (2) expand consumer choice; (3) encourage 
investment in new technologies; and (4) speed the introduction of 
advanced services, including digital television. Some have argued that 
the Act is not working--especially when one considers the lack of 
widespread competition in local residential telephone markets. But we 
should not let slow progress in local exchange competition eclipse the 
fact that the Act has successfully spawned competition in the 
multichannel video market. As cable companies complete system upgrades 
across the country, consumers are realizing benefits in the form of 
digital cable, cable modems, and cable telephone service. As I will 
describe more fully, cable faces real competition in every one of these 
businesses.
    Before 1996, cable operators faced video competition primarily from 
over-the-air television, C-band satellite receivers, video rentals, and 
movie theaters. Direct broadcast satellite (DBS) competition has 
changed that forever. Being digital from the start, and having the 
advantage of substantially greater channel capacity, DBS spurred cable 
operators to replace hundreds of thousands of miles of coaxial cable 
with fiber optics so that they too could offer consumers hundreds of 
channels of digital video and audio services. In responding to vigorous 
competition from DBS, cable operators have made enormous investments in 
not just plant but computers, billing systems, personnel, and 
training--resulting in significant improvements in the quality of 
service we provide to our customers.
Market Share of Multichannel Video Program Distributors (MVPDs)

----------------------------------------------------------------------------------------------------------------
                                                                    Subscribers (in
                             MVPD                                      Millions)          Percent of MVPD Market
----------------------------------------------------------------------------------------------------------------
                                                     DBS                      15.34                    17.40
                                                  C-Band                       1.12                     1.30
                                                    MMDS                       0.70                     0.80
                                                   SMATV                       1.50                     1.70
                                                        Local Telephone Compani0.43                     0.49
                                   Broadband Competitors                       0.66                     0.75
 
                                         Total Non-Cable                      19.75                    22.44
                                                   Cable                      68.28                    77.56
 
                          Total Multichannel Subscribers                      88.03                   100.00
 
----------------------------------------------------------------------------------------------------------------
Source: NCTA Research Department estimate based on data from A. C. Nielsen, Paul Kagan Associates, Cable World,
  SkyREPORT, and public reports of individual companies.

  2. Competition in the Video Market is Well Established and Growing 
                                Steadily
  a. nearly 20 million consumers now subscribe to cable's competitors
    Today, consumers can choose from a variety of multichannel video 
providers, including DBS, alternative broadband providers like RCN, 
phone companies, and utilities. As a result of this competition, nearly 
20 million consumers--more than 22 percent of subscription television 
customers--now obtain multichannel video programming from some company 
other than their local cable operator. In contrast, five years after 
passage of the 1996 Act, the regional Bell companies still control 97 
percent of all residential telephone lines.
   b. dbs in particular has become a competitive substitute for cable
    With the passage of the Satellite Home Viewer Improvement Act 
(SHVIA) in November 1999, DBS companies can now retransmit local 
broadcast signals into their market of origin (``local-into-local''). 
As of December 2000, DirecTV and EchoStar made available local TV 
signals to over 61 million television households in 41 markets. When 
combined with their ability to offer hundreds of channels of digital 
video and CD quality sound, DBS companies compete vigorously with 
cable. Just ask Drew Carey.
    The total number of DBS subscribers jumped from 10.7 million to 
15.3 million between February 2000 and February 2001--a 43 percent 
annual growth rate. DirecTV now has more subscribers (9.8 million) than 
all but two cable operators--AT&T and AOL Time Warner making it the 
third largest multichannel video provider in the U.S. The number two 
DBS provider, EchoStar, has more customers than all but five cable 
companies.
c. total dish subscribershiu (c-band and dbs) now exceeds 15 percent in 
                               38 states.
    According to SkyREPORT, Direct-to-Home (DTH) subscribers (all dish 
customers, including DBS and C-Band) grew from 13.44 million to 16.45 
million between February 2000 and February 2001, an increase of 22 
percent (versus 1 percent for cable). In 38 states, DTH satellite 
subscribership now exceeds 15 percent of all television homes. As of 
January 2001, DTH penetration exceeded 20 percent in 28 states, 25 
percent in 11 states, 30 percent in 4 states, and 40 percent in 1 
state. For example, DTH penetration in Ohio is over 15 percent, in 
Wisconsin over 20 percent, in Utah almost 25 percent, and in Vermont 
more than 40 percent. Today, most consumers have the choice of two DBS 
providers in addition to cable, and some have other multichannel video 
choices as well.
States With Direct-To-Home (DTH) Dish Penetration of Fifteen Percent or 
        More     (January 2001)

 
 
                                                                Percent
                            State                              of  VHH w/
                                                                  DTH
 
Vermont......................................................      40.63
Montana......................................................      38.39
Wyoming......................................................      33.16
Mississippi..................................................      30.76
North Dakota.................................................      28.42
Arkansas.....................................................      28.42
Idaho........................................................      27.91
North Carolina...............................................      26.71
Kentuck......................................................      26.38
West Virginia................................................      25.39
Missouri.....................................................      25.27
South Dakota.................................................      24.46
South Carolina...............................................      24.42
Utah.........................................................      24.00
New Mexico...................................................      23.83
Texas........................................................      23.64
Indiana......................................................      23.51
Tennessee....................................................      23.02
Alabama......................................................      23.01
Oklahoma.....................................................      22.43
Maine........................................................      22.33
Virginia.....................................................      22.10
Iowa.........................................................      21.88
Georgia......................................................      21.78
Colorado.....................................................      20.88
Wisconsin....................................................      20.68
Nebraska.....................................................      20.62
Oregon.......................................................      20.03
Arizona......................................................      19.82
Kansas.......................................................      19.80
Minnesota....................................................     219.04
Michigan.....................................................      17.78
Louisiana....................................................      17.10
Florida......................................................      16.79
Washington...................................................      16.42
New Hampshire................................................      15.32
Ohio.........................................................      15.27
Nevada.......................................................      15.26
 
 
Source: SkyTRENDS SkyMAP January 1, 2001; www.skyreport.com


               d. dbs is not the only competitor to cable
    The ability to sell telephone, high speed Internet access, and an 
expanded number of video programming channels over a single broadband 
facility (or in conjunction with wireless or satellite providers) is 
providing new incentives for facilities-based broadband competition. 
Companies like RCN, Knology, WideOpenWest, Altrio, Carolina Broadband, 
Everest Connection, Grande Communications, and Western Integrated 
Networks have obtained franchises to provide consumers with competitive 
broadband services. Although relatively new, and despite recent 
difficulties in the capital markets, these companies have raised 
billions of dollars to construct alternative broadband facilities in 
various areas across the country.
    As utilities face a newly deregulated and competitive marketplace, 
they--like other telecommunications companies--have incentives to offer 
and package additional services over their facilities. Consequently, 
utilities like Sigecom in Indiana and Seren Innovations in California 
are joining the new class of broadband overbuilders in offering 
multichannel video programming services to consumers.
    Incumbent local exchange carriers are also adding video programming 
to their product line-ups. For example, Qwest has introduced a means of 
delivering video programming to telephone subscribers in the 
metropolitan Phoenix area over existing fiber-optic and residential 
copper-wire telephone facilities. The new technology--VDSL (very high 
speed digital subscriber line)--is similar to the DSL service used by 
the telephone companies to provide high speed Internet service.
3. Cable Operators are Upgrading Their Systems and Competing With Other 
          Providers to Bring Consumers New Broadband Services
    Cable companies have responded to competition in the video market 
by aggressively upgrading their facilities and launching new services. 
Since passage of the Telecommunications Act of 1996, the cable industry 
has invested $42 billion to deploy broadband plant in order to offer a 
wide array of advanced services, including digital video, digital 
music, high speed access to the Internet, and telephony. These upgrades 
involve rebuilding more than a million miles of cable plant. At year-
end 2000, they were approximately 75 percent complete. As the 1996 Act 
``turned five'' in February 2001, cable added its 10 millionth digital 
video customer, 4 millionth high-speed data customer, and 1 millionth 
residential cable telephone customer.
                            a. digital video
    Among the new options that cable customers have are digital video 
services. Digital video provides increased channel capacity through 
compression of multiple video signals in the same 6MHz slot previously 
occupied by a single analog channel. As a result, customers are able to 
receive dozens of new programming services from cable operators. 
Digital video also offers crystal-clear video images, CD-quality sound, 
on-screen menus, interactive program guides, search capabilities, and 
expanded parental controls.
    Cable program networks have already launched some 60 new digital 
channels, offering consumers additional choice and further program 
diversity. Examples include the Biography Channel and History Channel 
International (from A&E); Science, Civilization, and Kids (from 
Discovery); Noggin, Nick Too, and Nickelodeon Games & Sports (from 
Nickelodeon); and style. (from E!). There are six new Hispanic channels 
from Liberty Canales, new music channels from MTV and BET, and separate 
channels targeting Indian, Italian, Arabic, Filipino, French, South 
Asian and Chinese viewers from The International Channel. There are 
also many new premium offerings from HBO (HBO Family, ActionMAX, and 
ThrillerMAX), Showtime (Showtime Extreme, Showtime Beyond) and Starz! 
Encore (Starz! Family, Cinema, Movies for the Soul, and Adventure 
Zone).
    Consumers are responding by signing up for digital tiers in record 
numbers. Cable operators started 2000 with just under five million 
digital video subscribers but doubled that number to 10 million by 
March 2001. A survey released in March 2000 by the Cable and 
Telecommunications Association for Marketing (CTAM) showed positive 
customer response to their upgraded, digital cable offerings: of nearly 
2,600 consumers polled, 95 percent expressed satisfaction with their 
service.
    With millions of digital set-tops now deployed in cable networks, 
and thousands more installed every week, cable operators are beginning 
to look beyond simple broadcast services toward new, interactive 
services that meet the needs of individual customers. One service that 
many operators are aggressively pursuing is video-on-demand (VOD, which 
includes ``subscription video-on-demand''). This `personalized' 
television service allows customers to watch new movie releases or 
favorite TV programs, with real-time control of such features as pause, 
fast-forward, and rewind.
           b. cable modems: high speed access to the internet
    Cable's upgraded broadband facilities also enable consumers to 
access any website of their choice at speeds 50 to 100 times faster 
than standard dial-up services. In addition, cable modem service is 
``always-on'': there is no waiting for a connection to the network or 
the Web. Customers can download information instantaneously with cable 
modems, which can be purchased at retail stores or leased from a cable 
operator. The industry ended last year with 3.7 million customers--more 
than double its 1999 total of 1.6 million. By March 2001, the number of 
cable modem subscribers exceeded 4 million.
    Cable's entry into high speed data services has also benefited 
consumers by prompting a strong competitive response from incumbent 
telecommunications companies. For example, cable's deployment of cable 
modems has led local telephone companies to offer digital subscriber 
line (DSL) service, a broadband data technology that has been available 
for over a decade. When there was no competition from cable, companies 
like NYNEX and Bell Atlantic (now Verizon) chose to sell more expensive 
T-1 and ISDN lines to consumers. However, as soon as cable offered 
broadband access to the Internet, local exchange carriers took DSL off 
the shelf and began selling it aggressively to millions of households 
across the nation. By year-end 2000, DSL subscribership reached the two 
million mark. In addition, companies such as Worldcom and Sprint 
provide broadband fixed wireless service, while satellite operators 
have begun to offer two-way broadband service.
                           c. cable telephony
    The local residential telephone market has proven to be most 
resistant to the introduction of competition. Despite strong incentives 
provided by the Telecommunications Act of 1996, the vision of CLECs 
purchasing unbundled network elements and reselling local loops has not 
materialized as planned. However, with upgraded digital broadband 
facilities, cable operators are well positioned to offer facilities-
based competition to local telephone companies.
    Cable telephony provides numerous enhanced services, including 
voice mail, caller ID, and call forwarding. AT&T Broadband, Cox Cable, 
and Cablevision are today offering such services at rates 10-50 percent 
below those charged by incumbent telephone providers. For example, Cox 
communications offers its 200,000 residential phone customers a first 
line at 10 percent below the prevailing Bell rate; additional lines at 
up to 50 percent discounts; and feature packages such as call waiting 
at 30-75 percent discounts.
    Cable operators started the year 2000 with 200,000 residential 
telephone customers and ended it with 850,000. They added a record 
280,000 new residential telephone subscribers during the fourth quarter 
of 2000, and currently serve more than 1 million telephone customers. 
In addition, cable companies such as Cox, Adelphia Business Solutions, 
and Cablevision Lightpath are providing more than two million telephone 
lines to business customers.
    Although still a new business, telephony is a key component of 
cable's business strategy for the future. This includes both switched 
voice service and Internet protocol (IP) telephony over broadband 
networks. Cable companies like Charter, Comcast, AOL Time Warner, and 
others are already field-testing IP telephony. Just as the first five 
years of the Act have seen video, wireless, and Internet competition 
flourish, I believe the next five will see Congress' vision of local 
phone competition finally realized.
                        4. Programming Ownership
    Today there are 224 national cable networks, compared with 76 in 
1989. At the same time that cable is expanding its service offerings, 
vertical integration in the cable industry has declined from 53 percent 
in 1989 to 35 percent in 2000. This percentage will drop even further 
when AT&T completes its plans to divest Liberty Media.
    In contrast, major companies like Disney, General Electric, Viacom, 
and News Corp (who respectively own the ABC, NBC, CBS and Fox 
networks), are increasing their ownership of cable networks. Each of 
the major commercial broadcast TV networks today is owned by a media 
company that has financial interests in 10 to 20 cable networks. Some 
are nationally distributed channels like CNBC, while others are 
regional channels like Fox Sports Net. Recently, Viacom (the owner of 
CBS) completed the acquisition of Black Entertainment Television, 
adding to its array of popular cable networks, which already includes 
Showtime, MTV, and Nickelodeon.
Broadcast Network Investments in Cable Networks
Walt Disney/ABC
 
The Disney Channel
SoapNet
Toon Disney
 
Partial Ownership:
ESPN
ESPN2
ESPNews
ESPN Classic
Lifetime Television
Lifetime Movie Network
E! Entertainment Television
A&E Television
The History Channel
The Biography Channel
The History Channel International
 
 
 
 
News Corp./Fox/Fox Entertainment
Fox News
Fox Sports Americas
Fox Sports World
fX
fXM: Movies on Fox
The Health Network
Fox Sports (regional networks): Southwest, West,
West 2, Pittsburgh, Rocky Mountain, Northwest,
Utah, Midwest, Arizona, Detroit, North
 
Partial Ownership:
National Geographic
TV Guide
Fox Family
Outdoor Life
Speedvision
Golf Channel
Fox Sports (additional regional sports networks)
 
 
Viacom/CBS/UPN
 
BET Holdings: BET, BET Action Pay-Per
 View, BET on Jazz, BET Gospel
The Box
MTV Nickelodeon/Nick at Nite
TV Land
VHi
TNN: The National Network
Showtime
The Movie Channel
Flix
The Suite (digital networks): Noggin,
 Nickelodeon GAS, Nick Too, M2,
 MTV X, MTV S, VH1 Country, VHI
 Smooth
 
Partial Ownership:
Comedy Central
Sundance Channel
 
 
 
General Electric/NBC
CNBC
 
Partial Ownership:
MSNBC
A&E Television
The History Channel
The Biography Channel
The History Channel International
AMC
Bravo
Independent Film Channel
MuchMusic
WE: Women's Entertainment
Valuevision
Fox Sports (regional networks): Chicago,
 Bay Area, Florida, New England, New
 York, Ohio, Madison Square Garden
 Network

                            5. Cable Prices
    Despite escalating programming costs (especially higher sports 
rights fees) and billions spent on system upgrades, cable prices have 
remained relatively stable on a per-channel basis. For example, the 
Federal Communications Commission found that cable rates stayed 
unchanged in the year 2000 on a cost-per-channel basis (Report on Cable 
Industry Prices, FCC 01-49, MM Docket No. 92-266, released February 14, 
2001). According to the same report, during the 12month period ending 
July 1, 2000, average monthly prices for basic service tiers (BST), 
cable programming service tiers (CPST), and equipment increased by 5.8 
percent. This represents a very slight increase (from 5.2 percent) for 
the year ending July 1, 1999--during which CPST prices were subject to 
FCC regulation from July 1, 1998, to March 31, 1999.
    Industry critics may seize on the fact that average monthly cable 
prices increased 5.8 percent compared to the inflation rate of 3.7 
percent during the 12-month period ending July 1, 2000. But their 
criticism fails to take into account the fact that cable subscribers 
also received an average of three additional channels of BST and/or 
CPST programming. As cable systems are upgraded and new satellite 
programming services are launched, cable operators have added new 
channels that consumers want. Year-to-year comparisons which fail to 
consider the increased number of channels that operators provide to 
customers therefore create a misleading picture. In fact, data from the 
FCC and General Accounting Office show that over time, the price per 
channel of cable's video services has declined since 1986 when adjusted 
for inflation:

                   Price Per Cable Channel, 1986--2000
------------------------------------------------------------------------
                                      12/1/86   4/1/91  7/31/97  7/31/00
------------------------------------------------------------------------
          Nominal Price per Channel     $0.44    $0.53    $0.63    $0.66
     Price Per Channel Adjusted for     $0.69    $0.68    $0.68    $0.66
        Inflation (in 2000 dollars)
------------------------------------------------------------------------
Source: GAO Survey of Cable Television Rates and Services, July 1991;
  FCC Reports on Cable Industry Prices, released 12-15-97 and 2-14-01;
  Bureau of Labor Statistics, CPI-U.


    This drop in real per-channel cable prices has occurred even though 
programming costs have skyrocketed since 1986. For example, between 
1996 and 2000, the cable industry spent over $36 billion on basic and 
premium programming--roughly 75 percent more than the $20.6 billion it 
spent during the previous five years. Cable customers today are 
receiving more channels and better value for their dollar than ever 
before.

Cable Systems' Programming Expenditures: 1986-2000

 
 
                                                            Expenditures
                           Year                                  (in
                                                              Billions)
 
1986......................................................       $2.030
1987......................................................        2.289
1988......................................................        2.599
1989......................................................        2.918
1990......................................................        3.195
1991......................................................        3.463
1992......................................................        3.811
1993......................................................        4.000
1994......................................................        4.370
1995......................................................        4.963
1996......................................................        5.656
1997......................................................        6.413
1998......................................................        7.466
1999......................................................        8.000
2000......................................................        8.882
 
Source: NCTA Research Department estimate, based on data from Paul Kagan
  Associates, Inc. and the U.S. Copyright Office


                             5. CONCLUSION
    Over the last five years, there has been rapid and unabated growth 
of competition in the video market. The job is not yet done, but the 
convergence of video, voice, and data services in the digital broadband 
marketplace will only accelerate this trend. Cable will continue to be 
a leader in providing consumers with choice--not only in video 
services, but also in high speed Internet services and telephony. At 
the same time, consumers will be able to choose from among multiple 
vendors when making their purchases. In this highly competitive 
business environment, companies that succeed will be those who offer 
consumers the best quality, value, and service. While it is not 
possible to forecast precisely which companies will be most successful, 
one thing that can be said with certainty is that American consumers 
will be the ultimate winners of this competition.
    Thank you again for this opportunity to present our industry's 
views. I would be happy to answer the Subcommittee's questions.

    Chairman DeWine. Thank you.
    Mr. Kent?

STATEMENT OF JERRY KENT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
          CHARTER COMMUNICATIONS, ST. LOUIS, MISSOURI

    Mr. Kent. Good morning. Thank you, Mr. Chairman, Senator 
Kohl, Senator Specter, for inviting me to testify today.
    I cofounded Charter as an entrepreneurial company in 1993 
and we have grown to be the fourth largest cable company in the 
country, serving approximately 6.5 million customers in 40 
States. Today, Charter is facing increasing competition in the 
video marketplace from direct broadcast satellite and from 
terrestrial competitors such as local utilities, phone 
companies, and cable overbuilders. Approximately 20 percent of 
the homes in Charter's service areas have chosen to subscribe 
to a competitor, and that is growing daily.
    To compete effectively, Charter has chosen to capitalize on 
what we perceive to be our greatest competitive advantage, our 
advanced broadband delivery system. We believe that we have the 
best technology to transmit voice, video, and data services 
with the speed, capacity, and interactive capability that our 
customers demand. That belief in our broadband pipe was the 
main driver in my founding of Charter Communications.
    Subsequently, in 1998, Paul Allen bought controlling 
interest in Charter to help realize his vision of a wired world 
in which cable's broadband capabilities will facilitate the 
convergence of television with computers and the Internet.
    Today, we are delivering on that wired world vision by 
upgrading our plant and equipment to state-of-the-art 
technology that is second to none. Our strategy is to invest in 
and deploy a plethora of services through that broadband pipe 
that will give us a competitive advantage in the open 
marketplace.
    We are well into a 3-year, $3.5-billion program to upgrade 
and rebuild Charter's systems to the highest broadband 
standards in the industry. The billions of dollars we are 
investing to convert our plant from a one-way analog video 
delivery service into a two-way interactive digital platform is 
in large part fueled by the competition we face.
    In response to this competition, we also made converting 
our systems to digital our top priority in the year 2000. 
Charter started the year with just 155,000 digital customers. 
By the end of the year, we had over 1 million digital 
customers, accounting for almost 15 percent of our customer 
base. In the first quarter of 2001, we added well over 20,000 
new digital customers per week. Through the end of this year, 
Charter will have invested approximately $1 billion in the 
conversion to digital, which is over and above our $3.5 billion 
plant upgrade program.
    Now, of course, rebuilt plant is more than just increased 
programming choices and better quality. Using our new capacity, 
we are able to offer our customers exciting, new interactive 
services, including high-speed Internet access, Internet access 
over the television set, and video on demand. And we have begun 
trials on Internet protocol, or IP telephony, in order to offer 
our customers a choice in local phone service.
    In 2000, we nearly tripled customers to our high-speed 
Internet service, called Charter Pipeline. In the first quarter 
of this year, we have added 6,000 new data customers per week. 
Charter Pipeline cable modem service competes directly with the 
telephone industry's fast-growing DSL service.
    We also recently launched Video on Demand in two of our 
markets. With this new service, customers have access to a 
library of more than 400 movie titles and can enjoy full VCR 
functionality while viewing their selection. By the end of 
2001, we are projecting 2.2 million Charter homes will have 
access to Video on Demand technology.
    But in a competitive environment, it all comes down to 
taking care of your customer. They vote with their pocketbook 
everyday in this competitive environment, and that is why we 
are continuing to enhance our customer service program.
    For example, in Wisconsin we have invested more than $500 
million to upgrade our plant and swiftly deploy advanced cable 
services. To service our newly upgraded systems, we opened our 
first state-of-the-art regional customer contact center in Fond 
du Lac, which is staffed 24 hours a day, 7 days a week. This 
center will serve as a template for six additional regional 
centers that we are building just this year at a total cost of 
over $60 million.
    Charter is also undertaking telephony initiatives focusing 
on the testing of Internet protocol calling technologies. We 
are working currently on a trial in Wisconsin and in the St. 
Louis market, and we expect to compete in local telephone 
service when our IP technology is ready.
    In conclusion, Charter is working on several other advanced 
technology initiatives because we acknowledge a new era of 
competition. As I say in investor conferences, we do not bury 
our head in the face of competition. By investing in broadband 
technologies and deploying new services through innovation, 
Charter is well positioned to compete effectively in this 
vibrant new marketplace. The American consumers are the real 
winners, with an increasing array of digital, data, and 
interactive services available from a growing number of 
competitive providers.
    Thank you.
    [The prepared statement of Mr. Kent follows:]

   Statement of Jerry Kent, President and CEO, Charter Communications

    Good morning. I am Jerry Kent, President and CEO of Charter 
Communications. I cofounded Charter as an entrepreneurial company in 
1993, and we have grown to be the fourthlargest cable company in the 
country. With the closing of a pending acquisition, Charter will be 
serving approximately 7 million customers in 40 states. Thank you for 
inviting me to testify this morning on how Charter Communications is 
responding to the intense competition we face in the multichannel video 
marketplace.
    The cable industry is facing increasing competition in the video 
marketplace from direct broadcast satellites and from terrestrial 
competitors such as local utilities, phone companies and cable 
overbuilders. More than 20% of the homes in Charter service areas have 
chosen to subscribe to a competing DBS provider. Terrestrial 
competitors include Knology, which competes with us in several markets 
in the southeast; Wide Open West, which has obtained franchises in Fort 
Worth, Texas and in several communities in our hometown of St. Louis; 
and several local utilities and phone companies in communities 
including Wisconsin Rapids, Wisconsin; Newnan, Georgia; and St. Cloud, 
Minnesota.
    In order to compete effectively, Charter has chosen to capitalize 
on what we perceive to be our greatest competitive advantage: our 
advanced local delivery system. We have the ability to transmit voice, 
video and data services with the speed, capacity and interactive 
capability that our customers demand. That belief in our broadband pipe 
was the main driver in my founding of Charter Communications. In 1998, 
Paul Allen bought controlling interest in Charter to help realize his 
vision of a Wired World, in which cable's broadband capabilities will 
facilitate the convergence of television with computers and the 
Internet.
    Based upon our potential, my management team in 1999 completed what 
was then the third largest IPO in U.S. history.
    Today we are delivering on that Wired World vision by upgrading our 
plant and equipment to state-of-the-art technology that is second to 
none. Our strategy is to invest in and deploy a plethora of services 
through that broadband pipe that will give us the ability to compete 
effectively in the open marketplace.
    We are well into a three year $3.5 billion program to upgrade and 
rebuild our systems to the highest broadband standards in the industry. 
Today, nearly 70% of our customers are served by systems that are newly 
upgraded and capable of providing digital video, high speed Internet 
access and other exciting interactive services. And by the end of next 
year, almost 90 percent of our customers will be served by systems of 
750 MHz or greater.
    This massive rebuilding project is not occurring in a vacuum. 
Charter is engaged in a fierce competitive battle with DBS providers, 
telephone companies, utilities, and cable overbuilders. The billions of 
dollars we are investing to upgrade our plant from a one-way analog 
video delivery service into a two-way interactive digital platform is 
in large part fueled by the competition we face in the marketplace. We 
are deploying advanced services to set us apart from the competition in 
the eyes of the consumer.
    In response to this competition, we made converting our systems to 
digital our top priority in 2000. Our digital conversion has been 
occurring at a rapid rate and our customers are responding with great 
enthusiasm. Charter started the year 2000 with just 155,000 digital 
customers. By the end of the year, we had over one million digital 
subscribers accounting for almost 15 % of our customer base-a 550% rate 
of growth. On average, we added 17,500 new digital customers per week, 
a 560% rate of growth. In the first quarter of 2001, we added well over 
20,000 new digital customers per week and we expect to end the year 
with over 30% of our customers subscribing to digital services.
    Of course, rebuilt plant is more than just increased programming 
choices and better picture quality. Using our new capacity, we are able 
to offer our customers exciting new interactive services including high 
speed Internet access, Internet access over the television set and 
video on demand. And we have begun trials on Internet Protocol (IP) 
telephony in order to offer our customers a choice in local phone 
service.
    In 2000, we nearly tripled customers to our high speed Internet 
service, called Charter Pipeline, ending the year with 250,000 data 
customers. We added over 3,500 new data customers per week last year. 
In the first quarter of this year, we have added 6,000 new data 
customers per week. Charter Pipeline cable modem service competes 
directly with the telephone industry's fast growing DSL service, and 
our prices are very competitive. In fact, it was the deployment of 
cable modem service that sparked competition from DSL providers. We 
also provide significant discounts for a bundled video and data product 
to attract and retain customers.
    We also recently launched Video on Demand in two of our markets. 
With this new service, customers have access to a library of more than 
400 movie titles and can enjoy full VCR functionality while viewing 
their selection. Customer response has been extraordinarily positive. 
We have seen Video on Demand take rates double that of traditional pay-
per-view and we will roll out Video on Demand in 10 more markets this 
year. By the end of 2001, we are projecting 2.2 million Charter homes 
will have access to Video on Demand technology.
    But in a competitive environment, it all comes down to taking care 
of your customer. They vote with their pocketbook every day in this 
competitive environment. That is why we are continuing to enhance our 
customer service program.
    For example, in Wisconsin, we have invested more than half a 
billion dollars to upgrade our plant and swiftly deploy advanced cable 
services. To service our newly upgraded systems, we opened our first 
state-of-the-art regional customer contact center in Fond du Lac. The 
center does not replace our local offices, but adds a level of 
specialized customer support for advanced digital products, available 
24 hours a day, seven days a week. This center will serve as a template 
for six additional regional centers that we are building this year at a 
total cost of over $60 million, culminating in twelve regional call 
centers at a cost of over $100 million in the next two years.
    Charter is also undertaking telephony initiatives focusing on the 
testing of IP calling technologies and developing back-office support. 
We are working with Cisco, Telecordia and Motorola on a trial in 
Wisconsin and another home-user trial with Nortel and Antec in the St. 
Louis market. We expect to compete in local telephone service when our 
IP technology is ready. We anticipate this to be 2003.
    Charter is working on several other advanced technology initiatives 
including video streaming, which will be available to our customers in 
the third quarter; home networking, and web cams for video conferencing 
that will benefit our residential customers.
    Charter fully recognizes that we are in a new era of competition 
for the various services we offer to our customers. By investing in 
broadband technologies and deploying new services through innovation, 
Charter is well positioned to compete effectively in this vibrant new 
marketplace. The American consumers are the real winners with an 
increasing array of digital, data and interactive services available 
from a growing number of competitive providers.
    Thank you again, Mr. Chairman, for inviting me to appear before you 
today. I would be happy to answer any questions you might have.

    Chairman DeWine. Thank you, Mr. Kent.
    Mr. Currey?

  STATEMENT OF ROBERT CURREY, VICE CHAIRMAN, RCN CORPORATION, 
                     PRINCETON, NEW JERSEY

    Mr. Currey. Mr. Chairman, Ranking Member Kohl, and members 
of the Antitrust Subcommittee, I am pleased to be here to 
discuss the importance of competition in the cable market.
    RCN was formed in 1996 with the unique mandate to provide 
bundled telephone, cable, and Internet access all on one pipe, 
through one provider, on one bill--true convergence. We operate 
in 7 of the 10 largest U.S. markets, and for the first time in 
these markets consumers have a choice.
    RCN is the largest cable competitor in the country, with 
about 1 million customer connections. We are also unique 
because unlike telecom startup companies, we focus on serving 
residential consumers.
    Today, the cable industry is dominated by a small number of 
multiple-system operators who also own programming and who are 
now clustering their systems geographically for greater local 
control. The country's 10 largest cable monopolies now serve 
almost 90 percent of all subscribers.
    Despite this David-and-Goliath scenario, RCN is 
aggressively competing in the market. We are spending large 
amounts of time and money and we are making healthy progress, 
but we continue to face serious anti-competitive practices by 
entrenched incumbent cable operators. Their anti-competitive 
practices include withholding vital programming, restricting 
our access to apartment buildings, and pressuring local 
authorities to deny competitive franchises.
    As to the programming, consumers simply will not switch to 
RCN if we cannot guarantee first-rate programming, especially 
local sports. Naturally, incumbents are trying to keep the best 
programming away from us. In New York City, for example, 
Cablevision owns or controls the programming rights to 7 of the 
9 professional sports teams and their venues, and Cablevision 
has withdrawn from our consumers an important tier of local 
sports programming by claiming the so-called terrestrial bypass 
loophole.
    In Philadelphia, Comcast serves about 90 percent of the 
market and controls the programming for professional 
basketball, baseball, and hockey. Yet, Comcast won't give us 
more than a rolling 3-month contract for that programming. This 
is simply not sustainable commercially.
    Congress has tried to prevent this abuse by requiring 
vertically integrated cable companies to make their programming 
available to competitors. But the FCC's mistaken interpretation 
of the law allows the incumbents to withhold that programming 
by simply delivering it by terrestrial means. We urge Congress 
to close this loopholes.
    Incumbents also attempt to deter our access to the market 
by preventing us from serving apartment buildings through 
exclusive agreements with building owners and operators, or in 
an even more insidious way by claiming ownership to the inside 
wire inside the building walls. These buildings are a crucial 
core market for a new competitor providing residential service 
in urban areas. Incumbents also pressure local franchise 
authorities to delay granting competitive franchises. If that 
doesn't work, they push for commercially unreasonable 
obligations on the potential competitor.
    In Philadelphia, Comcast heavily lobbied the city against 
our entry. Eventually, the city government became indifferent, 
even hostile to our efforts. After 2 1/2 years, we reluctantly 
abandoned our plans to spend more than $200 million and bring 
hundreds of new jobs to the city, as well as introduce choice 
for the first time for cable and phone service. This is not in 
the public interest.
    Competition is such a powerful force that merely announcing 
our entry into a market dramatically changes the incumbent's 
behavior. Price increases are moderated or delayed and channel 
lineups and customer service are improved. These facts are 
documented for a number of markets in detail and covered in my 
written testimony.
    Incumbent monopolists are aggressively pushing a message 
that oversight is no longer necessary because competition has 
arrived. Well, competition has begun to arrive, but during the 
transition to a fully competitive environment we need the 
Government's active oversight and enforcement of the existing 
rules.
    Most immediately, the provisions of the Cable Act of 1992, 
barring exclusivity in the distribution of vertically 
integrated programming, will sunset next year unless the FCC 
acts to retain them. Congress should urge the FCC to prevent 
the sunset of this rule. Further, Congress should close the 
terrestrial bypass loophole and make clear the FCC's power to 
enforce pro-competitive policies. These actions are vital to 
guarantee consumers the benefits of competition.
    I will be happy to answer any questions you may have. Thank 
you very much.
    [The prepared statement of Mr. Currey follows:]

       Statement of Robert Currey, Vice Chairman, RCN Corporation

    Mr. Chairman and Members of the Subcommittee:
    My name is Bob Currey. I am the Vice Chairman of RCN Corporation 
(``RCN''), which is one of the largest new competitive entities in the 
cable, or Multichannel Video Programming Distribution (``MVPD'') 
industry. I am grateful for the opportunity to testify today before the 
Antitrust Subcommittee to give you my company's perspective on the 
state of competition in an industry which historically has been 
dominated by entrenched monopolists.
                            I. Introduction
    RCN, which was created in response to the pro-competitive policies 
adopted in the Telecommunications Act of 1996, is unique in a number of 
respects. We offer our customers a variety of bundled services, 
including competitive local exchange carrier and interstate telephone 
service, high speed internet access services and cable services. We 
focus our efforts on bringing competition to residential consumers. We 
are building out, and relying on, our own state-of-theart broadband 
fiber optic cable network, an investment of many billions of dollars. 
We operate in the Northeast corridor, from Boston to Washington, D.C., 
and in the San Francisco, Los Angeles, and Chicago areas. Through our 
Resilinksm plan, we offer our customers the option of subscribing to 
one or more of our services. In respect to each we seek to provide 
higher value than the competition and, in addition, we offer discounts 
for those who participate in all three. The focus of my testimony 
today, however, is on the video aspect of our business and specifically 
on the state of competition in the cable, or MVPD marketplace. In such 
capacity we are frequently described as a ``cable overbuilder.''
    Before describing RCN's business model and activities, let me 
briefly outline the state of the cable market as I see it. Given the 
very strong economies of scale and scope which exist in the 
construction, installation and servicing of a broadband facility, the 
cable industry has historically been characterized by monopoly in any 
given area. There has been some minor competition in certain markets, 
coming from wireless (so-called SMATV and MMDS) operators, especially 
in large apartment buildings, but on the whole incumbent cable 
operators have accounted for virtually all of the market.\1\
---------------------------------------------------------------------------
    \1\ In a very few markets cable-to-cable competition has existed 
for some years, for example in Allentown, Pennsylvania, in which RCN 
has been competing with another local franchisee for many years. Both 
companies have wired most of the community and most homes have 
immediate access to two sets of cable wires.
---------------------------------------------------------------------------
    Competing with an existing cable operator in an urban area is not 
for the faint-hearted or the thinly-capitalized. Since passage of the 
Telecommunications Act of 1996, however, with its strong emphasis on 
encouraging competition in the telecommunications and broadband 
markets, and legislation addressing certain problems faced by the 
Direct Broadcast Satellite (``DBS'') industry, competitive entry has 
taken root. In its January, 2001 annual survey of the MVPD industry, 
the FCC concluded that traditional cable now accounts for only 80% of 
the market, with DBS having captured some 15%, and other market 
participants, such as overbuilders of traditional cable systems and 
wireless operators, accounting for the remainder.\2\ The terrestrial 
wireless and DBS systems suffer from line-of-sight limitations which do 
not hinder RCN's fiber optic based service. For that reason, it is 
particularly important for city dwellers to have access to a cable-
based competitor like RCN.
---------------------------------------------------------------------------
    \2\ In the Matter of Annual Assessment of the Status of Competition 
in the Market for the Delivery of Video Programming, 7th 
Annual Report, CS Docket No. 00-132, FCC O1-1, rel. January 8, 2001. 
According to the FCC, cable's share of the MVPD market has declined in 
2000 from 82% to 80%, although the number of cable subscribers has 
grown from 66.7 million to 67.7 million. Non-cable MVPD subscribership 
has grown from 14.2 million to 16.7 million, an 18% increase. Most of 
this growth is attributable to DBS, whose share of total MVPD 
subscribers has grown from 10.1 million to 13.0 million, or 15.4% of 
all MVPD subscribers. Local exchange carrier (telephone) participation 
in the MVPD industry is slowing; there is little OVS activity (less 
than. 1%) and little cable participation in telephony.
---------------------------------------------------------------------------
    Nevertheless, it is worth emphasizing that, even as modest 
competitive entry has been occurring, the cable industry has grown ever 
more concentrated, with the 10 largest multiple system owners 
(``MSOs'') now accounting for some 52.5% of the market, and with the 
vertical integration of cable companies and programming vendors growing 
ever more concentrated.\3\ This continuing concentration expresses 
itself also geographically, through the development of ``clustering,'' 
by which large, multiple system owners (``MSO''s) trade systems among 
themselves with the goal of concentrating an entity's ownership in one 
or a few areas, rather than having widespread but less market-dominant 
operations. The industry claims that this clustering allows it to 
undertake system and program upgrades, and no doubt it does. 
Unfortunately, it also has the effect of making a local cable company's 
entrenchment in a metropolitan area even more unassailable than it may 
have been before the clustering took place.
---------------------------------------------------------------------------
    \3\ The Commission states flatly that the market for the delivery 
of video programming ``continues to be highly concentrated and 
characterized by substantial barriers to entry which serve to increase 
the cost of potential entry into a rival's market.'' (para. 
137). The 7th Annual Report notes that the top four MSOs 
serve more than 50% of all subscribers: ATT (19.1%);T/W (14.9%); 
DirecTV (10.3%); and Comcast (8.4%). The Report notes also that the top 
10 MSOs served 75% of the MVPD universe in 1999 but 84% in 2000. 
(para. 169). One or more of the top five MSOs holds 
ownership interests in each of the 99 vertically integrated services. 
(para. 174). Nine of the top 20 video programming networks 
ranked by subscribership are vertically integrated with a cable MSO. 
(para. 175). A ``significant amount'' of video programming 
is controlled by only 11 companies, including cable MSOs. (Id.).
---------------------------------------------------------------------------
    While this is not the place to recite the long and complex 
regulatory history of the cable industry, a few very brief observations 
are necessary to understand the current situation. The basic 
Communications Act of 1934, of course, had no reference to cable 
service, although in the late 1950's and mid 1960's the FCC did take 
regulatory steps to protect the television industry from the rapidly 
growing power of cable operators. Congress itself did not specifically 
impose regulation on the cable industry until 1984, when it passed the 
Cable Communications Policy Act of 1984,\4\ which established the basic 
federal regulatory scheme by which local franchise authorities have 
jurisdiction to authorize cable systems, subject to a limited degree of 
federal oversight. This legislation, however, only provoked growing 
concern about the monopolistic power of the cable industry and the need 
to impose some greater degree of regulation on it. As a result, the 
Cable Television Consumer Protection and Competition Act of 1992 was 
adopted.\5\ This legislation followed three years of contentious 
congressional hearings, was heavily oriented toward regulation, and 
added to the FCC's authority to control cable's rates and practices in 
an effort to address widespread and vocal public concern about the 
economic power and poor service performance of the cable industry. Yet 
it too failed to quell rising unhappiness with the prices and services 
offered by the industry.
---------------------------------------------------------------------------
    \4\ Pub. L. No. 98-549, 98 Stat. 277 (1984), codified at 47 U.S.C. 
Sec. Sec. 521, et seq.
    \5\ Pub. L. No. 102-385, 106 Stat. 1460 (1992), codified in 
scattered sections of Title VI of the Communications Act. See 47 U.S.C. 
Sec. 521, et seq.
---------------------------------------------------------------------------
    Accordingly, the Congress again addressed the issue in the 
Telecommunications Act of 1996 which contains a number of provisions 
specifically intended to encourage competitive entry into the MVPD 
market. The most important of these is section 653,\6\ which creates a 
new mode of competitive entrant, known as an open video system 
(``OVS'') operator. The OVS, a mixture of cable operator and common 
carrier, was designed by Congress to permit local exchange telephone 
companies and others to enter the cable business, enjoy a reduced 
degree of regulation, and offer unaffiliated programmers the 
opportunity, in effect, to program their own small capacity system, 
riding on a portion of the high capacity pipe installed by the OVS 
operator.
---------------------------------------------------------------------------
    \6\ 47 U.S.C. Sec. 573.
---------------------------------------------------------------------------
    RCN has become the country's largest OVS operator,\7\ and has 
entered local markets either as an OVS operator or as a traditional 
Title VI franchised cable company, depending on the circumstances in 
each community. Specifically RCN currently operates as an OVS in 
certain suburbs of Boston, in New York City, in Washington, D.C. and 
certain of its suburbs, as well as in South San Francisco. We are also 
developing traditional franchised cable operations in the Boston, New 
York, Philadelphia, Washington, D.C., San Francisco, Los Angeles, and 
Chicago metropolitan areas. Unfortunately, the OVS model has not proven 
as attractive as one might have hoped due to a variety of factors. 
These include a court decision which struck down the FCC's rule 
eliminating the need for local franchising of OVS systems, the 
hesitation and even reluctance of many local franchising bodies to put 
aside the traditional franchise as a regulatory model and to adopt the 
new OVS concept, and, in addition, certain regulatory decisions of the 
FCC which have had a chilling effect on the OVS approach by permitting 
local cable competitors, in certain circumstances, to require the OVS 
operator to divulge its service and operational plans to a local 
competitor.
---------------------------------------------------------------------------
    \7\ Indeed, there exist no other significant OVS operations 
although Congress and the FCC intended OVS to be the primary source of 
facilities based competition to cable operators. See, e.g., 
Implementation of Section 302 of the Telecommunications Act of 1996, 
Open Video Systems, Second Report and Order, 11 FCC Rcd 18223, 18259 
(1996)(Subsequent history omitted).
---------------------------------------------------------------------------
    Another of the procompetitive steps taken in the Telecommunications 
Act of 1996 was the amendment of section 224 of the Communications Act 
to compel pole-owning utilities to make their poles accessible to cable 
companies and to telecommunications companies and to impose additional 
pro-competitive conditions on the utilities.\8\ RCN has found it 
invaluable to have the benefit of this legislation. As a telecom entity 
which plans to build its own facilities to serve primarily residential 
customers, rather than the more limited universe of commercial 
subscribers targeted by the great majority of competitive local 
exchange carriers (``CLECs''), and as a cable competitor, RCN must run 
its facilities up every residential street and down every alley.
---------------------------------------------------------------------------
    \8\ 47 U.S.C. Sec. 224(e), 224(f)(1).
---------------------------------------------------------------------------
    In Massachusetts, for example, we are currently on 72,000 poles and 
will require access to some 60,000 more. In Pennsylvania we are 
currently licensed for almost 16,000 poles and, ultimately, may need 
access to over 100,000. In Queens, New York, we are on 5,200 poles. 
This means that suitable access to poles is far more important to RCN 
than it is to other telecom competitors. Indeed, we have had to rely on 
the pro-competitive policies embodied in section 224 of the 
Communications Act to address circumstances in which RCN has been 
unable to secure what it deems just and reasonable terms for access to 
utility poles.\9\ In both the Boston and Washington, D.C. markets RCN 
has entered into partnerships with affiliates of local power companies 
in part to assure access to utility poles.
---------------------------------------------------------------------------
    \9\ RCN has experienced difficulties securing access to the poles 
of Verizon in both Massachusetts and Pennsylvania. In the Philadelphia 
suburbs RCN has filed a formal Pole Access Complaint against the local 
power company, Exelon, alleging that Exelon's pole attachment fees are 
excessive, and in other respects unjust and unreasonable. See RCN 
Telecom Services of Philadelphia, Inc. v. Exelon Corp, PA No. 01-
______, filed March 16, 2001.
---------------------------------------------------------------------------
    Earlier, I noted that competing with entrenched monopolists is a 
daunting challenge. The entrant must be able to market its services 
against entrenched cable operators who have substantial advantages in 
the competitive battle: name recognition, an embedded customer base, 
strong economies of scale, established relationships with local 
franchise and governmental authorities, a corporate presence in the 
community, and vertically integrated programming affiliates or 
established contracts for programming.
    The new entrant has no captive subscribers; no initial revenue and 
enormous start-up expenses such as securing the local franchise. This 
latter process alone generally takes six months to a year. Local 
franchise authorities usually attempt to secure as high a price as 
possible for granting a franchise and typically require high standards 
of proof of a franchise applicant's financial and operational 
experience and capability. Multiyear construction commitments are 
normally required. Accordingly, the potential competitor must earmark 
funds, purchase long lead time items, enter into programming 
commitments, hire hundreds of employees in each market, and, most 
important, fight for each subscriber because the local citizens who 
want cable service are probably already customers of the incumbent. To 
use a well-worn metaphor, the lowhanging fruit has been picked. 
Installing fiber optic or coaxial cable throughout a community can cost 
tens to hundreds of thousands of dollars per mile. As a result, it has 
generally been thought that competitive MVPD service based on 
construction of a second local broadband distribution network is not 
sustainable financially \10\ and there has been relatively little of 
it, either before passage of the Telecom Act of 1996, or thereafter.
---------------------------------------------------------------------------
    \10\ Typically, it is said that ``[o]nce an incumbent system has 
captured a large share of the viewing public in a particular area, it 
is quite difficult for a new system to come into the market and offer 
potential subscribers as favorable pricing and viewing options as those 
available from the incumbent system.'' Piraino, A Proposal For the 
Antitrust Regulation of Professional Sports, 79 B.U.L. Rev. 889 (1999) 
at n. 387.
---------------------------------------------------------------------------
    Of course, RCN also enjoys certain competitive advantages: its 
newly designed and installed fiber optic network is among the most 
advanced in the world,\11\ it is able to offer bundled service 
combining local and long distance telephony, high speed Internet 
access, and broadband video from day one. Because it is not an 
incumbent cable operator it is not generally disdained or disliked by 
the general public, as are so many established cable companies whose 
reputation for poor service and high price is well deserved. In fact, 
almost without exception RCN has found that local franchise authorities 
and local residents enthusiastically welcome the introduction of a 
cable competitor.
---------------------------------------------------------------------------
    \11\ See Morgan Stanley Dean Witter Report, March 31, 1999. RCN has 
been rated number 2 out of 100 of the most innovative 
telecommunications companies in America. See Forbes ASAP Dynamic 100 
List, April 5, 1999.
---------------------------------------------------------------------------
    In each of the markets in which we have made a bridgehead in spite 
of the numerous and daunting entry barriers, we have been able to 
fulfill the fundamental pro-competitive premise of the 1996 Act. This 
Subcommittee, of course, does not need to be persuaded that competition 
is a good thing, nor that competition in the video marketplace is both 
desirable and necessary. The continuous increase in customers' cable 
rates, typically well in excess of inflation, is a constant topic of 
concern.\12\ Yet it is interesting to see the theory at work. Economic 
theory recognizes that the cable incumbents, who have enjoyed a quiet 
but very prosperous life for decades, do not welcome new 
competition.\13\ Over the last three years we have been subjected to a 
barrage of anticompetitive activities by incumbent cable companies: we 
have been harassed by pleadings seeking the withdrawal of our OVS 
authority on various specious grounds--pleadings filed both by 
individual cable companies and by cable trade associations. We have 
been subjected to multiple administrative proceedings instigated by the 
cable incumbent in Boston--our first OVS market--as well as litigation 
in federal court brought by the incumbent cable operator which the 
presiding judge urged be withdrawn because it was so lacking in merit. 
We have been denied access to critical programming by our video 
competitors both in Boston and New York and threatened with such denial 
in the Philadelphia area.
---------------------------------------------------------------------------
    \12\ See, e.g., FCC 7th Annual Report on Competition in 
Video Markets (Jan. 2001), para. 155, reporting an overall 
increase in cable rates of 4.8% as compared with a CPI increase of 
3.2%; Communications Daily, July 15, 1998, p. 2, reporting CPI data 
showing cable rate increases of 7.3% over the previous 12 months as 
compared with a 1.7% inflation rate.
    \13\ See Predation In Local Cable TV Markets, Antitrust Bulletin, 
9/1/95 by T.W. Hazlett: ``Cable television operators pursue a 
predictable set of reactions. . . to a potential CATV entrant. . . 
beginning with a vigorous lobbying campaign to deny entry rights. . . 
selective price cutting, preemptively remarketing the first submarkets 
to be competitively wired. . . tying up cable network programming. . . 
delaying access to . . . poles and/or underground conduits. . . and 
creating customer confusion . . ..'' Id. at 11.
---------------------------------------------------------------------------
    For any prospective competitor to have a meaningful chance to be 
commercially successful in introducing competition into a community 
served by an entrenched cable operator, whether or not that incumbent 
is one of the large vertically integrated multiple system operators, 
the competitor must have deep pockets, an ability to postpone profits 
for some years, the most modern technology, and the patience to 
negotiate franchise agreements and rights-of-way agreements with local 
governments, pole attachment agreements with local utilities, and all 
the associated real estate, employment, marketing and related business 
relationships. But all of these pale into relative insignificance 
compared with the need to acquire the product which is to appear on the 
screens of the competitor's subscribers.
    Programming is of course essential to MVPD competition since in the 
absence of appealing programming nothing else matters. RCN is not aware 
that any participant in the MVPD industry disputes this proposition. 
Even the Commission has accepted its root importance: ``A major 
component of the ability to compete with cable systems is the ability 
to secure programming. Ensuring fair and equitable program access is 
the key to fostering the development of vigorous multichannel 
competitors to cable.'' \14\ The general public does not know or care 
about technology, corporate structure, or abstract theories of 
competition. It cares only about the programming and the costs of that 
programming, and it is here--at this core issue--that RCN faces a key 
barrier to the successful implementation of its competitive services.
---------------------------------------------------------------------------
    \14\ In the Matter of Competition, Rate Deregulation and the 
Commission's Policies Relating to the Provision of Cable Television 
Service, Report, 5 FCC Rcd 4962 (1990) (``FCC 1990 Cable Report''), at 
para. 112.
---------------------------------------------------------------------------
    Of course, we anticipated resistance but to be candid the extent 
and intensity of that resistance--the prevalence of anticompetitive 
practices--has really surprised us. I hasten to add the important point 
that it has not deterred us but merely required allocating more time 
and resources to establishing ourselves in various local markets than 
we had initially anticipated.
                      II. Competitive Improvements
    With this brief background, let me turn to illustrations both of 
the advantages to the public of competitive entry and to the various 
difficulties we have encountered. RCN's introduction or announced 
introduction to a market benefits consumers because it leads the 
incumbent to improve its existing offering in one or more ways. 
Sometimes these are voluntary adjustments by the incumbent. Sometimes 
they occur in the context of a franchise renewal when RCN is awaiting 
the award of its own franchise, a process which gives the local 
franchise authority more leverage on the incumbent:
                             somerville, ma
    Incumbent Time Warner announced rate freezes in Somerville, a 
Boston suburb, upon RCN's entry, even though it was raising rates in 
most of the eastern Massachusetts communities in which it was the 
franchisee by 10% to 15%.
                               boston, ma
    The City was able to negotiate a franchise renewal with Cablevision 
which imposed obligations on the incumbent more favorable to the public 
than would otherwise have been possible because RCN was already 
operating in the city as an OVS. Cablevision agreed to increase its 
commitment to public, educational and government (``PEG'') channels and 
increase the channel capacity of its system. Cablevision also moderated 
its regional rate increase in the Boston area because it faced 
competition from RCN.
                             new york city
    In Manhattan the incumbent, Time Warner, adopted an aggressive bulk 
discount plan for apartment buildings targeted for service by RCN.
                         suburban philadelphia
    As RCN has rolled-out its competitive cable and local telephone 
services in suburban Philadelphia communities such as Folcroft, the 
incumbent, Comcast, began offering rate locks and service improvements 
in towns to which RCN was offering or about to begin offering service. 
These special offers were highly selective, and focused specifically on 
the imminent arrival of RCN's competitive service.
                             allentown, pa
    Allentown is one of the very few communities in the United States 
which has been served for 20 years by competitive cable companies. In 
Allentown the competitors are RCN and Service Electric. Both have 
almost fully built-out the city, so that most residences have two 
broadband wires available at each house. As a result of the 
competition, cable rates are significantly below the national average, 
and penetration is higher than the national average (approximately 90% 
of the city is wired by both companies). There are also fewer customer 
complaints on a percentage basis than the industry experiences 
nationally.
                   washington, d.c. metropolitan area
    RCN's affiliate in Washington, D.C., Starpower, has provoked 
dramatic changes in the offerings of incumbent cable operators, 
discouraging price increases and improving service offerings. Upon the 
announcement of Starpower's entry into the market, the D.C. incumbent's 
rate increases moderated from previously announced annual increases in 
the range of 7% to a mere 2% in 1998. Starpower's basic rate in 
Washington, D.C. is $31.95 for 96 channels and no installation fee. 
Comcast charges $33.87 for 56 channels with a $39.95 installation fee. 
In anticipation of competitive entry, Cox Cable announced that it would 
upgrade its cable to 860 MHz capacity in Fairfax County. In Prince 
George's County, Comcast announced an upgrade of its plant beyond its 
franchise obligation in light of Starpower's arrival. Comcast in 
Arlington announced a major overhaul of its channel line-up with 
significant additional channel capacity and digital upgrades to make 
its offerings more competitive with newly-franchised Starpower.
                               in general
    The FCC has broadly addressed this issue in its annual reports on 
the status of competition in the MVPD market.\15\ Typical observations 
are the following: ``[C]ompetition often results in lower prices, 
additional channels, improved services, or additional non-video 
services.'' \16\ ``Generally, we find that in communities where head-
to-head competition is present, the incumbent cable operator has 
responded to competitive entry in a variety of ways, such as lowering 
prices, providing additional channels at the same monthly rate, 
improving customer service, adding new services including high speed 
Internet and telephone services, or by challenging the legality of the 
entrant's activities.'' \17\
---------------------------------------------------------------------------
    \15\ See, e.g., Fourth Annual Report, Assessment of the Status of 
Competition in Markets for the Delivery of Video Programming, 13 FCC 
Rcd 1034 (1998), at para.para. 131-132; Fifth Annual Report, 
13 FCC Rcd 24284 at para.para.  121 and 136-137, and Sixth 
Annual Report, 15 FCC Rcd 978 at para.para. 129-133; Seventh 
Annual Report, supra, at para.para.  213-238.
    \16\ FCC, Seventh Annual Report at para. 39.
    \17\ ld., at para. 213.
---------------------------------------------------------------------------
             III. Opposition From Incumbent Cable Operators
    Almost without exception RCN has found that incumbent cable 
operators will attempt to inhibit, delay, complicate or, if possible, 
preclude altogether competitive entry. Such obstinance deprives 
consumers of the benefits of competition and should not be tolerated by 
policy makers. Among RCN's experiences is the following:
                               in general
    RCN has seen a troubling trend among incumbents to consolidate 
their holdings in a limited number of metropolitan areas, i.e. to 
``cluster,'' and then to build a fiber distribution network in those 
communities. The advantage of using fiber optic distribution is that 
the FCC has held (wrongly, in our view) that the program access 
provisions of section 628 of the Cable Act of 1992 do not apply to any 
programming not distributed by satellite. With clustering, the 
economics of fiber distribution becomes more practical, allowing the 
incumbent to evade the provisions of section 628 of the Act by buying 
the rights to local professional sports programming and refusing to 
share that programming with competitors. This is what Cablevision has-
done to RCN in New York City, and is what Comcast threatened to do to 
RCN in Philadelphia.
    In the Washington, D.C. area, in which Comcast has the dominant 
position, it refused the request of a member of the Arlington, Va. 
County Board to agree in principle to make its vertically integrated 
programming available to competitors but appears to have been deterred 
from curtailing access to Home Team Sports, now renamed ``Comcast 
SportsNet,'' because the Justice Department carefully reviewed 
Comcast's proposed acquisition of that programmer and negotiated an 
agreement with Comcast. Local sports programming is critical to 
entrants because many consumers subscribe to cable programming solely 
or primarily to view such programming; many consumers will not switch 
providers without it.\18\ Starpower also has been as yet unable to 
secure the rights to carry certain other programming, including News 
Channel 8 and MSNBC, due to claims of exclusivity. Clearly the public 
is not served by its inability to view those channels on Starpower's 
system.
---------------------------------------------------------------------------
    \18\ RCN's business plan anticipates a penetration rate of about 
30% of the homes it passes in each market it builds out. As the surveys 
it has taken indicate, approximately 40-58% of any local market would 
essentially be impenetrable to an overbuilder if it lacked access to 
the bulk of local sports programming. The result would be a penetration 
rate of about 15%, a rate so low that no entrepreneur would be willing 
to risk the hundreds of millions of dollars required to overbuild an 
urban area with modern fiber optic plant. In essence, this is the plan 
of the entrenched MSOs. Both the Commission and the Congress have 
repeatedly recognized the special importance of sports programming. RCN 
can provide further detail on this crucial issue if it would be helpful 
to the Subcommittee.
---------------------------------------------------------------------------
                               boston, ma
    In Boston the incumbent refused to make certain programming it 
controlled available to RCN. It also attempted to use the FCC's OVS 
rules to pry proprietary and confidential data from RCN concerning its 
market plans. The FCC rejected the effort. The incumbent also filed 
suit in Federal Court against the City of Boston and RCN's Boston 
affiliate to try to delay the build out of RCN's competitive 
system.\19\ The incumbent refused to share its cable inside wiring with 
RCN in multi dwelling units (MDUs) where the building owners would not 
allow RCN to install its own wiring. Another incumbent, operating in 
the suburbs, sought acquisition of RCN's OVS data. In this instance, 
the FCC ruled partially in favor of the incumbent and partially in 
RCN's favor. The full Commission has been asked to reconsider its 
ruling and the U.S. Court of Appeals for the D.C. Circuit has been 
asked to review the FCC's decision.\20\
---------------------------------------------------------------------------
    \19\ The filing of this suit, Cablevision of Boston, Inc. v. Public 
Improvement Commission, et al., 38 F. Supp. 2d 46 (D. Mass. 1999), 
affirmed, 184 F. 3d 88 (1999), neatly illustrates the anticompetitive 
motives of incumbents. In its suit Cablevision sought to have the Court 
stay further implementation by RCN of its business plan to use existing 
conduit and fiber to accelerate the roll-out of RCN's competitive OVS 
services in the City of Boston. The District Court denied any 
injunctive relief to Cablevision and found that Cablevision's case was 
not likely to succeed on the merits. Indeed, the Court characterized 
RCN as ``a paradigm of the new entrant that Congress contemplated,'' 
and observed that:
    Cablevision has brought this suit, which In have preliminarily 
found has little chance of succeeding, just as the people of Boston 
have a realistic hope of receiving the benefits of fair competition in 
the cable television industry. Those benefits include more choices, 
better service and the prospect of lower prices. It would be contrary 
to the public interest to issue the preliminary injunction Cablevision 
now seeks. Id., at 63. The First Circuit Court of Appeals sustained the 
denial of stay, and found that the suit had little merit. Cablevision 
ultimately dismissed it with no decision on the merits.
    \20\ See, e.g., Time Warner Co. v. RCN BecoCom, LLC, 15 FCC Rcd 
1124 (2000), recon. pending, appeal pending sub nom. RCN Telecom 
Services of New York, Inc. v. FCC, D.C. Cir. Case No. 00-1043, filed 
February 9, 2000.
---------------------------------------------------------------------------
                             new york city
    In New York City one of the incumbents, Cablevision, with some 2.7 
million subscribers, controls programming rights for seven of the nine 
local professional sports teams\21\ and their venues. In early 1999, 
Cablevision revised its sports programming distribution system from 
satellite to terrestrial so as to preclude RCN's carriage of an 
important tier of extremely popular local sports programming. As RCN 
explained to the FCC, the loss of a full slate of local sports 
programming is a serious detriment in marketing RCN's new service.\22\ 
Another New York City incumbent, Time Warner, sought access to RCN's 
competitively sensitive OVS data as Cablevision had done in Boston. In 
this instance the FCC ultimately ruled partially in favor of Time 
Warner and partially in favor of RCN.\23\ Time Warner also declined to 
carry RCN's advertising on its Manhattan cable system, and for a long 
time refused to permit RCN to share apartment building inside cable 
wiring or to use Time Warner's poles to distribute its competitive 
programming.
---------------------------------------------------------------------------
    \21\ These teams are the Yankees, Mets, Knicks, Nets, Rangers, 
Islanders, and the N.J. Devils. Cablevision owns outright two of these 
teams: the Knicks and the Rangers.
    \22\ ``From the viewpoint of marketing, it is not good enough to 
say we offer `most' local sports, or `almost all' local sports. The 
public does not want to have to analyze what is missing; they want to 
know they will get it all, and this is especially important in a 
fiercely competitive environment such as the New York City MVPD market. 
Stated differently, having, for example, 85% of the local sports 
programming is not 85% as good as having 100%; it is a significant 
competitive disadvantage, and this is true whether we have 75% or 85% 
or even 95%.'' Reply of RCN Telecom Services of New York, Ex. A, pp. i-
ii, June 28, 1999.
    \23\ This proceeding, consolidated with the Boston case described 
above, is subject to FCC reconsideration and Court of Appeals review.
---------------------------------------------------------------------------
                              philadelphia
    In the Philadelphia metropolitan area the overwhelmingly dominant 
incumbent, Comcast,\24\ acquired the great bulk of the local sports 
programming, as well as their venues, and threatened to deny RCN long 
term access.\25\' The threat was mitigated only when Comcast faced 
Justice Department review of its plan to acquire Home Team Sports in 
the Washington area. To this day, however, Comcast has refused to enter 
into a multi-year industry-standard contract for local sports 
programming in Philadelphia, but keeps RCN on a revolving three month 
renewal. This is no way to run a business and puts us at constant risk. 
Comcast also was successful in making RCN's effort to secure a 
franchise from the City of Philadelphia so difficult, expensive, and 
time consuming that RCN ultimately abandoned the effort altogether. 
This withdrawal removed some 200 million of potential investment in the 
City and the prospects of hundreds of jobs.
---------------------------------------------------------------------------
    \24\ Comcast serves 1.9 million subscribers in the Philadelphia 
metropolitan area, about 90% of the total subscribership. Nationally it 
is one of the largest MSOs, with some 8.2 million subscribers.
    \25\ Through subsidiaries, Comcast owns a controlling interest in 
the Philadelphia Flyers National Hockey Team, the 76ers National 
Basketball team and two area arenas. It also holds a controlling 
interest in SportsNet which controls the great bulk of the professional 
area sports programming in the Philadelphia DMA. SportsNet carries 
approximately 66% of the games of the Philadelphia Flyers (NHL) and 73% 
of the Philadelphia 76ers' (NBA) regular season games as well as 49% of 
the Phillies' games (MLB). Comcast also owns exclusive rights to 
broadcast games of the Philadelphia Phantoms (American Hockey League), 
Philadelphia Wings (National Lacrosse League), and Philadelphia Kixx 
(National Professional Soccer League), as well as numerous football and 
basketball games of regional colleges and universities. This 
programming is distributed terrestrially to 2.7 million subscribers in 
the Philadelphia DMA. In its own promotional material Comcast has 
touted the strategic importance of SportsNet: ``SportsNet provides a 
significant marketing advantage against satellite TV and other 
competitors.''
---------------------------------------------------------------------------
                            washington, d.c.
    In the Washington, D.C. metropolitan area Media General, which 
operated in a number of suburban counties, followed the approach 
pioneered by Cablevision and Time Warner when faced with competition 
from RCN, and attempted to use the FCC's OVS rules to get access to 
proprietary and confidential business data of Starpower, RCN's 
affiliate. The matter is still pending before the Commission. In 
various D.C. metropolitan area jurisdictions incumbents have sought to 
delay the granting of franchises to Starpower and to influence local 
franchise authorities to impose financially and operationally 
unrealistic obligations on Starpower. Comcast has adopted the practice 
of paying MDU owners up front to sign contract renewals, and seeks 
exclusive agreements wherever it can get them. In northern Virginia in 
particular, Starpower has been locked out of numerous buildings because 
the incumbent has the benefit of an exclusive right to provide service 
to that structure.
                          IV. Critical Issues
    There are other impediments to the successful roll-out of 
competitive cable service. These include the following:
                   denial of access to inside wiring
    Competitive cable providers must have access to tenants in 
apartment and office buildings to survive. About 30-35% of the total 
population lives in multiple dwelling units (MDUs), such as apartments, 
cooperatives or condominiums. The ability to serve this sector of the 
market is crucial because it is generally more profitable due to the 
large number of subscribers in each MDU. For a start-up company, MDU 
access is especially vital since it allows a more rapid build up of 
operating revenue than developing market share by building out service 
to individual homes. However many MDU owners fear that new entrants 
will disrupt the building to install their own wiring to each 
apartment, and incumbents frequently claim that they own the existing 
wiring and by law or contract have the right to remain in the building 
and need not share their wiring with the newcomer. The result is that 
the new competitor is effectively blocked or, at the least, 
significantly impeded in this especially valuable segment of the 
market. RCN has encountered this problem in every metropolitan area.
    The inside wiring issue has been a problem for cable overbuilders 
for some time. Section 624(i) of the Communications Act,\26\ which 
Congress adopted in the Cable Act of 1992, directed the FCC to adopt 
rules governing the disposition of wiring within the cable subscriber's 
home when such subscriber voluntarily terminates service. The FCC 
subsequently adopted such rules setting forth the rights to such wiring 
of the cable provider, the resident, and the building owner, and any 
new competitor. However, the FCC restricted the application of these 
new rules to the wiring inside individual units and up to 12 inches 
beyond such units.\27\ In 1997 the Commission adopted rules governing 
access to home run wiring in cases where an incumbent does not have an 
enforceable right to remain on the property.\28\
---------------------------------------------------------------------------
    \26\ 47 U.S.C. Sec. 544(i).
    \27\ See 47 C.F.R. Sec. Sec.  76.801-2 and 76.5(mm).
    \28\ See Telecommunications Services, Implementation of the Cable 
Television Consumer Protection and Competition Act of 1992, Cable Home 
Wiring, Report and Order and Second Further Notice of Proposed 
Rulemaking, CS Docket No. 95-184 and MM Docket No. 92-260, 13 FCC Rcd 
3659 (1997) (``Inside Wiring Order''), recon. pending and appeal 
pending, Charter Communications, Inc. v. FCC, Case No. 97-4120 
(8th Cir.).
---------------------------------------------------------------------------
    In formulating its inside wiring rules, the FCC anticipated that 
incumbent cable companies, especially in the case of service to MDUs, 
might not cooperate with new video competitors and adopted rules 
specifically designed to address such situations. The Commission has 
therefore gone to great lengths to resolve the many complex bottleneck 
issues related to inside wiring within MDUs, and has adopted 
regulations that attempt to moderate the anticompetitive inclinations 
of incumbents. In explaining these procedures, the Commission 
accurately described some of the problems RCN has faced:

[W]e believe that disagreement over ownership and control of the home 
        run wire substantially tempers competition. The record 
        indicates that, where the property owner or subscriber seeks 
        another video service provider, instead of responding to 
        competition through varied and improved service offerings, the 
        incumbent provider often invokes its alleged ownership interest 
        in the home run wiring. Incumbents invoke written agreements 
        providing for continued service, perpetual contracts entered 
        into by the incumbent and previous owner, easements emanating 
        from the incumbent's installation of the wiring, assertions 
        that the wiring has not become a fixture and remains the 
        personal property of the incumbent, or that the incumbent's 
        investment in the wiring has not been recouped, and oral 
        understandings regarding the ownership and continued provision 
        of services. Written agreements are frequently unclear, often 
        having been entered into in an era of an accepted monopoly, and 
        state and local law as to their meaning is vague. Invoking any 
        of these reasons, incumbents often refuse to sell the home run 
        wiring to the new provider or to cooperate in any transition. 
        The property owner or subscriber is frequently left with an 
        unclear understanding of why another provider cannot commence 
        service. . .. The result, regardless of the cable operators' 
        motives, is to chill the competitive environment.\29\
---------------------------------------------------------------------------
    \29\ Id. at para. 38 (footnotes omitted).
---------------------------------------------------------------------------
    Unfortunately, the Commission's inside wiring rules are grossly 
deficient. They are limited to instances in which the incumbent does 
not have a legal right to retain its wiring on the premises. In many 
states the incumbent cable companies have persuaded the legislature to 
adopt what are known as ``mandatory access laws.'' These laws, with 
variations from state to state, grant cable companies a legal right to 
install their service in MDUs even over the objection of the building's 
owners or managers.\30\ Because the mandatory access laws were crafted 
only for the benefit of Title VI cable companies, they are one-sided 
relics of a by-gone era and have been relied on repeatedly by the 
incumbents to claim that they own inside wiring, even when they can not 
provide any proof of ownership. For its part, the Commission has 
declined to draft its rules so as to preempt these anticompetitive 
statutes, instead expressing hesitation about the scope of its 
authority to do so.\31\
---------------------------------------------------------------------------
    \30\ There are about 18 such statutes.
    \31\ Report and Order and Second Further Notice of Proposed 
Rulemaking, in Docket No. 95-784, MM Docket No. 92-260, at page 81-101.
---------------------------------------------------------------------------
                             program access
    Section 628 of the Communications Act,\32\ adopted in the Cable Act 
of 1992, is vitally important to the development of broadband 
competition. Section 628(b) was enacted in response to widespread 
difficulties experienced by competitors gaining access to programming 
controlled by the incumbent cable companies. The statute therefore 
provides that vertically integrated cable companies cannot engage in 
unfair methods of competition or unfair or deceptive practices in an 
effort to hinder competitors' access to programming controlled by the 
integrated cable companies. It also prohibits discrimination in the 
terms under which such programming is made available to 
competitors.\33\ The FCC however, has interpreted the statute to be 
inapplicable to instances in which such programming is distributed by 
terrestrial, as compared with satellite, distribution.\34\ This 
interpretation of the law makes no practical sense whatever, and has 
created a giant loophole which is being used by a number of incumbent 
cable companies to shift programming previously distributed by 
satellite to terrestrial transmission and then to refuse to make it 
available to local competitors.\35\
---------------------------------------------------------------------------
    \32\ 47 U.S.C. Sec. 548.
    \33\ See 47 U.S.C. Sec. 548(b) and Sec. 548(c)(2)(B). The following 
excerpt from the legislative history of section 628 containing remarks 
by Representative Tauzin provides considerable insight into 
Congressional intent: ``[My] amendment, very simply put, requires the 
cable monopoly to stop refusing to deal, to stop refusing to sell its 
products to other distributors of television programs. In effect, this 
bill says to the cable industry, `You have to stop what you have been 
doing, and this is killing off your competition by denying it 
products.'. . . Programming is the key. . .. Without programming, 
competitors of cable are . . . stymied and who is the big loser? The 
big loser is everyone in America who pays a cable bill. . ..'' What 
does it mean? It means that cable is jacking the price upon its 
competitors so high that they can never get off the ground. In some 
cases they deny programs completely to those competitors to make sure 
they cannot sell a full package of services. So the hot shows are 
controlled by cable. . .. It is this simple. There are only five big 
cable integrated companies that control it all. My amendment says to 
those big five, ``You cannot refuse to deal anymore.' '' 138 Cong. Rec. 
H6533-34 (July 23, 1992) (statement of Rep. Tauzin) (emphasis added).
    \34\ See, e.g. RCN Telecom Services of New York, Inc., v. 
Cablevision, et al., 14 FCC Rcd 17093 (CSB, 1999), application for 
review pending.
    \35\ See, e.g., id, and DirecTV, Inc., et al. v. Comcast, 15 FCC 
Rcd 22802 (2000).
---------------------------------------------------------------------------
    As I have noted above, in three of our principal markets we have 
had serious concerns about access in particular to local sports 
programming. This is not an accident. The cable industry appears to 
have adopted ownership or control of local sports programming as a 
device to capture or assure dominance in local markets. It has long 
been recognized that sports programming is crucial.\36\ Cablevision is 
not only dominant in the New York City sports programming market but 
has investments in a wide variety of sports programming activities.\37\ 
Industry commentators recognize the value of the sports programming 
monopoly to cable operators:
---------------------------------------------------------------------------
    \36\ See, e.g., Implementation of Section 26 of the Cable 
Television Consumer Protection and Competition Act of 1992; Inquiry 
into Sports Programming Migration, Final Report, 9 FCC Rcd 3440 (1994).
    \37\ According to Multichannel News, Cablevision's Rainbow Media 
Holdings Inc. and Fox/Liberty Networks (with which Cablevision has 
sports affiliations) ``either own or are affiliated with more than 20 
regional sports networks that have programming deals with most 
professional teams: 25 of 30 MLB teams, 26 of 29 National Basketball 
Association teams and 19 of 26 National Hockey League squads.'' 
Multichannel News, May 4, 1998, p. 74. The article also comments that 
such programming is a ``gold mine'' for the regional sports networks, 
``[L]ocal events often generate the highest ratings of any cable 
program . . ..'' Id.

[P]rofessional sports leagues have further extended their economic 
        power by allying with other monopolies in related markets. The 
        leagues' relationships with broadcast networks and cable 
        systems have limited competition in local media as well as 
        sports markets. The New York Yankees, for instance, have 
        granted Cablevision the exclusive right to broadcast games in 
        the New York area in exchange for a payment of $486 million 
        over twelve years. Such a relationship, however, does not only 
        increase the Yankees' monopoly profits. By giving Cablevision 
        exclusive control over sports programming critical to any cable 
        system's success, the Yankees have allowed Cablevision to 
        preclude potential competitors from entering the New York cable 
        market.\38\
---------------------------------------------------------------------------
    \38\ Piraino, supra, at 891 (footnotes omitted). Cablevision has 
tied up programming rights to the Mets for 30 years, and the Yankees 
for 12 years. Possessing the rights for seven of the nine teams in the 
New York metro area has allowed Cablevision to triple its previous 
subscribership. Id., at 919.
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    The FCC's narrow interpretation of Section 628 has acted as a 
substantial barrier to entry and we urge Congress to amend the law so 
that the method of program distribution is irrelevant to the 
applicability of the program access provisions. Another important 
provision of section 628 limits the ability of vertically integrated 
cable companies which own programming to enter into exclusive 
agreements that result in denying such programming to new 
competitors.\39\ However, this provision sunsets on October 5, 2002, 
unless the Commission determines in a rulemaking that continuing that 
provision beyond the termination date is necessary to preserve and 
protect competition and diversity in the distribution of video 
programming.\40\ Failure to extend those provisions would be a disaster 
for new entrants like RCN. In any case, however, it is vitally 
important that all provisions of section 628 are vigorously enforced by 
the FCC.
---------------------------------------------------------------------------
    \39\ 47 U.S.C. Sec. 548(c)(2)(D).
    \40\ 47 U.S.C. Sec. 548(c)(5).
---------------------------------------------------------------------------
  difficulty in accessing local rights-of-way on fair and reasonable 
                                 terms.
    Competitive cable providers must have access to local rights-of-way 
to deploy their networks to consumers, whether by attaching to existing 
utility poles or using underground conduit. Sections 253 and 621 \41\ 
of the Communications Act leave control over local franchising and 
local rights-of-way to municipal or other local authorities subject to 
broad principles of federal law. It is extremely common for local cable 
regulators to use the need to secure local authority as an occasion to 
extract substantial revenue or valuable concessions such as free 
municipal service from new competitors during franchise negotiations. 
Numerous FCC and court cases have addressed the scope of local rights 
to impose such charges or obligations under federal and state law. RCN 
has suggested to the Commission that it establish federally-mandated 
standards governing access to such public rights-of-way and require 
local authorities to adhere to reasonable standards of timeliness and 
equitable treatment in granting such access. The Commission has not yet 
acted on this proposal. At the moment there are few clear rules which 
are uniformly interpreted and applied in all areas.
---------------------------------------------------------------------------
    \41\ 47 U.S.C. Sec. Sec. 253, 541.
---------------------------------------------------------------------------
              adverse administrative and judicial action.
    Numerous recent decisions of the Cable Services Bureau are 
anticompetitive and inhibit, rather than encourage, the development of 
broadband competition. Congress should encourage the FCC to enforce the 
pro-competitive provisions of existing law. Some of these are described 
above. In a broader context, RCN has been urging the Commission to take 
a more dynamic and interventionist approach to the preservation and 
encouragement of cable overbuilding by construing its rules in a more 
procompetitive fashion, and by considering the adoption of rules or 
policies to facilitate the transition to meaningful competition. 
Although the Commission frequently acknowledges that problems may exist 
in the implementation of broadband competition, it has often declined 
to address them in a meaningful way and frequently requires far too 
long to resolve individual matters.\42\
---------------------------------------------------------------------------
    \42\ In one instance, involving RCN's September 1998 request for an 
interpretive ruling concerning access to MDUs, the Cable Services 
Bureau has not yet acted.
---------------------------------------------------------------------------
    The Federal Courts have also issued a number of decisions which 
have inhibited the development of broadband competition. As described 
above, section 653 of the Communications Act created a new form of 
cable provider, the OVS which was intended to expedite broadband 
competition. The FCC developed rules implementing section 653 and 
provided that, consistent with Congressional intent to encourage new 
competition, OVS operators could secure an FCC certification within 10 
days and need not be franchised by local communities. This streamlining 
of regulatory hurdles promised to significantly accelerate the 
development of cable competition.
    However, at the urging of local governments and the cable industry, 
the 5th Circuit Court of Appeals struck down the rule 
eliminating the need for a local franchise.\43\ By doing so it severely 
diminished one of the principal advantages of the OVS mode of 
operation, and in fact OVS has not been widely exploited by new 
competitors. There are other federal district and appellate court 
decisions which have interpreted various provisions of the 
Communications Act in a fashion which inhibits the development of MVPD 
competition. Among these are Gulf Power v. FCC (Gulf Power II),\44\ 
which denies to cable or telecom companies providing internet access a 
federally-mandated right to attach their wires to such utility poles or 
conduits and the benefits of regulated rates for such use of utility 
poles or conduit for the distribution of their signals. We believe both 
these decisions seriously misconstrue federal law and have the effect 
of eviscerating Congress' procompetitive purposes.\45\
---------------------------------------------------------------------------
    \43\ City of Dallas v. FCC, 165 F.3d 341 (5th Cir. 
1999).
    \44\ 208 F. 3d 1263 (11th Cir. 2000), reh. den. 226 F.3d 
1220, cert. granted sub nom. FCC v. Gulf Power Co., 121 S.Ct. 879 (Jan. 
22, 2001) (No. 00-843).
    \45\ Many other federal court decisions have construed 
Communications Act provisions in mutually inconsistent ways, thereby 
creating uncertainty about their practical meaning.
---------------------------------------------------------------------------
    In sum, we are seeing competitive entry into the MVPD market, 
primarily from DBS operators and RCN, with a few other cable 
overbuilders. However the market remains highly concentrated and indeed 
the 80% of the market still served by traditional cable entities is 
becoming more and more concentrated as time goes by. Looking back over 
the five years since passage of the pro-competitive Telecommunications 
Act of 1996, we can see in retrospect that significant barriers to full 
competitive entry persist, and that the competition which has emerged 
is in response to the opportunities created by, and fostered by, 
forward-looking legislation and regulation. The bottom line issue here, 
of course, is not the fate of RCN; we will continue to deploy our 
financial and human resources to compete with the entrenched 
monopolists. The bottom line is the consumer, and it is clear from 
these five years of experience that the consumer benefits tremendously 
from the emergence of competitors. We hope this Subcommittee, and 
others in the Congress, will continue to assure that the competitive 
opportunity remains alive and well.
    Thank you very much.

    Chairman DeWine. Mr. Currey, thank you very much.
    Mr. Kimmelman?

 STATEMENT OF GENE KIMMELMAN, CO-DIRECTOR, WASHINGTON OFFICE, 
               CONSUMERS UNION, WASHINGTON, D.C.

    Mr. Kimmelman. Thank you, Mr. Chairman, Senator Kohl, for 
once again inviting me to represent consumers' point of view on 
these important issues.
    My colleagues on this panel present some very, very 
impressive statistics about what their companies are doing, and 
I certainly don't doubt that they are doing very important 
things for our economy. However, I would like to highlight what 
consumers are facing and echo what you both said in your 
opening statements. This is not what was promised with the 1996 
Act.
    It is not unheard of in an industry where rates have gone 
up 33 percent since passage of deregulation law, almost three 
times the rate of inflation, and there are new players in the 
marketplace--it is not unheard of for competition to involve 
rate increases. But I would like to suggest to you that it does 
not fit with the market economics in this instance, and 
therefore truly indicates that there is something more complex, 
maybe even something very fishy going on here.
    If you look at adjacent communities in certain parts of the 
country, they have very different attributes, but we have 
looked at a number and they are all over the country and in 
these adjacent communities cable companies are upgrading, just 
like Mr. Kent's company. And just like Mr. Sachs indicates, 
they are moving to digital service and high-speed Internet, and 
investing billions and billions of dollars. But there are some 
differences, also.
    In one set of communities right next to each other, the 
average local basic cable rate is about $11 a month; in the 
adjacent communities it is $17.67. For the whole package of 
expanded basic, in the first set of communities the price on 
average is $27, compared to $31 in the other communities. Why 
the difference? They are the same cable companies in many of 
these adjacent communities with the same upgrades.
    In both sets of communities, satellite TV is available. In 
both sets of communities, you get that high-cost, very popular 
TV programming--Fox, NBC, CBS, ABC. You get that really 
expensive sports programming--ESPN. As a matter of fact, in the 
communities that I indicate where the prices are cheaper, you 
get more than 10 percent more channels, 71 versus 63.
    There is only one meaningful difference we can find in 
these communities, and we find this throughout the country. In 
the communities where the prices are lower, there are two wires 
competing head to head. That is the only meaningful difference.
    Now, if you look carefully at some of the cable industry's 
explanations for why their rates go up, I would suggest they 
are not presenting the whole picture. Programming costs, as 
reported to the Federal Communications Commission, have 
increased more than $2 billion since 1997. When you add their 
increased advertising revenue and you add their new pay-per-
view services, that virtually covers all those costs.
    And if you look at all of their operating cost increases, 
all of them, and compare it to just their new revenue, not any 
of their basic rate increases, not any of their expanded basic 
rate increases, you find that the new digital services, the new 
high-speed Internet services, the advertising revenue, and the 
others that I mentioned cover 90 percent of all those new 
operating costs.
    So then you find that for basic and expanded basic, since 
1997, consumers are paying more than $4 billion a year more. A 
billion dollars of that would cover the other operating 
expenses. What about the other $3 billion? It looks like it is 
going to the bottom line.
    All the data suggest that there is clear price gouging 
going on in this industry, despite the fact that there are more 
players, not nearly as many as we had hoped for after passage 
of the 1996 Act, but more players. Something is wrong when, 
where there is competition, you get 14- to 30-percent price 
reductions compared to where there is only one company.
    So we urge you to step back and truly declare war on the 
persistent monopoly elements of these industries. We would 
certainly concur with Senator Kohl's suggestions of what needs 
to be done, extending access to programming, urging the FCC to 
more aggressively go after discriminatory practices, making 
sure that the loophole that applies to terrestrial transmission 
of cable programming is closed.
    It is time both to pressure the agency to do more to 
promote competition and for Congress to step in and fill the 
gaps. This should not be an ideological issue. As I think about 
electricity prices going up almost 50 percent in California 
with deregulation and I think about your own committee's 
oversight of the airline industry and what is going on, and 
then add the 30-plus-percent cable rate increases, what is 
obvious here is that deregulation, whether you are for it or 
against it, just doesn't work automatically to translate the 
benefits that many of its proponents argue are there.
    We know in the political process passing legislation often 
involves compromises. It is not an ideological question to go 
back in and make mid-course corrections and make sure that we 
truly deliver a marketplace with more choices and lower prices 
for consumers. I urge you to do that.
    Thank you.
    [The prepared statement of Mr. Kimmelman follows:]

 Statement of Gene Kimmelman, Co-Director, Washington Office Consumers 
 Union on behalf of Consumers Union and Consumer Federation of America

    There is something rotten in the state of ``cable television 
competition.'' Very rotten. Cable rates are up about 33 percent nearly 
3 times the rate of inflation since Congress passed the 
Telecommunications Act of 1996.\1\ There is no sign of meaningful price 
competition in sight. Consumers Union \2\ and Consumer Federation of 
America \3\ believe the need for policymakers to curtail the abusive 
practices of cable monopolies is long overdue.
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    \1\ Bureau of Labor Statistics, consumer price indexes, March 2001.
    \2\ Consumers Union is a nonprofit membership organization 
chartered in 1936 under the laws of the state of New York to provide 
consumers with information, education and counsel about good, services, 
health and personal finance, and to initiate and cooperate with 
individual and group efforts to maintain and enhance the quality of 
life for consumers. Consumers Union's income is solely derived from the 
sale of Consumer Reports, its other publications and from noncommercial 
contributions, grants and fees. In addition to reports on Consumers 
Union's own product testing, Consumer Reports with more than 4 million 
paid circulation, regularly, carries articles on health, product 
safety, marketplace economics and legislative, judicial and regulatory 
actions which affect consumer welfare. Consumers Union's publications 
carry no advertising and receive no commercial support.
    \3\ The Consumer Federation of America is the nation's largest 
consumer advocacy group, composed of over two hundred and forty state 
and local affiliates representing consumer, senior, citizen, low-
income, labor, farm, public power an cooperative organizations, with 
more than fifty million individual members.
---------------------------------------------------------------------------
    Let's put this problem in context. At the time the 
Telecommunications Act became law, consumers were given the clear 
impression that cable prices would go down, not up Consumers Union were 
led to believe competition would expand sooner rather than later. 
President Clinton promised that ``consumers will receive the benefits 
of lower prices, better quality and greater choices in their telephone 
and cable services.'' \4\ The bill's co-sponsor, Rep. Thomas Bliley, 
predicted that that the Act would break up ``two of the biggest 
government monopolies left--the monopolies in local telephone service 
and in cable television. Beside lower rates and better service, the 
result will be innovative new products and services.'' \5\ Based on 
these optimistic predictions, the Act phased out cable rate regulation 
and assumed that the elimination of legal barriers to entering the 
catme business would unleash a torrent of competition from local 
telephone companies, electric utilities and others.
---------------------------------------------------------------------------
    \4\ Aversa, Jeannine. ``Promises, Promises--Two Years after Big 
Telecom Bill: Promises Unfulfilled.'' Associated Press, January 20, 
1998.
    \5\ Id.
---------------------------------------------------------------------------
    Unfortunately, the local telephone companies have virtually 
abandoned efforts to compete with cable.\6\ Electric utilities have had 
difficulty breaking into the market. Even the quickly expanding 
satellite television companies have been unable to discipline cable 
prices. So without the benefit of regulations that prevent cable price 
gouging, only consumers in the few communities where two wire-line 
companies engage in head-tohead competition for cable services are 
receiving the benefits promised in the 1996 Act. Federal Communications 
Commission (FCC) data show that head-to-head competition saves 
consumers 14 percent compared to prices charged by cable monopolies 
(where satellite service is also available), and independent research 
indicates that competition can save consumers as much as 32 percent on 
their cable bills.\7\ Indeed, Dr. Thomas Hazlett of the American 
Enterprise Institute points out that ``even using a conservative 
estimate, the prompt establishment of competition for [video services] 
could save consumers over $1 billion annually.\8\
---------------------------------------------------------------------------
    \6\ FCC Seventh Annual Assessment of the Status of Competition in 
the Market for the Delivery of Video Programming (CS Docket No. 00-
132), January 8, 2001.
    \7\Declaration of Thomas Hazlett, PhD (Resident Scholar, American 
Enterprise Institute for Public Policy Research). In the Matter of 
Applications of Northpoint USA, PDC Broadband Corporation, and 
Satellite Receivers, Ltd. To Provide a Fixed Service in the 12.2-12.7 
GHz Band. (ET Docket No. 98-206.
    \8\ Hazlett Declaration at 2.
---------------------------------------------------------------------------
    A recent Los Angeles Times article compared rates charged by the 
same cable companies in communities with and without competition. The 
article vividly illustrates how much consumers are being shortchanged 
by the persistence of monopoly. In Southern California cities where 
there were two cable companies competing head-tohead, basic cable 
subscribers paid 37.5% less ($11.06/monthly) than basic subscribers in 
cities where there was not a wire-line competitor ($17.69 monthly).\9\ 
Subscribers to enhanced cable in cities with competition paid an 
average of $26.92/month for 71 channels compare that to the $30.93 for 
63 channels that subscribers paid in cities without wire-line 
competition. In addition to price competition in cities where there 
were two cable companies, consumers also received better service 
quality and more channels than in communities where only satellite 
competes against a single cable company.
---------------------------------------------------------------------------
    \9\ Talev, Margaret. ``Consumers Have Little Recourse on Cable 
Rates,''Los Angeles Times, Feb. 4, 2001.
---------------------------------------------------------------------------
    Unfortunately, two-wire towns are the exception to the rule in 
today's marketplace. The cable industry is increasingly dominated by 
large companies that are well positioned to block competition. 
Currently two companies (AT&T and AOL Time Warner) together own cable 
systems serving more than 50% of the nation's cable subscribers. A 
recent court decision may strengthen the largest cable companies' 
hands. AT&T, which had exceeded legal limits for cable ownership when 
it merged with Media One, was under an obligation to divest its 
holdings in Time Warner's cable systems as a result of the FCC's cable 
horizontal ownership rules and the conditions the Commission imposed 
during review of the merger. However, in the wake of a federal court of 
appeals decision on cable ownership limits,\10\ the FCC recently 
suspended the deadline for AT&T to come into compliance with the 
Commission's ownership limits in the merger order,\11\ setting the 
stage for further consolidation.
---------------------------------------------------------------------------
    \10\ Time Warner Entertainment Co., v. Federal Communications 
Commission, No. 94-1035 (D.C. Cir).
    \11\ AT&T Receives a Reprieve on a Deadline to Shed Some 
Holdings,'' New York Times, Mar. 19, 2001.
---------------------------------------------------------------------------
    In order to defend their rate hikes, cable companies often cite 
increases in programming costs as a primary reason for the increases. 
However, upon closer inspection of cable industry data, we find that a 
substantial portion of the increase in programming costs should be 
offset by corresponding increases in advertising revenue. As 
programming gets more expensive, cable companies are receiving greater 
revenue from advertisers who run commercials during the programming. 
For example, FCC data show that during the years cable programming 
costs rose 18-21 %, advertising revenue increased 16%.\12\ Furthermore, 
considerable revenue increases in advanced services such as high-speed 
Internet \13\ and pay-per view services \14\ are offsetting any 
additional expenditures that the cable companies are making in either 
programming or infrastructure investment.
---------------------------------------------------------------------------
    \12\ FCC, Fifth Annual Assessment of the States of Competition in 
Markets for Delivery of Video Programming (CS Dkt. No. 98-102). Dec. 
17, 1998.
    \13\ Cable industry total revenues for advanced services have 
increased from $91 million in 1996 to an estimated $4.2 billion at 
year-end 2000. FCC Seventh Report, Annual Assessment of the Status of 
Competition in the Market for the Delivery of Video Programming (CS 
Docket No. 00-132), Jan. 2, 2001.
    \14\ Cable industry pay-per-view revenues have increased from $647 
million in 1996 to an estimated $1.5 billion in 2000.
---------------------------------------------------------------------------
    Complaints from cable companies that programming costs and capital 
outlays are rising and account for the increase in monthly rates for 
basic and expanded basic monthly service simply do not withstand 
scrutiny.
    First, the largest cable system operators have a significant 
financial interest in about one-third of all national and regional 
programming services. Complaining about rising costs is simply an 
excuse for the right pocket to charge the left pocket more, and to put 
the excess profits in the bank. The substantial vertical integration 
into programming and the market power that the largest cable operators 
enjoy blunts any incentive cable companies have to resist price 
increases.
    In addition, even at the local level, the complaint about rising 
programming costs does not hold water. Since the passage of the 1996 
Act, cable revenues have increased much faster than costs. Since 1996, 
total revenues are up 50 percent, and operating revenues are up 43 
percent.\15\ Average operating revenues (total revenues minus operating 
costs) are up 32 percent.\16\ Most notably, the revenues that are 
associated with the expansion of systems--advertising, pay-per view and 
shopping services, advanced services and equipment are up 123 
percent.\17\
---------------------------------------------------------------------------
    \15\ FCC Seventh Video Competition Report at 102, Table B-6. is Id.
    \16\ Id.
    \17\ Id.
---------------------------------------------------------------------------
    The dollar value of revenue increases for new and expanded services 
since 1997 alone swamps the increase in programming costs. It would 
cover over 90 percent of cable's increase in total (programming and 
non-programming) operating costs. Viewed in this way, virtually all of 
the increase in basic and expanded basic service revenues have been 
carried to cable's bottom line in the form of increases in operating 
profits.
    While there are certainly capital costs that must be covered with 
this increasing flow of operating revenues, cable companies have 
exhibited an irrational exuberance for acquisitions that dramatically 
diluted the assets of the industry's dominant firm. AT&T's bidding war 
to become the dominant cable firm tripled the price of cable systems 
and helped reduce its stock price by almost three-quarters. Driven by 
these outrageous acquisition costs and unchecked by price competition 
or regulation, basic service ratepayers have been socked with abusive 
price increases. (See Attachment A).
    While Direct Broadcast Satellite television (DBS) continues to 
grow, for most consumers it remains more expensive and less attractive 
than cable. In addition to problems (often in urban areas) obtaining 
satellite reception, or failure to receive local broadcast channels 
with satellite TV, the high cost of installation and multiple TV 
hookups still makes DBS significantly more expensive than cable.
    The FCC's recent finding that ``DBS is a substitute for cable and 
exerts a small (as shown by the small magnitude of the DBS coefficient) 
but statistically significant influence on the demand for cable 
services,'' should not be interpreted to suggest that DBS disciplines 
the abusive pricing practices of cable systems. Leaving aside the fact 
that the FCC data are self-reported, self-selected, unaudited data in 
which forty percent of the respondents left out the key variable (DBS 
penetration), the data show that satellite exerts no significant effect 
on cable prices.\18\
---------------------------------------------------------------------------
    \18\ As a strict economic proposition, a statistically significant 
cross price elasticity is a much better demonstration of the 
substitutability of DBS for cable services. DBS continues to be a niche 
market technology that may substitute for cable in the high capacity, 
high cost market segment and in rural areas. It does not compete head-
to-head with cable in any broad sense.
---------------------------------------------------------------------------
    This is exactly the point we have demonstrated time and again in 
our analysis of cable price increases. It makes more sense for cable to 
raise prices and lose a small market share to DBS than it does to 
exercise price restraint.\19\
---------------------------------------------------------------------------
    \19\After two decades of relentless price increases (except for a 
short period of regulated price restraint), it should come as no 
surprise that cable is beginning to approach the limit price set by 
satellite in an increasing segment of the market, hence the fact that 
the FCC's competition report finally shows a small responsiveness of 
cable to DBS penetration. What this means is that the monopoly abuse of 
cable operators has become embedded and institutionalized in the 
market. The rip off of consumers is permanent, although its rate of 
escalation may slow in the years ahead. It will remain until 
policymakers gain the courage to relieve the public of this cable 
monopoly tax, or some new technology with cost characteristics that can 
compete with cable comes along to break its iron grip on the 
multichannel video programming market.
---------------------------------------------------------------------------
    And technological developments may strengthen the hand of cable and 
reinforce its ability to abuse market power. The roll out of digital 
cable and the bundling of high speed internet access erode the ability 
of DBS to compete even in high capacity niche markets. By allowing the 
cable companies to leverage their market power base in cable into the 
high speed Internet access market, the FCC has all but ensured that the 
abuse of consumers will continue. Three years after consumers asked the 
FCC to begin requiring cable companies to open their systems to 
multiple high-speed Internet service providers, virtually all cable 
companies still sell high speed service on an exclusive basis and 
bundle it with video services. The best chance for a technological 
development to weaken the market power of the cable operators-streaming 
videohas been destroyed by the FCC's failure to require open access.
    Today's ``hands off' legal and regulatory climate does not bode 
well for consumers. Prohibitions on exclusive deals in cable television 
programming could expire this year if the FCC fails to extend its 
``access to programming'' rules,\20\ which will give the largest cable 
companies (which own vast programming in addition to their cable 
networks) even more sway over potential competitors. Not only must this 
programming remain accessible to cable's potential competitors, but 
Congress should consider expanding this requirement to include cable-
owned regional sports channels or other popular programming that cable 
companies directly or indirectly prevent from being made available to 
others. And the nondiscrimination obligations should apply regardless 
of whether cable distributes its programming terrestrially or by 
satellite.\21\
---------------------------------------------------------------------------
    \20\ 1992 Cable Act, Public Law 102-385, 47USC548.
    \21\ The FCC has interpreted the 1992 Cable Act's access to 
programming provisions to apply only to satellite distribution 
channels.
---------------------------------------------------------------------------
    In addition, the Federal Court of Appeal's recent ruling regarding 
cable ownership limits in Time Warner Entertainment, Co. v. Federal 
Communications Commission \22\ has created an even greater risk of 
increased marketplace domination by just a small handful of large 
companies. The court reversed and remanded the FCC's horizontal 
ownership limit (which limited any one company to a maximum of 30% of 
the nation's cable and satellite subscribers), holding that the FCC had 
not adequately justified its limits on purely competitive grounds, and 
was not allowed to justify its limits with ``diversity'' concems. 
Although FCC Chairman Powell has indicated that he thinks the court's 
decisiorv, was incorrect in its exclusion of diversity concerns from a 
properly' formulated cable ownership limit,\23\ he so far shows no 
interest in seeking a rehearing or appeal of the court's decision. We 
believe it is essential that the FCC challenge this court decision as 
an inappropriate reading of the statute, its legislative history, and 
the Commission's appropriate authority to make legitimate regulatory 
judgments in establishing ownership limits.
---------------------------------------------------------------------------
    \22\ Time Warner Entertainment Co. v. Federal Communications 
Commission, No. 94-1035 (U.S. App., DC Cir.) Mar. 2, 2001.
    \23\ Testimony of FCC:Chairman Michael Powell before the House 
Telecommunications Subcommittee, March 29, 2001.
---------------------------------------------------------------------------
    Finally, a proceeding currently before the FCC showcases the high 
barriers to entry faced byA would-be cable competitors. North poi nt/
Broadwave is a promising potential compEittor to cable and satellite TV 
that is trying to secure a license for its service, but is oaught in a 
regulatory morass at the FCC. After having invested large sums to bring 
ali patented technology to market-a technology which offers a practical 
and ingenious solution to our country's spectrum shortage and lack of 
competition for video services--the FCC appears inclined to delay or 
thwart cable and satellite competition by denying Northpoint a license 
and instead begin proceedings to auction this spectrum.\24\
---------------------------------------------------------------------------
    \24\ FCC ET Docket No. 98-206, RM 9147, RM 9245. While there are 
numerous instances where we believe spectrum auctions offer enormous 
consumer benefits, this is not one of them. If there were ever an 
instance where consumers deserve immediate access to more choices and 
lower prices, it is in the cable and satellite markets. We believe that 
the failure of cable deregulation to deliver lower prices and better 
service requires the most aggressive regulatory efforts to let 
potential competitors like Northpoint enter the market as soon as 
possible.
---------------------------------------------------------------------------
    With cable prices continue to rise at an alarming rate, and no sign 
of meaningful price competition, consumers believe measures designed to 
jump-start market entry and prevent--monopoly abuse are needed. 
Potential competitors like North point/Broadwave should be allowed to 
enter the market and begin earnest, pricedisciplining competition. Most 
importantly, Congress must renew and expand nondiscrimination 
requirements where cable retains monopoly power over content and 
distribution of video programming and high-speed Internet services.
    Finally, we urge you to ensure that the FCC does everything in its 
power to prevent further cable consolidation or unfair distributional 
arrangements that thwart the expansion of more choices and lower prices 
for consumers.
[GRAPHIC] [TIFF OMITTED] T7277.001

    Chairman DeWine. Thank you very much.
    Let me welcome William Johnson and Marsha Globerman from 
the FCC's Cable Services Bureau. They are here with us today 
and we appreciate that very much. They have submitted a 
statement for the record, and without objection we will make it 
a part of the record at this point.

    Chairman DeWine. Mr. Kimmelman, what do you think of Mr. 
Sachs' argument about these extra channels, that really I ought 
to be happy because I am getting well over 100 channels now on 
my cable system?
    Mr. Kimmelman. Well, I think people probably like more 
rather than less, but the fact of the matter is that using Mr. 
Sachs' own measurement, in the communities where you have two 
wires the price per channel is approximately 45 cents and where 
there is only one cable company the price is more than 60 cents 
a channel.
    The FCC has consistently shown a 30-percent differential 
between wire-to-wire competition in one cable company. So while 
cable companies are adding more channels, I don't believe they 
are doing it at a fair price to consumers.
    By the way, Mr. Chairman, I would just be interested to 
have a poll of everyone in every one of these communities who 
faced a couple-buck cable rate increase last year to identify 
the three new channels they got for it. I bet you they are not 
very highly watched, popular channels.
    Chairman DeWine. Mr. Sachs, do you want to respond to that? 
Just jump right in.
    Mr. Sachs. I will be happy to. There is continued consumer 
demand for services that aren't offered on cable systems, and 
whether it is Arts and Entertainment's new History Channel or 
Odyssey, a new women's channel, or the newly launched National 
Geographic Channel, we are hearing from customers that they 
want new programming. Programming has costs associated with it.
    In Mr. Kimmelman's analysis, he spoke of electric rates in 
California. Well, when electric prices go up, the consumer is 
not receiving more kilowatts for that. When cable prices are 
adjusted, consumers are receiving more product and service for 
it. If we look at the period since cable--and we are really 
talking about cable program service tiers, not the underlying 
basic rates, but since those were deregulated, which is as of 
the end of March 1999, we are talking about a 2-year period.
    There have been two cycles of cable rate increases. Those 
increases have been each year about 2 percent above inflation, 
and at the same time consumers have received more programming. 
So I believe what I said in my opening statement is correct 
that--and this is consistent with what the FCC found--on a per-
channel basis, the cable rates essentially have been flat.
    I think the one other thing that is probably fair to say is 
when you are looking at cable prices, you really have to look 
community by community. You also have to say, compared to what 
in terms of entertainment and information value.
    I was at the movies with my wife Saturday night--$8.75 for 
a ticket for a 2-hour movie. There were just the two of us. If 
it were a family of four, you are looking at $35.
    Chairman DeWine. You go in the afternoon if you are a 
family of four.
    [Laughter.]
    Mr. Sachs. You could, and maybe you should.
    Chairman DeWine. That is what the DeWine family does.
    Mr. Sachs. The newsstand price of the Wall Street Journal 
this week went from $.75 to $1.00. Well, you know, if you 
happen to buy it everyday at the newsstand, that is $5.00 a 
week.
    You look at cable where the average customer is taking your 
basic and expanded service and is paying something in the 
neighborhood of $35 a month. The average household is watching 
television 7 hours a day, 30 days a month. Compared to other 
entertainment and information options, cable remains a very 
good value.
    Chairman DeWine. Mr. Hartenstein, assume for me that there 
is no change in the law, that we do not change the law, as you 
have suggested should take place. You have testified, I believe 
I wrote down correctly here, 61 percent of the households--you 
now have the ability to offer them local TV as part of the 
package. Is that where you are, 61 percent?
    Mr. Hartenstein. That is correct.
    Chairman DeWine. Assuming no change in the law, when do the 
other 39 percent get theirs?
    Mr. Hartenstein. With no change in the law--
    Chairman DeWine. No change in the law. Assume that for me. 
You have already made your point about you need a change in the 
law.
    Mr. Hartenstein. With no change, we can do no more markets 
than we have up today because the new satellite that we are 
putting up would then only serve to fill up all of the 
channels, the ``must carry'' that we have for the markets that 
we already have up.
    If we have that same spectrum and the satellite that we are 
putting up, we could expand to perhaps as many as 80 markets 
and get closer to about 79, 80 percent of the households of the 
entire country coverage, and that is what we would propose to 
do.
    Chairman DeWine. You might get to Dayton, Ohio, sometime?
    Mr. Hartenstein. I picked those cities specifically because 
they are the next ones that we would go to if we don't have to 
do the--
    Chairman DeWine. I get the argument. We all understand that 
argument.
    My time is about up. I am going to go ahead and vote. We 
are now about 5 minutes into a vote. I am going to turn it over 
to Senator Kohl. He is going to go as long as he wants to go 
and when he is done, I suggest, Herb, that you stop at that 
point and we will take a break until we come back.
    Senator Kohl. That is fine.
    Chairman DeWine. Senator Kohl?
    Senator Kohl. Thank you, Mr. Chairman.
    Gentlemen, we believe that cable rates are increasing and 
we have heard the explanations for these price hikes, but be it 
the cost of upgrading or expensive programming, Congress has 
reacted in the past to an unchecked trend of rising prices. But 
I would like to see competition, not the Government, discipline 
rates.
    Mr. Sachs, I have two questions. Can we expect cable rates 
to level off any time soon, and how would you describe the 
state of price competition? Is it vigorous?
    Mr. Sachs. I think the answer to your first question 
depends on our costs. Not to avoid your question, but our rates 
are a function of our costs. What is happening and will happen 
more as we introduce new services like movies on demand that 
Mr. Kent spoke of and high-speed data and cable telephony is 
that there will be reduced pressure on basic and expanded cable 
rates.
    Insight Communications, for instance, another NCTA member 
company, has been very aggressively marketing video on demand. 
Their increases last year were in the 4- to 5-percent 
neighborhood because 20 percent of their subscribers in the 
first year had signed up for new digital services. So those 
digital services are actually subsidizing the basic-only and 
basic and expanded subscribers.
    So as we have more sources of revenue, I would expect to 
see the pressure on basic rates reduced. But when we are seeing 
double-digit increases in programming costs year to year, and 
sports increases in the mid-teens, it is difficult to keep your 
rates at inflation.
    Mr. Kimmelman suggested that because of advertising revenue 
and pay-per-view revenue, all the programming cost increases on 
basic ought to be absorbed. The vast majority of the 
advertising revenue does not flow to the local cable operator; 
it flows to the program networks. And as to pay-per-view, there 
are programming costs associated with that as well.
    Mr. Kimmelman. If I could just clarify, Senator Kohl, I am 
not counting the $8 billion that flows to the programming 
networks, only the $1 billion-plus increase since 1997 that has 
flowed to actual cable operators, according to your submissions 
to the FCC.
    Senator Kohl [presiding.] Mr. Kent, what would you tell the 
subscribers in Wisconsin about the future of their rates?
    Mr. Kent. Senator Kohl, our research has shown that in this 
competitive environment our consumers are much concerned about 
quality of service, about the channel lineup, and about the 
advanced offerings that we can provide our customers.
    The situation we have been in over the past several years 
is that, frankly, up until we launched our digital product in 
this industry, which is only about a year-and-a-half to 2 years 
ago, we had an inferior product to direct broadcast satellite. 
They had enhanced channel capacity and were able to offer a 
superior product with more channels. We are just now catching 
up, and we now have a level playing field where we have spent 
the dollars, added our channel capacity, particularly in 
Wisconsin, and we now have pretty much the same number of 
channels as DIRECTV and EchoStar for similar offering.
    What we have seen is this year--and I can document it. I 
have to tell Mr. Kimmelman that prior to being a cable 
operator, I was a CPA and I can assure him that pay-per-view 
revenues and ad sales don't come close to earning an adequate 
rate of return on our investment on upgrading our plant.
    The situation is such that this year alone, Charter 
Communications has experienced a 24-percent increase in our 
programming costs, half of which is adding of channels to try 
to provide a level playing field with our satellite 
competitors. The other half is just sheer inflation increases, 
particularly sports inflation.
    Where Charter is today is our margins, the gross revenues 
less programming costs, are absolutely decreasing. We cannot 
raise our rates to recoup the full amount of programming costs 
that we are absorbing, so we are trying to remain competitive. 
Where we are competing significantly on price is in the 
advanced services, in our pay channels.
    Just last year in Wisconsin, and frankly nationwide, for 2 
and 1/2 months we had what we called a Summer Sizzle. For 
$49.95 a month, you could get every single digital and analog 
offering, including all the pay channels that we offered, which 
was about a $35 discount from our normal cost and frankly about 
a $27 discount to DIRECTV.
    Today, those same consumers have the ability to take that 
service for $10 less than DIRECTV. So there is significant 
price competition going on across all of our offerings. I think 
the problem with basic and expanded is until we get sports 
inflation under control, it is going to be hard for us to 
decrease our rates. In fact, DIRECTV and EchoStar have the same 
problem and have also recently increased their rates.
    Senator Kohl. Thank you, gentlemen. We will have to stand 
in recess until the votes are completed.
    [The Subcommittee stood in recess from 11:04 a.m. to 12:02 
p.m.]
    Senator DeWine [presiding.] Well, let me apologize to our 
panel and to our audience. The first vote in the Senate took 50 
minutes. The second one only took a few minutes, but it is one 
of the interesting things about having a divided Senate. We 
have a lot of close votes and we have the Vice President who is 
even closer, so it is going to be an interesting week.
    Let me start again with you, Mr. Hartenstein. You have 
stated in your testimony that you don't believe the FCC should 
permit competitors to use the spectrum that your company uses 
to provide its services. Northpoint is one company that would 
like to do so, and we certainly appreciate your concerns and 
understand that you want to ensure that your business can 
deliver its service without interference from other services.
    However, I understand that there have been several tests 
performed that have shown minimal interference. Why have these 
tests failed to alleviate your concerns?
    Mr. Hartenstein. Without getting into some of the 
technical--
    Chairman DeWine. Don't do that. Thank you.
    [Laughter.]
    Mr. Hartenstein. I won't. Thank you.
    Chairman DeWine. Just give me the summary.
    Mr. Hartenstein. The tests have been problematic, I think, 
to say the least. We did, we feel, have a positive step forward 
when a few months ago the FCC agreed to bring in an outside 
firm, a third party, to conduct the tests.
    Chairman DeWine. Excuse me. You are going to have to be a 
little more specific than ``problematic.'' What do you mean? 
You don't trust them, you don't like them, they are no good? 
What is the deal?
    Mr. Hartenstein. Up to before the FCC brought in a third 
party, it was, if you will, EchoStar's and DIRECTV's tests and 
analysis versus Northpoint's, and I think the FCC saw the 
wisdom in bringing in a neutral third party to conduct the 
tests.
    As we stand today, those tests have commenced. There is an 
issue, however, because the DBS providers and the trade 
association for DBS have not been allowed to review the test 
procedures and the actual test setup to verify that it would 
actually replicate a real-life situation.
    We in the DBS industry--and DIRECTV and EchoStar I think 
can speak together on this--are not at all afraid of 
competition. For gosh sakes, we are up against cable which has 
the market power and the size, and we are not afraid of that. 
What we are very concerned about, as I think anybody who uses a 
portion of the spectrum, is that when a new application would 
get planted on top of you in the same spectrum with the 
potential to cause interference and cause interruptions and 
outage. That is what we are concerned about. If the tests are 
done above board and if the procedures in doing the tests are 
shared and made available to all parties, then we will stand by 
the results of those tests.
    Chairman DeWine. Mr. Currey, I wonder if you could 
elaborate a little bit on your comments about both the 
Philadelphia and the New York markets as far as sports. It has 
been my experience in talking to people both in the business 
and also as consumers that, maybe to state the obvious, sports 
is just an unbelievable draw.
    One of the things I would tell Mr. Hartenstein is when I 
was trying to decide in Cedarville, Ohio, whether I was going 
to get DIRECTV or not was what sports we could get and whether 
I could see the Cincinnati Reds. I don't know that I am unique 
to anybody else, but I think sports is just huge.
    I am kind of intrigued by your written testimony and the 
summarization you made of it, and I wonder if you could maybe 
describe the market in New York and Philadelphia in regard to 
sports and the withholding of that from basically your ability 
to function or others to function and offer consumers what they 
want, which is sports. You mentioned in New York, I guess, 7 of 
9--well, you tell me; go ahead. You said 7 of the 9 sports 
are--
    Mr. Currey. Controlled by Comcast, and the venue.
    Chairman DeWine. Yes. Tell me about that.
    Mr. Currey. Well, maybe just a preliminary comment about 
this whole programming issue. We talked about the cost of it. 
Yet, if you look behind that cost, too, and who owns a lot of 
that programming, that is also highly concentrated among the 
largest cable operators in the country. So a lot of that profit 
is going right back into that company.
    Chairman DeWine. They own the product?
    Mr. Currey. Yes, they do; in many instances they do.
    To your point, though, cost is one thing. More important is 
the withholding or the threat of withholding of that program. 
So while in New York we can get sports from Comcast, our 
customers don't know what sports they are going to get because 
they allow us certain sports, but they won't tell us which 
sports we are going to get.
    So you may want the Cincinnati Reds, and that day you are 
going to get the Cleveland Indians and the Chicago Cubs. It 
would have to be a local one, but in New York they control 7 of 
the 9. The only two they don't control are professional 
football, so they have got hockey, basketball, and baseball.
    Chairman DeWine. So they have got everything but football?
    Mr. Currey. Yes, sir. The more problematic one for us is 
also Philadelphia, though, where Comcast has the same control 
over the sports as I described. What they do to us there is not 
only threaten us with denial of that programming, but then sign 
a 3-month contract with us so that it is commercially available 
for 3 months. We don't know when they are going to not re-up it 
for the 3 months. Then, worse, they will tell their salespeople 
to go out; don't switch to RCN because you don't know how long 
they are going to have sports programming.
    To your point, our market research shows that about 50 
percent of the consumers will not even consider switching 
unless they can be guaranteed that they are going to have the 
sports programming of the incumbent provider. So it is a 
critical issue, not only getting it and getting it at a 
reasonable rate, but more so just the guarantee that you can 
get it.
    We are not asking for subsidies, we are not asking for it 
to be free. We are willing to pay a competitive price for it, 
but we have to have it and we have to be able to tell our 
potential customers that--
    Chairman DeWine. So your point is that at least in the 
Philadelphia market they just jerk you around, is what you are 
saying.
    Mr. Currey. That is exactly right.
    Chairman DeWine. And getting back to the New York market, 
where are you with that?
    Mr. Currey. Well, again, that is Comcast.
    Chairman DeWine. You are in there?
    Mr. Currey. We are in.
    Chairman DeWine. It is your market?
    Mr. Currey. Yes. In the Philadelphia market, we are not 
just in the city; we are going to build in the Philadelphia 
suburbs. We are not just going to the city. We are going to 
spend the money, but we finally just gave up after 2 and 1/2 
years. We have enough other cities that want us to come to town 
that recognize the benefits of competition, recognize that the 
incumbent starts to behave to withhold prices and add channels.
    The mayor of Detroit's office called us after Philadelphia 
and said Comcast is a competitor here, but they are not located 
here; come to Detroit; we would love to have a competitor. And 
there are multiple examples of that right now, that the cities 
recognize the benefits to their consumers and they would love 
to have us come to town. So why stay in a city that really 
doesn't want you? We don't have to do that anymore.
    Mr. Hartenstein. DIRECTV and EchoStar, Mr. Chairman, didn't 
even get the 3-month rolling option from Comcast. We have been 
denied access all along.
    Chairman DeWine. In what markets, then?
    Mr. Hartenstein. In Philadelphia, if you are a DIRECTV 
customer, we do not deliver the local, regional sports channel 
there. So you don't get the Sixers' games, you don't get the 
Flyers' games.
    Chairman DeWine. So they have totally denied you?
    Mr. Hartenstein. Yes, yes.
    Chairman DeWine. It is not a price issue?
    Mr. Hartenstein. We said the name the price and there is no 
price.
    Chairman DeWine. If you can't have that product, I don't 
know how you compete. We all have our own example, but when I 
checked you all out, I wouldn't have gotten you if I couldn't 
have gotten the Cincinnati Reds. I just wouldn't have done it, 
and so if someone could deny you that, you are at horrible 
disadvantage, it would seem to me.
    Mr. Currey. I just wanted to correct the record. I made a 
mistake. I commented on Comcast in New York, and it is 
Cablevision. It is Comcast in Philadelphia and Washington, 
D.C., just to correct the record.
    Chairman DeWine. Thank you very much.
    Mr. Sachs. Mr. Chairman, may I be heard on that topic?
    Chairman DeWine. Yes.
    Mr. Sachs. The vast majority of cable programming networks, 
satellite networks, are not owned by cable operators. Going 
back to the time of the 1992 Act, there was about 50-percent 
vertical integration. That is down to about 35 percent, and 
when AT&T broadband completes its spin-off of Liberty Media, 
that percentage will go down further.
    There is a very limited amount of exclusive programming 
today, and it is not limited just to cable. DIRECTV has the NFL 
all-you-can-eat package on Sunday afternoons.
    Chairman DeWine. All you can eat?
    Mr. Sachs. All you can eat, all you can consume, any city, 
any game, which has been advertised quite heavily and it is a 
very good competitive tool that DIRECTV has. So I think to 
complete the picture, you have to--
    Chairman DeWine. Your point is that is exclusive. Is that 
right?
    Mr. Sachs. It is not available to any cable companies.
    Mr. Kent. Nor any other satellite provider.
    Mr. Currey. But I would add, look at his penetration in 
Philadelphia or other urban areas. It is not the 15 percent or 
17 percent that he has nationwide. It is much less; it is 
probably a third of that, and part of that is attributable to 
the lack of local sports programming.
    Mr. Kimmelman. Mr. Chairman, if I could just add, as we 
know, programming is not all equal. As you just pointed out, 
you wouldn't have gotten the service if you didn't have your 
favorite teams. Of the channels that are owned by cable 
companies, it turns out that among the top most viewed cable 
channels about half are owned by cable companies; among the top 
20, about half; among the top 30, about half.
    So while, when you go down to 200 channels, a whole bunch 
of the small ones are independent, a lot of the most popular 
ones are owned by the cable companies themselves. Obviously, 
these are the marquis-draw channels that, like yourself, are 
the reasons why consumers would want a particular service.
    Mr. Hartenstein. Mr. Chairman, if I may just clear the air 
on it, DIRECTV currently is the exclusive DBS provider for the 
NFL Sunday Ticket service, the so-called all-you-can-eat. That 
doesn't preclude the consumer's access to probably five to six 
games every week of NFL between CBS, the Fox feeds on Sunday, 
the ESPN, and then the ABC feeds.
    Chairman DeWine. Right, right, but if I want that package, 
the only place I can get it is from you?
    Mr. Hartenstein. From me or from C-BAN satellite, the 
larger dish. Whether the product is available to cable is an 
issue frankly between cable and the NFL. There is no mention of 
that in our agreement.
    Chairman DeWine. Your agreement is a non-exclusive 
agreement?
    Mr. Hartenstein. Yes. What I said is we are the exclusive 
DBS distributor for that. We negotiated with the NFL, which is 
an independent third party. There is no cross-ownership between 
DIRECTV and the NFL.
    Chairman DeWine. So there is nothing in your contract that 
says they can't sell that to cable. Is that what you are 
saying?
    Mr. Hartenstein. That is correct.
    Chairman DeWine. OK, so they have decided to market it 
differently for cable?
    Mr. Hartenstein. Yes, and the NFL is an independent third 
party which has no reason to favor, no incentive to favor one 
distributor over another. On the other hand, Comcast in this 
case--and I don't disagree with you, Mr. Sachs. You are right. 
The amount of vertical integration has gone down. By the way, 
we never had a problem with Liberty on any of the content.
    But I think there is an incentive to favor in the case of 
Comcast, namely themselves, to what is their only competitor in 
the Philadelphia market, which is DBS, and presumptively here 
Mr. Currey's company to come in and overbuild. So those are the 
reasons that I think we both feel strongly about cleaning up 
that loophole in the program access provision and continuing it 
beyond the sunset of next year.
    Chairman DeWine. Let me ask this question to any members of 
the panel who would like to respond. Section 304 of the 1996 
Telecom Act required the FCC to open up the set-top box market 
to competition. Why do you think we haven't seen competition in 
this area and what more needs to be done to foster competition?
    Does anyone want to jump on that one?
    Mr. Sachs. I would be happy to speak to that. In 1992, when 
Congress reregulated cable rates, that included set-top boxes. 
With the 1996 Act and deregulation in 1999 of the cable program 
service tiers, regulation of set-top boxes continued. So the 
cable operator today--its equipment is price-capped at 11.25 
percent over cost. Consumer electronics retailers are 
accustomed to much higher margins than an 11-percent markup 
over cost. So there has been little economic incentive for them 
to compete with us on that basis.
    The other factor there is that with DIRECTV and with 
EchoStar, they are functioning as the local distributor and 
they are working out arrangements which involve some commission 
and perhaps some continued revenue stream from that subscriber. 
With cable being a local business, 30,000 separate franchises 
in local offices, we are for the most part our own local 
distributor. So there is no economic benefit to the cable 
operator to be paying out to Circuit City or Radio Shack or 
Best Buy a continuing revenue stream on set-top boxes. So there 
is not an economic proposition that is particularly attractive 
to the consumer electronics retailers.
    Chairman DeWine. Anybody else?
    Mr. Kent. Mr. Chairman, if I may, at Charter 
Communications--and I think I can speak for the rest of the 
cable industry--we have invested in point of deployment 
security devices that we have available at each of our systems 
to ensure that if a consumer does buy a set-top box at a retail 
outlet that we can serve that customer.
    Frankly, Mr. Chairman, it is in our best interest. Right 
now, we are spending hundreds of dollars per box and we can 
only, under law, mark that up 11.25 percent over cost to charge 
back to that customer. To the extent I can move those boxes to 
the retail market, I don't have to expend those capital 
dollars, so it is in my interest.
    In fact, we have recently entered into deals with CompUSA 
and others to get a retail presence in the store. So I think we 
have done as much as we can to help promote the retail outlet.
    Chairman DeWine. Mr. Kimmelman, in the past you have said 
that the cable industry needs to be reregulated to get rates 
under control. Some have expressed concern that this will slow 
the cable companies' efforts to roll out new services, such as 
broadband and telephony. Do you want to comment on that 
criticism of your criticism?
    Mr. Kimmelman. Well, you asked me to come up today and 
speak to competition, so I didn't raise rate regulation, but 
Senator Specter did.
    Chairman DeWine. We are going to give you a chance.
    Mr. Kimmelman. I agree with Senator Specter. I think we 
traditionally put a lid on what monopolists can charge, and we 
still believe that would be necessary until we get to 
competition.
    I think that there is no question about the fact that you 
can have a dampening effect on innovation, but what we are 
seeing is blatant price gouging, and you have to balance the 
interests of consumers who don't have meaningful choice and 
meaningful price competition versus the interests of the 
industry. Some of the industry's behavior is being questioned 
as to whether it is blatantly anti-competitive as well.
    I think at this juncture the logical course to follow, Mr. 
Chairman, is to really try to break open this market more 
forcefully to competition. I recognize there is not a lot of 
sentiment to reregulate in the Congress today. I disagree with 
Mr. Hartenstein. I can't speak to the technical issue, but we 
will file today urging the FCC to go forward and license 
Northpoint broadwave as a competitor to both satellite and 
cable to give consumers another choice.
    They are proposing a $20 price point for, I think, 70 to 90 
channels that we think could be extremely attractive to 
consumers, and we certainly hope the FCC can move this way 
without any interference problems, certainly extending access 
to programming, expanding it to make sure that marquis 
programming like sports programming cannot be used to 
circumvent the non-discriminatory access provisions.
    So I think that we are at a point now, practically 
speaking, where a few surgical endeavors here, both 
regulatorily at the FCC and with Congress' help to ensure non-
discrimination, hopefully will get us to a point where we are 
going to start seeing some price competition.
    Chairman DeWine. Let me thank you all very much for your 
patience today. Again, I apologize for the major break that we 
had that lasted over an hour. We do appreciate your testimony. 
It has been very helpful.
    Senator Specter has indicated, as you have heard, that he 
has an interest in holding hearings in Philadelphia. We are 
certainly going to accommodate him on that. So I would 
anticipate that we would be holding hearings in Philadelphia, 
or at least one hearing.
    There is also the possibility that this Subcommittee will, 
within a short time, have another hearing on this same topic. 
If we do not do that, however, this Subcommittee obviously is 
going to continue periodically to hold oversight hearings to 
see how we are doing and to get the update and to see what, if 
any, additional legislation is needed by Congress.
    So, again, we thank you all very much.
    [Whereupon, at 12:22 p.m., the Subcommittee was adjourned.]
    [Questions and answers and submissions for the record 
follow:]

                         QUESTIONS AND ANSWERS

 Responses of Shawn Bentley, Motion Picture Association of America, to 
                  questions submitted by Senator Hatch

    Question 1: For all panelists (especially Mr. Parsons, Mr. Ken 
Berry, Mr. Murphy, and Mr. Richards, and Mr. Henley and Ms. 
Morissette): One argument we have heard in favor of a compulsory 
license is that music has so many nieces to license and there have been 
substantial disputes between the record labels, the publishers and 
technology companies like MP3.com about how to get the publishing 
rights cleared in the volume demanded by online offerings. Some have 
suggested that a stumbling block to getting the labels to license sound 
recordings is that they tray not have the rights from their artists to 
want those rights I understand there may even be problems with the 
MusicNet offering to some degree because of these impediments. Would 
any of you be interested in commenting on this particular problem and 
suggest ways to remedy it?
    Answer: As I said in response to some questions in the hearing, I 
speak only for the movie industry. I will defer to my colleagues on the 
panel to address questions concerning the music industry. In our haste 
to bring legitimate digital content to online consumers, we must not 
abandon the market-based principles that are the bedrock of the 
nation's economy. As Congress has noted in the past, compulsory 
licensing is an intrusion by the government into the marketplace. That 
intrusion artificially shrinks and devalues the exclusive rights of 
authors and creators. Government price fixing just never works. Never 
has. Never will. It is a flimsy substitute for the marketplace. 
Compulsory licensing is always a drastic measure of last resort. At 
this moment the online world is still very much in its infancy, as dot-
com failures and almost-daily retooling of business models has made 
clear. In this environment we must take care that our impatience in 
building the online marketplace does not lead us to abandon essentials 
of our economy. The marketplace is the arena where competition thrives. 
It is the marketplace that drives growth in the national economy. 
Therefore, a leap by Congress into a ``compulsory licensing'' mode for 
the digital environment would not only be unnecessary, it would be 
wrong.
    That is not to say that rights clearance is easy. Movie studios 
deal with difficult rights clearance issues every single day, ranging 
from synchronization rights for music to portrayals of visual arts in 
motion pictures to publicity rights. None of this is easy, but we do 
it. The vast majority of programs on every cable system are freely 
negotiated between rights holder and cable system. The same with 
satellite delivery, the same with over-the-air television. Online 
marketplace distribution of digital will work in the same way.

    Question 2: For all panelists: Mr. Hank Barry argues that we have 
created compulsory licenses in the past, for publishing rights in music 
and in rebroadcast of television programming because it was difficult 
to clear the rights to the myriad creative interests involved in making 
up a broadcast day. Would anyone like to explain why that analogy does 
or dues not obtain in the online music and entertainment world?
    Answer: The Register of Copyrights addressed a similar question 
when studying whether it was appropriate to extend the cable and 
satellite compulsory licenses to Internet retransmissions of broadcast 
programming. She concluded that it would be inappropriate to ``bestow 
[] the benefits of compulsory licensing on an industry so vastly 
different from other retransmission industries now eligible fur 
compulsory licensing under the Copyright Act.''
    The Copyright Act's existing compulsory licenses are totally 
different in scope and applicability than the type of compulsory 
license proposed by Mr. Barry. To begin with, there is no compulsory 
license for digital downloads via cable or satellite--only for 
retransmission of broadcast signals. Perhaps even more importantly, the 
impact of the cable and satellite licenses on copyright owners is 
tempered by regulatory and technical limitations that restrict the 
reach of those media and their potential to foster serial copying and 
retransmission. Cable and satellite operators have to deal not only 
with the fact that they can only transmit within limited viewing areas, 
but also with regulatory requirements like syndicated exclusivity, 
network non-duplication, sports blackout, retransmission consent, etc. 
The Internet, on the other hand, is global and unrestricted in its 
reach. It allows perfect serial copies and distribution of copyrighted 
works that is both infinite and instant. As I am wont to say from time 
to time, the Internet is to cable/satellite environments as lightning 
is to the lightning bug.
    The existing compulsory license for musical compositions--the so-
called mechanical license--is similarly inapposite. That license 
enables a person to make and distribute recordings of a particular 
musical composition (i.e., the sheet music) that has been previously 
recorded and distributed to the public under authority of the copyright 
owner. In other words, it allows someone to record a song that has been 
previously recorded, using their own performers and as their own 
rendition of the song, upon payment of the prescribed royalty to the 
copyright owner in the underlying musical composition (i.e., the 
composer and songwriter). It is not a license to reproduce and 
distribute the underlying sheet music in copies, and it does not convey 
a right to make copies of the resulting sound recording. That is the 
right, with respect to sound recordings, that Mr. Barry proposes to 
usurp by way of a compulsory license. There is simply no precedent for 
such a proposal in the Copyright Act.
    The justifications suggested in this question for the existing 
cable and satellite compulsory licenses might very well not even hold 
true were Congress revisiting the need for those licenses today. As I 
already mentioned, the majority of programming offered on cable and 
satellite is not subject to compulsory licensing. Cable networks like 
HBO, Showtime, USA, Lifetime, Discovery Channel, ESPN, Nickelodeon, and 
hundreds of others are not subject to any compulsory license, yet cable 
and satellite operators have no problem acquiring retransmission rights 
for these networks. The reason? In the absence of a compulsory license, 
these networks have emerged as rights aggregators for all the programs 
on those channels. For example, HBO secures both the right to exhibit 
the show and the right to sublicense the retransmission by satellite 
and cable providers. There is no reason to believe that similar market-
based solutions would not emerge with respect to online digital content 
delivery, provided that the market is allowed to work.
    Finally, four quick points why it is that a compulsory license 
simply will not work for movies. First, as I mentioned already, the 
Internet is global in nature and provides the means for perfect serial 
copying. This means that the 100' copy of a digitized movie is as pure 
as the original. Not so in the analog format, where each copy is 
degraded in quality. More ominously, transmission of a movie on the 
Internet is instantaneous to every corner of the globe. The potential 
for harm to copyright owners is immense. The effect is particularly 
alarming in the film industry, where the average major studio motion 
picture costs $82 million to produce, distribute, and advertise, and 
where only 1 in 10 films ever makes its money back from domestic 
theatrical exhibition. Here is the question that the Congress must 
answer: If films are unable to return their investment through 
ancillary markets like home-video, pay-per-view, and international 
territories because perfect digital copies are floating around the 
Internet for anyone to take down, who will put up huge amounts of 
private risk capital to produce films if they can be so easily and so 
swiftly pilfered?
    Second, a compulsory license would devastate small and independent 
film producers. These producers cannot finance films out-of-pocket. 
Rather, they finance their films by pre-selling distribution rights in 
markets around the world. An Internet compulsory license would do away 
with this entire market. The small independents would be doomed.
    Third, to repeat, government price-fixing does not work. As 1 said 
in the hearing, today a cable system with $9 to $10 million in revenue 
pays less than one percent of that revenue in royalties to the 
copyright owners. A satellite provider pays 19 cents per subscriber for 
ALL the programming of a SINGLE broadcasting station for ONE month. 
Everyone knows that an Internet compulsory license would similarly 
undervalue content, but that degradation of worth would have far 
greater an impact on copyright owners given the Internet's global 
reach. Risk capital would dry up. Not a happy augury for the future.
    Fourth, an Internet compulsory license would force American 
consumers to subsidize foreign consumption of American copyrighted 
works. American movies are the most popular on all the continents. Our 
movies dominate the world for one simple reason: Most citizens of just 
about every country find our creative movies the most entertaining. The 
U.S. movie industry is a big reason why the Copyright Industries have a 
surplus balance of trade with every single nation in the world. No 
other U.S. business industry can make that statement. A compulsory 
license would change all of that in a most desolating way. Keep in mind 
that a compulsory license would have to take into account the global 
reach of any distribution system, as well as the increased potential 
for unauthorized copies and distribution. Because copyright law is 
national, American consumers--not foreign consumers--would have to bear 
the costs of foreign uses. Rather than bringing more foreign revenues 
to the U.S., a compulsory license for movies would give foreign 
consumers a free-ride on the back of American consumers.

    Question 3: I have heard a number of entertainment companies say 
that acceptable protection for online content simply does not exist 
yet, that existing Digital Rights Management and watermarks. wrappers. 
or encryption, is simply not good enough to protect valuable content. 
Yet we have a number of technology companies here today who believe 
that they have such a solution, and now we, have announcements of 
online initiatives from all five major labels, which suggests the 
technological protections have developed recently. Would any of you 
care to comment on the state of technological protection for content?
    Answer: Companies with content protection products to sell are 
motivated to declare that the answer to this question is a clear yes 
(and that each, in fact, has the specific ``yes'' that is needed!). Yet 
as the clip from ``Gladiator'' viscerally demonstrated, the current 
marketplace is filled with illegitimately obtained copyrighted works, 
strongly suggesting a diametric answer as the correct one.
    Technology development is an iterative process and the core issue 
at the heart of the question is ``where are we in this iterative 
process?'' Are we near the start, middle, or the end of the process of 
the development and deployment of effective content protection 
technologies?
    As is pointed out in the question, there are numerous vendors 
offering content protection technologies that, as witnessed by recent 
announcements, are now entering the marketplace for initial tests with 
real products and real consumers. Some of these technologies will be 
fully flawed while others will show more promise.
    The fact that we are seeing the start of deployment clearly 
indicates that the answer to the question posed is that we are at the 
beginning, not the middle or the end, of the deployment of content 
protection technologies in the marketplace. Extrapolating when we will 
arrive at the middle--a robust and active market--is impossible to 
judge as the pace of adoption and acceptance of these first-to-be-
deployed technologies will depend on the unknown answers to questions 
such as how consumers will respond as they test and trial the products 
wrapped in these protection technologies and how effective the vendors 
of these products will be at repelling the legions of hackers that are 
sure to arrive on the scene.

    Question 4: The premise of this hearing is that digital content is 
coming soon to digital devices to he enjoyed by consumers soon. Bared 
on our discussion today. how soon is soon, and when will the promise 
become a reality?
    Answer: Legitimate, technologically protected digital content is 
already reaching millions of consumers in many ways such as via DVDs, 
digital satellite, digital cable, and other methods. These consumer-
friendly technologies did not appear overnight. They required years of 
dedicated effort by hundreds of companies and they continue to be 
refined to this day not only in the area of content protection but, 
equally important, in ways that heighten the entertainment. experience 
and usability for the consumer. Innovation will continue and we expect 
both product types and variations to multiply every year as far as we 
can see into the future. Competitive products such as those noted, 
which provide great consumer experiences and also protect content, take 
real work, innovation and dedication to produce--and those that would 
look to Congress to diminish their efforts to the detriment of the 
rights of others should not be encouraged.

                                

 Responses of Shawn Bentley, Motion Picture Association of America, to 
                  questions submitted by Senator Leahy

    Question 2: Jack Valenti testified that within four to six months, 
several movie studios plan to use the Internet to transmit to American 
homes in encrypted form, but that more protection may be needed. ``some 
of which might require congressional legislation. `` In the Digital 
Millennium Copyright Act (DMCA). the Congress has provided protection 
for technological measures that effectively control access to 
copyrighted works and barred the manufacture, import. or sale of 
products or services primarily designed to circumvent such 
technological measures. 17 U.S.C. Sec. 1201 (a)(1) & (2). Please 
describe the circumstances where additional protection may he warranted 
and the areas not already covered by the DMCA where additional 
legislation may be requested.
    Answer: The DMCA provides a critically important remedy against 
those who would circumvent technical measures used to protect against 
unauthorized access to and reproduction of copyrighted content. This 
remedy already had been successfully applied to protect the integrity 
of DVD technical protection measures, without which there would be no 
DVD marketplace--a marketplace that has benefited consumers enormously.
    However, the DMCA measures, although critically important, are 
quite limited in their application. In particular, the DMCA does not 
require devices to affirmatively respond to access and copy protection 
technology. This is a hugely significant limitation. In the case of 
DVDs, responsiveness to technical protection measures has been required 
by technology licensing terms. However, such terms require privity of 
contract, which substantially narrows, and complicate,, the ability of 
content owners to require device manufactures to respond to technical 
protection measures.
    A statutory mandate that requires devices to recognize 
technological protection measures would provide a much broader and more 
reliable safety net for content owners and could make it easier for our 
industry to distribute more high quality, high value ;films to 
consumers. So I believe that Congress should give serious thought to 
this possibility, but 1 am not at this time prepared to recommend 
specific legislative measures. Of course, if a statutory mandate were 
enacted, it would have to be accompanied by measures that would 
preserve the balance among the various interests that were struck in 
the DMCA.

    Question 3: Concerns have been expressed that ``copyright 
management'' measures being developed by copyright owners to control 
the distribution of their digital works may erode the first sale 
doctrine. If a customer pays for the personal use of a copyrighted 
work, the right holder may use technological means to ensure that the 
work is not posted on a website for my by others. Do you believe that 
the marketplace will sort out the scope of copyright management 
measures since customers who believe they are not getting what they pay 
for will simply stop buying?
    Answer: We strongly believe that ``copyright management'' measures 
will in no way undermine the sanctity of the ``First Sale'' doctrine 
and that such concerns are sorely misplaced. The First Sale doctrine 
does not prohibit the use of either technical or contractual measures 
to restrict the dissemination of copyrighted material. However, the 
marketplace has placed practical limitations on the use of such 
measures. For instance, the use of contractual restrictions to prevent 
the rental of videos by purchasers proved unworkable in the 
marketplace. We do believe that the marketplace will sort out the scope 
of copyright management measures on-line, as it has off-line. If 
imbalances occur, they should be addressed. But at this time there are 
no problems that need to be ``fixed"-only speculation about what could 
or might happen sometime in the future. There is certainly no basis for 
even considering ``prospective'' amendments to the First Sale doctrine, 
which is operating as intended.

    Question 4: Retailers of music, movies, video games, and other 
copyrighted works have expressed concern about whether copyright 
management measures and end user licensing agreements will erode the 
ability of retailers and distributors to distinguish themselves from 
one another in meaningful ways with the potential of stifling 
competition among retailers, since those measures may yet uniform price 
policies. and terms for the online distribution of digital works
    Answer: Motion Picture companies are in the very earliest stages of 
marketing their films to consumers on-line. It remains to be seen 
whether copyright management measures and user licensing agreements 
will be uniform or whether they will have an adverse impact on 
competition. If so, however, existing laws should be more than adequate 
to protect retailers and the public against any anticompetitive 
practices that might develop. Indeed, the likelihood is that 
distribution of films through the Internet will have strong 
procompetitive effects and provide significant benefits to consumers.

                                

Response of Shawn Bentley, Motion Picture Association of America, to a 
                   question submitted by Senator Kohl

    Question 1: While all of the panelists are primarily concerned with 
access to the online entertainment marketplace, they must also 
understand chat they have a responsibility to parents. The Internet 
makes it even more difficult or parents to police the songs that their 
children hear, the images that they see and the games that they play. 
I'd like the panelists to discuss what their company or industry plans 
to do to help parents as online entertainment becomes more readily 
accessible to all consumers, especially children.
    Answer: Your question, ``what our industry plans to do to help 
parents as online entertainment becomes more readily accessible to all 
consumers, especially children,'' is quite relevant, in part because it 
highlights the importance of facilitating a legitimate marketplace for 
the distribution of digital entertainment.
    The movie industry is now implementing a 12-point set of 
Initiatives to help parents determine what films they want their 
children to watch or not to watch in theaters. Included in those 
Initiatives is a pledge to give reasons fur the ratings of a movie in 
advertising and on web sites so that parents can easily assess that 
films' suitability for their children.
    The voluntary movie rating system, established November 1, 1968, 
has won high marks of parental endorsement. I attach a summary of 
national surveys over the past 30 years which confirm that statement; 
the latest Opinion Research Corporation of Princeton, New Jersey poll 
reveals 81% of parents with children under 13 find the rating system 
Very Useful/Fairly Useful. An independent poll taken by the Federal 
Trade Commission in 2000 found that 80% of parents were ``Satisfied'' 
wit the rating system.
    The Motion Picture Association is also a founding participant in 
the voluntary television program rating system. All TV shows visually 
display a rating; most newspapers also carry the ratings. This aids 
parents in guiding their children's TV viewing.
    As you know, Congress passed the V-Chip legislation (supported by 
the MPA), which allows parents to block TV programming they choose for 
their children not to watch.
    MPAA and its member companies are committed to fulfilling our 
pledge to parents in the online world as we do in the offline world. To 
date, the Internet has largely been a promotional tool for MPAA member 
companies. As such, the MPAA has adopted a policy that requires 
Internet advertising for all rated films to be pre-screened by the 
MPAA's Advertising Administration just like any other ad. That means 
that before it can be put on the Internet, every trailer, every 
official web page, and associated banner ads must be approved by the 
Advertising Administration and must meet the same standards as offline 
advertisements to ensure that Internet ads are likely to be judged 
appropriate for even the youngest audience.
    As I said in the hearing last week, we are now on the eve of an 
important shift in the way movie studios use the Internet to market 
their films. Within four to six months, several movie studios will be 
online offering downloads of full-length feature films. Each film 
offered to the public will have to pass the scrutiny of parents before 
it can be downloaded for a fee. The computer format will demand a 
credit card and a password for that credit card so that youngsters will 
be unable to download movies on their own, unless their parents 
approve. Every movie offered to families will have a rating, and the 
reasons for the rating. Through the use of technology, the MPAA and its 
member companies are committed to giving effect to the MPAA ratings 
system in the online environment.
    Keep in mind that web sites which illegitimately offer copyrighted 
works for download, without permission of the owner (such as Napster, 
Gnutella, Freenet, Aimster, and others) have no information about 
ratings and make no effort to assist parents in discerning what is 
appropriate for their children. These web sites and software 
applications that offer films, illegally, are easily accessible by 
children, and most am riddled with obscenity and child pornography. We 
are now in the process of determining technological procedures which 
are needed to protect valuable creative works on the Internet, and many 
of those same technologies may also enable parents to exercise greater 
control over their children's viewing choices. If some part of that 
technology requires congressional legislation, we will return to you 
and your colleagues to help preserve the worth of America's most 
valuable trade export and a huge part of the national economy. One 
thing, however, is perfectly clear: Only in a legitimate marketplace 
will parents be given meaningful choices and information necessary to 
enable them to influence their children's viewing habits. The ``near 
perfect anarchy'' envisioned by Ian Clark, the creator of Freenet, is 
as bad for parents as it is for copyright owners.
    To graphically illustrate the difference between legitimate on-line 
movie sites, and pirate sites, I have attached two screen shots taken 
from the Web. One is the opening screen for a legitimate movie site 
called Sightsound.com, which offers movies (including rating 
information), music, sports events, children's programs and other 
material. The other is an illegitimate site, Gnutella, which offers 
pirate movies, music, video games and the most tawdry pornography 
imaginable--all on one page, easily accessible to children.

                                

   Responses of National Music Publishers' Association to questions 
              submitted by Senators Hatch, Leahy and Kohl

                      Questions from Senator Hatch
    Question: One argument we have heard in favor of a compulsory 
license is that music has so many pieces to license and there have been 
substantial disputes between the record labels, the publishers and 
technology companies like MP3.com about how to get the publishing 
rights cleared in the volume demanded by online offerings. . .. Would 
any of you be interested in commenting on this particular problem and 
suggest ways to remedy it?
    Answer: As you are aware, songwriters and music publishers already 
operate pursuant to the statutory compulsory license in section 115 of 
the Copyright Act. MP3.com has mischaracterized its experience in 
clearing publishing rights with the Harry Fox Agency (``HFA''), and in 
fact substantial progress has been made recently between MP3 and HFA, 
which we describe in detail below. There has been no increase in the 
number of licenses necessary to distribute music since the emergence of 
online digital music services, and music has been successfully 
distributed for decades under the current legal regime. As we 
demonstrate in detail in the answers that follow, no new compulsory 
license is necessary--nor would it be beneficial.

    Question: Mr. Hank Barry argues that we have created compulsory 
licenses in the past for publishing rights in music and in rebroadcast 
of television programming because it was difficult to clear the rights 
to the myriad creative interests involved in making up a broadcast day. 
Would anyone like to explain why that analogy does or does not obtain 
in the online music and entertainment world?
    Answer: NMPA does not believe that any new compulsory license is 
warranted to promote the availability of music over the Internet. What 
is necessary for a vibrant online music market to take root is for 
``services'' such as Napster to cease their promotion and facilitation 
of online infringement. At both the Committee's initial hearing on 
music and the Internet, held July 11, 2000, and the April 3, 2001 
hearing, witnesses representing companies and interests offering 
appropriately licensed music services acknowledged the virtual 
impossibility of competing with rogue entities that make other people's 
music available to anyone for nothing. Until Napster and its imitators 
follow the law by seeking necessary licenses and making the necessary 
payments to creators and rights holders, law-abiding companies will 
remain at a serious, if not fatal, commercial disadvantage.
    As Mr. Barry knows, at the time Napster launched its service, the 
company was eligible--like any other Internet music service--for 
compulsory licenses under the terms and conditions of section 115 of 
the Copyright Act for the making of ``digital phonorecord deliveries'' 
(``DPDs'') of musical compositions. It chose not to use the compulsory 
licensing system available to it. Napster has therefore forfeited 
eligibility for compulsory licensing through its continued 
infringement. The company now urges Congress to establish a new 
compulsory license regime that would reward it with access to all 
musical compositions (and all sound recordings), presumably at a rate 
it finds acceptable and with few if any administrative responsibilities 
for Napster. NMPA believes that the existing section 115 compulsory 
license provides an adequate framework for Napster and other Internet 
distributors of music to secure licenses at a reasonable rate.

    Question: I have heard a number of entertainment companies say that 
acceptable protection for online content simply does not exist yet, 
that existing Digital Rights Management and watermarks, wrappers, or 
encryption, is simply not good enough to protect valuable content. Yet 
we have a number of technology companies here today who believe that 
they have such a solution, and now we have announcements of online 
initiatives from all five major labels, which suggests the 
technological protections have developed recently. Would any of you 
care to comment on the state of technological protection for content?
    Answer: The technology for protection of digitally distributed 
content is still in its infancy. The field is extremely complex and 
combines disparate academic fields of study including computer science, 
encryption mathematics, digital signal processing and acoustics. Our 
experience with reviewing the different technologies offered by various 
vendors (large and small) is that a technology is ``tamper-proof' or 
``hacker proof' only as a matter of degree. Today, there is no single 
copy protection technology that meets the requirement of consumer 
convenience, strong protection, practicality and reasonable cost.
    In addition to copy protection technology, use tracking mechanisms 
are equally important to ensure a vibrant digital music business where 
all of the participants, including songwriters and publishers, get 
properly paid for the uses of their creations. While ``fingerprinting'' 
technology is useful to identify unauthorized music files on computer 
servers, such a function is distinct from managing legitimate delivery 
to consumers of copy protected music. For example, The Harry Fox Agency 
has proposed for several years, most recently in the ``SDMI'' process, 
that the license number corresponding to the mechanical license (and 
any other relevant license number) authorizing a digital distribution 
be included in the header of each downloaded or streamed file. 
Inclusion of the mechanical license number would permit automated spot 
checking of websites and allow automated auditing of a licensed 
website. It is a given that different website operators may secure the 
authority to distribute a song from their website from different 
parties. In order for a songwriter, publisher or their agent (HFA, for 
example) to check that a website has such authority, it is essential 
that a license number corresponding to the license granting the 
operator the authority to execute such distribution appear in the 
header of the digital music files being distributed from their website.
    Although digital rights management technology vendors profess to 
have the solution to this problem, they and the record labels have 
resisted attaching license numbers to digital music files. While we 
have been given a number of reasons for this resistance (including the 
``header'' can only accommodate so much data), all can be 
technologically surmounted. By continuing to resist inclusion of this 
license information in the ``header,'' the record companies make it 
much more difficult for music publishers to audit record company 
compliance with our licensing agreements. Furthermore, because the 
primary clients of digital rights management vendors are the record 
labels (because the record labels control the distribution of sound 
recordings), the technology they have developed and adopted so far has 
been responsive to the interests of record labels, not those of music 
publishers. An important principle arises from our experience with 
digital rights management: technology alone is not the only challenge 
facing an effective digital rights management regime. The economic 
tensions that have been a part of the music business for decades are 
also a significant factor in whether the right technology is made 
available. We remain hopeful that on-going discussions between the 
music publishing community and the RIAA will resolve this issue.
    There is an important additional factor to consider: the 
``consumerfriendliness'' of the protection and management technologies. 
A near-perfect copy protection technology is of little help to the 
music industry if it frustrates consumers. It is our experience that 
the easier and more versatile the technology is for consumers, then the 
easier they are to ``hack'' or bypass. Conversely, the more tamper-
resistant the technology is, the more difficult it becomes for 
legitimate consumers to access their purchased content and for the 
music licensing community to implement the technology. Currently, the 
Achilles heel of all of these technologies is a product called ``Total 
Recorder.'' This packaged software product, generally available, 
pretends to the computer operating system that it is the sound card 
hardware that produces the musical sound. This means that after 
legitimate content is legitimately decrypted by the copy protection and 
rights management software, the Total Recorder software can copy the 
decrypted digital sound data constituting the song into a separate 
file, typically in MP3 format, that would be ``clear'' of encryption. 
In other words, truly piracy-proof digital music delivery technology 
must protect the entire chain of delivery, from the website to the 
speaker. This last state of affairs will only occur if the entire 
industry agrees on a copy protection and rights management model that 
meets everyone's needs and is implemented across all platforms at each 
point in the chain of digital music delivery. So far, as mentioned 
above, that has not occurred.
    In summary, copy protection technology is still developing. 
``Perfect'' systems from a technological perspective are not yet 
perfect from a business market perspective. Digital rights management 
technologies are improving but so far, music publishers are at the 
mercy of the record companies regarding which digital rights management 
technology is used and what information is included in the identifying 
``headers.'' Industry-wide resolution of this issue remains elusive. We 
are confident that these problems can be resolved, but as this answer 
indicates, there are some significant issues remaining.

    Question: For all panelists: The premise of this hearing is that 
digital content is coming soon to digital devices to be enjoyed by 
consumers soon. Based on our discussion today, how soon is soon, and 
when will the promise become reality?
    Answer: Mr. Chairman, for music, the question is not when the 
content is coming digital delivery of music is here. NMPA members have 
licensed more than thirty enterprises, most of them fledgling 
businesses less than five years old, to distribute recordings of music 
over the Internet. EMusic and MP3.com are among the licensees. These 
companies have chosen to respect the rules laid down by Congress by 
obtaining licenses and paying compensation to the copyright owners. Our 
licensing arrangements demonstrate that music publishers are fully 
prepared to license any Internet music service if that service is 
prepared to follow the law.
    Furthermore, NMPA has every incentive to license its works in the 
digital environment. Some digital music services imply that music 
copyright owners are deliberately impeding the issuance of licenses for 
online music services. This suggestion is both inaccurate and 
illogical. Music publishers only get paid when their work is used; if 
it is not used, no revenue is generated. NMPA members are eager (and 
economically motivated) to license their works in the new digital 
environment.

    Question: For all panelists: Is there any point you feel should be 
raised or that you would like to further respond to for the 
completeness of our record?
    Answer: We would like to respond to the suggestion of some that a 
new ``blanket'' statutory license be created for digital music 
distribution.
    Music website operators (including MP3.com in its written 
testimony) often propose that digital music distribution be governed by 
a ``blanket licensing'' scheme without further elaborating on the 
complexities of current blanket licensing. NMPA believes that blanket 
licensing is inappropriate to the licensing of digital phonorecord 
deliveries, for the following reasons.
    Blanket licensing is a process that the performing rights societies 
(e.g. ASCAP, BMI and SESAC) use to license and collect performance 
royalties from radio and television stations for performances of songs 
on radio and television. Created during the World War I era to address 
the practicalities of keeping track of the public performance of 
musical works on radio and in live performances, the blanket license is 
premised on the impracticality of reviewing every radio or television 
station's play log or programming for every minute the station is on 
the air or every location where the music is played. Instead, 
statistical sampling of a smaller number of radio and television 
stations is employed to estimate how many times a particular work is 
performed.
    Sections 111 and 119 of the Copyright Act establish limited 
compulsory licenses for the retransmission of certain broadcast signals 
under modified blanket licensing. Royalties deposited pursuant to the 
terms of these compulsory licenses are subject to a complex, two-phase 
distribution proceeding. In phase one, groups of eligible rights 
holders demonstrate how much of the overall royalty pool should be 
allocated to each group. In phase two, disputes regarding the 
allocation of royalties among claimants within each group are resolved. 
Such a system may be appropriate in the context of the transmission of 
copyrighted material employing technologies that, at least for now, do 
not provide a ready means for identifying individual rights holders. It 
is not appropriate, however, to impose by law a licensing regime 
developed for the specific facts of the cable or satellite industries 
where (as in the case of certain Internet music services) the 
transmitter is the originator of the transmission and has control over 
the material being made available to subscribers, and where technology 
is available to facilitate accurate licensing on behalf of the affected 
rights owners.
    It is inaccurate for music website operators to state that blanket 
licensing resolves technical licensing problems in the digital era. 
First, the compulsory license of section 115 is available to any entity 
wishing to distribute music over the Internet. Second, website 
operators routinely collect information on millions of visits to their 
websites which they use in marketing their products and attracting 
advertising revenue. It is disingenuous for the same website operators 
to claim that it is impractical for them to account for each use of the 
works that they are licensing (as a justification for blanket 
licensing) when they already have that detailed information in digital 
form in their databases. In other words, website operators are ideally 
equipped for this kind of accounting task.
    The principal reason for advocacy of a blanket license by web-based 
music services is that it transfers the royalty distribution burden 
from users to copyright owners in a manner that costs the creators of 
the work significantly more than per-use accounting. Digital 
technologies are particularly well suited, however, to performing the 
accounting tasks associated with licensing uses of works in a networked 
environment and ensuring accurate payments to the appropriate rights 
owners and creators. Congress recognized this fact when it enacted 
section 1202 of the Copyright Act to protect copyright management 
information from intentional interference.

    Question: Mr. Murphy: Could you comment on the publishing issues 
and how you believe your members will be able to meet the demands of 
licensing hundreds of thousands of songs where you have in the past 
licensed ten to twelve at a time?
    Answer: The assertion that HFA can only license ten to twelve songs 
at a time is inaccurate. In recent years, HFA has routinely issued 
licenses for approximately 250,000 titles annually. Everyone at HFA is 
aware, however, that the digital economy is changing the licensing 
paradigm from individual licenses to bulk licenses, and we are adapting 
to this new reality promptly--along with the rest of the music 
industry. Our transformation is not complete, and the process has not 
been error free, but we are confident .that HFA has made rapid progress 
and is performing as well as or better than any other digital music 
licensing entity. HFA anticipates it will have a smoothly functioning 
digital licensing mechanism in the very near future.
    Here are some examples from the HFA-MP3 relationship to prove our 
point. Presently, HFA and MP3 are working under the terms of an interim 
license under which the MyMP3 service may operate while permanent 
licenses are issued. This is a critical fact that MP3 omitted entirely 
from its testimony. With respect to permanent licenses, MP3 has 
submitted a database of 914,914 titles for licensing, and HFA has 
completed a file matching and validation search on each one. As of 
April 5, 2001 HFA had issued permanent licenses for 32,885 songs. 
Between April 5 and April 20, 2001, HFA issued permanent licenses for 
an additional 131,072 songs. In conducting our analysis of the MP3 
database, HFA determined that 64,482 were duplicate requests. In other 
words, HFA has reviewed the entire file and has resolved (by permanent 
licensure or by confirmation that a request was a duplicate) 228,439 of 
the records. The ``10 to 12 licenses at a time'' criticism is simply 
misplaced.
    There is no question that a substantial number of requests are 
pending. A significant portion of the unresolved requests, however, are 
due to incomplete information submitted by MP3. We continue to work 
with MP3 to perfect the songclearance mechanism so that we can issue 
licenses for whatever number of songs that MP3 submits to us. It should 
be noted, however, that users of the copyrighted material have 
responsibilities as well. A company cannot simply ``rip'' CDs with 
impunity (that is, disassemble lawfully purchased CDs which contain the 
necessary licensing information), disregard data retention and quality 
requirements in this process, and then blame the licensing entity for a 
failure to respond promptly. A substantial portion of the 686,000 
titles that are pending are due to MP3's incomplete database. HFA is 
committed to resolving the pending MP3 license requests; but we ask 
that the necessary minimum identifying data be submitted to us so that 
we can ensure proper compensation of the lawful copyright owners.

    Question: Mr. Murphy: You have testified that the Harry Fox Agency 
has provided MP3. com with an electronic copy of its licensing database 
and I understand you will not support litigation against MP3.com while 
you mutually attempt to address problems faced in issuing licenses for 
these songs.
    Answer: The Chairman's understanding on this point is correct. The 
President of HFA (Gary Churgin) confirmed this fact in a letter to 
MP3.com dated March 29, 2001.

    Question: I have some questions about how this is working 
practically, and must how the clearance process will work. First, how 
many song titles are on that database and does the Harry Fox Agency 
represent all of the publishers for each of those songs? If not, with 
respect to how many of these songs does the Harry Fox Agency represent 
100 percent of the publishers?
    Answer: MP3 has advanced the notion that HFA must represent all of 
the owners of each work in order to issue a license--which betrays a 
fundamental misconception of the copyright law on this point. 17 
U.S.C.Sec. 201(a) states: ``Copyright in a work protected under this 
title vests initially in the author or authors of the work. The authors 
of a joint work are co-owners of copyright in the work.'' The leading 
treatise notes that ``one joint owner'' has the right ``to license the 
work without the consent of the other joint owners'' and ``an 
authorization to [a user] from one joint owner will be an effective 
defense to an infringement action brought by another joint owner.'' 
NIMMER ON COPYRIGHT Sec. 6.10. A long series of cases encompassing most 
of the major federal circuits is cited in support of these 
propositions, which we will not repeat here. Id. The result of this 
well-settled aspect of copyright law is that HFA need not represent 
``all of the publishers for each of the songs'' in order to issue a 
license upon which MP3 may rely; if HFA represents one co-owner of a 
musical work, that is sufficient to issue a license.\1\
---------------------------------------------------------------------------
    \1\ In the event HFA licenses through one joint owner, that owner 
owes an accounting for profits to the other co-owners. See Nimmer 
Sec. 6.12[B].
---------------------------------------------------------------------------
    With respect to the second part of the question, the number of 
songs for which HFA represents at least one owner is constantly 
changing (and growing). The now over 27,000 music publisher principals 
represented by HFA have historically owned or administered 
approximately 90% of the compositions in the American repertoire. HFA's 
publisher principals collectively own more than 2.5 million copyrighted 
musical works. We are continually acquiring more titles and publishers.

    Question: Second, online music services such as MP3.com have 
testified that they want to offer consumers access to a vast library of 
music, exceeding 900, 000 titles. For those songs whose publishers are 
not represented by Harry Fox, could you help us understand how an 
online music provider would go about identifying the publishers and 
obtaining licenses from them?
    Answer: Some background information on the 914,914 titles in the 
MP3 database is necessary. First, 64,482 of the titles are confirmed 
duplicates. Second, an unspecified portion of the 914,914 were placed 
there by MP3 through their music hosting service for independent 
artists (without record label affiliation and in most cases not 
containing copyrighted musical work). It is obvious that HFA would not 
have these MP3-facilitated songs in its database.
    In the relatively rare instances where MP3 presents sufficient 
licensing information \2\ to HFA, and HFA represents none of the 
copyright owners of the underlying musical work, MP3 (or any other 
online music provider) could do the following to identify the publisher 
and obtain a license: (1) directly contact the publisher, which would 
be listed in the sound recording license that the music provider must 
obtain from the record labels (most of the artists are affiliated with 
such labels); or (2) use the compulsory license provisions of section 
115(b) of the Copyright Act and either determine the copyright owner 
from the Copyright Ofce records or, in the case no such owner is 
listed, file notice with the Office pursuant to that section (and its 
implementing regulations at 37 CFR Sec. 201.18 \3\) and distribute the 
work pursuant to the statutory compulsory license.
---------------------------------------------------------------------------
    \2\ In the case of a previously issued CD, a licensable match 
requires the song title and two of the following: (1) artist, (2) 
album, or (3) catalogue number or UPC code.
    \3\ A good summary of the compulsory licensing mechanism for music 
is found in Copyright Office Circular 73, available at the Office's 
website: http://www.loc.gov/copyright/circs/circ73.pdf

    Question: Third, given that there are many songs whose publishers 
are not represented by the Harry Fox Agency and that even where you 
represent a publisher claiming an interest in a song there may be other 
publishers in that same song that you don't represent, do you have any 
practical suggestions for businesses like MP3. com who have paid the 
major rights holders in most of their music library to avoid 
infringement suits from the myriad smaller, independent publishers and 
other rights holders who might have some interest in one or more of the 
many songs they offer?
    Answer: There is no ``given'' that ``many songs'' are published by 
entities not represented by HFA. As noted above, the over 27,000 
publisher principals represented by HFA have historically owned or 
administered approximately 90% of the compositions in the American 
repertoire, and the recent growth in the number of publishers whom HFA 
represents is substantial. Furthermore, also as noted above, when HFA 
represents one owner of a musical work, it may license a third party to 
use the work, and that party is insulated against an infringement 
action by any other co-owners.
    In the relatively rare circumstance when HFA represents none of the 
publishers of a work that MP3 seeks to use, as mentioned before, we 
suggest: (1) contacting the publisher directly, after identifying the 
publisher through either Copyright Office records or through the 
information contained on the sound recording license; or (2) invoking 
the compulsory license in section 115 and filing ``notice of 
intention'' to use the work with the Copyright Office.
                      Questions from Senator Leahy
    Question 3: Concerns have been expressed that ``copyright 
management'' measures being developed by copyright owners to control 
the distribution of their digital works may erode the first sale 
doctrine. If a customer pays for the personal use of a copyrighted 
work, the rights holder may use technological means to ensure that the 
work is not posted on a web site for use by others. Do you believe that 
the marketplace will sort out the scope of copyright management 
measures since customers who believe they are not getting what they pay 
for will simply stop buying?
    Answer: The question raises several issues. First, is there a need 
for an expanded ``digital first sale doctrine'' as some have suggested? 
NMPA believes the answer is no. The first sale doctrine, in section 109 
of the Copyright Act, provides, in pertinent part,

Notwithstanding the provisions of section 106(3), the owner of a 
        particular copy or phonorecord lawfully made under this title, 
        or any person authorized by such owner, is entitled, without 
        the authority of the copyright owner, to sell or otherwise 
        dispose of the possession of that copy or phonorecord.

    The Digital Media Association (``DiMA'') and other advocates of 
expansion of the first sale doctrine argue that a consumer who 
purchases a digital download should be able to forward that download to 
someone else, provided the consumer deletes her original copy. A 
similar proposal was offered during consideration of the Digital 
Millennium Copyright Act and rejected by Congress because Members 
recognized that: (1) unlike in the physical world, in the digital 
context the owner of a copyrighted work did not relinquish the original 
copy, and (2) relying on the ``honor system'' to ensure that the 
``original'' copy would be deleted or otherwise rendered inaccessible 
in the digital environment would open the door to widespread abuses and 
encourage disrespect for the law. The advent of Internet-based peer-to-
peer file propagation software has demonstrated that Congress's 
concerns were warranted. In addition, it is inconsistent for DiMA to 
advocate a philosophy that copyright is an anachronism in the digital 
age but then ask Congress to apply an inapplicable copyright concept to 
restrict the right of songwriters and publishers to apply digital 
rights management technology to protect their creations.
    Forced to acknowledge that the ``honor system'' would not work, in 
law or in practice, DiMA now asserts that technologies are available to 
enforce the limits of a digital first sale doctrine. But there is no 
evidence that consumers desire or would benefit from a change in the 
law that would result in the deployment of ``forward and delete'' 
technologies. As the Senator's question implies, the pertinent inquiry 
is not whether technology can be deployed to police a first sale 
privilege, but whether controls can be employed to serve the legitimate 
interests of copyright owners in curbing unauthorized uses of their 
works and the desire of consumers to enjoy works in new ways. NMPA 
believes that the marketplace is the only venue flexible enough to 
respond to this challenge effectively in the many contexts and business 
models in which it is likely to arise.
    Finally, it is important to recall that Congress has examined the 
first sale doctrine as it relates to works in digital form in at least 
three instances and, each time, has found that the special 
vulnerability of such works warranted an exception to--rather than an 
expansion of--the first sale privilege. In responding to the 
introduction of compact disc technology by enacting the prohibition 
against the unauthorized rental of phonorecords, in making that 
prohibition permanent, and in enacting a similar provision prohibiting 
the unauthorized rental of copies of computer programs, Congress has 
recognized that allowing exercise of first sale privileges in copies of 
works in digital form would lead to unacceptable levels of copying that 
would prejudice the legitimate interests of copyright owners. Certainly 
the concerns underlying these legislative reforms apply with equal 
magnitude with regard to the reproduction and distribution of copies 
over the Internet.

    Question 5: The Copyright ice issued a Notice of Inquiry on March 
9, in response to a petition by the RIAA, stating that: ``there is 
considerable uncertainty as to the interpretation and application of 
the copyright laws to certain kinds of digital transmissions of 
prerecorded musical works. It is also apparent that the impasse 
presented by these legal questions may impede the ability of copyright 
owners and users to agree upon royalty rates under section 115. . .. `` 
66 Fed. Reg. 14099, 14101 (2001).
    Question (A): Do you agree with this statement and, if so, please 
explain how the uncertainty over the legal questions presented in the 
petition is affecting voluntary licensing agreements for new online 
music services?
    Answer: NMPA filed comments in response to the Notice of Inquiry on 
April 23. Those comments made clear that NMPA does not agree with the 
statements and explained the reasons why it believes the existing legal 
framework is adequate to allow marketplace to address licensing issues 
that have arisen as well as those that might arise in the future. A 
copy of those comments is attached to this response.
    NMPA does not believe that there is ``considerable uncertainty as 
to the interpretation and application of the copyright laws to certain 
kinds of digital transmissions of prerecorded musical works.'' In 
enacting the Digital Performance Rights in Sound Recordings Act in 
1995, Congress extended the existing compulsory license in section 115, 
which covers the making and distribution of phonorecords of protected 
musical compositions, to certain Internet uses.
    In enacting these important changes into law, Congress did not 
attempt to anticipate every possible business model for making music 
available to Internet users. Nor, as we discuss below, did Congress 
assign that burden to the Copyright Office. Rather, it provided general 
definitions establishing the principle that songwriters and music 
copyright owners--like record companies--should be compensated fairly 
and in a manner that reflects the economic significance of those 
business models for current as well as new sources of publisher and 
writer income.
    We believe the model Congress has adopted is working, and can 
continue to work for the benefit of songwriters, music publishers, 
record companies and companies seeking to offer innovative music 
services. Music publishers, through HFA, have already issued licenses 
to more than 30 music service providers covering downloads as well as 
interactive streaming services, and we are prepared to license others.
    There is no question that some have constructed specious arguments 
to evade the obligation to pay reasonable royalties for covered 
services. Napster, for example, has argued that its ``service,'' which 
provides the means for the distribution of billions of unauthorized 
downloads of protected music, is exempt from infringement liability and 
royalty payment obligations under a parade of theories, including the 
assertion of a defense under the Audio Home Recording Act, a ``staple 
article of commerce'' defense, and claimed eligibility for a ``safe 
harbor'' under the service provider liability provisions of the Digital 
Millennium Copyright Act. We are gratified that, as to each of these 
purported defenses and privileges, both the Ninth Circuit Court of 
Appeals and Judge Patel's court have found that music publishers and 
record companies are likely to prevail on the merits.
    What is needed now, in NMPA's view, is for entrants into the 
digital music services market to cease efforts to evade their 
responsibilities under the law and to engage in good faith efforts to 
obtain the required licenses. Voluntary negotiations, under the regime 
established by Congress, in NMPA's view will yield the fairest result 
for music creators and copyright owners, for commercial users of their 
works, and for consumers. In the event voluntary negotiations fail, 
Congress has provided for an arbitration mechanism that will resolve 
disputes and allow the music to be used.

    Question (B): In 1995, the Digital Performance Right in Sound 
Recordings Act expanded the scope of the mechanical license, under 17 
U.S. C. sec. 115, to include the right to distribute, or authorize the 
distribution of, by digital transmission both hard copy phonorecords 
and ``digital phonorecord deliveries'' or ``DPDs. `` DPDs are defined 
in the Act but a subset of DPDs, called ``incidental DPDs `` which are 
also subject to the mechanical licensing process, are not defined. One 
of the issues before the Copyright Office is to determine what is and 
what is not an ``incidental DPD. `` Is this a question that the 
Copyright Ofce for the Congress should determine in the first instance?
    Answer: Congress has already spoken to this question, and it has 
expressed a strong preference for the resolution of these issues 
through voluntary, private negotiations. As the Senator observes, 
Congress expressly defined the term ``digital phonorecord delivery'' 
(``DPD'') in its 1995 amendments to section 115. It did not, however, 
create a statutory classification known as ``incidental digital 
phonorecord delivery.'' In fact, Congress did not even use the term 
``incidental digital phonorecord delivery'' in section 115. Instead, it 
merely directed that any ``rates and terms'' for DPDs established 
through voluntary negotiations or arbitration proceedings distinguish 
between (1) digital phonorecord deliveries where the reproduction or 
distribution of a phonorecord is incidental to the transmission which 
constitutes the digital phonorecord delivery, and (2) digital 
phonorecord deliveries in general.'' 17 U.S.C. sec. 115(c)(3)(C).
    Had Congress wished to create pre-defined, static categories known 
as ``incidental DPDs'' and ``general DPDs,'' it certainly could have 
done so. It did not. Nor did Congress choose to assign responsibility 
for creating such static definitions to the Copyright Office, which it 
certainly could have done. Instead, it wisely recognized that the 
distinction of ``incidental'' versus ``general'' could only be made in 
the fact-specific context of a voluntary rate-setting negotiation or a 
Copyright Arbitration Royalty Panel (``CARP'') proceeding and with 
respect to the particular business models and technologies known at the 
time.
    The legislative history of section 115 supplies a number of 
illustrative examples of DPDs that might be considered ``incidental'' 
to the making of transmissions constituting DPDs, but does not suggest 
that an exhaustive list would be possible or at all necessary to 
create. Congress's approach clearly demonstrates that it sought to 
leave the ``incidental'' and ``general'' DPD concepts flexible and 
subject to definition through voluntary negotiations or arbitration 
based upon the specific activities and technologies at issue at the 
time. NMPA urges that the approach adopted by Congress be given the 
opportunity to work.

    Question (C): The Copyright Office is currently considering the 
applicability of the section 115 mechanical license to two new services 
for the delivery of music: ``On-demand streaming'' (which permits users 
to listen to real-time streamed music they want when they want it) and 
``Limited Downloads'' (which permits users to download music for 
listening for only a limited time). According to the Notice of Inquiry, 
these types of services were not ``anticipated'' when the Congress 
expanded the scope of section 115 to cover digital transmissions. Is 
legal uncertainty over the applicability of section 115 to these new 
services having any effect on the deployment of such services and, if 
so, please explain what that effect is?
    Answer: As we have discussed, Congress did not create static 
categories in section 115 and provided, in the legislative history, 
only a non-exhaustive list of examples of what might constitute an 
incidental digital phonorecord delivery, based upon the technologies 
known at the time. No effort was made to anticipate or prospectively 
deal with any new technology.
    But saying that certain services were not anticipated in section 
115 will not lead one to the conclusion that section 115 does not 
provide the mechanism for dealing with the new services discussed in 
the Notice or Inquiry or any others that might arise in the future. 
Congress established its clear preference for issues related to the 
licensing of new, interactive music services to be dealt with in 
private, voluntary negotiations and, if those negotiations fail, by 
arbitration before a Copyright Royalty Arbitration Panel. This decision 
by Congress was the appropriate one in 1995 and remains so. To have 
chosen otherwise--or to choose otherwise now--would invite every new 
entrant into the online music market to bring what should remain 
private business matters to Congress or to the Copyright Office. Others 
might simply be tempted to use Congressional or regulatory pressure on 
rights owners and creators in an attempt to exact a more favorable 
deal. This is hardly a prescription for rapid introduction of 
legitimate services for the distribution of music or any other form of 
creative content.
    As noted above, voluntary negotiations have resulted in the 
issuance of licenses for rights in musical compositions to more than 30 
companies. NMPA is pleased to report that it is involved in 
negotiations with affected users over potential rates for the very 
services outlined in the Copyright Office Notice of Inquiry. Progress 
in these voluntary negotiations is being made. It is apparent to us, 
however, that any progress toward voluntary resolution of licensing 
issues would be undermined by injecting these business decisions back 
into the policy arena before the regime set out by Congress in 1995 has 
been given an opportunity to work.

    Question (D): Various music publishers filed suit in December 2000 
against UMG for copyright infringement alleging that UMG was copying 
sound recordings on servers for its new online music subscription 
service, Farmclub.com, and stating that: ``UMG recently obtained a 
judgment from this court that the operator of another Internet music 
service, MP3.com, Inc., had willfully infringed UMG's sound recording 
copyrights by placing copies of those sound recordings on its public 
servers--precisely what UMG has done here without plaints permission. 
`` Would clarifying the scope of the mechanical license under section 
115 of the Copyright Act in the context of such new online music 
services help avoid the undue delay and undue distraction from 
litigation?
    Answer: No, clarification of section 115 would not have avoided the 
need for the litigation against UMG.
    UMG has admitted in the litigation that it made computer server 
copies of copyrighted musical works and that these constitute 
phonorecords. Instead of seeking a license for these actions, it 
attempted to rely on licenses previously obtained from HFA that were 
expressly limited to CD's, audiocassettes, and LP's. No clarification 
of the statute would help avoid a dispute such as this. UMG has 
alternatively argued that there was no need for a license because the 
server copy was not distributed. If this were the case, then only the 
reproduction right in section 1060) was violated, the compulsory 
license under section 115 was not available, but UMG is liable 
nonetheless for infringing the exclusive reproduction right of the 
plaintiffs. Even under this alternative argument, no statutory 
clarification would have helped avoid the litigation. HFA and UMG are 
sophisticated members of the music industry with ample access to legal 
counsel: there is no possibility that one of the parties to the 
litigation ``misunderstood'' the law such that a statutory 
clarification is needed.
                       Question from Senator Kohl
    Question: While all of the panelists are primarily concerned with 
access to the online entertainment marketplace, they must also 
understand that they have a responsibility to parents. The Internet 
makes it even more difficult for parents to police the songs that their 
children hear, the images they see and the games that they play. I'd 
like the panelists to discuss what their company or industry plans to 
do to help parents as online entertainment becomes more readily 
accessible to all consumers, especially children.
    Answer: With the exception of the sheet music market, music 
publishers do not generally sell a ``product'' directly to consumers. 
Rather, they license a separate business entity--usually a record 
company--to make and distribute recorded versions of that music. Thus, 
as a general matter, music publishers are not involved in the marketing 
of recorded music to the public, and have no right or ability to 
control the advertising, packaging or labeling of sound recordings 
issued by record companies.
    Music publishers believe that government intrusion into decisions 
about the content of a musical work raises important First Amendment 
concerns. Indeed, the Federal Trade Commission has stated that First 
Amendment concerns dictate that industry self-regulation should prevail 
in determining practices in connection with the marketing and labeling 
of works for explicit content. NMPA supports that view.
    At the same time, however, music publishers understand the concern 
of parents who wish to know more about the music to which their 
children listen. NMPA is troubled, therefore, by the findings of the 
Federal Trade Commission's April 24 followup report on the marketing of 
violent entertainment to children. The FTC observed that the 
``recording industry, unlike the motion picture and electronic game 
industries, has not visibly responded to the Commission's [September 
2000] report'' urging all three industries to move quickly toward more 
effective self-regulation both in limiting the advertising of 
inappropriate material to young audiences and in providing rating 
information useful to parents.
    The follow-up report noted, among other things, that none of the 
major record company or artists web sites it surveyed provided links to 
an educational web site that could provide parents and other consumers 
with information about the record industry's system for labeling 
explicit content. NMPA would encourage the record industry to develop 
and implement such as site, and NMPA would be pleased to assist in the 
education effort by establishing an appropriate link from its own web 
site and encouraging individual music publishers to do the same. 
Moreover, we stand ready to explore with the recording industry other 
ways in which we might assist in promoting the availability of 
information about parental advisory labels.
    Finally, we would note that HFA posts lyrics to some of the titles 
its publishers own or administer at its ``songfile'' website and also 
posts a disclosure at the page where such lyrics may be viewed that 
some of the lyrics may not be appropriate for children.

                                

                       SUBMISSIONS FOR THE RECORD

                    Statement by Comcast Corporation

    Comcast Corporation thanks the Antitrust subcommittee for the 
opportunity to submit this brief statement for the record.
    Our experience as a competitor in the multichannel video 
marketplace demonstrates the great effectiveness of the 
Telecommunications Act of 1996 in promoting competition and delivering 
benefits to consumers. Comcast constantly responds to increasing video 
and broadband competition by expanding investment, improving operations 
and customer service, and delivering new products. We urge Congress and 
the FCC to continue the legislative and regulatory stability that has 
given the financial markets the confidence to support us and our 
competitors in bringing new products to market; this stability is 
essential to the continued growth and expansion of competition.
    Comcast Corporation is the nation's third largest cable operator 
serving more than 8.4 million customers in 26 states, as well as 
providing high-speed Internet service through cable modems available to 
more than 6.4 million households in over 20 markets. In addition, 
Comcast holds ownership interests in various programming networks. 
Comcast subsidiaries also provide wired local exchange telephone 
service in Florida, Maryland, and Virginia, and long-distance service 
in 14 states.
                        Evidence of Competition
    In sharp contrast to the conditions that prevailed when Congress 
passed legislation in 1992, competition in the video marketplace today 
is vigorous and accelerating. Almost every customer of Comcast has more 
than one alternative choice for their television service. Two direct-
to-home broadcast satellite (DBS) companies, DirecTV (with 13 million 
customers, larger than all but the two biggest cable companies) and 
DishTV (with nearly a million customers, larger than all but the top 
ten cable companies), sell their products through hundreds of stores 
like Circuit City, Radio Shack, and Best Buy, and directly through 
newspaper and radio advertisements. The passage of the Satellite Home 
Viewer Improvement Act in November 1999 allows DBS to retransmit local 
TV stations to most US households. As a result, DBS is adding 
subscribers at the rate of more than 8,300 a day, a pace three times 
that of cable's subscriber growth, with the result that 70% of new DBS 
customers are in areas served by cable.\1\ These satellite services are 
well-funded, formidable competitors with distinctive and attractive 
programming offerings for customers.
---------------------------------------------------------------------------
    \1\ Annual Assessment of the Status of Competition in Markets for 
the Delivery of Video Programming, Seventh Annual Report, CS Docket No. 
00-132, FCC 01-1 at para. 8 (rel. Jan. 8, 2001); Alan 
Breznick, ``Cable Operators Aim for Steady Flow of New Digital 
Services,'' COMMUNICATIONS DAILY, Sept. 22, 2000, at 3; ``Skyfonnn: 
Smug in the Enemy Camp,'' CABLEFAX DAILY, Sept. 22, 2000, at 1
---------------------------------------------------------------------------
    Terrestrial providers are also an increasingly important source of 
competition. For instance, in Comcast's home of Philadelphia, 
Popvision, the wireless cable company with over 10,000 local customers, 
has been serving Philadelphia for years and actively markets its 
service throughout the region. There are also numerous companies that 
serve apartment and condominium buildings. Every one of these 
companies, including Comcast, offers a distinct range of service and 
price options. Competition among all of them is robust.
    Similar competition is growing in other communities served by 
Comcast. RCN, with $6.56 billion in available capital, is providing 
service in the Washington, DC market to 352,000 customers. RCN reports 
cable penetration of 30% and local phone penetration of 20% in its 
service areas.\2\ Knology provides multichannel video service in 
communities including Charleston, South Carolina, Panama City, Florida, 
Huntsville, Alabama, Knoxville, Tennessee, and Augusta, Georgia. SBC 
Communications operates Americast services in 16 Michigan communities, 
and provides video service in the entire state of Connecticut, while 
several new overbuilders and OVS providers are seeking to enter the 
market.\3\
---------------------------------------------------------------------------
    \2\ RCN has agreements to serve 20 communities around Philadelphia 
and Union, New Jersey and is currently building or serving in dozens of 
townships in Delaware County, Pennsylvania. RCN is also currently 
providing OVS service under the Starpower name in Washington, DC and 
Gaithersburg, MD. RCN has been awarded cable franchises in Arlington, 
VA (scheduled to commence service 1Q2002), Prince George's County, MD, 
and Montgomery County, MD. RCN also is in negotiations in Baltimore 
County, MD, Alexandria VA, and Reston (Fairfax Co.), VA, as well as 
several communities in the Philadelphia and New Jersey areas.
    \3\ BroadbandConnect has obtained OVS franchises in 30 Maryland 
communities in the Baltimore and Washington, DC areas.
---------------------------------------------------------------------------
              Comcast Responses to Increasing Competition
    Comcast is responding to this competition by continuing to invest 
to upgrade its operations, and delivering new video and broadband 
services so that its customers enjoy an increasing array of service 
choices. Comcast Digital Cable offers more than 170 channels of 
programming with CD quality sound to 95% of its customers, with more 
than 1.35 million subscribers at year-end 2000, doubling the 1999 
level, with stated expectations of over 2 million customers by year-end 
2001.\4\ Comcast's high speed cable Internet service, Comcast@Home, has 
400,000 customers, and is available to over 4.4 million households in 
20 markets, with 7,400 new modem customers added each week. Other 
products are on the horizon, as Comcast expects to launch Video-On-
Demand in 2001 and Interactive TV by year-end 2002.\5\
---------------------------------------------------------------------------
    \4\ Comcast's Digital Basic Tier offers more than 200 channels of 
programming with CD quality sound. Digital Plus Tier offers over 280 
channels with 45 premium channels available in 40 systems, with an 
interactive screen guide that allows customers to search for programs 
by title, time, channel or category.
    \5\ Comcast is a leader in developing IP telephony, and plans 
comprehensive entry into phone markets by 2002.
---------------------------------------------------------------------------
    For its existing analog cable customers, Comcast continues to 
provide a variety of options by structuring program service offerings 
to offer three or more levels of service, including a lowprice basic 
service for between $9-12 consisting of local broadcast stations plus 
C-SPAN. The prices for Comcast's cable service offerings remain well 
below the national average price per channel for comparable services, 
according to FCC figures,\6\ despite continued pressure from rising 
input costs due to significant upgrades and programming costs.\7\
---------------------------------------------------------------------------
    \6\ Implementation of Section 3 of the Cable Television Consumer 
Protection and Competition Act of 1992; Statistical Report on Average 
Rates for Basic Service, Cable Programming Services, and Equipment, 
Report on Cable Industry Prices, FCC 01-49, MM Docket No. 92-266,--FCC 
Rcd--(released February 14, 2001) (``FCC Cable Price Report'').
    \7\ The FCC's recent Report on its annual price survey also 
acknowledged these trends of rising upgrade and programming input costs 
as major factors for explaining pricing for multichannel video service. 
See FCC Cable Price Report.
---------------------------------------------------------------------------
    In order to develop and deploy these services, Comcast has spent 
$3.2 billion for fiber optics and system upgrades over the past four 
years. More than 86% of Comcast customers are now served by systems of 
550 MHz or greater, and 70% of customers are served by systems of 750 
MHz or greater. Every month, Comcast upgrades plant serving nearly 
250,000 homes.
    Comcast also has made substantial investments in creating local and 
regional programming networks, including regional sports networks, to 
provide programming of particular interest to the communities we serve. 
Comcast SportsNet (``CSN'') in Philadelphia is made available to RCN 
and all other terrestrially based competitors to cable television who 
carried ``PRISM,'' the predecessor home-team sports network in 
Philadelphia, but not to'DBS operators, who did not seek to carry 
PRISM. This approach is not only consistent with the law, but in fact 
exceeds the legal requirements imposed on CSN by the ``program access 
rules.'' Congress deliberately and explicitly chose not to apply the 
``program access rules'' to terrestrially distributed programming 
networks, presumably because Congress wanted to encourage the 
development of locally-oriented and regionally-oriented programming 
networks, and did not want to burden those networks with additional 
regulation. CSN--a terrestrially distributed regional service--is made 
available to RCN and other competitors to cable television even though 
there is no legal obligation to do so. In addition, it is important to 
note that, in the interest of ensuring that no Philadelphia sports fan 
would be denied the opportunity to see their teams, Comcast returned a 
substantial number of Philadelphia professional sports games to free 
over-the-air broadcast television (under a previous owner, one of the 
teams had been removed completely from over-the-air TV).
    CSN's decision to distribute its signal by terrestrial means was 
not an evasion of the FCC's program access rules or any other law. CSN, 
like many other local and regional networks, uses terrestrial 
distribution technology to reach its customers because it is far 
cheaper and more efficient than satellite delivery. The FCC carefully 
investigated claims by DirecTV and EchoStar and confirmed these facts; 
the FCC also found that CSN had not engaged in any conduct designed to 
``evade'' the FCC's program access rules.
    Even without CSN, DirecTV and EchoStar are fully capable of 
competing with their cable operator competitors in the provision of 
local sports programming. As stated in its own advertising, DirecTV has 
more sports programming than anyone else, with over 20 sports networks, 
including full season sports subscription packages. Moreover, both 
DirecTV and EchoStar already carry most of the games shown on CSN 
through arrangements with other programmers. DirecTV also has its own 
exclusive sports programming (including its extremely popular NFL 
packages) that is not available to Comcast or to any other cable 
operator--or, for that matter, to EchoStar's Dish TV (which has sued 
DirecTV for the right to carry NFL programming).
    In view of the DBS industry's exclusive sports programming 
arrangements, its complaint that it cannot compete without CSN seems 
disingenuous. But the claim is also incorrect. DirecTV has a higher 
percentage of subscribers in the Philadelphia market than it does in 
the New York, Boston or Hartford-Springfield markets, where it does 
carry regional sports networks.
    RCN does carry Comcast SportsNet, and has done so since the minute 
RCN switched on its Philadelphia-area service. RCN's contract with CSN 
is identical in all key respects to CSN's contracts with its other 
affiliates. Last year, CSN gave all of its affiliates--including 
Comcast, Time Warner, Popvision and RCN--short-term agreements, all of 
which expired on the same day, while CSN reviewed significant business 
restructuring opportunities. As RCN has been told, once that business 
restructuring process is completed, CSN will resume offering its 
affiliates standard multi-year agreements on terms standard in the 
industry. RCN has not been singled out for differing treatment or 
required to agree to materially different contract terms than CSN's 
other affiliates.
                Comcast's Commitment to its Communities
    Comcast has deep local roots in the communities it serves, and 
looks to strengthen those roots by showing its community commitment, 
particularly in the area of education. For example, Comcast has led the 
cable industry's commitment to provide schools with free highspeed 
cable Internet service; over 1000 schools and 250 public libraries are 
now receiving free cable Internet service from Comcast. Comcast will 
connect an additional 750 schools as part of its entry into the 
Washington, DC metropolitan area. In addition, the Comcast Foundation's 
primary focus is to enhance education initiatives in Comcast 
communities. The Foundation announced a $60,000 grant in 2000 for Cable 
In The Classroom to support teacher Internet training initiatives in 
the Washington, D.C. area through the Comcast Technology Academy. More 
than 1,000 teachers in Montgomery County, Maryland have already taken 
advantage of the free technology training, and the program will be 
expanded this year. These are only two examples of creative and 
significant community involvement by Comcast.
    Customers in the multichannel video marketplace enjoy more and more 
choices from more and more providers of video service, driven by the 
massive investments in better technology encouraged by the 1996 
Telecommunications Act. Comcast believes that its responses to 
competition have produced many benefits for its customers. We urge 
Congress to continue the pro-competitive and deregulatory policies that 
have helped to create this atmosphere.
    Comcast respectfully submits and appreciates the Committee's 
consideration of this statement regarding the state of video 
competition.

                                

  Statement of the Federal Communications Commission, Cable Services 
                         Bureau, Washington, DC

                              Introduction
    Section 628 of the Communications Act of 1934, as amended 
(``Communications Act''), requires the Federal Communications 
Commission to report annually to Congress on the status of competition 
in the market for the delivery of video programming. The Commission 
submitted its Seventh Annual Report (``2000 Report'') to Congress on 
January 8, 2001.
            Summary of Findings in the Seventh Annual Report
    In the 2000 Report, the Commission found that overall competitive 
alternatives and consumer choices continue to develop. Cable television 
still is the dominant technology for the delivery of video programming 
to consumers in the multichannel video programming distribution 
(``MVPD'') marketplace, although its market share continues to decline. 
As of June 2000, 80 percent of all MVPD subscribers received their 
video programming from a franchised cable operator, compared to 82 
percent a year earlier.
    The following presents the status of competition in the market for 
the delivery of video programming, the general trends that have 
occurred in the competitive environment between June 1999 and June 
2000, and barriers to entry that continue to exist. (See also 
Attachment.)
                         mvpd subscriber growth
    The total number of subscribers to both cable and non-cable MVPDs 
(e.g., direct broadcast satellites or DBS, multipoint multichannel 
distribution systems or MMDS, satellite master antenna television 
systems or SMATV, open video systems or OVS) continues to increase. A 
total of 84.4 million households subscribe to multichannel video 
programming services as of June 2000, up 4.4 percent over the 80.9 
million households subscribing to MVPDs in June 1999. This subscriber 
growth accompanied a 2.4 percentage point increase in MVPDs' 
penetration of television households to 83.8 percent as of June 2000.

 The number of cable subscribers continued to grow, reaching 
        67.7 million as of June 2000, up about 1.5 percent from the 
        66.7 million cable subscribers in June 1999.
 The total number of non-cable MVPD subscribers grew from 14.2 
        million as of June 1999 to 16.7 million as of June 2000, an 
        increase of almost 18 percent.
 The growth of non-cable MVPD subscribers continues to be 
        primarily attributable to the growth of direct broadcast 
        satellite (``DBS'') service. Between June 1999 and June 2000, 
        the number of DBS subscribers grew from 10.1 million households 
        to almost 13 million households, which is nearly three times 
        the cable subscriber growth rate. DBS subscribers now represent 
        15.4 percent of all MVPD subscribers.
 Cable operators reported that DBS service has captured, on 
        average, an estimated 14.7 percent share of television 
        households in their service areas in 2000 (18 percent in rural 
        and 11.8 percent in urban areas) compared to a 10.4 percent DBS 
        share of households reported in the 1999 price survey report. 
        In addition, the Commission found that the demand for cable 
        service is somewhat sensitive to DBS penetration. This finding 
        also suggests that DBS is a substitute for cable service. The 
        difference between cable and DBS prices has declined and recent 
        DBS price increases have been of a similar magnitude as those 
        for cable. According to one study that compared 1999 cable and 
        DBS prices, DBS's average programming price was $29.50 per 
        month while large multiple system owners' (``MSOs'') 
        programnung prices averaged $30.56 per month.
 There also have been a number of additional cable overbuilds 
        in the last year.
 While the Commission has certified new open video systems, 
        some open video system (``OVS'') operators have converted 
        portions of their systems to franchised cable operations.
 Over the last year, the number of subscribers to larger-than-
        DBS home satellite dishes (``HSD'') and multichannel multipoint 
        distribution system (``MMDS'') subscribers continued to 
        decline. However, the number of satellite master antenna system 
        (``SMATV'') subscribers has increased slightly between June 
        1999 and June 2000.

                              cable rates
    During the period under review for the 2000 Report, cable rates 
rose faster than inflation. According to the Bureau of Labor 
Statistics, between June 1999 and June 2000, cable prices rose 4.8 
percent compared to a 3.2 percent increase in the Consumer Price Index 
(``CPI''), which measures general price changes.
    Pursuant to Section 623 of the Communications Act, the Commission 
is required to conduct an annual survey of cable rates. As reported in 
the 2000 Annual Survey of Cable Rates:

 As of July 1, 2000, cable operators facing competition 
        charged, on average, $32.40 per month, an increase of 5.8 
        percent over 1999, while cable operators not facing competition 
        charged $34.11, also a 5.8 percent increase. [The Consumer 
        Price Index for all goods and services rose by 3.7 percent over 
        the same period.] The differences between the average rates 
        charged by competitive and non-competitive cable systems were 
        $1.71 and $1.62 for 1999 and 2000, respectively.
 On a per channel basis, rates charged by competitive operators 
        remained stable at $0.57 per channel during the year ending 
        July 2000. For the noncompetitive group, per channel rates 
        increased from $0.65 to $0.66, a 1.5 percent increase, over the 
        same period. The average number of channels offered by 
        competitive cable systems was 59.9 in July 2000, an increase of 
        4 percent over a year earlier. For non-competitive cable 
        systems, the average number of channels offered was 54.8 in 
        July 2000, an increase of 5.4 percent over the previous year. 
        Non-video service offerings also increased in 2000. As of July 
        1, 2000, the percentage of surveyed cable operators that 
        offered a digital programming tier doubled to 54 percent from 
        27 percent a year earlier. Of the surveyed cable systems, 47 
        percent offered Internet services and 7 percent offered 
        telephone services.

    Concurrently with these rate increases, capital expenditures for 
the upgrading of cable facilities increased (from $5.6 billion in 1998 
to $10.6 billion in 1999, an increase of 89.3 percent), the number of 
video and non-video services offered increased, and programming costs 
increased (license fees increased from $4.9 billion in 1998 to $5.5 
billion in 1999, or 12.2 percent, and programming expenses increased 
from $4.9 billion in 1998 to $5.8 billion in 1999, or 16.2 percent).
    The available evidence indicates that when an incumbent cable 
operator faces ``effective competition,'' as defined by the 
Communications Act, it responds to such head-to-head competition in a 
variety of ways, including lowering prices or adding channels without 
changing the monthly rate, as well as improving customer service and 
adding new services such as interactive programming.
                         competition from lecs
    The Telecommunications Act of 1996 (``1996 Act'') removed barriers 
to local exchange carrier (``LEC'') entry into the video marketplace in 
order to facilitate competition between incumbent cable operators and 
telephone companies. At the time of the 1996 Act, it was expected that 
LECs would compete in the video delivery market and that cable 
operators would provide local telephone exchange service.

 The 2000 Report found that there had been an increase in the 
        amount of video programming provided to consumers by telephone 
        companies, although the expected technological convergence that 
        would permit use of telephone facilities for video service had 
        not yet occurred.
 In the 2000 Report, the Commission found that the rate of 
        entry by LECs into the MVPD marketplace appears to be slowing, 
        even by the most aggressive telephone companies, and several 
        LECs have reduced or eliminated their MVPD efforts. Many 
        incumbent local telephone exchange carriers appear to have 
        decided to exit the facilities-based video programming business 
        and instead are seeking to market DBS service to their 
        customers.
 While the 1996 Act created the OVS framework as a means of 
        entry into the video marketplace by LECs, few telephone 
        companies have sought certification.
 Alternatively, only a limited number of cable operators have 
        begun to offer telephone service and their strategies for 
        deployment remain varied. Some MSOs continue to deploy 
        traditional circuit-switched telephone service. Others are 
        offering cabledelivered telephony on a limited basis, waiting 
        until Internet Protocol (``IP'') technology becomes available 
        before accelerating their rollout of telephone service, or 
        continuing to test such service.
                 broadband high-speed internet services
    The most significant convergence of service offerings continues to 
be the pairing of Internet service with other service offerings. There 
is evidence that a wide variety of companies throughout the 
communications industries are attempting to become providers of 
multiple services, including data access. Cable operators continue to 
make large investments to expand the broadband infrastructure that 
permits them to offer high-speed Internet access.
    Currently, the most popular way to access the Internet over cable 
is through the use of a cable modem and personal computer. Virtually 
all the major MSOs offer Internet access via cable modems in portions 
of their nationwide service areas. A small portion of cable Internet 
access is delivered through a television receiver rather than a 
personal computer. Many cable operators also are planning to integrate 
telephony and high-speed data access. There are now approximately 4.6 
million subscribers to cable Internet services.
    Like cable, the DBS industry is developing ways to bring advanced 
services to its customers. For example, one DBS operator currently 
offers a satellite-delivered highspeed Internet access service with a 
telephone return path. Another DBS company now offers its subscribers 
an interactive program guide and weather service and recently initiated 
two-way Internet access service via satellite. There are approximately 
40,000 subscribers to DBS high-speed data service.
    Many SMATV operators offer local and long distance telephone 
service and Internet access along with video service. In addition, 
digital technology makes it possible for MMDS operators, who provide 
video service in only limited areas, to offer two-way services, such as 
high-speed Internet service and telephony. Two of the largest long 
distance companies have acquired most of the larger MMDS operators with 
the intent to use the acquired frequencies to provide two-way, non-
video communications services.
                          regulatory barriers
    Non-cable MVPDs continue to report that regulatory and other 
barriers to entry limit their ability to compete with incumbent cable 
operators and to thereby provide consumers with additional choices. 
Non-cable MVPDs also continue to experience some difficulties in 
obtaining programming from both vertically integrated cable programmers 
and unaffiliated programmers who continue to make exclusive agreements 
with cable operators. In multiple dwelling units (``MDUs''), potential 
entry may be discouraged or limited because an incumbent video 
programming distributor has a long-term and/or exclusive contract. 
Other issues also remain, e.g., how, and under what circumstances, 
existing inside wiring in MDUs may be made available to alternative 
video service providers, delays in gaining access to local rights-of-
way, pole attachment delays, and excessive rates.
    Consumers historically reported that their inability to receive 
local signals from DBS operators negatively affected their decision as 
to whether to subscribe to DBS. The significant increase in DBS 
subscribership between June 1999 and June 2000 has been attributed, at 
least in part, to the authority granted to DBS providers to distribute 
local broadcast television stations in their local markets by the 
Satellite Home Viewer Improvement Act of 1999 (``SHVIA'') enacted on 
November 29, 1999.
    Under SHVIA, DBS operators can offer a programming package more 
comparable to and competitive with the services offered by cable 
operators. The two DBS companies now offers a package of local ABC, 
CBS, NBC, and Fox affiliates along with a national PBS feed for $5.99 a 
month in approximately 40 markets, which cover about one-half of all 
television households. Moreover, in the last year, as required by 
SHVIA, the Commission has adopted rules for satellite companies with 
regard to mandatory carriage of analog broadcast signals, 
retransmission consent, and program exclusivity that closely parallel 
the requirements for cable service.
                        industry consolidations
    Consolidations within the cable industry continue as cable 
operators acquire and trade systems. As a result of acquisitions and 
trades, cable MSOs have continued to increase the extent to which their 
systems form regional clusters. By clustering their systems, cable 
operators may be able to achieve efficiencies that facilitate the 
provision of cable and other services, such as telephony.

 The ten largest operators now serve close to 90 percent of all 
        U.S. cable subscribers. In terms of one traditional economic 
        measure (the Herfindahl-Hirschman Index or HHI), national 
        concentration among the top MVPDs has increased since last 
        year, although it remains below the levels reported in earlier 
        years.
 DBS operators DirecTV and EchoStar rank among the ten largest 
        MVPDs in terms of nationwide subscribership along with eight 
        cable multiple system operators (``MSOs'').
 Currently, 44 million of the nation's cable subscribers are 
        served by systems that are included in regional clusters.

                satellite-delivered programming networks
    The number of satellite-delivered programming networks has 
decreased by two from 283 in 1999 to 281 in 2000. Vertical integration 
of national programming services between cable operators and 
programmers, measured in terms of the total number of services in 
operation, declined from last year's total of 37 percent to 35 percent 
in 2000, continuing a five year trend.

 In 2000, one or more of the top five cable MSOs held an 
        ownership interest in each of 99 vertically integrated national 
        programming services.
 The 2000 Report identifies 75 regional networks, 27 of which 
        are sports channels, many owned at least in part by MSOs. 
        Sports programming warrants special attention because of its 
        widespread appeal and strategic significance for MVPDs. There 
        are also 30 regional and local news networks that compete with 
        local broadcast stations and national cable networks (e.g., 
        CNN).

    The program access rules adopted pursuant to the 1992 Cable Act 
were designed to ensure that other MVPDs can have access to vertically-
integrated satellite delivered programming on non-discriminatory terms. 
The Commission recognizes that the terrestrial distribution of 
programming, including, in particular, regional sports programming, 
could eventually have a substantial impact on the ability of 
alternative MVPDs to compete in the video marketplace. The prohibition 
on cable exclusivity in the program access rules sunsets on October 5, 
2002, unless the Commission finds that the prohibition continues to be 
needed to preserve and protect competition and diversity in the 
distribution of video programming.
      additional findings for specific sectors of the mvpd market
    In addition, with respect to particular distribution technologies 
operating in markets for the delivery of video programming, the 
Commission found the following:
    Cable Systems: Since the 1999 Report, the cable television industry 
has continued to grow in terms of subscribership (up to 67.7 million 
subscribers as of June 2000, a 1.5 percent increase from June 1999), 
revenues (an approximate 13 percent increase between year end 1998 and 
year end 1999), audience ratings (non-premium cable viewership rose 
from a 42 share at the end of June 1999 to almost a 46 share at the end 
of June 2000), and expenditures on programming (an approximate 12 
percent increase in program license fees paid by cable system 
operators). However, the number of national satellite-delivered video 
programming services, which had been increasing steadily in recent 
years, decreased by two networks, from 283 to 281, between June 1999 
and June 2000. The cable industry remains healthy financially, which 
has enabled it to invest in improved facilities, either through 
upgrades or rebuilding. As a result, there have been increases in 
channel capacity, the deployment of digital transmissions that provide 
better picture quality than can be offered through analog service, and 
non-video services, such as Internet access. Cable operators also offer 
telephony, although the use of integrated facilities remains primarily 
experimental with limited exceptions.
    Direct-to-Home (``DTH'') Satellite Service (DBS and HSD): Video 
service is available from high power DBS satellites that transmit 
signals to small DBS dish antennas installed at subscribers' premises, 
and from low power satellites requiring larger satellite dish antennas. 
The 2000 Report found that DBS had approximately 13 million subscribers 
in June 2000, an increase of approximately 29 percent since the 1999 
Report. Currently, there are approximately 15 million DBS subscribers. 
Between June 1999 and June 2000, the number of HSD subscribers, 
measured as the number of HSD users that actually purchase programming 
packages, declined from 1.8 million to 1.5 million, a decrease of 17 
percent, that is likely due to subscribers switching to DBS. DirecTV 
and EchoStar are among the ten largest providers of multichannel video 
programming service. In June 2000, DBS represented a 15.4 percent share 
of the national MVPD market and HSD represented another 1.8 percent of 
that market.
    Wireless Cable Systems: Currently, the wireless cable industry 
(``MMDS'') provides competition to the cable industry in only limited 
areas. MMDS subscribership fell from 821,000 subscribers to 700,000 
subscribers between June 1999 and June 2000, a decrease of 14.7 
percent. With the advent of digital MMDS and the Commission's 
authorization of two-way MMDS service, it appears that MMDS spectrum 
will be used to provide video services in limited areas, and that most 
MMDS spectrum will eventually be used to provide high-speed data 
services. Wireless cable represented a 0.8 percent share of the 
national MVPD market in June 2000.
    SMATV Systems: SMATV systems use some of the same technology as 
cable systems, but do not use public rights-of-way, and focus 
principally on serving subscribers living in multiple dwelling units 
(``MDUs''). SMATV subscribership has increased approximately 3.5 
percent since the last report, with the industry representing 
approximately a 1.8 percent share of the national MVPD subscribership 
as of June 2000.
    Broadcast Television: Broadcast networks and stations are 
competitors to MVPDs in the advertising and program acquisition 
markets. They supply video programming directly to the approximately 20 
percent of television households that are not MVPD subscribers. 
Additionally, broadcast networks and stations are suppliers of content 
for distribution by MVPDs. Since the 1999 Report, the broadcast 
industry has continued to grow in the number of operating stations 
(from 1599 in 1999 to 1663 in 2000) and in advertising revenues ($36.6 
billion in 1999, a 5.7 percent increase over 1998). While audience 
levels continue to decline, the four major television networks still 
account for a 50 percent share of prime time viewing for all television 
households. Broadcast television stations continue to deploy digital 
television (``DTV'') service. There are 173 television stations on the 
air broadcasting DTV signals, and digital simulcast of analog 
programming continues to increase.
    LEC Entry: The 1996 Act expanded opportunities for LECs to enter 
the market for the delivery of video programming. In the 1999 Report, 
the Commission noted that it appeared that the rate of entry into the 
video marketplace by LECs might be slowing, even by the most aggressive 
LECs, and that several LECs had reduced or eliminated their MVPD 
efforts. This trend continued or accelerated in 2000. Most incumbent 
local exchange carriers are seeking to sell their MVPD facilities, 
preferring instead to market DBS service to their customers. One 
notable exception is BellSouth, which continues to pursue a number of 
methods for providing MVPD service. BellSouth has been the largest LEC 
investor in MMDS licenses, with its service area covering approximately 
3.5 million homes. However, in December 2000, BellSouth announced that 
it was phasing out this service and transitioning existing subscribers 
to EchoStar's DBS service. It has acquired 21 cable franchises in its 
telephone service area with the potential to pass 1.4 millions, 
provides service in 12 franchise areas, and is negotiating for 
additional franchises. Previously, Ameritech was the most significant 
LEC provider of in-region cable service, but recent reports indicate 
that SBC, its current owner, seeks to sell these cable assets. Verizon, 
which acquired GTE's 10 competitive and one non-competitive cable 
franchises, is seeking to sell those cable assets. SNET, now also owned 
by SBC, currently offers service to 30,000 homes in 29 Connecticut 
localities, but is exiting the business. Qwest (formerly U S West) 
continues to offer video, high-speed Internet access, and telephone 
service over existing copper lines using very high speed digital 
subscriber line (``VSDL'') in Omaha and Phoenix.
    Open Video Systems: In the 1996 Act, Congress established a new 
framework for the delivery of video programming-the open video system 
(``OVS''). Under these rules, a LEC or other entrant may provide video 
programming to subscribers, although the OVS operator must provide non-
discriminatory access to unaffiliated programmers on a portion of its 
channel capacity. The Commission has certified 25 OVS operators to 
serve 50 areas. RCN owns the only operating open video systems and 
currently serves areas surrounding Boston, New York City, Washington, 
D.C, and San Francisco. In several areas for which it holds OVS 
certifications, or portions of these areas, RCN has converted its 
systems to franchised cable systems. The number of OVS subscribers has 
remained constant over the last year at approximately 60,000 
subscribers. OVS subscribers now represent slightly less than 0.1 
percent of all MVPD subscribers.
    Internet Video: As of June 2000, 56 percent of the U.S. population 
has Internet access. Real-time and downloadable video accessible over 
the Internet continues to become more widely available and the amount 
of content also is increasing. Despite the evidence of increased 
interest in Internet video deployment and use, the medium is still not 
seen as a direct competitor to traditional video services. Television 
quality Internet video requires a high-speed broadband connection, 
which most current broadband providers cannot guarantee. Also, 
deployment of broadband is far from ubiquitous. However, Internet users 
continue to download and use software for accessing Internet video and 
Web sites dedicated to streaming video continue to proliferate.
    Home Video Sales and Rentals: The home video marketplace includes 
the sale and rental of video cassettes, DVDs, and laser discs. As in 
past reports, the Commission considered home video sales and rentals 
part of the video marketplace because they provide services similar to 
the premium and pay-per-view offerings of MVPDs. Almost 86 percent of 
all U.S. households have at least one VCR. The number of homes with DVD 
players has grown rapidly since their introduction into the market. The 
number of homes with DVD players was expected to reach between 10 and 
12 million by the end of 2000. The newest home video technology, the 
personal video recorder (``PVR''), was introduced in 1999. A PVR is a 
device connected to a television set that uses a hard disk drive, 
software, and other technology to digitally record and access 
programming. In the last year, TiVo and ReplayTV, the two PVR 
companies, have joined with MVPDs, equipment manufacturers, 
advertisers, and programmers to incorporate PVR technology into set-top 
boxes and develop content specifically for PVRs.
    Utilities: Since the 1999 Report, several electric and gas 
utilities have announced, commenced, or moved forward with ventures 
involving multichannel video programming distribution. Utilities are 
not yet major competitors in the telecommunications or cable markets, 
but they generally possess characteristics, such as ownership of fiber 
optic networks and access to public rights-of-way, that could 
potentially help them become competitively significant. Moreover, 
deregulation of utilities, accompanied by the advent of competition, is 
prompting more utilities to diversify and find new revenue streams. 
Starpower, a joint venture between RCN and PEPCO, continues to expand 
the area where it offers voice, video, and high-speed Internet access 
in the Washington, D.C., area. Last year, the Commission reported that 
Seren, a wholly-owned subsidiary of Minneapolisbased Northern States 
Power, offered cable and high-speed data access as an overbuilder in 
several Minnesota communities. It also offers service in the San 
Francisco Bay area and plans to expand its service area. Siegecom, 
funded by Blackstone Capital and a joint venture of Southern Indiana 
Gas and Electric and Utilicom, is offering bundled voice, video and 
data access services in Evansville and Newburg, Indiana, and has 
approached other communities about obtaining franchises. Digital Union, 
a subsidiary of the local utility in Austin, Texas, plans to overbuild 
the incumbent cable operator. Braintree, Massachusetts, granted a 
franchise to the municipal utility and plans to begin cable service by 
the end of 2000.

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