[Senate Hearing 107-893]
[From the U.S. Government Publishing Office]
S. Hrg. 107-893
DOMINANCE ON THE GROUND: CABLE COMPETITION AND THE AT&T-COMCAST MERGER
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
BUSINESS RIGHTS, AND COMPETITION
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
APRIL 23, 2002
__________
Serial No. J-107-75
__________
Printed for the use of the Committee on the Judiciary
85-889 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware STROM THURMOND, South Carolina
HERBERT KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin JON KYL, Arizona
CHARLES E. SCHUMER, New York MIKE DeWINE, Ohio
RICHARD J. DURBIN, Illinois JEFF SESSIONS, Alabama
MARIA CANTWELL, Washington SAM BROWNBACK, Kansas
JOHN EDWARDS, North Carolina MITCH McCONNELL, Kentucky
Bruce A. Cohen, Majority Chief Counsel and Staff Director
Sharon Prost, Minority Chief Counsel
Makan Delrahim, Minority Staff Director
------
Subcommittee on Antitrust, Business Rights, and Competition
HERBERT KOHL, Wisconsin, Chairman
PATRICK J. LEAHY, Vermont MIKE DeWINE, Ohio
RUSSELL D. FEINGOLD, Wisconsin ORRIN G. HATCH, Utah
CHARLES E. SCHUMER, New York ARLEN SPECTER, Pennsylvania
MARIA CANTWELL, Washington STROM THURMOND, South Carolina
SAM BROWNBACK, Kansas
Victoria Bassetti, Majority Chief Counsel
Peter Levitas, Minority Chief Counsel
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
Brownback, Hon. Sam, a U.S. Senator from the State of Kansas..... 10
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 3
Hatch, Hon. Orrin, a U.S. Senator from the State of Utah......... 6
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin...... 1
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 9
Thurmond, Hon. Strom, a U.S. Senator from the State of South
Carolina....................................................... 91
WITNESSES
Armstrong, C. Michael, Chairman and Chief Executive Officer, AT&T
Corp., Basking Ridge, New Jersey............................... 15
Betty, Garry, Chief Executive Officer, Earthlink, Atlanta,
Georgia........................................................ 25
Green, Richard R., President and Chief Executive Officer, Cable
Television Laboratories, Inc., Louisville, Colorado............ 30
Haverkate, Mark, President and Chief Executive Officer,
WideOpenWest, Castle Rock, Colorado, on behalf of the Broadband
Service Providers
Association.................................................... 34
Perry, Robert A., Vice President, Marketing, Mitsubishi Digital
Electronics America, Irvine, California........................ 42
Roberts, Brian L. President, Comcast Corporation, Philadelphia,
Pennsylvania, accompanied by Ralph Roberts..................... 12
SUBMISSIONS FOR THE RECORD
RCN Corporation, statement....................................... 69
Writers Guild of America, west, Inc., Los Angeles, CA............ 94
DOMINANCE ON THE GROUND:
CABLE COMPETITION AND THE
AT&T-COMCAST MERGER
----------
TUESDAY, APRIL 23, 2002
U.S. Senate,
Subcommittee on Antitrust, Business Rights
and Competition,
Committee on the Judiciary,
Washington, D.C.
The Subcommittee met, pursuant to notice, at 2:03 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl,
Chairman of the Subcommittee, presiding.
Present: Senators Kohl, DeWine, Hatch, Specter, and
Brownback.
OPENING STATEMENT OF HON. HERBERT KOHL, A U.S.
SENATOR FROM THE STATE OF WISCONSIN
Chairman Kohl. This subcommittee will come to order.
Today, we examine the merger between Comcast and AT&T
Broadband. This is the end of AT&T as we know it, but a new
AT&T, a wide-ranging, powerful cable monopoly, is emerging.
Just as the pre-1984 AT&T controlled the phone line, the
equipment, and the content, this new cable giant has the
potential to wield similar control over the cable line, the
equipment, and the content sent to more than 22 million
American homes. The creation of this new and even broader
communications conglomerate may pose the same dangers to
consumers and to innovation that led to the break-up of the old
AT&T monopoly.
As this merger indicates, big changes are coming to the
cable industry, but one thing remains the same: cable rates
continue to rise, about triple the rate of inflation since the
passage of the 1996 Telecommunications Act, and more than 7
percent last year.
Make no mistake, if this merger is approved, AT&T-Comcast
will become the Nation's largest cable company, providing
television signals to about 30 percent of the Nation's homes.
Since this merger was announced, we have been asking ourselves
over and over again, how is this good for consumers. We know it
is good for the companies, but what does it do for the average
consumer?
Ten years from now, if trends like this merger continue,
consumers may find almost all of their personal communications
and information dominated by a very few large media companies.
Their phones, their movies, their Internet, their cable, their
link to the outside world will be priced, processed and
packaged by one company that faces virtually no competition.
While the Echostar-DirecTV deal has faced a barrage of
antitrust questions, this deal has not. In fact, it appears
there are few, if any, traditional antitrust concerns raised by
it. Nevertheless, there are some serious issues that need to be
looked at.
Big is not necessarily bad, but we cannot ignore the
potential for a cable company as big as AT&T-Comcast to throw
its weight around. We should be frightened about this future,
and we need to be thinking about imposing meaningful conditions
on this merger to make it tolerable for consumers. Therefore,
before we can fully understand the impact of this merger on
consumers, we need answers to five key questions.
First, the parties have promised that they will
aggressively continue efforts to offer cable telephone service
in more markets. This competition to the local telephone
monopoly is sorely needed, so how can we be sure that they will
keep their promise?
Two, we cannot ignore that such a large company will affect
and perhaps control programming. Small, independent media
voices will have even a harder time gaining access to the video
airwaves. For the last 10 years, we have had rules to guard
against cable companies leveraging their monopolies and
blocking access to programming to competitors.
These program access rules are expiring this year. Now more
then ever, in the face of all of this consolidation, these
rules need to be extended. Why do the parties oppose extending
these rules?
Three, the parties have promised that they will let
consumers choose who will provide them their Internet, but they
have been unwilling to make the promise binding. AOL-Time
Warner made the promise binding as a condition of their merger.
Why shouldn't these parties?
Four, after recent court decisions, the long-established
cable ownership caps are currently under review by the FCC.
With a seemingly unrelenting wave of media mergers underway,
reasonable ownership limits are the last line of defense
against excessive concentration in this industry. Will the FCC
live up to responsibilities as guardians of diversity of
expression in our video marketplace?
Finally, 6 years ago we passed a law mandating a
competitive market for the so-called set-top box, the device
that delivers the cable signal to the consumer. In the digital
age, controlling technology and software is the ultimate power.
All of us remember the time when there was only one type of
telephone, a clunky and rudimentary device. But when we broke
up that monopoly, innovation then flourished. Only a truly
competitive set-top box market can unlock the type of
innovation that brought us cell phones, faxes, and the Internet
itself. We required a competitive set-top box market 6 years
ago. So what is going on here?
The answers to these questions and others are essential. We
thank our distinguished panel of witnesses for testifying today
and we look forward to your testimony.
[The prepared statement of Senator Kohl follows:]
Statement of Hon. Herb Kohl, a U.S. Senator from the
State of Wisconsin
Big changes are coming to the cable industry. Consolidation is
picking up. Court rulings are reconfiguring the laws that govern the
industry. New technology is blossoming. But one thing remains the same:
cable rates continue to rise--about triple the rate of inflation since
the passage of the 1996 Telecommunications Act, and more than 7 percent
last year.
Today we examine the merger between Comcast and AT&T Cable. If this
merger is approved, AT&T and Comcast will become the Nation's largest
cable company, providing television signals to about 30 percent of the
Nation's homes. Three companies--AOL-Time Warner, Charter
Communications and the new ATT-Comcast--will control 65 percent of the
Nation's cable market. And, if this wasn't already enough, the only
head-to-head competitors to cable in most areas--the satellite
television companies Echostar and DirectTV--are also planning to merge,
further reducing consumer choice.
While the Echostar-DirectTV deal has faced a barrage of antitrust
questions, this deal has not. In fact, it appears that there are few if
any traditional antitrust concerns raised by it. Nevertheless, there
are some serious issues that need to be looked at. Big is not bad, but
we can't ignore the potential for dominance in a cable company as big
as ATT-Comcast will be.
Since this merger was announced, we have been asking ourselves over
and over: how is this good for consumers? We know it's good for the
companies--but what does it do for the average consumer? Ten years from
now, if trends like this merger continue, consumers may find almost all
of their personal communications and information dominated by a very
few, large media conglomerates. Their phone, their movies, their
Internet, their cable, their link to the outside world will be priced,
processed and packaged for them by one company that faces virtually no
competition.
Before we can fully understand the impact of this merger on
consumers, we need answers to five key questions:
One, the parties have promised that they will aggressively continue
efforts to offer cable telephone service in more markets. This
competition to the local telephone monopoly is sorely needed. How can
we be sure they will keep their promises?
Two, the parties have promised that they will let consumers choose
who will provide them their Internet--but they have been unwilling to
make the promise binding. AOL-Time Warner made the promise binding as a
condition of their merger, why shouldn't these parties?
Three, we cannot ignore that such a large company will affect and
maybe control programming. Small, independent media voices will have
even a harder time gaining access to the video airwaves. For the last
10 years, we've had rules to guard against cable companies leveraging
their monopolies and blocking access to programming to competitors.
These program access rules are expiring this year. Now more than ever,
in the face of all this consolidation, these rules need to be extended.
Why do the parties oppose renewing these rules?
Four, 6 years ago we passed a law mandating a competitive market
for the so called set-top box--the device that delivers the cable
signal to the consumer. In the digital age, controlling the technology
and software is the ultimate power. All of us remember the time when
there was only one type of phone--a clunky and rudimentary device. But
when we broke that monopoly, innovation flourished. Only a truly
competitive set-top box market can unlock the type of innovation that
brought us cell phones, faxes, and the Internet itself. We required a
competitive set-top box market 6 years ago--what's going on here?
Finally, after recent court decisions, the long-established cable
ownership caps are currently under review by the FCC. With a seeming
unrelenting wave of media mergers under way, reasonable ownership
limits are the last line of defense against excessive concentration in
this industry. Will the FCC live up to responsibilities as guardians of
diversity of expression in our video marketplace?
The answers to these questions are essential. I thank our
distinguished panel of witnesses for testifying today and I look
forward to their views.
Chairman Kohl. Senator DeWine.
STATEMENT OF HON. MIKE DeWINE,
A U.S. SENATOR FROM THE STATE OF OHIO
Senator DeWine. Mr. Chairman, thank you very much for
holding this hearing on this very important issue.
This afternoon, we will examine the proposed merger between
two of the leading cable providers in the country, AT&T
Broadband and Comcast Corporation. This merger would create an
industry giant, as you have pointed out, serving over 27
million subscribers, more than double the size of the next
largest cable company.
But, Mr. Chairman, despite its resulting size, this deal
appears to avoid many of the traditional antitrust concerns
raised by horizontal mergers because the companies in this case
do not currently compete with each other in the delivery of
video services. Accordingly, in regard to the delivery of video
services, a merger between the two is probably not a violation
of the Clayton Act test of the ``substantial lessening of
competition.''
But the effects of this deal are not limited only to the
video delivery market, and it cannot be examined in isolation.
It occurs at the same time that the courts and to some extent
the Federal Communications Commission are acting to
significantly roll back restrictions on media consolidation.
This trend toward further media consolidation is troubling.
Frankly, the regulators must pay close attention to the impact
of consolidation, beyond just the standard antitrust analysis.
Obviously, preserving vigorous competition is always important
and will ensure that consumers receive affordable, high-quality
products. However, it is also important that we ensure that
information outlets in communities or regions of the country
are not controlled by just a few players.
If one company were to own the cable franchise, several
broadcast stations, and newspaper outlets in any one given
community, the people of that community would suffer not only
from a lack of competition, but in all likelihood they also
would be exposed to a smaller range of opinions. This would be
unacceptable in an era that has been dubbed as the
``information age.''
Mr. Chairman, in light of recent court decisions, the
Federal Communications Commission needs to develop reasonable
rules to protect this marketplace of ideas, and it must do so
in a coherent fashion that will pass the scrutiny of the
courts.
One such rule that they may need to reexamine that is
particularly relevant to our hearing today is the cable
ownership limit. The FCC must thoroughly examine cable
ownership limits and establish an appropriate limit that would
ensure healthy competition and a diverse marketplace. If they
can't do it, then Congress will need to take a look at it.
Now, focusing again on the specifics of the deal we have
before us today, there are competitive implications of this
merger that I believe deserve examination. Perhaps the most
important is the effect of the merger on the programming
market.
As I have said, a combined AT&T-Comcast would control
access to over 27 million customers. This customer base would
become an extremely important outlet for programmers,
increasing the pressure to obtain a spot on the AT&T-Comcast
cable system. This would impose a challenge for those who offer
new, independent programming.
These independent producers may not have the leverage of
linking their product with more established programs. An
independent programmer also may not have the financial backing
to offer very low initial prices. This creates an obvious
problem. The programmer more than ever needs the customer base
of AT&T-Comcast, but does not necessarily have the leverage to
strike a worthwhile deal. Thus, the increased size of the
combined AT&T-Comcast may make it more difficult for
independent programmers, and this, I believe, we should be
concerned about.
This increase in the market power of AT&T-Comcast also
raises concerns in situations where the cable companies own
programming. For example, Comcast owns the Outdoor Life
Network. The combined company, with an expanded presence across
more media markets, would likely be less willing to carry a
similar network from an independent producer. This incentive to
exclude independent programming, coupled with fewer programming
outlets, might harm the ability of new programs to develop and
then to survive.
However, we should acknowledge that these two companies
have limited programming ownership. Along those lines, it is
important that AT&T has confirmed publicly that it will divest
its ownership interest in Time Warner Entertainment
programming. I applaud them for that decision and look forward
to the completion of that transaction.
The increased market power of AT&T-Comcast also could have
an effect on the ability of competitors to gain access to
programming. Depending on the competitive circumstances in a
local market, the combined AT&T-Comcast might have enough
negotiating power to demand exclusive rights to programming,
therefore harming the ability of a satellite system or cable
over-builder to compete. This obviously would be a very serious
concern for consumers, since there is significant evidence that
the existence of viable cable over-builders helps to lower
prices.
Of course, increased purchasing power also might have a
positive effect on prices. If AT&T-Comcast were able to drive
down programming costs, it might be able to limit the seemingly
endless rise of cable rates. This obviously would be of great
benefit to consumers if, in fact, it happened.
One additional area of concern involved broadband,
specifically the ability of consumers to choose an Internet
service provider when they obtain broadband service from their
cable company. When AOL and Time Warner merged, the Federal
Trade Commission required the combined company to allow a range
of competitive ISPs to provide service on their broadband
network.
While the competitive dynamics of this deal differ from
those in the AOL merger, this remains an important issue, and I
look forward to hearing what plans the company has to ensure
that their 27 million consumers will have a choice of ISP
providers.
In addition, I look forward to hearing the parties' plans
for rolling out broadband and voice services to consumers, and
how this merger will help them speed this process. I am
particularly interested in their plans for cable telephone
service.
Mr. Chairman, I think it is fair to say that we have all
been very disappointed in the amount of competition in the
local phone service market since the passage of the 1996
Telecommunications Act. If this merger can speed competition in
that area, it would be a big plus for consumers.
The AT&T-Comcast merger is an important one and it has the
potential to reshape the competitive landscape of cable service
in a number of significant ways. We have a very excellent panel
today, Mr. Chairman, and I look forward to our discussion.
I thank the Chair.
Chairman Kohl. Thank you, Senator DeWine.
Now, we call on Senator Orrin Hatch from Utah.
STATEMENT OF HON. ORRIN HATCH,
A U.S. SENATOR FROM THE STATE OF UTAH
Senator Hatch. Well, thank you, Mr. Chairman. I commend you
and Senator Dewine for your work on this committee and for
holding this hearing to discuss the AT&T-Comcast merger.
This merger before us today follows a series of
consolidation activities in the communications sector since the
passage of the 1996 Telecommunications Act. Careful antitrust
scrutiny is necessary where two of the five largest cable
companies in the Nation plan to merge, and our inquiry should
include the possible effects of this merger on related
businesses and markets.
These include areas such as the deployment of broadband
Internet service; the manufacture and design of cable set-top
boxes, which could be the access point for all communications
in the future; and the continued vitality of the video
programming and Internet content markets.
Overall, this merger by itself does not appear to present
the types of competitive concerns that have led me to be
skeptical or critical of some other recent major media mergers.
For example, unlike the AOL-Time Warner merger, this
transaction does not involve the aggregation of the enormous
ownership of content with an online service provider and the
cable pipes to deliver that content, creating powerful
incentives to favor one's own content over competing content.
Nor does the proposed AT&T-Comcast transaction involve the
elimination of a direct competitor as does the pending
Echostar-DirecTV merger.
It appears that this merger is largely free from these
types of traditional antitrust concerns, and I would hope that
this merger would not raise issues regarding content
discrimination that leads to fewer choices of diverse content
which I have found to be of great concern in past media
mergers.
I should note that this merger does raise several broader
policy questions for us to consider as policymakers. These
largely center around potential limitations on consumers'
access to rich and diverse content resulting from changes in
the competitive landscape as divergence of technologies
continues.
By means of the 1996 Telecommunications Act, Congress
succeeded in creating a shift in policy in key high-tech
industries toward increased deregulation and a concomitantly
increased reliance on antitrust principles and enforcement to
protect competition.
Now, 6 years later, consumers are really beginning to see
some of the benefits of these actions in the form of increased
competition and increased choice. Much of this choice is the
result of convergence in the types of services provided by the
varied companies that form the new information economy. I
believe that this convergence will continue to the point where
services provided by telecommunications and cable companies
will be indistinguishable to consumers. This technology-driven
convergence should increase competition, and therefore
hopefully consumer choice.
Along with convergence, however, consumers have at the same
time witnessed increasing consolidation in the cable, media,
and telecommunications markets. In contrast to convergence,
this consolidation tends to reduce the number of competitors,
and consequently threatens to reduce competition and choice.
As these two forces, consolidation and convergence, work to
reshape the competitive landscape of the new economy, I
strongly believe that we must not merely protect but, where
possible, seek choices that allow the marketplace to expand
consumer choice to ensure that as many Americans as possible
have full and free access to rich and diverse entertainment and
information content.
Accordingly, as the competitive landscape changes, we must
ensure that legislation and regulation do not inadvertently
hinder consumer choice. In light of these ongoing changes, it
is perhaps appropriate to continue to examine existing
regulations and their effects on competition in new and
evolving marketplaces to protect and strengthen consumer
choice.
I have frequently expressed my concerns regarding
competition in digital entertainment services and the harms
that may befall consumers when information ``gatekeepers''
limit consumers' choices or access to content and information
for anticompetitive purposes. These concerns have arisen in
contexts ranging from the Microsoft case to the AOL-Time Warner
merger. These concerns apply equally to cable programming and
broadband Internet content.
Because the proposed merger would create the largest cable
provider in the Nation, a merged AT&T-Comcast would have
significant power as a major purchaser of content. A merged
AT&T-Comcast would have similar power in determining which and
how many Internet service providers will have access to
consumers over its cables. Any merged entity with such power
must exercise carefully its powers to ensure that consumer
choice and marketplace competition are not unfairly hindered.
In the digital age, a cable merger involves much more than
simply which company will deliver video programming to
consumers. Rather, a merger within the cable industry today is
likely to affect other services, products, technology, and
business relationships between very large cable companies and
providers of content and communications services.
Finally, I have some basic concerns about implementation of
the proposed merger. We need to take into account the practical
effects of the proposed merger on consumers. More specifically,
I note that AT&T currently provides cable broadband and
telephone services in my own home State of Utah. I would like
to hear today, and hopefully get some types of assurances
regarding how the merger has been structured to avoid
difficulties such as loss or disruption of these services,
degradation of the quality of these services, and unexpected
rate hikes.
Again, I want to thank you, Mr. Chairman. I look forward to
hearing from all of our witnesses here today.
[The prepared statement of Senator Hatch follows:]
Statement of Hon. Orrin Hatch, a U.S. Senator from the State of Utah
This merger before us today follows a series of consolidation
activities in the communications sector since the passage of the 1996
Telecommunications Act. Careful antitrust scrutiny is necessary where
two of the five largest cable companies in the Nation plan to merge,
and our inquiry should include the possible effects of this merger on
related businesses and markets. These include areas such as the
deployment of broadband Internet service, the manufacture and design of
cable set-top boxes, which could be the access point for all
communications in the future, and the continued vitality of the video
programming and Internet content markets.
Overall, this merger by itself does not appear to present the types
of competitive concerns that have led me to be skeptical or critical of
some other recent major media mergers. For example, unlike the AOL-Time
Warner merger, this transaction does not involve the aggregation of the
enormous ownership of content with an online service provider and the
cable pipes to deliver that content, creating powerful incentives to
favor one's own content over competing content. Nor does the proposed
AT&T-Comcast transaction involve the elimination of a direct competitor
as does the pending Echostar-DirecTV merger. It appears that this
merger is largely free from these types of traditional antitrust
concerns, and I would hope that this merger will not raise issues
regarding content discrimination that leads to fewer choices of diverse
content which I have found to be of great concern in past media
mergers.
I should note that this merger does raise several broader policy
questions for us to consider as policymakers. These largely center
around potential limitations on consumers' access to rich and diverse
content resulting from changes in the competitive landscape as
divergence of technologies continues.
By means of the 1996 Telecommunications Act, Congress succeeded in
creating a shift in policy in key high-tech industries toward increased
deregulation and a concomitantly increased reliance on antitrust
principles and enforcement to protect competition. Now, 6 years later,
consumers are really beginning to see some of the benefits of these
actions in the form of increased competition--and increased choice.
Much of this choice is the result of convergence in the types of
services provided by the varied companies that form the new information
economy. I believe that this convergence will continue to the point
where services provided by telecommunications and cable companies will
be indistinguishable to consumers. This technology-driven convergence
should increase competition and, therefore--hopefully--consumer choice.
Along with convergence, however, consumers have at the same time
witnessed increasing consolidation in the cable, media, and
telecommunications markets. In contrast to convergence, this
consolidation tends to reduce the number of competitors, and,
consequently, threatens to reduce competition and choice.
As these two forces--consolidation and convergence--work to reshape
the competitive landscape of the new economy, I strongly believe that
we must not merely protect, but--where possible--seek choices that
allow the marketplace to expand consumer choice to ensure that as many
Americans as possible have full and free access to rich and diverse
entertainment and information content. Accordingly, as the competitive
landscape changes, we must ensure that legislation and regulation do
not inadvertently hinder consumer choice. In light of these ongoing
changes, it is perhaps appropriate to continue to examine existing
regulations and their effects on competition in new and evolving
marketplaces to protect and strengthen consumer choice.
I have frequently expressed my concerns regarding competition in
digital entertainment services and the harms that may befall consumers
when information ``gatekeepers'' limit consumers' choices or access to
content and information for anticompetitive purposes. These concerns
have arisen in contexts ranging from the Microsoft case to the AOL-Time
Warner merger. These concerns apply equally to cable programming and
broadband Internet content. Because the proposed merger would create
the largest cable provider in the Nation, a merged AT&T Comcast could
have significant power as a major purchaser of content. A merged AT&T
Comcast would have similar power in determining which and how many
Internet Service Providers will have access to consumers over its
cables. Any merged entity with such power must exercise carefully its
powers to ensure that consumer choice and marketplace competition are
not unfairly hindered.
In the digital age, a cable merger involves much more than simply
what company will deliver video programming to consumers. Rather, a
merger within the cable industry today is likely to affect other
services, products, technology, business relationships between very
large cable companies and providers of content, and communications
services.
Finally, I have some basic concerns about implementation of the
proposed merger. We need to take into account the practical effects of
the proposed merger on consumers. More specifically, I note that AT&T
currently provides cable, broadband, and telephone services in my home
State of Utah. I would like to hear today and hopefully get some type
of assurances regarding how the merger has been structured to avoid
difficulties such as loss or disruption of these services, degradation
of the quality of these services, and unexpected rate hikes.
Chairman Kohl. Thank you very much, Senator Hatch.
Now, we call on Senator Specter.
STATEMENT OF HON. ARLEN SPECTER,
A U.S. SENATOR FROM THE STATE OF PENNSYLVANIA
Senator Specter. Thank you very much, Mr. Chairman. May I
note at the outset that there is parity between the parties? We
have four Republicans and you, Mr. Chairman, a Democrat. So the
odds are about even at this point.
Chairman Kohl. You are right on that.
Senator Specter. There is a practice of a fair amount of
testifying on this side of the podium as on that side. I think
the issues have been delineated so that I will await for
further comment on the substance for the witnesses.
I would like to take just a moment or two to introduce Mr.
Brian Roberts from Comcast. The cable company was founded by
his father, Ralph Roberts, 35 years ago, just about the time I
became District Attorney of Philadelphia, and I am in a
position to say unequivocally that there was never an
investigation of Ralph Roberts or his company.
[Laughter.]
Senator Specter. In my capacity as a United States Senator,
I am obviously concerned about the serious issues which have
been discussed, but as a Pennsylvania Senator and as a
Philadelphian there is a great deal of pride in what the
Roberts family has done and what Comcast has done.
Mr. Brian Roberts, at the age of 42, brings an
extraordinary record as a leader of this company. He has had
the osmosis advantage of being associated with his father for
42 years, and having a son about the same age I know what
osmosis can do.
His educational background is sterling--Wharton School. His
public service activities are extensive. He serves on the Simon
Weisenthal Board, taking up the important issues of the
Holocaust. He took on a very big job several years ago on being
co-chairman of the committee which brought the Republican
National Convention to Philadelphia, a much-heralded event,
with agreement by our mayor, who was a Democrat, and the
Republicans who came and enjoyed the hospitality of the city.
He has received very distinguished awards, the Powell
Police Athletic Award and the William Penn Award, and those go
to people who have done some significant amount on public
service. Last October, he had Comcast's 35,000 employees
nationwide engage in a day of public service. His persuasion
brought me for a day of public service as well. I was
commandeered to join the enormous throng that he had in
Fairmont Park that day.
It is a matter of great economic concern to my city and
State to have a company which has 35,000 employees and $40
billion. I took another look at the figure to be sure. I have
watched Comcast grow. I visited them several years ago when
they were downtown, and I had just noted that they took on a $7
billion operation and I said to the Roberts, Ralph, Brian, are
you sure, $7 billion in debt? And now they have moved ahead as
giants.
I visited a very high-tech operation in northeast
Philadelphia and saw what consumer service can be. This line of
activity is very complicated and it requires a lot of capital,
a lot of know-how and a lot of technology on speed of
transmission and availability of services for the consumer.
While there are important questions we have to answer in our
duties on the Antitrust Subcommittee, we should also note what
this kind of a merger can do for the consumer.
Thank you very much, Mr. Chairman.
Chairman Kohl. I thank you, Senator Specter.
Before we hear from Senator Brownback, I would ask
unanimous consent that the statement of Senator Thurmond be
made part of the record.
Senator Brownback.
STATEMENT OF HON. SAM BROWNBACK,
A U.S. SENATOR FROM THE STATE OF KANSAS
Senator Brownback. Mr. Chairman, thank you very much. I
want to associate myself with the comments already made and
just would note that the convergence issue that Senator Hatch
had talked about, I think, is an important one, and we are
wrestling with it both here and in the Commerce Committee.
It affects different areas of legislation that are coming
up now, along with this hearing and the proposed merger that is
here today. So I see, as well, some convergence of issues
coming together, and I look forward to hearing the panel's
thoughts of how that impacts us in bringing these various
technologies together in one place in the home as it comes out
the other end of the pipe.
Thanks for holding the hearing.
[The prepared statement of Senator Brownback follows:]
Statement of Hon. Sam Brownback, a U.S. Senator from the State of
Kansas
Washington.--U.S. Sen. Sam Brownback today addressed the issue of
broadband and the AT&T-Comcast merger at a Senate Judiciary Antitrust
Subcommittee hearing. Portions of Brownback's statement follow:
``Broadband connections are having a powerful impact on the
underlying service industries providing them to consumers,'' Brownback
said. ``Cable TV, wireless, satellite, and telephone companies are
converging, with each deploying new technologies that will permit them
to offer the same voice, video, and data services over their respective
platforms. These developments are ushering in a new era of
interplatform competition in telecommunications.
``While today's broadband services provide us with a window into
the future converged and borderless market, we can still clearly
recognize traditionally distinct communications industry sectors. For
this reason, distinct regulatory regimes continue to be applied to
each, and we tend to understand market power within each sector as we
always have.
``Convergence requires something more. Congress is currently
searching out answers to the question of how regulations should be
balanced between the old and the new, as reflected in the Tauzin-
Dingell bill and legislation I have introduced, S. 1126, the Broadband
Deployment and Competition Enhancement Act. Likewise, the merger of
AT&T and Comcast, as with Echostar and DirecTV, requires us to balance
our traditional understanding of market power with the development of a
converged market where the pool of potential competitors is greatly
increased.
``AT&T has vigorously opposed regulatory parity for all broadband
service providers, specifically incumbent local telephone companies,
rejecting the importance of convergence in the broadband regulatory
debate. Yet, today AT&T comes before this subcommittee hoping that we
recognize the advent of convergence-and-inter-platform competition in
the broadband-and multichannel- video markets as reason to rubber stamp
this merger.
``If AT&T's opposition to broadband parity is correct, then I
cannot imagine how convergence justifies this merger. Cable rates
continue to rise, the cable industry controls two-thirds of the
broadband market, and cable modem subscribers have little choice in
ISPs.
``I prefer to embrace the future, and not be mired in the past. I
have had the opportunity to meet with Mr. Roberts, and I think he
understand the changes that are underway in the marketplace. I
appreciate the impressive investments made by the cable industry--
including both Comcast and AT&T Broadband--to compete in a converging
market.
``While I might not be overly enthusiastic about mergers in
general, I am prepared to recognize a validity to consolidation that,
traditionally, has never existed as it does in a converging market.
``The Federal Communications Commission, in classifying cable modem
service as an information service, has similarly moved forward with an
eye toward our future. I commend the commission for this action, and
look forward to similarly enlightened treatment of all broadband
service providers in the commission's ongoing proceedings,'' Brownback
said.
Sen. Brownback is author of the Broadband Deployment and
Competition Enhancement Act of 2001 (S. 1126).
Senator Specter. Mr. Chairman, may I just add one note? I
left out perhaps Brian Roberts' most important qualification.
He won the silver medal in squash at the Macabbean squash
tournament. When I found that out, I almost revoked my
agreement to introduce him today. I am a squash player, but not
that kind.
Chairman Kohl. Well, we thank you very much and we will
start with our panelists. I will introduce them. I would like
to bring this information to you briefly: We will have to
recess at about 2:30, maybe at 2:40. There is a vote, and then
we will come back immediately after that vote and we will
continue this hearing.
Our first witness today will be Mr. Brian Roberts, who is
president of his family's Comcast Corporation. Before becoming
president in 1990, Mr. Roberts held a number of senior
management positions within the company.
Next, we will hear from Mr. Michael Armstrong, who is
chairman and CEO of AT&T. Mr. Armstrong joined AT&T in 1997,
after 6 years as the chairman and CEO of Hughes Electronics.
Prior to that, he was with IBM for three decades.
Joining us from EarthLink is its CEO, Mr. Garry Betty.
Before joining EarthLink in 1996, Mr. Betty was president and
CEO of Digital Communications Associates, and senior vice
president of sales, marketing and international operations at
Hayes Microcomputer.
Next, we will hear from Dr. Richard Green, who is CEO of
CableLabs, a non-profit research and development consortium of
the cable television industry. Mr. Green has been involved in
this industry in a variety of capacities, from television
broadcasting and engineering to managing key industry
technology projects.
From WideOpenWest, also known as WOW, we have Mr. Mark
Haverkate, who is founder, president and CEO of that company.
Prior to the launch of WOW in 1999, Mr. Haverkate was executive
vice president of RCN Corporation and president of Cable
Michigan.
Finally, we will be hearing from Mr. Robert Perry, who is
vice president of marketing at Mitsubishi Digital Electronics
America. Mr. Perry joined Mitsubishi after a 7-year tenure with
Sharpe Electronics, where he served most recently as the head
of the Consumer LCD Products Division.
In addition, Consumers Union, RCN, and the Writers Guild
have submitted testimony for the record today.
Following conclusion of this hearing, the record will
remain open for 1 week for any additional statements to be
included.
So now we would like to call upon Mr. Brian Roberts for
your statement.
STATEMENT OF BRIAN L. ROBERTS, PRESIDENT, COMCAST CORPORATION,
PHILADELPHIA, PENNSYLVANIA, ACCOMPANIED BY RALPH ROBERTS
Mr. Roberts. Chairman Kohl, Senator DeWine, members of the
subcommittee, on behalf of my father, Ralph, who is seated just
behind me, and myself, we are honored to be here today to talk
about our vision and our excitement about what the merger of
Comcast and AT&T Broadband will mean for American consumers. I
hope we will get to all the issues you laid out, but obviously
in questions we can go into specifics. Let me also thank
Senator Specter for that gracious introduction, and
particularly my squash attributes.
Because this is my first time before this subcommittee, I
would like to just take a brief moment to tell you about
Comcast and our roots and the kind of company we are.
As Senator Specter mentioned, my dad founded the company in
1963, and I think we represent what is truly great about family
business in America, the opportunity to chase your dream. My
dad is a true entrepreneur and he is always forward-looking;
evidence the name he coined for his new company back in 1963,
Comcast, which means communications and broadcasting. Today, I
can't think of a more concise summary of our vision than
communications and broadcasting.
I went to work for my father right out of college and have
been with Comcast in many different jobs ever since. We both
love the cable business; it is in our blood. Having the chance
to work together side by side during this great era that we
have seen in cable and to have been part of the terrific things
that cable has brought this Nation--the creation of CNN, HBO,
C-SPAN I, II and III, Fox News, and hundreds of new channels
that today we all take for granted--we have always been
enthusiastic about the ability of cable technology to do even
more. That is why we keep rebuilding and reinvesting.
Our company was one of the first to experiment with the
high-speed cable modem, delivering lightning-fast Internet over
cable, and one of the first to deploy it. We set the pace in
rolling out digital cable, which gives you over 250 channels of
TV and audio programming. Now, we are introducing high-
definition television right here in Washington, and video-on-
demand, another product that lets viewers watch what they want
when they want it.
We think there are going to be more and more other great
services that broadband cable can deliver. This is why I am so
excited about the proposed merger with AT&T Broadband. In all
the decades that we have been in this industry, we have never
seen another business opportunity that is as exciting for our
customers, our employees, and our shareholders.
There is a lot of interest in making sure that the benefits
of broadband reach all Americans, and much discussion of what
the Government can do. This merger presents a private sector
response to that question. It will bring more digital services
and features to more Americans more quickly. Let me explain
why.
Comcast has substantially completed the upgrade to our
cable systems necessary to offer broadband. Nearly 95 percent
of our systems are now built to current industry standards.
Comcast also has a strong balance sheet, among the very best in
our industry, and our business first and foremost has been and
will remain cable television.
By contrast, a greater number of AT&T Broadband systems
still require additional investment to get them up to current
standards. Of course, AT&T has been in a number of different
businesses up until now, all of them competing for scarce
capital dollars. In the face of external financial pressures,
they haven't completed system upgrades as quickly as Comcast
did.
This merger will give the combined company a clear focus, a
solid balance sheet, and strong borrowing capacity. It will
find cost savings in several key areas which will help to
finance system upgrades and speed up the introduction of new
services, including video, Internet, and cable telephone.
Now, I haven't mentioned phone yet. Frankly, we at Comcast
have been a little slow to introduce cable-based phone service.
We have been excited and always have said we have been excited
about the prospect of cable telephony, but we haven't been
focused on circuit-based, but rather the so-called next
generation Internet protocol or IP phone, which we believe
offers more features at lower cost.
However, the more I spoke with Mike about AT&T Broadband's
business and phone business, the better the opportunity looks.
Comcast can now take advantage of AT&T's considerable expertise
and experience in providing circuit-switched phone over cable,
and that will let us give millions more customers a true choice
between facilities-based telephone providers. Mike will speak
more about these opportunities and their experience in a
moment.
I have used the term ``facilities-based'' a couple of
times. Promoting facilities-based competition--telephone
against cable, cable against satellite, satellite against
wireless--was a cornerstone of our Nation's pro-competitive
communications policies of the 1990s. As a result, satellite
alone has captured nearly 20 percent of the video marketplace.
Our industry certainly got the competitive message. In the
past 6 years, we have invested over $55 billion as an industry
to prepare our systems and our companies for the digital era.
Comcast alone has invested over $5 billion. This merger is
completely consistent with these pro-competitive policies. It
will accelerate broadband, promote more investment in
facilities, and let us keep with the rapidly changing, hotly
competitive communications world.
So let me summarize the fundamental case for this merger.
What specifically will it mean for consumers? It will mean that
more Americans will have broadband sooner. It will speed up the
introduction of digital cable, high-speed cable, and other
innovative services still on the drawing board.
It will bring facilities-based phone competition to
millions more homes, it will allow us to expand investment in
improved local and regional programming, and it will permit us
to expand our strong commitment to our local communities using
the latest technology. This merger will make all these things
possible, as you have said, while not reducing competition in
any relevant market.
Chairman Kohl and other Senators, I could not be more proud
of what the cable industry and Comcast have brought to America
in the past. With our new company, joining Comcast and AT&T
Broadband, we have the chance to do so much more. We want to
make our new company a true 21st century leader in every sense.
We are committed to serve our customers and our local
communities both as quality communication service providers and
as good corporate citizens.
I thank you for the opportunity to appear today and I look
forward to your questions.
[The prepared statement of Mr. Roberts follows:]
Statement of Brian L. Roberts, President, Comcast Corporation
Comcast's merger with AT&T Broadband will accelerate the growth and
availability of broadband services. Combining these two companies, and
drawing on the special strengths and capabilities and resources of
each, will ensure that more Americans have access to more digital
services and features, sooner. The transaction will yield demonstrable
benefits in investment, innovation, facilities-based competition, and
new and improved video, data, and voice services, with no offsetting
detriments. The merger will therefore serve the public interest.
The merger of Comcast and AT&T Broadband will accelerate the
deployment of facilities-based high-speed Internet service and other
broadband services. Speeding the deployment of these advanced services
not only will benefit consumers by offering them innovative video and
other services, but also will benefit the Nation at large by
stimulating productivity gains and economic growth. Although Comcast
has substantially finished the upgrades to its cable plant necessary to
offer broadband services, AT&T Broadband's systems require significant
additional investment in order to complete needed upgrades. Due to
economies of scale and scope and cost savings resulting from the
merger, those upgrades can and will be implemented faster, bringing
more benefits to more consumers sooner, than would be possible without
the merger. Scale and scope efficiencies and cost savings generated by
this merger will also increase the incentive and ability of the merged
firm to invest in, and assume the risks associated with, developing and
deploying a variety of innovative services and features, such as high
definition television (``HDTV''), video-on-demand, and other
interactive television (``interactive TV'') services.
The proposed merger will also bring benefits in the form of long-
awaited local telephone competition, particularly for residential
customers. AT&T Broadband brings to this merger its considerable
expertise and experience in the provision of circuit-switched telephony
over cable plant. It currently markets cable telephony to more than 7
million households and serves more than 1.5 million lines.
Significantly, Comcast has no comparable offerings, and the merger will
thus permit Comcast to accelerate its entry into this market. Although
providing local telephone service in competition with incumbent
carriers involves substantial business risk, AT&T Comcast will be
better equipped to confront that risk than either company could alone,
because of the complementary assets and expertise of Comcast and AT&T
Broadband. Importantly, this competition will be facilities-based, thus
allowing the merged company to offer residential customers a broader
range of differentiated services and features that are far less
dependent on access to the incumbent telephone companies' facilities on
economically-viable terms and conditions.
The proposed merger also will deliver benefits to consumers by
stimulating the production and delivery of local and regional
programming. Comcast is widely recognized as an industry leader in the
development of successful, high-quality programming geared to regional
and local markets. The merger will enable AT&T Comcast to extend this
expertise to areas in which AT&T Broadband has significant clusters.
The merger will also allow the two companies to draw on their
respective expertise in community outreach efforts, including
initiatives to connect classrooms to the Internet.
The proposed merger is consistent with all applicable laws,
including the antitrust laws. The proposed merger will have no
anticompetitive effects in any relevant market. Comcast and AT&T
Broadband provide services to consumers in different local markets and,
therefore, their union will not affect horizontal concentration in any
relevant market. Further, the combined entity will not have either the
ability or incentive to exercise buyer or seller market power in any
relevant market.
It will not result in any violations of the Communications Act or
the Federal Communication Commission's rules. In particular, it bears
emphasis that AT&T Comcast will serve less than 30 percent of the
Nation's multichannel video programming distribution (``MVPD'')
customers, the national limit that was reversed and remanded in Time
Warner II. That calculation does not include the customers served by
the Time Warner Entertainment (``TWE'') and Time Warner Inc. (``TWI'')
cable systems. AT&T, with the full support of Comcast, is firmly
committed to completing the sale of its limited partnership interest in
TWE. If that divestiture is not completed prior to closing, the
applicants are prepared to take the steps that may be necessary to
insulate the interest (and thus render it non-attributable) under the
Commission's rules, as well as such additional steps as may be
appropriate to ensure that AT&T Comcast would not be able to influence
TWE prior to its ultimate sale.
In addition, AT&T Comcast is fully committed to negotiating
mutually beneficial service agreements with Internet service providers
(``ISPs'') so that its cable customers will have a choice of ISPs. Both
AT&T Broadband and Comcast have conducted trials to explore the issues
associated with multiple ISP arrangements. Now, each applicant is
actively (and independently) negotiating to reach commercial agreements
with unaffiliated ISPs. Indeed, Comcast recently announced that it has
executed an agreement with United Online that will provide Comcast's
customers in Indianapolis and Nashville with access to United's ISP
service, with the potential to roll-out this offering to other Comcast
cable systems with the concurrence of both Comcast and United Online.
In addition, AT&T recently announced that it has reached an agreement
with Earthlink.
In summary, the proposed merger of Comcast and AT&T Broadband
offers real and substantial benefits to consumers. It will enable AT&T
Comcast to accelerate costly investments required to equip cable
systems with the capability to deliver and improve high-speed Internet
and other broadband services. The proposed combination will also
promote facilities-based local telephone competition, particularly for
residential customers, and will hasten the development and deployment
of other advanced competitive services. The merger will not have any
adverse competitive effects in any relevant market. Thus, the merger
will be pro-competition, pro-consumer, and consistent with the public
interest.
Chairman Kohl. We thank you, Mr. Roberts.
Mr. Armstrong.
STATEMENT OF C. MICHAEL ARMSTRONG, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, AT&T CORP., BASKING RIDGE, NEW JERSEY
Mr. Armstrong. Thank you, Chairman Kohl and Senators, for
inviting me to testify about this proposed merger of AT&T and
Comcast.
This merger is a unique opportunity, I think, to achieve
two of Congress' longstanding goals: first, the widespread
deployment of facilities-based local telephone competition,
and, second, the more rapid provision of advanced broadband
services. By uniting two companies with complementary assets,
this merger will bring more voice, data, and digital video
services to more Americans more quickly than would be possible
without this merger.
When I testified before the Judiciary Committee almost 3
years ago, I offered that AT&T's cable investments would give
more American consumers a choice of local telephone providers.
Just 2 years after closing that merger, we are over-achieving
on that commitment. We now serve more than 1 million
residential telephone subscribers. This is a fivefold increase
over the number of cable telephony customers we served at the
time of the MediaOne merger.
As a result of this progress, in just these 2 years AT&T
Broadband has become one of the ten largest local telephone
companies in the Nation. Today, in 55 communities, our
telephone penetration is already 25 percent or higher, and this
includes several cities such as Salt Lake, Pittsburgh, and
Seattle. We enable customers to pay one charge for local
intraLATA toll and long distance, and savings are some 39
percent when compared to incumbent telephone companies.
In our original 5-year plan, we thought we would break even
financially on telephony in the last quarter of this year and
we are on track, because we are over-achieving, to beat that
goal. But despite this rapid success, there is still much more
to be done. Incumbent local exchange carriers still serve
nearly 95 percent of the market for residential telephone
service.
We are confident that AT&T-Comcast will take our success to
the next level. Comcast cable systems today provide telephone
service on a very small scale. AT&T's broadband telephony
expertise will strengthen Comcast's ability to offer telephony.
First, Comcast can take advantage of AT&T Broadband's
technical and operational capability in launching and providing
cable telephony. We have already deployed the systems for the
design, for the installation, and for the operation of the
complex fiber-coaxial systems that it takes to support digital
voice.
Second, Comcast will gain access to AT&T Broadband's back
office and customer care systems. Third, our marketing success
will help Comcast face the difficult challenge of competing
with local monopolies.
Importantly, because AT&T Broadband's cable telephony
approach is so highly scalable, it will allow us to expand the
availability of telephony over Comcast's systems much more
quickly, at least capital expense, and in a more customer-
friendly manner. In fact, Brian and I have already announced
that shortly after closing the merger we will begin deploying
telephone service in Comcast's Philadelphia and Detroit
systems. This will bring facilities-based local telephone
choice to about 1 million more consumers.
But local telephony competition is not the only important
benefit of our merger. The merger will also enhance our ability
to offer new broadband services such as HDTV, video-on-demand,
and expanded Internet services to virtually millions of
additional Americans. In particular, the combined company will
have greater financial strength than either one of us would
have to do this alone. As a result, we will have far greater
access to the capital required to upgrade our cable systems to
deploy broadband services.
In addition, the scale economies created by the merger will
allow us to more efficiently use the combined resources. For
example, we can combine the call centers, centralize repair and
maintenance facilities, and more efficiently manage broadband
research and development costs. All of this means that we will
be in a much better position to bring new broadband services to
many, many more customers.
This was our experience in our merger with MediaOne. When I
testified before you about that merger, I noted that we would
give many more American consumers access to high-speed Internet
and other broadband services. In the 2 years since the merger
closed, our high-speed data customers have nearly doubled to
1.5 million, and our digital video customers have jumped from
2.2 million to 3.5 million. We are just as confident that the
combination of our two companies will continue these benefits.
I also want to address the issue of ISP choice which I know
is of interest. Given the competition we have in the
marketplace with DSL, we are interested in being as competitive
in our offerings to consumers as possible. We concluded a 20-
million trial in Boulder, Colorado, with 4 ISPs. We learned a
great deal about what we had to do to implement a multiple ISP
network.
In fact, we have negotiated and now have in the process of
planning an EarthLink implementation in Boston and Seattle, and
we announced just this morning another ISP in the Boston area,
a local, regional ISP, Net One Plus, so that there will be
three ISPs on the network, and we are currently in negotiation
with others.
Finally, I want to stress that we will achieve all of the
benefits of our merger without violating any FCC rule or
antitrust policy. As I described in the written testimony, our
merger will not reduce competition in any market.
I look forward to answering any specific questions you may
have, Mr. Chairman.
[The prepared statement of Mr. Armstrong follows:]
Statement of C. Michael Armstrong Chairman and CEO, AT&T Corp.
Thank you, Mr. Chairman and Members of the Subcommittee, for
inviting me here today to testify about the proposed merger between
AT&T Broadband and Comcast Corp.
The merger creates a unique opportunity to accelerate the
development and widespread deployment of facilities-based local
telephony and broadband services. By uniting two companies with
remarkably complementary assets, this merger will bring more digital
video, data, and voice services and features, to more Americans, more
quickly than would be possible without the merger. In short, the merger
will benefit American consumers and enhance competition, without
violating any FCC or antitrust rule or policy.
I will focus today on two of the principal public interest benefits
that will be made possible by the merger. Specifically, I will discuss
how the merger will: (1) promote facilities-based local telephone
competition; and (2) accelerate the deployment of facilities-based
high-speed Internet service (as well as ISP choice), digital video, and
other broadband services. I then will explain that the merger will not
violate any law or regulation (including any horizontal ownership
limit) and will cause no competitive harm in any relevant market.
I. The Merger Will Promote Facilities-based Local Telephone
Competition, Particularly to Residential Consumers
The proposed merger will create substantial benefits in the form of
long-awaited local telephone competition, particularly for residential
customers. Six years after passage of the Telecommunications Act of
1996 (``1996 Act''), virtually all local exchange traffic--and
particularly residential traffic--continues to be carried by the
incumbent local exchange companies (``ILECs''). While we are making
tremendous strides, the ILECs still provide local exchange service to
95 percent of the customers in their territories. Although our merger
obviously cannot be a full solution to producing local competition, it
will accelerate the availability of local telephone choice to millions
of additional consumers.
The deployment of cable telephony in new markets continues to
involve considerable business risks. Cable systems entering the
telephony business must underwrite large, upfront investments in new
plant and develop and implement order processing, customer care, and
other complex support systems, in order to overcome the substantial
advantages of incumbent providers. An ILEC's installed infrastructure
allows it to serve customers at a lower incremental cost than a new
facilities-based entrant and to realize scale efficiencies provided by
heavily concentrated customer bases. The magnitude of the risks facing
new entrants is underscored by the numerous telecommunications
companies that have filed for bankruptcy in recent years.
AT&T Comcast will be on a stronger footing in dealing with these
substantial business risks because of the complementary assets and
expertise of AT&T Broadband and Comcast and the scale economies created
by the merged entity. AT&T Broadband brings to the merged entity
extensive experience and expertise in the design, roll-out,
provisioning, operations, and marketing of cable telephony in a
customer-friendly manner. AT&T Broadband currently offers cable
telephony in 16 markets to more than 7 million households and has
approximately 1.1 million customers. We offer special ``Block of Time''
plans that allow customers to pay one charge for local, intraLATA toll,
and long distance telephone services, with savings in some markets of
over 39 percent when compared to incumbent LEC calling plans. Savings
for customers buying more than one line can be even higher.
Our experience has been quite positive. For example, in the Salt
Lake City market, we have had consumer take rates of 25 percent or
higher in Ogden, Provo, and Salt Lake. We have had a similar consumer
response in several Pittsburgh-area communities, including McKeesport,
Aliquippa, East Hills, South Hills, Beaver Falls, Carnegie, McKees
Rocks, Ross, and Midland, as well as Bellingham in the Seattle market.
In the past year alone, AT&T Broadband added almost one-half
million new cable telephony customers, increasing its customer base by
over 100 percent. As illustrated below, AT&T Broadband is by far the
leading provider of cable telephony in the U.S. today:
[GRAPHIC] [TIFF OMITTED] T5889.029
By contrast, Comcast's cable systems currently provide cable-
delivered telephone services on only a very small scale, mostly in
cable systems Comcast acquired from third parties which had already
launched telephone service.
Fortunately, AT&T Broadband's cable telephony expertise is highly
scaleable and can be applied to Comcast's existing cable systems. As a
result, AT&T Comcast will be better able to expand the availability of
telephony over the Comcast systems more quickly, at less expense, and
in a more customer-friendly manner. In light of these synergies,
Comcast has announced that, after closing, the merged company intends
to begin to deploy telephone service in the Philadelphia and Detroit
markets currently served by Comcast, bringing facilities-based local
telephone choice to about one million additional homes.
AT&T Broadband's cable telephony expertise will enhance the ability
of Comcast's cable systems to offer telephony services in three
important respects: technical and operational expertise, back office
systems, and marketing.
A. TECHNICAL AND OPERATIONAL EXPERTISE
Comcast will acquire AT&T Broadband's technical and operational
expertise in launching and providing cable telephony. AT&T Broadband
has already deployed centralized systems to support the design,
installation, maintenance, and operation of the complex, two-way hybrid
fiber-coaxial systems that support digital voice and data applications
and that interconnect with both copper twisted-pair and fiber optic
technologies used by the ILECs.
AT&T Broadband has several business units that have developed--at
significant cost--the technical and operational know-how to provide
cable telephony in an efficient and consumer-friendly manner. For
example, the AT&T Broadband National Operations team provides support
on a wide range of planning, engineering, technical, and operational
issues that are faced when deploying complex cable telephony service.
AT&T Broadband's Technical Operations Organization has already
developed operational performance metrics to ensure quality cable
telephony services, effective training of technicians and field
fulfillment personnel, and cost-effective investigation and resolution
of field performance issues. AT&T Broadband's National Service
Assurance Center provides the means for our cable systems to ensure not
only that calls are completed successfully and billed correctly, but
also that all of the necessary number portability, emergency service,
and other databases are managed correctly. And, cable telephony
providers must be interconnected to, and coordinate with, ILECs (and
other competitive LECs) and interact effectively with a variety of
third parties to rate, record, and bill traffic for purposes of
reciprocal compensation--all functions that AT&T Broadband already
performs for its systems. Upon closing of the merger, the same
organizations at AT&T Broadband that now act as the points of interface
for these issues will be available to support cable telephony
operations over the Comcast systems. Comcast will also be able to take
advantage of certain interconnection agreements that AT&T Broadband has
with the incumbent LECs serving Comcast's territories.
B. BACK OFFICE SYSTEMS
Comcast will also gain access to AT&T Broadband's existing back
office systems that support cable telephony. These systems allow AT&T
Broadband to take customer orders and to serve as the point of contact
for customer care inquiries. Having in place these ``nuts and bolts''
back office capabilities and employees is essential to offering local
telephone service in competition with incumbent LECs. Not only are AT&T
Broadband's back office systems highly robust and efficient, but they
employ technologies and processes that will allow AT&T Comcast to use
them to support offerings in Comcast territories without incurring
substantial additional cost.
The combination with AT&T Broadband will also enhance Comcast's
telephone billing capabilities. AT&T Broadband has in place specialized
billing software processes, developed over several years, that are
sufficiently flexible to handle a service area's unique billing
parameters and sufficiently robust to handle substantial increases in
volume. These back office billing systems can be used to support
telephone entry in Comcast territories at a mass market level.
C. MARKETING.
AT&T Broadband's substantial marketing expertise will also help
Comcast face the considerable challenge of competing for local
telephony customers against formidable incumbents in Comcast's service
areas. AT&T Broadband has already conducted primary market research on
topics such as pricing and offer design--benchmarked against the
competition--to assist it in developing successful product offers,
programs, and marketing campaigns. And AT&T Broadband has learned a
tremendous amount about customer preferences (including the types of
marketing that customers like and dislike) as a result of its market
experience over the past several years.
Finally, the technical, operational, back office, marketing, and
customer care experience AT&T Broadband has gained from its cable-
based, circuit-switched telephony operations should be applicable in an
IP telephony environment. Comcast and AT&T Broadband have taken
leadership roles in developing cable-delivered IP telephony. IP
telephony may result in significantly lower roll-out costs and
increased flexibility and may also provide a common infrastructure that
supports multiple advanced services. AT&T Broadband is committed to the
continued development of IP telephony.
I want to emphasize that the synergies detailed above are not
merely theoretical. AT&T Broadband's experience in deploying cable
telephony after the MediaOne merger has proven that combining new cable
assets will result in just such consumer benefits. Indeed, as
illustrated below, the number of telephony customers served by AT&T
Broadband today is five times greater than the number served by the two
separate companies before their merger:
[GRAPHIC] [TIFF OMITTED] T5889.030
We are confident that AT&T Comcast can build on this successful
record, and that the combination of our complementary assets and
expertise will further accelerate the pace, broad deployment, and
effectiveness of facilities-based local telephone competition, creating
substantial benefits for consumers. It is also worth emphasizing,
however, that while the promise of facilities-based local telephone
competition is a major benefit of this merger, realizing this promise
will require a substantial investment of time and money by AT&T
Comcast, as well as other cable operators, to deploy the necessary
technology and gain the necessary market presence. AT&T Broadband and
Comcast are strongly committed to making these investments, but nothing
about cable telephony or this merger diminishes the independent need to
facilitate the other means of creating local telephone competition that
Congress specified in the 1996 Act.
II. The Merger Also Will Enhance the Deployment oF Facilities-based
High-speed Internet Service, Digital Video, and Other Broadband
Services, Particularly to Residential Customers
Comcast and AT&T Broadband both offer high-speed Internet services,
serving a combined 2.5 million customers. By combining complementary
assets and experience and creating economies of scale and scope, the
merger will allow us to more efficiently develop and deploy new,
innovative broadband applications over the AT&T and Comcast cable
facilities, providing substantial benefits to consumers and stimulating
productivity gains and growth in the U.S. economy. Moreover, AT&T
Comcast's efforts will provide a competitive spur to other entities,
including incumbent telephone companies, nationwide direct broadcast
satellite (``DBS'') providers, and others. The existence of a strong
and credible broadband alternative on cable has already generated
competitive responses in the form of accelerated DSL deployment by
incumbent telephone companies, and this proposed merger will further
advance this trend.
A. Capital Improvements And Other Merger Benefits
AT&T Broadband's merger with Comcast will enhance significantly its
access to the capital required to underwrite an aggressive plan for
deploying new broadband services such as HDTV, video-on-demand, and
expanded Internet offerings to residential consumers over existing AT&T
Broadband systems. It is estimated that AT&T Broadband and Comcast
collectively will spend approximately $5.5 billion in 2002 on capital
expenditure items and, following the merger, AT&T Comcast will continue
to make substantial capital expenditures. AT&T Comcast should be able
to obtain lower prices for many of these capital items as a result of
the increased scale of its purchases.
More generally, the scale economies created by the merger will
foster more efficient use of infrastructure (e.g., by allowing for more
efficient use of call centers), and provisioning, repair, and
maintenance (e.g., by providing local/regional scale to support
efficient, centralized truck rolls). The merger will also provide
national scale that will allow the merged firm to defray more
efficiently the enormous research, development, and testing costs
associated with new services and features. This increased scale is
particularly important to accelerating the development and testing of
new interactive TV services, voice-enhanced data services, home
networking and security, and other new, and as yet untested, broadband
services.
B. ISP Choice
I want to address in particular the issue of ISP choice, which I
know is of interest to members of the Subcommittee. AT&T Broadband and
Comcast share a strong commitment to providing multiple ISP access on
their broadband networks. Indeed, both companies have ample market
incentives to make commercially reasonable, customer-friendly
arrangements with unaffiliated ISPs in order to maximize the
attractiveness of their Internet offerings to customers and potential
customers. Given the need to compete with DSL and other comparable
high-speed data providers, AT&T Comcast will continue to have such
incentives to offer its customers a choice of ISPs post-merger.
AT&T Broadband has made real progress in its efforts to provide ISP
choice. In particular, in 2000 and 2001, AT&T Broadband conducted a $20
million 6-month trial in Boulder with four ISPs (Excite@Home,
EarthLink, Juno, and WorldNet) which provided significant experience on
the technical and operational requirements needed to support a multiple
ISP environment. The Boulder trial enabled us to test our technical
infrastructure and assess our key business assumptions. For example, we
learned a great deal in Boulder about routing architecture, consumer
self-help and diagnostic tools, business-to-business interfaces, and
how consumers value ease of ISP selection.
The lessons learned in Boulder will be valuable as we roll out ISP
choice in Boston and Seattle this year. The first step in commencing
implementation of ISP choice is the agreement we recently entered into
with an unaffiliated ISP, EarthLink. Under the agreement, EarthLink
will offer high-speed cable Internet service via AT&T Broadband's
network. Initially, EarthLink will launch service in Seattle followed
by greater Boston. The companies anticipate launching EarthLink's
service in additional AT&T Broadband markets in 2003. The planning
discussions are underway with EarthLink regarding, for example, the
interconnection of our two networks, the deployment of efficient
operational interfaces between the companies, and the schedule for
rolling out the service in particular communities. In addition, we are
actively reaching out to a number of regional ISPs in an effort to
provide our customers with even greater ISP choice. We are also
migrating to a more robust high-speed data provisioning system across
all of our markets to provide more effective support for our high-speed
data customers, both those we serve directly and those receiving ISP
services from unaffiliated ISPs.
Comcast also has conducted trials of ISP choice, which have
provided it with valuable experience and insight into how best to roll
out this new offering. The merger will enable our two companies to
share the unique experiences we have had and the important knowledge we
have gained in our respective ISP choice trials. This sharing of ``best
practices'' will enable AT&T Comcast to overcome the substantial
technical and operational complexities involved in implementing ISP
choice, so that this important new service offering can be rolled out
on a more efficient and widespread basis than the two companies could
hope to achieve independently.
III. The Merger Will Not Result in any Violation of the Communications
Act or the FCC's Rules
The proposed merger will not result in the violation of any
provisions of the Communications Act, other applicable statutes, or the
FCC's rules. In particular, I will address today the reasons why the
proposed merger will not violate the FCC's cable horizontal ownership
limit.
In October 1999, the FCC adopted a rule prohibiting a cable
operator from having an attributable interest in cable systems that
account for more than 30 percent of all MVPD subscribers nationwide.
However, as the Subcommittee knows, last year the D.C. Circuit in Time
Warner II reversed the 30 percent limit and remanded the rule to the
FCC for further consideration. The FCC has initiated a proceeding to
consider the cable horizontal issue in light of Time Warner II. The FCC
has not yet reached a decision in that proceeding.
Of course, AT&T Comcast will take all steps necessary to comply
with any new cable horizontal ownership limit that the FCC adopts. But,
it is especially noteworthy that the merger would not violate even the
30 percent limit that was set aside in Time Warner II. AT&T Comcast
will serve approximately 27.3 million subscribers, or about 29.7
percent of the Nation's MVPD subscribers. Because this percentage is
below the horizontal limit in effect before the ruling in Time Warner
II, there can be no reasonable basis for concern that the proposed
merger would violate any horizontal ownership rule.
This calculation does not include the subscribers served by the
cable systems owned by Time Warner Entertainment Co., L.P. (``TWE'').
When AT&T merged with MediaOne, AT&T Broadband acquired a minority,
limited partnership interest representing about 25 percent of TWE.
Subsidiaries of AOL Time Warner hold the remaining majority interest in
TWE. Under the terms of the TWE Limited Partnership Agreement
(``LPA''), AT&T Broadband has no role in or ability to influence the
management or operations of TWE, nor does it have the right to
communicate with TWE, or AOL Time Warner, the general partner of TWE,
on matters pertaining to the day-to-day operations of TWE. The TWE
Cable Management Committee (all members of which are appointed by and
from AOL Time Warner) has full discretion and final authority over
TWE's cable operations. All of MediaOne's rights with regard to the TWE
Cable Management Committee were terminated before AT&T merged with
MediaOne and acquired the TWE interest. Thus, we believe that the
interest in TWE would qualify for insulation from attribution to AT&T
Broadband under the FCC's attribution rules today, and to AT&T Comcast
post-merger.
In any event, AT&T Broadband and Comcast do not view the TWE
interest as a long-term investment and are firmly committed to
divesting the interest for a fair price as quickly and efficiently as
possible. In fact, the process of attempting to sell the TWE interest
is already underway. AT&T Broadband has pursued with AOL Time Warner
various options for the sale of its TWE interest to AOL Time Warner in
an efficient and expeditious manner. AT&T Broadband also is pursuing
the sale of its TWE interest via a public offering pursuant to the
registration rights provisions of the TWE LPA. Although AT&T Broadband
is pursuing diligently all possible avenues to dispose of its TWE
interest, the simple fact is that our ability to sell promptly the
interest at a fair price depends almost entirely on the cooperation of
AOL Time Warner and its subsidiaries, who do not have the same
interests or incentives as AT&T Broadband in this regard.
IV. The Merger Will Have No Anticompetitive Effects in Any Relevant
Market
AT&T Broadband and Comcast provide services to consumers in
different local markets and therefore the proposed merger will have no
measurable impact on horizontal concentration in any relevant market.
Additionally, the combined entity will not have either the ability or
incentive to exercise buyer market power in any relevant market.
A. MULTICHANNEL VIDEO PROGRAMMING DISTRIBUTION
The merger will not have any adverse effect on competition in the
business of multichannel video programming distribution. AT&T Broadband
and Comcast cable systems reach different residences and businesses and
compete in different local markets, so the proposed merger will not
reduce actual competition in any relevant local distribution market.
Further, the merged company will face intense competition from DBS
providers. DirecTV and EchoStar, two DBS providers, distribute video
programming throughout the United States and compete directly in all
local markets served by AT&T Broadband, Comcast, and other cable
operators. In less than 10 years, DBS has grown from serving no
multichannel video subscribers to serving nearly 18 million
subscribers, over 19 percent of all MVPD subscribers nationwide. Last
year alone, DBS grew 12 times faster than cable, with both DirecTV and
EchoStar experiencing tremendous subscriber growth. Indeed, four out of
five new customers now are choosing DBS over cable, and almost one-half
of existing DBS subscribers are former cable customers. In addition,
AT&T Comcast will face retail competition in many localities from cable
``overbuilders'' (including RCN and Knology), electric utilities
(including Starpower and Seren), and MMDS and SMATV providers.
B. VIDEO PROGRAMMING PRODUCTION AND PACKAGING
The merger will not adversely affect competition in the production
and packaging of video programming for sale to MVPDs. As explained
below, AT&T Comcast will have neither: (1) ``seller power'' that would
allow it to raise prices for, or discriminate in the distribution of,
video programming; nor (2) ``buyer power'' that would allow it to
insist on anticompetitive terms and conditions for programming that it
purchases from others.
As the members of the Subcommittee know, a critical element of any
competition analysis is the definition of the relevant geographic
market. The relevant geographic market for the purchase and sale of
video programming is quite broad and, for many types of programming,
international in scope. There are no significant limitations on
transporting programming and, as a result, video programming can be
sent to virtually any distribution outlet in the world for roughly
equivalent costs. Moreover, the only limiting factor on the
international distribution of U.S.-produced content is whether there is
foreign demand for that content. Foreign demand is quite strong;
international sales now account for a very substantial portion of video
programmers' businesses. By way of example, MTV reaches more than 340
million households in 140 countries.
1. Seller Power
The merger will not reduce competition or create market power in
the sale of video programming by AT&T Comcast. The combined company
will have only very modest programming interests and no enhanced
ability to control the pricing of video programming to MVPDs. AT&T
Comcast will have ownership interests in a total of 24 video
programming networks, or 6.4 percent of the current 374 programming
networks. This very limited set of post-merger interests (many of which
are minority interests) presents no concentration problem or threat of
competitive harm, particularly when viewed against the backdrop of the
highly competitive video programming marketplace, and the far more
significant program holdings of other media entities.
2. Buyer Power
AT&T Broadband and Comcast are, of course, buyers of video
programming. There are two theories of competitive harm that could be
raised by an assertion that the merger creates buyer ``market power'':
first, that the merger would reduce horizontal competition in the
purchasing of programming and thereby create buyer monopsony power; and
second, that the merger would increase the incentive and ability of the
merged firm to engage in distribution foreclosure in the purchase of
video programming from video programming producers. As explained below,
the merger will not create any anticompetitive consequences under
either of these theories.
Monopsony Power. Traditional monopsony theory holds that a firm
buying a sufficiently high percentage of the output of a group of
sellers may have the ability to set unilaterally the price it pays for
goods or services produced by the sellers. This theory has no
applicability in the present case for several reasons.
First, companies can only exercise monopsony power over goods that,
when sold to one buyer, cannot be sold to another buyer. However, video
programming can be consumed by an unlimited number of buyers. This
negates the normal intuition that a very large purchaser may be able to
exercise monopsony power over sellers.
Second, a programmer's distribution alternatives will largely
determine whether the programmer is vulnerable to an attempt to
exercise monopsony power. As noted, AT&T Comcast will account for less
than 30 percent of total purchases, and that is not remotely enough to
give it buyer market power, since the alternative distribution channels
and revenue sources available to video programmers are significant
(i.e., over 70 percent of the U.S. distribution market, as well as
substantial international distribution markets).
Third, a cable operator's appetite for quality programming is
driven by consumer demand and retail competition. As a cable operator
gets bigger, there is no change in its incentives to buy the
programming that is likely to produce the greatest number of viewers
relative to the cost of the programming. For these reasons, and given
the intense competition from DBS and others at the retail level, even
if a cable operator was large enough to exercise monopsony power--and
AT&T Comcast clearly will not be large enough--it would choose the same
quantity and quality of programming as a competitive, ``non-
monopsonist'' purchaser.
Distribution Foreclosure. Nor could the combination of AT&T
Broadband and Comcast trigger any foreclosure concerns. Such concerns
could arise if the merged entity would have sufficient market power in
the distribution of programming such that it would have the incentive
and ability to foreclose access to its cable systems by refusing to buy
programming that viewers desire from unaffiliated program packagers or
producers.
As an initial matter, AT&T Comcast will not have the incentive to
foreclose unaffiliated video program packagers or producers because
AT&T Comcast will have only modest video programming interests, and the
damage caused by distribution foreclosure to its core cable
distribution business could be substantial. It is clear that consumers
view DBS and cable as substitutes and have demonstrated that they would
readily switch from cable to DBS if they viewed AT&T Comcast's offering
as inferior. As a result, any action by AT&T Comcast that degraded the
quality of its programming--by foreclosing competitively priced
unaffiliated programming that consumers want--would cause AT&T Comcast
to lose customers to DBS or other distributors. Moreover, given the
modest programming interests of AT&T Comcast, the potential benefits of
such a strategy would be essentially non-existent.
AT&T Comcast will also have no ability to foreclose. In order to
engage in foreclosure successfully, AT&T Comcast would have to control
such a substantial percentage of all distribution channels to which
rival video programmers could turn as to be able to drive them out of
business or substantially raise their costs. However, even focusing
solely on U.S. MVPD distribution channels, AT&T Comcast will purchase
programming for systems that serve less than 30 percent of subscribers.
Video programmers, of course, understand marketplace dynamics and would
recognize that, even without AT&T Comcast, they still have access to
more than 70 percent of U.S. MVPD subscribers.
C. SET-TOP BOXES, CABLE MODEMS, AND OTHER MVPD CONSUMER EQUIPMENT
Likewise, the merger will have no adverse effect on any equipment
market. The relevant geographic market for MVPD customer equipment is
global. Set-top boxes, modems, and other navigation devices are
purchased by MVPDs and MVPD customers in the U.S., as well as by MVPDs,
consumers, and other buyers worldwide. With fewer than 30 million
subscribers, AT&T Comcast will represent less than 10 percent of the
317 million worldwide cable and DBS subscribers. Accordingly, AT&T
Comcast cannot be considered to have the power to do anything to harm
the production or supply of such equipment.
Even if one were to focus on the domestic equipment market, AT&T
Comcast would purchase equipment for less than 30 percent of U.S.
multichannel video customers--a level too low to raise any concerns
about anticompetitive harm.
Moreover, given the ubiquitous availability of DBS and DSL
alternatives, AT&T Comcast will have no incentive to exercise market
power against set-top box or modem manufacturers. Any action by a cable
operator that has the effect of restricting the supply of high-quality
equipment that enables consumers to access operator-provided services
would cause the operator to lose cable customers to the DBS competitors
and Internet customers to DSL or other competing providers. Thus, AT&T
Comcast will be compelled by market forces to deal fairly with
equipment manufacturers and to ensure that it and its customers have
access to the best quality state-of-the-art equipment at the best
possible price.
D. INTERACTIVE TV SERVICES
The merger will not harm consumers or competition with respect to
the provision of interactive TV services. As with MVPD and other
services discussed above, AT&T Broadband and Comcast do not compete
with each other in the provision of interactive TV services, so the
merger will have no adverse effect on competition in this business.
Moreover, the interactive TV business is in the very early stages of
its development and many questions remain about the technology and
consumers' demand for it. Indeed, there has not yet emerged a clear
definition of what interactive TV is or how the market should be
defined. So, it is entirely premature to even speculate on how the
merger might affect this business.
Moreover, notwithstanding the nascent stage of the interactive TV
business, numerous companies (including DBS providers) are investing
substantial resources in developing, deploying, and distributing
interactive TV content, equipment, and services. In this highly dynamic
environment, AT&T Comcast will have no market power in the provision of
interactive TV services.
Conclusion
Thank you for this opportunity to testify. I would be pleased to
answer any questions you might have about the proposed merger.
Chairman Kohl. We thank you, Mr. Armstrong.
As I noted, there is a vote, so we will have now a 10-
minute recess and then we will be back.
[The subcommittee stood in recess from 2:44 p.m. to 3:02
p.m.]
Chairman Kohl. This hearing will resume, and we will
commence with testimony by Mr. Betty.
STATEMENT OF GARRY BETTY, CHIEF EXECUTIVE OFFICER, EARTHLINK,
ATLANTA, GEORGIA
Mr. Betty. Thank you, Chairman Kohl, Senators, and thank
you for inviting me to testify today about the proposed merger
between AT&T and Comcast and its potential impact on
competition and consumer choice in the broadband Internet
access arena.
My name is Garry Betty. I am the CEO of EarthLink.
EarthLink is the Nation's third largest Internet service
provider and we are the largest independent ISP. We currently
serve 4.9 million customers with dial-up, broadband, and Web-
hosting services. In broadband, EarthLink is platform-agnostic,
providing high-speed Internet access to over 530,000 customers
through digital subscriber line, cable, and satellite
connections. The majority of EarthLink's broadband customers
today have DSL connections, as most major cable companies do
not offer cable modem customers a choice of ISPs.
All of us here today want to encourage broadband
deployment. Broadband deployment is a term that is frequently
used about almost anything these days. Unfortunately, it is
also misused as an excuse for activities that benefit network
owners at the expense of consumers.
It has been said that you can do just about anything you
want in Washington these days as long as you say it is to
promote broadband deployment. One example of this has been the
refusal of most major cable companies to allow consumers who
want to connect to the broadband Internet through high-speed
cable modems to choose their ISP. Rather, these cable companies
have forced customers to use just their cable company's in-
house Internet service.
This ``take or leave it'' choice has resulted in higher
prices and lower adoption rates than would be the case if
consumers had competitive choice in their Internet provider
over cable. We are therefore here today to ask that AT&T and
Comcast commit to providing customers in all their markets a
choice in broadband ISPs over cable by signing commercially
reasonable contracts with independent ISPs prior to the merger
being approved.
AT&T and Comcast have argued since 1998 to Congress, the
FCC, Federal courts, and local authorities that they should not
be required to offer their subscribers a choice in Internet
providers over broadband cable. Rather, they have proposed that
open access should be voluntary, and have promised that they
would open their networks by this year. They have couched these
arguments in very appealing calls for market-based solutions
for broadband Internet access over cable.
Unfortunately, while ISPs have always existed in a
competitive marketplace, cable companies have not. Just as most
consumers have no competitive choice in their cable television
provider, so too most consumers have no choice in their
Internet provider over broadband cable.
This is a significant problem, since cable is and will
remain the primary platform through which consumers get
broadband Internet access. In 2001, cable provided about two-
thirds, or 6.5 million out of 9.7 million, of all broadband
connections. By the end of 2002, cable will still be 60
percent, and by 2005 it is estimated that cable will provide
more than half of the connections for broadband customers.
Notwithstanding calls for ubiquitous competition in
platforms, the fact remains that cable will remain the only
broadband connection for millions of Americans for years to
come. This many consumers should not be denied meaningful
choice in their Internet provider over these cable connections.
Furthermore, broadband is the future of the Internet. While
the market for dial-up Internet access has matured and reached
a platform of about 55 million households, broadband continues
to grow and it has grown from about 1 million households at the
end of 1999 to an estimated 30 million households by the end of
2005.
There have been a lot of promises made over the years.
During 1999, in AT&T's merger with TCI, AT&T told the
Commission that it was committed to an open broadband platform
and that it would favor the unbundling of the modem in order to
provide consumers with choice at the lowest prices.
Later that year, at the urging of then-FCC Chairman
Kennard, AT&T signed a statement of principles with MindSpring
Enterprises, now part of EarthLink, in which AT&T committed to
offer broadband consumers a choice of ISPs when its exclusive
contract with its own affiliated ISP, Excite@Home, expired in
June 2002.
In June 2000, AT&T signed an agreement with the
Massachusetts Coalition for Consumer Choice and Competition,
which was seeking an open access referendum on the November
2000 ballot. In exchange for removing the ballot initiative,
AT&T committed to conduct a multiple ISP trial no later than
October 2001 and to implement ISP choice statewide by July 1,
2002.
As part of their acquisition of TCI, AT&T also made a
commitment in the year 2000 to the local franchising authority
in King County, Washington, to provide multiple ISP choices to
consumers once their contract expired. On March 12, we
announced an agreement with AT&T to offer broadband service to
AT&T Broadband cable customers in Boston and Seattle later this
year. They have also suggested that they will open additional
markets during 2003, although they are under no obligation to
do so.
While we are pleased to have reached the agreements we have
and look forward to signing others like them, there are still
millions of AT&T and Comcast cable customers who have no
competitive choice in broadband Internet service over cable.
Similarly, Comcast recently signed an agreement with United
Online to provide Indianapolis and Nashville customers with a
choice of ISPs. Again, these limited agreements raise a
question as to whether this is a slow trend toward long-
promised open access or merely an effort to forestall an open
access requirement in the context of this merger review.
As I am running out of time, I will say that we have been
very satisfied with the arrangement that we have been able to
negotiate with AOL Time Warner. I think it is an example of how
it does provide consumer choice. Their business and adoption
rates have increased 20 to 25 percent only 6 months after the
introduction of that and has been a big part of their growth
story prospectively.
What I urge today is to have support from the Senate to
support concepts of customer choice on open access over AT&T
and Comcast systems, look for standards of effective open
access consistent with what was set forth in the AOL Time
Warner agreement that we signed, and perhaps push for getting
more than just a promise and actually implement contractual
arrangements between independent third parties prior to the
merger being concluded.
Thank you.
[The prepared statement of Mr. Betty follows:]
Statement of Garry Betty, CEO, Earthlink
Good afternoon and thank you for inviting me to testify today about
the proposed merger between AT&T and Comcast and its potential impact
on competition and consumer choice in broadband internet access.
I am Garry Betty, CEO of EarthLink. EarthLink is the Nation's third
largest Internet Service Provider (ISP) and is the largest independent
ISP. EarthLink serves 4.9 million customers with dial-up, broadband and
web hosting services. In broadband, EarthLink is ``platform agnostic''
providing high-speed internet access to over 530,000 customers through
Digital Subscriber Line (DSL), cable, and satellite connections. The
majority of EarthLink's broadband subscribers today have DSL
connections as most major cable companies do not offer cable modem
customers a choice of ISPs.
All of us here today want to encourage broadband deployment.
``Broadband deployment'' is a term that is frequently used these days.
Unfortunately, it is also sometimes misused as an excuse for activities
that benefit network owners at the expense of consumers. It has been
said that you can do just about anything you want in Washington these
days as long as you say it is to promote broadband deployment.
One example of this has been the refusal of most major cable
companies to allow consumers who want to connect to the broadband
internet through a high-speed cable modem to choose their internet
provider. Rather, these cable companies have forced consumers to use
just their cable company's in-house internet service. This take-it-or-
leave-it choice has resulted in higher prices and lower adoption rates
than would be the case if consumers had competitive choice in their
internet provider over cable.
We are therefore here today to ask that AT&T and Comcast commit to
providing customers in all their markets a choice in broadband ISPs
over cable by signing commercially reasonable contracts with
independent ISPs prior to their merger being approved.
AT&T and Comcast Must Offer Cable Modem Customers a Choice of ISPs
ATT and Comcast have argued since 1998 to Congress, the FCC,
Federal courts and local authorities that they should not be required
to offer their subscribers a choice in internet providers over
broadband cable. Rather, they have proposed that open access should be
voluntary and have promised that they would open their networks by this
year. They have couched these arguments in very appealing calls for
market-based solutions for broadband internet access over cable.
Unfortunately, while ISPs have always existed in a competitive
marketplace, cable companies have not. Just as most consumers have no
competitive choice in their cable television provider, so too most
consumers have no choice in their internet provider over broadband
cable.
This is a significant problem since cable is and will remain the
primary platform through which consumers get broadband internet access.
In 2001, Cable provided about \2/3\ (6.5 million out of 9.7 million) of
all broadband connections. By year-end 2002, cable will still provide
60 percent (8.0 million out of 13.8 million) of all broadband
connections. By 2005, cable will still provide more than half (est.
17.0 million out of 30.7 million) broadband connections.
Notwithstanding calls for ubiquitous competition in platforms (i.e.
cable vs. DSL vs. satellite) the fact remains that cable will remain
the only broadband connection for millions of Americans for years to
come. This many consumers should not be denied meaningful choice in
their internet provider over those cable connections.
Furthermore, broadband is the future of the internet. While the
market for dial-up internet access has matured and reached a plateau at
about 55 million households, broadband continues to grow from about 1
million households at year-end 1999 to an estimated 30 million or more
households by 2005.
Promises Made
In 1999, during the FCC's review of AT&T's merger with TCI (even
then the Nation's largest cable company), AT&T told the Commission that
it was committed to an open broadband platform and that it ``would
favor the unbundling of the modem in order to provide consumers with
choice and lowest prices.''
Later that year, at the urging of then FCC Chairman Kennard, AT&T
signed a statement of principles with MindSpring Enterprises (now part
of EarthLink) in which AT&T committed to offer its broadband consumers
a choice of ISPs when its exclusive contract with its own affiliated
ISP, Excite@Home, expired in June 2002. (Letter to FCC Chairman William
E. Kennard from James W. Cicconi, David N. Baker and Kenneth S.
Fellman, December 6, 1999).
Boston and Seattle: Local Commitments
In June 2000, AT&T signed an agreement with the Massachusetts
Coalition for Consumer Choice and Competition which was seeking an open
access referendum from the November 2000 ballot. In exchange for
removing the ballot initiative, AT&T committed to conduct a multiple
ISP trial no later than October 2001, and to implement ISP choice
statewide by July 1, 2002. (Memorandum of Agreement between AT&T Corp.
and the Massachusetts Coalition, June 27, 2000).
As part of their acquisition of TCI, AT&T also made a commitment in
year 2000 to the local franchising authority in King County, Washington
to provide multiple ISP choice to consumers once their contract with
Excite@Home expired on June 4, 2002. As Excite@Home expired before
their contract did, King County demanded in February 2002 that open
access should immediately be implemented. (Letter to Janet Turpen,
AT&T, from Kevin Kearns, King Co. Washington, February 19, 2002).
Small Steps Forward
On March 12, 2002, EarthLink announced an agreement with AT&T to
offer broadband internet service to AT&T Broadband cable customers in
Boston and Seattle later this year. AT&T has also suggested that they
will open additional markets in 2003. While we are pleased to have
reached the agreements we have, and look forward to signing others like
them, there are still millions of AT&T and Comcast cable customers who
still have no competitive choice in broadband internet service
providers over cable.
Similarly, Comcast recently signed an agreement with United Online
to provide Indianapolis and Nashville customers with a choice of ISPs.
Again, these limited agreements raise the question as to whether this
is a slow trend toward long-promised open access or merely an effort to
forestall open access requirements in the context of a merger review.
While we would like to believe that AT&T, Comcast and other cable
companies will voluntarily open their systems, promises may no longer
be enough. This merger would combine the Nation's first and third
largest cable companies into super-size company controlling cable TV
and internet access to over 40 percent of American homes. We would
prefer to be able to sign business contracts on commercially reasonable
terms. But barring such commitments, open access requirements would be
necessary to ensure consumer choice in access.
AOL-Time Warner Example
As part of its' antitrust review of the AOL Time Warner merger, the
FTC required open access as a condition of approving that merger. In
order to offer cable internet access through its affiliate AOL, Time
Warner Cable must allow subscribers on its cable systems to choose from
among AOL, Roadrunner (another in-house service), EarthLink, or other
two other unaffiliated ISPs.
While it is still early in our relationship with Time Warner, we
are glad to report significant progress. Beginning in September 2001,
EarthLink now offers broadband internet access to Time Warner Cable
customers in 30 of their top 40 markets, with the remainder to come
online by the end of this year.
This open access relationship benefits all involved. Not only can
EarthLink offer broadband service to customers formerly foreclosed to
us, but we have helped drive overall broadband subscriber growth on the
Time Warner systems. Time Warner executives have noted a 20 percent to
25 percent increase in overall broadband take rates. (Chris Bogart,
Pres./CEO of Time Warner Cable Ventures, at Goldman Sachs Communacopia
2002, April 9, 2002). Consumers also benefit as they now have
competitive choice in their internet provider over cable, with price
differentiation and EarthLink service offered at a market-leading
$41.95 a month.
I urge you today to support the same basic conditions of open
access on the AT&T and Comcast systems that apply to the AOL Time
Warner systems.
The minimum standards for effective open access are:
Consumers of broadband cable services should have a choice
among multiple ISPs.
Cable broadband providers must negotiate at arms-length
nondiscriminatory commercial arrangements with both affiliated and non-
affiliated ISPs (including ``first screen'' placement).
ISPs should have the choice of operating on a national,
regional, or local basis.
Both the ISP and the cable operator should have the
opportunity for a direct relationship with the customer.
ISPs should be allowed to provide video streaming and
there should be no discriminatory restrictions on provision of content.
These are the basic standards that shaped the FTC's requirement for
open access on the AOL Time Warner systems. These same requirements
should be met by AT&T and Comcast as a condition of their merger.
Not Regulating the Internet
There's been a lot of rhetoric by cable companies and their
surrogates that open access is ``regulatory.'' But stop for a moment
and consider what's being regulated. Throughout the country, cable
companies have had exclusive local franchises to operate the cable
system in any given area. These franchises were created by government
regulations. Actions that seek to limit cable monopoly power created by
these regulations, and to give consumers increased choices in broadband
services are, by definition, de-regulatory.
This is also not ``regulating the internet.'' The open unregulated
competitive internet we enjoy today exists because of regulations on
the underlying largely non-competitive infrastructure over which it
travels. That's why even though consumers until recently had no choice
in local phone service (and may only have limited choice today), they
have never been required to buy the local phone company's ISP. For
example, Verizon's ISP is available as a competitive choice, but you're
not required to buy or use their ISP just because you get your local
phone service from them. Compare this to most cable companies (which
are also regulated, just under different rules) where if you want
internet access through a cable modem, you have no choice but to
purchase the cable company's affiliated ISP.
By comparison, internet access has always been competitive. There
are over 6,000 ISPs across the country. Consumers in major cities can
choose from hundreds of ISPs that serve their local area. And over 96
percent of internet users throughout the country, even in the smallest
towns and rural areas, can choose from among at least 4 Internet
Service Providers. Compare this to cable, where over 96 percent of
customers throughout the country have NO choice in who their cable
company is. As high speed internet access becomes available over cable,
we are at a crossroads. Will we follow the open consumer choice path of
the internet, or the closed no choice model of cable?
Cable folks will say that open access isn't necessary because there
are other means of high-speed access to the internet, such as Digital
Subscriber Line (DSL) technology over phone lines. But DSL has distance
limitations. Once you get more than a mile and a half from a telephone
central office, DSL service starts to degrade. Once you get beyond
three miles, it is essentially unavailable. And technologies such as
satellite, wireless and electric lines will not be widely available for
many years to come. The upshot is that for as many as a third of
consumers across the country, particularly in rural areas, if they get
any broadband access at all in the next 5 years, it will only be
through a cable line. These customers deserve choice in broadband
internet access as well.
It has been consistent policy in this country for over 20 years to
give consumers greater choice in their telecommunications services. The
Federal court decision that broke up the old Ma Bell AT&T in 1984 and
allowed competition in long distance has resulted in rates that are
more than \2/3\ lower today than they were then. In passing the
Telecommunications Act of 1996, Congress established the framework to
bring these same benefits of competition to local phone service and to
wireless. Legislation such as the Satellite Home Viewer Act and the
program access provisions of the 1992 Cable Act sought to end cable's
longstanding monopoly over multi-channel video programming. And
consumers have always had competitive choice in Internet Service
Providers in large part because FCC decisions beginning in the 70s, and
80s and continuing today that allowed such information services to
travel unfettered over phone lines. At every turn, policymakers have
sought to give consumers greater choice in their communications
services. Broadband internet access over cable should be no exception.
Thank you for giving me the opportunity to speak with you today. I
look forward to any questions you may have.
Chairman Kohl. We thank you, Mr. Betty.
Mr. Green.
STATEMENT OF RICHARD R. GREEN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CABLE TELEVISION LABORATORIES, INC., LOUISVILLE,
COLORADO
Mr. Green. Good afternoon, Chairman Kohl and Senators. I am
Richard Green, President and CEO of CableLabs. I appreciate
this opportunity to testify before this subcommittee and look
forward to answering any of your questions that you have
concerning the role of the cable industry in developing and
deploying new technology.
CableLabs is a research and development consortium of the
cable television system operators serving North and South
America. CableLabs conducts and funds research and development
projects to help cable companies plan for the future and apply
technology to meet customers' needs.
We have been working to promote development of new services
over cable systems and to introduce competition among suppliers
to increase innovation and reduce prices to consumers. Our
tremendously successful effort with cable modems is an example
of this work.
Today, 7 million American homes enjoy cable high-speed data
service. The cable modems used in those homes were developed at
CableLabs. The cable industry recognizes that to make cable
modems broadly available, it would be necessary for these
modems to use a common interface. Interoperability of the
modems was achieved through the cooperation of the cable
industry, equipment manufacturers, retailers, and others
working with CableLabs on the DOCSIS project.
As a result, a highly competitive environment has
developed, to the benefit of consumers. CableLabs has certified
over 200 different modem models from dozens of vendors. Cable
modem retail prices have dropped from $300 to $50.
In a similar and parallel effort, CableLabs has worked hard
to encourage the commercial availability of cable set-top boxes
and other equipment that work with cable systems. CableLabs
members have been very clear in their instructions to us. These
members supported the DOCSIS effort that successfully created a
retail market in cable modems. They want the same thing to
happen with cable set-top boxes and integrated digital
television sets.
But first and perhaps foremost, it is important for you to
understand that cable systems can deliver and today are
delivering broadcaster digital signals. High-definition digital
cable set-top boxes which allow cable operators to provide
digital and high-definition broadcast to consumers exist and
they are being deployed today.
Therefore, in those areas where cable companies have
reached agreement with broadcasters to carry their digital
signals, there are no technical compatibility problems.
A number of cable companies, including Comcast, AT&T, AOL
Time Warner, Cox, and Charter are currently providing such
services or have announced plans to do so in the near future.
The cable industry has worked with the consumer electronics
industry to develop an integrated DTV set which would allow the
cable set-top box to be incorporated within the DTV.
To this end, the National Cable and Telecommunications
Association and the Consumer Electronics Association reached a
voluntary agreement in February of 2000, and that agreement
would allow consumer digital television sets to be connected
directly to digital cable systems.
In a related area, the FCC has implemented the provision in
the 1996 Telecommunications Act calling for the commercial
availability of navigation devices such as set-top boxes.
Consistent with the congressional direction that the security
of the cable operator's signal not be jeopardized, the FCC
rules require that separable security modules must be available
from cable operators. These modules support integrated
television receivers, as well as set-top boxes, in the retail
market.
These removable point-of-deployment, or POD, security cards
foster the portability of set-top boxes and other point-of-
deployment-enabled devices. Leading cable operators, including
the two companies here today, have publicly affirmed that these
systems will support set-top boxes and integrated TV equipment
built to these specifications.
Moreover, to further promote retail sales of set-top boxes,
in October of 2001 the cable industry launched an initiative
that provides customers with the option of purchasing from
participating retailers the exact same set-top box that they
lease from the cable operator.
In addition to the open cable hardware specification
mentioned above, the Open Cable project has recently published
an open specification for middleware, a voluntary initiative
called OCAP, that will promote the commercial availability of
fully portable digital set-top boxes and integrated TVs that
will function seamlessly on cable systems. Once again, Comcast,
AT&T and other cable operators have committed that their
systems will support OCAP-enabled devices.
The CableLabs process is open, cooperative, and efficient.
We modeled our Open Cable effort on our successful DOCSIS
effort. As we did with DOCSIS, we worked with equipment
designers and manufacturers, over 500 companies in all, to
cooperatively prepare and approve specifications. We are
convinced that by attracting additional manufacturers,
competition will add features to and reduce the price of set-
top boxes for consumers as well as cable operators. Our goals
are to issue specifications that will unleash market forces to
promote innovation and competitive offerings.
Thank you again for this opportunity to testify this
afternoon, and I will be pleased to answer the subcommittee's
questions.
[The prepared statement of Mr. Green follows:]
Statement of Richard R. Green, President and Chief Executive Officer,
Cable Television Laboratories, Inc.
Good afternoon. I am Dr. Richard Green, President & CEO of
CableLabs. I appreciate the opportunity to testify before this
Committee, with particular emphasis on the development of the retail
market for cable set-top boxes. I also look forward to answering any
technical questions you may have concerning the role of the cable
industry in developing and deploying new technology.
I speak to you today as a scientist who has devoted a great deal of
his professional career to questions involving the application of
digital technology. The experience I gained during 4 years as Director
of the CBS Advanced Television Technology Laboratory, 5 years as Senior
Vice President of Operations and Engineering of PBS, and 14 years as
CEO of CableLabs gives me a special appreciation for the technical
perspectives of manufacturers, cable operators, and broadcasters.
CableLabs is a research and development consortium of cable
television system operators serving North and South America. CableLabs
conducts and funds research and development projects to help cable
companies plan for the future and apply technology to meet consumers'
needs. I know this hearing is focused on the pending merger between
Comcast and AT&T Broadband, and I would be remiss if I did not note
that both of those companies are important participants in the work of
our laboratory. Brian Roberts has recently served as Chairman of the
CableLabs Board of Directors.
CableLabs was incorporated under the Cooperative Research Act. The
Act, which this committee played a key role in developing, encourages
research and development among companies within industries like the
cable industry. I believe that we have been able to realize the
potential of that Act by, among other things, contributing to the
development of a burgeoning broadband industry and helping spur the
digital transition.
For example, over ten million American homes now enjoy high-speed
Internet access connections and over seven million of those homes are
served by cable high-speed data service. The cable modems used in those
homes were developed at CableLabs. In the past, computer users knew
that they could buy a modem that would work on any phone line. Cable
industry leaders wanted their customers to be able to buy their own
cable modem at retail and be confident that it would work on any cable
system in North America. hrough CableLabs' DOCSIS (Data Over Cable
Service Interface Specification) project, that goal has been achieved.
Cable's broadband service is providing an important new and
competitive, high-speed data highway into American homes.
A word about the CableLabs' cable modem or DOCSIS effort is
instructive because it is a model for our OpenCable project which aims
to address similar interoperability and retail availability issues for
cable set-top boxes and digital television sets.
The cable industry recognized that to make cable modems broadly
available and take advantage of the economies of scale to get the
lowest possible price for consumers, it would be necessary for cable
modems to use a common interface. Interoperability of DOCSIS cable
modems was achieved through the cooperation of the cable industry,
equipment manufacturers, retailers and others working with the
CableLabs DOCSIS project. With 3 years of careful development of the
specification, relying upon input from CableLabs' member companies and
the consumer electronics and software industries (including many who
were not traditional suppliers for the cable industry), the DOCSIS
modem specification became an international standard at the
International Telecommunications Union. Then, CableLabs, again with
input from its members and industry vendors, invited vendors to bring
their equipment to CableLabs to test its interoperability with other
vendors' DOCSIS modems. CableLabs developed a series of tests to
measure conformance with the standard and, in so doing, insure product
interoperability. We do this by ``certifying'' cable modem compliance
with the DOCSIS standard.
The certification process gives retail purchasers confidence that a
certified cable modem will interoperate with other DOCSIS products made
by other manufacturers. As of today, a highly competitive environment
has developed to the benefit of consumers as CableLabs has certified
over 200 different modem models from dozens of vendors.
In a similar and parallel effort, CableLabs has worked hard to
reduce the technical barriers to the delivery of digital and HDTV
television and to encourage the commercial availability of cable set-
top boxes and other equipment that works with cable systems. CableLabs'
members, the leading companies in the cable industry, have been very
clear in their instruction to us. These members supported the DOCSIS
effort that successfully created a retail market in cable modems. They
want the same thing to happen with cable set-top boxes and integrated
DTVs.
The process of developing the digital set-top box standards has
proved immensely more complicated, as we have attempted to reconcile
the often competing interests of hundreds of parties from outside our
industry. But with a lot of give and take among the players, we've now
done it.
I would like to give you a sense of how complex an undertaking this
is, and of just how much progress has nevertheless been made.
First and perhaps foremost, it is important for you to understand
that cable systems can deliver--and today are delivering--broadcasters'
digital signals (including high definition signals) to DTV sets owned
by cable customers. In short, there is no technical impediment to
current generation DTVs working with cable. ``High-definition'' digital
cable set-top boxes which allow cable operators to provide digital
broadcast signals (including high definition signals) to consumers
exist and are being deployed today. Therefore, in those areas where
cable companies have reached agreements with broadcasters to carry
their digital signals over the cable plant, there is no technical
``compatibility'' problem with the delivery of those signals. A number
of cable companies including Comcast, AT&T, AOL Time Warner, Cox and
Charter are currently providing such services or have announced plans
to do so in the near future.
The cable industry has also worked with the consumer electronics
industry to develop an ``integrated'' DTV set which would allow the
cable set-top box to be incorporated within the DTV--so that no
external cable set-top box is needed. To this end, the National Cable &
Telecommunications Association (NCTA) and the Consumer Electronics
Association (CEA)-representing all major manufacturers-reached
voluntary agreements in February 2000, that will allow consumer digital
television sets to be connected directly to digital cable systems. The
features agreed to by CEA and NCTA for these types of DTV models are
specifically spelled out in the agreement. The agreements detail the
technical specifications that will enable these sets to work with cable
systems. Those specifications, developed by CableLabs, were adopted as
U.S. standards in November 2001, although manufacturers could develop
products based on the specifications even before the standards were
adopted as some did.
In fact, these specifications have been available to manufacturers
for over 2 years and some manufacturers have developed prototype
integrated DTV receivers. One such device was on display at the January
2001 Consumer Electronics Show, connected to and working with the local
Cox cable system in Las Vegas. In short, just as there is no technical
barrier to a consumer receiving digital signals over the cable plant,
there are no technical barriers for a manufacturer to build an
``integrated DTV'' model with the features described in the CEA-NCTA
technical agreement.
In a related area, the FCC has implemented the provision in the
Telecommunications Act of 1996 calling for the commercial availability
of navigation devices such as set-top boxes. Consistent with the
congressional direction that the security of the cable operator's
signals not be jeopardized while fostering the commercial availability
of set-tops and other devices, the FCC rules require that separable
security modules for set-top boxes must be available from cable
operators to support ``integrated television receivers'' as well as
set-top boxes in the retail market. These removable ``point-of-
deployment'' or ``POD'' security cards handle conditional access and
encryption of premium cable channels. They foster the portability of
digital set-top boxes and other POD-enabled devices since the devices
may be sold nationwide and will work with POD modules supplied by
various cable operators to accommodate their particular conditional
access systems. Leading cable operators--including the two companies
here today--have publicly affirmed that their systems will support set-
top boxes and integrated DTV equipment built to these specifications,
including integrated DTV sets contemplated by the February 2000 NCTA-
CEA agreement.
CableLabs developed the removable security modules as part of its
OpenCable project. The cable industry has invested millions of dollars
to develop specifications and support for the ``POD module'' for one
reason--to facilitate the retail availability of digital set-top boxes
and integrated digital television receivers. The specifications needed
to produce devices accommodating the separate security POD modules were
also adopted as U.S. standards last year, although they have been
available since 1999. Moreover, to further promote retail sales of set-
top boxes, in October 2001, the cable industry launched an initiative
that provides customers with the option of purchasing from
participating retailers the exact same set-top boxes they can lease
from their cable operator.
In addition to the OpenCable hardware specifications mentioned
above, the OpenCable project has recently published an open
specification for middleware (software)--the OpenCable Application
Platform (``OCAP'') specification--that will promote the retail
availability of fully portable digital set-top boxes and integrated DTV
sets that will support a wide range of applications. For example, OCAP
will permit the downloading and execution of applications, such as
program guides, to any OCAP-enabled devices by any cable system
supporting OCAP. This will enhance the portability of set-top boxes and
DTV sets which the OpenCable POD modules already foster. Because OCAP
is based upon an existing European specification, tremendous economies
of scale and scope can be achieved. Once again, Comcast, AT&T and other
cable operators have committed that their systems will support
CableLabs certified, OCAP enabled devices.
The CableLabs process is open, cooperative, and as efficient as
possible. We work to keep equipment development time to a minimum. To
fulfill this goal we modeled our OpenCable effort on our successful
DOCSIS effort. As we did with DOCSIS, we work with equipment designers
and manufacturers--over 500 companies in all--to cooperatively prepare
and approve the specifications. Over the last 3 years, the OpenCable
project has released specifications which provide the details necessary
to build set-top boxes and integrated DTV sets that will function
seamlessly on cable systems.
We are convinced that by attracting additional manufacturers,
competition will add features to, and reduce prices of, set-top boxes
for consumers as well as cable operators. Our goals are to issue
specifications that will unleash market forces to promote innovation
and competitive offerings. (In fact, our License Agreements explicitly
assure manufacturers that our specifications are not a ceiling on
innovation, and invite them to add other features and functionalities.)
Finally, I would like to briefly mention that we are also pursuing
a similar approach to remove technical barriers for the deployment of
telephone services over cable networks. The PacketCable project at
CableLabs has issued specifications, now worldwide standards,
supporting telephone services using advanced voice over the Internet
technologies. Thus, in the near future, we believe consumers will
benefit greatly from lower cost equipment and competitive telephone
services delivered over cable networks in an even wider fashion than
currently is the case.
In closing, CableLabs has been working to remove technical barriers
inhibiting the deployment of innovative new services over cable
systems. Through the efforts I described above, we are assisting the
cable industry in developing a new wave of innovative products that we
hope will keep cable services attractive to consumers in an
increasingly competitive environment. I hope that this has helped to
clarify some issues of interest to the Committee. Thank you again for
this opportunity to testify this afternoon. I'd be pleased to answer
the Committee's questions.
Chairman Kohl. We thank you, Mr. Green.
Now, we turn to Mr. Haverkate.
STATEMENT OF MARK HAVERKATE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, WIDEOPENWEST, CASTLE ROCK, COLORADO, ON BEHALF OF THE
BROADBAND SERVICE PROVIDERS ASSOCIATION
Mr. Haverkate. Mr. Chairman, Senator DeWine, thank you very
much for allowing me to participate in this important hearing
today. I am the President of WideOpenWest and I represent today
my company, as well as the Broadband Services Providers
Association, which is a group of 13 entrepreneurial companies
across the country that have been out building brand new high-
speed residential broadband networks for the last several
years.
In effect, when the Congress passed the 1996 Cable Act,
they passed us the ball. We caught it and we ran with it. Since
that time, we have been working as hard as we can to build new
networks and provide competition to the local incumbent cable
and telephone companies in as many markets as possible.
Since that time, we have invested collectively over $5
billion in building these new high-speed networks. We are up to
about 1 million customers together, so we feel like we have
made substantial progress from a ground-zero start back in
1996. But even with that tremendous progress, we are still only
about 5 percent the size of an AT&T-Comcast, just to put things
in perspective.
A few months ago, my company, WideOpenWest, stepped up to
the plate to preserve competition when no one else would and we
acquired the properties that Ameritech built in the Midwest,
the competitive cable TV properties that were built in the
States of Ohio, Illinois, and Michigan.
Since acquiring those properties, we have been aggressively
adding digital services, aggressively rolling out high-speed
Internet, and now are providing competitive choice for all
those products to over 1.3 million households in those three
States, much to the delight of the municipalities, because now
they have a competitive choice today and going forward,
hopefully.
I am pleased to report not only from WOW but also from the
other Broadband Service Providers Association members that, in
fact, the demand for broadband is very strong. We have
tremendous support for the services that we offer. The
penetrations that we are getting are generally on target with
our business plan. In fact, our business model is a good
business model.
One example of innovation I would like to bring up is on
the Internet side. A lot of people consider us more on the
cable TV or phone side, but not only WOW but the other
companies have put a lot of attention on the roll-out of high-
speed Internet service, and we are doing it in a different way
than the cable industry has done it so far.
In WOW, for example, we have three different options for
the customer on price and speed. So depending on whether the
residential user is a high-bandwidth user or a home
telecommuter and they need the highest possible speed and
performance, we have that option available. We also have an
option as low as $19.95 a month for ``always on'' high-speed
Internet for the customer who just wants to have an ``always
on'' connection to the Net. So we actually have broadband
services available for prices less than a dial-up connection.
Before I move into talking about our concerns with the
AT&T-Comcast merger, I would just like to point out that I
personally, and I am sure many other members of the BSPA, have
tremendous respect for the Roberts family. Just like Mr.
Roberts, Sr., who was an entrepreneur years ago and built a
great communications company, that is what we aspire to do
today, so in many ways we look up to that. But we do have
issues with the conduct of the corporation and I would like to
use the rest of my time to point out some of those things. It
is not just Comcast, but AT&T as well, as well as some of the
other MSOs.
We think that there has been a decision made that the best
time to try to eliminate the local broadband competitors from
the market is right now. Everyone knows that the capital
markets are a little bit weak. There are big companies
combining together. There is talk about competition between the
cable industry and the telephone industry. It is a good time
now to look around and say we have 13 entrepreneurial companies
out there that really pose a serious competitive threat to us
on the Internet side, on the digital services side, on the
video-on-demand side coming up. Maybe now is the time to really
put the pressure on and see what we can do.
So two things are happening. One is on the program
exclusivity side. Everyone knows that Comcast and AT&T have
control and ownership interests in a lot of different channels,
not only the basic cable channels but sports teams and the
channels that distribute those sports teams, video-on-demand
programming. They are moving into control over all sorts of
programming.
Even one possibility is the purchase of broadcast stations.
If they end up owning broadcast stations, and all this clout
combined, the risk that we have, all 13 of our companies, is if
we can't have equal access to all the programming that is
available on fair, economic terms, that is a trump card that
they automatically win. We cannot possibly compete with a
company that has all this programming and control of it and
doesn't make it available to us, or if they do make it
available, they make it on harsh terms, and expect to be able
to hold on to our customer base.
The second issue that I would like to point out before I
close is a current practice that should cause concern for the
subcommittee because it is certainly a concern for the
competition, and that is that there are now two rates that are
being used in the market.
Historically, in the cable television business, ever since
Mr. Roberts, Sr., was in it in 1963, the common practice is to
have one rate. You notify the municipality, you notify the
customers, and everybody in that municipality pays the same
rate. It is not like a flea market or an eBAY where everybody
gets a different rate.
But now there is a strategy that is being deployed, we
feel, directly targeting us, and that is to have two rates in
the same municipality for the same service, one rate that their
customers pay, their big, large base of customers pay, and then
a second rate that is 35 percent less, or sometimes more, that
is directed at our customers or any of their customers that
consider switching over to Comcast.
So now you have two rates in the same market for the same
services, next-door neighbors getting the exact same services
paying different rates. And you ask, well, why is that? Is that
good competition? Well, it is not. It is clearly designed by a
big corporation to try to squeeze out the competition, and we
are here to object to that and to bring it to the
subcommittee's attention.
So are we in favor of the merger or not? For us, it is not
an issue about size. For us, it is an issue about corporate
behavior and whether it is in the best interests of this
country, after all the work that was done by Congress, by the
municipalities, and by all these entrepreneurial companies to
build these networks and really have local competition be at
its height. Is it really in our best interests to allow some of
this bad behavior to jeopardize that whole process? We suggest
that it isn't and we ask for some attention to be put to this
so that our entrepreneurial dreams can come true.
Thank you very much.
[The prepared statement of Mr. Haverkate follows:]
Statement of Mark Haverkate, President and Chief Executive Officer,
WideOpenWest, on behalf of the Broadband Service Providers Association
Mr. Chairman, Members of the Committee, my name is Mark Haverkate,
and I am the Chief Executive Officer of WideOpenWest, a broadband
communications company providing residents and small businesses in 5
States with cable television, high speed internet, and telephone
services.
I appear today on behalf of my company, and also on behalf of the
Broadband Service Providers Association (``BSPA''), an organization
founded in October 2001, and consisting of 13 pioneering companies
committed to building competitive broadband networks in communities
across the country.\1\
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\1\ The member companies of the BSPA are Altrio Communications,
Carolina Broadband, ClearSource, Everest Connections, Gemini Networks,
Grande Communications, Knology, RCN, Seren Innovations, Starpower
Communications, Utilicom Networks, WideOpenWest, and WinFirst.
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We appreciate your invitation to participate in this hearing. We
have great concerns about the proposed merger between AT&T and Comcast,
and look forward to discussing them with you today.
Introduction
Ten years ago, neither my company, nor any of the members of the
BSPA, existed in the form they do today. Their creation was in direct
response to the Telecommunications Act of 1996--which brought down
barriers to competition among telephone, cable, and data service
providers--and to advances in fiber optic and other technologies that
made it possible to provide all of these services through ``one wire.''
Through this marriage of law and technology, the means has been
borne to bring the great benefits of competition to consumers
everywhere: as the FCC has proved, where consumers have a choice
between providers of communications services, they pay lower prices,
get better service, and have a greater range of more advanced offerings
to choose from.
For example, WideOpenWest--or WOW as most of our customers call
us--began operations in March of 2000, connecting our first customers
in the Denver metropolitan market, where we continue to operate a
digital cable and high speed Internet system in direct competition with
AT&T Broadband. We are proud of the innovation we brought to the
residential communications market, being the first cable television
operator to champion the cause of open access for ISPs, the first
company to offer flat rate unlimited long distance telephone service,
and the first company to offer residential Internet customers a choice
of three speed and price options.
In November of last year, WOW stepped forward when no one else
would to acquire Ameritech's extensive competitive cable television
systems in the Midwest markets of Chicago, Columbus, Cleveland, and
Detroit. We are now adding digital and Internet services to those
networks in order to bring residents there unprecedented--and much
appreciated--consumer choice.
My company, and all the members of the BSPA, are bringing these
benefits to consumers in dozens of communities around the country
today.
Yet we are far from satisfied. Our goal is to expand much further,
bringing the benefits of competition to every community that wants it.
To do so, however, we face significant challenges. As we build our
systems it is imperative that we:
Can count on vigorous enforcement of the Nation's
antitrust and communications laws, to ensure that incumbents do not use
their vast market power to stifle competition before it can become
fully established.
Have fair access to video programming that customers want
to watch.
Have fair access to utility poles and conduits.
Have fair access to residents of multiple dwelling units--
often the first toehold for competitors entering a market.
Are not discriminated against in the application of
franchising, tax and other laws.
The proposed merger between AT&T and Comcast has significant
implications with respect to each of these areas. Whether that merger
occurs, and under what conditions, will therefore have a major impact
on whether the promise of the broadband industry is met, and consumers
in other parts of the country have real choice in the purchase of cable
television and other communications services in the future.
The Proposed Merger Would Reduce Competition
In many of our markets, the incumbent we face is either Comcast or
AT&T Broadband. As a group, the members of the BSPA today have
franchises to build systems in communities with more than 15 million
households--nearly half which are now being provided service by either
Comcast or AT&T. For some companies this number is much higher. In the
case of WideOpenWest, for example, more than 75 percent of our
territory is now being served by systems owned by either Comcast or
AT&T. For other members of the BSPA, that percentage is even higher.
The members of the BSPA are highly concerned about the adverse
effects of the proposed merger between Comcast and AT&T. I want to
discuss two of the reasons for our position with you today.
First, the merger parties now control several key programming
channels that all residential customers want access to. In the future,
they will control more, including many sources of interactive and ``on
demand'' programming. Yet they have already shown themselves willing to
use their control over that programming for anticompetitive purposes.
We fear the merger only will make this situation worse.
Second, the merger parties have shown that they are willing to
resort to unfair and anticompetitive pricing tactics to prevent us from
doing business in their communities. We fear that the merger would lead
to even greater use of these tactics, in a targeted and coordinated
way, with even more damaging results.
Merger Would Reduce Competitors' Access To Key Programming Services
As the Chairman of the FCC has recognized, ``content is king'' in
the broadband world. Unless a competitor carries what subscribers want
to watch, it cannot survive.
Comcast and AT&T today own numerous national and regional
programming services that BSPA members need in order to compete. The
merger parties have also announced their intention to use their
combined resources to gain control over additional programming
services. They have also shown that they will use their control over
programming as a sword against competitors, and to undermine efforts to
enter the merged entity's markets.
For example, Comcast owns, either in whole or in part, seventeen
programming services carried by it and other cable television systems.
These services comprise 6 percent of all those distributed nationally.
Some of these services are extremely popular with certain segments of
the population.\2\
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\2\ In re Annual Assessment of the Status of Competition in the
Market for the Delivery of Video Programming, Sec. 158, CS Dkt No. 01-
129 (rel. Jan. 14, 2002)(``Eighth Annual Report.'')
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These services include three regional sports networks: Comcast
SportsNet, which is carried on Comcast systems in the Philadelphia
market; Comcast SportsNet Mid Atlantic, which is carried on Comcast
systems in the Washington and Baltimore markets; and Comcast Sports
Southeast, which is carried on Comcast Systems in various markets in
the Southeast. All three networks feature real-time sporting events
played by local professional and collegiate teams, as well as sports
news and discussion shows. Comcast has exclusive rights to much of the
programming carried on these networks.\3\
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\3\ In re Applications for Consent to the Transfer of Control of
Licenses, Comcast Corporation and AT&T Corp., Transferors, to AT&T
Comcast Corporation, Transferee, Applications and Public Interest
Statement, at 14 (filed Feb. 28, 2002)(``Applications and Public
Interest Statement.'')
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Comcast also owns two other regional programming services, the
Comcast Network and the Sunshine Network. Its other programming
interests include QVC, E! Entertainment, Golf Channel, Discovery Health
Channel, iN DEMAND, Outdoor Life, and style.\4\
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\4\ Applications and Public Interest Statement, at 15.
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AT&T holds positions in three national programming services: E!
Entertainment, style, and iN DEMAND. It also has equity in three
regional ones: Fox Sports New England, New England Cable News, and
Pittsburgh Cable News Channel.\5\ By virtue of its approximately 25
percent interest in Time Warner Entertainment, it has ownership
interests in several more: Home Box Office, Cinemax, Comedy Central,
and CourtTV.\6\
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\5\ Applications and Public Interest Statement, at 25. AT&T spun
off its Liberty Media subsidiary last summer, and with it AT&T's
attributable interest in numerous additional programming services
formerly owned by Tele-Communications Inc. Whether and the extent to
which AT&T has exclusive or preferential terms for carriage of these
services today is unknown.
\6\ Applications and Public Interest Statement, at 25, 53. AT&T
also has a slightly less than 5 percent ownership interest in
Cablevision Systems Corp., which owns numerous important programming
services, including American Movie Classics, Bravo, Fox Sports Net, and
the MSG Network. See id at 20 & n.27.
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BSPA members must have equal access to the programming services
controlled by Comcast and AT&T if they are to compete effectively in
their markets, and provide the benefits of that competition to
consumers.
This is particularly true with respect to the regional sports
programming networks, which have long been recognized as ``must have''
programming. Many potential customers care deeply about sports, and
will not subscribe to the service of any competitor that does not carry
the sports programming they want to watch.\7\ This fact has been borne
out by hard data by BSPA member RCN: according to a survey it
conducted, 40-58 percent of cable subscribers indicated that they would
be less likely to subscribe to cable service if it lacked local sports
programming.\8\
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\7\ Eighth Report, Sec. Sec. 171-74; See also In re Annual
Assessment of the Status of Competition in Markets for the Delivery of
Video Programming, Sec. 183 (``Seventh Annual Report''); Impact of
Sports Programming Costs on Cable Television Rates, GAO/RCED-99-136, at
3 (June 1999.)
\8\ In re Annual Assessment of the Status of Competition in Markets
for the Delivery of Video Programming, Sec. 184 n.650 (``Sixth Annual
Report.'')
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For the same reason, iN DEMAND is considered an essential offering,
since it features not only films and other entertainment programs, but
sports packages as well. HBO, too, is considered a ``marquee''
programming service, and one that competitors must be able to offer
their customers.
The other programming services owned by the merger parties are also
of great importance to the competitiveness of BSPA members. QVC, in
particular, is key because it is the most popular home shopping service
on cable television today, and is also a source of revenue for systems
that carry it.\9\ Others are as well--at least to certain segments of
the population. To individuals in these groups, the ability to watch
certain golf tournaments, or more extensive coverage of the Tour de
France, is important enough to control their choice of broadband or
cable service provider.\10\ While the number of such subscribers would
vary among service areas, the experience of the BSPA members is that
some number of customers in each would cancel their service if they
could no longer watch this programming.\11\ If access to several such
services were denied, the total number of customers lost could be
highly significant.
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\9\ QVC is carried to over 77 million homes. See Eighth Annual
Report, App. D, Table D-6. Systems that carry QVC are paid a portion of
the gross revenue generated from sales to buyers within their franchise
areas. Where more than one system serves a particular area, these
payments are divided in proportion to each system's number of
subscribers as a percentage of the total number of subscribers within
the franchise area.
\10\ The Golf Channel is reportedly of immense importance to golf
enthusiasts. The Outdoor Life Channel also appeals to core groups of
sports enthusiasts; for example, several years ago it obtained
exclusive rights to cover the Tour de France bicycle race in the United
States.
\11\ See Statement of Brian Roberts, President, Comcast
Corporation; (Golf Channel), ``People thought nobody would ever want to
watch a golf channel. Golf Channel is probably one of the best brands
in television if you happen to like golf.'') (Joint analyst
meeting)(Dec. 21, 2001.)
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Merger Parties Have Withheld Programming To Defeat Competition
The merger parties have previously shown they are willing to use
their control over programming to suppress competition in the market
for multichannel video distribution services.
For example, it is well known that access to sports programming is
crucial for any new entrant to this market. Comcast knows that, too, so
in the late 1990s, when it was establishing Comcast SportsNet, it
assiduously refused to allow RCN (or DirecTV or EchoStar) to carry that
service on any of its systems in the Philadelphia area. The DBS
providers both filed complaints against Comcast with the FCC, but
because the programming service is not distributed by satellite, and is
instead distributed by terrestrial means, neither was able to persuade
the FCC to order Comcast to grant it access to this programming. RCN
was able to avoid this fate but just barely--it now has access to
SportsNet programming, but only for 3 months at a time.
AT&T, too, has not been above using its own exclusive access to
programming as a sword against competition. For example, in Kansas City
the incumbent cable operator--a joint venture between AT&T and AOL Time
Warner called Kansas City Cable Partners (``KCCP'')--has refused to
allow BSPA member Everest Connections to carry Metro Sports, a local
sports network KCCP has established.\12\ This service has exclusive
rights to certain popular sports programming, such as the basketball
games played by the University of Missouri, other college basketball
and football games, professional soccer matches, high school sporting
events, and more. Everest's efforts to gain access to this programming
service have been stymied by the fact that KCCP distributes it by
microwave transmission, not satellite.\13\
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\12\ AT&T and Time Warner are both 50 percent owners of KCCP. In
addition, Time Warner's interest is mainly held through its subsidiary,
Time Warner Entertainment, in which AT&T owns about 25 percent. See
Applications and Public Interest Statement, App. 7.
\13\ The FCC's program access rules protect--to some extent--
competitors' access to satellite delivered programming owned by
vertically-integrated cable programming vendors. It does not extend to
programming delivered by terrestrial means.
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Since Everest is not allowed to carry Metro Sports, it is
effectively prevented from signing up residents for whom watching
sports is a priority. This is true, as Everest's marketing staff has
found out, even for residents who are otherwise dissatisfied with
service from KCCP.\14\ To add insult to injury, KCCP allows Comcast--
which provides service in several adjacent suburbs, but which does not
compete with KCCP--to carry this programming.\15\
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\14\ Some of the sports programming that appears on Metro Sports is
produced by Mizzou Sports Properties (``Mizzou.'') Because KCCP has
refused to allow Everest to carry Metro Sports, Everest has tried to
obtain this programming directly from Mizzou so Everest could produce
its own sports programming channel for its systems. Yet, KCCP,
anticipating this response, has locked up this programming by means of
an exclusive contract with Mizzou.
\15\ The communities in the Kansas City metropolitan area served by
Comcast include Olathe in Kansas, and Raytown, Independence and other
communities in Missouri.
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The proposed merger could lead to an expansion of the programming
tactics Comcast and, to a lesser extent, AT&T have used to impede
competition in their markets, and increase the adverse impact of these
tactics on both BSPA members and consumers. It would provide an
incentive for both Comcast and AT&T to discriminate in the sale of
their programming not only to benefit their own systems, but those of
their new partner as well. It would also provide additional leverage to
obtain exclusive access to programming owned by third parties, which
the merged entity could use to pressure its competitors in multiple
markets.
The merger parties have also expressed their intention to develop
new programming services, which they have strongly implied they do not
intend to share with competitors. As the parties have recently stated
to the FCC, ``Comcast's established expertise in producing local and
regional programming will enhance the ability of the merged entity to
offer AT&T Broadband customers the kinds of community-oriented coverage
that Comcast already provides today to many of its customers. [This
programming] offers potential customers a reason to sign up for
Comcast's services, and offers existing customers one more reason to
continue to subscribe.'' \16\
---------------------------------------------------------------------------
\16\ Applications and Public Interest Statement, at 42, 44.
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To the extent such services were the sole source for regional
sporting events and other highly popular programming, new entrants
could be denied access to the ingredients that are most critical to
their success as competitors.
Secret, Selective Discounting
Over the past year many members of the BSPA have been subjected to
extreme, targeted discounting by Comcast and AT&T in order to drive us
out of business. These discounts are huge, and they are only offered to
our customers or residents in our communities that want to switch to us
from the incumbent. They are not advertised or made available
generally--they are granted secretively over the telephone or in the
doorways of our customers' homes. For example:
Throughout southeastern Michigan, in markets where
WideOpenWest competes with Comcast, residents we sign up for service
are being offered rate discounts of between 33 and 50 percent to switch
back to Comcast. They are also being offered free digital service, free
pay per view, and other giveaways. Existing Comcast customers that try
to cancel their service to sign up with us are being offered similar
benefits not to do so. Importantly, these offers are not publicized,
nor are they made available to anyone other than our existing customers
and those Comcast customers who have asked to be disconnected in order
to switch over to us.
In Austin, Corpus Christi, and other markets in Texas,
both Grande and ClearSource are being subjected to deep discounting by
AT&T, through its joint venture with AOL Time Warner, Texas Cable
Partners.\17\ In Austin, for example, TCP is offering discounts of
between $16 to $28 per month to customers of these competitors in order
to lure them back to the incumbents' own service.\18\
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\17\ Texas Cable Partners owns cable systems across Texas, and is
50 percent owned by AT&T. The remainder of the partnership is owned by
a partnership controlled by and AOL Time Warner subsidiary, Time Warner
Entertainment.
\18\ See, e.g. Time Warner Cable Discounts Draw Fire From City,
Competitor, Austin American-Statesman (Feb. 19, 2002.)
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In Kansas City, Everest is being subjected to comparable
tactics by AT&T, through its joint venture with AOL Time Warner, Kansas
City Cable Partners. In that market, however, KCCP has gone even
further than its Texas affiliate--promising Everest customers
additional payments of $200 if they switch back to KCCP, and even more
if they agree to write testimonials in favor of KCCP's service. KCCP
has also made so-called customer ``loyalty test'' offers to residents
in areas where Everest is building out its system, through which
customers in these neighborhoods are guaranteed discounts on service
prices if they agree to stay with KCCP or 12 months. To fund these
discounts, KCCP has raised the price of service for other neighborhoods
served by its system.
In Augusta, Georgia, Comcast is offering discounts in
excess of 50 percent for basic and digital cable, high speed data, and
other services--but only in areas where Knology offers competitive
services. These offers are not made generally throughout Comcast's
service area, but are instead mailed directly to Knology customers and
new residents in competitive neighborhoods.
Secret, selective discounting like this will destroy competition if
it is allowed to continue. Giving big discounts to a chosen few is a
cheap way for incumbents to exact the greatest possible toll on new
entrants. And while that relative handful of customers gets a big
financial benefit, once the competitor is forced from the market they--
with the rest of their neighbors--will resume paying the pre-
competition, monopoly rate: just like customers do in the communities
where competitors have not yet entered.
In truth, the merger parties are waging a behind-the-scenes hostile
take-over of our company and the entire competitive broadband
industry--one customer at a time. It is a clever strategy, and one that
is likely to work if it is allowed to continue. Moreover, once they
achieve this goal, they will also have complete control over the huge
market for cable modem Internet access, and again know no restraint in
what they charge for it.
The Federal Communications Commission recognizes these facts, and
publicly stated that secret and selective discounting threatens to
destroy broadband competition. In its recent report on the state of
competition in the cable television industry, the Commission reviewed
these actions and concluded:
The vast resources of a large MSO may simply prove too much if
brought to bear in a targeted fashion against a single system entrant.
Moreover, we are concerned about the signal such targeting may send to
others who would compete in the MVPD market, and particularly to the
financial markets to which a new entrant may well be dependent for
resources. [S]uch practices. . .tend to limit competition and
discourage new entry.\19\
---------------------------------------------------------------------------
\19\ Eighth Annual Report, Sec. 209.
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These tactics will only get worse if the merger is approved.
Combining the resources of both AT&T and Comcast, without preventing
the merged entity from targeting BSPA members in this manner, will
allow the new company to coordinate and intensify these actions--with
lethal effect on competitors. If this is allowed to happen, it will be
too much for many of our companies to endure.\20\ The result would
undermine competition in the market for broadband services across the
country.
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\20\ For example, the merged company could use these predatory
tactics simultaneously in multiple markets served by a particular
competitor, thereby forcing that competitor to fight battles, and
expend scarce resources, in each of these markets at the same time.
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Merger Parties Engage In Other Anticompetitive Conduct
The selective discounting programs now being used by the merger
parties against BSPA members are not the only means they are using to
prevent entry, impede competition, and deny consumers choice. Numerous
other tactics are also being employed, and are producing comparable
results.
These tactics include efforts to prevent competitors from getting
franchises, or to saddle them with onerous or unrealistic terms. They
include securing exclusive contracts for certain programming services
that they do not own--and that are not owned by other MSOs, or are not
delivered by satellite, thereby making it impossible for the competitor
to gain access through use of the FCC's program access rules. They
include taking action to impede or slow competitors' ability to build
their systems, get access to utility poles, and serve multiple dwelling
units.
All of these tactics impose substantial financial burdens on BSPA
members, and directly reduce the level of competition they are able to
provide. The merger parties plainly pursue them to eliminate from the
market the only competitor they have that can match them for quality
and value, and can provide consumers with a more complete range of
communication services than they themselves can.
BSPA members believe that, given the track record of the merger
parties, combining their assets and management would lead to
coordinated campaigns in multiple markets targeting one or more of them
to achieve this goal. If that were to happen, competition would
suffer--if not disappear altogether. Entry would be prevented,
expansion would be delayed, consumers would be denied choice, prices
would rise, and the market would be denied all the other benefits that
competitive communications providers provide.
Conclusion
I want to be very plain that our company is ready for competition.
So are all the members of the BSPA. That competition may well be bare-
knuckled, and we expect that. But the tactics we are seeing today go
well beyond a fair fight. They are the equivalent of a bully slipping
on brass knuckles before the fight begins. No competitor can long stay
in the ring under these circumstances.
Six years ago Congress adopted as Federal policy the goal of
bringing facilities-based competition to the national markets for
multichannel video, telephony, and data services.\21\ WOW and the other
members of the BSPA have answered this call, and are now in the process
of bringing all of its benefits to consumers around the country. But we
are now at a crossroads: If we cannot put a stop to the tactics
Comcast, AT&T and other incumbents are using against us, and if we
cannot get fair access to the programming customers want to watch, then
this goal will either be long delayed in its achievement, or undermined
altogether.
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\21\ See, e.g., S. Rep. No. 104-230, at 1 (1996)(Congress seeks to
accelerate the ``deployment of advanced telecommunications services to
all Americans [and open[] all telecommunications markets to
competition'')(conference report for Telecommunications Act of 1996.)
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If this happens, then all your hard work, and of the FCC, and of
the many, many local franchising authorities around the country with
which we have worked to bring competition to their communities, will
have been for nothing.
Thank you again for inviting me here today. We stand ready to work
with this Committee in any way we can to ensure that the fruits of
competition are within the reach of consumers everywhere.
Chairman Kohl. We thank you, Mr. Haverkate.
Now, we ask Mr. Perry to make his statement.
STATEMENT OF ROBERT A. PERRY, VICE PRESIDENT, MARKETING,
MITSUBISHI DIGITAL ELECTRONICS AMERICA, IRVINE, CALIFORNIA
Mr. Perry. Thank you, Chairman Kohl and Senator DeWine, for
having me here this afternoon. I appreciate the opportunity to
address you. I would also like to thank you, Chairman Kohl, for
your fifth point, which is in the 1996 Telecommunications Act
the FCC was to promote the availability of retail set-top boxes
to create this vast competitive environment for new products
and innovation. So I appreciate you bringing that up; it was
obviously lacking in some of the statements that have been made
here today.
First and foremost, my name is Robert Perry. I am the Vice
President of Marketing of Mitsubishi Digital Electronics
America. My responsibilities include produce development,
government affairs, and dealing with the retailers who sell our
products across the country.
My goal in life is quite simple. It is to sell large
volumes of advanced digital television receivers and other
products as quickly, inexpensively and effectively as possible.
One out of every five HDTVs in consumers' homes today is a
Mitsubishi. But despite the best efforts of the members of this
committee to introduce competition, my competitors and I are
still unable to offer a single consumer product of any sort
that connects directly to any digital cable system. The
dominance of the AT&T-Comcast deal can either seal this market
from competition or finally open it. This power will all be in
the hands of one of my colleagues at this witness table.
The prepared statements of Comcast and AT&T for today's
hearing do not even address the device market, nor does their
oral testimony, but 10 years of leaving this issue to CableLabs
has not enabled competitive entry. For such entry to have a
chance, it must be actively embraced and supported by the CEOs
before you today.
For 10 years, the Congress has tried to open this market to
competition. In 1991, Senator Leahy pointed out that cable
systems do not really support the operation of television
receivers. In 1996, Congress explicitly instructed the FCC to
assure the competitive commercial availability of any product
necessary to receive any service offered by a cable operator.
In 1998, the FCC accepted an offer from CableLabs and its
MSO owners to draft and support necessary technical
specifications by July 1, 2000. These specifications turned out
to be late, inadequate, incomplete, and not sufficiently
tested. Mr. Green barely refers to them in his testimony today.
Recently, a competitor of ours asked CableLabs to certify a
prototype DTV receiver built essentially to the July 2000
specifications, but CableLabs refused to consider certifying it
because it does not also rely on newer specifications that are
still under development and revision. So CableLabs' first try
was deemed good enough for the FCC, but not good enough for an
actual product.
CableLabs' newer specification, known as OCAP, may be an
improvement, if and when it is complete and reliable. But today
it is untested, far from ready, and even farther from being
relied upon. In fact, in recent public statements they have
commented that OCAP may not even be ready in time to support
the digital television transition.
In addition, at present we have no assurance that the
products built to this specification would actually work when
connected to cable systems. The cable MSOs themselves, such as
Mr. Roberts and Mr. Armstrong, have been unwilling to say that
they will rely on this specification in the devices that they
themselves lease to customers.
Moreover, both OCAP 1.0 and OCAP 2.0 provide that
competitive product features such as recording, games, program
guides, telephony, and home networking might not work or could
be disabled at will by the MSO. CableLabs has referred to this
issue as ``tools, not rules.'' As we all know, no one orders
tools without intending to use them.
We face another show-stopper in the so-called POD-host
interface, or PHILA license, which any entrant must sign in
order to compete with MSOs in the device market. Elements of
this license are anti-competitive and profoundly anti-consumer.
Such provisions include turning off home network interfaces by
remote control, reducing the resolution of high-definition
content, turning off consumer home recording via technical
means, and requiring CableLabs certification prior to sale at
an unlimited per-product certification fee.
While we try to fight through this obstacle course, cable
MSOs say they distribute about 135,000 digital set-top boxes
per week, about 25 million to date, all proprietary, and none
which conform to the standards set for competitors or are bound
by this license. Not a single competitive product has been sold
or even certified for manufacture by CableLabs. The competitive
score to date is cable MSOs $10 billion in commerce,
competitive entrants zero.
AT&T-Comcast will be CableLabs' largest owner and
Motorola's biggest customer. I believe this committee can and
should insist on a commitment here and now that the enormous
power resulting from this merger be used to deconstruct
monopoly, not consolidate and perpetuate it.
Here are the minimum commitments that I urge this
subcommittee to demand from my colleagues at this witness
table. As to standards and specifications, a simple and
authoritative pledge from AT&T-Comcast that by a date certain
their devices will live by the same rules and specifications
they set for competitors, and that specifications will not
discriminate against competitive entrants. This would go an
enormous way to build confidence in manufacturers, retailers,
and consumers to enter this marketplace.
As to product certification, while my colleagues and I like
and respect Mr. Green, MSO policies and resource constraints on
CableLabs have led to certification practices that in many
cases are discriminatory, under-funded, over-priced, non-
transparent, inefficient, and unpredictable. It is up to AT&T-
Comcast as the dominant cable MSO to build confidence that
CableLabs will drop any requirement that they approve
competitive products for sale.
As to the PHILA license, the POD-host interface license,
this license is a public trust originating in the Congress. A
reasonable license would not threaten the 2.5 million HD
displays now owned by consumers with degraded resolution or
with interfaces being shut off and screens going dark, or with
the unconstrained ability to stop home recording by technical
means.
AT&T-Comcast will have the power to insist on reasonable
license terms that a manufacturer could sign without having to
apologize to its past, present, and future customers.
Accomplishing this would fulfill Mr. Armstrong's commitment
here today not to violate any FCC regulation, as well as
complying with the will of Congress.
On behalf of my company, I thank you very much for having
invited me today.
[The prepared statement of Mr. Perry follows:]
Statement of Robert A. Perry, Vice President, Marketing, Mitsubishi
Digital Electronics America, Inc.
My name is Robert Perry. I am Vice President, Marketing, of
Mitsubishi Digital Electronics America. My professional goal is to sell
large volumes of advanced digital television receivers, as quickly,
inexpensively, and effectively as is possible. While I have enjoyed
some success in doing this, I face a massive and frustrating
competitive obstacle that also afflicts 70 percent of my customers.
Despite the efforts and instructions of the Congress and the FCC, my
competitors and I are still unable to offer a consumer product, of any
sort, that connects directly to any digital cable system. The power to
be conveyed by the merger of Comcast and AT&T Broadband can be used to
make this obstacle insurmountable, or finally to clear it away. If the
merger goes through, this power will all be in the hands of my
colleagues at this witness table.
One out of every five HDTVs in consumers' homes today is a
Mitsubishi. But even with this leadership, we are unable to make
headway in offering products that connect to digital cable systems. And
I see competition from others repressed as well. Although I appear
today on behalf of my company, I am also the chairman of the Video
Board of Directors of the Consumer Electronics Association, a Board
member of the Home Recording Rights Coalition, and a Board member of
HAVI, a corporation devoted to digital home networking software
systems. In each capacity I have learned how and why consumers are
still denied the benefits of competition mandated by the Congress 6
years ago.
A little history:
In 1991, Senator Leahy complained that cable systems do
not adequately support the operation of TV receivers. His attention to
this issue led to legislation in 1992, telling the FCC to ``promote''
the availability of competitive remote controls and set-top boxes.
In 1996, Section 304 of the Telecommunications Act more
explicitly instructed the FCC to assure the competitive commercial
availability of any product necessary to receive a service offered by a
cable operator--not just set-top boxes, but also DTV receivers and
other new products that consumers want and expect, such as digital
video recorders.
In 1998, FCC regulations gave the cable industry until
July 1, 2000, to support the operation of competitive devices bought by
consumers from independent manufacturers and retailers. CableLabs, the
research consortium of the cable industry, offered to draft the
necessary technical specifications, and the FCC accepted this offer.
Today, in the second quarter of 2002, there is no
competitive entry on the horizon. The July 1, 2000 standards were late,
inadequate, incomplete, and not sufficiently tested. Recently a
competitor of ours did ask CableLabs to certify a prototype DTV
receiver built to this specification, as subsequently modified and
improved. But CableLabs refused to consider certification of such a
product, because it does not incorporate newer specifications that are
still under development and revision.
The newer specification--the ``Open Cable Access
Platform,'' or OCAP, is software-based and may be an improvement if and
when it is complete and reliable. But it is untested, far from ready,
and even farther from being relied upon. Why? Because at present we
have no assurance that products built to this specification would
actually work when connected to cable systems. The cable operators
themselves have been unwilling to say that they will rely on this
specification in the devices that they, themselves, lease to customers.
Moreover, as now written, this specification enables cable operators
and program suppliers to remotely and unilaterally suppress competitive
features of multi-purpose products. Product features such as recording,
games, program guides, telephony, and home networking, might not work
or could be disabled at will if they are provided in a consumer
electronics device connected to digital cable.
In 2000, a new and persistent legal barrier emerged--a
license offered by the consortium of major cable MSOs, take it or leave
it. Due to copy protection considerations advanced by the motion
picture industry, any competitive entrant must sign this license,
offered by CableLabs. Elements of this license are not only
anticompetitive, they are also profoundly anti-consumer. It includes
provisions for:
Turning off home network interfaces by remote control.
Reducing the resolution of high definition content by
three-fourths on designated programs.
Allowing consumer home recording to be turned off via
technical means on an unrestricted basis.
Requiring ``certification'' of these products by CableLabs
prior to their sale, at an unlimited per-product ``certification'' fee.
The only companies that have signed this license are Motorola,
Scientific Atlanta, and Pace--all entrenched suppliers of set-top boxes
to cable operators themselves, who are not bound by its terms.
So, Mr. Chairman, as Comcast and AT&T Broadband appear today to
defend their proposed aggregation of power in all markets, you should
be aware that their industry thus far has used its concentrated power
to frustrate the competitive entry legislation launched a decade ago by
the chairman of your own parent committee:
Cable operators distribute about 135,000 digital set-top
boxes per week; they own about 25 million proprietary set-top boxes,
none of which conforms to or relies on competitive standards, or the
proposed CableLabs standards for attachment to cable systems.
Not a single competitive product has been sold to any
consumer, nor has any yet been manufactured or even certified by
CableLabs for manufacture. The fox does not simply rule the henhouse;
it is owner and sole tenant.
A merged AT&T and Comcast will be by far the biggest, most
powerful, and most influential cable operator in the markets for both
cable services and cable devices. Today, both companies procure their
set-top boxes from the same supplier, which already dominates its
market. The merged AT&T and Comcast will be CableLabs' largest owner,
and Motorola's biggest customer. Its combined intentions and single
checkbook will determine whether this product market remains closed to
viable competition, or finally becomes the open and competitive market
that Chairman Leahy envisioned in 1992, and that the Congress demanded
in 1996.
You could, of course, simply approve this aggregation, and rely on
the FCC to insist on compliance through closer regulation. There are
proposals pending at the FCC for it to demand compliance with existing
regulations, and I support them. But in the face of the concentrated
cable industry power that already exists, the FCC has been pushing a
string. In my view this Committee can and should insist on a
commitment, here and now, that the enormous power resulting from this
merger be used to deconstruct monopoly, rather than to consolidate and
perpetuate it.
Here are the minimum commitments I believe this Subcommittee should
demand of my colleagues at this witness table:
As to standards and specifications: I don't see how I can ask my
company to invest millions of dollars in a new product line, or my
customers to invest over three thousand dollars in an HDTV receiver, if
the cable operators who wrote the software and specifications governing
the product's operation are unwilling to rely on them in the products
that they distribute themselves. A simple and authoritative pledge,
from the individual who will run the combined AT&T-Comcast, that by a
date certain (preferably 2003) their devices will live by the same
rules and specifications they set for competitors, and that these will
not discriminate against competitive features, would go an enormous way
to build confidence that those who buy products from competitive
entrants will not be disappointed or abandoned in their investment.
As to product certification: I don't understand how the July 1,
2000 CableLabs specification could be adequate to satisfy FCC
regulations, but not adequate for CableLabs certification of an actual
product. The CableLabs certification practice is in many cases
discriminatory, underfunded, overpriced, nontransparent, inefficient,
and unpredictable--at least as it is encountered by those who would
compete with CableLabs' MSO owners. A pledge from the merged Comcast-
AT&T to look very seriously into these complaints, and to work
expeditiously toward self-certification, as we enjoy in other standards
areas, would go a long way.
As to the ``PHILA'' license that competitive entrants must sign:
The ability to license competitors is a public trust that the FCC has
granted to CableLabs, albeit perhaps in error, and that CableLabs
continues to abuse. How can CableLabs be shielded from antitrust
scrutiny, but not public accountability, in exercising it? A reasonable
license would be one that did not threaten the 2.5 million displays now
owned by consumers with degraded resolution, or with interfaces being
shut off and screens going dark, or with the unconstrained ability to
stop home recording by technical means. Even the motion picture
industry has disavowed so-called ``selectable output control,'' by
which high-definition outputs, home network connections and recordable
interfaces can be shut off in this manner. But in April 8 letters to
Senators Leahy and Hatch, the President of CableLabs refused to disavow
selectable output control. I call upon the prospective head of the
merged AT&T-Comcast, here and now, to disavow selectable output
control, and to pledge to sit down and work out, expeditiously, a
license that manufacturers could sign without having to apologize to
their past, present, and future customers.
Mr. Chairman, I know that this subcommittee has been looking into
the competitive issues that I've discussed today for quite some time,
and that it has inquired of Chairman Powell of the FCC about them on
more than one occasion. I believe you have performed a great public
service in doing so. We are fortunate that this merger transaction,
which would further aggregate monopoly power in the distribution of
devices and in the setting of technical standards for their
procurement, is within the jurisdiction of this Subcommittee, as are
the regulators who must rule on it. On behalf of my company, I thank
you very much for having invited me today.
Chairman Kohl. We thank you, Mr. Perry, and we will begin
asking a few questions.
Mr. Roberts, your statement was very well written and very
well delivered. We appreciate it very much, but I was
disappointed that you didn't seem to have answered any of the
points and questions that I felt were most pertinent and that I
noticed as I spoke you were at least to some extent marking
down.
So, first of all, will this merger offer consumers any
relief from continually rising cable rates--the first question,
if you would mark that down.
The second question: Won't, Mr. Roberts, this merger make
it more difficult for small, competitive cable operators like
our witness here today, WideOpenWest, to compete with you and
other giant cable companies, as Mr. Haverkate has attested?
Third, Mr. Roberts, how can independent programmers ever
hope to distribute their programs over cable lines? Won't large
cable companies like yours prefer to get their content from
their own affiliated companies? Specifically, shouldn't the
program access rule be extended past this October?
Fourth, why won't you agree in a legally binding manner to
allow access to your high-speed Internet connections by
competing companies, as AOL-Time Warner did as a condition of
their merger?
Fifth, how do you respond to Mr. Perry, and what assurances
can you give us that the law with regard to the set-top boxes
will actually be implemented soon with your full approval?
Mr. Roberts. Thank you, Mr. Chairman. As I mentioned in the
opening statement, I look forward to the chance to address
specifically all five of those issues.
So, taking it from the beginning, cable rates: As you know,
two-thirds of our cost comes from the programming cost that we
pay to the programming channels, the 100 channels that we
carry, or more. Last year, in Comcast, and the year before, our
programming costs went up about 15 percent per year, and you
see today in New York City, with the New York Yankees' dispute
with Cable Vision, a real-live example of the terrible dilemma
facing a cable operator.
It is a product that clearly many people want, and at the
same time a new cost above and beyond all your existing costs
have been reported of around $2.00 a month for one channel. So
in our case and in AT&T's case, we launched that channel and we
have recently announced a rate increase, and that rate increase
is substantially more than inflation.
Another cable company has chosen not to carry the new
product and they have significant competitive problems with
full-page ads being run by dish competitors saying switch your
cable over and you can get the Yankees. So this is a
competitive business today and your principal competitor is the
satellite industry, who also has many of the same channels, and
in many cases their programming costs have gone up as well and
they have raised rates.
So the complexity of what happens to the consumer from
their cable company has to be looked at at a couple of levels.
One, what are your programming costs? Two, we have been able to
rebuild all of our systems and offer new products like digital
and modems, as you have heard here today. All of those products
are optional, so all consumers get a better cable system, but
many have chosen to take incrementally more services.
Finally, the issue of how do you put a package together to
compete with your satellite brethren or companies like
WideOpenWest? In our case, our rate increases have been about 5
percent each of the last several years, and our programming
costs have gone up double digits. If it wasn't for the new
services, our business would be going backward. So that is No.
1.
Chairman Kohl. How will this merger affect your rates? How
will this bring down rates to your customers who are listening
to you today?
Mr. Roberts. I think that the ability to accelerate the new
products so we can get more of the incremental revenues takes
pressure off the basic rate. If it had not been for digital and
modems, I don't believe you could pay 15 percent more for
programming, which is two-thirds of your costs, and only have a
5-percent increase, which we acknowledge is higher than the
inflation rate as it is already. So the first problem is can
you get more new products to consumers to not have to raise
basic rates?
No. 1, will there be an ability between the two companies
to reduce costs and be able to then pass some of that or all of
that through in some form of consumer benefit, whether that is
an acceleration of new products or directly in rates or in
giving better service and competing as a better competitor. So
that is hopefully responsive to question No. 1, and Mr.
Armstrong may want to add to that.
No. 2, will it be more difficult for small companies or
small entrants to compete with us? I don't believe the merger
affects that question because the markets are different
markets. So AT&T is Boston and Comcast is in Michigan, where we
compete with WideOpenWest. The reality is that this is a very
different cable business than your father's cable business, if
I can steal the line from the commercial.
Since 1992, with the cable law of 1992, there was the
creation of the satellite industry. Today, we have two
competitors in satellite and many local competitors such as
WideOpenWest, and in other cities we have wireless competitors.
But nationwide, everywhere, there are two competitors from
satellite. There is price competition. They run specials and
marketing promotions. It is the customary practice in a
competitive business, very different than pre-1992, where the
only way to get ESPN or HBO was through cable. That is not the
case today. You can get a free satellite dish and in many cases
6 months of very discounted service at $9 a month.
So we have to match that new marketing offer on the ground.
In those cases, three out of four new sign-ups appear to be
going to satellite, and their growth rate has been faster the
last several years than cable. So I don't believe the merger in
any way changes the competitiveness today in each of the local
cities where we compete.
We have a national competitor in every one of our markets,
and in many of the markets where WideOpenWest is, and other
facilities-based competitors, we are competing and I think all
of our behavior is customary and we basically meet their price.
We have to build an entire franchise. In many cases, they do
not or have not, and we have sometimes additional burdens put
on us by the local municipality that they may or may not have.
On the question about independent programmers and won't you
discriminate against small, independent programmers, I actually
think this deal has the potential to be an enabler for the
content and technology community to galvanize and incubate new
development. Why do I say that?
We have paid a lot of money in this merger. There is
pressure for us to innovate and to create new services. Now,
not all those ideas are going to come from Comcast employees,
and so we have gone out and will go out and try to say to any
new entrepreneur, especially given our roots, can you come and
with one contract with this company really make your business
plan come alive and become real?
Some of the examples like the Outdoor Life Network that you
mentioned--there was a group of entrepreneurs that founded that
channel and they were able to make deals. There is a
competitive channel; we carry that competitor. You mention QVC.
We carry the Home Shopping Network, which we do not have any
financial interest in.
We have a competitor in satellite, just using that for the
moment, in every one of our markets. If we don't carry the best
programming, we are going to lose our customers, and therein
lies the debate in New York City right now. So as people have
new ideas, whether it is things like cable modems, there is a
pressure on us to make sure we are innovating and finding new
revenues that are optional to the consumer and something that
causes them to want to stay with Comcast.
You asked about Internet service providers and whether we
should have a condition like AOL. I would submit that we are
not AOL. AOL has a huge market force in narrow-band Internet.
More than 50-percent penetration of all the people who get
Internet connections do so through AOL. Comcast has a total of
1 million Internet connections. AOL has 30 million. So we are
an innovator in the space of high-speed broadband.
Dr. Green, who helped us innovate cable modems--I can
remember many times when people said cable modems will never
work. And even though it may sound harmless to put a condition
on, it chills the financial capital that went into a brand new
service like cable modems, where we have less than a 10-percent
market share of homes. But of total Internet connections, it is
a much lower number. This is an early entrant.
Now, to the specific of EarthLink and other multiple ISPs,
we have said for some time we want to do business with as many
connective points as possible so that consumers have the choice
that they want because if they don't take it from us, they are
going to take it from DSL, our competitor. Every one of our
products is competitive today, including high-speed modems,
with DSL and wireless.
So we were in an exclusive arrangement with Excite@Home
when we invented cable modems. The contract terminated when
Excite@Home went bankrupt in December. In January, we
transitioned, with great pain, 1 million customers off of
Excite@Home in a hurry-up way onto the Comcast high-speed
network, and in February announced that we wanted to get
started on our commitment to do multiple ISPs.
The first arrangement we made was with United Online, who I
believe has sent you a letter, and that is Net Zero and Juno.
AT&T announced an arrangement with EarthLink. The reason we
begin in two cities is we want to get it right for our
customers and make this work. But you have my commitment, and I
reaffirm what I have said before, which is it is absolutely our
intention, because we think it is good business, to get
multiple ISPs in commercially reasonable ways throughout our
company. We want to get it done. We just transitioned 1 million
customers.
I don't think it should be a condition of this deal because
we don't have a gatekeeping service today. We have a brand new
competitor and we don't want to get the financial community
concerned that there are going to be regulations on something
we just invented.
On Mr. Perry's concerns, he is technically knowledgeable
and Dr. Green is technically knowledgeable, so I would like to
defer some of that. But let me specifically address the big
picture of set-top boxes which was on your list in the
beginning.
I went to the consumer electronics show with a number of
cable operators this January and I was amazed at what I saw.
Everywhere is high-definition sets, as Mr. Perry is talking
about, and that is clearly a very real possibility that that is
what Americans want. Every one of those sets was connected to
satellite.
I walk into Circuit City and I see all they want to do is
sell you a satellite dish and sell you a high-definition or
flat-screen monitor. It is critical to the cable industry that
we have a competitive offering. So I came away from that saying
we have to accelerate our relationships with the set-top
manufacturers and get these set-top boxes available at retail
so that our competitor's product, who does offer some of these
functions and features, isn't the only place.
I met with the CEO of Circuit City last week, the first
time we had ever met. In cable modems, we have all the Circuit
City stores carrying our cable modems. In cellular telephone, a
previous business Comcast has been in, and AT&T as well, we
offered all of our products at retail. Cable television has
traditionally not done that. That has to change for business
reasons because our competitor has an advantage over us and if
the consumer, as they replace these sets, is being told by the
consumer electronics industry and by the retail industry to
switch to satellite, I am the loser and Comcast is the loser.
So we are going to try to fix that, and Dr. Green will tell
you all the steps that the cable industry came home from that
consumer electronics show and said let's accelerate our
activities there. So hopefully that addresses some of your
issues.
Chairman Kohl. You have, and I appreciate your frankness.
My sense in listening to your testimony and to your response is
that you are doing an outstanding job in representing your
company's best interests, and I think that is what you should
do and I appreciate that.
Whether nor not that is in the best interests of the
consumers of America is, of course, open to debate, I am sure,
as you would agree, and open to question. I am always
concerned, as I was, as you know, in the case of the satellite
television companies who wanted to merge. I am against it, and
when you appeared in our office we discussed it and I made it
very clear that I thought that that was not in the best
interests of consumers to take the two biggest satellite
companies and merge them.
I have forgotten your specific response, but I thought you
understood what I was saying and were somewhere sympathetic to
some of the arguments that I made about consolidation.
I am going to pass it on to Senator DeWine. Before I do, I
would just like to ask Mr. Green, Mr. Haverkate, and Mr. Perry
to respond briefly, but respond to some of the things that Mr.
Roberts has said.
I will start with you, Mr. Green.
Mr. Green. Thank you, Mr. Chairman. I welcome the
opportunity to respond.
Specifically on set-top boxes, we are disappointed, as you
are, that the retail market has developed so slowly. We have
worked very, very hard to try to solve the technical problems
that may have been part of this issue. Specifically, I want to
set the record straight with respect to the performance of
cable in producing the POD modules.
In other words, there were a series of agreements. First,
in February of 2000 there was an agreement between the Consumer
Electronics Association and the National Telecommunications
Association in which we agreed on the specifications for
interconnection. In July of 2000, the FCC required that we
prepare a module that could be inserted in a television set or
a set-top box to provide interoperability, the separation of
the security module.
We were on time. We delivered that product. It works and it
was certified. Mr. Perry is incorrect in saying late,
inadequate, and not complete. Those modules are available and
as proof of that, at the consumer electronics show there were
two manufacturers that showed television sets that accepted the
POD module, were connected to the Cox Cable television system
in Las Vegas and they worked. So it is not true that these
specifications were not complete.
In addition to that, we worked with Mr. Perry's group to
define the interfaces for a digital television receiver. We
published those specifications. These specifications are
American national standards. They are not just CableLabs
specifications. They are standards.
Following that, we worked within the cable industry and
working with manufacturers to develop the next generation of
specifications, which are software. We are very interested in
developing an attractive retail product, so that the software
and the applications that need to run on a set-top box or a
television set are very important.
The Open Cable specification, OCAP, provides that software.
It is a fair and open specification which provides a set of
interfaces that anyone can write to. It is available to anyone
for development. We have issued two sets of the specifications
Mr. Perry referred to, and we hope that this will also help to
provide an attractive retail product moving forward in the set-
top box.
Thank you, Mr. Chairman.
Chairman Kohl. Mr. Haverkate.
Mr. Haverkate. Mr. Chairman, Brian Roberts made one comment
on the programming issue. I think I got the quote down exactly
right. He said if we don't carry the best programming, we will
lose our customers. I think that is exactly the point that I am
trying to make relative to our relationship and our ability to
compete with Comcast-AT&T, where they have control over what
programming is available and have the ability to restrict
access to that programming to us.
So I couldn't agree more on that point with Mr. Roberts
that if we don't carry the best programming, we will lose all
of our customers. But if it is their programming and they get
our customers, then they have certainly an incentive to
withhold that programming, and they have shown in the past that
they will.
The second point on the issue of this rate discrimination
and improper practices in the markets themselves--Brian
referred to it as customary promotions, I think was the term
that he used. That is not the case. A promotion is something
designed to try something new, but at least it is a public
promotion. I have never once seen an ad, and I don't expect I
will see an ad that says please call Comcast and say that you
are interested in switching your service to WOW and we will
reduce your rate by 35 percent.
This price strategy is being done undercover; it is being
done in secret. It is not a promotion. It is designed to
restrict the ability of a competitor like us to succeed. They
can call it a promotion if they want. Look it up in the
dictionary. It is not a promotion and the intent is clear.
In fact, I think basically what is happening here, Mr.
Chairman, is they are conducting a hostile takeover of our
industry one customer at a time. They probably wouldn't be
allowed to buy our companies, so they have decided to buy it
one customer at a time by going out to our customers and
offering whatever price they have to to take it over. And if it
is allowed to continue, I think it is going to be successful.
With the company of the size that they have and the
resources that they have, and the young stage of development
that our industry is in, there is no way--no matter how good we
are, no matter what products we offer, no matter how good our
Internet service is, going up against that kinds of odds is
impossible. So I would certainly appreciate any advice or
attention to this matter that could be given.
Thank you.
Chairman Kohl. Thank you.
Mr. Perry, do you have a comment?
Mr. Perry. Yes, sir, and thank you for giving me an
opportunity to respond.
In addition to my duties at Mitsubishi, I am also the Chair
of the Video Division of the Consumer Electronics Association,
as well as a member of the executive board of directors. I also
am pleased to serve on the Home Recording Rights Coalition,
which is a grass-roots organization that is dedicated to
preserving consumers' normal and customary recording practices.
We happen to believe, in this transition from analog to
digital, that you didn't give up any of your rights.
That being said, I would like to respond to some of these
points very specifically, but still not get into an engineering
discussion. I am not one, and I don't even play one on TV.
Having said all that, Mr. Green's response about the
specification--he is referring to the POD specification. The
POD is essentially an access card that slides into the front of
some kind of a set-top box. That specification is essentially
complete. The other specifications that are required to build a
complete product are not. They are not, and we cannot build to
them, and this belies kind of a central underpinning of what we
are in the business of doing.
What we do in the consumer electronics business everyday,
myself and all of my competitors, is we try to develop the
latest, coolest products that consumers want, and they get to
vote in the stores. What we do as manufacturers is quite
literally bash each other's heads in lowering prices and
increasing ingenuity and new features.
In fact, if you were to look at the projection television
business as an example, in 1997, just as we were starting the
digital transition of our country's infrastructure, a 50-inch
projection television, a big-screen TV, sold for a little more
than $2,000. Today, the HD version of that television sells for
under $2,000. We do that everyday in our business.
So it is a little bit disingenuous to assume that there is
a specification out there that we can build products to, but we
simply don't. What we want to make are products that connect
directly to the wall, don't require set-top boxes, or we want
to make set-top boxes for those consumers who may need one for
secondary televisions and other televisions in the home.
Those specifications and the license agreements that go
with them--the specs are not complete and the license terms are
egregious. Let me explain how egregious one of those license
terms is.
In this PHILA license, we are being asked to agree to allow
the content provider, by encoding their digital content before
they sell it to an MSO, or to allow the MSO to send a signal to
turn off outputs of those products. There are two kinds of
outputs on products. There are those outputs that I can record
at home and enjoy my customary home recording rights, and then
there are the other outputs that I can't record.
The specification and its associated license agreement
specifically require us to relinquish that right to the MSO. If
they want to keep all the recording capability in a set-top box
so they can charge--in other words, pay every time you press
``play''--they can do it under these specifications. These are
some of the issues in a very, very complex document which
frankly have to be addressed before manufacturers will risk
capital.
Another key point which has not been spoken about is there
are two sets of specifications. There is this very complex
specification that requires paying tribute to CableLabs in the
form of licensing fees and certification fees. It is very
complex. It makes a very expensive consumer product.
Then there is another specification which the cable MSOs
themselves can use which is simple. No cable MSO has appeared
and said we will abide by the specifications issued by our
scientific organization, CableLabs. None of them have agreed to
follow their own specification. That should be a pretty clear
indicator of really what is going on here.
I applaud the fact that Comcast is a good supporter of
HDTV. They have had a number of great announcements recently
and it is wonderful. Our country is trying to transition to a
digital infrastructure. The unfortunate part is, as we
transition, we need to make sure that the set-top box issued by
the cable company is not a gatekeeper that is designed to
abridge normal consumer recording rights, the ability to
network, and all these kinds of new technologies that can
happen in the home and benefit consumers.
We haven't heard any conversations about how does the cable
MSO unlock their monopoly for set-top boxes. If a specification
truly existed that didn't come with egregious licensing terms
that required us to effectively pay a competitor, you can bet
we would be making those products today. Those are truly the
issues.
Thank you.
Chairman Kohl. We thank you, Mr. Perry.
I am going to turn this over to Senator DeWine right now. I
need to go to another meeting, a conference committee on the
bankruptcy reform bill. So I want to thank you all for coming
and I will turn this over to the ranking member of this
subcommittee, Senator Mike DeWine.
Senator DeWine [presiding]. Thank you, Mr. Chairman.
The FCC's recent report on cable prices indicated that when
consumers have effective competition in cable, they enjoy lower
prices. That certainly shouldn't come as a shock to anybody.
The competition from over-builders, though, has come from new
entrants and relatively small providers of cable services.
Let me ask you all, and we will start with Mr. Roberts, why
is it that the larger cable companies have not moved into other
large companies' markets to bring consumers the benefits of
head-to-head competition? We really haven't seen that. Why?
Mr. Roberts. Well, in our case----
Senator DeWine. And let me just say, is this merger going
to make that any more likely?
Mr. Roberts. Well, heretofore, because you served the
entire community and because you have now two national
competitors in satellite, it has not proven to make a lot of
money. Ameritech, as was mentioned earlier, went into the
business, and before them Florida Power and Light and others,
large, substantial companies who wanted to go into other
markets where you have to wire up the entire community or some
substantial amount of homes and then see how many customers you
get.
Satellite and wireless have proved to be a quicker and
easier way to get a large footprint. So in our case, when that
happened, satellite occurred, we put $5 billion, as I mentioned
in my testimony, in the last 5 years into upgrading our
existing facility to try to sell new products and to have a
more competitive offering so that customers would retain with
us.
Senator DeWine. Mr. Armstrong.
Mr. Armstrong. Senator, I think that having pursued, first,
the acquisition of TCI and then MediaOne, and now putting
together AT&T-Comcast, we are probably the most aggressive in
believing in and committing to enormous amounts of capital to
deploy broadband services.
Second, this is a very, very high fixed-cost business,
whether you are an entrepreneur starting it up or whether you
are transforming what is already there. I have been in three
forms of networking in my career--data communications with the
IBM Company for 3 decades, then 6 years with Hughes in
satellite communications and wireless communications, and now
wire line and cable communications--and there are some common
denominators to those businesses.
One is that they are very capital-intensive and have an
extremely high fixed-cost nature to them, and you have got to
get as much content going over those infrastructures that you
spent all that money to make go fast and connect to customers
as you can. So we have been concentrating on clustering our
assets so that we can leverage our capital so that we can bring
more services to more people sooner.
In that respect, we hope we can converge the interests of
the consumer, as was spoken to before, with the interests of
the cable company, because if we can bring more services at
better prices in better bundles sooner to the consumers because
we have clustered these properties, we will be as competitive
as we can possibly be.
Senator DeWine. Anyone else on the panel?
Mr. Haverkate. Senator, there are, I think, two references
now that implied that the new broadband companies are not
building entire communities. Generally speaking, that is not
the case at all. The franchises that we have in the Midwest
have been completely built out. We are providing services to
100 percent of the communities there, and we are providing
similar franchise requirements as the incumbent MSO and we
certainly don't believe that we are getting any special
treatment in that respect.
There has also been an implication that our business is not
a viable business, but it certainly is. While we are still
young, we still have several members of the Broadband Service
Providers Association that are turning into a positive cash-
flow situation. We are right on the edge of becoming successful
companies, and I think if we can prove that this is a viable
business model and that there is room for a second local
network in these markets, considering the explosion of Internet
and digital services, I think that will lead to more
competition, including the possibility of big companies
competing with each other.
So I would certainly not give up on the goals of the Cable
Act in having this local competition, because we are not, and
we think we have an excellent opportunity as long as there are
some ground rules that are established now going forward.
Senator DeWine. How are things going for you, Mr.
Haverkate, in Columbus and in Cleveland?
Mr. Haverkate. We have about 21 to 22 percent penetration
in those markets, so 1 in 5 households is connected to our
network. When Ameritech built it, they built an excellent
analog cable network, but they were slow to introduce digital
services and they didn't introduce Internet at all because they
had a DSL strategy.
When we took over, we accelerated the roll-out of digital
cable and Internet services, so now we have a comparable suite
of services as Comcast or Time Warner does, or Adelphia Cable
does. So we are doing very well on increasing the range of
services that we are providing to our existing customers, but
we are having some serious difficulty in fighting this issue on
rate discrimination that I mentioned before, where our
customers are being targeted and asked to switch for a big
payoff.
Senator DeWine. Let me ask Mr. Armstrong, Mr. Roberts and
Mr. Haverkate the following question. Cable franchise
agreements often require cable providers to have uniform
pricing for consumers in their franchise area, at least for
basic cable services. Many cable over-builders have noted that
when they enter into a specific neighborhood that the incumbent
cable provider will offer free programming, discount prices,
and cash rebates in that area to prevent their customers from
switching to competing services. Obviously, the customers who
receive these benefits and this competition have benefited from
the competition.
Let me ask you, do these types of discounts and promotions
violate the franchise agreements, and also will the ability to
offer these types of discounts harm consumers in the long run
if new entrants are unable to establish a sufficient customer
base and remain viable?
Mr. Armstrong, do you want to start?
Mr. Armstrong. First, Senator, I don't think it will harm
consumers. I think competition is pretty darn good. We spend a
lot of time competing with dish.
Senator DeWine. Long run, as well as short run, they will
be better off? Clearly, in the short run they are going to be
better off.
Mr. Armstrong. Sure, and I think in the long run they are
going to be better off, also. We spent a lot of time competing
with dish in my old outfit, DirecTV, as well as over-builders,
as well as Bell companies, and as Brian mentioned, in some
cases some wireless outfits. I don't think it violates, to my
knowledge, being competitive.
I do think it is wrong if people start to price below cost
in order to keep them long term. That is very bad and that is
not the right thing to do at all. I know at least in our
company's case, we have never, never approached that.
So the bottom line, Senator, is I think it is good to have
competition. I think we have got a lot of competition, and
over-builders aren't the only ones we are reacting to day by
day.
Senator DeWine. Mr. Haverkate, any comment?
Mr. Haverkate. Yes. I don't believe I responded to the
question about franchise requirements, but for them most part
the franchises do address the issue of discriminatory pricing
and charging uniform rates and publicly disclosed rates across
the entire customer base. So in most cases, this practice that
I have been talking about today certainly appears to be in
violation of the franchise agreements that municipalities have.
Senator DeWine. It would be?
Mr. Haverkate. It would be. It is in violation, yes,
because rates are supposed to be publicly disclosed, which they
are not, and uniform, which they are not.
The second thing is certainly it is hard to argue against a
lower rate. Certainly, everyone wants to get a deal, but if the
price of allowing this activity to happen is the elimination of
competition, be assured that rates will go up faster in the
future. Choices of Internet service will be reduced.
Competition in the digital arena will not exist.
We are not talking about a short term/long term like 3
years from now. If this issue isn't addressed immediately and
some stop isn't put to it, companies of this size, if they have
the intent, have the ability to put us out of business, not
next year but this year. So it is a very serious issue.
They keep talking about the satellite industry. Well, I
want to talk about the local network industry that has spent so
much money, time and effort to put themselves in place and now
are at risk.
Senator DeWine. Mr. Roberts, any comment?
Mr. Roberts. Thank you. A couple of points. First of all, I
have tremendous admiration for a fellow entrepreneur. The
Ameritech Company, which is now part of SBC, built some of
these markets, and I believe your company was able to buy them
for substantially less than they had spent to build them. So
that is the entrepreneurial model at work, and he is absolutely
entitled to pursue his business and I wish him good luck.
The reason we keep referring to satellite as a major
competitor is that is where the vast--first of all, it is
available everywhere in the country, not market by market. And,
of course, in the last couple of years Congress has passed a
law, the Satellite Home Viewer Act, to allow satellite to have
all the local broadcast signals.
I believe what has been referred to in the local franchise
of one rate is the level of service that includes the local
broadcast signal, the so-called B-1, and I believe if there is
a certain community where there is some behavior, then you
could complain to that community or complain to the FCC.
So, again, I guess I would step back and say I don't see it
as a merger issue. The satellite industry and the over-build
industry are competing, and we are responding, in turn, by
upgrading our networks, investing, clustering, as Mike
mentioned, and hopefully creating a compelling proposition to
the consumer.
Senator DeWine. Senator Specter.
Senator Specter. Thank you very much, Mr. Chairman.
One of the concerns which I have involves the tie-ins
between sports teams and cable. Two examples come to mind, or a
number of examples come to mind. One example is the Braves
network, another example is the Yankees network.
I heard recently that a substantial charge was being added
to the cable subscribers of Yankees' games and the
interrelationship of this arrangement is that enormous revenues
go to teams like the New York Yankees. They are able to buy
pennants and buy World Series championships almost at will.
Mr. Haverkate, you are nodding in the affirmative. I think
I will start with you. You appear to agree with me.
Mr. Haverkate. Well, I agree 100 percent with your comments
so far.
Senator Specter. Well, what is the extent of major sports
teams' ability to control cable television to acquire more
funds, which then in turn can be used to buy players and buy
pennants?
Mr. Haverkate. Well, they have an enormous ability there.
The example that you are using in New York--while WOW doesn't
operate in New York, I know that RCN and other members do.
Typically, the negotiations go something like this: We have
decided to put this number of games on this channel and this is
what the rate is and you have until Friday to agree to it.
If you are a competitive provider like we are or like the
satellite industry is and you have a lower market share and you
are doing everything that you can to try to hold on to the
customers that you have, the last thing you need is to not have
programming like the New York Yankees. So, in effect, we agree
to whatever demands they have, no matter what the price is.
Generally speaking, the cable MSOs have had to do the same
thing because if they don't do it, then they are painted as the
bad guys and withholding key programming from consumers.
Occasionally, there is a company like Cable Vision that says no
and takes the heat on it. But generally speaking, all the
leverage in that negotiation is with the sports owners and the
sports channel, and the cable companies have very little to do
with it, in my experience.
Senator Specter. Do the Yankees own a cable network?
Mr. Haverkate. I believe they do. Since I don't operate in
the New York market anymore, I have only been following this
particular issue through the trade press. So maybe Mr. Roberts
or Mr. Armstrong would know the details more than myself.
Senator Specter. Does anybody know for sure whether the
Yankees own a network?
Mr. Roberts. It is 50-50.
Senator Specter. Mr. Armstrong, you are looking with an
affirmative nod.
Mr. Armstrong. It is 50-50.
Mr. Roberts. I think they own 50 percent of the network and
they sold the other 50 percent to some investors recently in
the last year.
Senator Specter. Mr. Perry, what do you think Congress
ought to try to do about that, if anything?
Mr. Perry. Well, sir, I think that concentrations of power,
as commented very early, I think, in some of the opening
comments, are not necessarily bad if, in fact, there is
oversight and if an environment is created where this power can
be put to tremendous use of allowing for competition and
allowing for equal access and allowing for lots of entrants to
innovate and bring technology to the party, which is something
that we do in our business.
Senator Specter. How can you have oversight, or how can you
have competition? It is a full circle. The Yankees own the
system or 50 percent of it. They must have had a good reason
for bringing in investors. That produces revenues because
people like to watch the Yankees because they are good, and
that enables them to acquire a lot of money to buy more players
who are good. What happens to competition in the American
League?
I am frankly more worried about Atlanta because they are in
our division, but let's stick with the Yankees.
Mr. Perry. As we discussed earlier, being a Burks County
boy and actually having taught economics at a couple of
colleges in the Burks County area, it is a fact of like that
all companies as they grow tend to desire to stifle competition
and to exert more market power.
I believe that is why the 1996 Telecommunications Act was
passed. I believe that is why the Federal Government has a wide
range of legislation and regulatory oversight on all of these
issues, and I believe that that oversight has to be properly
employed, and vigilantly.
Senator Specter. Do you think oversight could do something
about the Yankees' practices?
Mr. Perry. I am not so sure whether there is specific
legislation or regulatory authority to address that issue.
However, this specific issue that you bring up, while it is not
particularly an issue that our industry focuses on, does have
an effect of being exclusionary, and let me explain how that
works.
Today, while we have two DBS satellite providers, one
offers sports programming packages that are highly attractive,
and the other cannot. They cannot because the arrangements for
the provisioning of programming are exclusionary. They, in
fact, are used as a competitive weapon, and that is market
power at work which a lot of us would probably say is probably
inappropriate use of market power.
That is going to flip to the cable side fairly quickly. It
has been commented on that they have a national competitor
called satellite. Well, our country is in the middle of this
digital television transition. In fact, all of the local
broadcasters in the Philadelphia market have transitioned.
This transition allows the local broadcasters to deliver
high-definition, very high-quality pictures, and broadcasters
like CBS and ABC deliver their prime-time schedules in high-
definition. Well, one of the things that is not being brought
up here today is that cable has a very natural advantage in
this marketplace. Even if Echostar purchases DirecTV, they
cannot offer HD programming in all their markets. They will
relegated to 12 channels of HD and then lower-resolution
programming across the rest of the country, where cable,
because they are a wired, on-the-ground system, will be able to
deliver, if they wish, high-definition programming in every
market of the country. So while, in fact, they are competitors,
they don't necessarily compete on equal footing.
So I went a little bit over the answer to your question,
sir, but these are part of the intricacies that affect how
these business models work and whether they are really fair to
the consumer. Our company, and frankly our industry, really
doesn't have a position for or against this merger. Our
position is that the regulatory and legislative authorities
that are already there should be enforced to ensure that if
this goes forward that the consumer is treated fairly and they
have all this access and they have the right to get this
variety of programming and services without the set-top box or
contracts creating exclusionary environments to control them.
Senator Specter. Mr. Betty, do you agree that cable has
that kind of an advantage over satellite?
Mr. Betty. I really don't have an opinion on the subject.
Senator Specter. Well, that is refreshing.
[Laughter.]
Senator DeWine. Mr. Armstrong.
Mr. Armstrong. Senator, could I take a shot? And I find
myself very uncomfortable doing this, but I was 6 years in the
satellite industry and we started DirecTV. The satellite
industry can provide more capacity by advanced satellite
technology, better use of frequency on the transponders, and
reuse of the spectrum. It is called a spot beam technology that
will enable them to, in fact, implement the same frequency in
different geographies from a geosynchronous satellite system.
So while I think that we in the cable industry have some
advantages over satellite, I just don't buy into that is one of
them.
Mr. Perry. I would point out, sir, if I could, that the
people who are promoting the deal between Echostar and DirecTV,
I believe, when they have come to the Hill have talked
specifically about a commitment to deliver, I believe, local-
to-local broadcasts in standard definition in all TV markets
and 12 channels of HD. If it was part of their business plan to
deliver HD in every market, I am sure that would have been
offered up.
Senator DeWine. Mr. Perry, let me just interrupt Senator
Specter for a moment and let me just say that we will be
certainly interested in getting the answer to that question.
Senator Specter. Well, I am concerned about the impact on
sports which is readily apparent. There are a lot of other
questions which are on the table which defy analysis and are
very hard to figure out.
There is a sense of unease in the Congress, or at least in
this member, on mergers and acquisitions, but unless there is a
violation of the antitrust laws, lessening of competition--and,
candidly, there does not appear to be that here--there is no
legislative reach to object.
A number of us have wrestled with what has happened not
just here, but everywhere, on gigantic concentration. There is
a sense, as Jefferson said, about a feeling of discomfort with
the size, with the gigantic nature in so many, many of the
lines. We see the import in a number of ways. We see it in
sports, where America has a love affair with sports, and I have
seen this cable operation work to the disadvantage of most of
the teams.
We have a franchise in western Pennsylvania, in Pittsburgh,
doing very well right now, but a small-market team has a very,
very tough time surviving, and the big-market teams, where they
tie into cable, really have it made. We wrestled on this
subcommittee with the problem of franchise changes, and while
this does not directly affect the issues here, it does in an
indirect way as to cable's import on helping teams like the
Braves or the Yankees, where the franchises are extracting
enormous sums of money--$1 billion in public money for stadiums
in Pennsylvania.
I introduced legislation which would require Major League
Baseball or the NFL to pay for three-quarters of the cost of
stadium construction. The NFL has a $17.6 billion, multi-year
television contract. It doesn't go over cable, but the
extortion of the big cities is just overwhelming and we are
trying to put our hand around the issue.
Does anybody have any ideas as to what we might do on the
examples we have on the table, the Yankees or the Braves?
Mr. Armstrong, you have been in this business a long time.
What do you think?
Mr. Armstrong. I don't think that qualifies me, but I do
think that there is a very natural market tug between the love
affair, as you have rightly put it, with sports teams and
American consumers. We love our sports, we idolize our heroes,
and we do a pretty good job, whether it is from the sky on the
ground, of bringing that action to everybody, almost too much
of it some weekends. But right now, we have a difficult tug.
By the way, Senator, it is not just the NFL and the NHL and
the NBA. Also, you have things like ESPN who have rate
increases every year that are very high, double-digit rate
increases for what they bring, as well. And what we are trying
to do, to the best of our ability, is to tier them so we can
price them to the people who want to watch them, and to try to
mitigate the impact on the basic service that many people take
as their fundamental service.
So I hope over time that market forces lead us to, if
people are going to want to watch it that much and the teams
are going to charge that much for people to watch it, we can
evolve to the ability to tier it so that the people who do
watch it pay for it and not all the other people. I hope the
market will enable that to happen over time.
Senator Specter. Well, I didn't get any part of your answer
to the issue of how to break up the Yankees.
[Laughter.]
Mr. Armstrong. Or beat them.
Senator Specter. Mr. Roberts, I know that there is an
element with Comcast and the sports teams with which you have
an interest. Would you comment on the ways you see your
practices evolving with the Flyers or the other sports teams
and I think some activities in Washington, too, to ameliorate
this kind of an issue?
Mr. Roberts. Well, I think you put your finger on the pulse
of a quagmire, and I don't know that anybody has the answer or
we all would be chasing it right today. We recognize that love
affair and want to be associated with it, but at the same time
it is a cost and there is an unevenness, as you point out. I
think you probably need to talk league by league on that
unevenness, because in some leagues there is a cap or some sort
of less extreme disparity between teams.
At the same time, our behavior in the sports business is
pretty consistent with the norm of the industry. It is not a
market leader the way the Yankees are right now, or the Braves
on a national basis with having their games available
everywhere, and that creates extra revenue. You are right; for
years, they have done better, so there is a cause and effect.
I think the point you made about stadiums--we know from
Philadelphia that that is exactly the tough problem for what to
do, and if we didn't have it, then the teams may have moved. I
don't know, but I think it is worthy, and going back to the
earlier discussion on cable rates, at least that there is an
understanding that this is a complicated, multi-layered
problem, not just somebody desiring to raise rates 5 percent
and, gee, that is great. In fact, the cost of sports is going
up way greater than that amount of money, as you know.
Senator Specter. Mr. Armstrong, I am advised that you are
to be the chairman of the board of AT&T-Comcast. There is a
provision that the chairman cannot be removed without the
approval of 75 percent of the board before the year 2010 that
is more job security than Senator DeWine and I have. We have to
run and can be defeated more often at a lower figure.
Is it true that you will be the chairman of the board, or
that is the plan, and can't be retired without a vote of 75
percent of the board?
Mr. Armstrong. That provision is currently in there,
Senator. It does not apply to me, however, until 2010. It
applies to me until the spring of 2005, and it applies so that
I will be able to help with this transition to assure the
success of this company in coming together deliver on the
synergies that we promised the shareholders. So for me, it is a
transitional vehicle.
Senator DeWine. Just until 2005?
Mr. Armstrong. Yes.
Senator Specter. Well, why is the provision in there, then?
Is it only applicable to whoever takes over after you, until
the year 2010?
Mr. Roberts. I think it applies to, in all probability,
myself. As you may know, the Roberts family has 88 percent,
approximately, of the votes in Comcast. In the merger
discussions between ourselves and AT&T, it was negotiated that
we would reduce that voting percentage from hard control, if
you will, north of 51, to 33\1/3\. So it was a balanced package
of governance to say, since we are now below, it would require
three-fourths of the board so that there would be stability
that the vision that we painted out, which is going to take
many years to fulfill, could happen; that our investment had
been with a number of years since we went public for 29 years.
My father has had hard control of the company, and in
giving that up, which was a huge line to cross, but in order to
help create this company this was a negotiated balance and will
be put before all the AT&T shareholders to see whether they
like this deal or whether they don't, and we will live with
that outcome.
Senator Specter. Are you saying, in effect, because you
have so many obligations under this arrangement, you want to be
sure that you are in a position to operate the company to make
sure that the company and you can fulfill your commitments?
Mr. Roberts. That was the basis of us wanting to go forward
with making this large investment in this new company for our
family's investment.
Senator Specter. Thank you very much. My time has expired
long since, actually.
There is a letter which has been written by the AFL-CIO to
the Securities and Exchange Commission raising quite a number
of issues, and you have probably already responded to it. I
would like to have this made a part of the record, Mr.
Chairman.
Senator DeWine. Without objection, it will be made part of
the record.
Senator Specter. And also to have your responses to the
issues which were raised here. To repeat, I believe you have
already responded to them, but I think that our record here
ought to have those responses as well.
Senator DeWine. I would advise all the members of the panel
that members of the subcommittee have the opportunity to submit
written questions and those can be submitted.
Senator Specter, anything else?
Senator Specter. That concludes my questioning.
Senator DeWine. I am going to jump around a little bit with
a few additional questions. I want to get back to the issue
about exclusive contracts in regard to programming and maybe
get some comments about that.
The ability of any program distributor to get access to
programming is obviously a key element of being a valid
competitor in this business. Let me ask you what you believe
would be appropriate concerning the program access rules in
regard to the exclusive deals for programming. A good example,
of course, would be DirecTV's deal with the NFL, the Sunday
package, the NFL Sunday Ticket, where if you want to watch any
football game in the country, about the only way you can really
do that is to buy that package. You can't buy it from cable,
you can't buy it from anybody else but DirecTV.
Mr. Armstrong, you are smiling. Let's get your comment.
Mr. Armstrong. I am smiling, Senator, because when I was at
DirecTV we negotiated the arrangement with the NFL.
Senator DeWine. So you are responsible for that?
Mr. Armstrong. I used the word ``we.'' They own it now. The
company at the time paid quite a premium to put that package
together and at the time we were betting a lot on would we have
the kind of package that would differentiate us in the
marketplace.
The NFL felt they were clearly within the rules of the road
in program access to cut such a deal with a satellite carrier.
On the same token, after coming to AT&T and getting in the
broadband cable business, I realized how outrageous this was.
Senator DeWine. You saw it from a little different
perspective?
Mr. Armstrong. Absolutely, and so I can only say that I
think the program access rules, as interpreted by the FCC, have
held up that transaction. I think now Chairman Powell and the
Commission are taking that under review and we have yet to
learn their direction.
Senator DeWine. Although that has been in effect, though,
since when?
Mr. Roberts. 1992.
Senator DeWine. What year?
Mr. Roberts. 1992, so basically it has been in effect for
10 years and it said that the FCC at the end of that period
would review it and that is the process we are in.
Senator DeWine. That is where we are now.
Mr. Roberts. And I think that that is an appropriate point,
because it doesn't apply to the satellite industry and it does
apply to cable and it has, I think, worked in today having 16
million customers who now have satellite dishes. The question
is is it still appropriate or does it need to be modified, and
that process is ongoing.
Senator DeWine. Staying with you, Mr. Roberts, the D.C.
Circuit Court recently ruled that the 30-percent cable
ownership cap was not valid and needs to be revisited by the
FCC. What do you think about that? Do you think a cable
ownership cap is important, and what would be the level?
Mr. Roberts. Well, I don't know that I have an answer as a
number. I would defer to what is going on in other industries.
Senator DeWine. You all would not be violating that, right?
Mr. Roberts. Well, that was what I was going to say.
Senator DeWine. You are close.
Mr. Roberts. Well, we would be right at about 30 percent if
you assume that we are able successfully, and we plan to--and I
want to confirm what Mike had said earlier about the Time
Warner interest that we are going to dispose of that
partnership. The remaining company, based on the old rules,
would be right around 30 percent, I think slightly under. That
has, as you said, been remanded.
I think one of the reasons that I think this transaction
hopefully doesn't present difficulties--somebody mentioned
earlier, well, what about broadcast stations, what about
newspapers? Today, in Comcast-AT&T, none of that is there, and
I think you have to do all these rules in their totality.
What is the number of TV stations that can be owned? What
is the number of networks? So I think you have to look in the
totality, and the same in the phone industry. But I don't think
this transaction, even if the old rules were in place, would be
violative. So we are hopeful to participate in that process
with the FCC to help them set kind of a set of rules that both
the courts uphold and apply uniformly.
Diversity of voices which somebody mentioned earlier--I
think that is a critical thing to safeguard. I would submit
that cable television has added more to the diversity of news
and information over the last 25 years in this country than
almost any single industry contribution.
Senator DeWine. So the summary of your answer is what?
Mr. Roberts. The summary of the answer is I think something
higher than 30.
Senator DeWine. I guess so.
Mr. Roberts. At least 30.
Senator DeWine. At least 30, OK. Forty?
Mr. Roberts. I really don't know, honestly.
Senator DeWine. Mr. Armstrong, a comment at all?
Mr. Armstrong. I think it ought to have a minimum of 4 in
front of it. I wouldn't even think that 3 was appropriate. No.
2, I hope they do away with the attribution rules which lend to
the counting of subs when they set this thing. That would be a
good step forward.
Senator DeWine. Mr. Haverkate.
Mr. Haverkate. While size isn't a factor for the broadband
services providers, generally speaking, either one of these
companies in their current size are already large enough to
take actions to trample our business. So we are concerned more
about the rules of the game and the actions and behaviors that
are permitted than we are about the size of the company.
Senator DeWine. Senator Specter, anything else?
Senator Specter. No, thank you.
Senator DeWine. Well, I have got a couple more here.
Both AT&T and Comcast own programming, not as much as some
other cable systems, but nonetheless this merger will increase
vertical integration. There are a number of concerns associated
with this type of consolidation.
For example--and I mentioned this in my opening statement--
independent programmers may find it more difficult to gain
access to cable systems as cable companies own more
programming. In addition, competitors may have difficulty
gaining access to programming owned by the incumbent cable
system.
Concerned with issues such as these, the Department of
Justice imposed conditions on the Liberty-TCI transaction,
requiring that the company not discriminate against independent
programmers or competing program distributors.
Let me ask the panel, would similar non-discrimination
provisions relating to programming be appropriate in this
merger?
Mr. Haverkate.
Mr. Haverkate. Well, I would certainly think that would be
a good idea. But in addition to that, if you were an
independent programmer and you were trying to get access on the
AT&T-Comcast network and they said to you one of the terms and
conditions of you getting on our system is that you are an
exclusive on our system and you are not allowed to sign an
agreement for carriage on our competitor, believe me, that is
what they will do because getting on that large of a network is
key to their business. Getting on our network is not key to
their business.
So this issue of kind of collecting these programming
assets and holding them in tight control is a key issue on
whether this competition is going to last in the marketplace or
not. Especially going back to Senator Specter's point where a
company actually owns the sports teams in the same market where
they can say we are going to carry these only on our network
and we are not going to sell them to our competition in the
network, that basically locks out all competitors in that
market.
Mr. Betty. Senator DeWine, I think similarly, when you look
at the opportunity to provide customer choice of ISPs, having
non-discriminatory access to things like video streaming or
restrictions on provisioning that content over the pipe coming
into the home also will be important in order to maintain
competition in an open-access environment.
Senator DeWine. Mr. Roberts.
Mr. Roberts. Thank you. Between the two companies, I think
we have about 6 percent or less of the cable networks. As you
mentioned, it is not very many. I think we pride ourselves on
the good relationships we have with both large content
companies, but also small and medium-size companies. We have a
relationship with News Channel 8 right here in the District,
with the Weather Channel, Word Network, with, as I mentioned
earlier, Outdoor Life Channel, and many others.
I really think if you are on a pro-competitive path, any
regulatory restrictions have consequences, and I think today
there are safeguards in place and we are in a competitive
business. We have very few exclusive agreements with
independent programmers such as you are referring to, and
virtually none that I can think of against WideOpenWest. So I
do think the marketplace is working.
Senator DeWine. Mr. Armstrong and Mr. Roberts, last year it
was reported that at least one cable company attempted to
require a popular programmer to agree not to permit its
programming to be delivered over the Internet. As high-speed
Internet access becomes available to more consumers either
through cable companies, phone companies or other providers,
many people believe that video streaming over the Internet
could bring competition into the multi-channel video market in
coming years. Yet, established distributors of video
programming such as cable companies may have an incentive to
prevent this emerging competition.
Let me ask you, will a merger such as the one that you
propose that increases the market power of individual cable
firms enable the ability to block or delay video distribution
from these emerging competitors? Do either of your companies
have agreements in place today that prevent or limit
distribution of content over the Internet, and will you commit
not to enter into such agreements?
Mr. Armstrong. Senator, let me try that. The answer is yes,
video streaming indeed will be enabled by Web sites. There are
a couple of billion Web sites out there, everything from maybe
you and I doing some video streaming with full motion pictures
of family, to people who have servers that, in fact, charge,
pay-per-view kinds of services that come from video streaming.
It is very difficult to monitor those bit streams as they
come through in terms of the content that they are carrying. On
the other hand, we can now monitor with our networks how much
consumption people are using. You might be interested to know
that in the Excite@Home days when we did an analysis with over
3 million subscribers to a broadband service Excite@Home
offered, 5,700 consumed 30 percent of the network. We tended to
call them the Net Hogs, and they are obviously using a lot of
capacity that we are spending a lot of capital on.
So what the industry is going to have to migrate to, and
the technology is there to do it, is to understand what the
consumption is that is causing us to spend so much capital to
keep the performance levels up, the reliability there, and the
service levels appropriate, and charge for it.
I look at it as a business opportunity. If Web sites want
to video-stream, if ISPs want to video-stream, if portals want
to video-stream, terrific. I would just like to get paid for
that consumption and the capital I have got to put forward to
let that happen.
Mr. Roberts. I totally want to just agree on that point
that as a business model we are trying to take 10 percent of
consumers and give them more than 10 percent, a reason to buy a
cable modem. This hearing, I believe, is being streamed on C-
SPAN III, and that is a practice now that is very common and
that is one of the benefits of cable modems. So we absolutely
want to encourage it. Mike's point about finding a way to
charge for different consumption models is very logical.
I think the second point you raised is sort of akin to a
broadcaster if they were streaming one of the big networks, and
yet the local broadcaster said what about the integrity of what
I have purchased or my business relationship? So I think what
you are referring to is probably if we are being asked to pay
for a channel that is then given for free over the Internet, is
that a good business model?
So we are not ever blocking any Web sites. We have never
done that. Excite@Home never did that, to my knowledge. What I
think you are referring to is just--and there have not been any
contracts where this has been a dispute with our company or
that any programmers ever raised with me. I think we are going
to try to, as this becomes more prevalent, find an acceptable
business model so that they can begin to stream the content, if
that is what the consumer wants, and find a secure way for them
to get paid and to make sure that there is an integrity to the
product.
Senator DeWine. Well, Mr. Roberts, I know that your company
started as a family-owned business and remains a family-owned
business. It was started by your dad and your dad has been
seated very quietly behind you during this whole hearing. I
just, before we close, want to see if he might have any brief
comment before we close this down.
Mr. Roberts. It is my honor to turn it over to the elder
statesman.
Senator DeWine. Mr. Roberts.
Mr. Ralph Roberts. Thank you very much, and I am slightly
prepared. I want to thank you for giving me this chance to say
a few words. Pardon my throat.
Senator DeWine. Well, my throat, as you can tell, Mr.
Roberts, has been bad throughout the hearing. So you are doing
very well, sir.
Mr. Ralph Roberts. Thank you. I have had a lot of
experiences in my life, but this is the first time I have had
an opportunity to talk to a congressional committee.
Senator DeWine. They are to be avoided, Mr. Roberts.
[Laughter.]
Mr. Ralph Roberts. I learned how to avoid them for 60
years.
I am really quite thrilled to be here today, and I know you
have heard from Brian and Mike what an incredible vision we
really have for what Comcast and AT&T Broadband can become.
What is especially wonderful for me personally is that I have
had the opportunity to work side by side with my son, Brian,
and seeing him sort of taking a family business that I founded
over 30 years ago and seeing it grow into a leader in the cable
and broadcast community industry--a long distance from Tupelo,
Mississippi, where we started.
Brian and I think of ourselves as entrepreneurs. We think
that that is the spirit that makes American business the best
in the world. Being an entrepreneur means understanding your
customer, being willing to take risks, but to do it
intelligently so that you can build and grow something that
customers really want. We will keep that spirit in this new
company and we will deliver the quality and the value that
Comcast customers have come to expect. We will continue to
create the kind of competition that you in Congress want to
see.
I was very interested in the many questions you asked and I
hope you received clear answers. I also hope that you share our
belief that this merger is really a good thing for America's
consumers.
Thanks again for giving me this few moments.
Senator Specter. Mr. Chairman, if I may comment, I am glad
I stayed until the very end.
You should have been the lead witness.
[Laughter.]
Senator Specter. This would have been a much shorter
hearing had you said that at the outset. I complimented you at
the start, Mr. Roberts, and I would compliment you at the
conclusion for what you have done and your comments on
entrepreneurship. You are certainly Exhibit A, and Brian is
Exhibit A-plus.
Mr. Ralph Roberts. Well, thank you very much.
Senator Specter. You have done a great job on your own and
a great job in producing your successor.
Mr. Ralph Roberts. Thank you.
Senator Specter. Thank you. Thank you, Mr. Chairman.
Senator DeWine. Mr. Roberts, thank you very much. Senator
Specter, thank you. Let me thank all of our witnesses for their
testimony today.
There are clearly some points of disagreement about
specific issues related to this merger. The Department of
Justice and the FCC must look closely at program access issues
and consumer choice regarding ISPs. They should do what is
necessary to protect consumer choice.
I encourage the agencies to look closely at media
consolidation, in general, and put in place rules to protect
the marketplace of ideas that is so vitally important to this
democracy of ours. Should this merger be approved, we expect
AT&T-Comcast to live up to the promises that they have made
today in terms of new services and faster deployment.
I again thank the members of the panel, I thank our
audience, and the hearing is adjourned.
[Whereupon, at 4:49 p.m., the subcommittee was adjourned.]
[Submissions for the record follow.]
[Additional material is being retained in the Committee
files.]
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