[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



     DIRECT BROADCAST SATELLITE SERVICE IN THE MULTICHANNEL VIDEO 
                          DISTRIBUTION MARKET

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

                                HEARING

                               BEFORE THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 8, 2003

                               __________

                             Serial No. 22

                               __________

         Printed for the use of the Committee on the Judiciary


    Available via the World Wide Web: http://www.house.gov/judiciary


                                 ______

86-953              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
CHRIS CANNON, Utah                   SHEILA JACKSON LEE, Texas
SPENCER BACHUS, Alabama              MAXINE WATERS, California
JOHN N. HOSTETTLER, Indiana          MARTIN T. MEEHAN, Massachusetts
MARK GREEN, Wisconsin                WILLIAM D. DELAHUNT, Massachusetts
RIC KELLER, Florida                  ROBERT WEXLER, Florida
MELISSA A. HART, Pennsylvania        TAMMY BALDWIN, Wisconsin
JEFF FLAKE, Arizona                  ANTHONY D. WEINER, New York
MIKE PENCE, Indiana                  ADAM B. SCHIFF, California
J. RANDY FORBES, Virginia            LINDA T. SANCHEZ, California
STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel


                            C O N T E N T S

                              ----------                              

                              MAY 8, 2003

                           OPENING STATEMENT

                                                                   Page
The Honorable F. James Sensenbrenner, Jr., a Representative in 
  Congress From the State of Wisconsin, and Chairman, Committee 
  on the Judiciary...............................................     1
The Honorable John Conyers, Jr., a Representative in Congress 
  From the State of Michigan, and Ranking Member, Committee on 
  the Judiciary..................................................     2

                               WITNESSES

Mr. Rupert Murdoch, Chairman and CEO, The News Corporation, Ltd.
  Oral Testimony.................................................     7
  Prepared Statement.............................................     8
Mr. Kevin J. Arquit, Partner, Simpson Thacher & Bartlett
  Oral Testimony.................................................    19
  Prepared Statement.............................................    20
Mr. Neal Schnog, President, Uvision, LLC, and Vice Chairman, 
  American Cable Association
  Oral Testimony.................................................    26
  Prepared Statement.............................................    27
Mr. Gene Kimmelman, Senior Director for Advocacy and Public 
  Policy, Consumers Union
  Oral Testimony.................................................    41
  Prepared Statement.............................................    42

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable Bob Goodlatte, a 
  Representative in Congress From the State of Virginia..........     3
Prepared Statement of the Honorable William L. Jenkins, a 
  Representative in Congress From the State of Tennessee.........     4
Prepared Statement of the Honorable Tom Feeney, a Representative 
  in Congress From the State of Florida..........................     4
Prepared Statement of the Honorable Jeff Flake, a Representative 
  in Congress From the State of Arizona..........................     5
Prepared Statement of the Honorable Chris Cannon, a 
  Representative in Congress From the State of Utah..............     5
The Honorable Howard Coble, a Representative in Congress From the 
  State of North Carolina........................................     6
Financial Times article submitted by Representative Chris Cannon.    62

                                APPENDIX
               Material Submitted for the Hearing Record

Letter from Mr. Rupert Murdoch dated June 3, 2003................    79
Mr. Rupert Murdoch's response to Representative Rick Boucher's 
  question for the record........................................    80
Mr. Rupert Murdoch's response to Representative Robert C. Scott's 
  question for the record........................................    80
Letter from William M. Wiltshire to Marlene H. Dortch of the FCC 
  dated May 30, 2003.............................................    81

 
     DIRECT BROADCAST SATELLITE SERVICE IN THE MULTICHANNEL VIDEO 
                          DISTRIBUTION MARKET

                              ----------                              


                         THURSDAY, MAY 8, 2003

                  House of Representatives,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10 a.m., in Room 
2141, Rayburn House Office Building, Hon. F. James 
Sensenbrenner, Jr. (Chairman of the Committee), presiding.
    Chairman Sensenbrenner. The Committee will be in order.
    The Committee on the Judiciary has exclusive congressional 
jurisdiction over laws pertaining to antitrust and effective 
competition in the national marketplace. As Chairman of this 
Committee, I have made it a priority to rigorously examine 
business practices and structural barriers that unfairly 
restrain competition in our Nation's free market economy. Over 
90 million Americans receive multichannel video services. The 
multichannel video industry, which comprises both cable and 
satellite video service distributors has expanded entertainment 
options for millions of Americans and provided access to timely 
and important news information. Last year cable and satellite 
revenues were well over $50 billion.
    The last several years have seen rapid growth in the direct 
broadcast satellite video distribution market. DBS technology 
provides Americans with expanded viewing options by 
transmitting satellite signals directly to their homes. Since 
1994 the number of DBS subscribers has skyrocketed from zero to 
nearly 20 million. Satellite service has provided millions of 
Americans with access to multichannel video programs once 
reserved to cable subscribers in urban areas. In my State of 
Wisconsin, for example, 30 percent of the homes have no access 
to cable, including mine.
    My Committee colleagues on both sides of this dais have 
heard complaints from constituents concerning poor cable 
service and cable bills that continue to increase well above 
the rate of inflation. DBS serves as an important competitive 
counterweight to cable's traditional dominance of the 
multichannel video TV programming distribution market. Two 
fierce competitors, DirecTV and EchoStar, control over 90 
percent of the U.S. DBS market, but only around 20 percent of 
the broader, multichannel video distribution market. DBS offers 
the potential to provide rural communities with broadband 
Internet service, a central feature of the 21st century 
infrastructure. But far more remains to be accomplished in this 
field.
    In 2001 the Hughes Corporation announced plans to sell 
DirecTV to EchoStar Communications. That combined company would 
have created a horizontally-integrated U.S. DBS monopoly. In 
December of 2001 this Committee conducted an oversight hearing 
on competition in the multichannel video distribution market at 
which competitive aspects of this proposal were discussed. 
After a protracted period of review, the Department of Justice, 
and a unanimous FCC, rejected that merger because of its 
serious anticompetitive potential.
    Last month News Corp. announced that it had acquired a 
controlling interest in Hughes Corporation's DirecTV. While 
reaction to this announcement has not been universally 
enthusiastic, there is virtually unanimous agreement that the 
competitive implications of this merger are fundamentally 
different from those presented by the failed EchoStar-DirecTV 
merger. Because News Corp. does not own U.S. based satellite 
distribution assets, its acquisition of DirecTV does not raise 
horizontal antitrust concerns. At the same time, News Corp. has 
significant programming assets, including 20th Century Fox, the 
Fox Network, National Geographic Network and the Fox News 
Channel. As a result, its acquisition of DirecTV has led some 
to express concern about the creation of a vertically-oriented 
media conglomerate that could withhold programming from 
distribution competitors. Vertically-oriented media 
organizations are not without parallel in the U.S. media 
market. Larger media companies such as AOL Time Warner control 
both programming and distribution resources. Nonetheless, in 
its recently filed FCC transfer application, News Corp. agreed 
to several binding commitments to address potential program 
access concerns. The Committee looks forward to learning more 
about the nature and scope of these obligations. It should also 
be emphasized that News Corp.'s acquisition of DirecTV does not 
require relaxing media ownership rules presently being examined 
by the FCC.
    Before we begin, I would like to stress that the purpose of 
today's hearing is not to prejudice the outcome of pending 
antitrust review of News Corp.'s proposed acquisition of 
DirecTV. We are legislators, not regulators. However, as 
legislators, particularly on this Committee, we have an 
obligation to continually examine the legal environment to 
ensure our antitrust laws are enforced in a manner that 
provides American consumers the most affordable, highest-
quality products that our free-market economy can produce. 
Today's hearing advances this important commitment. And let me 
state that this hearing is restricted to this particular 
aspect, and the Chair intends to rule out of order questions or 
comments that are outside the scope of this hearing.
    I look forward to hearing from today's distinguished panel, 
and yield to Ranking Member Conyers for his opening remarks.
    Mr. Conyers. Thank you, Mr. Chairman. Good morning, Members 
of the Committee, witnesses. I'm happy to have you all here. I 
want to thank the Chairman to begin with. I think this is very 
important, and Mr. Murdoch is not the most frequent witness 
that we have up on the Hill. We should extend our compliments 
to him for accepting our invitation.
    We're all here to examine a merger that could have a 
greater potential impact on the diversity that we consider is 
so important in the American system. News Corp., 16 billion 
global, to acquire DirecTV, 9 billion, subsidiary of General 
Motors, reaches 11 million viewers. This is the big guys.
    New Corp would be a new entrant into the multichannel video 
market, and so the merger does not present any serious 
horizontal antitrust issues as far as I and my lawyers are 
concerned. So if there are antitrust issues, they're all 
vertical. Well, I don't know how some people count, but when 
you count viewers, News Corp.'s market share is about 19 or 20 
percent. And in specific markets like sports programs, it's 
probably 50 percent or more of a given geographic market, a 
position that could constitute a market power issue under case 
law.
    So what can we do to make sure that this enormous 
aggregation of power is not misused? Well, we get promises. 
News Corp. has promised to make Fox programming available to 
DirecTV's competitors on comparable terms and prices. Now, will 
Fox overcharge both DirecTV and its competitors for a desirable 
program? No. They wouldn't do anything like that. [Laughter.]
    So when you put that possibility together with another 
possibility, that FCC may lift ownership caps entirely, we come 
up with a more critical issue that needs to be examined, and so 
that's why we're here. We want to put all the cards on the 
table. This is a one-time hearing, unless I can restrain the 
Chairman from holding a second hearing on this subject. So 
we've got to figure this stuff out. So I want as many of you 
that can, put aside--we've got your prepared statement, but 
let's talk business here today. What about the consumers? Where 
do they fit into this picture? On the affirmative action side 
we've got a very sorry picture. And so we are here, as the 
Federal Government always says, ``We're here to help you guys. 
We're friends. Let's all work this out together.''
    There are some other issues here, as Chairman Sensenbrenner 
has raised, and he's asked me not to raise them, but I've got 
your addresses anyway, so I'll be seeing you after this hearing 
to go into them as well.
    So I thank you again, Mr. Chairman.
    Chairman Sensenbrenner. Thank you. Without objection, all 
Members opening statements will appear in the record at this 
point.
    [The prepared statement of Mr. Goodlatte follows:]

Prepared Statement of the Honorable Bob Goodlatte, a Representative in 
                  Congress From the State of Virginia

    Thank you, Mr. Chairman, for your aggressive oversight of our 
Nation's antitrust laws. I am pleased to be here today to discuss the 
proposed merger of News Corp. and DirecTV. Direct Broadcast Satellite 
(DBS) technology brings broadcast television to rural areas, such as 
portions of the 6th district of Virginia, that otherwise would be 
difficult, if not impossible to reach by other video delivery 
technologies. Because the signals are sent directly to the homes of the 
consumers, this delivery method is not as limited by mountainous 
terrain as are other technologies. DBS is crucial to rural areas, and I 
have a strong interest in ensuring that competition in the DBS market 
thrives.
    DBS technology provides important competition in the multi-channel 
video distribution market. For years, cable companies dominated this 
market but now DBS technology provides a high quality option for 
consumers. The continued growth of both the cable and DBS distribution 
industries will create a competitive atmosphere in the market and will 
thus ultimately benefit consumers.
    Some argue that this proposed merger would create an anti-
competitive environment. However, the proposed merger of DirecTV and 
News Corp. certainly does not raise horizontal antitrust concerns. 
Although there are some that question whether such a vertically-
oriented business model would create an anti-competitive environment, I 
am pleased that News Corp. has expressed a willingness to adopt certain 
guidelines to specifically address the concerns that it could 
potentially deny access to its programming.
    I am hopeful that these commitments from News Corp. illustrate the 
company's willingness to work to ensure that this proposed merger is 
good for competition and good for consumers. I look forward to hearing 
more details about the proposed merger and the precautions that are 
being taken to ensure that competition in the multi-channel video 
distribution market thrives. Thank you again Mr. Chairman, for holding 
this important hearing.

    [The prepared statement of Mr. Jenkins follows:]

       Prepared Statement of the Honorable William L. Jenkins, a 
         Representative in Congress From the State of Tennessee

    I appreciate Chairman Sensenbrenner holding a hearing today to 
explore the proposed merger between News Corporation and DirectTV. 
Although I was required to miss most of the testimony due to the 
Agriculture Committee's legislative markup, I am familiar with the 
subject.
    The message I receive repeatedly from the constituents of the first 
district of Tennessee is their need to obtain local channels, the 
expansion of local programming into more markets and the advancement of 
new technologies that will bring high-speed internet access to rural 
areas at an affordable price with improved quality.
    The testimony given today suggested this may be achieved by the 
proposed merger. I am hopeful that all of those who review the proposed 
merger between News Corporation and DirectTV will keep the public in 
mind and the need to allow rural areas in the United States to be 
included in the advancements made in the media markets.

    [The prepared statement of Mr. Feeney follows:]

  Prepared Statement of the Honorable Tom Feeney, a Representative in 
                   Congress From the State of Florida

    Mr. Chairman, I want to thank you for holding this hearing today on 
``Direct Broadcast Satellite Service in the Multichannel Video 
Distribution Market.'' I believe that the innovation and competition 
that the satellite industry has brought to the pay television market 
has already had a positive impact on consumers. However, I also believe 
that the satellite industry is only at the early stages of being able 
to truly compete with cable. That is why I strongly support News 
Corporation's purchase of DirecTV. I believe that a combined News 
Corporation--DirecTV will offer the first true competition to cable and 
will make both cable and satellite a better service for consumers.
    News Corporation has a history of bringing competition and 
innovation to old markets. From its introduction of a fourth television 
network, to competing with an entrenched cable news service, to 
starting the first 24-hour Spanish language sports channel, News 
Corporation has always been willing to invest and innovate to shake up 
the status quo. I believe that News Corporation will do the same in the 
pay television market. With the introduction of more vibrant 
competition in the MVPD marketplace, not only will cable rates likely 
stabilize, but consumers will benefit from improved service and 
technological innovation as News Corporation and cable operators try to 
differentiate their products in order to attract and maintain 
customers. While concerns have been raised about vertical integration 
and the anti-competitive threat posed by the combination of programming 
content and distribution outlet, I believe that the parties program 
access commitments will ensure that all competitive MVPD operators will 
have fair and open access to News Corporation programming. I look 
forward to working with the parties and the regulators to ensure that 
this merger is approved quickly and will provide the best competition 
and choice for all consumers.

    [The prepared statement of Mr. Flake follows:]

  Prepared Statement of the Honorable Jeff Flake, a Representative in 
                   Congress From the State of Arizona

    Thank you, Mr. Chairman, for conducting this important hearing on 
the proposed merger between News Corporation and Hughes Electronics.
    As a believer in the free market, Mr. Chairman, when it comes to 
public policy, I always seek to find ways to allow the market to work--
to determine what succeeds and what fails. Governments are not equipped 
to predict the market, nor should they try, and I believe that the 
Federal Government should have a limited role in reviewing mergers 
between private sector companies. Although I will certainly pay 
attention to the proceedings at this hearing and in the future, I do 
not anticipate that this merger will warrant substantial antitrust 
action.
    Thank you again, Mr. Chairman. I am interested to learn what News 
Corporation plans for DirecTV, and I look forward to hearing today's 
testimony.

    [The prepared statement of Mr. Cannon follows:]

 Prepared Statement of the Honorable Chris Cannon, a Representative in 
                    Congress From the State of Utah

    Mr. Chairman, I would like to congratulate you for holding this 
hearing on the merger between News Corporation and Hughes Electronics. 
I have been following the issue of satellite television for some time. 
Last year, my congressional district encompassed a large percentage of 
the land mass of Utah, and for my rural constituents, satellite 
television is the only method of receiving video programming. When the 
proposed merger between EchoStar and DirecTV was considered, I took an 
active role, in large part because of my role with the Western Caucus 
and my concerns about rural constituents.
    The last round of redistricting rendered my district less rural 
than it had been before--and although I still represent some rural 
constituents, I now represent the much more urban areas of Provo and 
Salt Lake County. It bears mentioning that satellite television is also 
a lot less rural than it used to be--DirecTV and DISH Network dishes 
are now often perched on the balconies of high-rise apartment buildings 
as these two companies have taken the competitive fight right into 
cable's backyard. This has been good for DBS service, for cable 
service, and for consumers in general. I believe that having strong, 
competitive and vital DBS companies is in the interest of urban and 
rural consumers alike.
    Last year, I initiated a letter from the House Western Caucus in 
opposition to the proposed merger between Hughes and EchoStar. From the 
standpoint of westerners with no access to cable systems, it was a 
merger between Macy's and Gimbel's in a town with two stores, and 
despite assurances from EchoStar that this would be a benign monopoly, 
I felt that consumers never benefit from the absence of competition.
    The merger before us presents different issues. There is no 
question this is an issue of horizontal concentration. While it will 
certainly involve vertical integration, the two companies have proposed 
considerable measures to ensure that there will be no opportunity for 
them to disadvantage their competitors. I commend News Corporation and 
DirecTV for recognizing the need for merger conditions which will 
assure their competitors that there will be no discrimination in 
programming access.
    In my role as a member of the House Judiciary Committee, it is my 
job to consider any antitrust threats that this merger may pose, and my 
initial impression is that there aren't any. However, in my role as 
Chairman of the Western Caucus, I am interested in the opportunities 
that the merger might provide for the same western and rural consumers 
that were threatened by the previous merger proposal.
    News Corporation has more experience with satellite broadcasting 
than any other company. I am also interested in the questions of rural 
broadband and local-into-local, and how the post-merger DirecTV would 
proceed in these areas. In short, I am interested to hear from Mr. 
Murdoch how he intends to strengthen the company he is acquiring.
    Obviously, the great benefit of DBS is that it is not sensitive to 
population density or to line-of-sight issues. This accounts for its 
popularity in the Intermountain West, and the development of satellite 
technology bears directly on the quality of life in that area. It is my 
hope that this merger will energize DirecTV and speed the deployment of 
the next generation of services.
    News Corp.'s approach is to shake things up, creating out of 
nothing a fourth broadcast network, a second cable news network, and a 
second cable sports package. It is my hope that this company brings the 
same vigor to the DBS industry.

    [The prepared statement of Mr. Coble follows:]

 Prepared Statement of the Honorable Howard Coble, a Representative in 
               Congress From the State of North Carolina

    I appreciate Chairman Sensenbrenner holding a hearing today to 
discuss the merits of the proposed merger between News Corporation and 
DirecTV. I also applaud the contribution of all of the witnesses and 
appreciate their sharing with us their experiences and opinions.
    Currently, as I understand it, there are two major suppliers of 
satellite services in the U.S.--DirecTV and Echostar. In some areas of 
my home state of North Carolina, cable providers may not effectively 
and cost-efficiently reach customers. In those cases, satellite may be 
a viewer's only option.
    That said, I believe public policy should promote competition in 
the satellite industry. We must enable an environment that encourages 
new technologies, innovative business ideas and progressive strategies. 
I believe my constituents deserve choices and should be offered 
reasonable prices for programming no matter what their address--country 
road or city thoroughfare.
    Over the years, I have heard from North Carolinians complaining 
that they cannot access local programming, such as college sports 
events and local news, because cable does not reach their viewing area 
and they cannot get a local signal through their satellite. I believe 
it is important for paying customers to be able to have access to local 
programming. As technology improves, so should service to all 
customers, including those in rural America.
    The benefit of this merger to News Corporation is obvious--if 
approved, News Corporation will gain access to a satellite market in 
which it is not currently involved. The financial benefit for DirecTV 
is also apparent.
    During today's questioning, however, I asked Mr. Murdoch to explain 
what benefits this merger may bring to current satellite customers. I 
was encouraged to learn that he is committed to expanding local-into-
local services into markets which are difficult to reach, hoping to 
reach 85% of all customers by the end of the year. He also suggested 
that if the merger were to be consummated, News Corporation would 
continue towards the goal of expanding local programming into more 
markets that are currently not reached.
    I was also glad that Mr. Murdoch mentioned, as another benefit to 
satellite customers, the advancement of new technologies aimed at 
bringing high-speed Internet access to rural America at a reasonable 
price and with improved quality. If the merger were to be approved, he 
suggested that one priority of News Corporation would be to invest in 
research, equipment and technology to expand broadband capabilities.
    In my opinion, News Corporation is a maverick in an industry once 
dominated by the status quo. Mr. Murdoch's innovative approach to the 
media market has created competition, new program choices for consumers 
and a fresh, and sometimes controversial, debate. I am neither unnerved 
by nor apprehensive about Mr. Murdoch's successes.
    As the debate on this merger moves forward, I hope those reviewing 
the merger application will not be swayed by personal opinions about 
Mr. Murdoch and the size of News Corporation. Instead, I hope the focus 
of this debate will be on implementing public policy that will bolster 
competition and provide more choices at better prices for all 
customers.

    Chairman Sensenbrenner. Our first witness is Rupert 
Murdoch, the Chairman and CEO of News Corp. News Corp. is a 
diverse media organization with film, newspaper, television, 
sports and print publishing assets. Under Mr. Murdoch's 
leadership, News Corp. has grown to represent some of America's 
best known brands, including the Fox Channel, 20th Century Fox, 
Movie Studio and Fox News Channel. News Corp.'s 2002 revenues, 
U.S. media revenues, were the sixth largest after AOL Time 
Warner, Viacom, Comcast, Sony and Disney.
    Kevin Arquit is a partner at Simpson Thacher & Bartlett, 
where he focused on antitrust and competition issues. Before 
entering private practice, Mr. Arquit was General Counsel of 
the FTC and served as Director of the FTC's Bureau of 
Competition.
    Neal Schnog is President of Uvision, an Oregon-based cable 
operator serving over 6,000 customers. He is also Vice Chairman 
of the American Cable Association, an industry group 
representing smaller cable operators. Mr. Schnog has extensive 
experience in the cable industry, having served in a variety of 
positions at more than a dozen cable TV systems ranging in size 
from 100 to over 100,000 customers.
    Our final witness is Gene Kimmelman, Senior Director for 
Advocacy and Public Policy for Consumers Union. Mr. Kimmelman 
is a frequent witness before congressional Committees on 
telecommunications and antitrust issues. Mr. Kimmelman 
testified during the Committee's 2001 hearing on the state of 
competition and the multichannel video distribution market. 
Prior to joining the Consumers Union, Mr. Kimmelman was a staff 
member on the Senate Judiciary Committee, for which we forgive 
him, and served as Legislative Director for the Consumer 
Federation of America, and was a consumer advocate for Public 
Citizen.
    Would each of you please stand, raise your right hand, take 
the oath?
    [Witnesses sworn.]
    Chairman Sensenbrenner. Let the record say that each of the 
witnesses answered in the affirmative. Without objection, each 
witness's printed statement will appear in the record. The 
Chair will ask each witness to confine their remarks to 5 
minutes, and then we will proceed with questioning by Members 
of the Committee under the 5-minute rule.
    Mr. Murdoch, you are first.

        TESTIMONY OF RUPERT MURDOCH, CHAIRMAN AND CEO, 
                   THE NEWS CORPORATION, LTD.

    Mr. Murdoch. Good morning, Chairman Sensenbrenner, Ranking 
Member Conyers and Members of the Committee. Thank you for the 
invitation to testify this morning on News Corporation's 
proposed acquisition of a 34 percent interest in Hughes.
    This transaction will infuse DirecTV with the strategic 
vision, expertise and resources necessary to bring increased 
innovation and robust competition----
    Chairman Sensenbrenner. Mr. Murdoch, can you pull the 
microphone a little bit closer to you? Thank you.
    Mr. Murdoch. I'm sorry, sir. The resulting public interest 
benefits are manyfold and substantial. Today I would like to 
tell you specifically why this deal will be good for consumers 
and good for competition. By combining the expertise and 
technologies of our two companies, consumers will benefit from 
better programming, more advanced technologies and services and 
greater diversity.
    One of the first enhancements DirecTV subscribers will 
enjoy is more local television stations. News was the first 
proponent of local-into-local service as part of our ASkyB 
satellite venture 6 years ago, and it remains one of our top 
priorities. News is committed to dramatically increasing 
DirecTV's present local-into-local commitment of 100 DMAs by 
providing local-into-local service in as many of the 210 DMAs 
as possible, and to do so as soon as economically and 
technologically feasible.
    In addition, News is exploring new technologies to expand 
high definition television content and aggressively build 
broadband services.
    News will also bring a wealth of new services to DirecTV 
subscribers from BSkyB in Britain, including interactive news 
and sports, and access to online shopping, banking, games, e-
mail and information services. And we will infuse Hughes with 
our deep and proven commitment to equal opportunity and 
diversity, including more diverse programming and a variety of 
mentoring, executive development and internship programs.
    You can count on these enhancements because innovation and 
consumer focus is part of our company's DNA. We have a long and 
successful history of defying conventional wisdom and 
challenging market leaders, whether they be the ``Big 3'' 
broadcast networks, the previously dominant cable news channel, 
or the entrenched sports establishment.
    We started as a small newspaper company and grew by 
providing competition and innovation in stale, near 
monopolistic markets. It is our firm intention to continue that 
tradition with DirecTV.
    With these consumer benefits, DirecTV will become a more 
formidable competitor to cable and thus enhance the competitive 
landscape of the entire multichannel industry. To that end, I 
should note that there are no horizontal or vertical concerns 
arising from this transaction. The transaction does result in a 
vertical integration of assets because of the association of 
DirecTV's distribution platforms and News's programming 
interests.
    But this is not anticompetitive for two reasons. First, 
neither company has sufficient power in its relevant market to 
be able to act in an anticompetitive manner. Second, neither 
News nor DirecTV has any incentive to engage in anticompetitive 
behavior. As a programmer, News's business model is predicated 
on achieving the widest possible distribution to maximize 
advertising revenue and subscriber fees. Similarly, DirecTV has 
every incentive to draw from the widest spectrum of attractive 
programming regardless of its source.
    Nevertheless, we've agreed to a series of program access 
undertakings to eliminate any concerns over the competitive 
effects of this transaction, and we've asked the FCC to adopt 
these program access commitments as a condition of the approval 
of our application. Viewed from another perspective, neither 
News nor Hughes is among the top five media companies in the 
United States. News is sixth with 2.8 percent of total industry 
expenditures, and Hughes is eighth. Even combined, the 
companies would rank no higher than fifth, half the size of the 
market leader.
    In closing, I believe this transaction represents an 
exciting association between two companies with the assets, 
experience and history of innovation to ensure DirecTV can 
provide better service to consumers and become an even more 
effective competitor.
    Thank you for you attention. I look forward to your 
questions.
    [The prepared statement of Mr. Murdoch follows:]

                  Prepared Statement of Rupert Murdoch

    Good Morning, Chairman Sensenbrenner, Ranking Member Conyers, and 
Members of the Committee. Thank you for the invitation to testify today 
regarding News Corporation's proposed acquisition of a 34% interest in 
Hughes Electronics Corporation.
    Let me say at the outset that we believe that this acquisition has 
the potential to profoundly change the multichannel video marketplace 
in the United States to the ultimate benefit of all pay-TV customers, 
whether they are direct-to-home satellite or cable subscribers. It is 
my hope, and my goal, that as a result of this acquisition, Hughes' 
DIRECTV operation will be infused with the strategic vision, expertise, 
and resources necessary for it to bring innovation and competition to 
the multichannel marketplace and, of course, to the televisions of tens 
of millions of American viewers.
    The public interest benefits of this transaction are manifold, but 
I would like to briefly touch on three key areas today:
    First, News Corporation's outstanding track record of providing 
innovative new products and services to consumers, a track record that 
it is determined to replicate at Hughes and DIRECTV;
    Second, the specific consumer benefits that will be realized from 
this transaction, including improvements in local-into-local service, 
new and improved interactive services, and the many new diversity 
programs News Corporation will bring to Hughes; and
    Third, the absence of any horizontal or vertical merger concerns 
about this transaction. This transaction will only increase the 
already-intense competition in the programming and distribution 
markets, and market realities will compel our companies to continue the 
open and non-discriminatory practices each company has lived by. 
Nonetheless, to eliminate any possible concerns over the competitive 
effects of vertical integration, the parties have agreed as a matter of 
contract to significant program access commitments, and have asked the 
FCC to make those commitments an enforceable condition of the transfer 
of Hughes' DBS license.
    News Corporation's track record of innovation as a content provider 
and as a satellite broadcaster is without parallel. Our company has a 
history of challenging the established--and often stagnant--media with 
new products and services for television viewers around the world. 
Perhaps our first and best-known effort to offer new choices to 
consumers in the broadcasting arena came with the establishment of the 
FOX network in 1986. FOX brought much-needed competition to the ``Big 
3'' broadcast networks at a time when conventional wisdom said it 
couldn't be done. Seventeen years later, we have proved unambiguously 
that it could be done, with FOX reigning as the number one network so 
far this calendar year in the highly valued ``adults 18-49'' 
demographic. Along the way, we redefined the TV genre with shows like 
The Simpsons, In Living Color, The X-Files, and America's Most Wanted, 
and more recently 24, Boston Public, Malcolm in the Middle, The Bernie 
Mac Show, and the biggest hit on American TV, American Idol.
    The FOX network was launched on the back of the Fox Television 
Stations group, an innovator in local news and informational 
programming since it was first formed. Today, Fox-owned stations air 
more than 800 hours of regularly scheduled local news each week--an 
average of 23 hours per station. We have increased the amount of news 
on these stations by 57 percent, on average, compared to the previous 
owners. Viewers demand more local news, and we provide it. Fox-owned 
stations were often the first--and in many markets are still the only--
stations to offer multiple hours of local news and informational 
programming each weekday morning. This commitment to local news extends 
well beyond the stations we own. Since 1994, Fox has assisted more than 
100 affiliates in launching local newscasts.
    In addition to providing greater choice and innovation in network 
entertainment and local news, we have also redefined the way Americans 
watch sports. With viewer-friendly innovations such as the ``FOX Box'' 
and the first ``Surround Sound'' stereo in NFL broadcasts, the catcher 
cam in baseball, the glowing puck in hockey, and the car-tracking 
graphic in NASCAR, FOX has made sports more accessible and exciting for 
the average fan. FOX Sports Net, launched in 1996, has provided the 
first and only competitive challenge to the incumbent sports channel, 
ESPN. Fox Sports Nets' 19 regional sports channels, reaching 79 million 
homes, regularly beat ESPN in several key head-to-head battles. In 
2002, Major League Baseball on ESPN averaged a 1.1 rating. On Fox 
Sports Net, baseball scored an average 3.5 rating in the markets it 
covers. The NBA on ESPN has averaged a 1.2 rating during the current 
season. In Fox Sports Net's markets, it has rated a 2.2. The key to Fox 
Sports Net's success is its delivery of what sports fans want most 
passionately: live, local games, whether at the professional, 
collegiate, or high school level, coupled with outstanding national 
sports events and programming.
    Perhaps News Corp.'s most stunning success against conventional 
wisdom--and our most innovative disruption of the status quo--is the 
Fox News Channel, launched in 1996. A chorus of doubters said CNN owned 
the cable news space and no one could possibly compete. A scant five 
years later, Fox News Channel overtook CNN, and since early 2002 has 
consistently finished first among the cable news channels in total day 
ratings. Growing from 17 million subscribers at launch to almost 82 
million subscribers this month, Fox News Channel boasts some of the 
most popular shows on cable and satellite. I think it is fair to say 
Fox transformed the cable news business, introducing innovative 
technology and programming, and bringing a fresh choice and perspective 
to American news viewers.
    Across the dial on American television are examples of where our 
challenges to the status quo have made a difference for viewers and 
proven we could be competitive against entrenched competition. We've 
launched and expanded FX, a general entertainment channel; we've 
launched the movie channel FXM; and we've re-launched and expanded the 
Speed Channel, a channel devoted to auto racing enthusiasts. And in 
January 2001, we launched National Geographic Channel with our partner, 
the National Geographic Society, into nine million homes. Today, Nat 
Geo is the fastest-growing cable network in the nation with 43 million 
subscribers and is making steady progress in the ratings against the 
established industry leader, The Discovery Channel.
    News Corp.'s track record of innovation is not limited to the 
United States. News Corp. will bring a wealth of innovation to Hughes 
and DIRECTV from its British DTH platform, BSkyB. We launched BSkyB in 
1989 with only four channels of programming. In 1998, frustrated by the 
limitations of analog technology and determined to give viewers even 
wider choices, BSkyB launched a digital service that boasted 140 
channels. In 1999, in order to speed the conversion to digital and to 
drive penetration, BSkyB offered free set-top boxes and dishes. The 
conversion to digital took three years and cost BSkyB nearly one 
billion dollars, but by 2001, when the transition to digital was 
complete, BSkyB's subscriber base had grown to 5 million homes. Through 
BSkyB's digital offering, BSkyB viewers may choose from 389 channels 
delivering programming 24 hours each day. They also have a vast array 
of new services, including world-first interactive innovations such as 
a TV news service that allows viewers to choose from multiple segments 
being broadcast simultaneously on a news channel, multiple camera 
angles during sporting events, or multiple screens of programming 
within a certain genre. In addition, BSkyB viewers have access to 
online shopping, banking, games, email, travel, tourism and information 
services. With the launch of Europe's first fully integrated digital 
video recorder in 2001, BSkyB customers won access to even more 
interactive capabilities and viewing choices.
    Upon completion of this transaction, News Corp. will bring the same 
spirit of innovation to the DBS business in the U.S, in the process 
redefining the choices Americans have when they watch television. This 
spirit of never-say-die competition and News Corp.'s demonstrated 
determination to provide ever-expanding services to the public have the 
potential to re-energize the entire American multichannel video 
marketplace.
    To my second point about this transaction: its benefits to 
consumers. Apart from a history of bringing new competition and 
innovation to the television industry, News Corp. has been tremendously 
successful in bringing tangible benefits to consumers over nearly two 
decades of operating both here in the United States and abroad. This 
transaction will be no exception, enabling us to share our best 
practices across our platforms and across geographical boundaries to 
the benefit of consumers. These benefits will be very real, and often 
easily quantifiable.
    One of the first enhancements to DIRECTV's service that News 
Corp.'s investment in Hughes will bring will be more local television 
stations for subscribers, offering consumers a more compelling 
alternative to cable. News Corp., as a leading U.S. broadcaster, was 
the first proponent of local-into-local service as part of our American 
Sky Broadcasting (``ASkyB'') satellite DTH venture six years ago. In 
fact, I testified before Congress on this very topic, urging passage of 
copyright legislation to allow the retransmission of local signals by 
DBS. ASkyB conceived and designed a DBS spot beam satellite to 
implement this previously unheard of idea. As a broadcast company, News 
Corp. was convinced then--as it is now--that DBS will be the strongest 
possible competitor to cable only if it can provide consumers with the 
local broadcast channels they have come to rely on for local news, 
weather, traffic and sports.
    With that in mind, News Corp. is committed to dramatically 
increasing DIRECTV's present local-into-local commitment of 100 DMAs by 
providing local-into-local service in as many of the 210 DMAs as 
possible, and to do so as soon as economically and technologically 
feasible. To that end, we are already actively considering a number of 
alternative technologies, including using some of the Ka-band satellite 
capacity on Hughes Network Systems' SPACEWAY system; seamlessly 
incorporating digital signals from local DTV stations into DIRECTV set-
top boxes equipped with DTV tuners; and by exploring and developing 
other emerging technologies that could be used to deliver local 
signals, either alone or in combination with one of the above 
alternatives.
    In addition, News Corp. is exploring new technologies that promise 
to improve spectrum efficiency or otherwise increase available capacity 
so that DIRECTV can expand the amount of HDTV content. Options include 
use of Ka-band capacity, higher order modulation schemes, such as the 
8PSK technology FOX uses for its broadcast distribution to affiliated 
stations, and further improvements in compression technology. News 
Corp. will urge DIRECTV to carry many more than the four HDTV channels 
it currently carries and the five channels that some cable operators 
carry. In this way, we hope to help drive the transition to digital 
television by providing compelling programming in a format that will 
encourage consumers to invest in digital television sets.
    As to broadband, News Corp. will work aggressively to build on the 
services already provided by Hughes to make broadband available 
throughout the U.S., particularly in rural areas. Broadband solutions 
for all Americans could come from partnering with other satellite 
broadband providers, DSL providers, or new potential broadband 
providers using broadband over power line systems, or from other 
emerging technologies. News Corp. believes it is critical that 
consumers have vibrant broadband choices that compete with cable's 
video and broadband services on capability, quality and price.
    The public will also benefit from the efficiencies and economies of 
scope and scale that News Corporation will bring to DIRECTV. We believe 
by sharing ``best practices,'' and by using management and expertise 
from our worldwide satellite operations, we will be able to 
substantially reduce DIRECTV's annual expenses by $65 to $135 million 
annually. Other efficiencies include sharing facilities of the various 
subsidiaries of News Corp. and Hughes in the U.S., and developing and 
efficiently deploying innovations, such as next-generation set-top 
boxes with upgraded interactive television and digital video recorder 
capabilities and state-of-the-art anti-piracy techniques. When Hughes 
becomes part of News Corp.'s global family of DTH affiliates, it will 
benefit from a number of scale economies that will more efficiently 
defray the enormous research and development costs associated with 
bringing new features and services to market. Moreover, common 
technology standards for both hardware and software across the News 
Corp. DTH platforms should help to drive down consumer equipment and 
software costs. Through these various cost savings, DIRECTV will be 
able to finance more innovations in programming and technology to 
ensure that it achieves and maintains the highest level of service for 
its customers at competitive prices.
    News Corp. also plans to bring to DIRECTV the ``best practices'' it 
has developed at its satellite operations in other countries. DIRECTV's 
``churn rate''--that is, the rate at which customers discontinue use of 
the service--is around 18 percent, whereas BSkyB's annual churn rate is 
currently 9.4 percent. By using BSkyB's ``best practices'' and 
accelerating the pace of innovation, we predict that DIRECTV should 
experience a 2 to 3 percent decline in its annual churn rate. We 
calculate that every percentage point reduction in churn will add 
approximately $33 million to Hughes' earnings. With these additional 
financial resources, DIRECTV will be able to finance additional 
initiatives in research, development and marketing.
    Another important element that News Corp. will bring to Hughes and 
DIRECTV is its deep and proven commitment to equal opportunity and 
diversity. Specifically, the diversity initiatives we will implement 
include:

          A commitment to carry more programming on DIRECTV 
        targeted at culturally, ethnically and linguistically diverse 
        audiences;

          An extensive training program for minority 
        entrepreneurs seeking to develop program channels for carriage 
        by multichannel video systems;

          A program for actively hiring and promoting 
        minorities for management positions;

          An extensive internship programming for high school 
        and college students;

          Improved procurement practices that ensure outreach 
        and opportunities for minority vendors; and

          Upgraded internal and external communications, 
        including the Hughes web site, to assist implementation of the 
        above initiatives.

    Finally, to my third point: there are no horizontal or vertical 
merger concerns arising from this transaction. Because this transaction 
involves an investment in DIRECTV, a multichannel video programming 
distributor with no programming interests, by News Corp., a programmer 
with no multichannel distribution interests, no ``horizontal'' 
competition issues arise. There will be no decrease in the number of 
U.S. competitors in either the multichannel video distribution market 
or the programming market. To the contrary, because of News Corp.'s 
plans to bring ``best practices'' and innovations to DIRECTV, 
competition in these markets will intensify and consumers will be 
presented with more and better choices.
    The transaction does result in a ``vertical'' integration of assets 
because of the association of DIRECTV's distribution platform and News 
Corp.'s programming assets. But this ``vertical'' integration is not 
anti-competitive for two reasons. First, neither News Corp. nor DIRECTV 
has sufficient power in its relevant market to be able to act in an 
anti-competitive manner. DIRECTV has a modest 12 percent of the 
national multichannel market, compared to as much as 29 percent of the 
market held by the largest cable operator. News Corp. has a modest 3.9 
percent of the national programming channels, compared to the largest 
cable programmer at 15.2 percent of the channels.
    Second, rational business behavior will prevent News Corp. and 
DIRECTV from engaging in anti-competitive behavior. As a programmer, 
News Corp.'s business model is predicated on achieving the widest 
possible distribution for our programming in order to maximize 
advertising revenue and subscriber fees. Any diminution in distribution 
reduces our ability to maximize profit from that programming. Even if 
we were voluntarily willing to lower our earnings potential by 
withholding our programming from competing distributors, we would be 
precluded from doing so by the FCC's program access rules. Similarly, 
DIRECTV has every economic incentive to draw from the widest spectrum 
of attractive programming, regardless of source, in order to maximize 
subscriber revenue. In short, it makes no business sense for either 
party to do anything to limit our potential customer base or our 
programming possibilities.
    Notwithstanding these strong economic and business incentives, News 
Corp. and Hughes have agreed--as a matter of contract--to a series of 
program access undertakings to eliminate any concerns over the 
competitive effects of the proposed transaction. We have asked the FCC 
to adopt these program access commitments, which are attached to my 
written testimony, as a condition of the approval of our Application 
for Transfer of Control that was filed at the FCC on May 2. These 
program access commitments are largely the same as those required of 
cable operators, but in some respects go further. These commitments 
will:

          Prevent DIRECTV from discriminating against 
        unaffiliated programmers;

          Prevent DIRECTV from entering into an exclusive 
        arrangement with any affiliated programmer, including News 
        Corp.; and

          Prevent News Corp. from offering any national or 
        regional cable programming channels it controls on an exclusive 
        basis to any distributor and from discriminating among 
        distributors in price, terms or conditions.

    These extensive commitments apply for as long as the FCC's program 
access rules remain in effect and News Corp. owns an interest in 
DIRECTV. They make it clear that News Corp. and Hughes are committed to 
fair, open and non-discriminatory program access practices that go well 
beyond what the law requires of DBS operators, cable programmers, and 
even cable operators.
    In any event, neither News Corp. nor Hughes is among the top five 
media companies, by expenditure, in the United States. As you can see 
in the chart attached to my testimony, News Corp. is sixth with 2.8 
percent of total industry expenditures, and Hughes is eighth with 2.2 
percent. Even combining the expenditures of News Corp. and Hughes would 
place the company fifth in expenditures behind AOL Time Warner with 
10.1 percent, Viacom with 6.4 percent, Comcast with 6.3 percent, and 
Sony at 5.3 percent. If the expenditures from Disney's theme parks were 
included in its total, the combination of News Corp. and Hughes would 
rank sixth in total ``entertainment'' revenues.
    In closing, I believe this transaction represents an exciting 
association between two companies with the assets, experience and 
history of innovation that will ensure DIRECTV can become an even more 
effective competitor in the multichannel market. There will be 
significant public interest benefits for consumers as a result of this 
transaction, including bringing more local channels to more markets, 
innovations such as set-top boxes with next generation interactive 
television and digital video recorder capabilities, and a diversity 
program that will set the standard for the rest of the entertainment 
industry.
    Thank you for your attention, and I look forward to your questions.

    
    
    
    
    
    
    
    
    
    
    
    
    Chairman Sensenbrenner. Thank you, Mr. Murdoch.
    Mr. Arquit?

            TESTIMONY OF KEVIN J. ARQUIT, PARTNER, 
                   SIMPSON THACHER & BARTLETT

    Mr. Arquit. Mr. Chairman and Members of the Committee, 
thank you for the opportunity to comment on the role of 
antitrust in the Hughes-News Corp. transaction.
    At the outset, it is important to distinguish between 
horizontal and vertical effects.
    Mr. Nadler. Mr. Chairman, it's hard to hear the witness.
    Chairman Sensenbrenner. Each of the witnesses pull the mic 
right in front of them, and it might work better.
    Mr. Arquit. Okay. Is that better, sir?
    At the outset it is important to distinguish between 
horizontal and vertical effects. By definition, horizontal 
combinations always have some impact on competition. After all, 
competition between the merging parties is eliminated. By 
contrast, vertical integration does not inevitably decrease 
competition, but does generally yield some level of efficiency 
by streamlining the production process. Even so, vertical 
relationships can be problematic, where they allow an entity to 
choke the competition and cut off its air supply.
    This transaction is vertical in nature. To say the least, 
it is the polar opposite of the recent effort to merge EchoStar 
with DirecTV. That latter transaction would have created a 
merger to monopoly in some areas, and obviously cried out for 
Government enforcement, even in an Administration that is not 
commonly associated with over enforcement of the antitrust 
laws.
    By contrast, this transaction eliminates no direct 
horizontal competition. The status quo is maintained. If 
anything, News Corp.'s history of being a maverick, shaking up 
business segments it enters, suggests that competition may be 
increased. Whatever industry participants or others may think 
of such market behavior, or whether it causes political delight 
or dismay, antitrust policy looks favorably on maverick firms 
because they engage in the unexpected. Uncertainty spurs 
competition. This leaves possible negative consequences that 
could result from the vertical affiliation between Fox 
programming and distribution through DirecTV.
    There are really two questions. Will DirecTV favor Fox 
programming? In the alternative, will Fox programming favor 
DirecTV at the expense of other MVPDs? In the circumstances 
here, neither question creates cause for serious concern.
    Taking these questions one at a time, would DirecTV favor 
programming from Fox? If DirecTV favors Fox programming, it 
could act as a bottleneck, hurting the ability of competing 
programmers to get distribution. However, a quick look at 
actual market conditions demolishes the theoretical construct. 
With approximately 12 percent of the market, DirecTV can ill 
afford to cut back in quality. Engaging in such discrimination 
would undermine any chance DirecTV has to compete effectively 
against the dominant cable operators. If DirecTV is so short-
sighted as to ignore servicing its subscribers' demand for 
quality and selection just so it can pursue a News Corp. battle 
against other programming vendors, it will be sacrificing the 
DirecTV franchise to deliver little more than a glancing blow 
to competing programming vendors. Even if DirecTV and News 
Corp. feel compelled to act irrationally, it will be self-
destructive. DirecTV, with only 12 percent of the market, 
certainly cannot dictate terms to programming vendors. They 
would simply bypass DirecTV, knowing they have close to 90 
percent of MVPD subscribers still available to them. In sum, 
News Corp. would be embarking on a remarkably foolish strategy 
of shooting itself in the head for the privilege of shooting 
someone else in the foot.
    The second theoretical concern is whether to prop up 
DirecTV, News Corp. would deny its Fox programming to competing 
MVPDs? As with the last concern, such a strategy would be 
embarrassingly self-defeating. First, programming competitors 
would seize the opportunity to supply more programming to the 
market. Beyond this, News Corp. has no logical incentive to 
limit distribution of its programming. Viewership is its key 
asset. Viewership determines fees collected and advertising 
revenue. Why would News Corp. take a direct hit in lost 
viewership and revenue in exchange for the hope that some 
subscribers might switch to DirecTV? Take the Fox News Channel. 
News Corp. entered, challenging a dominant incumbent, CNN, and 
against the prediction of many, turned the channel into the 
most watched cable news provider. If News Corp. refuses to 
provide this programming to DirecTV's competitors, it risks 
losing significant share back to CNN. A simple look at the math 
further shows how ill advised a foreclosure strategy would be. 
Any incentive News Corp. may perceive in unfairly promoting 
DirecTV has to account for the fact that News Corp. will own 
only a 34 percent share. Thus, while News Corp. would absorb 
100 percent of the lost programming and advertising revenue, it 
would recoup only about one third of any unlawful rents 
received by DirecTV.
    It appears that News Corp. has also offered protection 
against antitrust concerns by agreeing to be bound by program 
access rules and similar rules to protect competing 
programmers. To the extent those commitments are enshrined in a 
binding consent agreement, it creates added protection, 
although the predominant rationale from my antitrust 
conclusions are based on discipline imposed by market reality.
    In conclusion, a transaction of this size always requires 
an informed inquiry into the antitrust implications. However, 
given the lack of any horizontal overlap and the inability of 
News Corp. or DirecTV to engage in vertical foreclosure, there 
do not appear to exist any substantial antitrust issues with 
this acquisition.
    [The prepared statement of Mr. Arquit follows:]

                Prepared Statement of Kevn J. Arquit \1\
---------------------------------------------------------------------------
    \1\ Mr. Arquit was General Counsel of the Federal Trade Commission 
from 1988-1989, and Director of the FTC's Bureau of Competition from 
1989-1992. He is presently a partner in the law firm of Simpson Thacher 
& Bartlett. This testimony reflects the individual views of Mr. Arquit. 
Neither he nor the law firm represents any party to the transaction, 
and the preparation of this testimony was not financed in whole or in 
part by any client.
---------------------------------------------------------------------------
                            I. INTRODUCTION

    Mr. Chairman, thank you for the invitation to express my views on 
the antitrust issues presented by the proposed acquisition of 34% of 
Hughes Electronics, Corporation (``Hughes'') by News Corporation 
Limited (``News Corp.''). The most specific questions arise from the 
vertical integration of News Corp.'s Fox media group with Hughes' 
DirecTV direct broadcast satellite (``DBS'') service. Although any 
acquisition of this size, and involving a market so vital as the media, 
requires some careful thinking before regulatory approval, this 
particular transaction does not appear to raise any significant 
potential for the lessening of competition, such as to trigger 
antitrust concerns.
    When analyzing the antitrust implications of a transaction, it is 
critical to distinguish between the consequences that flow as a result 
of any horizontal overlap (i.e., direct competition), and the effects 
that may result from a vertical relationship between two companies. In 
the case of horizontal overlap, there is no need to search for 
potential effects on competition; some impact is inevitable and 
immediate. Of course, that does not mean that the transaction is 
unlawful; there may be valid efficiencies created by the combination of 
assets, and in the vast majority of situations there are sufficient 
remaining competitors in the marketplace to overwhelm, and thereby 
neutralize, any attempt to restrict output by the merging entities. The 
point remains, however, that a horizontal transaction, by definition, 
always eliminates at least some competition, and is thus more apt to 
raise antitrust issues.
    By contrast, vertical combinations do not inevitably, or even 
commonly, reduce competition. To the contrary, vertical integration 
generally yields some level of efficiency--i.e., the streamlining and 
rationalizing of processes by which products or services are delivered 
to consumers. I hasten to add that vertical combinations are not always 
good for competition. They can facilitate the ability of the combined 
entity to place a chokehold on competition at multiple levels, by 
creating the wherewithal and incentive to refuse to deal. The result 
can be the cutting off of the competition's air supply. This potential 
exists in any number of industries, involving the combination of 
complementary assets. This is as true in the context of beverages and 
bottlers, and software and hardware providers, as it is for video 
programming and distribution. However, when a transaction is vertical 
in nature, the starting point is that the transaction does not 
necessarily decrease competition and the presumption is that some 
efficiencies result.
    With that introduction, I explain my conclusion that this 
essentially vertical transaction is not likely to foreclose competitors 
of News Corp. or DirecTV, and does not raise significant antitrust 
concerns.\2\ As we all know, this is not the first proposed transaction 
involving the DirecTV assets. Approximately six months ago, the 
Department of Justice (``DOJ'') sought to block the proposed merger of 
EchoStar and DirecTV assets, resulting, ultimately, in the abandonment 
of the acquisition. As I will discuss in a moment, that proposed 
combination stands in stark contrast to this transaction.
---------------------------------------------------------------------------
    \2\ This testimony focuses on the MVPD and programming businesses. 
I have not reviewed other lines of business the parties may have, such 
as the satellite services provided by PanAmSat or the broadband 
services provided by Hughes Network Services.
---------------------------------------------------------------------------
                        II. COMPETITIVE ANALYSIS

    The first step in an analysis of competitive effects, is 
identification of the relevant product and geographic markets. The DOJ 
consistently has analyzed the competition between and among cable 
operators and DBS operators as a market composed of all multichannel 
video programming distribution (``MVPD'') systems.\3\ Although there 
may be some room to argue that the relevant market should not include 
low-capacity cable systems, it is difficult to articulate a conclusive 
economic rationale as to why consumers would not perceive all cable 
operators and DBS operators as reasonable enough substitutes.\4\
---------------------------------------------------------------------------
    \3\ See, e.g., Complaint at  24-29, United States v. EchoStar 
Communications et al, (D.D.C. filed Oct. 31, 2002) (``EchoStar 
Complaint'').
    \4\ See, e.g., EchoStar Communications Corporation, Hughes 
Electronics Corporation, and General Motors Corporation, Hearing 
Designation Order, 17 FCC Red. 20559, 20609 (2002) (``EchoStar/
Hughes'').
---------------------------------------------------------------------------
    In any event, for purposes of this transaction, the distinction is 
insignificant. No matter how narrow or wide the MVPD market is defined, 
there is no direct overlap between the parties.\5\ Therefore, the 
discussion that follows is premised on an ``all MVPD systems'' market. 
Further, consistent with precedents in this area, the relevant 
geographic market is presumed to be the franchise area of a local cable 
operator, since customers within that territory have the choice between 
the incumbent franchised cable company and the two DBS providers. In 
such a market, depending on the geographic location, DirecTV faces 
competition from one (or occasionally more) cable operators, as well as 
EchoStar Communications (owner of the DISH network). In areas where 
cable is unavailable, MVPD competition is largely between EchoStar and 
DirecTV.
---------------------------------------------------------------------------
    \5\ It is my understanding that any MVPD horizontal overlap is 
indirect and certainly de minimis. Liberty Media, which has a passive 
stake in News Corp., also has an ownership in the cable operator 
Cablevision of Puerto Rico. However, according to the parties' FCC 
Application, filed on May 2, 2003, Liberty Media's stake will be no 
more than 19% in News Corp., and less than 1% in Hughes after the 
proposed transaction. Further, the News Corp shares held by Liberty 
have no voting rights except in limited issues. Therefore, Liberty 
Media does not and will not have any decision-making authority in News 
Corp. or Hughes. By the same token, DirecTV has a 5% passive equity 
stake in the Hallmark Channel, which does not create any meaningful 
horizontal overlap in the programming space.
---------------------------------------------------------------------------
A. Horizontal Effects
    The transaction does not eliminate any direct horizontal 
competition between DirecTV and EchoStar or any cable operator. The 
number of competitors in the MVPD market and their relative market 
shares are not altered by the transaction. So an analysis focusing 
solely on horizontal issues would yield the conclusion that the 
transaction does not alter the status quo, let alone the competitive 
landscape.
    If anything, reference to the Government's Horizontal Merger 
Guidelines,\6\ suggests that the transaction likely will increase the 
competitive vigor of DirecTV. It is widely accepted that News Corp. has 
historically been a maverick in the media industry. The company 
regularly has chosen to ``shake up'' the business segments it has 
entered. Whatever industry participants or others may think of such 
market behavior (or whether it causes political delight or dismay) 
antitrust analysis looks favorably towards such maverick firms, and for 
sound policy reasons.\7\
---------------------------------------------------------------------------
    \6\ United States Dept. of Justice and Federal Trade Comm'n. 
Horizontal Merger Guidelines (1992) (``Merger Guidelines'').
    \7\ Merger Guidelines Sec. Sec. 2.12 and 4.
---------------------------------------------------------------------------
    When an industry is characterized by increasing levels of 
concentration, the tendency is for firms to start behaving 
oligopolistically. In other words, the fewer the competitors, the more 
likely each competitor will start making competitive decisions with 
some level of understanding as to how the remaining competitors will 
react. Although there is nothing unlawful, in and of itself, about such 
rational business decision making, it can curtail competitive vigor. 
But when there exists a competitor that does the unexpected, the 
conditions more nearly approximate that of a perfectly competitive 
market, where uncertainty abounds. In short, although the proposed 
transaction does not change the number of competitors in the MVPD 
market, any impact of News Corp. on the business decisions of DirecTV 
may well increase competition at the MVPD level.

            1.  The present transaction does not raise the same 
                    antitrust issues that were present in the abandoned 
                    EchoStar/DirecTV transaction
    In October 2002, the DOJ, joined by 23 states, the District of 
Columbia and the Commonwealth of Puerto Rico, filed a lawsuit to block 
the acquisition of Hughes by EchoStar. In short, this transaction 
proposed the combination of the nation's two largest DBS providers, 
and, in my view created one of the most obvious and compelling cases 
for Government challenge in recent history.
    The DOJ's argument in opposing the transaction was 
straightforward.\8\ The merger would have reduced the number of 
competitive choices available to consumers in the MVPD market from 
three (Hughes' DirecTV, EchoStar's DISH network, and cable) to two 
where cable is available. In non-cable areas, DOJ alleged that the 
proposed transaction was quite simply a merger to monopoly, resulting 
in one company controlling all three full continental U.S. satellite 
positions, and making it virtually the exclusive gatekeeper for 
nationwide direct broadcast satellite services.\9\
---------------------------------------------------------------------------
    \8\ See EchoStar Complaint at  37	59.
    \9\ The merger proponents argued forcefully that the combination of 
the two primary DBS services would in fact spur even more horizontal 
competition vis-`-vis cable, by creating a larger, more robust, DBS, 
and would bring together resources that would foster further 
innovation.
---------------------------------------------------------------------------
    Clearly, the proposed partial acquisition of Hughes by News Corp. 
does not present the same issues. EchoStar/Hughes was a horizontal 
concentration between two competitors in a highly concentrated market. 
By contrast, the News Corp./Hughes transaction is a vertical 
integration of a supplier and a distributor. Thus, while the DOJ 
predicted in EchoStar/Hughes that the beneficial products of the 
intense competition between DirecTV and DISH (for example, reduced 
programming prices, more attractive programming packages, reduced 
equipment costs, and free installation) would be lost post-merger, 
there are no similar concerns here. DirecTV will still compete head-to-
head with DISH and, where available, cable. The market position of 
competitors in the MVPD market will therefore be unaffected by the 
proposed transaction.
B. Vertical Issues
    What remains to be examined is the possible anticompetitive effect 
that could flow from the vertical affiliation between the programming 
business of News Corp. and the distribution business of DirecTV. 
Therefore, the antitrust inquiry needs to focus on any incentive or 
ability that News Corp. or DirecTV will have as a result of a partial 
overlap in ownership between these businesses. Will DirecTV have the 
incentive or the ability to favor programming from News Corp. such that 
News Corp.'s programming competitors will be at a competitive 
disadvantage? In the alternative, will News Corp. have the incentive or 
the ability to favor DirecTV at the expense of other MVPDs such that 
DirecTV will have an anticompetitive advantage?
    Under the facts of this case, neither of these theories appears to 
present a realistic antitrust concern. Given the resulting market 
structure, neither News Corp. nor DirecTV appears to have the incentive 
or the ability meaningfully to discriminate against competitors

            1.  Would DirecTV favor programming from News Corp.?
    I would like to start by outlining a theoretical antitrust concern 
from the vertical affiliation: if DirecTV favors programming from News 
Corp. and either refuses to carry programming from competitors or 
carries competing programs under onerous terms, News Corp.'s 
programming would gain an advantage against such competitors. Whereas 
News Corp.'s programming would be free to contract for access on all 
distribution channels available, its competitors would be denied the 
ability to reach the DirecTV subscribers on competitive terms. 
Therefore, depending on the market strength of DirecTV, News Corp. 
would be able to decrease competition in the market or markets for 
programming.
    This theoretical construct, however, breaks down when one factors 
in present market conditions. By refusing to deal with competing 
programmers on competitive terms, DirecTV takes the risk that consumers 
will find its service less valuable because it does not carry the 
programming sought by consumers. Therefore, for this concern to 
materialize, News Corp. and DirecTV need to be convinced that the 
strategy will result in increased profits for News Corp. and that these 
profits will not be offset by an even larger detrimental effect on 
DirecTV.
    If DirecTV were a monopolist, I would tell you that the inquiry 
would have to dig deeper because under those circumstances, a strategy 
to foreclose News Corp.'s competitors might actually pay off. It might 
turn out that even as a monopolist, DirecTV and News Corp. do not in 
fact have the ability or the incentive to engage in a foreclosure 
strategy, but it certainly is a theoretical and mathematical 
possibility. As a monopolist, DirecTV likely would not lose that many 
subscribers by refusing to carry some programming desired by consumers; 
and News Corp.'s programming would have a significant competitive 
advantage by having unhindered access to the monopolist distributor.
    Of course, the marketplace, as it exists, presents a very different 
picture. The FCC recently concluded in its Annual Report to Congress 
that cable distribution still constitutes over 75% of the MVPD market 
and that ``cable television still is the dominant technology for the 
delivery of video programming to consumers in the MVPD market place.'' 
\10\ With approximately 12% of the MVPD market,\11\ it appears unlikely 
that DirecTV could effect a successful anticompetitive programming 
foreclosure strategy here.
---------------------------------------------------------------------------
    \10\ See Federal Communications Commission, Annual Assessment of 
the Status of Competition in the Market for the Delivery of Video 
Programming, Ninth Annual Report, 17 FCC Rcd. 26901.  4 (2002) 
(``Ninth Cable Competition Report'').
    \11\ Ninth Cable Competition Report,  131.
---------------------------------------------------------------------------
    Indeed, the concern about the strength of cable distribution 
underlies the program access rules \12\ adopted by Congress and the FCC 
to prohibit cable operators from discriminating against non-affiliated 
programmers: as long as cable operators dominate delivery of 
programming, a vertically integrated programmer will have the ability 
to foreclose its programming competitors from the market.\13\
---------------------------------------------------------------------------
    \12\ See, 47 CFR Sec. Sec. 76.1000-1003.
    \13\ See Federal Communication Commission, Implementation of the 
Cable Television Consumer Protection and Competition Act of 1992--
Sunset of Exclusive Contract Prohibition, 17 FCC Rcd. 12124, 12144-45 
(2002).
---------------------------------------------------------------------------
    These FCC findings also support the observation that DirecTV has no 
apparent incentive to discriminate against non-affiliated programming, 
because it would undermine any chance DirecTV has in competing against 
the dominant cable operators. DirecTV is not immune to competition in 
any area of the country, and overall, it controls only 12% of the 
national MVPD market. Even in areas where DirecTV does not face an 
incumbent cable operator, DirecTV faces competition from EchoStar. 
DirecTV needs to provide competitive quality and selection of 
programming to compete successfully against the incumbent cable 
operators and EchoStar. If DirecTV foregoes servicing its subscribers' 
demand for quality and selection in order to pursue a News Corp. battle 
against other programming vendors, it will be sacrificing the DirecTV 
business to deliver little more than a glancing blow to the 
unaffiliated programming vendors. In short, DirecTV and News Corp. do 
not appear to have the incentive to engage in conduct that will be 
detrimental to the non-affiliated programming vendors.
    Even if DirecTV and News Corp. feel compelled to follow what 
appears to be an irrational strategy, DirecTV does not have the ability 
to inflict harm on non-affiliated programming vendors by refusing to 
deal with them. DirecTV alone, with only 12% of the market, certainly 
cannot dictate terms to the programming vendors; the programming 
vendors simply would refuse to accept unreasonable terms because they 
have close to 90% of the cable and DBS subscribers still available to 
them.

            2.  Would News Corp. Favor Distribution Through DirecTV?
    The vertical integration of News Corp. programming with DirecTV 
theoretically could create an incentive for News Corp. to advantage 
DirecTV by denying News Corp. programming to DirecTV competitors at 
competitive terms. However, the ability to engage in such 
anticompetitive behavior is constrained by programming competitors, who 
would likely seize the opportunity to supply more programming to the 
market. MVPD operators choose to carry programming that will facilitate 
their market penetration: it is unclear that Fox has any essential or 
unique programming in that regard. Moreover, News Corp. programming 
does not in aggregate represent a significant percentage of the 
programming market. Indeed, competitors such as AOL Time Warner, 
Viacom, and The Walt Disney Co. each possess a greater share of the 
media programming business. The wide availability of substitute 
programming therefore greatly minimizes the risk of foreclosure in the 
programming market.
    Another flaw with this theoretical concern is the premise that, in 
the U.S. market, News Corp. has an incentive to cease distribution of 
its programming through competing MVPDs. Viewership is the key asset 
for News Corp.; viewership determines not only the fees collected from 
the MVPDs but also the advertising revenue. It is not clear why News 
Corp. would disrupt its current distribution system, significantly risk 
a reduction in viewership and revenue for the distant promise that 
subscribers might switch to DirecTV. In any event, whatever the desire 
of News Corp. to unfairly promote DirecTV may be, it would have to 
factor in that News Corp. will own only 34% of DirecTV. Therefore, 
while News Corp would absorb 100% of the lost programming and 
advertising revenue from denying programming to competing MVPDs, it 
would recoup only about a third of any unlawful rents that result from 
advantaging DirecTV.
    Take the Fox News Channel. News Corp. entered this segment of 
programming challenging a dominant incumbent, i.e. CNN, and, contrary 
to the prediction of many, has turned the channel into the most watched 
cable news provider.\14\ If News Corp. refuses to provide this 
programming to DirecTV's competitors, it risks losing significant share 
back to CNN, without any guarantee that consumers would switch to 
DirecTV simply because they prefer Fox News Channel over CNN. Even with 
respect to regional sports programming, News Corp. appears to have 
strong incentives to continue to distribute through DirecTV 
competitors. In the regional markets where News Corp. has sports 
programming, to the extent DirecTV's market share is roughly the same 
as elsewhere (i.e., 12%), News Corp. would have to risk 88% of the 
market to discriminate against DirecTV's competitors.
---------------------------------------------------------------------------
    \14\ Application of General Motors Corporation, Hughes Electronics, 
and News Corporation Limited, Consolidated Application for Authority to 
Transfer Control at 25, filed May 2, 2003
---------------------------------------------------------------------------
    With a 12% market share, DirecTV does not have--and is not likely 
to gain--sufficient subscribers to enable Fox to sustain its current 
level of license fees, and the related advertising revenue, should the 
distribution of Fox programming be in any way curtailed post-merger.

            3.  Commitment to be Bound by Program Access Rules
    Of course, all of these discussions about the vertical issues may 
prove to be merely academic. I understand that the parties to the 
transaction have expressed their willingness to abide by the program 
access rules of the FCC and incorporate appropriate terms into a 
consent decree with the regulatory agencies.\15\ The program access 
rules are designed to protect non-cable MVPDs like DBS providers, and 
technically apply only to cable operators and to programming vendors 
that are affiliated with cable operators--not DBS operators. (It is my 
understanding, however, that as a result of Liberty Media's minority 
stake in News Corp. and in some cable operators, News Corp.'s 
programming is subject to the program access rules.)
---------------------------------------------------------------------------
    \15\ Id. at Attachment G.
---------------------------------------------------------------------------
    The rules prohibit vertically-integrated programming vendors from 
discriminating in the prices or terms and conditions of sale of 
programming to cable operators and other MVPDs. The rules also prohibit 
any cable operator that has an attributable interest in a programming 
vendor from improperly influencing the decisions of the vendor with 
respect to the sale or delivery, including prices, terms, and 
conditions of sale or delivery of satellite-delivered programming to 
any competing MVPD. Finally, under the rules, cable operators generally 
are prohibited from entering into exclusive distribution arrangements 
with vertically-integrated programming vendors.
    Of course, since the rules apply only to ``cable operators'' and 
their affiliates, these restrictions presumably would not otherwise 
apply to DirecTV, or to News Corp. in the event Liberty Media divests 
its interest in News Corp. or the cable operators. However, according 
to their FCC application, the parties are willing to subject their 
operations to the antitrust safeguards provided by these rules 
irrespective of Liberty Media's stake in News Corp. or cable operators, 
and more generally undertake to subject DirecTV to all of the 
restrictions that apply to cable operators. Also, again according to 
the application to the FCC, the companies agree to the following in 
addition to the program access rules:

        1.  Neither News Corp. nor DirecTV will discriminate against 
        unaffiliated programming services in the selection, price, 
        terms or conditions of carriage.

        2.  News Corp. will not offer any of its existing or future 
        national and regional programming services on an exclusive 
        basis to any MVPD and will continue to make such services 
        available to all MVPDs on a non-exclusive basis and 
        nondiscriminatory terms and conditions.

        3.  Neither News Corp. nor DirecTV (including any entity over 
        which either exercises control) shall unduly or improperly 
        influence: (i) the decision of any Affiliated Program Rights 
        Holder to sell programming to an unaffiliated MVPD; or (ii) the 
        prices, terms and conditions of sale of programming by any 
        Affiliated Program Rights Holder to an unaffiliated MVPD.

    In light of the lack of incentives or ability to engage in vertical 
foreclosure, the companies' commitments may be unnecessary. However, 
they provide added assurance that there will be no anticompetitive 
effects, i.e., that News Corp. would foreclose other MVPDs or DirecTV 
would freeze out other programmers. The parties thus appear to commit 
that neither News Corp. nor DirecTV will enter into any exclusive deals 
or discriminate against any MVPD or programming vendor.
    Of course, the commitments not to discriminate against other 
programmers or other MVPDs inevitably will be criticized by some as 
leaving a loophole for News Corp. to raise prices to all MVPDs and 
``reimburse'' DirecTV for the price hike through either some 
distribution or other internal accounting mechanism. Putting aside the 
facts that News Corp. will own only 34% of DirecTV,\16\ and that, as 
discussed above, News Corp. lacks the power to raise fees to MVPDs, 
such an argument assumes that the FCC regulations and the 
administrative adjudication procedures provided by the program access 
rules cannot effectively prevent abuse. The FCC has considered a number 
of other cases involving vertical issues in MVPD transactions, and has 
consistently found that its program access rules are a sufficient 
protection against potential abuse.\17\
---------------------------------------------------------------------------
    \16\ The financials of DirecTV likely will be kept separate from 
News Corp. making any circumvention of the program access commitments 
harder to implement and easier to detect.
    \17\ See, e.g., Comcast Corporation, AT&T Corp., and AT&T Comcast 
Corporation, 17 FCC Rcd 23246, 23286 (2002); Telecommunications, Inc. 
and AT&T, 14 FCC Rcd 3160, 3180 (1999).
---------------------------------------------------------------------------
  III. POTENTIAL EFFICIENCIES RESULTING FROM THE PROPOSED TRANSACTION

    In addition to injecting a maverick firm into the MVPD market, the 
companies have identified expected synergies not only in reduction of 
operating expenses but also in the form of implementation of new 
service and better customer service. In particular, the companies 
expect to benefit from News Corp.'s extensive experience abroad in the 
field of DBS and implementation of new related services such as 
interactive television applications. Similarly, News Corp. has a 
history of making local programming a central element of its business 
model. Therefore, it would not be surprising to see DirecTV accelerate 
its local-into-local programming as a way to expand customer service 
and quality of programming.
    The combination of News Corp.'s DBS business outside of the United 
States with the DirecTV business likely will also create economies of 
scale with respect to research and development of new and innovative 
technologies. Further, the ability to coordinate development, marketing 
and delivery of new programming likely will streamline and rationalize 
the service to the consumer.

                             IV. CONCLUSION

    As I mentioned before, a transaction of this size always requires 
an informed inquiry into the antitrust implications. However, the facts 
of this transaction dispel concerns as to any substantial antitrust 
issues. First, the lack of any horizontal overlap and the likely 
immediate efficiencies argue for cautious regulatory scrutiny. Second, 
any potential for vertical foreclosure appears unlikely because the 
parties do not have the incentive or the ability (market power), to 
engage in conduct that would foreclose other MVPDs or programming 
vendors. Finally, the parties have expressed a willingness to enter 
into a consent decree that tracks and adds to the regulations the FCC 
put in place to tackle the same antitrust concerns that arise when 
cable companies vertically affiliate with programming vendors. 
Therefore, there appears to be no reason to oppose the transaction on 
antitrust grounds.

    Chairman Sensenbrenner. Thank you, Mr. Arquit.
    Mr. Schnog? And please pull the microphone in front of you.

    TESTIMONY OF NEAL SCHNOG, VICE CHAIRMAN, AMERICAN CABLE 
              ASSOCIATION, PRESIDENT, UVISION, LLC

    Mr. Schnog. Thank you, Mr. Chairman. As the President and 
Chief Executive Officer of Uvision, an independent cable 
business serving 8,000 customers in rural Oregon, I come here 
representing the American Cable Association, a group that 
represents small cable operators, not 8 million customers, not 
800,000 customers, not 11 million customers, but 8,000 in our 
case.
    ACA represents more than 1,000 independent cable 
businesses, serving almost 8 million customers in smaller 
markets and rural areas across the United States. Our American 
Cable Association serves customers in every State in nearly 
every congressional district, and none of us own any 
programming interests.
    ACA opposes this merger. The Federal Government should not 
let this fox into the DirecTV henhouse. Here's why. DirecTV 
says it needs this merger to compete against cable. This is 
fiction. In small towns and rural areas where my company 
provides service, competition with DirecTV has been vigorous 
for years and remains intense. Unless the merger is denied, the 
competitive landscape in smaller markets and rural areas will 
be forever tilted toward Fox and DirecTV. This will drive my 
company and thousands of others like it out of the marketplace, 
leaving your constituents with no choice.
    Like the robber barons of the past, Fox will have every 
incentive to hurt small cable companies and push our customers 
to DirecTV. Fox will have an arsenal of content at its 
disposal: A broadcast network, television stations, programming 
services, DBS distribution and much, much more. If past is 
prologue, Fox's anticompetitive behavior is all the proof 
needed to oppose the merger. For example, if many of our 
companies want to carry a local Fox Broadcast station, Fox 
forces them to carry several additional Fox programming 
channels. Just to get a local broadcast station, our customers 
have to pay for a range of an additional Fox programming 
services. Fox also prohibits our companies from offering 
regional sports programs or other channels on an a la carte or 
tier basis, forcing our constituents to pay for programming 
that they don't want. Finally, Fox prevents transparency 
through contractual gag orders. This prohibits any disclosure 
of Fox's onerous rates and terms to my customers or even to the 
U.S. Congress.
    In one breath, Fox says there is no danger to competition 
in the merger if it's approved, but in the next it proposes 
some conditions. Fox says it will provide its satellite 
programming to my company on the same terms and conditions it 
would sell DirecTV. But this condition only extends the Fox's 
satellite programming. Fox says nothing about its television 
networks, its broadcast programming, NFL Sunday Ticket or any 
other media assets Fox controls or could control. Fox has every 
incentive to use these content assets to foreclose competition 
from small cable companies. Regardless of Fox's conditions, 
competition in smaller markets and rural areas will remain easy 
prey. If the Federal Government accepts these meager 
constraints, consumers throughout America will be the ones 
outfoxed.
    If this merger proceeds, the reality will be like the Fox 
show ``Joe Millionaire.'' The merger has superficial appeal, 
and its stars are smooth talkers. They even have great 
Australian accents. But at the end of the show, the ugly truth 
will emerge. For television viewers in small towns and rural 
areas, the merger will be like the closing of the Royal Theater 
in ``The Last Picture Show'' and begin the certain end to true 
competition.
    Thank you.
    [The prepared statement of Mr. Schnog follows:]

                   Prepared Statement of Neal Schnog

                            I. INTRODUCTION

    Thank you, Mr. Chairman.
    My name is Neal Schnog, and I am the president and chief operating 
officer of UVISION, LLC, an independent cable business currently 
serving 8,000 customers in small towns and rural areas in Oregon.
    I also serve as the vice chairman of the American Cable 
Association, which represents more than 1,000 independent cable 
businesses serving almost 8 million customers primarily in smaller 
markets and rural areas across the United States. In fact, our American 
Cable Association members serve customers in every state and U.S. 
territory and also in nearly every congressional district.
ACA vehemently opposes this proposed merger.
    Unlike big companies you hear about, ACA members are not affiliated 
with programming suppliers, television networks, big cable, broadcast, 
satellite and telephone companies, major ISPs or other media 
conglomerates. We focus on smaller market cable and communications 
services, often in markets that the bigger companies chose not to 
serve. Because we live and work in these rural communities, we know how 
important it is to have advanced telecommunications services available 
and to be a provider of choice in these communities.
    ACA members are leading the industry in delivering advanced 
services in smaller markets. Far from living on the wrong side of the 
digital divide, millions of customers served by independent cable 
companies enjoy access to digital cable and broadband Internet services 
that are not available in some urban areas. Some ACA member systems 
have begun to deliver DTV broadcast signals as well, doing our part to 
move the transition forward.
    We also look forward to providing newer, advanced services to our 
customers in rural America too. Advanced services like digital 
broadcast television, high definition television, video-on-demand and 
cable and Internet telephony, to name a few.
    As you know, most of today's headlines in the communications world 
are about the large companies, such as the Fox/News Corp./DirecTV 
merger and the media giants created by the mergers of the 1990s and 
beyond.
    Just for the record, my small company is not the ``giant entrenched 
cable monopoly'' that others talk about so frequently. Rather, being on 
this panel makes me feel like a David among many Goliaths. The American 
Cable Association represents no Goliaths. We're simply small businesses 
in cable that happen to serve customers in rural America.
    We're here to speak for the millions of small-town customers and 
thousands of small-town businesses that are represented by every member 
of this committee.
    Quite frankly and ironically, we're the smaller-market and rural 
competitor to what may soon become the ``giant entrenched, vertically 
integrated satellite conglomerate''--Fox, News Corp., and DirecTV.
    I hope my testimony here today will help you serve your 
constituents by understanding the critical issues facing the 
multichannel video programming and distribution industry and the 
negative effects that continue to occur as a result of increasing media 
consolidation.
    These issues will have a significant impact on all Americans and 
could have a devastating effect on smaller markets and rural 
communities where our ACA members employ thousands and serve millions. 
I therefore ask for your consideration and hope you will agree that the 
industry is in need of congressional and regulatory review.

II. COMPETITION AND CHOICE ARE THE VICTIMS OF INCREASING CONCENTRATION 
                          OF MEDIA OWNERSHIP.

    To me, the real benefit of this hearing is the opportunity to 
highlight the current status of customer choice in the multi-video 
services market, because competition really means customer choice. No 
choice, no competition. However, the irony here is that the status of 
competition and customer choice today, especially in rural areas and 
small towns, is already significantly limited because it is governed by 
an unlikely cast of players that do not live in rural America, do not 
focus on rural Americans' needs, and who have found anti-competitive 
means to extract enormous wealth from the pockets of rural consumers 
and businesses.
    Unless there is significant congressional and regulatory review of 
these issues, the situation is sure to get worse. Consumer choice and 
competition may be wiped out in the wake of the mergers creating these 
mighty communications giants. The proposed acquisition of DirecTV by 
FOX is a perfect example of the many things that are broken. Let me 
tell you why.
    There are three very important issues that threaten consumer choice 
in smaller markets and rural America and that will derail the progress 
to provide advanced services in smaller markets:

        1.  The abusive conduct of a handful of media conglomerates 
        toward smaller market distributors and their customers. The 
        media giants are using their vastly increasing control of 
        content, pricing, terms, conditions and placement requirements 
        to control what the consumer sees and how much he or she pays. 
        The News/Corp. Fox team is near the top of this short list. 
        Congress must act to address the worsening structural 
        programming problems that are forcing consumers to pay more 
        while taking away any choice.

        2.  The disproportionate burden of regulation on smaller, 
        independent cable companies, like mine in rural America, 
        compared to the free regulatory ride enjoyed by giant 
        multinational satellite powerhouse. Congress and the FCC must 
        reduce or balance these regulatory burdens with DBS to foster 
        and protect full and fair competition in smaller markets and 
        rural areas.

        3.  In most other industries the consolidated market power and 
        anti-competitive behavior of the programming media 
        conglomerates, including Fox, would likely violate federal 
        anti-trust laws or at least invite close scrutiny by Congress 
        and the federal government. This anti-competitive behavior will 
        have a greater impact in smaller, rural markets where Fox/News 
        Corp.'s worldwide market dominance and pricing power can 
        quickly drive small competitors out of town. Therefore, 
        Congress should apply federal anti-trust laws to the anti-
        competitive practices of Fox and others.

        4.  The adverse effect of the proposed Fox-News Corp.-DirecTV 
        merger, which will limit current competition in U.S. markets--
        particularly in smaller and rural markets--by consolidating 
        enormous, vertically-integrated content and control in the 
        hands of one company--the merged Fox/News Corp./DirecTV empire. 
        If this merger is ultimately approved, then at the very least 
        the Federal Communications Commission and Department of Justice 
        must place significant conditions on this merger to ensure fair 
        access to News Corp. affiliated satellite and broadcast 
        programming. The conditions News Corp. have proposed in their 
        first FCC filing fall far short of what is required. But even 
        beyond strict conditions, Congress should also extend and apply 
        current program access laws covering vertically integrated 
        cable operators to vertically integrated satellite operators.

    Before addressing the merger and its negative effects on our 
members and consumers in small towns and rural areas, it is important 
to review current practices employed by the large conglomerates, 
including Fox/News Corp.

                            III. KEY ISSUES

1.  The abusive and anti-competitive conduct of a handful of media 
        conglomerates, including Fox/News Corp., is threatening the 
        ability of cable systems, particularly in smaller markets, to 
        compete. More importantly, these abuses are driving consumer 
        costs up while taking away choice. Congress must act to address 
        the worsening structural programming problems caused by 
        increasing media concentration.
    From our standpoint, this hearing provides an important and 
appropriate opportunity to highlight how little customer choice exists 
today in the multichannel video services market, especially in rural 
America. The fact is that the status of competition and customer choice 
today, especially in rural areas and small towns, is already 
significantly diminished because it is governed by an unlikely cast of 
players who neither live in rural America, nor focus on its needs.
    This unlikely cast includes several major media conglomerates that 
are mandating the cost and content of most of the services we provide 
in smaller markets. These include Fox/News Corp.(DirecTV), Disney/ABC/
ESPN, General Electric/NBC, CBS Viacom/UPN, and AOL/Time Warner/WB. For 
smaller markets cable systems, this is a fundamental problem that 
directly impacts our ability to provide a viable, competitive service 
to our customers. These major media conglomerates, which we call OPEC, 
the Organization of Programming Extortion Companies, have found through 
media consolidation the means to use market power to extract ever-
increasing profits from consumers and businesses in smaller markets.
    Unless there is significant congressional and regulatory action to 
address these issues, the situation will only worsen. Without your 
intervention, consumer choice and competition, not to mention the 
deployment of advanced telecommunications services in rural areas, will 
disappear in the wake of this merger frenzy.
    A vitally important question here: Who controls what your 
constituents see on their TV sets? Not a small cable business like mine 
or any one of our ACA members. Customers and local franchise 
authorities are unaware of this, but their television choices are 
controlled by the five OPEC companies.
    Over the past five years we have seen an explosive consolidation in 
the programming industry that has led to sharply increased prices, less 
freedom to offer popular content, and little customer awareness as to 
why they are forced to buy the channels they do.
    For example, ESPN's fifth 20% increase in five years was announced 
just this past week, and Fox Sports isn't far behind and closing fast.
    Imagine how your Committee would react if it were my cable company 
or any other cable operator that raised its rates 20% a year for five 
years in a row--an increase of almost 250% over five years. Frankly, 
the same indignation you would feel if my company raised rates like 
this must be focused on ESPN and other programmers, like Fox Sports, 
that raise rates like this every year.
    The fact is that programming rates for 14 of the major cable 
programming networks have risen 66.6% over the past five years--an 
increase of more than 5 times the Consumer Price Index (CPI) over the 
same period.
    In ESPN's case, one day after ESPN announced last week its fifth 
consecutive annual 20% increase, ESPN's parent company, Disney, 
announced a $400 million revenue increase for the 2nd Quarter of 2003, 
largely attributed to revenue growth at ESPN and other Disney 
programming networks.
    Now let's turn to Fox. For a typical independent cable business in 
rural areas Fox Sports is the second most expensive service after 
ESPN--exceeding even HBO (Home Box Office).
    If you want to know why cable rates are increasing, this is a big 
reason why.
    But there's more.
    Obviously, some of our customers want ESPN. But ABC-Disney will not 
generally let us buy just one service. Fox won't either in the area of 
retransmission consent. Oftentimes, in order to get the local ABC or 
Fox affiliate, Disney and Fox will force us through retransmission 
consent to take and pay for other channels we know our customers don't 
want.
    This abuse of retransmission consent goes farther--in order to get 
consent to carry a local broadcast station in one market, our members 
are forced to carry Disney or Fox's satellite programming in other 
markets, where Disney and Fox do not even own the broadcast station.
    For example, is it really in the public interest for all of my 
customers to pay for recycled soap operas, a programming service for 
which most of them have absolutely no interest, just so some of my 
customers can be permitted to watch their ABC affiliate?
    Adding to the absurdity of the situation, these conditions for 
carriage often outlive the terms of the retransmission consent period 
for the local broadcast station by many years. As a result, these 
mandated conditions clog a cable system's channel capacity with OPEC 
programming while denying that capacity to independent, non-OPEC 
programmers. The end result is that these mandated OPEC conditions 
increase costs and decrease choice for consumers.
    It gets worse. One solution might be to offer the expensive 
services in tiers or a la carte. This would allow consumers to choose 
whether or not they wish to pay for the expensive services. But all of 
the OPEC programming companies, including Fox, force their programming 
onto the lowest, basic levels of service, making your constituents pay 
for all of their programming whether they want it or not. We must ask: 
Is this good for the consumer? Is this in the public interest? Is this 
why these companies get free spectrum?
    Consolidation has turned retransmission consent into extortion. 
Even more appalling is that fact that the OPEC companies embed in their 
contracts various ``non-disclosure'' terms. These provisions prohibit 
cable operators from telling any customer, even the local franchise 
authority or your Committee, the rates and terms for the distribution 
of the OPEC programming. Thus, rate increases and unfair bundling 
practices are kept hidden from the public and even from Congress. That 
is not the foundation for an open, functional and fully competitive 
marketplace, or one that is transparent and constructed to best serve 
consumers.
    I am sure you all remember the retransmission consent showdown in 
New York City between Time Warner and Disney over this very issue.
    After that enormous struggle between industry titans, imagine the 
odds a small company like mine has when negotiating with Fox, 
especially an even bigger, stronger post-merger Fox.
    The five major OPEC programmers control all broadcast networks and 
at least 50 other of the most popular stations. More than 90% of cable 
systems offer 30-to-90 channels, which, as you can see, are dominated 
by OPEC programmers.
    In fact, on your own House cable system 60% of the widely 
distributed channels on it are controlled by the OPEC media 
conglomerates.
    The irony here is that at a time when Congress wants our small 
cable businesses to provide our customers with more choice and greater 
value, media conglomerates like Fox/News Corp./DirecTV, Disney/ABC/ESPN 
and the other OPEC companies are restricting choice and raising costs.
    If our smaller businesses and our customers are ever to regain any 
measure of control over the spiraling rates imposed by these voracious 
conglomerates, then Congress must intervene.
    The members of the American Cable Association and independent 
cable's buying group, the National Cable Television Cooperative, have 
for years sought meaningful dialogue with Fox/News Corp. and the OPEC 
programmers, but to no avail.
    More than a decade of debate and discussion on these issues with 
them has led to no positive change in their behavior.
    To break the stranglehold of control by Fox/News Corp. and the OPEC 
programmers and to give consumers and independent cable businesses any 
choice and control, Congress should act in five specific areas:

          ensure the freedom to unbundle OPEC programming;

          revamp the laws dealing with retransmission consent 
        and program access;

          require the transparency and disclosure of 
        programming costs;

    Unbundling: Today the OPEC programmers tie and bundle their 
services in such a way that to obtain one service our customers are 
forced to pay for other services they don't want.
    Congress should act to ensure that Fox and the other programming 
conglomerates cannot force consumers and cable businesses to take 
bundled services or require that these services be carried on the 
lowest levels of service.
    If the programming conglomerates had exercised any self-control to 
stop this conduct, we wouldn't be here today asking Congress to act. 
But the abuse goes on.
    Congress should amend telecommunications laws to provide that no 
programming provider can require that its services be carried only on 
the basic or expanded basic level of service. Rather, to give consumers 
choice and to allow the market to determine what gets on TV, 
programmers should be required to make their services available as part 
of a separate programming tier, or even a la carte.
    The template for this congressional action has already been 
created. For example, both Cablevision Systems and the Yankees 
Entertainment Sports Network (YES), are now allowing consumers to buy 
higher-priced programming services on either a tier or as a single, a 
la carte channel.
    However, this fundamental change to give consumers more choice 
through tiering and a la carte will not occur without congressional 
action.
    In the case of Cablevision and YES, it took the actions and efforts 
of the New Jersey Senate, U.S. Senator Frank Lautenberg, New York City 
Mayor Michael Bloomberg and New York State Attorney General Elliott 
Spitzer to compel this result.
    If it takes this kind of combined political pressure to force 
parties of equal bargaining power together, what chance do consumers in 
smaller markets and rural areas have to see similar improvements if 
this Fox is allowed to buy the hen house. Frankly, none.
    Therefore, Congress must help us give consumers greater choice by 
amending the Communications Act to allow us the right to offer all 
programming on a tiered or a la carte basis.
    Retransmission Consent: Today, as a result of unprecedented media 
consolidation, the OPEC programmers abuse retransmission consent laws 
simply to line their pockets. They do this by forcing your constituents 
to pay for unwanted programming in exchange for receiving their local, 
free over-the-air broadcast stations.
    ACA has provided detailed evidence of these abuses to the Federal 
Communications Commission and has asked the FCC to undertake an inquiry 
into these abusive retransmission consent practices. The FCC has so far 
not acted on this petition. We ask the Congress to urge the FCC to take 
immediate action on this inquiry.
    The retransmission consent laws when enacted in 1992 were designed 
to put local broadcasters on a more equal competitive footing with 
cable operators. Since then, unforeseen media consolidation has turned 
this process on its head. Now, Fox and other media conglomerates are 
using the retransmission consent laws to evade market forces in order 
to artificially inflate the revenues from their satellite programmers. 
The practical impact of this evasion by the media conglomerates is that 
rural and smaller market consumers have less choice and higher costs, 
effectively subsidizing urban markets.
    Congress should amend the retransmission consent laws to protect 
our consumers from being forced to pay for unwanted satellite 
programming just to see their local broadcast stations.
    Transparency and Disclosure: What consumer, local franchising 
authority or congressional office knows what it costs to watch TV? The 
answer is not one. That's because the OPEC conglomerates resist 
transparency by hiding their abusive practices under the cloak of 
confidentiality requirements.
    Who gets the blame when programmers force unpopular or costly 
programming on our basic tiers? Not them, but us.
    As ESPN's increase of nearly 250% over the last five years 
demonstrates, programming prices continue to escalate far in excess of 
the rate of inflation, raking in enormous sums from consumers. It's 
greed run amok. One way to rein in the greed of programmers is to 
require transparency.
    Congress should amend the Communications Act to require programmers 
to make annual disclosures to local franchise authorities and the 
Federal Communications Commission. These disclosures should include 
what programmers charge cable businesses and how they mandate bundling 
or placement of their services.
    Moreover, Congress should direct the FCC to compile every year a 
comprehensive Programming Price Index to show Congress and consumers 
how much they are truly being charged to watch television. Every three 
years the FCC should also compile and publish a Retransmission Consent 
Index to show consumers what it truly costs them to receive their local 
network television stations.
    Until there is transparency in the programming marketplace, 
consumers and their local providers of service will have little control 
over what is seen on TV, when it is seen on TV, or how much it will 
cost.

2.  Smaller, independent cable companies face a disproportionate burden 
        of regulation, compared to the free regulatory ride enjoyed by 
        the giant satellite companies. Congress should reduce 
        independent cable's regulatory burden or balance it with 
        satellite's.
    We continually hear representatives of the direct broadcast 
satellite industry say how Congress should help DBS compete against the 
``giant, cable monopoly'' by reducing or eliminating the DBS regulatory 
burden.
    However, contrary to these DBS cries, two facts are clear:
    First, as we have already outlined, the new Fox/News Corp./DirecTV 
juggernaut will assemble an unparalleled array of content and 
distribution assets. Absent clear enforceable restrictions, the 
conglomerate will expand the use of this massive power to the detriment 
of choice, competition and consumers in rural America.
    Second, my company and the nearly 1,000 other small, independent 
cable businesses in the American Cable Association are obviously not 
the ``cable giants'' that DBS says it must compete against. Rather, we 
are and will be the competitor in smaller markets and rural areas. 
That's why preserving competition in rural markets is vital.
    But it's more than that. Right now direct broadcast satellite 
enjoys favored regulatory treatment that gives it a great advantage in 
the rural marketplace. Consider the following list and ask if this 
regulatory balance is fair. The average ACA member company serves 8,000 
subscribers, more than 9,992,000 fewer subscribers than the post-merger 
DirecTV. Fox and DirecTV cannot seriously maintain that they need 
governmental help to compete against smaller market cable companies.


    In smaller markets and rural areas, the regulatory disparity that 
exists between independent cable and DBS must be addressed if Congress 
and federal policymakers want to ensure that multiple providers of 
video service are there to provide choice to consumers. This means that 
Congress should reduce, or at least equalize, the regulatory burdens on 
smaller cable.

3.  Congress should apply federal anti-trust laws to the anti-
        competitive behavior of the OPEC programmers, including Fox/
        News Corp.
    The actions of the programming conglomerates, including Fox/News 
Corp., to tie their services and gouge consumers implicate core anti-
trust principals. Current federal anti-trust laws are designed to 
prohibit contracts and combinations in restraint of trade, and to 
prohibit price discrimination where it has an anti-competitive effect.
    If programming were any other business, the tying, bundling and 
price fixing that goes on year after year would have been prohibited on 
anti-trust grounds by either Congress or the Department of Justice.
    Why then are the programming conglomerates allowed unfettered 
ability to perpetrate the same harmful actions on consumers without 
consequence? There is no good reason.
    As a result, Congress should carefully scrutinize potentially 
harmful consequences from the vast increase in market power by Fox/News 
Corp, which has consistently exhibited anti-competitive behavior. Even 
if this merger is blocked, Congress should apply federal anti-trust 
laws to this anti-competitive behavior.
    Just because consumers can't touch a programming service on TV 
doesn't mean that it's not bought or sold like any other good or 
commodity consumers purchase. It is a ``good'' for anti-trust purposes 
that is tied and bundled just like any other commodity.

4.  The adverse effect of the proposed Fox-News Corp.-DirecTV merger 
        will limit current competition and choice in U.S. markets--
        particularly in smaller and rural markets. The Federal 
        Communications Commission and Department of Justice must place 
        significant conditions on this merger, and Congress should also 
        extend and apply current program access laws to vertically 
        integrated satellite operators.
    Customers will also face less choice as a result of the vertically 
integrated satellite conglomerate that would be created from a Fox-News 
Corp.-DirecTV merger.
    The merger of Fox, News Corp. and DirecTV will create perhaps the 
world's largest vertically integrated programming distributor. This 
multi-national behemoth will possess global reach and control a 
television broadcast network, scores of broadcast affiliates, a 
significant number of cable and satellite programming channels, and a 
complete satellite distribution system with DirecTV's more than 10 
million customers. These facts alone will give Fox the ability to 
control access to programming, limit customer choice, raise programming 
prices, and eliminate competition in rural markets.
    The threat by a merged Fox/News Corp./DirecTV to use its 
programming leverage against other competitors is not theoretical. Upon 
completion of the merger, the conglomerate will have exclusive control 
over certain sporting events, including the NFL's Sunday Ticket and 
numerous regional sports networks.
    This Committee has a long history of exploring antitrust activities 
and anticompetitive behavior. In today's marketplace, our business is 
akin to the wild west, in which the large robber barons are free to 
impose their will, especially on consumers.
    Last Friday, News Corp. proposed some ``voluntary conditions'' in 
its first FCC filing on the merger. These do not go nearly far enough. 
Even with the proposed conditions, News Corp. and its many broadcast 
and programming affiliates will still have an arsenal to increase costs 
and reduce choice for rural consumers.
    Because of these concerns, we believe the government must place 
strict and easily enforceable conditions on any such merger. In 
addition, Congress should amend the program access laws to extend them 
to vertically integrated satellite entities, like Fox, just as these 
laws are applied to vertically integrated cable entities.

                             IV. CONCLUSION

    Each one of the foregoing issues directly affects the market's 
ability to: (1) provide competition and choice in smaller markets; (2) 
give consumers control over what they see on television and how much 
they pay for it; and, (3) deploy advanced new services in rural 
communities.
    My company and the members of the American Cable Association are 
here today alongside the giants of the television, cable, satellite and 
telecommunications world. Why should anyone here listen to what we have 
to say?
    Because the nature of our businesses makes us uniquely sensitive to 
the needs of small and rural markets. We serve nearly 8 million 
consumers in nearly all congressional districts and, in fact, every 
state represented on this Committee.
    The irony here is that the impact of these media ownership issues, 
if not addressed by Congress, will have the opposite outcome to what 
Congress desires. This potential outcome will not provide advanced new 
services, competition and choice for consumers in the smaller and rural 
marketplaces.
    This merger is emblematic of these issues and the unintended 
consequences that will result and, most importantly, ultimately cause 
great harm to television viewers, particularly in small towns and rural 
areas.
    The American Cable Association and its members are committed to 
working with the Committee to solve these important issues.
    I would like to sincerely thank the Committee again for allowing me 
to speak before you today.

                                EXHIBITS













    Chairman Sensenbrenner. Thank you very much.
    Mr. Kimmelman?

 TESTIMONY OF GENE KIMMELMAN, SENIOR DIRECTOR FOR ADVOCACY AND 
                 PUBLIC POLICY, CONSUMERS UNION

    Mr. Kimmelman. Thank you, Mr. Chairman. On behalf of 
Consumers Union, the print and online publisher of Consumer 
Reports Magazine, I appreciate the opportunity to appear before 
you this morning.
    Satellite was supposed to be the competitive silver bullet 
that was going to bring down the cable monopolies, and even 
with substantial growth in satellite, we've seen cable rates 
rise 50 percent since you launched deregulation of the cable 
industry in 1996. The GAO testified before the Senate Commerce 
Committee on Tuesday and indicated that their preliminary 
conclusion was that satellite has not been able to discipline 
cable's pricing at monopolistic rates.
    At this point it appears that only a very aggressive, 
cutthroat competitive spirit in the satellite industry could 
possibly compete cable rates down. Is that likely to happen 
with this proposed merger between News Corp. and DirecTV? I'm 
afraid not. The last time I testified with Mr. Murdoch, I 
supported his satellite venture. This morning I'm afraid I will 
not be able to do so.
    Mr. Arquit indicated a history of competitive activities. I 
will note that that's not consistent with what the Justice 
Department thinks in a complaint involving the Primestar 
transaction, the Justice Department found that Mr. Murdoch 
appeared to be colluding with the cable industry, not 
attempting to compete with them.
    Let's look at this transaction, at what News Corp. holds 
and how it could affect competition and consumers. News Corp. 
owns 35 local broadcast stations, we believe above the national 
ownership cap established by the FCC, that the FCC's been 
turning away from enforcing. It owns a national television 
network with affiliates across the country. It has market 
power, contrary to what Mr. Arquit said, through its 
retransmission rights of bundling local programming with 
guaranteed carriage with all of the remainder of its 
programming, something sanctioned by law that would not 
necessarily be appropriate under normal market conditions under 
antitrust.
    Fox owns the News Channel, Fox News Channel. It owns FX and 
other properties. It owns studios that can support this large 
distribution channel in both cable and broadcast. It owns more 
than 20 regional sports channels with rights to 67 teams in the 
NBA, the NHL, Major League Baseball, major package of Sunday 
NFL, college football games, basketball games. Otherwise 
commonly viewed as marquee programming in antitrust, something 
it doesn't appear Mr. Arquit looked at carefully. Must-have 
programming, you can't watch the Super Bowl 2 weeks later and 
think you're getting the same value as watching it when it 
happens.
    Now, many Wall Street analysts believe that with this mass 
of programming assets--and we agree with this--News Corp. won't 
drive down and won't have incentives to drive down cable rates 
or satellite rates, and his promises do nothing to prevent 
prices from going up. Instead, it has the opposite incentive, 
make its money from all its programming, charge higher prices 
to cable operators, charge higher prices to itself and to its 
one satellite competitor. I did not note Mr. Murdoch ever in 
his testimony indicating that he was intending to drive his 
prices or compete down cable prices through his transaction. In 
other words, I'm afraid this deal is truly bad for consumers.
    And how would these promises be enforced? We appreciate the 
effort to put up front some nondiscriminatory principles and 
abide by access to programming. That's laudable on behalf of 
News Corp., but it does nothing to prevent them from charging 
themselves a high price and everyone else a high price for all 
of their programming. Cable pays more. Satellite pays more. 
Consumers of both pay more. That is not a good deal for 
consumers.
    And what is discrimination? I'm afraid the FCC has been 
woefully inadequate in even defining that in the past. We 
believe this is an area where the Department of Justice would 
need to weigh in with much more severe, much more restrictive 
conditions in order for this merger not to harm consumers or 
competition.
    But this is only the tip of the iceberg. We believe News 
Corp. is over its national ownership cap for broadcast 
stations, and we're afraid the FCC is about to let them own 
even more, about to let them own even more local broadcast 
stations in each local market around the country, and allow 
them to combine those assets with a dominant newspaper in each 
of those markets. That would lead to an avalanche of mergers 
and consolidation that is nothing short of a threat to the 
major sources of news and information that American people rely 
upon in their local community.
    We urge you to prevent that from happening through this 
transaction and the FCC's relaxation of ownership rules. Thank 
you.
    [The prepared statement of Mr. Kimmelman follows:]

                  Prepared Statement of Gene Kimmelman

                                SUMMARY

    Today consumers are not receiving the fruits that a competitive 
cable and satellite marketplace should deliver, and consumers are 
likely to suffer further harm if antitrust officials do not impose 
substantial conditions on the proposed deal between News Corp. and 
DirecTV. Since passage of the 1996 Telecommunications Act, cable rates 
have risen over 50%,\1\ and according to the FCC, satellite competition 
is not helping to keep those rates down.
---------------------------------------------------------------------------
    \1\ Bureau of Labor Statistics, Consumer Price Index (March 2003). 
From 1996 until March 2003, CPI increased 19.3% while cable prices rose 
50.3%, 2.6 times faster than inflation.
---------------------------------------------------------------------------
    We are pleased to see that the combined News Corp./DirecTV has 
agreed to offer access to their programming as part of the 
acquisition.\2\ However this promise must be expanded to prevent other 
forms of anti-competitive discrimination, and must be enforceable 
through appropriate Dept. of Justice oversight mechanisms.
---------------------------------------------------------------------------
    \2\ ``As part of the acquisition, News Corp. and DIRECTV has agreed 
to abide by FCC program access regulations, for as long as those 
regulations are in place and for as long as News Corp. and Fox hold an 
interest in DIRECTV . . . Specifically, News Corp. will continue to 
make all of its national and regional programming available to all 
multi-channel distributors on a non-exclusive basis and on non-
discriminatory prices, terms and conditions. Neither News Corp. nor 
DIRECTV will discriminate against unaffiliated programming services 
with respect to the price, terms or conditions of carriage on the 
DIRECTV platform.'' News Corporation Press Release, ``News Corp. Agrees 
to Acquire 34% of Hughes Electronics for $6.6 Billion in Cash and 
Stock.'' Apr. 9, 2003.
---------------------------------------------------------------------------
    Even given the terms of what News Corp. is willing to concede by 
way of program access, substantial danger remains. First, there is a 
danger that News Corp. will discriminate against non-affiliated 
programmers in determining what programming to offer on its DirecTV 
satellite system. News Corp. could also pressure cable operators to do 
the same in return for more favorable carriage terms for News Corp. 
owned programming.
    Second, the agreement preserves the right to a variety of exclusive 
carriage arrangements, including distribution of Liberty Media 
programming, as well as sports programming where News Corp. enjoys 
substantial market power. Liberty Media owns approximately 18% of News 
Corp., and News Corp. has interests in several Liberty properties, 
indicating a close relationship between the two. It is hard to 
understand how such exclusive arrangements involving a company with 
such massive market power would not have a detrimental impact on 
competition in video programming. Antitrust officials must prevent 
these types of behavior.
    The recently announced proposed merger between the News Corporation 
(``News Corp./Fox'') and Hughes Electronics Corporation's satellite 
television unit DIRECTV (``DirecTV''), combined with the Federal 
Communications Commission's (FCC) current efforts to relax or eliminate 
media ownership rules that restrict ownership of multiple television 
stations, newspapers and radio stations both locally and nationally, 
threaten to harm meaningful competition between media companies. Most 
importantly, this lack of competition will mean that control of media 
that Americans rely upon most for news, information and entertainment 
could eventually be placed in the hands of a few powerful media giants.
    Consider the powerful interaction of the FCC's rush to lift media 
ownership rules and the proposed merger between a major network and the 
largest direct broadcast satellite (DBS) network. In the next month, 
the FCC is likely to relax ownership rules in a manner that would open 
the door to further concentration of ownership in a few hands, 
consolidation of outlets in national chains and conglomeration of 
control over different types of media. The FCC is considering:

          Relaxing the ban on news/broadcast cross-ownership 
        would allow broadcasters to buy newspapers in the same 
        communities they own local stations (even when there is only 
        one dominant newspaper in that community). News Corp./Fox 
        already has cross ownership ventures.

          Raising or eliminating the cap on how many television 
        stations national TV networks may own (which was set at a level 
        of stations servicing 35% of the population by Congress in 
        1996) would extend national network control over local 
        stations. News Corp./Fox already far exceeds the cap, as does 
        Viacom/CBS.

          Letting a single TV broadcaster own more than 2 
        stations in a single market. News Corp./Fox already owns 2 
        broadcast stations in New York, Los Angeles, Dallas, 
        Washington, D.C., Houston, Minneapolis, Phoenix, and Orlando.

          Although less likely, permitting national TV networks 
        to buy each other (e.g., Fox purchase NBC or Viacom/CBS 
        purchase Disney/ABC).

    While the antitrust laws can and should be used to limit potential 
competitive abuses resulting from the News Corp./DirecTV merger, these 
laws are not enough to prevent the excessive consolidation in the 
marketplace of ideas that would result from any combination of 
transactions under these relaxed ownership rules. Antitrust has never 
been used effectively to promote competition in and across media where 
there is no clear way--like advertising prices--of measuring 
competition/ diversity in news sources, information and points of view 
presented through the media.
    Consumers Union\3\ and the Consumer Federation of America\4\ 
believe the Dept. of Justice should impose significant conditions on 
the News Corp./DirecTV deal, and Congress should review and alter the 
laws that enabled industry consolidation spurred by excessive 
deregulation to weaken or undermine competitive conditions in media 
markets. The News Corp./DirecTV merger is likely to lead to higher 
prices for both satellite TV and cable TV, since the combined company 
can maximize its earnings by inflating the prices it charges for its 
broad array of popular programming that all cable and satellite 
customers purchase. And this transaction, in conjunction with relaxed 
media ownership rules, will spur a wave of mergers among the remaining 
national broadcast networks, satellite and cable giants.
---------------------------------------------------------------------------
    \3\ Consumers Union is a nonprofit membership organization 
chartered in 1936 under the laws of the state of New York to provide 
consumers with information, education and counsel about good, services, 
health and personal finance, and to initiate and cooperate with 
individual and group efforts to maintain and enhance the quality of 
life for consumers. Consumers Union's income is solely derived from the 
sale of Consumer Reports, its other publications and from noncommercial 
contributions, grants and fees. In addition to reports on Consumers 
Union's own product testing, Consumer Reports with more than 4 million 
paid circulation, regularly, carries articles on health, product 
safety, marketplace economics and legislative, judicial and regulatory 
actions which affect consumer welfare. Consumers Union's publications 
carry no advertising and receive no commercial support.
    \4\ The Consumer Federation of America is the nation's largest 
consumer advocacy group, composed of over 280 state and local 
affiliates representing consumer, senior, citizen, low-income, labor, 
farm, public power an cooperative organizations, with more than 50 
million individual members.
---------------------------------------------------------------------------
    We believe it is time for Congress to intervene and finally deliver 
more choices and lower prices for the media services consumers want, 
and to prevent excessive relaxation of media ownership which threatens 
the critical watchdog function media companies play in our nation's 
democracy. It is time for Congress to drop the rhetoric and look at the 
reality of deregulated video markets. Congress should:

          Reconsider its grant of retransmission rights to 
        broadcasters, where a broadcaster also owns a second means of 
        video distribution.

          Let consumers pick the TV channels they want for a 
        fair price.

          Prevent all forms of discrimination by those who 
        control digital TV distribution systems and those who control 
        the most popular programming in a manner which prevents 
        competition in the video marketplace.

          Strengthen, rather than weaken, media ownership 
        rules, to prevent companies from owning the most popular 
        sources of news and information in both the local and the 
        national markets.
                  the news corporation/directv merger
    If competition in the multichannel video market had performed up to 
its hope and hype, the NewsCorp./Fox/DirecTV merger might not be so 
threatening. But in light of the failure of deregulation, it presents a 
problem for public policy that cannot be ignored. There are two points 
of power in the marketplace--distribution and program production. The 
problem with a combination of News Corp./Fox and DirecTV is that it 
combines the two.
    The reach of News Corp./Fox's media empire is truly staggering. The 
following are highlights of some News Corp./Fox properties in the U.S.:

          Broadcast Television Stations (35 stations, including 
        two broadcast stations in New York, Los Angeles, Dallas, 
        Washington DC, Houston, Minneapolis, Phoenix and Orlando)

          Filmed Entertainment (20th Century Fox Film Corp., 
        Fox 2000 Pictures, Fox Searchlight Pictures, Fox Music, 20th 
        Century Fox Home Entertainment, Fox Interactive, 20th Century 
        Fox Television, Fox Television Studios, 20th Television, 
        Regency Television and Blue Sky Studios)

          Cable Network Programming (Fox News Channel--the most 
        watched cable news channel, Fox Kids Channel, FX, Fox Movie 
        Channel, Fox Sports Networks, Fox Regional Sports Networks, Fox 
        Sports World, Speed Channel, Golf Channel, Fox Pan American 
        Sports, National Geographic Channel, and the Heath Network)

          Publishing (New York Post, the Weekly Standard, 
        HarperCollins Publishers, Regan Books, Amistad Press, William 
        Morrow & Co., Avon Books, and Gemstar-TV Guide International)

          Sports Teams and Stadiums (Los Angeles Dodgers, and 
        partial ownership in the New York Knicks, New York Rangers, LA 
        Kings, LA Lakers, Dodger Stadium, Staples Center, and Madison 
        Square Garden)

    News Corp./Fox's merger with DirecTV adds a new, nationwide 
television distribution system to News Corp./Fox's programming/
production arsenal. DirecTV is the nation's largest satellite 
television distribution system, with more than 11 million customers and 
the ability to serve all communities in the United States.
    News Corp./Fox's vast holdings provide it with leverage in several 
ways. ``The biggest, most powerful weapon News Corp./Fox has is `a 
four-way leverage against cable operators, competing with satellite and 
using the requirement that cable get retransmission consent to carry 
Fox-owned TV stations, while potentially leveraging price for Fox-owned 
regional sports networks and its national cable and broadcast networks 
. . .' '' \5\
---------------------------------------------------------------------------
    \5\ Diane Mermigas, ``News Corp.'s DirecTV Monolith.'' Mermigas on 
Media Newsletter, (Apr. 16, 2003), quoting Tom Wolzien, a Sanford 
Bernstein Media Analyst.
---------------------------------------------------------------------------
    One of News Corp./Fox's most important weapons is significant 
control over regional and national sports programming. Mr. Murdoch 
often describes sports programming as his ``battering ram'' \6\ to 
attack pay television markets around the world. As David D. Kirkpatrick 
noted in an April 14, 2003 New York Times article regarding Mr. 
Murdoch's control over sports programming:
---------------------------------------------------------------------------
    \6\ David D. Kirkpatrick, ``Murdoch's First Step: Make Sports Fans 
Pay.'' The New York Times, Apr. 14, 2003.

        In the United States, News Corp./Fox's Entertainment subsidiary 
        now also controls the national broadcast rights to Major League 
        Baseball, half the Nascar racing season and every third Super 
        Bowl. On cable, Fox controls the regional rights to 67 of 80 
        teams in the basketball, hockey and baseball leagues as well as 
        several major packages of college basketball and football 
        games, which it broadcasts on more than 20 Fox regional sports 
        cable networks around the country. By acquiring DirecTV, Mr. 
        Murdoch gains the exclusive right to broadcast the entire slate 
---------------------------------------------------------------------------
        of Sunday NFL games as well.

        With DirecTV, Mr. Murdoch can start a new channel with 
        immediate access to its subscribers, currently 11 million. He 
        has other leverage in Fox News, now the most popular cable news 
        channel, and essential local stations in most major markets 
        around the country.\7\
---------------------------------------------------------------------------
    \7\ Id., Emphasis added.

    It is important to consider the ramifications of Mr. Murdoch's 
control of over 40% of Fox broadcast stations nationwide, control of 
11.2 million satellite subscribers, and his stranglehold over regional 
sports programming. With those extensive holdings, News Corp./Fox is in 
a position to determine what new programming comes to market, and to 
undercut competitive programming. The company will be able to decide 
what programming it does not want to carry and may be able to 
indirectly pressure cable operators (by offering a lower price for Fox 
programming as an inducement) not to carry programming that competes 
with Fox offerings. We believe Mr. Murdoch has a right as an owner to 
put whatever he wants on his system, but with the FCC moving to relax 
media ownership rules, companies like News Corp./Fox will have the 
ability to control key sources of news and information in an 
unprecedented manner.
    The merger between News Corp./Fox and DirecTV is extremely unlikely 
to stop skyrocketing cable rates and could very well exacerbate the 
problem. According to David Kirkpatrick's New York Times article: \8\
---------------------------------------------------------------------------
    \8\ David Kirkpatrick, ``By Acquiring DirecTV, Murdoch Gets Upper 
Hand.'' The New York Times, Apr. 10, 2003.

        some analysts said the structure of the deal suggested Mr. 
        Murdoch hoped to use DirecTV mainly to punish other pay 
        television companies and benefit his programming businesses. 
        The Fox Entertainment Group, an 80 percent-owned subsidiary of 
        News Corporation, will own a 34 percent stake in DirecTV's 
        parent, creating the potential for programming deals that favor 
---------------------------------------------------------------------------
        Fox over DirecTV.

        ``My sense is that the major purpose for News Corporation 
        controlling DirecTV is to use it as a tactical weapon against 
        the cable companies to get them to pay up for its proprietary 
        programming,'' said Robert Kaimowitz, chief executive of the 
        investment fund Bull Path Capital Management.

    While News Corp./Fox has agreed to abide by the FCC's program 
access requirements, this pledge could end up being nothing more than a 
tool for pumping up cable prices. That is, while News Corp./Fox agrees 
to make its programming available on non-discriminatory terms and 
conditions, there is absolutely nothing that would prevent News Corp./
Fox from raising the price that it charges itself on its satellite 
system, in return for increased revenues from the other 70 million 
cable households. If a cable system refuses to pay the increased price, 
then News Corp./Fox will be able to threaten cable operators to use its 
newly acquired satellite system to capture market share away from cable 
in those communities.
    An article in the Washington Post \9\ recently detailed the way 
this might work:
---------------------------------------------------------------------------
    \9\ Frank Ahrens, ``Murdoch's DirecTV Deal Scares Rivals.'' 
Washington Post, Apr. 11, 2003.

        For instance, News Corp./Fox raised the cost of his Fox Sports 
        content to some cable systems by more than 30 percent this 
        year, according to one cable operator. Like most officials 
        interviewed yesterday, he refused to be identified, saying he 
---------------------------------------------------------------------------
        had to continue dealing with News Corp./Fox.

        Most recently, in Florida, News Corp./Fox pulled its Fox Sports 
        regional sports programming off of competitor Time Warner 
        Cable's system over a rate dispute. News Corp./Fox wanted to 
        charge more than Time Warner was willing to pay, but the 
        conflict was resolved and service restored. ``If this happens 
        when Rupert owns DirecTV, you can assume DirecTV will go into 
        the market and just pound away at the cable system,'' said one 
        cable channel executive.

    And price is only the beginning of the problems in this industry. 
Even in the 500-channel cable universe, control of prime time 
programming rests in the hands of a very few media companies. Given the 
enormous power that will be concentrated in News Corp./Fox as a result 
of the DirecTV transaction, not only will the combined entity be able 
to insist on top dollar for its programming, it will be able to 
determine who makes it and who fails in the programming marketplace.

     CABLE RATES HAVE ESCALATED AND SATELLITE COMPETITION HAS NOT 
                        KEPT THEM UNDER CONTROL

    Despite the growth of satellite TV, the promise of meaningful 
competition to cable TV monopolies remains unfulfilled. Cable rates are 
up 50% since Congress passed the 1996 Telecommunications Act, nearly 
three times as fast as inflation.\10\ We welcome the possibility that 
satellite would aggressively cut its price and compete with cable, 
thereby keeping cable rates in check, but for several reasons that is 
unlikely to happen.
---------------------------------------------------------------------------
    \10\ Bureau of Labor Statistics, Consumer Price Index (March 2003). 
From 1996 until March 2003, CPI increased 19.3% while cable prices rose 
50.3%, 2.6 times faster than inflation.
---------------------------------------------------------------------------
    Satellite competition has failed to prevent price increases on 
cable because cable and satellite occupy somewhat different product 
spaces. First and foremost, the lack of local channels on satellite 
systems in many communities prevents satellite from being a substitute 
for cable; in fact, many satellite subscribers also purchase cable 
service for the express purpose of receiving local channels. And while 
many larger communities now receive local broadcast channels from 
satellite, service is not as attractive as cable in several respects 
and many consumers simply cannot subscribe. Many urban consumers cannot 
receive satellite services because of line of sight problems, or 
because they live in a multi-tenant dwelling unit where only one side 
of the building faces south.
    Restrictions on multiple TV set hookups also make satellite more 
costly. The most recent data on the average price for monthly satellite 
service indicates that consumers pay between $44 and $80 a month to 
receive programming comparable to basic cable programming. This monthly 
fee often includes two separate charges above the monthly fee for basic 
satellite programming--one fee to hook a receiver up to more than one 
television in the household, and another fee so consumers are able to 
receive their local broadcast channels.
    Satellite customers often subscribe to receive high-end services 
not provided (until the recent advent of digital cable) on cable 
systems, such as high-end sports packages, out of region programming, 
and foreign language channels. In essence, it is an expensive--but 
valuable--product for consumers that want to receive hundreds of 
channels.
    If satellite were a close substitute for cable, one would expect 
that it would have a large effect on cable. In fact, the FCC's own 
findings and data have contradicted the cable industry claims for 
years. The FCC found that satellite only ``exerts a small (shown by the 
small magnitude of DBS coefficient) but statistically significant 
influence on the demand for cable service.'' \11\ In the same 
econometric estimation, the FCC concluded that the ``the demand for 
cable service is somewhat price elastic (i.e. has a price elasticity of 
minus 1.45) and suggests that there are substitutes for cable.'' \12\ 
This elasticity is not very large and the FCC recognizes that in using 
the adjective ``somewhat.'' The FCC also attempted to estimate a price 
effect between satellite and cable. If cable and satellite were close 
substitutes providing stiff competition, one would also expect to see a 
price effect. Most discussions of in economics texts state that 
substitutes exhibit a positive cross elasticity.\13\ The FCC can find 
none. In fact, it found quite the opposite. The higher the penetration 
of satellite, the higher the price of cable.\14\
---------------------------------------------------------------------------
    \11\ Report on Cable Industry Prices, February 14, 2002, p. 36.
    \12\ Report on Cable Industry Prices, February 14, 2001, p. 36.
    \13\ Pearce, George, The Dictionary of Modern Economics (MIT Press, 
Cambridge, 1984), p. 94. Cross Elasticity of Demand. The responsiveness 
of quantity demanded of one good to a change in the price of another 
good. Where goods i and j are substitutes the cross elasticity will be 
positive--i.e. a fall in the price of good j will result in a fall in 
the demand for good i as j is substituted for i. If the goods are 
complements the cross elasticity will be negative. Where i and j are 
not related, the cross elasticity will be zero. Taylor, John, B., 
Economics (Houghton Mifflin, Boston, 1998), p. 59.
---------------------------------------------------------------------------
  A sharp decrease in the price of motor scooters or rollerblades will 
decrease the demand for bicycles. Why? Because buying these related 
goods becomes relatively more attractive than buying bicycles. Motor 
scooters or rollerblades are examples of substitutes for bicycles. A 
substitute is a good that provides some of the same uses or enjoyment 
as another good. Butter and margarine are substitutes. In general, the 
demand for a good will increase if the price of a substitute for the 
good rises, and the demand for a good will decrease if the price of a 
substitute falls.
  Bannock, Graham, R.E. Banock and Evan Davis, Dictionary of Economics 
(Penguin, London, 1987).
  Substitutes. Products that at least partly satisfy the same needs of 
consumers. Products are defined as substitutes in terms of cross-price 
effects between them. If, when the price of records goes up, sales of 
compact discs rise, compact discs are said to be a substitute for 
records, because consumers can to some extent satisfy the need served 
by records with compact discs. This account is complicated by the fact 
that, when the price of an item changes, it affects both the REAL 
INCOME 01 consumers and the relative prices of different commodities. 
Strictly, one product is a substitute for another if it enjoys 
increased demand when the other's prices rises and the consumer's 
income is raised just enough to compensate for the drop in living 
standards caused (pp. 390-391).
  Cross-price elasticity of demand. The proportionate change in the 
quantity demanded of one good divided by the proportionate change in 
the price of another good. If the two goods are SUBSTITUTES (e.g. 
butter and margarine), this ELASTICITY is positive. For instance, if 
the price of margarine increases, the demand for butter will increase 
(p. 99).
---------------------------------------------------------------------------
    \14\ Report on Cable Prices, p. 11.
---------------------------------------------------------------------------
    The most recent annual report on cable prices shows that the 
presence of DBS has no statistically significant or substantial effect 
on cable prices, penetration or quality.\15\ This is true when measured 
as the level of penetration of satellite across all cable systems, or 
when isolating only areas where satellite has achieved a relatively 
high penetration.\16\ At the same time, ownership of multiple systems 
by a single entity, large size and clustering of cable systems results 
in higher prices.\17\ Vertical integration with programming results in 
fewer channels being offered (which restricts competition for 
affiliated programs).\18\
---------------------------------------------------------------------------
    \15\ Federal Communications Commission, 2002b.
    \16\ Federal Communications Commission, 2001b, describes the DBS 
variable as the level of subscription. Federal Communications 
Commission, 2002b, uses the DBS dummy variable.
    \17\ The cluster variable was included in the Federal 
Communications Commission 2000a and 2001b Price reports. Its behavior 
contradicted the FCC theory. It has been dropped from the 2002 report. 
The MSO size was included in the 2002 report. System size has been 
included in all three reports.
    \18\ Vertical integration was included in Federal Communications 
Commission, 2002b.
---------------------------------------------------------------------------
    In other words, one could not imagine a more negative finding for 
intermodal competition or industry competition from the FCC's own data. 
All of the concerns expressed about concentrated, vertically integrated 
distribution networks are observed and the presence of intermodal 
competition has little or no power to correct these problems. The 
claims that the cable industry makes about the benefits of clustering 
and large size--measured as price effects--are contradicted by the 
data. In fact, only intramodal, head-to-head competition appears to 
have the expected effects. The presence of wireline cable competitors 
lowers price and increases the quality of service.
    While we hope that satellite will ultimately have a price 
disciplining effect in those communities where satellite offers local 
broadcast stations it is clear that the single most important variable 
in cable prices is whether there is a cable overbuilder in a particular 
community. Wire-to-wire competition does hold down cable rates and 
satellite does not seem to do the trick. The U.S. General Accounting 
office describes this phenomenon:

        Our model results do not indicate that the provision of local 
        broadcast channels by DBS companies is associated with lower 
        cable prices. In contrast, the presence of a second cable 
        franchise (known as an overbuilder) does appear to constrain 
        cable prices. In franchise areas with a second cable provider, 
        cable prices are approximately 17 percent lower than in 
        comparable areas without a second cable provider.\19\
---------------------------------------------------------------------------
    \19\ U.S. General Accounting Office, Report to the Subcommittee on 
Antitrust, Competition, and Business and Consumer Rights, Committee on 
the Judiciary, U.S. Senate: Issues in Providing Cable and Satellite 
Television Services.'' October 2002. In an important clarifying 
footnote, the report finds that:
---------------------------------------------------------------------------
      ``This was a larger effect than that found by FCC in its 
      2002 Report on Cable Industry Prices (FCC 02-107). Using an 
      econometric model, FCC found that cable prices were about 7 
      percent lower in franchise areas when there was an 
      overbuilder. One possible explanation for the difference in 
      results is that we conducted further analysis of the 
      competitive status of franchises that were reported by FCC 
      to have an overbuilder. We found several instances where 
      overbuilding may not have existed although FCC reported the 
      presence of an overbuilder, and we found a few cases where 
      overbuilders appeared to exist although FCC had not 
      reported them. We adjusted our measurement of overbuilder 
      status accordingly.

    In other words, where there are two satellite and one cable company 
in a market, prices are 17 percent higher than where there are two 
cable companies and two satellite providers in a market. If we had this 
type of competition nationwide, consumers could save more than $5 
billion a year on their cable bills.

                           PROGRAM PRODUCTION

    The failure of competition in the cable and satellite distribution 
market is matched by the failure of competition in the TV production 
market. In the 1980s, as channel capacity grew, there was enormous 
expansion and development of new content from numerous studios. 
Policymakers attributed the lack of concentration in the production 
industry to market forces and pushed for the elimination of the 
Financial Interest in Syndication rules (Fin-Syn) that limited network 
ownership and syndication rights over programming. The policymakers 
were wrong.
    Following the elimination of the Fin-Syn rules in the early 1990s, 
the major networks have consolidated their hold over popular 
programming. The market no longer looks as promisingly competitive or 
diverse as it once did. Tom Wolzien, Senior Media Analyst for Bernstein 
Research, paints the picture vividly--he details the return of the 
``old programming oligopoly:''

        Last season ABC, CBS and NBC split about 23% [of television 
        ratings] . . . But if the viewing of all properties owned by 
        the parent companies-Disney, NBC, and Viacom--is totaled, those 
        companies now directly control television sets in over a third 
        of the TV households. Add AOL, Fox and networks likely to see 
        consolidation over the next few years (Discovery, A&E, EW 
        Scripps, etc.), and five companies or fewer would control 
        roughly the same percentage of TV households in prime time as 
        the three net[work]s did 40 years ago. The programming 
        oligopoly appears to be in a process of rebirth.\20\
---------------------------------------------------------------------------
    \20\ Tom Wolzien, ``Returning Oligopoly of Media Content Threatens 
Cable's Power.'' The Long View, Bernstein Research (Feb. 7, 2003). 
Emphasis added.

    In addition, the number of independent studios in existence has 
dwindled dramatically since the mid-1980s. In 1985, there were 25 
independent television production studios; there was little drop-off in 
that number between 1985 and 1992. In 2002, however, only 5 independent 
television studios remained. In addition, in the ten-year period 
between 1992 and 2002, the number of prime time television hours per 
week produced by network studios increased over 200%, whereas the 
number of prime time television hours per week produced by independent 
studios decreased 63%.\21\
---------------------------------------------------------------------------
    \21\ Coalition for Program Diversity, Jan. 28, 2003.
---------------------------------------------------------------------------
    Diversity of production sources has ``eroded to the point of near 
extinction. In 1992, only 15 percent of new series were produced for a 
network by a company it controlled. Last year, the percentage of shows 
produced by controlled companies more than quintupled to 77 percent. In 
1992, 16 new series were produced independently of conglomerate 
control, last year there was one.'' \22\
---------------------------------------------------------------------------
    \22\ Victoria Riskin, President of Writers Guild of America, West. 
Remarks at FCC EnBanc Hearing, Richmond, VA (Feb. 27, 2003).
---------------------------------------------------------------------------
    The ease with which broadcasters blew away the independent 
programmers should sound a strong cautionary alarm for Congress. The 
alarm can only become louder when we look at the development of 
programming in the cable market. One simple message comes through: 
those with rights to distribution systems win.
    Of the 26 top cable channels in subscribers' and prime time 
ratings, all but one of them (the Weather Channel) has ownership 
interest of either a cable MSO or a broadcast network. In other words, 
it appears that you must either own a wire or have transmission rights 
to be in the top tier of cable networks. Four entities--News Corp./Fox 
(including cross ownership interests in and from Liberty) AOL Time 
Warner, ABC/Disney and CBS/Viacom--account for 20 of these channels.
    Of the 39 new cable networks created since 1992, only 6 do not 
involve ownership by a cable operator or a national TV broadcaster. 
Sixteen of these networks have ownership by the top four programmers. 
Eight involve other MSOs and 10 involve other TV broadcasters. 
Similarly, a recent cable analysis identified eleven networks that have 
achieved substantial success since the passage of the 1992 Act. Every 
one of these is affiliated with an entity that has guaranteed carriage 
on cable systems.\23\
---------------------------------------------------------------------------
    \23\ Federal Communications Commission, Ninth Annual Report, In the 
Matter of Annual Assessment of the Status of Competition in the Market 
for the Delivery of Video Programming, MB docket No. 02-145 (Dec. 31, 
2002).
---------------------------------------------------------------------------
    Moreover, each of the dominant programmers has guaranteed access to 
carriage on cable systems--either by ownership of the wires (cable 
operators) or by carriage rights conferred by Congress (broadcasters).

          AOL Time Warner has ownership in cable systems 
        reaching over 12 million subscribers and cable networks with 
        over 550 million subscribers.

          Liberty Media owns some cable systems and has rights 
        on Comcast systems and owns cable networks with approximately 
        880 million subscribers. Liberty owns almost 20% of News Corp./
        Fox.

          Disney/ABC has must carry-retransmission rights and 
        ownership in cable networks reaching almost 700 million 
        subscribers.

          Viacom/CBS has must carry-retransmission rights and 
        ownership in cable networks reaching approximately 625 million 
        subscribers.

          Fox (has must carry-retransmission and ownership in 
        cable networks reaching approximately 370 million subscribers 
        and a substantial cross ownership interest with Liberty).

    These five entities have ownership rights in 21 of the top 25 cable 
networks based on subscribers and prime time ratings. They account for 
over 60 percent of subscribers to cable networks, rendering this market 
a tight oligopoly. Other entities with ownership or carriage rights 
account for four of the five remaining most popular cable networks. The 
only network in the top 25 without such a connection is the Weather 
Channel. It certainly provides a great public service, but is hardly a 
hotbed for development of original programming or civic discourse. 
Entities with guaranteed access to distribution over cable account for 
80 percent of the top networks and about 80 percent of all subscribers' 
viewing choices on cable systems.
    In the world of broadcast and cable networks, almost three-quarters 
of them are owned by six corporate entities.\24\ The four major TV 
networks, NBC, CBS, ABC, Fox, and the two dominant cable providers, AOL 
Time Warner (which also owns a broadcast network) and Liberty (with an 
ownership and carriage relationship with Comcast and Fox), completely 
dominate the tuner. Moreover, these entities are thoroughly 
interconnected through joint ventures.
---------------------------------------------------------------------------
    \24\ One of the more ironic arguments offered by the cable 
operators feeds off of the observation that broadcast networks have 
carriage rights. They argue that even if cable operators foreclosed 
their channels to independent programmers, these programmers could sell 
to the broadcast networks. This ignores the fact that cable operators 
control the vast majority of video distribution capacity. There are 
approximately 60 channels per cable operator on a national average 
basis (Federal Communications Commission, 2002b, p. 10). There are 
approximately 8 broadcast stations per DMA on a national average basis 
(BIA Financial, 2002). Each broadcast station has must carry rights for 
one station. They can bargain for more, particularly in the digital 
space, but the cable operators control more stations there as well. In 
other words, if we foreclose 85 percent of the channels, the 
programmers will be able to compete to sell to the remaining 15 percent 
of the channels. Needless to say, this prospect does not excite 
independent programmers.
---------------------------------------------------------------------------
    If distribution rights win then an entity like News Corp./Fox/
DirecTV would create a powerhouse with guaranteed transmission rights 
on all three of the technologies used to distribute TV to the home. It 
will own broadcast stations, have must carry/retransmission rights on 
cable and satellite because of the broadcast licenses it holds, and own 
the largest satellite network. This is an immense power of distribution 
for a company that is vertically integrated into both broadcast and 
cable programming.
    In the 1992 Cable Act, Congress recognized that the Federal 
government ``has a substantial interest in having cable systems carry 
the signals of local commercial television stations because the 
carriage of such signals is necessary to serve the goals . . . of 
providing a fair, efficient, and equitable distribution of broadcast 
services.'' \25\ Congress also recognized that ``[t]here is a 
substantial government interest in promoting the continued availability 
of such free television programming, especially for viewers who are 
unable to afford other means of receiving programming.'' \26\
---------------------------------------------------------------------------
    \25\ Public Law 102-385, Section 2(a)(9).
    \26\ Public Law 102-385, Section 2(a)(12).
---------------------------------------------------------------------------
    These governmental interests, as well as a finding that ``[c]able 
television systems often are the single most efficient distribution 
system for television programming,'' formed the original rationale 
behind Retransmission Consent. Because a majority of the country was 
receiving broadcast television service through cable, it was necessary 
to require that cable systems carry local broadcast signals. However, a 
merger between News Corp./Fox and DirecTV would change the landscape 
against which Retransmission Consent was created. Given that this 
transaction will provide News Corp./Fox with assets that no local 
broadcaster had in 1992 when Retransmission Consent was originally put 
in place--it will have a satellite distribution system capable of 
reaching a majority of the country-it seems that the original logic 
behind the rule is strained in the present circumstances. Not only will 
News Corp./Fox own its own transmission system, but it also owns other 
programming that it bundles with its network programming, which may 
give it too much market power in negotiating cable and other carriage 
agreements. Congress should revisit the necessity of Retransmission 
Consent as it pertains to stations owned and operated by News Corp./
Fox.

                               CONCLUSION

    Consumers Union and Consumer Federation of America believe that the 
Dept. of Justice should impose substantial conditions on this deal 
which will otherwise be harmful to competition in the video programming 
market--harm that will be borne on the backs of consumers.
    Congress should impose a new set of nondiscrimination requirements 
that would enable all media distributors and consumers to purchase 
video programming and related services on an individual--as opposed to 
bundled--basis under terms that maximize competition and choice in the 
marketplace. Congress must reexamine the enormous market power and 
leverage that Retransmission Consent provides broadcast programmers--
particularly one like News Corp. which, as a result of the merger with 
DirecTV, will own a new nationwide video distribution system (in 
addition to its over-the-air broadcast distribution system). And 
Congress should require cable and satellite operators to offer 
consumers the right to select the channels they want to receive at a 
fair price--in other words, require an a la carte program offering from 
all video distributors. Since the average household watches only about 
a dozen channels of video programming, this requirement could empower 
consumers to help discipline excesses in cable (or satellite) pricing, 
and could possibly spur more competition.
    Congress must also carefully consider all the ramifications 
associated with the rulemakings on media ownership. Specifically, given 
that the FCC has announced an intended June 2nd decision date on media 
ownership rules, Congress should insist on seeing the FCC's proposal 
before any decision is finalized.
    If media ownership limits are significantly relaxed or eliminated 
by the FCC then the News Corp./DirecTV deal may look almost harmless in 
comparison to an avalanche of media mergers that ensue. It is 
completely unfair to force American consumers to accept inflated cable 
rates and inadequate TV competition. But excess consolidation in the 
news media is even worse: the mass media provides Americans the 
information and news they need to participate fully in our democratic 
society. Without ownership rules that effectively limit consolidation 
in media markets, one company or individual in a town could control the 
most popular newspaper, TV and radio stations, and possibly even a 
cable system, giving it dominant influence and power over the content 
and slant of news. This could reduce the diversity of cultural and 
political discussion in that community.
    The cost of excessive media consolidation and further media 
deregulation is very high. The cost of market failure in media markets 
is the price we pay when stories are not told, when sleazy business 
deals and bad accounting practices do not surface, when the watchdog 
decides that it would rather gnaw on the bone of softer news than chase 
down the more complicated realities that must be uncovered to make 
democracy function.

    Chairman Sensenbrenner. The gentleman's time has expired.
    Due to the large turnout today, the Chair is going to 
strictly enforce the 5-minute rule, and I am informed by the 
cloakroom that we are due to have some votes about 11 o'clock. 
So the Chair will recognize himself for 5 minutes.
    First of all, I would like to make the observation that 
according to the corporate SEC filings, News Corp. ranks sixth 
in the U.S. media marketplace in total revenues, 2.8 percent of 
the total media industry. I think everybody knows how extensive 
News Corp.'s media holdings are, and yet that only nets 2.8 
percent of the total industry, and with the proposed merger, it 
definitely would not get above 5 percent.
    As most of the people on the Committee and some of the 
witnesses know, I was not a fan of the proposed merger between 
DirecTV and EchoStar and stated so in the hearing that this 
Committee held on December 4, 2001. I note that Charlie Ergen, 
who is EchoStar's Chief Executive, and who will be the head of 
the corporation of the principal competition for satellite 
services, should this merger go through, stated publicly in the 
Financial Times of yesterday, that he thought that Mr. 
Murdoch's company would manage DirecTV better than Hughes by 
controlling piracy, which would benefit the entire satellite TV 
industry.
    Mr. Murdoch, would you like to comment on Mr. Ergen's 
statement and inform the Committee how you think that you can 
better control piracy than apparently the Hughes Company has 
done?
    Mr. Murdoch. Thank you, Mr. Chairman. This is a matter of 
some dispute, as a matter of fact, between DirecTV and News 
Corporation at the moment. But we supply, for instance, the--
all the anti-piracy devices and encryption for Hughes in their 
Latin America activities, and they have never been cracked 
there at all. We also do it in Britain, where we suffer from no 
piracy. We think we have know-how and the ability to follow 
through on that.
    Chairman Sensenbrenner. My final question----
    Mr. Murdoch. And if I can just say this. I believe that 
there's between one and one-and-a-half million pirates out 
there now getting the signals for token prices.
    Chairman Sensenbrenner. My final question is that there has 
been an overriding concern that News Corp. will use its 
superior programming capability to be able to foist allegedly 
expensive programs over satellite TV and onto cable television 
which is not owned by News Corp. Can you describe what types of 
protections you envision to prevent that from happening?
    Mr. Murdoch. Thank you for describing them as superior. The 
fact is that Hughes will still be owned 66 percent by the 
public. All related party transactions will be vetted by an 
audit committee, which will be manned totally by independent 
directors, and there is no other way that we can take advantage 
of DirecTV with unfair pricing against DirecTV, or should we 
say milk it in any way.
    Chairman Sensenbrenner. Thank you very much.
    The gentleman from Virginia, Mr. Boucher.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. I 
commend you for assembling today's hearing on a very timely 
subject, and I want to join with you in welcoming the witnesses 
and thank them for their very well-prepared testimony.
    Mr. Murdoch, I want to commend you for agreeing to abide by 
program access rules, even though you do not own cable 
properties and would not under the law strictly be required to 
abide by program access. And I think that is a start. But I 
don't think it goes quite far enough in addressing the concerns 
that there is a potential that your ownership of both content 
and a means of multichannel video distribution can lead to 
anticompetitive conduct.
    The first point I would note is that your agreement to 
abide by program access rules is not permanent in nature, and 
would only co-exist with the existence of the Federal 
Communications Commission's continuation of the program access 
requirements. I have some concern that at some point, perhaps 
in the not-too-distant future when the current rules expire, 
that the Commission may be led not to renew them. The purpose 
of those rules at the outset was to make satellite a viable 
competitor with cable, by assuring that satellite companies 
could get access to very popular cable programs. The satellite 
industry is doing pretty well. It's got about 20 million 
subscribers today, and as local-into-local service has expanded 
to more of the 211 television markets around the country, and I 
rather suspect that your total subscribership will increase 
dramatically, perhaps to double the current amount. When that 
happens, if that happens, I have some doubt that the FCC would 
continue to program access rules. And under the agreement that 
you have made, your obligation to abide by program access would 
therefore expire.
    So my first question to you is whether or not you would 
agree to abide by the program access rules on a permanent 
basis, even if their continuation is not renewed by the FCC. 
Your acquisition of a one-third interest in Hughes will be 
permanent in nature. Perhaps this commitment to program access 
for all of your potential distributors should also be 
permanent. Would you agree to that?
    Mr. Murdoch. Thank you, Congressman Boucher. No, we would 
not agree to that. We do not think it would be fair for us to 
be committed to abide by a rule which none of our competitors 
would be affected by, so we would put ourselves at a permanent 
disadvantage to all of our competition if we accepted your 
suggestion.
    Mr. Boucher. All right, thank you. I have a second question 
of you. The program access commitment only applies to your 
cable channels. It would not apply to your broadcast 
television. Therefore you would be in a position potentially to 
deny retransmission consent for your News Corp. originated 
programming to EchoStar, to cable companies, or perhaps you 
could charge EchoStar or cable companies a higher price for 
retransmission consent that then you would charge to DirecTV. 
What comfort should we take in that kind of structure, and what 
kind of commitment would you be willing to make that you would 
not engage in that kind of conduct? Would you, for example, be 
willing to accept a commitment that you would simply not charge 
retransmission consent fees to anyone?
    Mr. Murdoch. No, I wouldn't. Congressman, the question of 
retransmission fees and the justice behind all the free 
broadcasters having some payments or some consideration for 
their very expensive programming is a subject we needn't get 
into now. But as far as we're concerned, I just point out that 
it would be madness if I were to deny EchoStar the Fox signal, 
the Fox stations. It would cost us at least $400 million a 
year. And I'm sure that Mr. Ergen could do other things to me 
in retaliation which would cost me another $400 million a year. 
So it's just not realistic when you think about it.
    Mr. Boucher. Well, the concern I have is perhaps that you 
would not in a blanket way simply deny retransmission to the 
competitors, to DirecTV, but that you might charge a 
substantially higher price.
    I thank you for coming here this morning. Unfortunately, 
you haven't done very much to alleviate my concerns, and these 
shall be expressed perhaps in a different forum.
    Mr. Kimmelman, I have just a moment remaining. Let me ask 
you to comment on the problems that arise through the potential 
misapplication of retransmission consent by News Corp.
    Mr. Kimmelman. Well, the danger here, Mr. Boucher, is that 
you take a channel that's a broadcast channel that you in 
Congress deemed was so important for the public to get in 1992, 
that every cable operator either had to automatically carry it 
or negotiate with the broadcast owner for carriage since cable 
was the dominant transmission mechanism by which the public was 
receiving local signals. Now we see a whole cachet of cable 
channels being bundled with that local programming, and now one 
of the broadcasters, in the form of News Corp., has a separate 
distribution channel, a satellite system with nationwide 
coverage it did not have in 1992, by which it can send its 
signal to everyone in the country as well. The rationale for 
giving that power of retransmission, I would submit in this 
case, is no longer there and ought to be revisited.
    Chairman Sensenbrenner. The gentleman's time has expired.
    The gentleman from North Carolina, Mr. Coble.
    Mr. Coble. Thank you, Mr. Chairman.
    Mr. Murdoch, if I understood Mr. Conyers' opening statement 
correct, News Corp. has 20 percent of the market share, and 
either you or the Chairman, one indicated that your percentage 
of media revenue was 2.8 percent. That would appear to me, if 
you have 20 percent of the market share, your percentage would 
be in excess of 2.8 percent. What am I missing?
    Mr. Murdoch. I think the 2.8 percent is for the whole media 
industry in the United States. I think Mr. Conyers was talking 
about our viewership, that is 20 percent of people, 20 percent 
of all the viewing----
    Mr. Coble. Okay.
    Mr. Murdoch.--is to say, which I would research and like to 
answer Mr. Conyers another time, because I certainly can't 
believe it. I would love it to be true.
    Mr. Coble. Mr. Murdoch, tell us the benefits that this 
merger will bring to current satellite customers, and, in 
particular, rural customers who may not have access to cable 
services now.
    Mr. Murdoch. Congressman, we are absolutely committed to 
extend the local-into-local, so that everybody today getting 
satellite television will be able eventually to get their own 
local stations on the satellite, all in the one service.
    Also we are committed--I have to be slightly vaguer about 
this--in saying that we are determined to bring broadband to 
every home in America and particularly in rural America. Hughes 
has already spent $1.5 billion in developing a new system. It's 
not launched yet. There's still several hundred million dollars 
to go on that. There are some doubts about its economic 
feasibility as a consumer proposition. There are other people 
putting up satellites who feel they can do it much more 
cheaply. I think broadband, as a matter of opinion, will be a 
commodity.
    But there are other technologies and very exciting 
technologies being developed at the moment, such as using the 
power grids, allied to the new Wi-Fi technology. We are 
actively investigating that and the possibility of introducing 
that technology and selling it alongside DirecTV as a bundle.
    Mr. Coble. Thank you, Mr. Murdoch.
    Mr. Arquit and Mr. Kimmelman, let me put this question to 
you all. I'd like to know how much of the satellite market 
DirecTV currently has, and how much EchoStar currently 
controls, A. And B, if this merger were to, in fact, be 
consummated, is it your belief that EchoStar could effectively 
compete for satellite customers against an entity as large and 
diverse as News Corp.? Mr. Arquit and then Mr. Kimmelman.
    Mr. Arquit. If I understood your question, Congressman, as 
I understand it, in a total MVPD market, that DirecTV has 
somewhere around 12 percent, and EchoStar has 8 or 9 percent. 
So if you break that down in terms of--if you're looking at 
just direct broadcast satellite, which I understood your 
question to be, it would suggest that DirecTV is the larger of 
the two players.
    To respond to the second part of your question, I do 
believe they would be able to compete effectively, and it is 
for the reason that--when I think when you look at News Corp., 
I don't, as a former antitrust enforcer, we never really looked 
at people's promises as such. We looked at what market 
conditions would require them to do. And here because they gain 
so much from their programming revenues, and, I think, Mr. 
Kimmelman missed the point when he talked about the fact that 
Fox has some strength in some areas. Surely they do with things 
like regional sports. I mentioned the Fox News Service. But for 
every person that they take away, for every time that they deny 
access to some other one, like EchoStar, to go to your point--
--
    Mr. Coble. Mr. Arquit, my time has expired. Let me hear 
from Mr. Kimmelman. We want to give him equal time. Thank you.
    Mr. Kimmelman. Thank you, Mr. Coble. I would suggest that 
the danger is much less likely to be outright refusal to deal 
with a competitor as much as raising the input costs of key 
programming, some of the most popular programming, sports, 
news, the network, to drive up the costs of their competitor. I 
think that's the greatest danger. And I think the most likely 
result is you will see--you'll see just an avalanche of other 
mergers involving EchoStar as well, to go vertical, to try to 
respond to this combination.
    Mr. Coble. Thank you all, gentlemen, for being with us.
    Mr. Chairman, I yield back.
    Chairman Sensenbrenner. The other gentleman from North 
Carolina, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. I thank the Chairman and 
Ranking Member for convening the hearing.
    Mr. Schnog, you seem to be left out of this discussion 
here, and I'm trying to figure out whether you have a different 
perspective than the EchoStar people who are big, and all of 
the big folks, or whether you are the beneficiary of the same 
kind of power that other cable stations have. Can you help me 
understand how you are different than any other cable company?
    Mr. Schnog. Yes, I would love to do that. I think first 
that you have to look at the group that I represent and the 
size of our company. With 8,000 customers, we have zero market 
clout. Mr. Murdoch----
    Mr. Watt. So----
    Mr. Schnog.--could live with us or without us. I mean in 
the morning he could wake up, have breakfast and never know 
that we ever existed and would never have anything to do with 
his empire or anything to do with the financial statement.
    I think the most important thing to say, as I've listened 
to this, is I go back to Mr. Boucher's comments, and quite 
important to say a lot of the things that are going on, already 
small cable operators like myself are being bounced around in 
retransmission consent discussions in smaller markets, where 
they're already using their leverage and already extorting 
money for us.
    And one of the big fictions I keep hearing is, ``Boy, if we 
don't sell it to everybody, we're going to lose money.''
    No. If he sells it to DirecTV and nobody else, all the 
customers go to DirecTV. He never loses a viewer. Come on.
    Wait a minute. What happens is the viewer from our 
distribution channel to his. He just makes twice the money. So 
we're--I mean----
    Mr. Watt. Wait a minute. Wait, wait. I think I got your 
message there. Let me try to figure out how this is different 
from other providers of programming. I take it you don't 
provide any kind of programming--you don't produce any kind of 
programming.
    Mr. Schnog. Not a whit.
    Mr. Watt. Are they tying or bundling when they provide 
programming to you?
    Mr. Schnog. They are, especially in local markets. For 
instance, if you were in a market where you wanted to gain 
access to----
    Mr. Watt. How is that different than what you say Mr. 
Murdoch's merger will allow to be done? It's already happening 
to you, right?
    Mr. Schnog. Well, it's already happening. What's going to 
happen, it is our belief, it's just going to get much worse. 
Now you're not just looking at local stations, you're looking 
at the fact that he can go in and bring his own distribution 
network in, and now in the negotiation, if you say, ``Hey, 
listen, you've just gone too far,'' and the threat being, 
``I'll take you off.'' He says, ``Well, that's all right. I'll 
just, you know, I'd rather have you do that because now people 
go to my distribution system instead.''
    Mr. Watt. Mr. Murdoch, I guess I understand how you would 
not want to vex Mr. Ergen, whoever he is, at EchoStar. What do 
you have to say about whether you want to vex Mr. Schnog, the 
little guy? What's your response to what he said. I can't hear 
you.
    Mr. Murdoch. I beg your pardon. I said I have no wish to 
vex Mr. Schnog at all. But we, as a matter of business 
principle, want to be seen in every single home we can. We live 
by the ratings----
    Mr. Watt. If you cut him off, won't his customers just come 
to DirecTV?
    Mr. Murdoch. I don't think it's as easy as that. There's 
many other customers enjoying many other things.
    Let me say about these smaller cable systems. There are 
about what we would call 1,000 small cable operators. 300 of 
them are affected by Fox Television stations. We have 35 or--I 
think 35 stations in all, and we therefore have negotiations on 
retransmission with a total of 300, not with Mr. Schnog. We 
have just completed, very satisfactorily, negotiations on 
retransmission for another 3 years with all 300. 150 of those 
have less than 1,000 customers. We said, ``Just take the 
signal. Don't worry about a negotiation.'' The other 150 we had 
very----
    Mr. Watt. You mean you gave it to them?
    Mr. Murdoch. Yes. And the other 150, you have small 
negotiation, you probably find they're taking Fox News, and you 
say, ``Well, it would be nice if you could take the National 
Geographic Channel which we're trying to establish as a 
competitor to Discovery.'' And you see if they can fit it on, 
or what they do. You know, each negotiation is slightly 
different from the next one.
    Chairman Sensenbrenner. The time of the gentleman has 
expired. The gentleman from Texas, Mr. Smith.
    Mr. Smith. Thank you, Mr. Chairman.
    Mr. Murdoch, let me direct my first couple of questions to 
you, and the first is to ask you to respond to one of the 
concerns mentioned by Mr. Kimmelman. He said in his prepared 
testimony that the agreement preserves the right to a variety 
of exclusive carriage arrangements such as sports programming, 
where News Corp. enjoys substantial market power. Wouldn't that 
be at some disadvantage to consumers?
    Mr. Murdoch. Yes. I don't think that's true at all. The 
only exclusive programming that is there on DirecTV was done 
before my time, which was to purchase from the NFL what's known 
as the Direct Sunday Ticket. The NFL chose to bundle that 
product and make an exclusive offering to the highest satellite 
bidder, and there was competition between EchoStar and Direct 
and DirecTV won the competition, and loses a lot of money, I 
can assure you.
    Mr. Smith. Mr. Murdoch, my second question goes back to the 
earlier proposed merger between EchoStar and DirecTV. One of 
the primary justifications was to provide local TV service in 
all 210 television markets across the country, and at the time 
merger opponents claimed that separately EchoStar and DirecTV 
already each serve 210 markets. So is it the satellite capacity 
or a cost issue that prevents you from serving all of those 210 
TV markets?
    Mr. Murdoch. It's both. We can actually go out to many more 
than we do at the moment. We believe that new compression 
techniques and so on. But there is only a certain amount of 
spectrum which Direct Television has or which EchoStar has.
    Mr. Smith. So you're saying it's primarily capacity that 
prevents----
    Mr. Murdoch. Capacity is a problem. Cost is too--it is very 
costly. I think there are ways that we're going to try and 
examine that. I intend to approach Mr. Ergen and see if we 
can't share some of the costs, because we duplicate.
    Mr. Smith. How many markets do you expect to get into? Do 
you expect to cover all 210 at some point or not?
    Mr. Murdoch. As close as I can. I don't know whether I'll 
be down to 190, but currently we'll be--by the end of this year 
we'll be covering 85 percent of American homes. We will 
certainly go well into the 90's.
    Mr. Smith. Thank you, Mr. Murdoch.
    Mr. Schnog, let me direct my last question to you, and that 
is that the American Cable Association, in an April 11th news 
release, said only that the Fox News Corp./DirecTV deal must be 
closely scrutinized. Today the ACA, quote, ``vehemently opposes 
this proposed merger.'' Why the change? Why the escalation 
between this month and last month?
    Mr. Schnog. I think as we scrutinize the whole deal and 
what we see coming down the road, it's bad for everybody. It 
just doesn't work. It means higher prices for consumers. It 
means higher programming costs for us as operators that we're 
just going to have to pass along. It means that we hear about 
retransmission consent negotiations that are supposedly done, 
but I know of dozens and dozens of small cable operators that 
are still, you know, in month to month agreements with Mr. 
Murdoch's stations, because they can't reach even 
retransmission consent deals, and with that going on, we say to 
ourselves, this is a bad deal. This is a company that maybe we 
should all watch out for. I mean this is really a fox in the 
henhouse, and it's time for us to say, no, just forget it.
    Mr. Smith. Thank you, Mr. Schnog.
    Mr. Chairman, thank you.
    Chairman Sensenbrenner. Thank you. I thought that in 
Australia there were more crocs than foxes.
    The gentleman from New York, Mr. Nadler.
    Mr. Nadler. Thank you, Mr. Chairman. Mr. Chairman, I have 
two questions for Mr. Murdoch which I'll ask together. They're 
both based on an article in the Columbia Journalism Review of 
May/June 1998, which I'm going to read excerpts of. It says as 
follows: News Corporation's been able to keep its worldwide 
corporate tax rate surprisingly low, roughly one-fifth those 
paid by Disney, Time Warner and Viacom, largely shifting income 
through an almost unfathomable web to low tax or no tax havens 
in places as far flung as the Cayman Islands, Fiji and even 
Cuba. Virtually no other media organization has followed up on 
this story.
    Farhi--who's identified in the story--says when he began 
his own reporting, he found that no one would talk to him, not 
even Murdoch's competitors. Similarly, CJR found competitors 
refusing to speak for the record. Some noted ruefully how the 
range of possible employers has narrowed with media 
consolidation. And further elsewhere in the article: He wields 
his media as instruments of influence with politicians who can 
aid him and savages his competitors in his news columns. If 
ever someone demonstrated the dangers of mass power being 
concentrated in few hands, it would be Murdoch.
    And further as examples of this: The recently retired East 
Asia editor of the Times--of London, that is--Jonathan Mursky, 
had told the January Freedom Forum gathering that the paper, 
quote, ``had simply decided because of Murdoch's interests not 
to cover China in a serious way.'' Mursky also said he has a 
standard--a transcript, rather--of a 1997 conversation between 
the Times Editor, Peter Stoddard and the Chinese Vice Premier, 
in which Stoddard apologizes for having inquired about a 
Chinese dissident.
    Murdoch's British tabloid, The Sun, recently reversed its 
opposition to the controversial Millennial Dome, an enormous 
exhibition built in London after Murdoch's British Sky 
Broadcasting Satellite Service became a key investor. The 
English reading public had seen this before. Murdoch's firing 
of editors Harold Evans of the Times and Andrew Neal, the 
Sunday Times, were both widely felt to be over reporting by the 
papers that angered the Tory Government during a period when 
Government decisions were massively enriching the tycoon.
    Those are quotes from this Columbia Journalism Review 
story. My question is: To what extent is this not true, that 
is, that you're using shifting of income to foreign locales to 
evade U.S. taxes? And do you use your influence as a result of 
all these media properties to influence governments in their 
decisions on your commercial aspects, and why if in fact you're 
evading taxes and thus getting an unfair competitive advantage 
with respect to your media competitors, and using concentrated 
media power to distort the politics of the U.S. and other 
nations for your own commercial purposes, if this is true, why 
do you think Congress should grant your corporation the ability 
to control even further our domestic airwaves?
    Mr. Murdoch. Well, Congressman Nadler, I can assure you 
that the Columbia Journalism Review is famously misinformed on 
the subject. They have some paranoia----
    Mr. Nadler. Has there been a----
    Mr. Murdoch. Those facts are not there and we're very happy 
to show you anything about our tax returns.
    As for today, because we've eaten up a lot of tax losses 
because we started many things and made big losses, we are now 
paying about 30 percent of all our income, operating profits in 
taxes, which is about average for an American company.
    Mr. Nadler. So you never used or you're no longer using tax 
havens?
    Mr. Murdoch. We might have in the past. I'm not denying 
that, but not to the extent stated there.
    Mr. Nadler. Has there been a detailed refutation published 
of the specific allegations--and I've only read a couple of 
them; there are a lot more in here--that the Columbia 
Journalism Review makes both with respect to the taxes and with 
respect to alleged use of media influence to--let me just 
finish--to not cover things embarrassing to the Chinese 
Government, for instance, or to not cover things embarrassing 
to other governments in return for commercial concessions?
    Mr. Murdoch. The answer is no to both questions.
    Mr. Nadler. There has not been a refutation.
    Mr. Murdoch. We're quite prepared to put something on the 
record later if you like.
    Mr. Nadler. I think you misunderstood my question.
    Mr. Murdoch. My--my----
    Mr. Nadler. Excuse me. My question was, has there been a 
refutation published of this?
    Mr. Murdoch. No.
    Mr. Nadler. There has not been?
    Mr. Murdoch. No, not that I know of.
    As for using our political influence in our newspapers or 
television to favor investments, that is nonsense. As for the 
investment in the Dome, that was some sponsorship by Sky which 
all the rest of our newspapers attacked as ridiculous. We're 
not going to work in some monolithic way like that.
    And as for China, that's absolutely not the case. You get 
the odd disaffected journalist who will say anything about 
anybody.
    Mr. Nadler. Could you give us----
    Chairman Sensenbrenner. The gentleman's time has expired.
    Mr. Nadler. Could I have 30 seconds additional time?
    Chairman Sensenbrenner. Well, we're going to be having 
votes sometime between 11:15 and 11:45, and the Chair announced 
that he was going to enforce the 5-minute rule strictly in 
order to allow as many Members as possible to ask questions 
before the bell rang.
    The gentleman from Indiana, Mr. Pence?
    Mr. Pence. Thank you, Mr. Chairman, and thank you for 
holding this hearing. It is certainly an extremely illuminating 
debate, and I'm particularly grateful for all the panelists, 
and especially so for Mr. Murdoch.
    I feel as though I'm in the minority up here, Mr. Murdoch, 
and that's probably apparent from your seat. I'm a free market 
conservative, and I want to applaud your ingenuity and express 
my gratitude for your willingness to risk your personal 
resources in ways that I think have genuinely added diversity 
to the American debate. If you haven't already read Atlas 
Shrugged by Ayn Rand, you probably should. I'm tempted to greet 
you as John Galt today, but I hope not.
    I want to clarify with you, Mr. Murdoch, a couple of basic 
facts. My understanding is that News Corp. at this time ranks 
sixth overall in communications in the United States, which is 
2.8 percent, I believe, according to your testimony, of 
communications revenues. After the merger I think also your 
testimony, which may be somewhat in dispute among the panel, is 
that those revenues, based on 2002 numbers, will likely not 
exceed 5 percent of the marketplace. A part of me wants to ask 
what's all the fuss about when 95 percent of the market will 
remain in the hands of others, but I won't.
    I guess my question to you, Mr. Murdoch, is apart from the 
fact that News Corp. wasn't involved in the EchoStar/DirecTV 
merger, what was wrong from your standpoint and public 
statements that you made about that merger from an antitrust 
standpoint, and what's different about News Corp.'s purchase 
that we're considering today?
    Mr. Murdoch. Well, it was simply establishing a monopoly, 
and all our advice had been that it was illegal, as it proved 
to be. We had nothing personally against Mr. Ergen, who I 
admire as a very fine operator and a very competitor. But the--
it was very different.
    And this, we're going to bring to Direct Television a lot 
of new skills, and a great deal more energy, and we're going to 
really drive it as hard as we can to be competitive with cable.
    Mr. Pence. And specifically the monopoly would derive if 
EchoStar's 8.9 percent I think someone testified, and DirecTV's 
12 percent, but that would be a monopoly in that particular 
segment of the television programming and distribution market?
    Mr. Murdoch. Well, in that segment, yes, and in satellite 
it certainly would. Mr. Ergen is now growing faster than Direct 
Television and has about 10 percent of the market, according to 
the figures he released this week, whereas I think DirecTV is 
now at 12, 12\1/2\ percent.
    Mr. Pence. Very good. Well, I want to thank the entire 
panel for their testimony, and I'll yield back the balance of 
my time in the interest of the others, Mr. Chairman.
    Chairman Sensenbrenner. The gentlewoman from Texas, Ms. 
Jackson Lee.
    Ms. Jackson Lee. Thank you very much, Mr. Chairman. Let me 
thank the very fine presentations that have been made by this 
hearing this morning.
    Allow me first of all to acknowledge, Mr. Murdoch, two very 
outstanding employees of your organization. I particularly want 
to acknowledge them because the concerns that I have are far 
reaching, realizing that I will not be able to cover all of 
them in this hearing and also the posture and position of the 
Judiciary Committee with respect to impact on this merger, and 
so I will join in the comments of Congressman Boucher, that I 
will express my position in the necessary agencies as this 
process moves forward.
    But I think it's important to note the very fine work of 
Angela McGlowan and Misty Wilson, who have worked very hard to 
ensure that there is diversity in front of the camera and 
behind the camera, and might I also note that Juan Williams 
represents probably the best breath of fresh air that you could 
offer us on Sunday morning. I hope that you can increase that.
    I do want to note for the record that it seems that this 
merger generates concerns that News Corp. may use its market 
position in satellite to harm its competitors up and down the 
distribution chain, and as well, that this approval of the 
merger of this size could also lead other media companies to 
try and buy ever more assets to compete with News Corp. It is 
clear if you look at the testimony of Mr. Kimmelman--and I 
thank you--that, in fact, the ownership is truly staggering. 
And I am a zealot as it relates to the first amendment. I 
believe in the ability to freely express your viewpoints. You 
do so well in the Fox News Channel, to my disagreement 
vigorously, and the New York Post. And those are the two most 
prominent contents that we see. You seem to be against 
everything that is minority, everything that is progressive, 
but that is the first amendment.
    My concern, Mr. Murdoch, is one, your ownership is 
staggering. You are going to have impact on the content. The 
question is: Are you going to allow CNN to remain on DirecTV, 
because it is certainly one of the more vigorous competitors of 
Fox News Channel? And again, that's only a small aspect, but I 
think it is a question I would like to ask you, whether or not 
this merger will only propel more major ownerships, 
conglomerates, which really brings down the first amendment. It 
quashes the first amendment. It quashes content, different 
opinion. And whether or not you are going to impact this market 
position in the satellite to harm its competitors up and down 
the distribution chain? Could you give me those, the content 
question, and as well the distribution and up and down the 
chain, please?
    Mr. Murdoch. Of course we're going to keep CNN on the air, 
and we want--you know, just to have as much diversity in 
programming as is possible in every sense. We believe that the 
strength of satellite is its ability to give the public choice, 
choice in every way, of entertainment, of news, of views, and 
we will continue to do that. I don't concede to you what you 
said about Fox News. Why? I mean Congressman Nadler's a very 
regular guest and a very welcome one.
    Mr. Nadler. Thank you.
    Mr. Murdoch. And we have all viewpoints there.
    Ms. Jackson Lee. I'd love to see more of Congressman Nadler 
and keep promoting him, and I will do so as well, but I 
maintain my position that it's very narrowly focused and 
provocative. But again, remember what I said, the first 
amendment is something that I value.
    My question again, however, is your ownership is 
staggering. Do you not feel that this merger only contributes 
to the fact that there will be more and more conglomerates, and 
again, a bringing down of the diversity of opinion by the first 
amendment content is a question. So you don't feel that this 
merger that you're offering is going to again propel this 
question of large ownership of the media, and that is not a 
positive for this Nation.
    Mr. Murdoch. I think there's just tremendous competition 
everywhere. I'm well aware that I'm looked upon as more 
prominently than I deserve in size. That's because we've been a 
catalyst for change, because we've come in and we've challenged 
the big entrenched monopolies like the networks, like CNN, or 
like ESPN, and you know, that draws attention and a lot of 
animosity and fear.
    Ms. Jackson Lee. Thank you.
    Mr. Kimmelman, can you quickly just comment on that, 
please?
    Thank you, Mr. Murdoch.
    Mr. Kimmelman. I'm amused at the News Corp. definition of 
what the media market is. Consumer Reports is part of their 
media market, as they define it. Every radio station, every 
Internet site in the country. It's no surprise that they have 
such a small share when you include Sony and everybody else in 
this as well.
    This is--the key issue here in terms of excess control over 
viewpoints presented, you have to look at where people get news 
and information. Prime time television, prime time news. It's 
predominantly the network and these new cable news channels. 
This, I think, consolidates a lot of power. It is not a 
monolith, I agree with Mr. Murdoch, and I agree he puts 
different points of view on the air. But he shouldn't be 
ashamed of saying there's a bias. We think every media has a 
bias, and that's all part of the first amendment public debate.
    I think there's a danger you will see more consolidation 
among others who want to put content with the distribution 
channel to challenge him, and I fear it's too few entrepreneurs 
with something we cherish the most, diversity of viewpoints, 
competition in the media, to really feel our democratic 
process.
    Chairman Sensenbrenner. The gentlewoman's time has expired.
    Ms. Jackson Lee. Thank you very much, Mr. Chairman.
    Chairman Sensenbrenner. The gentleman from Utah, Mr. 
Cannon.
    Mr. Cannon. Thank you, Mr. Chairman. I'd like to thank the 
panel for being back. We've had several of the people on this 
panel before.
    Mr. Murdoch, welcome. We had your friend, Charlie Ergen, 
the last time we had a panel like this, and I believe he was 
actually sitting in the seat that you're now in.
    And Mr. Chairman, I'd like to offer for the record, ask 
unanimous consent to introduce into the record a Financial 
Times article called EchoStar lauds Murdoch Move. And if I 
might read the first two paragraphs, I think you might enjoy 
this, Mr. Murdoch.
    Mr. Murdoch. Thank you.
    [The material referred to follows:]

    
    
    
    
    Mr. Cannon. And if you could comment on it. Charlie Ergen, 
EchoStar's Chief Executive Officer, and I might say one of the 
toughest guys I've ever bumped into in business, bright, smart, 
said yesterday that News Corp.'s acquisition of DirecTV could 
help expand the satellite television industry, although he 
acknowledged he faced a formidable new rival. Congratulations. 
If regulators approve News Corp.'s bid for Hughes's DirecTV 
unit, it could strengthen the satellite industry's position 
against cable, Mr. Ergen said. It's clear News Corp.'s entry 
would be a negative for cable. It may or may not be a negative 
for EchoStar.
    This guy's a tough competitor. Do you want to comment on 
his statements there?
    Mr. Murdoch. Well, I agree with it and welcome it. We will, 
of course, be a tough competitor of his I hope, but he is, as 
you say, one of the toughest around. For instance, he runs a 
much lower cost operation than Direct. He charges less, and he 
makes more money per customer. Nothing wrong with that. I'm 
just saying he runs an extremely vigorous--he's one of the best 
operators in the world, and it's going to be an interesting 
test of our powers.
    Mr. Cannon. I for one am thrilled that we have two of the 
great competitors of the world competing to get more people 
access to more programming and more capability. I'm just 
fascinated to feel that Fox is narrowly focused. I like to 
think in terms of the broad market appeal that that channel's 
had and the huge new audience it's brought to bear on your 
channel, because I think it actually appeals to people and 
would disagree with the prior statements that it is narrow. I 
really enjoy it.
    You know, one of the problems that we had before about this 
is that the influence it had or the effect it would have had to 
have on satellite channels as it related to rural America, 
where often--I'm not in rural America, but I'm in sub-suburban 
America, and I can't get cable very--it has not worked out. 
Could you talk a little bit about what the benefits of this 
deal would be for rural customers?
    Mr. Murdoch. I think it means there will be real 
competition. We will be competing with EchoStar on every level, 
with the amount of high definition programming, who can get 
there first with local-into-local broadcasting, on price, on 
service, which is most important of all of this. There's great 
frustration very often with customers of cable. I think there 
is sometimes with satellite companies. They don't get the 
telephone answered, they don't get their queries answered. 
There's a great deal to do to improve ourselves and to give Mr. 
Ergen a real test.
    Mr. Cannon. I might just point out from personal 
experience, that I have some sons who are really into soccer, 
and they wanted satellite because it's where they could get 
some of the great soccer programs, and so I actually got on the 
phone and went through the process, and it could really use a 
high dose of service. I won't say which group it was that I 
called on that, but I'll just tell you that they could work a 
lot better. And we have great new ways of doing it. This is the 
kind of thing, I tried to do it online and you couldn't get the 
basic information you need online.
    If I might just ask, what other consumer benefits do you 
think will be derived from this deal?
    Mr. Murdoch. Well, I think of greater competition, a much 
faster move to high definition television. We believe that high 
definition will be the driver to get the American public to 
adppt digital.
    Mr. Cannon. If you don't mind, I'm going to cut you off 
because I'm about to lose my time, and I just want to say thank 
you for getting into this industry, thank you for being such a 
heck of a competitor. Thank you for putting a guy like Charlie 
Ergen on his very best behavior and his most aggressive 
behavior. I look forward to seeing a satellite industry that is 
robust and that informs virtually all the rest of our 
commercial communication and content, and I think that this is 
a great thing. Thank you for what you've done and for the risk 
you've taken, and I wish you the best in success as it goes 
forward.
    Mr. Murdoch. Thank you, Congressman.
    Mr. Cannon. Mr. Chairman, I yield back the balance.
    Chairman Sensenbrenner. The gentleman's time has expired.
    Mr. Murdoch, we're not going to let you quit while you're 
ahead.
    The gentleman from New York, Mr. Weiner. [Laughter.]
    Mr. Weiner. Thank you. Thank you, Mr. Chairman.
    Mr. Cannon. Mr. Chairman, will there be a second round?
    Chairman Sensenbrenner. No.
    Mr. Weiner. Well, I love the New York Post. Channel 5 is 
great. Channel 9, love those guys. Actually, I'm predisposed, 
frankly, in these types of issues, to be concerned about how 
media has become too concentrated, but I'll be very honest with 
you, I'm not sure I understand. The objections seem to fall 
into two camps. Mr. Schnog seems to object to competition at 
all. Let me just paraphrase and then you'll get a chance to 
respond, because it is the incumbent cable company, for a lot 
of reasons, there's no way practically for a cable company to 
come in and compete, the infrastructure, the investment that 
would be necessary.
    Mr. Kimmelman's testimony, who I'm a big fan of, but it 
seems contradictory. You started your testimony by saying that 
there hasn't been competition to keep rates down. Yet, this is 
an opportunity for a competitor to cable to emerge. One that 
has some technological advantages, but some with very big 
disadvantages not being the incumbent. We actually had a test 
of the notion that there was competition for cable in New York 
recently, when the New York Yankees were kept off the air 
because of a dispute about placement. Now, as a Mets fan, they 
could still be having the dispute, and I wouldn't care. 
[Laughter.]
    But I think that what DirecTV did is then came in and 
vigorously competed for those customers. Some left. Some didn't 
because they couldn't for technological reasons. Some didn't 
because they liked the incumbent's system.
    How is it, putting aside the fact that prices have gone 
up--and some would argue that prices went up after deregulation 
because they were held artificially low by regulation which was 
necessary then because there wasn't a viable option. It seems 
to me counter-intuitive that you would not want to create more 
stronger competitors for the cable monopoly. Tell me why this 
doesn't do that.
    Mr. Kimmelman. Mr. Weiner, we would absolutely want to 
create more competitors, and it's just sad to us, the structure 
of this deal. Let me point out on the issue of whether cable 
rates are too high or too low, the GAO reported Tuesday in the 
Senate Commerce Committee, preliminarily, that where there are 
two cable companies serving a community and two satellite 
companies, prices are 17 percent lower for the same channels, 
the same infrastructure, the same services. Where there's two 
satellite and one cable, so----
    Mr. Weiner. But where there are more competitors, yeah, 
you're going to have lower prices. This is an industry that 
grew out of advances in technology. They're still catching up, 
I think. There are still glitches in the system. For example, a 
lot of places can switch to their satellite if they want to get 
their local broadcasts, depends how difficult that is 
technologically. But on the issue that I'm asking about, it 
seems to me cable is realistically not going to compete with 
other cable. There's too much of a capital investment involved, 
and frankly, it's an antiquated technology. God bless you, but 
it's an old technology.
    Why isn't it that we should be in Congress and the Justice 
Department fighting to make sure there are more powerful 
satellite guys to give real competition?
    Mr. Kimmelman. I think you should be trying to get more 
players in the satellite market. This deal does not work this 
way. This deal combines a national over the air network with 
free given away licenses and guaranteed carriage on all cable 
systems with one of only two satellite players in the market. 
We need more players. I agree with you completely. The problem 
here is that this company can maximize its profits more by 
raising its programming prices, both on its own systems and on 
cable systems, then it can by trying to drive down----
    Mr. Weiner. Yeah, but hold on a second. Right now if you--
who has the deal with Blockbuster? Is that you guys or the 
other one?
    Mr. Murdoch. I think Direct has it.
    Mr. Weiner. The competition now is based on price. I mean 
you go in, every advertisement, only 99 bucks, we'll give you 
whatever it is. Competition based on price is going on now. 
Competition based on depth of service is going on now. It 
just--it's counter-intuitive from a consumer--yes, you know, 
maybe Mr. Murdoch is not the dream owner of this thing. I mean 
I can see, you know, more of this reality junk on 2,000 
stations rather than 30---- [Laughter.]
    But isn't the issue from the perspective of my 
constituents, let's get another player in there to compete, to 
keep Mr. Schnog--not him in particular, but his brethren 
honest? I mean----
    Mr. Kimmelman. I think Mr. Murdoch is a wonderful 
entrepreneur. I have nothing against him. I think the problem 
is that there is competition at the high end of the market for 
big packages of services. We've studied it. The GAO just looked 
at it. For the basic, expanded basic tier of service, satellite 
has done nothing to hold down cable prices.
    Mr. Weiner. Let me make--is there any competition you would 
support?
    Mr. Schnog. I support all competition, and actually, as one 
of your brethren put it, Darwinistic down and dirty 
competition. The problem is not at the distributor level. 
There's lots of us now. There is cable TV operators. There's 
two satellite operators.
    Mr. Weiner. Who's your competitor in your neighborhood?
    Mr. Schnog. We've got two satellite operators. We've got 
ourselves. We've got the telephone company who's telling us now 
that they're going to definitely deliver video. But let's not 
go there. Let's go to where the problem stems, and the problem 
is not there. It's in the programming market. There are five, 
six companies that control all the major programming assets in 
the world, this country, and when you look at this 2.8 percent 
of the market, that's not what it is. Look at your own House 
Capitol cable system. He's got three of the channels on there. 
With most of those channels being in-house things, that's way 
more than 2\1/2\ percent. We're talking more like 20 percent of 
what's here in your own cable system. In my cable system it's 
about 20 percent, and my customers, when I look at what my 
programming costs me, 25 percent of what my programming costs 
me goes back to that company. The rest of it goes to Disney, 
ABC. It goes back to GE. It goes back to AOL Time Warner. And 
those five, six huge, mega media companies control what the 
costs of our cable TV and what you end up buying is.
    The hard part of this whole thing is that you as a consumer 
never see the cost. None of you realize that when ESPN raised 
its rate 20 percent, which will go in July, that means that in 
my consumer's household, 52 cents per household more will go 
back to them. That won't come to me. It comes straight out of 
our pocket. It goes straight back to ABC. This happens year in 
and year out. So if I do a 52-cent rate increase, I'm the bad 
guy? Well, why not--why don't we just get it to the point where 
everything is open on this, really a Darwinistic level, 
competitive playing field, where when these guys who own the 
programming assets raise the rates, you as the consumer can see 
it. That is the problem.
    Chairman Sensenbrenner. The gentleman's time has expired.
    The gentleman from Massachusetts, Mr. Meehan.
    Mr. Meehan. Thank you, Mr. Chairman, and thank you very 
much for putting together this hearing. And it is clear that 
the News Corporation's acquisition of DirecTV would mark the 
first time that the owner of a national broadcast network was 
also in a position to control a national, multinational video 
programming distribution platform. And I think the issues of 
media consolidation and cross-ownership are really more nuanced 
than advocates on either side generally acknowledge. But I 
think this merger certainly raises questions about the leverage 
News Corp. would have over competing programmers and 
distributors.
    Mr. Murdoch, one of the concerns that you've heard this 
morning about consolidation in the media industry is that the 
owners of the large distribution platforms will have incentives 
to favor their own programming. Now, I understand that you have 
an agreement that you will keep programming, but we also heard 
you say, I think a little earlier, that this wouldn't be 
permanent; in other words, it would depend upon the 
circumstances; in other words, if there were changes at the 
FCC, then you would not want to put yourself at a competitive 
disadvantage, which certainly would be understandable.
    I think Members of this Committee want to know how we'll 
guarantee this nondiscriminatory treatment. How will it be 
enforced? How will it be interpreted in a situation where 
Disney, for example, is seeking to tie renewal of distribution 
for ESPN to agreement to carry additional Disney-owned 
channels? I'm not sure that it's good--a good thing to 
guarantee carriage for Disney, but at a minimum, I'm curious 
about how you are--how your commitments that you've made will 
deal fairly with your competitors, although I was interested to 
hear you talk about EchoStar. And did I hear you say that 
programming is actually cheaper with EchoStar?
    Mr. Murdoch. They have cheaper packages that they offer to 
the public, yes.
    Mr. Meehan. Because I get a little nervous----
    Mr. Murdoch. They are very price competitive with 
everybody. I would just like to comment, if I may, a little 
bit----
    Mr. Meehan. Sure.
    Mr. Murdoch. At the bottom of this question of the pricing 
of basic cable and really, you know, the problem here is sports 
and people who have exclusive sports. ESPN has an enormously--
after many years of struggle, has an enormously big list of 
exclusive sports. They charge for it--they put their rates up 
very aggressively, and they make very, very large profits.
    I would just say rather than break it up and say let's have 
a sports tier, that would have to be mandated by Congress. It 
could not be done without total agreement within the industry, 
which would be impossible.
    I believe that if ESPN continues on its present course or 
Disney does, other competitors will arise, and you will find 
that marketplace discipline will come in and hold their prices 
at more reasonable levels.
    As for our own sports networks, so to speak, it's a little 
federation of about 19 what we call regional sports networks. 
We actually own 10 of those, and we're in partnership obviously 
in--very often a non-controlling partnership in another 9. Mr. 
Ergen, if I may quote him--I'm sure he wouldn't mind me quoting 
him--saying that he hoped that we would stay absolutely in 
business there because, otherwise, every sports team would be 
following the Yankees and wanting $2 from every home. That 
would end up with his sportscasts for local sports and every 
MSO's going to about $8 in every market in the country; 
whereas, now it's somewhere between $1 and $1.50. And we think 
that--and there are a lot of problems with these RSNs and how 
they work. But they do hold--and they do aggregate the sports 
rights, and they do hold the prices down.
    Mr. Meehan. I get a little nervous when you indicated that 
his programming was cheap, because I'm a subscriber to DirecTV, 
and as a consumer I get a little concerned. Let me ask you, how 
many people purchase the NFL Ticket? And to what extent does 
that influence the number of subscribers DirecTV has been able 
to get?
    Mr. Murdoch. I don't know enough about it. It's, I think, 
between a million two and a million five. It is a very, very 
expensive loss leader. The prices will be going up on that. 
There's no question about that.
    Mr. Meehan. When is that--it is a contract that's up, I 
think, soon?
    Mr. Murdoch. The contract has just been renewed for 5 years 
at a very, very big increase. And it remains exclusive to them 
for 3 years only.
    Mr. Meehan. And when these--Mr. Kimmelman, when these--the 
NFL negotiates their package and puts it out available, is 
this--does this have a negative impact on consumers? Or what 
could we draw from----
    Mr. Kimmelman. One of our biggest concerns on this is 
something that is never raised, which is antitrust immunity for 
Major League Baseball, which has special antitrust protections 
under the 1961 Sports Broadcasting Act for negotiating league 
packages for professional sports. It is monopoly power at the 
point of sale on the leagues that can drive up a very high 
price. I think it's very hard to argue, even if you have two or 
three or five distribution systems, that you can keep the price 
of sports down because that's really at the other side. Mr. 
Murdoch knows--he owns a team--how the owners bargain for this. 
They bargain as a league. So that's difficult.
    One other point just to raise, on programming, ESPN or any 
others, what people often fail to consider is that the high 
price of the programming is often substantially if not 
completely offset by higher advertising revenue that comes in 
paid to the cable operators, although maybe not in small towns 
as much, but in general, and to the cable distributors; that 
there is an awfully big offset because advertisers pay for 
eyeballs. They pay higher prices. So when the programming price 
goes up, the revenue increases as well.
    Chairman Sensenbrenner. The time of the gentleman has 
expired.
    The gentlewoman from California, Ms. Lofgren.
    Ms. Lofgren. Thank you, Mr. Chairman. I think this is a 
very useful hearing airing the, I think, rather complicated 
issues that are presented here. And I think certainly we want 
vigorous competition in the marketplace and aggressive prices 
that will follow. And one of the things that I'm interested in, 
it seems to me that News Corp. is trying to address that issue 
with its offer of voluntary efforts.
    I was wondering, however, Mr. Schnog in his testimony 
outlined kind of lack of disclosures in the programming 
industry, and I'm wondering, Mr. Murdoch, if the programmers 
don't disclose what they charge cable and satellite operators, 
how will News Corp.'s promises be enforced, the voluntary----
    Mr. Murdoch. I didn't understand Mr. Schnog on that, 
Congresswoman. I think everybody knows pretty basically what 
the prices are. People get what they can get. They give 
sometimes discounts for size, for quantity. But I can tell you 
now, for instance, that Fox News gets half the price of what 
CNN gets because CNN was there 10 years earlier.
    Ms. Lofgren. So that----
    Mr. Murdoch. We all know these figures.
    Ms. Lofgren. Would that be posted with the FCC, what 
everybody kinds of knows is kind of a loose standard?
    Mr. Murdoch. No, I don't think so, but it's there for--I 
mean, we're--there are no secrets, really, about what everybody 
is selling their----
    Ms. Lofgren. So if there's no secrets, why wouldn't it be--
--
    Mr. Murdoch. It could be posted.
    Ms. Lofgren. It could be posted, and that would--and it 
seems to me if the--just listening to this, if the--if the 
voluntary compliance offer is really the safeguard for the 
public, we need to have some benchmarks so that they can be 
enforced and that that would be a very important aspect to 
this.
    Mr. Murdoch. This question of retransmission, it depends--
it's laid down by the FCC that it is quite correct, if we can't 
get money for our signals, that we can trade with other 
programming, and on the basis always that it be done in good 
faith.
    If someone like Mr. Schnog feels that a local station is 
not behaving in good faith, or a network or whatever, he's 
perfectly free to go to the FCC and ask for them to----
    Ms. Lofgren. Of course. I'm just concerned that if this 
goes forward and somebody feels that way, that there's, you 
know, information by which the behavior can be measured that's 
transparent to the public as well as to the business community.
    Mr. Murdoch. I certainly don't mind publishing what our 
rates are. I think they have been published, but they can be 
published again.
    Ms. Lofgren. Mr. Schnog, did you--you look like you----
    Mr. Schnog. I was just--I mean, I've got my Fox agreements 
in my hotel room that say I can't disclose anything. I can 
bring them in for you and show you. I mean, it says it right in 
the agreement. I mean, I don't know how untransparent it could 
be. I mean, every operator knows that--you know, I mean, ask 
the guys at NCTC, which is the cooperative for us small cable 
operators. I mean, it says we can't disclose it.
    Mr. Murdoch. Well, that's very often at the request of the 
operators, but if they wish to----
    Mr. Schnog. I mean, I mean, if he--if you're saying we can 
bring it all out and put it all out in the open----
    Ms. Lofgren. Well, it sounds like Mr. Murdoch is saying 
that that would change in the future.
    Mr. Schnog. That would be great. It would be terrific.
    Ms. Lofgren. And that might give some----
    Mr. Schnog. I mean, can we get a signature on that today?
    Ms. Lofgren. Well, I don't think that's the role of the 
Judiciary Committee, but just to air issues. And I'd like to 
ask kind of a--and I know we've got a vote going on. But I'm 
very interested in the aspect of broadband coming into 
communities that currently can't get broadband very well. Right 
now I have DSL lines in both coasts, and because the phone 
companies are regulated, I can set up an 802.11b network in my 
home, and once I've paid for the DSL line, you know, there 
aren't additional charges because I've, you know, installed 
802.11b, or a or b or g, whatever the next generation will be.
    Cable companies have taken a position that I think is just 
simply wrong that when they bring the pipe to the home and when 
a homeowner installs an 802.11b network, that somehow the cable 
company is owed additional funding, which I think is a 
preposterous point of view.
    I'm wondering, Mr. Murdoch, which position you would take 
as a satellite provider of broadband, the phone company 
position or the cable company position?
    Mr. Murdoch. Well, I think the phone company position, but 
I'd need to study it. I really am not an expert on this one.
    Ms. Lofgren. All right. That----
    Chairman Sensenbrenner. The gentlewoman's time has expired.
    Ms. Lofgren. Thank you, Mr. Chairman.
    Chairman Sensenbrenner. We have 40 minutes--the 45 minutes 
of votes. The gentlewoman from California, Ms. Waters, the 
gentleman from Virginia, Mr. Scott, have not asked any 
questions. Do either of you--are either of you able--and Mr. 
Conyers, too. Are any of the three of you able to come back 
after 45 minutes?
    Mr. Conyers. I certainly am, Mr. Chairman.
    Chairman Sensenbrenner. Okay. Ms. Waters?
    Ms. Waters. Yes.
    Chairman Sensenbrenner. Mr. Scott?
    Mr. Scott. Yes.
    Chairman Sensenbrenner. Okay. Now let me ask the witnesses. 
Are you able to stick around for about 45 minutes while we go 
and vote?
    Mr. Murdoch. I am, sir.
    Mr. Kimmelman. I am.
    Chairman Sensenbrenner. Okay. Then the Committee is 
recessed, and after the last vote, please be prompt in coming 
back.
    [Recess.]
    Chairman Sensenbrenner. The Committee will be in order. The 
gentleman from Virginia, Mr. Scott.
    Mr. Scott. Thank you. Thank you, Mr. Chairman.
    Mr. Murdoch? Mr. Murdoch?
    Mr. Murdoch. Yes, sir?
    Mr. Scott. Thank you. How many African American-owned 
channels are there on DirecTV at this point?
    Mr. Murdoch. I have no idea.
    Mr. Scott. Will the merger make it more or less likely that 
there will be more?
    Mr. Murdoch. More likely. We have made a very firm 
commitment in our submission here that we'll be mentoring 
people and starting channels in the business of running 
channels, and we expect things will arise out of that. But it's 
a development process, and anything that has quality we'll be 
very happy to make room for.
    Mr. Scott. Are you aware of any African American-owned 
channels on DirecTV? Or you don't know?
    Mr. Murdoch. I don't know.
    Mr. Scott. Well----
    Mr. Murdoch. I mean, BET was, but it's no longer African 
American-owned.
    Mr. Scott. Why don't we let you answer that for the--why 
don't we let you answer that for the record later on so that--
if you don't have the information, it's unfair to have you 
guess.
    Chairman Sensenbrenner. The information request will be 
included in the record when it's submitted.
    Mr. Scott. Thank you, Mr. Chairman.
    And I'd like all of the witnesses to comment on the 
question of what the merger will do to costs to the consumer, 
whether the costs will go up or down to the consumer if the 
merger is allowed.
    Mr. Arquit. I would think that overall that the costs would 
go down, and, of course, by costs, I mean it in the economic 
sense, that it's not just dollar price but quality. Generally, 
with vertical integration----
    Mr. Scott. The quality would go down?
    Mr. Arquit. No. Quality would go up and price down. It's a 
quality-adjusted price, might be a more precise way to describe 
it. But with the increase in efficiency and possibly the 
increase in local-to-local and some of these other types of 
phenomena and the competition that would result, it would put 
more pressure on companies like EchoStar and the incumbent 
cable operators.
    So, clearly, outside of the equation, which hasn't been 
focused on very much today, there's the other side of the 
equation as to what are the chances for discrimination and the 
like. And you have programming discrimination. You have to 
factor the two against each other, because I think that from a 
financial standpoint that there's very little incentive for 
News Corp. to favor programming and DirecTV. They only get--
they only own 24 percent of DirecTV, so they give up 100 cents 
on the dollar when they take programming off somebody else, off 
the cable, to get a third of a dollar from DirecTV, and 
DirecTV's only 12 percent of the market. So on the 
anticompetitive side, it seems like things are pretty slim, and 
on the procompetitive side, the innovations they can bring into 
the market are likely to force others to do the same.
    Mr. Schnog. Congressman Scott, unfortunately, I've never 
seen a cable rate or a satellite rate ever go down, and they're 
going to continue to go up and up and up. And----
    Mr. Scott. Well, will the merger make it likely they'll go 
up further?
    Mr. Schnog. Absolutely, and much faster. I mean, one of the 
most--one of the biggest reasons is retransmission consent in 
itself, and, you know, I'm sorry but Mr. Murdoch, I think, is 
mistaken and his staff is mistaken. We know of 12 instances, at 
least, where people are still trying at this point, before the 
merger, to negotiate retransmission consent agreements, and 
that's driving up the price. Now with this extra lever, it 
would just make it worse. And, I mean, this is something that I 
think, you know, it's already happening, it's just going to get 
worse as we concentrate the media.
    What's going to happen is the five people with the five 
companies that control most of the media in the United States 
still can get together among themselves, but when it comes down 
to the bottom line, they're all looking to get more revenue and 
more out of the content that they own, and bring it to their 
own pockets. And that goes straight through the distribution 
system. Small cable operators like me--I'm not Comcast. I'm not 
a giant company. We're a little, tiny--1,000 small companies 
across the Nation who get these rate increases that--for 
programming that we have no control over. And it's just going 
to get worse. Prices are going to go up. It gets passed on to 
our consumers. And, you know, it'll just continue to skyrocket.
    Mr. Scott. I think two other people want to comment, and 
you'll get the final word, Mr. Murdoch.
    Mr. Kimmelman. Yes, Mr. Scott, I think it's very likely 
prices will go up, and because of this merger, what it does is 
it takes Mr. Murdoch's very popular programming, and it doesn't 
do what Mr. Arquit was diverting attention to. It's not going 
to be put only on DirecTV. It gives him the opportunity to 
raise prices to all cable operators. If any cable operator 
refuses to carry the Fox Network, Fox News, a regional sports 
channel, he'll have it on DirecTV in that community. He will 
benefit immediately. He'll probably give away dishes for free. 
That cable operator can't survive very long losing customers in 
that environment.
    The prices will go up. Cable will have to pay. Satellite 
customers will have to pay as well.
    Chairman Sensenbrenner. The gentleman's time has expired.
    The gentlewoman from California, Ms. Waters?
    Mr. Scott. Mr. Chairman?
    Ms. Waters. Thank you very much, Mr. Chairman. Yes?
    Mr. Scott. Mr. Chairman, I'd ask unanimous consent that Mr. 
Murdoch be given 30 seconds to respond to the question.
    Chairman Sensenbrenner. Do you wish to respond?
    Mr. Murdoch. I'd just like to say that these retransmission 
agreements are always--a rule by the FCC, have to be done in 
good faith, and it's up to the cable operator if they feel it's 
not being done in good faith. Mr. Schnog is misinformed. We 
have reached agreement with every one of the 300 small 
operators in his association who deal with Fox stations. In his 
case, he's dealing with Fox-affiliated stations, which we have 
no ownership of.
    Chairman Sensenbrenner. The gentlewoman from California.
    Ms. Waters. Thank you very much.
    Mr. Murdoch, as you know, Congress has no direct role in 
the approval or disapproval of mergers, but the FCC and the 
Department of Justice must determine whether or not a merger is 
in the public interest, and DOJ, I guess, has some role in 
analyzing whether or not the--the anticompetitive potential. 
And that's what I'm concerned about, whether or not the merger 
is in the public's best interest.
    You're the head of a huge media conglomerate with annual 
revenue in 2002 of $15.2 billion. News Corp. owns a movie 
studio, Fox Broadcasting, a cable news channel, Fox News 
Channel, a book publisher, an Asian television station, StarTV, 
BSkyB, a British broadcaster, the Los Angeles Dodgers, and 
other properties.
    You're also well known for holding highly conservative 
views, political views. Many media commentators believe that 
these political views color the news coverage that Fox News 
Channel provides. Many Americans, including myself, believe 
that Fox News Channel, when they use the term ``fair and 
balanced reporting,'' it's really a code word for conservative 
bias, and that Fox News Channel is an adjunct and a cheerleader 
for this Administration.
    Clearly, there are few liberal voices who have a prominent 
role in Fox News Channel programming. Several commentators have 
spoken about a Fox effect that is causing other news 
organizations to reorient their own programming toward more 
conservative views. I believe, and many other Americans 
believe, that diversity of opinion and expression in news 
programming is critically important. I believe that it is 
imperative to ensure that we do not promote policies or 
practices that promote media consolidation where the effect of 
those practices could be to reduce the number of voices in the 
media.
    I certainly see why it is in the private interests of News 
Corp. to pursue its proposed transaction with DirecTV, but why 
should we be supportive of a transaction that could reduce 
diversity of opinion and result in fewer voices in news 
programming? How do you explain the absence of liberal voices 
on Fox News Channel? Do you contend that you're just responding 
to public taste? Or is Fox News Channel simply reflecting your 
own personal views? Or is there some other explanation that I 
don't understand?
    What conceivable reason do we have to believe that the 
proposed transaction will even maintain the existing level of 
diversity in news programming, let alone promote diversity of 
opinion? I understand that you're thinking about expanding your 
news in this merger. I suppose if I--as I believe, that you 
promote the views of this Administration and you were a 
cheerleader for the war--I happen to be a liberal. And why is 
it in the best interest of people to the left or liberals, or 
whatever they want to call us, to help you to consolidate in 
ways that your conservative views will be more and more 
dominant, we will get shut out? I'm worried that as you go 
before DOJ, and maybe--I don't know if Mr. Ashcroft is your 
friend or not--his conservative views will be reflected in your 
programming. So why should we--why should we support this even 
though we don't have direct responsibility for approval or 
disapproval? Maybe some of us should make a hell of a lot more 
noise than we're making because you're scaring the hell out of 
me.
    Mr. Murdoch. Thank you, Congresswoman. I can assure you 
that we are bringing diversity of opinion. We are--there is 
diversity of opinion on Fox News. You may disagree with that. 
We have many liberals there, many liberals are invited. We have 
liberal commentators, as we have conservative ones.
    Ms. Waters. Who are your liberal commentators?
    Mr. Murdoch. Alan Colmes, for one. Greta van Susteren. You 
know, it's in the eye of the beholder, I guess.
    I know you've had problems--you've made statements about 
Mr. O'Reilly. All I can tell you is that I can't control him, 
and I don't think anyone can, and he's a pretty equal 
opportunity beater-upper of people.
    Fox News is absolutely new. Before that, there was no 
diversity. There was CNN. There was the three big networks. 
Even last night, I believe, the head of CBS News said the 
problem is we're all too alike. The only one that's broken out 
is Fox News by being different. We would say that's by being 
fair.
    Chairman Sensenbrenner. The time of the gentlewoman has 
expired.
    May I ask you a question? If Baghdad Bob can be found, 
could you put him on so that we could get a little more humor?
    Mr. Murdoch. I'd be delighted.
    Chairman Sensenbrenner. The gentleman from Michigan, Mr. 
Conyers.
    Mr. Conyers. Thank you very much, Mr. Chairman.
    Mr. Murdoch, you've been quoted as describing sports 
programming as your battering ram to attack pay television 
industries using a portfolio of exclusive broadcasts to demand 
higher programming fees and win subscribers for your satellite 
services.
    How do we know that that's not going to happen since you've 
been quoted as saying it already?
    Mr. Murdoch. Oh, I think it's happening all right--right 
now. That was said actually in the context of Britain where we 
were able to buy and put on the National Soccer League, which 
was not on free television, and it proved extremely effective.
    Here, we managed to buy at great cost some years ago the 
NFC from the NFL, the rights for the Fox Network. And there's 
no doubt that that did more to establish the Fox Network, 
particularly amongst our small affiliates, than any other----
    Mr. Conyers. But you can use sports----
    Mr. Murdoch. So I would agree with you----
    Mr. Conyers.--to beat your way into any other market you 
want. That's the full point, right?
    Mr. Murdoch. Sports is a very popular form of programming.
    Mr. Conyers. I'm aware. Okay. Now, let's talk about how we 
count here in antitrust principles. We count by markets, not by 
counting up all the programming and say we're 2 percent. You're 
50 percent in sports, maybe more. And so you come to us as a 
little teeny, weeny guy just trying to get through on a lot of 
stuff. You're a big guy in a world of high rollers and big 
people. You're one of the biggies now.
    So you don't have to give us all of this poor mouth stuff. 
I mean, we know where you are in the scheme of things.
    Mr. Murdoch. Can I respond?
    Mr. Conyers. Briefly, yes.
    Mr. Murdoch. The football--let's take football for one----
    Mr. Conyers. Okay.
    Mr. Murdoch.--key sport. The NFL sells four packages: three 
to free television where there are four bidders, and one to 
ESPN on Sunday night. We have one out of four of those 
packages.
    Mr. Conyers. So you're a little buy in sports even.
    Mr. Murdoch. No, I think it--I think we have the best 
package, NFC. We're very happy with that. I'm not coming to you 
saying I'm small. I'm just saying, relatively, the market----
    Mr. Conyers. Do you know who controls the whole deal in 
Washington?
    Mr. Murdoch. I beg your pardon?
    Mr. Conyers. Do you know who controls this in Washington 
sports if you want to see the Detroit Lions? You.
    All right. Let me ask you this. Let me ask--who wants to 
see the Detroit Lions? Okay. [Laughter.]
    I'll see you after the hearing.
    Mr. Murdoch. I thought it was Comcast who controlled it.
    Mr. Conyers. Your commitments require you to offer----
    Mr. Murdoch. I don't control----
    Mr. Conyers.--your programming to other distributors on the 
same basis as you offer it to DirecTV. Are you going to do that 
with respect to other programming DirecTV acquires?
    Mr. Murdoch. Yes, absolutely.
    Mr. Conyers. Okay. Competitors, affiliates, interest groups 
say that Fox is already in violation of the 35-percent 
ownership cap. Did you know that?
    Mr. Murdoch. Yes. It is operating under a waiver, as is CBS 
and a number of other people. We, I think, cover 37 percent.
    Mr. Conyers. Okay. Are you willing to offer your sports 
programming on an a la carte basis?
    Mr. Murdoch. I'm not prepared to commit. It is a very 
interesting question. We certainly could not do it without the 
whole industry doing it. It would make sports extremely 
expensive to sports lovers, and it may reduce or at least hold 
the prices of the other basic----
    Mr. Conyers. Okay. I get it.
    Mr. Murdoch. It's an interesting--we do it that way in----
    Mr. Conyers. Let's talk about it some more.
    Mr. Murdoch. It's never been done in----
    Mr. Conyers. Mr. Arquit, have you ever opposed a vertical 
merger when you were with FTC?
    Mr. Arquit. Yes, I believe that I did, sir.
    Mr. Conyers. How many?
    Mr. Arquit. I believe, if I can think----
    Mr. Conyers. Name them.
    Mr. Arquit. Well, one had to do with--I'm going back now 10 
years, but one I can recall had to do with Shell Oil and some 
assets that existed in Hawaii. I cannot remember the precise 
situation where--the precise name of the case, but I certainly 
remember that.
    Mr. Conyers. Okay. I'll give you one or two.
    Mr. Arquit. I'm happy to----
    Chairman Sensenbrenner. The gentlemen's time has expired.
    The gentleman from Iowa, Mr. King?
    Mr. King. Thank you, Mr. Chairman.
    First, I'd want to offer that there's a tremendous amount 
of opportunity in the communications field that has been 
offered to us in the last decade or so, and I was very 
observant of the coverage that we saw of this war and the 
balance that came from a particular network, and you know that 
I'm appreciative of that. There's been significant 
opportunities for the public because of competition that's been 
brought into this industry and initiated much by Mr. Murdoch. 
And I'd direct my first question to you, Mr. Murdoch, and that 
would be that you've answered the questions on a la carte offer 
for sports programs. But that is a consistent criticism that we 
hear from all of the cable providers, which is how does a 
person select what they want and pay for what they want as 
opposed to having to take the broad package. And I understand 
it's an industry question. But what can be done to give 
consumers more options with that regard so that they don't have 
to take such a broad package and can limit some of their 
investment in their monthly fees?
    Mr. Murdoch. Well, the first thing, it would have to be 
industry-wide, and it would have to be--we'd need some special 
clearance from the Department of Justice to talk to each other 
on such a subject.
    I'm not against it in principle, but I think that it would 
be very difficult to effect. We'd certainly have to get the 
agreement to people like Disney with ESPN to put them in a 
special tier. And they'd certainly want a much higher price to 
be in that tier.
    I would predict that if you had all the sports programming 
that's available today in a separate tier, it would be an 
expensive tier. But, of course, the basic tier could come down 
$2 or $3, quite possibly. You know, you can have--there's 
always been in America the idea that you spread to a local 
community all the sports that you possibly can.
    Mr. King. Does the competition that exists in the 
marketplace today or the competition that would exist, provided 
that you're able to go ahead with your initiative, does that 
allow for a scenario by which consumer choice would push this 
and it could be developed as a consumer choice option because 
of the competition? Will free enterprise move us toward fixing 
that?
    Mr. Murdoch. yeah, I think it could--it could be, but it 
would be--all I can say is it's something which we'd have to 
experiment within separate markets to start with. It could be a 
very, very dangerous handicap to take on if we were to say we 
were the only ones with tiered sports.
    Mr. King. I would just encourage the industry to take a 
good look at that. If there's a consistent criticism, that 
would be it. I understand the circumstances by which this has 
been brought out.
    Thank you, Mr. Murdoch, and to Mr. Schnog, if I could 
direct my next question to you, I represent a very rural 
district, and it's 286 towns in 32 counties, the western third 
of Iowa. And our difficulty is in access to services, and we 
also know that competition brings technology. And so with this 
proposed transaction, how would you view the effect on my 
consumers in the region that I represent?
    Mr. Schnog. Well, I think in your region what happens is 
that the money that's small entrepreneurs, like most of our 
companies are, a thousand very small companies--as a matter of 
fact, I know one of your constituents who has 3,500 customers 
in that area. All of a sudden this money goes to programming 
and is sucked out of their companies and is not being invested 
back into the systems in your area. And I believe that 
broadband cable television has tremendous technological 
opportunities where it can be deployed. But if the money is 
sucked out, it's going to be that much more difficult to 
deploy. And, you know, I think that's absolutely going to 
happen.
    And, by the way, I'll tell you, if I had a sports tier, I 
could probably--I was just calculating it up. I could probably 
drop my basic rate by 5.60 right now this second. I mean, 
that's what the sports is costing us just net cost.
    Now, the tier would have to be pretty expensive, no 
question, but I wonder: Is it right for every consumer in 
America, you know, to go ahead and pay in their cable bill that 
much so that 30 percent of us can watch what we want to see 
and, you know, make Michael Jordan millions of dollars? But 
that's a whole other question.
    Mr. King. Well, what about, though, those folks that are 
out on the end of the line, the hardest ones to reach, the last 
meter on the electric line, and what about their access to 
high-speed Internet services as well? How do we get that to all 
those people out on the end?
    Mr. Schnog. Well, I think there's a lot of things that we 
can do. We're already serving very, very rural consumers. You 
know, I would--I know that there is money now available through 
the rural telecom bills that can go out to help serve them, and 
there is satellite available in those areas as well. I don't 
think satellite availability is going to disappear if, you 
know, this merger doesn't happen. And so there'll be lots of 
competing technologies, and I think that's a great thing to 
have.
    Chairman Sensenbrenner. The gentleman's time has expired.
    Mr. King. Thank you, Mr. Schnog.
    Thank you, Mr. Chairman.
    Chairman Sensenbrenner. Let me express my personal 
appreciation to all four of the witnesses today for their 
patience. I think this has been a very informative hearing 
relative to this issue, and I would hope that the transcript 
will be read by the folks in the Justice Department who will 
have the ultimate say on this.
    Mr. Murdoch, let me say that when my wife doesn't get a 
good dose of Fox News every day, she gets pretty grumpy. 
[Laughter.]
    So there are some of us that do appreciate what you put on 
the air.
    Mr. Murdoch. Thank you, Mr. Chairman.
    Chairman Sensenbrenner. There being no further business 
before the Committee, the Committee stands adjourned.
    [Whereupon, at 12:34 p.m., the Committee was adjourned.]


                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record



        Mr. Rupert Murdoch's response to questions submitted by 
                      Representative Rick Boucher

1. Do you support the provision in the FCC's proposed cable ``plug and 
play'' rule that would ban the use of selectable out put controls by 
both cable companies and DBS companies, including Direct TV?

    No, we do not. As we have stated in the past, although we had 
originally proposed, in the early stages of the 5C/MPAA negotiations, a 
selectable output control mechanism by which content owners could turn 
off a ``hacked'' 1394/5C digital interconnect (which can be used to 
connect set-top boxes to digital recorders and thereby facilitate 
copying of copiable content) in favor of ``unhacked'' interconnects, we 
are no longer seeking this particular selectable output capability 
either as part of the 5C license or in the OpenCable PHILA agreement.
    We continue to believe that other kinds of selectable output 
control (e.g., the ability to turn off unprotected analog outputs as a 
condition for providing content in earlier windows than it is now 
offered) would both facilitate new content-delivery business models as 
well as help combat piracy and signal theft. Therefore, we believe that 
any MVPD has a legitimate interest in including selectable output 
control capability in their set-top boxes. The conditions for use of 
such a capability would continue to be subject to arms' length 
negotiation between individual MVPDs and content providers, just as 
they are now, and we see no reason why the introduction of OpenCable 
devices into the market should foreclose such negotiations. Thus, we 
have argued that the OpenCable PHILA agreement should include this 
capability so that it can continue to be a legitimate subject for 
negotiation between content providers and MSOs, just as it is for 
content providers and DBS companies, in both cases with customers being 
the ultimate beneficiaries.
    In sum, for us, the basic issue is whether MVPD subscribers should 
be provisioned with equipment capable of providing the broadest 
practicable range of content security, thereby maximizing subscribers' 
opportunities to receive high-value content pursuant to arms' length 
negotiations between content providers and MVPDs. By contrast, device 
manufacturers appear to be petitioning government to place limitations 
on the functionality of their devices in order to limit consumer 
options. This cannot be good public policy. For that reason, we cannot 
support any regulation issued by the Federal Communications Commission 
that would impose business models, copyright protection rules and other 
technical standards on MVPDs that are unnecessary to establish a 
standard for cable-ready digital televisions and which can be 
implemented through private licensing agreements. We believe that 
imposing such rules on the entire MVPD market will stifle innovation 
and limit the rollout of new services and hinder the satellite 
industry's ability to compete with the entrenched cable monopolies.

                               __________
        Mr. Rupert Murdoch's response to questions submitted by 
                     Representative Robert C. Scott

    DirecTV does not keep as part of its business records the ethnicity 
of the programmer's ownership. Thus, we are unable to determine how 
many African-American owned channels are currently on Direct. In 
regards to diversity of the programming itself, DirecTV's customers 
currently have access to 11 public interest channels, 45 Spanish-
language channels, six Chinese-language channels, BET and Black STARZ. 
News Corporation is committed to bring to Hughes and DirecTV its deep 
and proven commitment to equal opportunity and diversity. Specifically, 
the diversity initiatives we will implement include:

          A commitment to carry more programming on DirecTV 
        targeted at culturally, ethnically and linguistically diverse 
        audiences;

          An extensive training program for minority 
        entrepreneurs seeking to develop program channels for carriage 
        by multichannel video systems;

          A program for actively hiring and promoting 
        minorities for management positions;

          An extensive internship programming for high school 
        and college students;

          Improved procurement practices that ensure outreach 
        and opportunities for minority vendors; and

          Upgraded internal and external communications, 
        including the Hughes web site, to assist implementation of the 
        above initiatives.

        
        
        
        
        
        
