[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) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
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.