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



 
 COMPETITION AND CONSUMER CHOICE IN THE MVPD MARKETPLACE, INCLUDING AN 
EXAMINATION OF PROPOSALS TO EXPAND CONSUMER CHOICE, SUCH AS A LA CARTE 
                       AND THEME-TIERED OFFERINGS

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


                                HEARING

                               before the

          SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 14, 2004

                               __________

                           Serial No. 108-110

                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                             __________


                 U.S. GOVERNMENT PRINTING OFFICE

95-453                 WASHINGTON : 2004
_________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, 
Washington, DC 20402-0001















                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
RALPH M. HALL, Texas                   Ranking Member
MICHAEL BILIRAKIS, Florida           HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
JAMES C. GREENWOOD, Pennsylvania     FRANK PALLONE, Jr., New Jersey
CHRISTOPHER COX, California          SHERROD BROWN, Ohio
NATHAN DEAL, Georgia                 BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING,       KAREN McCARTHY, Missouri
Mississippi, Vice Chairman           TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania        TOM ALLEN, Maine
MARY BONO, California                JIM DAVIS, Florida
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
LEE TERRY, Nebraska                  HILDA L. SOLIS, California
MIKE FERGUSON, New Jersey            CHARLES A. GONZALEZ, Texas
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
JOHN SULLIVAN, Oklahoma

                      Bud Albright, Staff Director
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

          Subcommittee on Telecommunications and the Internet

                     FRED UPTON, Michigan, Chairman

MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida                 Ranking Member
  Vice Chairman                      ALBERT R. WYNN, Maryland
PAUL E. GILLMOR, Ohio                KAREN McCARTHY, Missouri
CHRISTOPHER COX, California          MICHAEL F. DOYLE, Pennsylvania
NATHAN DEAL, Georgia                 JIM DAVIS, Florida
ED WHITFIELD, Kentucky               CHARLES A. GONZALEZ, Texas
BARBARA CUBIN, Wyoming               RICK BOUCHER, Virginia
JOHN SHIMKUS, Illinois               EDOLPHUS TOWNS, New York
HEATHER WILSON, New Mexico           BART GORDON, Tennessee
CHARLES W. ``CHIP'' PICKERING,       PETER DEUTSCH, Florida
Mississippi                          BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York              ANNA G. ESHOO, California
STEVE BUYER, Indiana                 BART STUPAK, Michigan
CHARLES F. BASS, New Hampshire       ELIOT L. ENGEL, New York
MARY BONO, California                JOHN D. DINGELL, Michigan,
GREG WALDEN, Oregon                    (Ex Officio)
LEE TERRY, Nebraska
JOE BARTON, Texas,
  (Ex Officio)

                                  (ii)


















                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Baxter, Thomas G., President, Time Warner Cable..............   150
    Fitzpatrick, Paul, COO, Crown Media Holding and Hallmark 
      Channel....................................................   154
    Hooks, Ben W., CEO, Buford Media Group.......................   116
    Kimmelman, Gene, Senior Director, Public Policy and Advocacy, 
      Consumers Union............................................   104
    Larue, Janet M., Chief Counsel and Legal Studies Director, 
      Concerned Women for America................................   160
    Liggins, Alfred, Chairman, TV One............................   113
    Plummer, Glenn, Chairman, National Religious Broadcasters....   147
    Pyne, Ben, Executive VP, Disney and ESPN Affiliates, Sales 
      and Marketing..............................................   123
Material submitted for the record by:
    Grocery Manufacturers of America, prepared statement of......   236

                                 (iii)















 COMPETITION AND CONSUMER CHOICE IN THE MVPD MARKETPLACE, INCLUDING AN 
EXAMINATION OF PROPOSALS TO EXPAND CONSUMER CHOICE, SUCH AS A LA CARTE 
                       AND THEME-TIERED OFFERINGS

                              ----------                              


                        WEDNESDAY, JULY 14, 2004

              House of Representatives,    
              Committee on Energy and Commerce,    
                     Subcommittee on Telecommunications    
                                          and the Internet,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Fred Upton 
(chairman) presiding.
    Members present: Representatives Upton, Bilirakis, Stearns, 
Gillmor, Cox, Deal, Whitfield, Cubin, Shimkus, Wilson, 
Pickering, Fossella, Buyer, Bass, Walden, Terry, Barton (ex 
officio), Markey, Wynn, Doyle, Gonzalez, Towns, Rush, Stupak, 
Engel, and Dingell (ex officio).
    Also present: Representative Hall.
    Staff present: Neil Fried, majority counsel; Howard 
Waltzman, majority counsel; Will Nordwind, policy coordinator 
and majority counsel; Will Carty, legislative clerk; Billy 
Harvard, legislative clerk; Peter Filon, minority counsel; and 
Gregg Rothschild, minority counsel.
    Mr. Upton. Good morning.
    Mr. Shimkus. Good morning.
    Mr. Upton. Thank you. Where is my apple? Today, we are 
examining competition and consumer choice in the MVPD 
marketplace. The evidence suggests that the vast majority of 
Americans enjoy more choice, more programming and more services 
than any time in history.
    Approximately 88 percent of all U.S. households get their 
TV through a multichannel video provider rather than over the 
air. While cable operators still hold the largest share of the 
MVPD market, DBS operators are gaining. Cable has approximately 
75 percent of the MVPD market, and DBS has approximately 22 
percent. But the DBS growth rate has exceeded the cable growth 
rate by double digits almost every year since the introduction 
of DBS more than a decade ago.
    DirecTV is now the second largest MVPD behind Comcast, and 
EchoStar is the fourth largest behind Time Warner. Another DBS 
provider, Voom, entered the market in the fall of 2003 and 
already has 10,000 subscribers. DBS operators have also entered 
into agreements with telephone companies and Internet service 
providers to bundle digital subscriber lines, DSL services, 
with their video offerings, which should increase the 
attractiveness of DBS for consumers interested in one-stop 
shopping.
    I also want to acknowledge the contribution of small cable 
operators across the country and encourage continued good faith 
pursuit of marketplace arrangements through the National Cable 
Television Cooperative in order to ensure optimal opportunity 
for small cable companies to compete in the marketplace.
    Since Congress eliminated most forums of cable regulation 
in 1996, the cable industry has invested $85 billion in its 
infrastructure, bringing hundreds of channels, interactive 
services, such as video-on-demand, broadband and voice services 
to the consumer. Moreover, the number of national cable 
networks has grown from 145 in 1996 to 339 in 2003--134 percent 
increase over the 7 years.
    So in my view, the vast majority of Americans enjoy more 
choice, more programming and more services than any time in 
history. That is why I oppose an attempt by the government to 
impose an a la carte system on the MVPD marketplace. The 
current business model upon which video programming and 
distribution relies has evolved over many years and has brought 
enormous benefits to the consumer.
    A little bit of history is also important to recall. At its 
inception in the Cable Act of 1992, retransmission consent 
contemplated a cable operator paying cash to the broadcast 
network in order to get consent to retransmit the broadcast 
network on the cable operator's system. However, many cable 
operators balked at paying the price set by the network, so the 
networks and the cable operators agreed to non-monetary 
compensation in the form of carriage of the network's sister 
cable channels for less or no cash.
    That was an innovative, market-based arrangement, which has 
led us to the universe that we have today, which provides 
tremendous diversity in programming and an impressive number of 
channel offerings and multiple tiers. An a la carte system 
would set back the clock and put us in the same boat that we 
were in when cable operators were balking at the price set for 
retransmission consent for the broadcast network. Of course, 
the only way around repeating that history is that if along 
with a la carte the Federal Government were to get back into 
the business of rate regulation, a business that Congress 
wisely got out of back in 1996. And when we got out of that 
business, the industry reacted by investing the $85 billion in 
cable infrastructure upgrades, and consumer's got an enormous 
upgrade and offering choice, quality and, yes, service. Add to 
that the enormous competitive pressure brought by the DBS 
industry, and we have a marketplace that is working. In my 
view, the government must resist the urge to reregulate and 
retinker with the marketplace.
    But let me address another important aspect of the a la 
carte issue which involves our ongoing debate regarding decency 
and indecency. As the author of the Broadcast Decency Act of 
2004, I share the desire of so many parents across the country 
who do not want objectionable cable programming coming into 
their homes. And while the Constitution imposes significant 
limits on the government's efforts to regulate indecent cable 
content, that does not absolve the cable industry from its 
corporate responsibility to American families.
    I would note that most of the major cable operators have 
embarked upon a massive public education campaign to inform 
parents of their right to have blocked for free programming 
which they find objectionable, and we will continue to monitor 
the effectiveness of those efforts.
    Having said that, there are those in the indecency debate 
who believe that families should not have to pay in the first 
place for programming which they believe is objectionable and 
then have to have blocked for free. However, I believe that an 
a la carte would result in higher prices to the consumer and 
cause families to pay more to get the channels that they do 
want than if they just blocked for free the channels they did 
not want.
    That belief is underscored in the GAO October 2003 cable 
industry report to Congress which concludes in pertinent part 
that, quote, ``Adopting an a la carte approach would provide 
consumers with more individual choice but could require 
additional technology and impose additional cost on both cable 
operators and subscribers. A move to an a la carte approach 
could result in reduced advertising revenues and might result 
in higher per channel rates and less diversity in program 
choice. If cable subscribers were allowed to choose networks on 
an a la carte basis, the economics of the cable network 
industry could be altered, and if that were to occur, it is 
possible that cable rates could actually increase for some 
consumers.''
    To me we can draw a comparison between the business model 
of the MVPD marketplace and that of your average newspaper. 
Both rely on subscriptions and ad revenue to survive. Take 
today's USA Today. It costs 50 cents. It is going up to 75 
cents. For me I want to see the sports, the front section and 
the business section. All the other sections automatically go 
into my recycling bin. I would imaging that I would pay a lot 
more on a daily basis for just the sections that I want if they 
had to be offered on a stand-alone basis. In essence, that is 
what an a la carte mandate would bring to the MVPD marketplace.
    In conclusion, I want to compliment my colleague, Mr. Deal, 
for all of his attention to the issue. While we might disagree 
on the merits of the government requiring a la carte or theme-
tiered offering, I know that he has the best interests of the 
consumers in mind, and I salute his determination to see that 
this issue has a fair hearing before this subcommittee today. 
And I yield to my friend and winner of the American League All 
Star Game last night against my National League guys, Mr. 
Markey.
    Mr. Markey. Thank you, Mr. Chairman, very much, and thank 
you for holding this very important hearing. The backdrop of 
our discussions this morning is the reality that cable rates 
continue to rise each year. This has been the case since the 
1992 Cable Act's consumer rate protection rules, which saved 
consumers over $3 billion from 1993 to 1995, were eliminated by 
Congress in the Telecommunications Act of 1996. These consumer 
rate protections were removed based upon the faulty premise 
that full-blown price competition would arise primarily from 
the telephone industry. It turns out that the telephone 
industry never did get into the cable industry. It is a lot 
like Samuel Beckett's, ``Waiting for Godot.'' We are still 
waiting for them to arrive. And yet the premise was that we 
could remove regulations because there would be real 
competition provided by the telephone industry in the cable 
sector, but they never deployed.
    And so as a result, in 95 percent or so communities in 
America, there is only one land-based provider. And of course 
that means that while the USA Today is a paper that you might 
want to go through and pick out the different sections that you 
want, if you are not happy with them at all, you can always 
purchase the Washington Post, and you can go through that 
entire paper in terms of the what they are doing or the New 
York Times or the Washington Times or a whole bunch of other 
papers here in Washington DC for their sports section, for 
their news section, which is not in fact possible when it comes 
to cable providers. There is only one, and it is whatever they 
provide, which is the basis of the selections which you can 
make.
    During the House floor debates on the 1996 Telecom Act, I 
offered an amendment which sought to prohibit the elimination 
of the consumer rate protections until that telephone company, 
that second newspaper, arrived in town. When it arrived in town 
providing competition for price and services, then there was 
deregulation of the marketplace, because competition would then 
be the protection for the consumer. The Markey consumer rate 
protection amendment failed, and in the absence of any 
widespread assault on cable markets from the telephone 
industry, cable rates have steadily and annually risen at a 
pace far in excess of the rate of inflation.
    It is true that the cable industry in the last several 
years has also made significant investments in upgrading their 
facilities. It is true as well that cable has deployed 
broadband service and forced the phone industry and others to 
respond. It is also true that more and more cable operators are 
entering the voice marketplace and offering consumers savings 
on their phone bills. Yet it remains true that many consumers 
continue to complain about rising cable rates, lack of choice 
and the channels they don't want are forced upon them.
    When questioned about why rates continue to go up, 
operators typically point to increases in programming costs. 
The cable programming marketplace is highly concentrated. The 
number of cable channels truly independent of cable operators 
or television networks is a paltry few. The biggest problem 
from a public policy standpoint is that there doesn't appear to 
be any near-term competition that will emerge to keep a check 
on consumer rates, and there doesn't appear to be any end in 
sight to annual programming rate increases either. That is not 
a good situation.
    Proposals have recently emerged to explore the possibility 
of offering cable channels on an a la carte basis as a way of 
addressing the dysfunction and concentration in the cable 
programming marketplace. Mandating an a la carte option for all 
cable operators, for all cable consumers may not be a panacea. 
As opposed to an a la carte mandate, permitting certain cable 
operators to voluntarily experiment and try a la carte 
offerings strikes me as the best way to find the right answer.
    When a la carte was offered as an amendment in this 
subcommittee during consideration of the 1992 Cable Act, I 
opposed it. I did so because, in part, because of concerns that 
such a proposal would adversely affect the ability to have a 
great diversity of programming with the independent editorial 
voices of minority programmers, foreign language programmers 
and other less powerful voices in the media mix struggling to 
get into cable. We now have a 12-year track record to assess, 
and while there may have been some successes in getting 
diversity on the cable tier, overall such voices, when they 
exist, still tend to be owned and controlled by the same large 
programmers who seem to dominate the cable dial.
    Today, some of the voices of diversity are calling for an 
experiment with an a la carte in order to foster diversity in 
the cable marketplace. I would like to ask, Mr. Chairman, 
unanimous consent to submit for the record a number of letters 
and submissions from entities addressing the diversity of 
voices question and the issue of a la carte. They are a letter 
from Brian Woolfolk; a letter from Tracy Jenkins Winchester, 
president of Colors, a multicultural television network founded 
by an African-American civil rights organization; comments from 
Steven Davis, chairman of the Black Education Network; and a 
letter from Jonathan Rintels, executive director of the Center 
for Creative Voices in the Media, a group of prominent 
independent producers. This is a complex issue, everyone will 
agree, to certain problems, and there appears to be no easy 
answer or short-term solution, but these issues do need greater 
attention, and I congratulate you on this excellent hearing 
today.
    Mr. Upton. Without objection, it will be made part of the 
record.
    [The information referred to follows:]



    


    Mr. Upton. I recognize the chairman of the full committee, 
Mr. Barton.
    Chairman Barton. Thank you, Mr. Chairman, and before I give 
my opening statement, I have an announcement to make. The 
Oversight Investigations Subcommittee is about to commence a 
proceeding upstairs which we are going to vote on the issuance 
of a subpoena, and we need a quorum to do that, so I would hope 
that the members that also serve on this subcommittee, which 
are Mr. Bilirakis, Mr. Stearns, Mr. Bass and Mr. Waldren, Mr. 
Markey, Mr. Deutsch and Mr. Dingell, after their give their 
opening statements will come upstairs. This meeting in O&I 
shouldn't take more than 15 minutes. So if you are one of those 
members, we would encourage your attendance for the issuance of 
a subpoena in the Oversight and Investigations Subcommittee.
    Mr. Chairman, I want to thank you for holding this hearing 
on competition and consumer choice in the multichannel video 
programming distribution, or MVPD, marketplace. The advent of 
MVPD such as cable and satellite operators have taken consumers 
from a world not too many years ago with at most three channels 
to one today with over 300 channels. As this subcommittee's 
hearings continue to demonstrate, the television industry is 
very competitive and very innovative.
    I was one of the few members that voted against 
reregulating cable in this committee back in 1992. I was very 
glad to see that cable was deregulated in the 
Telecommunications Act of 1996. Since 1996, cable operators 
have invested over $85 billion, that is b, billion dollars to 
offer consumers digital broadband and video-on-demand services. 
Direct broadcast satellite, or DBS, operators are also now 
offering consumers a nationwide alternative to cable and they 
have captured 22 percent of the MVPD marketplace in just over 
10 years. Consumers have and are continuing to benefit greatly 
in a deregulated marketplace.
    Digital technology now gives over-the-air broadcasters an 
opportunity to offer consumers even more choices. Indeed, 
multicasting in new endeavors, such as USDTV, allow 
broadcasters to provide multiple strings of content where once 
they could only provide one. Broadband and compression 
technology are also starting to make it possible for consumers 
to stream the content of their choice over the Internet. 3G 
wireless technologies may soon make it practical for consumers 
to watch television on cell phones and other handheld devices. 
With additional industry investment and fiber optic cable, more 
consumers may soon be getting television services from their 
telephone company, so it is clear that competition is alive and 
well and consumer choices are growing.
    I want to applaud Congressman Nathan Deal for raising the 
profile of how cable television is marketed by programmers to 
distributors and then to consumers. As this committee worked on 
legislation reauthorization the Satellite Home Viewer 
Improvement Act, Congressman Deal proposed an amendment 
restricting certain practices in negotiations. I was pleased 
that Congressman Deal was willing to withdraw his amendment so 
that the issue could be considered more carefully. The result 
of that decision is this hearing, and I want to comment 
Chairman Upton for holding this hearing. Congressman Deal has 
touched an important issue of fairness in negotiations. I have 
great sympathy for Congressman Deal's perspective. I believe 
cable and satellite programmers should give consumers more 
options. I believe that parents and families should have more 
opportunities to choose family friendly programming and block 
channels that sometimes carry indecent programming. That said, 
I also have heard of problems associated with the so-called a 
la carte approach, which is the purpose of the hearing today.
    In evaluating these a la carte proposals, the committee 
needs to ask many questions. No. 1, does anything currently 
prevent MVPDs from offering a la carte and theme-tiered service 
today? No. 2, would MVPDs be required to offer such service or 
should it be voluntary? No. 3, what would be the effect of an a 
la carte or a theme-tiered offering on prices? No. 4, would 
consumers have more or fewer channel choices to choose from 
under an a la carte system? No. 5, would independent, niche, 
minority and religious programming have an easier or harder 
time surviving in an a la carte atmosphere? No. 6, would 
consumers be able to decide what goes into a family tier or 
should we allow the company or cable company or the government 
to decide what channels go into this type of a package? And 
last but not least, would it end up being more expensive or 
less expensive for families to pick channels on an a la carte 
basis than to take the existing packages that they already have 
and then block channels using the free equipment that cable 
companies would provide?
    I encourage the witnesses today to help us answer these 
important questions and to also offer constructive solutions. 
Consumers have a wide range of viewing options in the current 
environment, and while no one watches everything, everyone has 
something that they like to watch. We should carefully examine 
what impact a la carte and theme-tiered proposals will have on 
consumers. Our goal should be to maximize consumer choice and 
control over what comes into the home while preserving the 
diverse selection of programming for consumers to choose from. 
I look forward to hearing more about these issues in today's 
hearing. I yield back, Mr. Chairman.
    Mr. Upton. Recognize my friend from the great State of 
Michigan, Mr. Dingell.
    Mr. Dingell. Mr. Chairman, thank you. I want to thank you 
for calling the hearing, and I want to commend you for it. I am 
very pleased that this committee will focus on the question of 
competition in the video marketplace. Interestingly enough, 
much of the recent conversation on this topic is centered on 
whether Federal laws should be amended to promote a la carte 
programming. The notion that consumers should be able to 
purchase only those channels of their choosing and no more has 
an intuitive appeal to this consumer, and I am sure it would to 
most others as well. At the same time, many reputable parties, 
including the GAO, have concluded that an a la carte 
marketplace would leave consumers paying more for fewer 
channels and might lead to fewer programming choices. In other 
words, the consumer would be, in fact, worse off.
    It occurs to me that I should quote my old dad who used to 
say, ``Look before you leap,'' or to perhaps remind my 
colleagues of the Hippocratic Oath, which says first, ``Do no 
harm.'' Federal law today does not prevent video service 
providers from offering a la carte programming, but it also 
does not prevent contractual restrictions on a la carte 
service. Those who seek to change Federal law to encourage a la 
carte programming have the burden to demonstrate that such a 
dramatic change is necessary and will not ultimately hurt 
consumers. Work needs to be done by all to gather the 
information before that burden can properly be met.
    On a related matter, I would note that I continue to 
receive complaints from constituents that cable rates continue 
to rise faster than the rate of inflation. The cable industry 
indicates otherwise, but it is quite clear that the marketplace 
is not yet sufficiently competitive. Most consumers still have 
only limited choice for their video service provider: The local 
cable company and the two national satellite companies. These 
companies compete on programming choices and related services, 
but they do not appear to compete on price or customer service.
    A recent GAO report demonstrates that only additional 
competitors in the marketplace beyond the existing satellite 
competitors will force the kind of competition that we need and 
will begin to act as a restraint on cable price increases. 
Though the cable industry has criticized this finding as based 
on too little evidence, it certainly is a point that the 
committee should address and something which our consumers want 
us to look at.
    The emergence of additional video competitors in the 
marketplace is certainly preferable to reregulating cable 
rates. That is why I have long championed the deregulation of 
cable's competitors and why I hope that the newly deregulated 
telephone companies will keep their promise and compete head on 
in this marketplace.
    In addition, Federal policy must be aggressive in fostering 
the development of additional transmission paths to the home. 
Be it from broadband over power line or new wireless 
technologies, we must all do our part to ensure that consumers 
are able to benefit as quickly as possible from a competitive 
marketplace, and that would include using new and innovative 
approaches and techniques which might assist in the speeding of 
this competition. But if competition does not develop and my 
cable friends do not exercise some restraint, I think they will 
witness again a period of wrath from angry consumers and 
perhaps the Congress responding to those events.
    I look forward to the testimony of our witnesses, and I 
thank you again for this hearing, Mr. Chairman.
    Mr. Upton. Thank you. Mr. Deal?
    Mr. Deal. Thank you, Mr. Chairman. I want to thank you and 
Chairman Barton for holding this hearing and also thank the 
witnesses for their willingness to testify.
    Ladies and gentlemen, I regard the issues that we discuss 
today to be some of the most important ones we will face in 
this committee, because they involve the most fundamental 
freedoms and cultural directions of our society. As Americans, 
we truly regard our homes as our castles, our places of refuge 
where we raise our children and establish the values of our 
families. That is why Congress and this committee have focused 
on the importance of the right of Privacy in almost every 
aspect of our lives.
    But just as our homes, our castles, are important refuges 
where our privacy should be guarded and protected, we also 
recognize that we live in the information age and that our 
castles must be connected to the outside world in order for us 
not to become isolated. Today, we will hear from some of those 
who link our castles to the outside world by way of their cable 
lines or satellite dishes. For almost 9 out of 10 Americans, 
these television avenues have become their primary source of 
news, information and entertainment, which they pay for in ever 
increasing amounts each month.
    One of the main questions for us today is who are these new 
gatekeepers for the castles of America? Are they responsive and 
responsible to the wishes of the owners of the homes into which 
they come or have they abandoned their position of trust and 
confidence for the financial rewards that are being offered by 
those who want to breach the castle walls? As Members of 
Congress we should be especially concerned, for we have given 
them the keys to the homes of America in the form of free 
broadcast signals, and they are now using those keys to force 
homeowners to buy additional services whether they want them or 
not.
    Who are these new gatekeepers? Are they elected officials 
responsible to the voters at the ballot box? No. Are they 
appointed government agents who are charged with protecting the 
well being of our citizens? No. They are five or six mega 
production cable and satellite conglomerates who control what 
comes into every American home and they are free from the 
normal constraints that apply to almost every other business in 
our country. They can tie and bundle their products with the 
power of a near monopoly and yet are exempt from our anti-trust 
laws. They can set prices that include the broadcast networks 
we have given them free of charge and refuse to tell this 
committee, the FCC or the Justice Department how those prices 
are arrived at and by contract seal the lips of the cable 
operators who deliver their products.
    Some, such as Time-Warner, have characterized today's 
hearing as one on the issue of mandatory a la carte, which was 
also the characterization of the GAO study, mandatory a la 
carte. That is not the case. They have created a straw man to 
attack in an effort to divert our attention. We should explore 
all options: Tiering of compatible programs, choice of basic or 
expanded basic services and voluntary a la carte. We should be 
told why certain programmers have gone to a 10-year contract in 
an effort to block these choices. And above all, we should be 
told why consumers, the owners of their castles, should not be 
given the choice of what television programming they want in 
their homes. So far, these conglomerates have taken an arrogant 
approach.
    I realize my time is running out, but let me just conclude 
by saying we should have them explain to us why the American 
public, why a family that wants to buy a cartoon program, Nick 
Tunes, should be forced to also buy the program, Logo, a gay 
and lesbian channel. Yes, these new gatekeepers have decided 
that families with small children who want to receive cartoons 
must be forced to buy a gay and lesbian program, a decision 
that was made by Viacom only a few weeks after they appeared 
before this committee to apologize for the Janet Jackson Super 
Bowl affair to assure us that they had learned their lesson. Of 
if your child wants to watch Spongebob Squarepants, a child's 
program, they must also buy Undressed or Stripperella, two 
highly sexual adult programs. If you want to simply watch 
Nickelodeon, you must buy the sexually explicit programming of 
MTV and Spike TV. If this is the business philosophy is applied 
everywhere, candy stores would be required to sell marijuana.
    Mr. Chairman, it is time that this hearing is held, and I 
thank you for having it. It is long overdue, for as the title 
of the late Star Allen's book says, ``The Vulgarians Are At the 
Gate.'' I yield back.
    Mr. Upton. Mr. Wynn?
    Mr. Wynn. Thank you very much, Mr. Chairman. I certainly 
appreciate you having this very important hearing, and let me 
begin by saying that I concur with the views you shared in your 
opening statement and your concern about the downside, if you 
will, of a la carte pricing.
    I think it is absolutely true that we have emerging 
competition, significantly emerging competition, in this 
industry from satellite companies as well as some of the 
traditional cable companies and that, as the GAO pointed out, 
it is very likely that in an a la carte system we could see the 
unanticipated consequence of increased rates rather than lower 
rates.
    There are a couple of points that I think are critical. 
One, we have talked a lot about diversity in the marketplace, 
and a la carte runs directly contrary to that. I think you will 
hear testimony to that effect. We have also talked about 
decency, and my colleague in his opening statement, Mr. Deal, 
just made a comment about that. The fact of the matter is some 
of the casualties of a la carte pricing might be the very 
wholesome programs that people would like to encourage as their 
market share decreases.
    It seems to me that at this time Congress should not allow 
a regulatory scheme to emerge in which that kind of mixed 
programming, educational, religious, ethnic-based programs, are 
stifled or inhibited. This is particularly true as we 
anticipate new available spectrum. Instead, it seems to me that 
Congress should do everything in its power to encourage the 
expansion of niche programming and give programmers comfort in 
knowing that niche programming is a viable option.
    I am particularly pleased today to have one of my 
constituents here, Alfred Liggins, representing TV One. He is 
located in my district in Lanham, Maryland, and I believe he 
will give you some excellent testimony on his viewpoints 
regarding a la carte pricing and how it would negatively affect 
minority and startup programming.
    Additionally, let me point out that a la carte pricing 
schemes, if they are implemented, consumer costs are likely to 
increase, because the channels with fewer subscribers will have 
to make up for loss of revenue. Advertisers likely will pull 
ads from channels with lower viewership, thus causing a 
situation in which programmers have to pull their programs or 
distributors have to stop offering certain stations because of 
lower revenues. This is exact opposite of what we have been 
trying to encourage in terms of diversity in the marketplace.
    So, Mr. Chairman, as I said, I believe that there are 
significant problems with a la carte pricing and that we should 
reject this approach as contrary to the notion of diversity and 
the concept of decency on the airwaves. With your permission, I 
would like to include in the record a package of letters which 
include letters from the New York State Black, Puerto Rican and 
Hispanic Legislative Caucus, the National Congress of Black 
Women, Incorporated and approximately 12 mayors of various 
cities from around the country, New Jersey, Connecticut, 
Mississippi, California, Oklahoma, Louisiana, Illinois and 
Texas as well, small town mayors who oppose a la carte pricing.
    Mr. Upton. Without objection.
    Mr. Wynn. Thank you, Mr. Chairman.
    [The information referred to follows:]


    
    
    Mr. Upton. Mr. Whitfield?
    Mr. Whitfield. Mr. Chairman, I am going to waive my opening 
statement.
    Mr. Upton. Mr. Shimkus. Ms. Wilson.
    Mrs. Wilson. Mr. Chairman, I will waive my opening 
statement.
    Mr. Upton. Mr. Cox.
    Mr. Cox. Thank you, Mr. Chairman. I look forward to hearing 
from today's witnesses as we focus on the best way to ensure 
that the consumer is king when it comes to television 
programming.
    I would also like to take this opportunity, Mr. Chairman, 
given a looming deadline, to encourage the President to add to 
his sterling record on behalf of Internet consumers by ensuring 
that the consumer is king when ordering Internet access service 
from cable companies. Not for the first time the U.S. Court of 
Appeals for the 9th Circuit in my home State of California has 
wrongly decided an important case. This time, however, it is 
not the Pledge of Allegiance but Internet access delivered via 
cable that the court is mucking up. Internet-over-cable is not 
a telecommunications service under Federal law, as the 9th 
Circuit has ruled. I urge the President and the Solicitor 
General to seek Supreme Court review of the 9th Circuit's anti-
consumer, anti-technology and legally incorrect decision.
    Slapping 1930's-era telephone regulation out of the 
Internet would be highly destructive to the continued 
deployment of broadband. Those early 20th century regulations 
were designed to counter the power of a monopoly telephone 
network in an analog age of communication scarcity. That kind 
of regulation has nothing to offer today's consumers of high-
speed Internet access. Legal analysis that rests on the premise 
that cable companies are monopoly providers of high-speed 
Internet access is fundamentally unsound. In fact, it is not 
even clear that they will serve, that is that cable broadband 
will serve a majority of this market once the dusts settles.
    According to the FCC's latest study of nationwide broadband 
deployment, DSL services offered by phone companies are growing 
faster than cable modem services. DSL customer connections rose 
by a full 47 percent in 2003. And, of course, as we have 
learned, Mr. Chairman, in a number of this subcommittee's 
valuable hearings, DSL isn't cables only competitor in this 
market. There are a variety of terrestrial wireless broadband 
services, satellite broadband services, the emergent power line 
broadband service. Any and all of these can be formidable 
competitors. It is ironic that in California where the 9th 
Circuit decided this case cable isn't even the market leader. 
According to the FCC, in California, DSL has 300,000 more 
customer lines in service than cable.
    Allowing this ruling to stand and thereby allowing the 
Internet to be pulled into the maw of traditional State and 
Federal telephone regulation would be an unmitigated disaster 
to the American consumer. Therefore, I urge the President and 
the Solicitor General to file a petition for Supreme Court 
review before the July 29 deadline and to continue the 
outstanding leadership of the Bush Administration in 
encouraging the deployment of high-speed, tax-free Internet 
connections.
    With respect to the important topic of a la carte 
programming, Mr. Chairman, I would just suggest that we try and 
adhere to the following general principles. First, customers 
should have maximum choice; second, customers should have the 
lowest possible prices; third, there should be an opt-in, not 
an opt-out, system for objectionable programming; fourth, the 
Federal Government should set rules of the road that promote 
maximum competition in the marketplace; fifth, and finally, we 
should take fullest advantage of new technologies that permit 
more discretion in providing individual choices to consumers 
based on individual tastes. With that, I yield back.
    Mr. Upton. Mr. Doyle.
    Mr. Doyle. Thank you, Mr. Chairman, and thanks to each of 
our witnesses for appearing before us today as we discuss some 
of the important issues affecting the MVPD marketplace.
    I have said before that I try to approach the issues this 
subcommittee considers from a consumer's point of view, and I 
can't think of many issues that stirs the passions the way the 
issues related to television programming seem to. In recent 
years, I have heard with increased frequency from consumers who 
are not happy with their television options. The biggest 
complaints seem to be related to objectionable content and the 
ever-increasing cost of service. Obviously, these are very 
valid concerns.
    So the question that I need to answer for myself and my 
constituents is would the implementation of a la carte 
programming address these basic concerns? Would a la carte 
programming lower prices? Would a la carte programming prevent 
the delivery of objectionable material into the home? I don't 
yet know all the answers to these questions, and I hope we will 
revisit this issue in the future as more information on this 
subject becomes available. As I understand it, the FCC is 
currently conducting a study on the feasibility of an a la 
carte system, and I hope we will review these findings when 
they become available.
    I should mention that I have never been one to embrace a 
mandated a la carte system of television programming, and in 
fact I have serious reservations about such a system. Mostly, 
this is because I am concerned that a la carte programming 
could raise the rates that most subscribers pay for for the 
programming package they currently receive in order to give a 
smaller minority the right to pay for only a few select 
channels. Philosophically, the right to choose channels you 
want and only pay for those channels is something I think most 
people will agree with. However, in reality, I worry that such 
a system could do more harm than good.
    The GAO has reported that some cable networks, especially 
small and independent networks, would not be able to gain 
enough subscribers to remain in operation. Additionally, 
consumers could end up paying the same monthly rate for fewer 
channels because the most popular channels would have the 
subscriber following to increase their fees considerably under 
such a system.
    With regards to objectionable programming, I must say that 
as the father of four children, I am sympathetic to the 
concerns of parents who want to control the type of material 
that enters the home. Parenting is an awesome responsibility, 
and I respect every parent's right to protect their children 
from material they deem inappropriate. Parental control 
technology that most cable and satellite providers offers 
accomplishes this goal, although a subscriber is still paying 
for a network that airs material they deem inappropriate.
    The MVPD marketplace is rapidly changing and it is 
therefore incumbent upon us to make sure that the laws and 
regulations governing this industry remain effective to promote 
healthy competition. Competition ultimately benefits the 
consumer and whatever actions we consider taking should be 
crafted with the consumer in mind.
    I want to thank the witnesses for agreeing to be here today 
on short notice to discuss these vital issues. I look forward 
to hearing your testimony. I yield back, Mr. Chairman.
    Mr. Upton. Thank you. Mr. Bilirakis.
    Mr. Bilirakis. Thank you, Mr. Chairman. I wasn't going to 
make an opening statement, but I will just go ahead and do one 
briefly.
    Mr. Chairman, we have heard a lot of viewpoints already on 
this. Unfortunately, we have heard an awful lot of pre-deciding 
on the part of many members of this committee. I am just not 
sure why are we holding hearings, which are supposed to be 
information gathering sessions, if we have already made up our 
minds on a particular subject. What the heck is the sense of 
holding a hearing and wasting time?
    So I would really plead for an open mind in this and 
objectivity on the part of all us. This is an important 
subject, a very important subject, and I think we all should be 
grateful to Mr. Deal for raising it. He was a voice in the 
wilderness and maybe in a sense he still is. Actually, when I 
hear some of these opening statements, he still is a voice in 
the wilderness. But we ought to be grateful to him for sticking 
to his guns and at least bringing it up.
    But we have heard it is going to increase costs, and I 
don't doubt that it might increase costs. We have talked about 
the lack of choice, but that could be looked upon in a number 
of different ways. I understand in Canada where they have some 
of this taking place that there is really a true lack of choice 
and what not.
    So, Mr. Chairman, I have said to you in our subcommittee 
chair meeting the other day that I would hope that we are going 
to really hear some facts here today to help us make that 
pretty tough decision. But I just wonder if even with all the 
facts we might hear here today, when I say facts I mean we are 
going to hear statements, it seems to me that maybe before we 
would make such a very important decision that we ought to 
actually take a look at some facts or possibly maybe some sort 
of a demonstration project somewhere so we could really see 
exactly what something like this would do. It may cause more 
harm than good. I think Mr. Deal would be the first one to 
admit if that is the case that it would cause more harm than 
good, but we don't know. I am not sure that we are going to 
know even after this hearing, although I am sure we will learn 
a lot, not as much as we would like.
    So, Mr. Chairman, again, I plead for open-mindedness and 
objectivity, and I haven't made a decision on this issue, 
although unfortunately, many of our members have, and I think 
that that is probably wrong. Thank you.
    Mr. Upton. Mr. Gonzalez.
    Mr. Gonzalez Thank you very much, Mr. Chairman, and I will 
be brief. A la carte is an issue that though it is deceptively 
simple on its face has, in my view, potentially dramatic 
consequences to the fundamental economics of the cable 
industry. This may be a good thing, but it must be something 
that we need to carefully consider, and I thank you for holding 
these very important hearings.
    I would ask unanimous consent to insert for the record 
statements made by the Hispanic Federation, the National 
Hispanic Policy Institute and Congresswomen Loretta and Linda 
Sanchez to the FCC. I believe that these statements should be 
part of the record in today's hearing.
    I further want to commend my colleague, Mr. Deal, for his 
enthusiasm and dedication to this issue. I have only been here 
6 years but yesterday was the first time that I have been here 
in Congress that someone from the other side of the aisle 
actually approached me, came over to our side, to tell me of 
the importance of today's hearing and that we should have an 
open and free debate. I have not made up my mind. There is no 
doubt that I am leaning a certain direction based on my region, 
my constituency and so on. Nevertheless, I will pledge to Mr. 
Deal and the supporters of this legislation to keep an open 
mind and to listen to the information and base any decision on 
the facts. And with that, I yield back.
    [The information referred to follows:]


    
    
    Mr. Upton. Mr. Walden.
    Mr. Walden. I am going to waive my opening statement, Mr. 
Chairman.
    Mr. Upton. Mr. Bass.
    Mr. Bass. Thank you, Mr. Chairman. I will ask unanimous 
consent to put my statement into the record and say that I am 
also coming to this hearing with an open mind. I appreciate Mr. 
Deal's efforts here on the a la carte issue and the Chair 
having this hearing. And I have had the opportunity to hear 
both sides, opponents saying, as others have said, that 
consumers will end up--may end up paying more, that small, 
startups won't be able to occur and so forth; the other side 
arguing that consumers shouldn't have to pay to have programs 
available that they are not interested in. And, as some other 
witnesses have mentioned, there are other alternatives, the 
iPod example and the recording industry is a good perhaps model 
to think about.
    So this is an informative hearing on a very important 
issue, but, ultimately, as I said during the SHVIA hearing, it 
is the consumer that we have to keep in mind, not the 
contractors or the broadcasters or the cable companies but our 
consumers, the ones that benefit most from good access to 
programming that they want to see. And I yield back.
    [The prepared statement of Hon. Charles F. Bass follows:]
    Prepared Statement of Hon. Charles F. Bass, a Representative in 
                Congress from the State of New Hampshire
    Mr. Chairman, thank you for holding this important hearing.
    I am glad we have the opportunity to hear from both sides today and 
I want to express my gratitude to my colleague Nathan Deal for 
advocating for this review of the issue.
    Because I want to get to the testimony and questions, I will be 
brief, but I do want to observe that so far, proponents and opponents 
of an a la carte system or any substantial change in how channels are 
offered miss the points made by their critics.
    One the one side, opponents say that consumers will end up paying 
no less or perhaps even more for the smaller number of channels they 
might choose under an a la carte frame work. In addition, they argue 
that start up and independent channels will disappear because they 
won't have the initial critical mass advantage of the current system. 
In effect, that the economies of scale require aggregation.
    The other side argues that customers should not be forced to pay 
for and accept channel ``X'' in order to get channel ``Y''. They say 
consumers might want only a limited range of channels and, as 
importantly, expressly not want certain other channels.
    It seems to me that both points might be right and they are 
certainly not mutually exclusive in any case. I am not sure we can ever 
know without trying it. An a la carte system might in fact not lead to 
any savings for most consumers; some channels without a substantial 
audience base might disappear; and yet consumers would be able to 
satisfy their yes to ``Y'' and no to ``X'' wishes.
    Again, I don't know what would occur, but I might suggest we look 
at Apple's iPod and recording industry for some evidence. That whole 
business models is being turned over because of consumer choice. People 
no longer want to pay $15 for 15 songs on an album, but at $1 a song, 
they are happy to buy lots of individual songs--and there is some 
evidence they are willing to spend more in total dollars in this 
condition. Something to think about.

    Mr. Upton. Mr. Stupak.
    Mr. Stupak. Thank you, Mr. Chairman, and thank you for 
holding this hearing. Welcome the Reverend Glenn Plummer from 
Southfield, Michigan; good to see you again.
    Cable prices in my district keep going up, and I don't see 
any change in this upward trend. My district, which comprises 
half the land mass of Michigan, has both small cable operators 
and big ones, like Charter and Time Warner. In general, we know 
that there are two factors in these rising costs: System 
upgrade and program costs. In my district, cable has invested 
to give us high-speed Internet.
    I know today's discussion will center around the issue 
between the current bundling system and the idea of allowing 
consumers more choices in the cable packages they choose. I am 
not sure there is a right answer or which system would be more 
economical to Northern Michigan cable consumers, so my 
questions today will focus on the following. How do we get a 
handle on the escalating costs of monthly cable service? Do 
consumers have enough flexibility and choice for cable today? 
Do consumers actually know what they are paying for, and what I 
mean is can I call my cable operator and ask, ``How much am I 
paying for ESPN versus the Disney Channel?'' Is that a 
legitimate request, especially if the consumer has no say on 
what they can receive in their basic package, or is that 
irrelevant? Does the current system promote diversity? Would a 
la carte limit diversity or suppress the 1st Amendment or do 
the opposite? Do rural cable operators under the current system 
pay more for cable and cable programming than their urban 
customers for the same service? Would a tiered or a la carte 
system make this problem better or worse?
    Again, I don't have all the answers to these questions. I 
look forward to our witnesses. And, Mr. Chairman, I will yield 
back the balance of my time.
    Mr. Upton. Mr. Terry.
    Mr. Terry. Thank you, Mr. Chairman. I have a lengthy 
opening statement that I will submit and just thank you for 
holding this hearing and Mr. Deal for urging you holding this 
hearing so we could vet these issues, and I think the series of 
questions that the chairman of the full committee, Mr. Barton, 
displayed in his opening statement mirror many of the questions 
that I raise in my opening statement. So with that, I will just 
submit.
    [The prepared statement of Hon. Lee Terry follows:]
Prepared Statement of Hon. Lee Terry, a Representative in Congress from 
                         the State of Nebraska
    Thank you Mr. Chairman,
    I want to thank you for holding this important hearing today. The 
issue of a la carte and whether this is the best way to enable 
consumers to lower their cable TV costs while at the same time being 
able to customize what they view is important, but it carries with it a 
lot of underlying issues that affect how companies do business and how 
the marketplace operates. Whether the idea behind a la carte is a move 
to allowing consumers to purchase channels on a tiered basis or on an 
individual level, may actually be detrimental to the cable/satellite 
consumer.
    Moving to an a la carte/tiered system runs the risk of giving 
consumers a false belief of cheaper cable. Taking a 60,000 foot view of 
this, I do not see how the marketplace can accomplish this goal. If 
companies are forced to move to an a la carte/tiered system, they will 
pass channel programming charges onto the consumer, like they do now, 
but the difference will be that when consumers choose channels they 
wish to watch, they will be purchasing them individually (or in a 
tiered package) and at prices that are most likely higher then what 
they would get if they were able to buy a larger package. This could 
mean that by the time the consumer buys all the channels he/she wishes 
to watch, they might actually be paying more for the same service they 
get today.
    Furthermore, the issues of moving to an a la carte/tiered system 
could mean the elimination of quality channels that only receive a 
minimum amount of viewers. I'll give you a perfect example. My wife 
loves to watch SoapNet. SoapNet is a new and emerging channel that 
doesn't have the viewer-ship of a channel like the History Channel, and 
frankly, it might never reach that lever. In an a la carte/tiered 
system, I would be forced to purchase this channel at an elevated price 
because the marketplace would force the programmer to make up its costs 
on those that watch this channel. However, should the programmer 
realize that they can not make up its costs on charges the consumer is 
forced to pay, they would stop programming and turn off this channel--
this is simple economics. Whether it be GAO, Booz Allen or someone else 
who does an economic analysis on what impact a la carte/tiered pricing 
system would have on a cable network's revenues as well as their 
marketing and production budgets, I see that prices rise and consumer 
choice goes down. If this is the case, and we move to an a la carte/
tiered system are we then going to hear the call for rate regulation 
when prices rise out of control?
    It is my understanding that when Congress imposed cable rate 
regulation in 1992 to 1996, the cable companies made very limited 
investment in capital improvements and virtually no investment in new 
programming. I want to hear what theses rate regulations did to 
companies from 1992-96. Why there was limited capital investment and 
virtually no investment in new programming and what companies have done 
since the lifting of these regulations.
    Channels like Oxygen, Lifetime, National Geographic, Discovery, 
Animal Planet, Food Network, the Speed Channel and Noggin all exist 
because of the current way programmers are allowed to bring new 
channels to market. By moving to an a la carte/tiered system it is 
conceivable that a number of these great channels will be lost because 
consumers will not be willing to pay individually for them. And if we 
move into a strict tiered system so these channels would not be lost, 
would I have to purchase the speed channel to watch baseball? And would 
WGN be included in this Sports tier because they cover the Cubs? It 
sees to me that in the end the consumers are the ones hurt because they 
would lose a channel that many people may watch if they only knew it 
existed, or they deemed it affordable and important enough to purchase.
    I understand that there is an argument that this a la carte/tiered 
system will allow parents to pick and choose what channels they want 
their families to watch and that by allowing a move to this a la carte/
tiered system would lessen the amount of violence and foul language our 
children may be subjected to. As a parent, I desire this outcome as 
well. I may not want my kids to watch MTV, but I can call my cable 
provider and have them block that channel, and if I have a digital 
cable box I can block it myself. Yes, I am paying for something that I 
choose not to receive--but I am getting additional channels I want for 
prices less than I would pay for under an a la carte/tiered system.
    Thank you again Mr. Chairman, and I yield back the remainder of my 
time.

    Mr. Upton. Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman. Let me also 
thank you for holding this hearing on the current state of 
competition and consumer choice in the video programming 
distribution market.
    Let me pause at this point and thank the witnesses for 
appearing as well. Competition in the marketplace is increasing 
and will likely continue to do so as new technologies develop 
and are adopted. As the General Accounting Office noted, 
competition between cable operators and direct broadcast 
satellite operators, which did not exist a decade ago, has 
emerged and grown rapidly in the recent years. Consumer choice 
has increased as well. Whereas consumers used to have access to 
30 or 40 channels, they now can view hundreds. This does not 
even include video services now available through high-speed 
Internet.
    Some have argued that consumers do not want all of these 
channels and would prefer the Canadians so-called a la carte 
system. However, the largest Canadian cable provider that 
operates in markets closely resembling those of the United 
States offers service that is nearly identical to cable service 
offered here. Consumers must first purchase an expanded basic 
package before getting access to niche channels, and most 
Americans receive for free as part of a digital tier, like ESPN 
Classic, the Animal Planet or the Game Show Network.
    While one provider offers theme packages, this is only the 
French Canadian market, which is not like ours and was done 
without programmers' permission. More importantly, the revenue 
generated in such markets are supplemental revenue. If such a 
model were employed in the United States, channels would 
disappear, as they would be located on fewer systems and be 
unable to generate the advertising revenue needed for survival. 
Programmers continuing their service would be forced to raise 
rates to make up the difference. Niche channels, such as Oxygen 
and women-focused programs or TV One, a cable network for 
African-Americans, could never be launched without access to 
the millions of households that subscribe to an expanded basic 
tier. In the end, consumers would likely pay more but receive 
fewer channels.
    This does not seem to be a better deal for consumers. For 
those who are offended by certain programs, cable operators 
already provide technological tools to block those channels. 
Finally, Mr. Chairman, I have several letters from elected 
officials from New York and around and also from New York-based 
Hispanic groups that I would like to submit for the record.
    Mr. Upton. Without objection.
    Mr. Towns. Therefore, Mr. Chairman, on that note, I will 
yield back and say again thank you so much for having this 
hearing and of course say to Mr. Deal and to Mr. Bilirakis who 
said about people have made up their mind already, but if you 
hear convincing testimony, maybe you might change it again.
    [The information referred to follows:]


    
    
    Mr. Upton. Mr. Pickering.
    Mr. Pickering. Mr. Chairman, I will waive my right and take 
my time with the panel. I will look forward to hearing from 
them today, and thank you for this hearing.
    Mr. Upton. Mr. Stearns.
    Mr. Stearns. Good morning and thank you, Mr. Chairman. The 
issue before us is a difficult one: The ability to choose what 
programs a consumer wants to pay for and whether the market can 
bear that type of business model for multichannel video 
programming distributors, MVPD, like cable and satellite. 
Joshua Hammond wrote a book called, ``The Seven Cultural Forces 
that Shape America,`` and one of them, in fact the No. 1 
cultural force was choice. Americans desire as many 
alternatives that the market can provide to suit their daily 
lives. The MVPD has provided numerous valuable programming 
choices every year and continues to add new programming in its 
quality.
    At stake is whether the consumer should have the choice to 
pick only those programs he or she would like to pay for, like 
you would on an a la carte restaurant menu. Sure, the prices 
may be higher, but that is a consumer's choice. Now, this idea 
seems simple, I tell my colleagues, and has garnered some 
support from constituents in my district. In fact, the Orlando 
Sentinel just did an editorial today endorsing Mr. Deal's bill. 
But I also point out to you religious and minority programs 
have benefited from two specific areas in the MVPD market: 
Must-carry and the use of bundling services and programs. At 
the very least, my colleagues, the use of a la carte could 
interfere with the mandatory carriage obligation and in fact 
possibly reduce diversity in programming.
    I raise these questions. I am concerned they are attempting 
to impose a particular business model into Federal legislation. 
I understand that the proposal offered by my friend from 
Georgia is not mandatory but a voluntary one, but even under a 
voluntary program, a Federal a la carte provision can cause 
problems with existing contracts and obligations.
    Now, having said that, I don't think anybody on this 
committee would object to a demonstration model, as my 
colleague, Mr. Bilirakis, mentioned. So why doesn't the 
industry, just as a group, small cable systems or operators get 
together, take on an additional near-term cost to determine if 
an a la carte system can work in certain markets, just to try 
it. I mean that is the spontaneity of American enterprise. It 
is not uncommon in this country for a group to glean success 
from an idea that a majority of industry dismisses as 
unworkable, but I say to the industry, why not follow up and 
have a demonstration model? That, my colleagues, is another 
form of choice which you as an industry can make.
    So I applaud you for this hearing, Mr. Chairman, and I look 
forward to hearing from the witnesses.
    Mr. Upton. Mr. Rush.
    Mr. Rush. Thank you, Mr. Chairman, and I also want to 
commend you for holding this hearing today, and I want to thank 
my colleague from Georgia, Mr. Deal, for his interest in this 
particular area and for his work that he has done on it. And, 
Mr. Chairman, I hope that this will be the first of many 
hearings to come. Today's hearing provides us with an 
unprecedented opportunity to learn more about a la carte 
pricing or theme-based tier pricing programming.
    Mr. Chairman, consumers, particularly the ones in my 
district, are continuously complaining about the rising costs 
in their cable rates. The average monthly cable bill is 
approximately $50 and is steadily climbing. It has been argued 
the if consumers have more choice and flexibility in 
programming, that their cable rates would decrease. The 
rationale is that consumers would have to control over what 
comes into their homes without having to pay for channels that 
they do not watch, especially indecent programming. However, a 
recent GAO report recognized that adopting an a la carte 
approach could require additional technology and impose 
additional costs on both cable operators and subscribers, 
thereby increasing cable rates for the consumer. Apparently, 
consumers who rely on cable-ready TV sets will still have to 
lease or buy the addressable set-top boxes to purchase channels 
on an a la carte basis, which is estimated to be $4.39 per box.
    On the issue of diversity, I am deeply concerned that an a 
la carte pricing scheme would have the unintended consequence 
in hurting minority and niche programming. I know that I raised 
this very issue during recent hearings and markups of the 
satellite television reauthorization legislation, but I want to 
remind my colleagues that it is the GAO that reported that 
programming diversity will suffer in an a la carte world 
because, quote, ``Some cable networks, especially small and 
independent networks, would not be able to gain enough 
subscribers to support the network,'' end of quote. In 
addition, the GAO report further stated that an a la carte 
pricing system would undermine the prospects of new cable 
networks that are attempting to launch. Accordingly, there may 
be fewer diversity of voices and choices on the airwaves.
    Mr. Chairman, I want to welcome all the panelists who are 
here, particularly Mr. Liggins and others, and I also want to 
say a special hello to my friend from Chicago for a long time, 
Mr. Jonathan Rogers who is also present here representing TV 
One. I would like to submit, Mr. Chairman, finally, various 
letters into the record from various organizations from across 
the Nation who are really concerned about this issue, from the 
NAACP to the National Urban League, to the National Council of 
Negro Women, Rainbow PUSH Coalition, the National Congress of 
Black Women, of course the Congressional Black Caucus and the 
National Black MBA Association. And thank you, I yield back the 
balance of my time.
    Mr. Upton. Without objection.
    [The information referred to follows:]


    
    
    Mr. Upton. Mr. Gillmor.
    Mr. Gillmor. I will simply enter my statement in the 
record. Thank you, Mr. Chairman.
    [The prepared statement of Hon. Paul E. Gillmor follows:]
    Prepared Statement of Hon. Paul E. Gillmor, a Representative in 
                    Congress from the State of Ohio
    Thank you, Mr. Chairman, for this opportunity to address cable and 
satellite-related marketplace issues.
    In particular, I look forward to learning more about consumer 
choice proposals such as A La Carte and Themed-Tiered Offerings. It was 
not long ago that our panel first touched upon such concepts. Since 
then, a number of entities, many represented on the witness panel 
today, have weighed-in with a number of arguments, both for and against 
as to whether cable or satellite operators should be required to offer 
an a la carte or themed-tiered service, or permitted to do so 
voluntarily. Thus far, many of the arguments sound enticing, but today, 
I believe, we will break the surface.
    Again, I thank the Chairman and yield back the remainder of my 
time.

    Mr. Upton. Mr. Buyer.
    Mr. Buyer. I will waive my opening statement.
    Mr. Upton. That concludes the opening statements. I will 
make a motion that all members not present will have an 
opportunity to enter an opening statement as part of the 
record.
    [Additional statements submitted for the record follow:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress 
                       from the State of Wyoming
    Thank you, Mr. Chairman.
    I look forward to our hearing today, which is effectively an 
extension of a discussion that started earlier this year. During our 
hearings on indecency and the satellite bill, the idea of A La Carte 
programming was discussed. It was not necessarily germane in those 
hearings, so today's hearing will give us a chance to fully vet the 
issue and determine if there ought to be any Congressional action on 
this matter.
    At issue is whether the current business model for delivering 
programming is adequate to provide maximum choice and maximum value to 
consumers. There is no question that folks want to get the most bang 
for their buck. And while there have been concerns raised about 
increasing subscription costs, I look at the array of available 
programming content and advanced services that one can get today from 
an MVPD--be it satellite or cable--and realize that providers have 
evolved greatly, through billions of dollars of investment, and this 
industry is a far cry from the one we deregulated nearly a decade ago.
    During this hearing, I look forward to learning from our witnesses 
how the current business model has contributed to this industry 
evolution, and how A La Carte would affect future offerings. It seems 
on the surface that choosing individual channels may be an attractive 
option, but I am not certain the economics uphold that assumption. In 
an age where there is a continuing drumbeat of concern about having a 
panoply of choices and voices in the media, I think Congress needs to 
ensure any action it takes will not reduce the spectrum of programming 
available today.
    Lastly, we need to ensure that there remains proper incentive for 
the continued roll out of advanced services in rural America--services 
that have allowed folks in Wyoming to connect to the economy of the 
21st Century.
    I yield back the balance of my time.
                                 ______
                                 
   Prepared Statement of Hon. Vito J. Fossella, a Representative in 
                  Congress from the State of New York
    I want to thank Chairman Upton for holding this hearing today. I 
would like to recognize Tom Baxter from Time Warner for coming down 
today and testifying in front of the Subcommittee. Based in New York 
and serving Staten Island, Time Warner Cable has spent invested 
billions of dollars since passage of the 1996 Telecom Act. Those 
dollars are providing families access to digital television, broadband 
Internet, and Voice-Over-IP. Again, I want to thank Mr. Baxter for 
coming down and I look forward to hearing his testimony.
    As we learned last week, unless you're from the part of Congressman 
Pickering's district that still uses tin cans and rope for telephones, 
you have undoubtedly witnessed the expansion and development of the 
cable industry since Congress passed the 1996 Telecom Act. Within the 
deregulatory environment that the cable industry enjoys, mutual funds, 
pensions, hedge funds, individual investors, small businesses and 
Future 500 corporations have invested billions of dollars to build an 
information highway into the home. It was these investors that gave 
fresh ideas an opportunity to become reality in an environment where 
the risk of government intervention was limited.
    As we discuss the idea of government stepping in and creating an 
``a la carte'' environment, whether it be voluntary or mandatory, 
Congress should remember that the Constitution mentions nothing about 
the right to cable services. Innovation is only limited when government 
intervenes in private industry. I don't believe there is lack of 
competition in television, broadband or telephone services. And with 
help from the Congress, I believe we can extend a similar deregulatory 
environment for competitors within these industries to ensure that 
consumers have a variety of options for television, broadband, and 
telephone services.
                                 ______
                                 
 Prepared Statement of Hon. Eliot Engel, a Representative in Congress 
                       from the State of New York
    Thank you Mr. Chairman:
    I appreciate the concerns about that people have about the content 
of programming coming into their homes. And I have supported rules 
governing the use of the public airwaves. However, the proponents of 
Cable A la carte, in an effort to prevent objectionable material coming 
into a household have chosen a solution that upsets the fundamental 
economic model of the system. The result will be less diversity and 
higher costs to consumers.
    There has been some discussion of how a la carte has worked in 
Canada. However, their system is far more regulated and they have far 
fewer choices than we have here in the U.S.--thus, I do not believe 
comparisons are applicable.
    Now, the question is posed ``why should I pay for things I don't 
want.'' This comes down to the economic model that we use in the Cable 
industry. There is probably some fancy economic term, but I will call 
the ``channel surfer'' model. In this model, people--mostly men it 
might be said--are known to surf the channels to see what is on. They 
may stop and see a commercial on a station they never watch--but that 
is a hit for the advertiser. They may also stop and start watching a 
program they have never seen before--that is a hit for the program 
producers. In an a la carte system, this is not possible.
    I have with me a letter from the Bronx Borough President, Adolfo 
Carrion, Jr. that implores the FCC not to adopt an A la carte system. 
The letter states, in part, ``For too long, Hispanics, African-
Americans, and other minorities did not have programming that reflected 
their cultures and life experiences . . . through a la carte prices 
will rise, marginalizing minority groups due the inevitable increase in 
overall system costs . . .'' I ask unanimous consent to have this 
letter added to the subcommittee's hearing record.
    A la carte also leaves the question of how to launch a new 
channel--which is estimated at $130 million. If a person only gets what 
they pay for--how can he or she see the new channel? And if no one is 
actually seeing the channel, where will the ad revenues come from?
    What about the case when a channel actually pays to be on a cable 
system. Would the consumer get that channel since it would be free to 
the consumer? What if the consumer still doesn't want it? Are we back 
to voluntary blocking technology?
    In terms of diversity and channels targeted to certain segments of 
our population, take BET for example. This channel produces its own 
programming using revenues generated by advertising. The cost of 
advertising on BET is based on ratings--some of which are garnered by 
the channel surfers--even me--I don't make a point of watching every 
BET Jazz show--but if I am surfing, I know I have stopped to listen to 
a song or two. If the universe of potential viewers shrinks to a 
definite number--the flow of advertising dollars will shrink too--
probably to the point that original programming will disappear if not 
the channel altogether.
    Finally, the Cable industry can block any channel that a family 
finds objectionable. I commend the industry for its efforts to educate 
consumers about the options available to control the programming coming 
into their homes. I believe that working together we can find common 
ground and solutions without a wholesale reworking of the underlying 
economics.

    Mr. Upton. Gentlemen, ladies, thank you for listening and 
participating. We are pleased to have a distinguished witness 
panel with us today, and I guess for the purpose of 
introduction, I want to recognize my colleague, Mr. Hall, for a 
brief moment. Mr. Hall. You need to hit that button. You need 
to hit that button, the mic button.
    Mr. Hall. I am honored to introduce my friend, Ben Hooks, 
who is here. He is the chief executive officer of Buford Media 
Group in Tyler, Texas. And Tyler, for 20 something years was in 
my district, and thanks to my friend, Tom DeLay, I now have the 
North Texas district up and down the Red River. So I am losing 
a very great supporter and a great friend out of my district, 
but we still have the opportunity to have his input here. They 
provide cable television and advanced telecommunications 
services to a lot of the smaller and rural markets in Northeast 
Texas and in Missouri, Oklahoma and Arkansas.
    I just want to say that over the years Ben Hooks has been 
the recipient of a lot of great awards. They include Technology 
Innovator of the Year by CableVision, Imagemaker of the Year, 
Cable Television Pioneer and on and on. I have called on him a 
lot of times. He has always been very resourceful, told me both 
sides of the situation, been a dear friend, a good supporter 
and giving of his time like the other men and women on this 
panel.
    I see the very finest here. I see my friend, Ben Pyne from 
Disney and ESPN, Reverend Plummer and others that we have 
worked with through the years. Thank you for the time it takes 
to prepare for this, the travel time and the testimony time and 
even the time to listen to tall of our opening statements. Mr. 
Chairman, thank you, and I yield back my time.
    Mr. Upton. Thank you. Now, first of all, I want to say 
thank you for submitting your testimony before the hearing so 
that we had a chance to review it this last evening. Your 
testimony is made part of the record in its entirety. At this 
point, we would like you to take no more than 5 minutes in 
terms of an opening statement.
    We are joined by Mr. Gene Kimmelman who is a senior 
director of Public Policy and Advocacy for the Consumers Union; 
Mr. Al Liggins, chairman of TV One; Mr. Ben Hooks, CEO of 
Buford Media Group in Tyler, Texas; Mr. Ben Pyne, executive VP 
for Disney and ESPN Affiliates, Sales and Marketing; Mr. Glenn 
Plummer, Reverend Glenn Plummer, chairman of the National 
Religious Broadcasters; Mr. Tom Baxter, president of Time 
Warner Cable; Mr. Paul FitzPatrick, COO of Crown Media Holding 
and Hallmark Channel, Ms. Janet LaRue, chief counsel and legal 
studies director of the Concerned Women for America.
    We thank you all for being here with us this morning, and 
Mr. Kimmelman, we will start with you.

TESTIMONY OF GENE KIMMELMAN, SENIOR DIRECTOR, PUBLIC POLICY AND 
 ADVOCACY, CONSUMERS UNION; ALFRED LIGGINS, CHAIRMAN, TV ONE; 
BEN W. HOOKS, CEO, BUFORD MEDIA GROUP; BEN PYNE, EXECUTIVE VP, 
DISNEY AND ESPN AFFILIATES, SALES AND MARKETING; GLENN PLUMMER, 
 CHAIRMAN, NATIONAL RELIGIOUS BROADCASTERS; THOMAS G. BAXTER, 
  PRESIDENT, TIME WARNER CABLE; PAUL FITZPATRICK, COO, CROWN 
 MEDIA HOLDING AND HALLMARK CHANNEL; AND JANET M. LARUE, CHIEF 
COUNSEL AND LEGAL STUDIES DIRECTOR, CONCERNED WOMEN FOR AMERICA

    Mr. Kimmelman. Thank you, Mr. Chairman. On behalf of 
Consumers Union, the print and online publisher of Consumer 
Reports, I appreciate the opportunity to testify. I want to 
start off by thanking Congressman Deal. Boy, you really shook 
things up. You raised questions about the current system of 
television programming in America, and I think it is all for 
the better. We appreciate you starting that process.
    I want to follow up on what Mr. Dingell said, do no harm. 
It reminds me of the model I think that is appropriate for 
policymakers to look at. Think of the pharmaceutical industry. 
When there is disease, pharmaceutical companies come in and 
offer us medicine. Now, we know every medicine is a poison. 
Every medicine causes harm, by definition. But it is a 
worthwhile harm because it is going after a disease, to cure a 
disease. Is there a comparable disease in television in America 
today?
    I think of three questions: Is there enough competition, is 
there real choice for consumers that they get to be in control 
of, their choice not someone else's choice, and is there 
meaningful diversity in the marketplace to reflect America?
    Is there enough competition? We have got two satellite 
companies come in against cable. One is now owned by a TV 
network, and their CEO says he has no interest in price wars 
against cable. Cable rates have risen five times faster than 
inflation over the last 20 years. The other satellite company 
has to buy all its programming from about a handful of media 
giants who sell it as a package at a high price. Even though 
technology costs have come down, equipment costs have come 
down, you can't make the programming costs go away when they 
are all bundled together that way. The GAO found in looking at 
this there is really no price discipline in effect with 
satellite. Is that enough competition?
    Is there really enough choice? Mr. Chairman, you are right, 
there are more than 330 channels, but are people being forced 
to pay for channels that they either don't want or are finding 
distasteful? The average household only watches about 17 
channels or fewer. Of the top 15 or 20 channels out there 
today, they are almost all the same channels in terms of 
viewership that were popular last year and the year before and 
5 years ago and 10 years ago. And every one of them but one is 
owned by a handful of media giants that control broadcast 
television and the largest cable distribution systems.
    Of the other channels out there, even a fairly highly rated 
channel, for every one person who is watching that channel, 
anywhere from 250 to 800 people don't want to watch it, and 
this is just of the top 50 that Nielsen rates. Of the other 
almost 300, Nielsen doesn't rate them because they don't have 
enough viewership. Do they get ad revenue? I don't believe they 
get ad revenue. It is a good question to ask. But they are on 
cable. In an a la carte world where you can have a tier, an a 
la carte, would they still be on? If they have very few viewers 
today, why wouldn't they still be on if the cable operator 
could put them on a tier but also offer them a la carte?
    The GAO found that every one of these large media companies 
that owns channels discriminates in favor of the programming it 
owns, against the programming it does not own. Is there really 
diversity? Reverend Plummer's testimony indicates that 10 to 20 
percent of TV viewing in America is by African-Americans--330 
channels. Mr. Liggins' channel, BET, are run by African-
Americans. Is that 10 percent of 330, is that 20 percent of 
330? Is there diversity? Is it reflecting the needs of that 
community? I don't believe so. And each of those channels 
needed a company like Comcast or another major media giant in 
order to get on in the first place or to remain on. Is that 
diversity? Submissions for the record by independent 
programmers say they cannot get on, and we have example after 
example in our testimony. Independent programmers can't get on. 
Is that diversity?
    Consumers Union has conducted a survey, others have as 
well, you hear about, just asking folks what they would like to 
have. More than two-thirds of consumers say they would like to 
be able to choose the channels they get on television. More 
than two-thirds of all ethnic groups, all political 
orientations, all ideologies, those people want to choose their 
own channels.
    Do no harm. Are there risks? Absolutely, there are risks to 
changing the system, but is this a marketplace with enough 
competition, with choice controlled by the consumers, with 
enough diversity? From a consumer perspective, we don't think 
so. From a diversity perspective, we don't think so. We have 
got to be able to do better.
    I am pleased to see Congressman Bilirakis and others have 
wanted to come and listen, ask questions. We believe there is 
room for looking at a la carte and experimenting, starting with 
a basic tier that has broadcast channels that must meet the 
Congress' description of localism needs and public interest 
needs, public access channels. And on top of that, let cable 
operators, satellite providers offer any package they want, any 
and every package. Why not have the opportunity for them to 
offer channels a la carte, prevent programmers from blocking 
them from offering them a la carte so consumers would have 
choice?
    I will conclude, Mr. Chairman, by saying that there is a la 
carte today. You can buy pay channels. There is some a la carte 
choice on digital. Cable is moving to that model, but it is 
choice that they control as the entry price for the consumer. 
It is a $60, $70 price point before you get to pick a lot of 
what you want. I believe with the technology we have, that 
price point could be at the $20 or $30 level, and you could 
have much more choice, much more diversity for consumers for 
much less money. I urge you to look into experimentation with 
this approach and others to try to get consumers more 
competition, better choices and more diversity. Thank you.
    [The prepared statement of Gene Kimmelman follows:]
 Prepared Statement of Gene Kimmelman, Senior Director, Public Policy 
                     and Advocacy, Consumers Union
    TV viewers today are forced to live in a world of the cable 
industry's making--extremely limited choice and endlessly spiraling 
prices. With no meaningful government oversight and virtually no 
competition, cable providers--with the exception of being required to 
carry broadcast channels--decide what programming consumers see by 
controlling both packaging and price. By placing their most popular 
channels in expensive tiers with other channels most people don't watch 
or find offensive, the industry forces consumers to pay a special 
``cable tax'' by requiring them to buy bloated packages of channels in 
order to get the programming they actually do want.
    Consumers Union 1 and Consumer Federation of America 
2 believe that cable operators get away with this 
manipulation simply because they can. Competition is virtually non-
existent--98 percent of Americans have only one cable provider--and 
there are only two satellite television companies in the nation, one of 
which has extensive ties to the cable and broadcast industries. 
Satellite also must purchase its programming from the same cable and 
broadcasting giants, leaving satellite customers to buy similarly large 
tiers of channels. The attached report prepared by Dr. Mark Cooper, 
Research Director of the Consumer Federation of America (CFA), entitled 
``Time to Give Consumers Real Choices'' provides a comprehensive 
economic analysis of the cable and satellite programming markets.
---------------------------------------------------------------------------
    \1\ 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 goods, 
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.
    \2\ 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.
---------------------------------------------------------------------------
    The only other market powerhouses are the large broadcast companies 
that own over-the-air and cable TV channels. Their control of popular 
network programming enables them to package their entire channel lineup 
and force these channels onto cable and satellite systems--and 
ultimately the consumer. This lack of competition has led to staggering 
price increases. According to the Bureau of Labor Statistics, cable 
customers have helplessly watched their bills increase by 56 percent 
since the industry was deregulated in 1996.
    Consumers who want choice and value are stuck. And creators of new 
and diverse programming find themselves in the same situation. The only 
way to get their programming out to the public is to put it under the 
control of huge cable companies or broadcast media conglomerates to 
package with their media giant's programming. This situation stifles 
diversity of ownership and programming by blocking independent access 
to cable systems. Indeed, today very few channels are independent or 
controlled by women and people of color. Those that do exist are under 
the firm control of the cable barons' or broadcast media giants' 
control.
    We imagine a cable world where choice is allowed and diverse 
programming encouraged. Cable and satellite would offer both packages 
of channels and individual channels on an a la carte basis Rather than 
having to dig deeper into their pockets just to get the channels they 
want, consumers have the option to pick and choose their channels, 
grouping together those they want, instead of paying for those they 
don't watch or find offensive. Local broadcast channels that serve 
community needs and interests would be preserved on a ``basic'' tier of 
programming, along with national broadcast networks that meet a 
``public interest'' test by providing diverse viewpoints on matters of 
national and global importance. And locally oriented public, 
educational and government (PEG) programming would be adequately funded 
and preserved in this basic tier. Independently-owned and public 
interest channels would be promoted alongside those owned by the major 
media corporations and new and diverse content providers would find an 
easier path to getting their programming out to the public. This is the 
world of cable a la carte that Consumers Union and CFA believe should 
be, and will be, the future of cable television.
Cable: A Historically Anti-Consumer Industry
    Cable television's upward pricing spiral reflects a major failure 
of market forces and public oversight since Congress launched cable 
deregulation in 1996.3 In that time, cable rates have 
ballooned nearly three times faster than the rate of inflation. 
According to the Bureau of Labor Statistics (which even adjusts cable 
price increases by crediting the industry when it adds channels), rates 
have shot up a staggering 56 percent since January 1996, while 
inflation increased by only 21 percent during the same 
time.4
---------------------------------------------------------------------------
    \3\ Public Law 104-104, The Telecommunications Act of 1996.
    \4\ Bureau of Labor Statistics, Consumer Price Index (March 2004). 
From 1996 until March 2004, CPI increased 20.6% while cable prices rose 
56%, 2.7 times faster than inflation.
---------------------------------------------------------------------------
    When price increases are not adjusted to give cable ``credit'' for 
adding new channels--many of which are barely watched--consumers find 
themselves paying prices that have risen five times faster than 
inflation (see attached report, p. 1, 23). It's clear that the hoped-
for competition from deregulation has failed to materialize to temper 
prices.
    To justify these skyrocketing prices, cable/satellite operators and 
programmers have used recent contract negotiations to engage in an 
unprecedented round of public finger-pointing.5 Cable 
operators and satellite providers blame the programmers, saying they 
charge too much for channels. Programmers blame the cable operators, 
saying they raise prices under the guise of providing advanced video 
and non-video services to customers. The finger pointing merely 
attempts to hide the real issue--facing no competition or oversight, 
cable companies can jack up their monthly cable rates with impunity.
---------------------------------------------------------------------------
    \5\ Eisenach, Jeffrey A. and Douglas A. Truehart, Rising Cable 
Rates: Are Programming Costs the Villain?, supported by ESPN, Inc., 
October 23, 2003 (hereafter ESPN); Economists Inc., Consumer, Operator, 
and Programmer Benefits from Bundling Cable Networks, July 2002; 
Rogerson, William P., Cable Program Tiering: A Decision Best and 
Properly Made by Cable System Operators, Not Government Regulators, 
November 10, 2003, funded by Cox (hereafter Cox); Correcting the Errors 
in the ESPN/CAP Analysis Study on Programming Cost Increases, November 
11, 2003, prepared for Cox Communications (Cox II)
---------------------------------------------------------------------------
    Part of the problem is clearly related to the special ``cable tax'' 
that industry places on consumers by forcing them to buy expensive 
bundles of channels to receive the programs they actually want. To 
purchase the channels they most want, consumers must buy large service 
tiers from cable operators ranging from 40 to 75 channels or more. As 
the General Accounting Office noted, recent Nielsen Media Research data 
show the average consumer watches about 12-17 channels 
regularly,6 and many of those channels are different for 
each person and family.
---------------------------------------------------------------------------
    \6\ GAO-04-08, Issues Related to Competition and Subscriber Rates 
in the Cable Television Industry, October 2003.
---------------------------------------------------------------------------
    Right now, cable customers must first buy a basic cable tier, as 
previously provided by Congress, to ensure availability of local 
broadcast and national network channels. That package is usually kept 
small and may be price regulated. It is separate from other tiers, and 
Congress requires that cable operators allow basic service subscribers 
to buy pay-per-view (PPV) and premium channels like HBO and Showtime 
individually on an a la carte basis.
    Beyond the basic package, however, cable operators engage in 
aggressive anti-consumer bundling of channels. The next tier, expanded 
basic, has grown steadily in size and cost over the years, increasing 
about two-and-a-half times as quickly as the basic tier in the past 
four years. It now contains three times as many channels as the basic 
tier. Expanded basic is also a required purchase if a consumer wants to 
buy digital service. A digital package is also large, consisting of 
roughly 30 channels, and in many markets the digital service alone 
costs more than the basic service. If consumers want Video on Demand 
(VOD) services, they also must purchase the digital tier.
    As previously mentioned, Nielsen ratings data show that most 
consumers' viewing are concentrated among a small group of channels. 
The top 10 cable networks account for 50 percent of all viewing, and 
the top 20 channels account for 75 percent of all such viewing. Since 
the GAO reports that the typical household watches only 17 channels, 
consumers are forced to buy a lot of channels they don't watch in order 
to get the ones they do want.
    Although the bottom 30 channels on the Nielsen scale pass an 
average of just under 70 million homes, only about a quarter of a 
million households watch them during any given day. For every one 
household watching, approximately 250 households who are forced to pay 
for those channels in the bundle are not. For the bottom two channels, 
the ratio is 1 to 800. Over 250 additional cable networks do not 
capture enough viewers to even register on the Nielsen 
scale.7 If cable companies can offer distribution to 
channels with such limited viewership and little or no advertising 
support today, why would they be any less likely to carry the same 
channels in a world where cable tiers are accompanied by the offer to 
purchase individual channels?
---------------------------------------------------------------------------
    \7\ The explanations that cable industry executives gave the GAO 
for the social welfare superiority of bundling assume that advertisers 
irrationally pay for homes passed, rather than eyeballs watching, and 
that consumers maximize their welfare by subsidizing their neighbor's 
viewing habits. (U.S. GAO, 2003, pp. 34-37). Those claims are 
inconsistent with the data in the attached paper, ``Time To Give 
Consumers Reach Choices: Twenty Years Of Anti-Consumer Bundling And 
Anticompetitive Gatekeeping.''
---------------------------------------------------------------------------
Taste and Programming: The Industry is in Charge
    The immense public furor generated by January's Super Bowl halftime 
incident involving entertainer Janet Jackson illustrates the 
overwhelming desire of American consumers to have some control over the 
programming that comes into their homes. While technology such as the 
V-Chip allows consumers to block distasteful programming, many cable TV 
consumers find themselves paying for the very programming they find 
offensive or indecent.
    Congress attempted to address the decency issue by dramatically 
hiking fines on broadcasters of indecent content. However, that 
approach does not apply to cable and satellite programmers, who are not 
subject to the same public duties as over-the-air broadcasters. And 
although these fines might help to slightly stem the tide, as Kansas 
City Star television critic Aaron Barnhardt told a reporter from the 
Marketplace Morning Report, ``In the time it will take for you to 
report this story, Viacom (which distributes The Howard Stern Show) 
will make enough profit to pay off all of its FCC fines and then 
some.'' 8
---------------------------------------------------------------------------
    \8\ Marketplace Morning Report, July 1, 2004.
---------------------------------------------------------------------------
    Giving consumers the choice to select only those cable channels 
they want provides a different solution to the growing public concern 
about violent and indecent programming. Rather than putting the 
government in the untenable position of trying to control cable content 
for taste and decency, consumers could merely choose the programming 
they want, eliminating from their homes those channels which they find 
offensive.
Diversity is Not Well-Served by Cable and Media Barons:
    The current cable model also shuts out those independent, diverse 
programmers who would like to offer their content to the public without 
being beholden to media gatekeepers that own or control a large bundle 
of channels. Six companies completely dominate the cable programming 
landscape of the basic and expanded basic tiers, accounting for three-
quarters of the programming and writing budgets of the video industry. 
But these aren't just any six companies. Each of them is also a 
national network broadcaster, a cable or satellite operator, or has 
significant ties to both.
    Of the 63 channels that reach more than half the cable viewers in 
the nation, only a half dozen are not owned by one of six dominant 
firms. According to the FCC's Tenth Annual Cable Report, of the top 20 
cable channels measured by subscribers and top 15 cable channels 
measured by primetime viewership, only one, The Weather Channel, is not 
owned by a cable operator, a broadcast network or the cable industry.
    Consider the dominance these companies have over the broadcast 
airwaves and cable/satellite viewers: 9
---------------------------------------------------------------------------
    \9\ Cooper, p. 36.

 Disney owns the broadcast network ABC, broadcast stations and cable 
        networks such as ESPN, Lifetime, A&E, History Channel, and 
        SoapNet.
 Viacom owns broadcast networks CBS and UPN, local affiliates reaching 
        almost 39 percent of the American television viewing audience, 
        and cable channels including MTV, BET, Comedy Central, 
        Nickelodeon, Showtime, Spike TV, CMT, and VH1.
 Time Warner owns the second largest cable company in the country, and 
        owns The WB broadcast network, and cable channels including 
        CNN, Headline News, HBO, Court TV, TBS, TNT, and Cartoon 
        Network.
 General Electric owns broadcast network NBC and local broadcast 
        outlets as well as cable networks Bravo, USA, Sci-Fi, Trio, 
        CNBC, and MSNBC.
 NewsCorp owns the Fox broadcast network, local affiliates of both Fox 
        and UPN reaching about 39 percent of the American TV viewing 
        audience, national DBS satellite operator DirecTV and cable 
        channels Fox News, FX, National Geographic and more than a 
        dozen Fox Regional Sports networks.
 Liberty Media & Comcast, the largest single shareholder of NewsCorp, 
        owns a few cable systems and through previous merger 
        transactions, has guaranteed carriage for many of its networks 
        like The Hallmark Channel, Discovery, Animal Planet, QVC, 
        Starz, and TLC on the largest cable operator in the country, 
        Comcast.10 With 23 million subscribers Comcast also 
        owns a significant stake in channels like TV One, E!, The Golf 
        Channel, Outdoor Life Network, G4 (the successor to TechTV) and 
        regional sports networks serving three of the nation's six 
        largest metropolitan areas--Chicago, Baltimore-Washington, and 
        Philadelphia.
---------------------------------------------------------------------------
    \10\ TV Week, Diane Mermigas, ``Comcast Courting Bornstein,'' 
November 18, 2002.
---------------------------------------------------------------------------
    The General Accounting Office found that cable companies 
discriminate in favor of their own programming: they are much more 
likely to carry channels that they have an ownership interest 
in.11 that leaves independent and small programmers with a 
simple take it or leave it proposition. They either must acquiesce to 
the cable operator's demands in order to be included on their lineup, 
or starve.
---------------------------------------------------------------------------
    \11\ GAO-04-08, p. 1
---------------------------------------------------------------------------
    Stephen Cunningham, CEO and president of start-up channel 
JokeVision, summed up his network's fate with a morbid sense of humor: 
``Have you heard the one about the cable programmer who paid no 
attention to a Comcast suggestion? He's not around any more.'' 
12
---------------------------------------------------------------------------
    \12\ Cable World, ``New Networks Face The VOD Taste Test,'' Andrea 
Figler, June 30, 2003.
---------------------------------------------------------------------------
    One programmer that has had some success paying attention to 
Comcast is TV One, which is significantly owned and controlled by the 
large cable company. Comcast made it clear during their negotiations 
with various African-American entrepreneurs including Russell Simmons 
and Tim Reid that they had to have a stake in whichever channel they 
might carry.13
---------------------------------------------------------------------------
    \13\ Multichannel News, ``Comcast's Clout: Giant MSO Flexes its 
Muscle with Nets,'' R. Thomas Umstead November 25, 2002.
---------------------------------------------------------------------------
    It's no wonder that network executives say these barriers are high 
when, ``combined with industry consolidation, which has left a handful 
of powerful MSOs (Multiple System Operators--a cable company) 
controlling the vast majority of cable subscribers, the current 
environment is arguably the worst ever to launch a new linear video 
service.'' 14
---------------------------------------------------------------------------
    \14\ Multichannel News, ``New Nets Abundant at National Show; 
Fledgling Services Find Entry Into Digital-Cable Realm Difficult,'' R. 
Thomas Umstead, May 3, 2004.
---------------------------------------------------------------------------
    In a world where big broadcast programmers control much of the 
cable dial, and cable operators are extracting as much money from 
independent programmers as possible, it's hard to imagine it could be 
any more difficult for independent programmers to get on cable systems. 
As start-up network consultant Cathy Rasenberger notes: ``The majority 
of networks out there have no chance at all. That doesn't mean there 
isn't opportunity for some new networks. The eye of the needle has 
become a lot smaller, but if you've got a refined piece of thread you 
can still get through. You have to match up with the cable operators' 
objectives--and even if you do, you still may not have an 
opportunity.'' 15
---------------------------------------------------------------------------
    \15\ Cable World, ``Attention New Networks! Here's everything you 
need to know about how to get a carriage deal with Comcast . . . step 
by step from Amy Banse and Matt Bond,'' Shirley Brady, June 21, 2004.
---------------------------------------------------------------------------
    Consider the dearth of programming offered to African-American 
consumers on expanded basic. There is only one national cable channel 
(BET--owned by Viacom) that targets African-Americans, and another 
channel (TV One) mostly available to Comcast subscribers. Most other 
African-American themed channels are offered only on unnecessarily 
pricy digital tiers.
    But according to the Cable Television Advertising Bureau, ``Urban 
black households are the most television-oriented as compared to all 
other groups.'' They go on to say ``Premium channel subscription in 
urban cable homes is greater among black and Hispanic subscribers as 
compared to white and Asian subscribers.'' 16
---------------------------------------------------------------------------
    \16\ Cable TV Advertising Bureau: Multicultural Marketing Resource 
Center. ``Psychographics and Cultural Insights,'' Urban Markets in the 
US, Horowitz Associates.
---------------------------------------------------------------------------
    Now if we had a la carte, more African-American themed and owned 
channels could be created and offered to consumers of color. And if we 
had a la carte, then African-American consumers, like all consumers, 
could select and pay for the programming they want without paying for 
unnecessarily pricy expanded basic tiers and other bundles.
    Since a la carte encourages consumer choice, cable operators should 
be encouraged to provide niche and targeted audience markets with two 
or more channels instead of the one they own. This notion that a la 
carte offerings will prompt more diverse programming is supported by 
the recent introduction of video-on-demand service.
    Cable operators now offer programmers the opportunity to prove 
themselves and sell their content on a stand-alone basis as video-on-
demand. After the cable operators have collected about $60 per month 
from subscribers and force-fed them the first 90 plus channels on 
expanded basic and the digital tier, independent programmers have the 
opportunity to compete for the discretionary income and viewer 
attention that might be left. We believe consumers should have the 
choice to access these new and diverse channels via an a la carte 
option without paying the ``cable tax'' that the current regimen of 
bundled channels requires.
A la Carte: A Solution to Cable's Problems
    The cable industry's current business model of requiring consumers 
to purchase two expensive packages of channels just to get the small 
amount of programming they actually may watch is simply unfair. This 
model not only sticks consumers with a ``cable tax'' for these bundles, 
it puts up unnecessary roadblocks to new and diverse programmers trying 
to get their content on the cable and satellite systems.
    The regulatory intervention we propose to solve this anti-consumer, 
anti-competitive model is far from intrusive. Rather than try to 
dictate channel bundles, or ban them, we propose allowing cable 
operators to continue to offer all the bundles they want, but also make 
the channels they choose to bundle available on an a la carte basis.
    Unbundling beyond the basic tier can create new demand among 
consumers for content not currently carried by their cable operator. 
Because the cable company won't have to worry about mainstream 
acceptance of niche and targeted content, and because both cable 
operator and programmer can earn revenue from selling to consumers as 
many channels as they want to watch--not just what they can shoehorn 
into a bundle--cable companies are free to serve those niches with as 
many channels as a consumer could want.
    Consumers Union and Consumer Federation of America would prefer to 
let competition be the solution to cable rate increases. However, in 
light of the failure of effective competition to materialize, and given 
the relentless price increases, the special ``cable tax'' on consumers 
due to bundling of channels, the lack of consumer control, the 
roadblocks that prevent independent programmers from getting cable 
space, and the abusive practices described in the attached report, we 
believe it is time for policymakers to release the stranglehold cable 
and broadcast giants have on the marketplace by encouraging an a la 
carte option.
A la Carte Works: Ask Canadian Consumers
    When those in the American cable industry try to raise feasibility 
arguments about the a la carte option, they need only look to their 
colleagues in Canada to realize their claims are baseless. Nearly all 
the major Canadian cable operators are offering their bundled 
programming on an a la carte basis, and some cable operators, most 
notably Videotron, offer the kind of system that we envision for the 
United States.17
---------------------------------------------------------------------------
    \17\ Canada imposes a variety of content regulations that we 
believe are unnecessary and inappropriate for the US market. We cite 
the Canada example for the purpose of showing how a la carte can work 
and what prices it offers in a real-world example.
---------------------------------------------------------------------------
    Consumers in Canada must first subscribe to basic and digital cable 
and rent or buy a converter box, and then they select their programming 
in ways American consumers can only dream about. Videotron customers, 
for example, first buy basic Canadian digital cable that includes 
roughly 20 TV channels (the company offers those, along with 30 music 
channels, and 14 broadcast radio stations for $8.25).18 Once 
a digital converter box is purchased for $45 after a rebate, or rented 
for $9 per month, the consumer is in control. Videotron offers three 
general bundles, numerous themed bundles, and the option to purchase 
channels individually--38 channels for $20 per month (the equivalent to 
the American expanded basic tier), 65 channels for $28 and 106 channels 
for $40, (their equivalent to various U.S. digital tiers).
---------------------------------------------------------------------------
    \18\ All conversions from CAD to USD obtained from http://
finance.yahoo.com/currency, 07/01/2004.
---------------------------------------------------------------------------
    But Videotron customers' choice doesn't stop there. The cable 
operator offers bundles of channels with programming focused on news, 
sports, documentaries, sitcoms, culture, lifestyle and music. It also 
lets consumers pick a bundle of programming in French or English. And 
if a consumer wants a channel that isn't part of the bundle they've 
selected, then most channels will let Videotron sell it to their 
customers individually for $1 per month, a per-channel price that drops 
if a consumer orders 5, 10 or 20 other channels.
    Some Videotron programmers don't want their channel offered 
individually, and demand it only be sold in a bundle with other 
channels. If that's what a customer really wants, then Videotron steers 
them to a bundle of 20 or 30 channels that a consumer selects--a bundle 
Videotron calls ``a la carte.'' This is the kind of package that 
Canadian Cable Association President Mike Hennessey calls a ``pick 
pack.'' Videotron offers 93 channels and allows consumers to select 20 
or 30 of them in that bundle. A Videotron spokesman told the Orlando 
Sentinel, ``We have noticed that some people prefer to pay for what 
they want to look [at].'' 19
---------------------------------------------------------------------------
    \19\ Orlando Sentinel, ``a la carte Cable Could Redefine Pay-Per-
View,'' Susan Strother Clarke, June 6, 2004.
---------------------------------------------------------------------------
    We believe that cable operators in the United States are prevented 
from following the a la carte options offered by their Canadian 
counterparts' because of restrictive provisions in programming 
contracts. We believe that all channels beyond the basic tier should be 
unbundled, and let cable operators decide in what ways to package and 
bundle them in addition to offering them on an individual, a la carte 
basis.
Cable A la carte Works in a Digital World
    Unfortunately, what little the diversely owned and independent 
programming that currently exists is only available to consumers if 
they purchase expensive digital packages. While millions of American 
homes subscribe to cable, most buy analog cable packages of basic and 
expanded basic programming that includes channels owned either by cable 
operators, broadcasters or other media conglomerates, but very little 
ethnic or independent programming. Seventy percent of cable's customers 
don't get digital, and therefore don't have access to most of the 
ethnic, targeted, niche or independent programming cable does offer. We 
believe that unbundling cable channels will encourage the transition to 
digital cable.
    Although the large majority of cable households purchase analog, it 
might not be economically feasible in the next few years to offer a la 
carte to those consumers. Sending a cable technician to an analog 
customer's home each time a channel is added or removed is not cost-
efficient. But cable operators have moved to, and are aggressively 
promoting digital, a technology that not only offers them more channel 
capacity but also the technical feasibility to unbundle content in new 
ways.
    Currently, there are 23 million digital cable subscribers and 20 
million Direct Broadcast Satellite (DBS) subscribers who receive 
digital service--which means 40 percent 20 of U.S. 
households are instantly capable of accessing a la carte, or unbundled 
content. The advent of inexpensive digital converter boxes and the 
increasing availability of digital cable-ready television are helping 
bridge the gap between digital and analog cable. But policymakers must 
also prevent the growth of a digital divide, where low-income consumers 
cannot afford the digital entry price to receive a la carte options. To 
achieve this, digital set-top boxes should be made affordable to all 
consumers in an a la carte environment.
---------------------------------------------------------------------------
    \20\ U.S. Census Bureau, USA Quick Facts, 2004.
---------------------------------------------------------------------------
Consumers Want A la carte
    Recent nationwide surveys conducted by Consumers Union and the 
Concerned Women for America demonstrate that consumers want increased 
choice and more control over their cable programming, and their cable 
bills.
    According to the CWfA poll, conducted by Wirthlin in April 
2004,21 more than two-thirds of cable customers would prefer 
to choose the channels in their cable packages, and less than a third 
are satisfied with the channel bundles they're currently offered. And 
approximately the same percentage of Latinos and African-Americans 
would prefer to choose their own channels. The poll found among non-
cable subscribers, 66 percent would be more likely to subscribe to 
cable if they had control over their programming.
---------------------------------------------------------------------------
    \21\ Wirthlin Worldwide, April 22, 2004, National Quorum for 
Concerned Women for America.
---------------------------------------------------------------------------
    Consumers Union found similar sentiments in our national survey of 
cable subscribers conducted in May 2004 22. We found that 66 
percent of subscribers would prefer the option to pick only those cable 
channels they want to watch or have included in their service plan. We 
also asked consumers about possible drawbacks of unbundling cable 
content, including channel selection and price. Of those surveyed, 59 
percent would pick fewer channels than they currently must buy in their 
cable package. And 29 percent would still choose fewer channels even if 
their cable bill didn't decline proportionally.
---------------------------------------------------------------------------
    \22\ Consumers Union, May 25, 2004, Cable TV Issues Survey.
---------------------------------------------------------------------------
Steps for the Commission
    Congress has appropriately directed the FCC to investigate the 
central policy questions affecting the adoption of a la carte by 
beginning the inquiry with questions about revenue generation. In order 
to answer these questions, it is essential for the Commission to obtain 
access to the contracts between cable operators and programmers.
    As the attached study from Dr. Mark Cooper explains, these 
contracts determine the pricing of channels, lineup placement, bundling 
provisions and more.23 The Commission should examine the 
language programmers use for big cable conglomerates and smaller, 
independent cable operators, and satellite providers. It should open 
these contracts for the public to evaluate who has the balance of power 
in these negotiations and if industry is preventing the choices that 
consumers deserve.
---------------------------------------------------------------------------
    \23\ Time To Give Consumers Reach Choices: Twenty Years Of Anti-
Consumer Bundling And Anticompetitive Gatekeeping, Dr. Mark Cooper, 
Consumer Federation of America, p. 1, 23.
---------------------------------------------------------------------------
    Policymakers should focus their analysis on what is known as mixed 
bundling--the offer to consumers of channel choices in both packages 
and on a stand-alone basis. Pure bundling, in which channels are 
offered only in packages, and pure component selling, in which packages 
are outlawed, have consistently been found in the economic literature 
to be inferior. The policy question is, why has the cable industry 
resisted mixed bundling so fiercely? We believe the answer is that its 
reliance on pure bundling within tiers is anticompetitive and anti-
consumer, and a detailed examination of those practices would reveal 
consumers are stuck with the industry's special cable tax.
    In our view, the current rate structure reflects the exercise of 
substantial market power by the cable operators who engage in bundling 
to extract monopoly profits and control the flow of content. Under 
these circumstances, if consumers were offered the opportunity to 
choose between bundles and an a la carte menu of the same programs, it 
is likely that the total rate paid by consumers for the channels they 
would choose to purchase will be reduced and consumer satisfaction 
would increase.
    Large cable operators, mega-broadcast programmers and advertisers 
have become comfortable with the current system because the 
inefficiencies and excess profits of the system are shifted onto the 
backs of consumers. As consumers pay more than their fare share to get 
the channels they want, cable operators and powerful programmers engage 
in minor skirmishes over the division of monopolistic profits, and put 
up roadblocks to unaffiliated programmers. The cable operators collect 
the tax, pay excessive amounts to large broadcasters in the form of 
high fees for some channels and guaranteed carriage for others, and 
dictate which programs the public can view, while forcing them to pay 
for large numbers of channels they do not watch.
    If the FCC can force manufacturers to rebuild entire classes of 
technology to fight piracy and adhere to Plug and Play specifications, 
and if the FCC can plant a Broadcast Flag in its goal to expedite the 
transition to digital television, surely policymakers can also give 
consumers more choice in cable programming. It is time for Congress and 
the FCC to put consumers' interest on equal footing with industry goals 
and let market forces begin to provide much needed discipline on 
exorbitant cable rates. And it is also time for policymakers to empower 
consumers to keep distasteful programming out of their homes.
    We urge policymakers to note what the industry itself said about a 
la carte pricing little more than a year ago. In testimony before the 
Senate Commerce Committee in March 2003, cable operators big and small 
endorsed pricing cable channels a la carte.
    James Gleason, president and chief operating officer of 
CableDirect, a cable operator serving 20,000 customers in the Midwest 
said, ``To give customers choice and 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. One solution might be 
to offer the expensive programming in tiers or a la carte.'' 
24
---------------------------------------------------------------------------
    \24\ James Gleason, Testimony before Senate Commerce Committee, 
``Media Ownership (Video Markets),'' May 6, 2003.
---------------------------------------------------------------------------
    Charles Dolan, chairman of Cablevision, one of the largest cable 
operators with over 4 million homes in the northeast, told the Senate 
Commerce Committee: ``Cablevision, as a policy, wants its customers to 
be able to pick and choose among its services, selecting what appeals 
to them, rejecting what does not, determining for themselves how much 
they will spend, just as they do every day in the supermarket or 
shopping mall.'' 25 He continued with an analogy repeated 
since, ``To help the dairy industry, I ask, would the government insist 
that all customers be required to buy a dozen eggs and a quart of milk 
before they can purchase their bread?''
---------------------------------------------------------------------------
    \25\ Charles, Dolan, Testimony before Senate Commerce Committee, 
``Media Ownership (Video Markets),'' May 6, 2003.
---------------------------------------------------------------------------
    In short, Congress and the FCC should abolish the ``cable tax'' the 
industry collects by forcing consumers to take tiers of programming 
that grow larger and more expensive each year. It should take the most 
prudent First Amendment approach to dealing with offensive programming 
by giving consumers the option not to have that programming come into 
their homes. And it should break the monopolistic power cable operators 
and large programmers have over what is offered to viewers over cable 
lines and satellite. By allowing the a la carte option, these important 
policy matters can be achieved with little to no government 
intervention.

    Mr. Upton. Mr. Liggins.

                  TESTIMONY OF ALFRED LIGGINS

    Mr. Liggins. Good morning, Mr. Chairman. I am Alfred 
Liggins, president and CEO of Radio One, the largest company 
primarily targeting African-American and urban radio listeners. 
And I am also chairman of TV One.
    Six months ago, on Martin Luther King's birthday, we and 
our partners launched TV One, a cable network featuring a broad 
range of lifestyle and entertainment programming designed to 
entertain, inform and inspire a diverse audience of African-
American adults. While the cable universe contains scores of 
channels designed to appeal to a wide variety of audiences, we 
launched TV One because we recognized a void in programming 
specifically oriented toward African-American adults.
    As chairman of TV One, I am in a unique position to speak 
on how a la carte or theme-tier mandates would affect startup 
networks, networks catering to minority audiences and program 
diversity in general. In short, I feel it would have a 
devastating effect. I would be a death knell for many new 
service offerings. TV One's business plan is based on a number 
of critical assumptions regarding programming costs, license 
fees, marketing costs, advertising revenues and most 
importantly distribution on cable and satellite systems. The 
bottom line for each of the other elements in the business plan 
depends heavily on our ability to gain commitments from cable 
and satellite operators for the broadest possible amount of 
carriage.
    For example, while TV One has been positively received by 
many in the advertising community, some advertisers have told 
us not to even come see them until the network is in 20 million 
households. This is particularly challenging because 
advertising makes up the bulk of the revenue for new networks 
like TV One. Fortunately, new networks factor that into our 
business plans since we know it may take a couple of years or 
more to hit 20 million households, but in an a la carte world 
where we have to sign consumers up individually, many minority-
targeted networks might never reach the 20 million subscriber 
threshold, cutting off a critical source of revenue.
    As a data point, there are roughly 13.5 million African-
American TV households. In an a la carte world, if we got 100 
percent of those households, which will be impossible, that is 
a failed network, and we would have to also compete against 
other networks like Lifetime that have 80 million households. 
Less distribution not only means less revenue from subscription 
fees and advertising, it means less money we can invest in 
programming. Without the ability to invest in quality 
programming, networks aimed at minority audiences will 
undoubtedly be much less attractive to viewers.
    One of the most troubling aspects of an a la carte mandate 
for new networks is that unlike Discovery, ESPN and Lifetime, 
we are just beginning to build our brands to make our target 
audiences aware that we exist. Because our marketing budgets 
are limited, many of our viewers find TV One by channel surfing 
or by word of mouth from regular viewers. If we cannot TV One 
packaged in a widely available basic tier, we will need to 
incur enormous consumer marketing costs, once again, to the 
detriment of our programming investments.
    I also want to point out that like many minority-oriented 
channels, we are a stand-alone service, meaning we can't 
leverage our infrastructure for activities like affiliate 
sales, ad sales and technical operations across multiple 
networks, as can many of the big cable programming families, 
like Viacom, Discovery, Disney and NBC Universal. We also must 
devote a substantial portion of our budget to original 
programming and don't have a library of existing product from 
which to draw as many of the big companies do.
    For the reasons I have described, a mandated a la carte 
scheme would put TV One's cost of doing business at even a more 
disadvantage to our established competitors and could turn what 
most agree would be a good bet at TV One into a highly risky 
proposition. At best, we would have to drastically increase 
what we charge on a per subscriber basis, much like pay 
networks such as HBO and Showtime do, resulting in much higher 
costs for consumers if indeed we could create an attractively 
priced product at all.
    I want to stress that mandated themed tiers pose also the 
same issues that mandatory a la carte presents. If a cable or 
satellite operator creates a family friendly tier and excludes 
TV One, does that make our quality network family unfriendly, 
and what kind of themed tier would the government say that TV 
One, a network targeted toward African-Americans, should be on? 
I think that any time the government starts trying to draw 
lines like this, terrible consequences follow.
    Finally, we created TV One because we believe that African-
American adults were underserved in the television marketplace, 
and we are targeting our programming accordingly. But we also 
expect that by TV One being available to a wide selection of 
cable viewers, non-African-Americans will tune in occasionally 
and learn something about the breadth and the depth of our 
culture. Throughout the years, television has allowed Americans 
to share ideas, thoughts, cultures and politics. Mandatory a la 
carte would lead to less choice, dwindling programming options, 
higher prices and in fact a trifecta of failure. It would have 
a chilling effect on programming diversity, as citizens would 
have the right to segregate themselves and their intellect. 
While that is probably not what the proponents of a la carte 
intend, I believe it is the likely result.
    Thank you for the opportunity to testify before you today.
    [The prepared statement of Alfred Liggins follows:]
   Prepared Statement of Alfred Liggins, President and CEO, Radio One
    Good morning, Mr. Chairman. I am Alfred Liggins, president and CEO 
of Radio One, the largest radio company that primarily targets African 
American and urban listeners, and chairman of TV One. Six months ago, 
on the Martin Luther King holiday, we and our partners launched TV One, 
a cable network featuring a broad range of lifestyle and entertainment 
programming designed primarily to entertain, inform and inspire a 
diverse audience of African American adults.
    While the cable universe contains dozens of channels designed to 
appeal to a wide variety of audiences, we launched TV One because we 
recognized a void in programming specifically oriented toward African 
American adults.
    As chairman of TV One, I am in a unique position to speak to how an 
a la carte or ``themed tier'' mandate would affect startup networks, 
networks catering to minority audiences and program diversity in 
general.
    In short, it would have a devastating effect. It would be a death 
knell for many new service offerings.
    TV One's business plan is based on a number of critical assumptions 
regarding programming costs, license fees, marketing costs, advertising 
revenues--and, most importantly, distribution on cable and satellite 
systems.
    The bottom line for each of the other elements in the business plan 
depends heavily on our ability to gain commitments from cable and 
satellite operators for the broadest amount of carriage possible.
    For example, while TV One has been positively received by many in 
the advertising community, some advertisers have told us not even to 
come to see them until the network is in 20 million households. This is 
particularly challenging because advertising makes up the bulk of the 
revenue for new networks like TV One, especially in the early years.
    Fortunately, new networks factor that into our business plans, 
since we know it may take a couple of years or more to hit 20 million 
households. But, in an a la carte world where we have to sign consumers 
up individually, many minority-targeted networks might never reach 20 
million subscribers, cutting off a critical source of revenue.
    Less distribution not only means less revenue from subscription 
fees and advertising, it means less money we can invest in programming. 
Without the ability to invest in quality programming, networks aimed at 
a minority audience will undoubtedly be much less attractive to 
viewers.One of the most troubling aspects of an a la carte regime for 
new networks is that, unlike Discovery, ESPN and Lifetime, we are just 
beginning to build our brands to make our target audiences aware that 
we exist. Because our marketing budgets are limited, many of our 
viewers find TV One by channel surfing or by word-of-mouth from other 
regular viewers.
    If we cannot get TV One packaged in a widely available basic tier, 
we will need to incur enormous consumer marketing costs, once again to 
the detriment of our programming investments.
    I also want to point out that, like many minority-oriented 
channels, we are a ``stand alone'' service, meaning we can't leverage 
our infrastructure for activities like affiliate sales, ad sales and 
technical operations across multiple networks as can many of the big 
cable programming families like Viacom/MTV, Discovery, Disney/ABC and 
NBC/Universal. We also must devote a substantial portion of our budget 
to original programming and don't have a library of existing product 
from which to draw as many of the big companies do.
    For the reasons I have described, a mandated a la carte scheme 
would put TV One's cost of doing business at even more of a 
disadvantage to our established competitors and could turn what nearly 
everyone has agreed is a ``good bet'' into a highly risky proposition. 
At best, we would have to increase drastically what we charge on a per-
subscriber basis, much like pay networks such as HBO and Showtime do, 
resulting in much higher costs for consumers--if, indeed, we could 
individually price it at a level that even allows us to offer cable and 
satellite operators, and viewers, an attractive product.
    I want to stress that mandated ``themed tiers'' pose all of the 
same issues that mandatory a la carte presents. If a cable or satellite 
operator creates a ``family-friendly'' tier and excludes TV One, does 
that make our quality network ``family-unfriendly?'' And what kind of 
``themed tier'' would the government say that TV One, a network 
targeted to African Americans, should be on? I think that any time the 
government starts trying to draw lines like this, terrible consequences 
follow.
    Finally, we created TV One because we believed that African 
American adults were underserved in the television marketplace, and we 
are targeting our programming accordingly. But we also expect and hope 
that, by TV One being available to a wide selection of cable viewers, 
non-African Americans will tune in occasionally and learn something 
about the breadth and depth of our culture.
    Throughout the years, television has allowed Americans to share 
ideas, thoughts, cultures and politics. Mandatory a la carte would lead 
to less choice, dwindling program options, and higher prices--a 
trifecta of failure. It would have a chilling effect on programming 
diversity as citizens would have the ``right'' to segregate themselves 
and their intellect. While that is probably not what proponents of a la 
carte intend, it is the likely result.
    Thank you for the opportunity to testify before you today..

    Mr. Upton. Mr. Hooks.

                    TESTIMONY OF BEN W. HOOKS

    Mr. Hooks. Thank you, Mr. Chairman and members of the 
subcommittee. My name is Ben Hooks. I am the CEO of Buford 
Media Group, an independent cable business currently serving 
56,000 customers in 6 States, including Texas, Mississippi and 
Missouri. I want to commend you for holding this hearing and 
trust that it will be the first of many investigations into how 
wholesale programming practices affect customers.
    What I want to highlight for you are the bigger policy 
concerns in the television programming market. What I mean are 
the growing concerns about choice, cost and content. You all 
hear a lot about that from your constituents. We hear the same 
from our customers. So what are the specific trouble spots that 
I see in today's market as I try to build systems and serve 
rural customers? While there are numerous issues I need to 
raise, I will focus my comments here to four specific items due 
to our time constraints.
    No. 1 is retransmission consent. Network owners and major 
affiliate groups have used retransmission consent to compel me 
to carry affiliated programming such as Fx, MTV2, SoapNet and 
others that I know the majority of my viewers do not want. This 
misuse of the law intended to assist the goal of localism is 
actually the center of the storm and must be reviewed. Forced 
bundling must be eliminated if choice is ever to be granted to 
consumers.
    No. 2, so how can the programmers get away with this? Most 
of my programming contracts are subject to strict 
confidentiality and non-disclosure obligations. If you were to 
ask me today what my company pays a certain programmer, like 
the one on this panel, I couldn't tell you without risking 
legal action. Programmers could agree to waive non-disclosure 
for purposes of this hearing or even in our contracts, but they 
haven't. You can ask them today.
    Furthermore, Congress and the FCC should be able to obtain 
specific programming contracts and rate information directly 
from the programmers so that someone can monitor whether the 
market is healthy and functioning properly. In short, without 
disclosure, there is no accountability. If you do nothing else, 
I believe Congress must pull back the curtain that is hidden 
the Wizard from all of Oz so that informed decisions by 
customers, legislators and regulators can be made.
    No. 3, we need more flexibility in how we can tailor 
programming to our local markets. Many American Cable 
Association members that I am here to represent as well today 
would like to move high-cost sports channels, certain music 
video channels and racier entertainment channels, both 
containing profanity and sexually suggestive content, to tiers. 
Breaking the bundling practices of programmers would allow 
operators to relieve consumers of the current dilemma whereby 
they have effectively one choice: Basic or expanded basic, take 
it or leave it.
    That decision forces a majority of my consumers to pay for 
channels they don't want, don't like and shouldn't have to 
view. For example, in order to carry family programming, such 
as Nickelodeon's Spongebob, I must also carry more suggestive 
and sexually explicit programming like MTV's Undressed or Spike 
TV's Stripperella. Who can really defend that logic to a 
family?
    No. 4, to make all this worse, media conglomerates charge 
smaller cable companies and their customers much more than 
their larger urban counterparts. ACA members have reported 
programming price differences of up to 30 percent and in one 
case 5 percent. Programming rates should be the same for all 
providers unless the differences are truly cost-based.
    Finally, I want to make one other point perfectly clear: 
The American Cable Association does not support mandated a la 
carte. For our companies, it simply costs too much. Attempts by 
many of our critics to make this the sole issue of today's 
hearing is simply an attempt to deflect scrutiny of their 
current business practices. I am here today to raise awareness 
that the way programming is currently owned, packaged, priced 
and bundled by the five media conglomerates is reducing choice, 
increasing costs and threatens our ability to bridge the 
digital divide in rural America. Simply put, American Cable 
Association members are not part of the problem, but we, along 
with our consumers, are most certainly a victim of it.
    In conclusion, the key question I believe everyone should 
be asking themselves is this: If you think rising programming 
prices are fine, if you like the channels being forced on your 
by the media giants, if you believe consumers have enough 
choice over what they view and have sufficient knowledge and 
control over what they pay for, then do nothing, but if you 
worry that consumers and providers are forced to take and carry 
programming channels they find indecent, unwanted or too 
expensive with no recourse, then please continue this line of 
inquiry.
    Again, I greatly appreciate the time to present some of my 
views and appreciate your time and interest in these matters.
    [The prepared statement of Ben W. Hooks follows:]
  Prepared Statement of Ben W. Hooks, Jr., President and CEO--Buford 
    Media Group, Allegiance Communications, Alliance Communications
                            i. introduction
    Thank you, Mr. Chairman and members of the subcommittee.
    My name is Ben Hooks, and I am president and CEO of Buford Media 
Group, an independent cable business currently serving 56,000 customers 
in Texas, Arkansas, Oklahoma and Kansas. My company provides cable 
television, digital cable, high-speed internet and other advanced 
services in 78 smaller systems and rural areas throughout the central 
United States.
    I am also the past chairman of the American Cable Association. ACA 
represents nearly 1,100 independent cable businesses. Collectively, ACA 
members serve more than 8 million customers, mostly in smaller markets 
and rural areas. ACA's constituency is truly national; our members 
serve customers in every state and in nearly every congressional 
district, particularly those of this Committee.
    To begin, I want to commend you for holding this hearing, and I 
trust that it will simply be the first of many investigations into how 
programmers and multi-video programming distributors inter-relate. I 
have been hoping that this type of hearing and line of inquiry would 
occur so that sunshine can finally be shed on a process that fails to 
provide consumers and operators with any sense of control over content, 
channels and price. I am grateful for your work here today and urge you 
to continue this effort with additional hearings to discuss how to best 
serve the market.
    I have been in the cable business for more than 35 years, starting 
at the bottom and working step-by-step to the top of my company and 
with others before it. I have seen firsthand the harmful effects 
growing media consolidation, rising programming increases, forced tying 
and bundling of channels, and retransmission consent have had on my 
company and, most importantly, on our customers who are your 
constituents.
    I hope my testimony will provide you with unique insight into the 
issues raised in this hearing. My company and other ACA members are 
fundamentally different than the major programming and broadcasting 
conglomerates, some of which are here today. Foremost, ACA members are 
independent businesses that are not controlled by vertically integrated 
media conglomerates, nor do we own programming channels. We strictly 
provide cable and advanced services to your communities. ACA members 
focus on serving modest customer bases in smaller markets that are 
often too small, too costly, or just too remote to interest the larger 
providers.
    And our companies are doing a great job. ACA members are leading 
the industry in responding to Congress' call to ``bridge the Digital 
Divide'' by delivering advanced services like digital cable and 
broadband Internet access. Because we live and work in these small 
``pockets'' and rural communities, we know how important it is to have 
advanced communications services available, and our members are working 
hard to deliver the promise of broadband to smaller markets.
    As a result, when the Committee focuses on programming increases, 
media consolidation, lack of programming choice, indecency and other 
important policy matters, my company and ACA members are not part of 
the problem. When the Committee is concerned about localism, broadband 
deployment and the economic health of rural America, ACA members are an 
important part of the solution.
    These companies are great examples of what entrepreneurial spirit 
and hard work can accomplish.
    At the same time, my small company, ACA members and our customers 
are increasingly threatened by the onerous pricing and practices of the 
major media programming giants, such as Disney, Viacom, Fox, and 
General Electric. These global media companies are controlling what 
channels are seen in rural America, how they are packaged, and how much 
they cost, without regard to input from providers like me, who must 
take these channels, and my customers, who must pay for them.
    Let me be clear. While the public and some policymakers believe we 
are in the driver's seat, in reality, we don't control the content, we 
don't control the price, we don't control the packaging, and we don't 
control whatever standards the media giants think are ``decent,'' 
regardless of what my customers think.
    It is not an exaggeration to say that the telecommunications future 
of rural America hangs in the balance on whether Congress continues to 
examine these important issues and decides to take action to ensure 
that local providers, like me, and my customers have economic input and 
choice in what channels are carried in our markets and how much they 
cost. Without more flexibility and choice in local markets, the media 
giants will create a new ``digital divide'' by killing the small 
provider, who is also often the only source of advanced services in the 
community.
    This is why I am honored on behalf of my company and ACA to be here 
today to tell you the truth about what is happening to local providers 
and customers in our rural marketplaces. I encourage you to dig deep in 
your Committee's search for answers, seeking disclosure of information 
the programming giants would rather go unnoticed.
    I think you will see that five specific steps must occur before 
rural customers and local providers can have any hope of restraining 
the ever-accumulating power of the media giants:

1. Local providers and customers must have more choice and flexibility 
        in how programming channels are priced and packaged, including 
        the ability to sell the highest-priced programming channels as 
        a single channel, or on a theme-based tier if necessary;
2. The programming pricing gap between the biggest and smallest 
        providers must be closed to ensure that customers and local 
        providers in smaller markets are not subsidizing large 
        companies and subscribers in urban America;
3. Tying and bundling of programming channels by the media giants must 
        end, where customers are no longer forced to receive and pay 
        for many channels in order to receive the single channel they 
        really want,;
4. Further tying through retransmission consent must end, preventing 
        the media giants from holding local broadcast signals hostage 
        for more carriage of affiliated media-giant programming, which 
        was never the intention of Congress when granting this power; 
        and,
5. The programming media giants must disclose what they are charging 
        local providers and customers, ending the strict 
        confidentiality and non-disclosure dictated by the media 
        giants. Confidentiality and non-disclosure mean lack of 
        accountability of the media giants.
    I hope my testimony today will help show that more work and 
scrutiny by the Committee is needed as it prepares to rewrite the 
nation's telecommunications laws beginning next year.
                       ii. problems and solutions
    This hearing provides an unprecedented opportunity for the 
Committee to gain deep insight into the current state of wholesale and 
retail distribution of programming. This insight will help the 
Committee better understand how developments in the wholesale 
programming market affect the important policy concerns of consumer 
choice, localism and cost.
    My independent company and ACA member companies must purchase most 
of their satellite programming wholesale from five media conglomerates, 
referred to here as the ``Big Five''--Disney, Viacom, Fox, General 
Electric and Time Warner/Turner. In dealing with the Big Five, all ACA 
members continually face contractual restrictions that eliminate our 
flexibility to determine how local cable systems can package and 
distribute programming, instead placing programming cartels, 
headquartered thousands of miles away, in charge of what my community 
deems as ``decent'' content, pricing and value. ACA members have 
intimate knowledge of the wholesale practices of the Big Five and how 
those practices can restrict choice and increase costs in smaller 
markets.
A. Core Problem--Media Conglomerates Force Channels and Cost Onto All 
        Customers
i. Forced Cost and Channels
    For nearly all of the 50 most distributed channels (see Exhibit 1), 
the Big Five contractually obligate my company and all ACA members to 
distribute the programming to all basic or expanded basic customers 
regardless of whether we think that makes sense for our community. 
These same contracts also mandate carriage of less desirable channels 
in exchange for the rights to distribute desirable programming.
    A small cable company that violated these carriage requirements 
would be subject to legal action by the media conglomerates, and for 
ACA's members, this is a very real threat.
    These carriage restrictions prohibit ACA members from offering more 
customized tiers and channel offerings that may reflect the interests 
and values of our specific community. Quite simply, there is no choice 
now.
ii. More Forced Cost and Channels Through Retransmission Consent
    Retransmission consent has morphed from its original intent to 
provide another means to impose additional cost and channel carriage 
obligations. As a result, nearly all customers have to purchase basic 
or expanded basic packages filled with channels owned by the Big Five 
(See Exhibit 2).
    Network owners and major programming affiliate groups have used 
retransmission consent to obtain carriage of affiliated programming on 
smaller cable systems. In this way, network owners have turned 
retransmission consent into another means to load affiliated 
programming and cost on smaller cable companies' basic or expanded 
basic tiers.
    In short, media conglomerates that control networks and broadcast 
licenses are exploiting current laws and regulations to actually reduce 
consumer choice and to increase costs, all for their own benefit.
iii. Forced Carriage Eliminates Diverse Programming Channels
    The programming practices of certain Big Five members have also 
restricted the ability of some ACA members to launch and continue to 
carry independent, niche, religious and ethnic programming. The main 
problem: requirements to carry Big Five affiliated programming on 
expanded basic eliminate ``shelf space'' where the cable provider could 
offer independent programming.
    It is purely a matter of fact that ACA member systems have been 
unable to launch or continue to carry independent channels like the 
Outdoor Channel, certain religious channels, and Spanish-language 
channels. In fact, my local marketplaces are growing in Hispanic 
populations, but my cable systems have little, if any, shelf space to 
add independent, Spanish-language channels, because of the channels 
dictated to me by the media giants.
iv. Local Choice and Flexibility is Needed
    In order to give consumers more choice and better value, changes in 
current wholesale programming practices and market conditions are 
needed. Specifically, my company and ACA members must be given more 
flexibility to tailor channel offerings that work best in our local 
marketplaces.
    As I have stated, the Big Five condition access to popular 
programming on a range of distribution obligations and additional 
carriage requirements. These restrictions and obligations eliminate 
flexibility to offer more customized channel packages in local markets.
    My company and ACA members would prefer mutually beneficial 
carriage arrangements with programmers. For this to occur, certain 
media conglomerates would need to temper economic self-interest with a 
heightened concern for the public interest in localism, consumer 
choice, and reasonable cable rates. However, I am wary that without 
congressional or regulatory involvement, corporate America is not ready 
to accept those altruistic values.
    With more flexibility, ACA members could offer a variety of options 
to their customers, including sports tiers, family-friendly tiers, 
contemporary adult tiers, children's tiers, and a la carte access to a 
few of the highest cost channels.
    For instance, many ACA members report they would like to move high-
cost sports channels to a tier. The ability to move high-cost sports 
channels to a tier would allow those consumers who want the ever-
escalating high-cost sports programming to have it, without forcing the 
majority of viewers to pay for prime programming that they do not want.
    Is that not what an effective market should allow for? Those who 
want a Lexus with every option should have one, but the rules of the 
market should not dictate that everyone has to pay the Lexus price for 
the more simple, stripped down Hyundai model they can pay for or want. 
Such a change would still allow programmers to price the channels to 
generate the same license fee revenue as currently.
    The key difference--consumers would have more choice.
    The same analysis applies to other types of services that some ACA 
members would like to move off the expanded basic tier--certain music 
video channels and ``racier'' entertainment channels--those that 
contain profanity, partial nudity and sexually suggestive content. In 
some markets, pervasive concern exists about this content on basic or 
expanded basic.
    It's important to point out that neither my company nor any ACA 
member controls the content that's on these channels. That content--
decent or not--is controlled by the media conglomerates that 
contractually and legally prevent us from changing or preempting any 
questionable or indecent content.
    However, if my company and other ACA members could tier these 
services it would allow ACA members the flexibility to address 
indecency concerns with the involvement of the consumer.
    For example, in many markets today a cable or satellite provider 
that wants to carry family programming, such as Nickelodeon, must also 
carry much more suggestive and sexually explicit programming on MTV and 
SpikeTV. Essentially, to get Spongebob Squarepants, a well-known 
children's program, cable and satellite providers and their customers 
have to also take Undressed or Stripperella, two highly sexual, adult 
programs. Here's what MTV's website says about its program, Undressed: 
``Not getting enough action before you go to bed? Undressed will 
definitely be changing that! This season is sure to titillate your 
senses--so tune in!''
B. Core Problem--Media Conglomerate Price Discrimination Against 
        Smaller Companies and Customers in Rural America
i. Price discrimination against smaller cable companies makes matters 
        worse.
    The wholesale price differentials between what a smaller cable 
company pays in rural America compared to larger cable operators in 
urban America have little to do with differences in cost, and much to 
do with disparities in market power. These differences are not 
economically cost-justified.
    For instance, ACA members have reported wholesale programming price 
differentials between smaller companies and major cable companies of up 
to 30%, and in one case, 55%. In this way, smaller cable systems and 
their customers actually subsidize the programming costs of larger 
urban distributors and consumers! We even end up with worse pricing 
than satellite companies DirecTV and EchoStar, who are the main 
competitors to our rural cable systems.
    Price discrimination against smaller cable companies and their 
customers is clearly anti-competitive conduct on the part of the Big 
Five--they offer a lower price to one competitor and force another 
other competitor to pay a 30-55% higher price FOR THE SAME PROGRAMMING. 
The effect of these practices by the Big Five is that the three MVPDs 
in the same town have to pay wildly different rates for the same 
product that each is distributing in that town.
ii. Price Discrimination Must End.
    In order to give consumers in smaller markets and rural areas more 
choice and better value, media conglomerates must be required to 
eliminate non-cost-based price discrimination against smaller cable 
operators and customers in rural America.
    This means that the net effective rates charged by the media 
conglomerates for their programming channels should be the same for all 
MVPDs, regardless of distribution technology, size or market 
characteristics, unless the differentials are truly cost-based.
    With less wholesale price discrimination, ACA members could offer 
their customers better value and stop subsidizing programming costs of 
large distributors.
    These two changes would go far in addressing the concerns of 
Congress, consumer interests, and many of the 8 million customers 
served by ACA members.
C. Pure Mandated A la Carte Is Not The Answer.
    Once again, to be clear, for ACA members these changes do not mean 
a mandated, regulated a la carte regime. Current technology costs make 
mandated a la carte a financial impossibility for ACA member systems. 
Moreover, ACA members report that most customers prefer a basic or 
expanded basic package and specialty tiers containing a variety of 
channels at a reasonable price.
D. Basis For Legislative and Regulatory Action
    Congress has the legal and constitutional foundation to impose 
content neutral regulation on wholesale programming transactions. The 
program access laws provide the model and the vehicle, and those laws 
have withstood First Amendment scrutiny. This hearing provides the 
Committee with a key opportunity to help determine the important 
governmental interests that are being harmed by current programming 
practices.
    Furthermore, based in large part on the FCC's actions in the 
DirecTV-News Corp. merger, there is precedent for Congress and the FCC 
to address the legal and policy concerns raised by the current 
programming and retransmission consent practices of the media 
conglomerates. The FCC's analysis and conclusions in the News Corp. 
Order persuasively establish the market power wielded by owners of 
``must have'' satellite programming and broadcast channels, and how 
that market power can be used to harm consumers. That analysis applies 
with equal force to other media conglomerates besides News Corp.
E. Pierce the Programming Veil of Secrecy--End Non-Disclosure and 
        Confidentiality.
    Most programming contracts are subject to strict confidentiality 
and nondisclosure obligations, and my company and ACA members are very 
concerned about retaliation by certain Big Five programmers. For 
instance, if you ask me today what my company pays a certain 
programmer, I could not tell you without fearing legal action against 
my company by the media giant. Programmers could agree to waive 
nondisclosure for purposes of this hearing or even in our contracts, 
but they never do. Ask them today, and I'd be shocked if they would 
disclose specific terms and conditions. Ask them why this 
confidentiality and non-disclosure exists. Who does it benefit? 
Consumers, Congress, the FCC? I don't think so. Why is this information 
so secret when much of the infrastructure the media giants benefit from 
derives from licenses and frequencies granted by the government?
    Congress should obtain specific programming contracts and rate 
information directly from the programmers, either by agreement or under 
the Committee's subpoena power. Moreover, Congress should ensure that 
programmers must disclose the true and effective prices they charge to 
providers and consumers. Without disclosure, there is no 
accountability.
                            iii. conclusion
    The American Cable Association and its members are committed to 
working with the Committee to solve these important issues.
    The key questions I believe everyone should be asking themselves 
are the following:

 If you think rising programming prices are fine, you like all of the 
        channels being forced on you by the media giants, and consumers 
        have enough choice over what they view and have sufficient 
        knowledge and control over what they pay for their programming, 
        then do nothing.
 But if you worry that consumers and providers are forced to take and 
        carry programming channels they find indecent, unwanted, or too 
        expensive, yet they--along with their local providers, like my 
        company--have no recourse, then please continue this line of 
        inquiry. There are solutions out there that can help your 
        constituents and my customers achieve a better viewing 
        experience, and we must be bold enough to look everywhere for 
        answers.
    My company and the more than 1,000 like it stand ready to be the 
advanced guard in providing new telecommunications and video services 
to customers in rural America and in smaller markets. But we won't be 
able to do it if the practices and price increases of the programming 
giants remain unchecked. As a result, for customers in smaller markets 
and rural areas to benefit from the advanced services my company can 
offer, the following must happen:

1. Local providers and customers must have more choice and flexibility 
        in how programming channels are priced and packaged;
2. The programming pricing gap between the biggest and smallest 
        providers must be closed;
3. Tying and bundling of programming channels by the media giants must 
        end;
4. Further tying through retransmission consent must be eliminated; 
        and,
5. The programming media giants must disclose what they are charging 
        local providers and customers.
    I would like to sincerely thank the Committee again for allowing me 
to speak before you today.

         EXHIBIT 1--Ownership of the Top 50 Programming Channels
------------------------------------------------------------------------
                  Channel                             Ownership
------------------------------------------------------------------------
BET.......................................  Viacom/CBS
CMT.......................................  Viacom/CBS
MTV.......................................  Viacom/CBS
Nickelodeon...............................  Viacom/CBS
Spike.....................................  Viacom/CBS
TV Land...................................  Viacom/CBS
VH1.......................................  Viacom/CBS
Comedy Central............................  Viacom/CBS
ABC Family................................  Walt Disney Co./ABC
Disney....................................  Walt Disney Co./ABC
ESPN......................................  Walt Disney Co./ABC
ESPN2.....................................  Walt Disney Co./ABC
Lifetime..................................  Walt Disney Co./Hearst
A&E.......................................  Hearst/ABC/NBC
History...................................  Hearst/ABC/NBC
CNBC......................................  GE/NBC
MSNBC.....................................  GE/NBC
Sci-fi....................................  GE/NBC
USA.......................................  GE/NBC
Bravo.....................................  GE/NBC
Shop NBC..................................  GE/NBC
Fox News..................................  News Corp.
Fox Sports................................  News Corp.
FX........................................  News Corp.
Speed.....................................  News Corp.
TV Guide..................................  News Corp.
CNN.......................................  Time Warner/Turner
Headline News.............................  Time Warner/Turner
TBS.......................................  Time Warner/Turner
TCM.......................................  Time Warner/Turner
TNT.......................................  Time Warner/Turner
TOON......................................  Time Warner/Turner
Court TV..................................  Time Warner/Liberty Group
Animal Planet.............................  Liberty Media
Discovery.................................  Liberty Media
Travel....................................  Liberty Media
TLC.......................................  Liberty Media
Golf......................................  Comcast Corp.
Outdoor Life..............................  Comcast Corp.
E!........................................  Comcast Corp.
QVC.......................................  Comcast Corp.
HGTV......................................  Scripps Company
Food......................................  Scripps Company
AMC.......................................  Rainbow/Cablevision Systems
C-Span....................................  National Cable Satellite
                                             Corp.
C-Span II.................................  National Cable Satellite
                                             Corp.
WGN.......................................  Tribune Company
Hallmark..................................  Crown Media Holdings
Weather...................................  Landmark Communications
HSN.......................................  IAC/InterActiveCorp.
------------------------------------------------------------------------


       EXHIBIT 2--Channels Carried Through Retransmission Consent
------------------------------------------------------------------------
              Program Service                         Ownership
------------------------------------------------------------------------
FX........................................  News Corp.
Fox News..................................  News Corp.
Speed.....................................  News Corp.
National Geographic.......................  News Corp.
Fox Movie Network.........................  News Corp.
Fox Sports World..........................  News Corp.
Fuel......................................  News Corp.
ESPN2.....................................  Walt Disney Co./ABC
ESPN Classic..............................  Walt Disney Co./ABC
ESPNews...................................  Walt Disney Co./ABC
Disney from premium to basic..............  Walt Disney Co./ABC
Toon Disney...............................  Walt Disney Co./ABC
SoapNet...................................  Walt Disney Co./ABC
Lifetime Movie Network....................  Walt Disney Co./Hearst
Lifetime Real Women.......................  Walt Disney Co./Hearst
MSNBC.....................................  GE/NBC
CNBC......................................  GE/NBC
Shop NBC..................................  GE/NBC
Olympic Surcharges for MSNBC/CNBC.........  GE/NBC
Comedy Central............................  Viacom/CBS
MTV Espanol...............................  Viacom/CBS
MTV Hits..................................  Viacom/CBS
MTV2......................................  Viacom/CBS
Nick GAS..................................  Viacom/CBS
Nicktoons.................................  Viacom/CBS
Noggin....................................  Viacom/CBS
VH1 Classic...............................  Viacom/CBS
VH1 Country...............................  Viacom/CBS
------------------------------------------------------------------------

    Comparing this with the Top Fifty Channels in Exhibit 1 
demonstrates how certain members of the Big Five have used 
retransmission consent to gain a significant portion of analog and 
digital channel capacity.

    Mr. Upton. Mr. Pyne, thank you.

                      TESTIMONY OF BEN PYNE

    Mr. Pyne. Thank you and good morning. Thank you, Chairman 
Upton, Ranking Member Markey and the rest of the distinguished 
subcommittee, for inviting me to today. One of my principal 
responsibilities is working with the 10 ABC-owned television 
stations to negotiate retransmission agreements with cable and 
satellite operators. Since the topic of retransmission consent 
has arisen during the debate on a la carte programming, I would 
like to address the continued importance of the concept and put 
to rest any misunderstanding about its application in the 
marketplace.
    Before discussing retransmission consent, I would be remiss 
if I didn't state for the record that government action to 
require or facilitate a la carte or tiered subscription 
television offerings would result in consumers paying more and 
receiving less. A la carte or tiering would drain advertising 
revenues from the system and precipitate increased equipment, 
marketing and transaction costs. Taken together, these 
decreased revenues and increased costs would result in sharply 
higher consumer rates with drastically reduced programming 
output and programming choices for consumers.
    If concerns about indecency are driving a la carte or so-
called family tiers, we at Disney believe a better solution 
would be application of a uniform approach to indecency across 
broadcast and expanded basic cable platforms. Government-
inspired a la carte or tiering will inevitably drag this body 
into rate and content regulation. This is an unnecessary step 
since the marketplace is providing consumer choice with an 
array of packages available with many different pricing 
options.
    The marketplace is also at work in striking in balance 
between cable and satellite operators' needs for an 
indispensable broadcast programming and the broadcaster's 
reasonable demand that it be compensated for the billions of 
dollars invested in that programming each year. This concept, 
known as retransmission consent, has worked well since Congress 
established it in 1992. Unfortunately, some have sought to 
muddy the debate over a la carte programming by hurling 
spurious allegations about the use of this process.
    In order to put these allegations in proper context, some 
history may be helpful. Several of you were on this panel and 
played key roles in authoring the Cable Television Consumer 
Protection Act of 1992. In passing that legislation, Congress 
concluded that, quote, ``A very substantial portion of the fees 
which customers pay to cable systems is attributable to the 
value they receive from watching broadcast signals,'' end 
quote. ``And public policy should not support a system,'' quote 
again, ``under which broadcasters, in effect, subsidize the 
establishment of their chief competitors,'' end quote.
    The 1992 act required the cable systems to attain the 
consent of and to compensate the owner of a broadcast channel 
before undertaking to sell that channel to consumers. Thus, 
retransmission consent is not regulatory intervention into the 
free market but a congressional recognition of free market 
principles, namely that broadcasters, like any other business 
in this country, should be compensated for their product if 
sold by another entity. Publicly available data from Paul Kagan 
Associates makes clear that at ABC last year we spent $3.1 
billion on programming.
    Now, if you listen to those who seek to turn the clock back 
to the pre-1992 regime, you will hear fanciful tales of 
defenseless cable or satellite operators being force-fed 
channels they do not want or lack the capacity to carry. Let me 
make very clear for the record that we at ABC offer cable 
operators a stand-alone cash deal for ABC retransmission 
consent. By that I mean that if the cable operator agrees to 
pay cash for the carriage of ABC in the 10 markets we own 
stations and negotiate retransmission consent agreements, then 
there is no additional obligation to carry any Disney, ABC or 
ESPN programming. To the extent cable or satellite operators 
decide not to accept ABC's stand-alone cash offer and instead 
elect the alternative to carry programming, that decision is 
made by the operators, not us. If they so elect, we attempt to 
work with them to customize a reasonable offer to address their 
particular needs.
    It is important to note that the concept of carriage 
instead of cash originated with the operators, not the 
broadcasters. In fact, in the wake of the 1992 act, almost 
every broadcaster sought cash and nearly cable operator said 
no. This standoff was resolved when three of the then four 
major broadcast networks agreed to proposals initiated by cable 
operators to grant retransmission consents for network-owned 
stations in return for cable carriage of and payment for new 
network-owned cable channels.
    The American Cable Association, which is represented here 
today, has termed our approximately 70 to 80 cent offer as a 
sham. Nothing could be further from the truth. ACA's petition 
to the FCC makes clear that its objection is not that the cash 
option isn't offered to small operators, it is just that they 
don't want to pay it or anything for broadcast programming. 
With your permission, Mr. Chairman, I would like the 
retransmission consent economic analysis, prepared by 
Economists, Inc. entered into the record. Their analysis makes 
it clear that our offer is not only reasonable but the fair 
market value is easily in the range of $1.42 to $2.09 per 
subscriber per month.
    We offer flexibility in striking these retransmission 
consent agreements with our rural cable partners. This is 
reflected by the volume discount deals that ESPN has reached 
with the National Cable Television Cooperative. ABC will 
continue to work in good faith to accommodate the needs of 
smaller cable systems. With the growing success of satellite 
competition, we recognize the pressure some rural and small 
operators are under. The vast number of retransmission consent 
negotiations never become acrimonious or spill onto the 
headlines. In fact, Congress got it right in 1992 when it 
decided to embrace the marketplace as the proper venue for 
these deals to be hammered out.
    Thank you, and I am happy to answer any questions.
    [The prepared statement of Ben Pyne follows:]
 Prepared Statement of Ben Pyne, Executive Vice President, Disney and 
              ESPN Networks Affiliate Sales and Marketing
    Good Morning. My name is Ben Pyne. I'm Executive Vice President, 
Disney and ESPN Networks Affiliated Sales and Marketing. Thank you 
Chairman Upton, Ranking Member Markey and the rest of the distinguished 
subcommittee for inviting me to testify today.
    The topic before the Committee is one of vital interest to The Walt 
Disney Company. In my position, I have the pleasure of working with ABC 
and all of the cable networks under the Disney umbrella. One of my 
principle responsibilities is working with the ten ABC Owned Television 
Stations to negotiate retransmission agreements with cable and 
satellite operators.
    Since the topic of retransmission consent has arisen during the 
debate on a la carte programming, I would like to address the continued 
importance of the concept and put to rest any misunderstanding about 
its application in the marketplace.
    Before discussing retransmission consent, I would be remiss if I 
didn't state for the record that government action to require or 
facilitate a la carte or tiered subscription television offerings would 
result in consumers paying more and receiving less. A la carte or 
tiering would drain advertising revenues from the system and 
precipitate increased equipment, marketing and transaction costs. Taken 
together, these decreased revenues and increased costs would result in 
sharply higher consumer rates with drastically reduced programming 
output and programming choices for consumers.
    If concerns about indecency are driving a la carte or so-called 
family tiers, we at Disney believe a better solution would be 
application of a uniform approach to indecency across broadcast and 
expanded basic cable platforms.
    Government-inspired a la carte or tiering will inevitably drag this 
body into rate and content regulation. This is an unnecessary step 
since the marketplace is providing consumer choice, with an array of 
packages available with many different pricing options.
    The marketplace is also at work in striking a balance between cable 
or satellite operators need for indispensable broadcast programming and 
the broadcaster's reasonable demand that it be compensated for the 
billions of dollars invested in that programming.
    This concept, known as retransmission consent, has worked well 
since Congress established it in 1992.
    Unfortunately, some have sought to muddy the debate over a la carte 
programming by hurling spurious allegations about the use of this 
process.
    In order to put these allegations in proper context, some history 
may be helpful. Several of you were on this panel and played key roles 
in authoring The Cable Television Consumer Protection Act of 1992. In 
passing that legislation, Congress concluded that ``a very substantial 
portion of the fees which customers pay to cable systems is 
attributable to the value they receive from watching broadcast 
signals'' and public policy should not support a system ``under which 
broadcasters in effect subsidize the establishment of their chief 
competitors.''
    The '92 Act required the cable systems to obtain the consent of, 
and to compensate the owner of, a broadcast channel before undertaking 
to sell that channel to consumers. Thus, retransmission consent is not 
regulatory intervention into the free market, but a Congressional 
recognition of free market principles, namely that broadcasters--like 
any other business-should be compensated for their product if sold by 
another entity.
    Publicly available data from Paul Kagan Associates makes clear that 
at ABC last year we spent $3.1 billion on programming. Even in 
Washington that's real money!
    Now if you listen to those who seek to turn the clock back to the 
pre-1992 regime, you will hear fanciful tales of defenseless cable or 
satellite operators being force fed channels they do not want or lack 
the capacity to carry.
    Let me make very clear for the record that an intial offer from our 
Company is a cash stand-alone deal.
    By that I mean that if the cable operator agrees to pay cash for 
the carriage of ABC in the ten markets we own stations and negotiate 
retransmission consent agreements, then there is no additional 
obligation to carry any Disney/ABC/ESPN programming.
    To the extent cable or satellite operators decide not to accept 
ABC's stand-alone cash offer, and instead elect the alternative to 
carry programming, that decision is made by the operators, not us. If 
they so elect, we attempt to work with them to customize a reasonable 
offer to address their particular needs.
    It is important to note that the concept of carriage instead of 
cash originated with the operators not the broadcasters. In fact in the 
wake of the 1992 Act, almost every broadcaster sought cash and nearly 
every cable operator said no. This standoff was resolved when three of 
the then four major broadcast networks agreed to proposals initiated by 
cable operators to grant retransmission consent for network-owned 
stations in return for cable carriage of, and payment for, new network-
owned cable channels.
    The American Cable Association, which is represented here today, 
has termed our approximately $.70 to $.80 offer as a ``sham.'' Nothing 
could be further from the truth. ACA's petition to the FCC makes clear 
that it's objection is not that the cash option isn't offered to small 
operators, it's just that they don't want to pay it or anything for 
broadcast programming.
    With your permission Mr. Chairman, I would like a Retransmission 
Consent Economic Analysis prepared by Economists Inc., entered into the 
Record. Their analysis makes it clear that our offer is not only 
reasonable, but the fair market value is easily in the range of $1.42 
to $2.09 per subscriber per month.
    We offer flexibility in striking these retransmission consent 
agreements with our rural cable partners. This is reflected by the 
volume discounts deals that ESPN has reached with the National Cable 
Television Cooperative. If some small cable operators refuse to pay 
cash for carriage and also have capacity constraints to carry other 
channels, we work with them to find capacity on other systems they 
might operate.
    ABC will continue to work in good faith to accommodate the needs of 
smaller cable system operators. With the growing success of satellite 
competition, we recognize the pressure some rural and small operators 
are under.
    The vast number of retransmission consent negotiations never become 
acrimonious or spill onto the headlines. In fact, Congress got it right 
in 1992 when it decided to embrace the marketplace as the proper venue 
for these deals to be hammered out. We believe the marketplace is 
serving consumers and that the legacy of government regulation of cable 
prices and packages has been counterproductive.
    Thank you and I'm happy to answer any questions.

    Mr. Upton. Thank you. Without objection, it will be entered 
into the record.
    [The economic analysis follows:]


    
    
    Mr. Upton. Reverend Plummer.

                   TESTIMONY OF GLENN PLUMMER

    Mr. Plummer. Thank you, Mr. Chairman. I also would like to 
thank Mr. Deal for raising this entire discussion. The National 
Religious Broadcasters is an international association of 
Christian communicators with over 1,700 member organizations. 
Our members reach millions of listeners, viewers and readers 
through television, radio, Internet and film. Recent research 
has confirmed the strength of our broadcast platform. More than 
141 million Americans listen to or watch religious programming 
at least once each month. I currently serve as chairman and CEO 
of our association.
    Second, I am here as a broadcaster. I am personally a 
broadcaster. I own two television stations, one in Detroit and 
one in New Orleans, Louisiana, free over-the-air FCC-licensed 
television stations. And so I represent really the interests of 
two distinct constituencies, broadcast and programmers, 
religious and African-American, with my comments. I have 
prepared a written statement for you, and I have provided that 
for you, and so if I may, Mr. Chairman, I would just like to 
say some things that are not here and really speak from my 
heart, if I may.
    Twenty-two years ago, I was 27 years old, I began the 
Christian Television Network. I did not own a VCR at the time, 
but I believed the American dream, that in fact I could enter 
into this industry. At the time, there were three religious 
broadcasters that were just being carried by cable that was in 
its infancy as well. Pat Robertson had the Family Channel that 
he founded, who is a member of the board that I Chair. Jim 
Bakker had PTL, and Paul Crouch had TBN. These were the three 
sole religious broadcasters that were carried and given full 
access on cable as they were developing and maintained that 
full access throughout the development of cable--22 years ago. 
Also Bob Johnson, founder of BET, just about at the same time, 
as an African-American communicator, received access as well.
    Over these 22 years that I have gone from a father of 5 
children, I have developed now, as they say, a couple of TV 
stations that I own, I am on satellite as well, being carried 
by a tier of the EchoStar system, I have seen a phenomenon take 
place. There has not been one religious broadcaster in 20 years 
that has been given full carriage on cable, any cable system, 
in the 20 years since these three original Christian 
broadcasters began, nor has there been one African-American 
broadcaster or programmer network that has been given full 
carriage in 20 years on cable television.
    Now, what happened to those four, Pat Robertson, Jim 
Bakker, Bob Johnson and Paul Crouch? Some would argue that 
there is little value to religious broadcasting. Well, Rupert 
Murdoch bought Pat's network for $2 billion. Pat sold it. Jim 
Bakker, as we know, went to prison. Bob Johnson sold his for $3 
billion to Viacom. It left one of the original four, TBN, which 
is the only religious broadcaster still given full carriage on 
cable in America. Our industry has developed about 40 full 24-
hour television networks, none of which are granted full 
access. African-American communicators, there are over 10 to 
15, TV One on the platform is one. They are not given full 
access. In fact, Time Warner, as I understand, still doesn't 
give TV One access.
    Now, I was reticent to share my personal story for fear of 
retribution but I will, and that is I was approached by 
Comcast. We discussed carriage. And as we went through the 
process, what I learned was if I was willing to give ownership 
and equity in our network, then there would be carriage 
granted. Our network is 100 percent African-American owned. We 
chose not to do that. They took us, hand walked us to Goldman 
Sachs, and we shared with them, ``We don't need the money. We 
are on satellite. We don't need staff, we don't need 
programming. We just need access.'' It was not granted, and so 
I propose to you that cable is conflicted in that it is 
incestuous.
    I am not suggesting that carriage is not being granted to 
African-American or religious broadcasters for any cynical 
reason other than they don't own these networks. And so I would 
appeal to you to give consideration for access. That is the 
core fundamental, foundational issue that underlines the 
discussion we are having on a la carte.
    With that, Mr. Chairman, I thank you for the opportunity to 
comment.
    [The prepared statement of Glenn Plummer follows:]
  Prepared Statement of Glenn R. Plummer, Chairman & CEO of National 
 Religious Broadcasters, Chairman & CEO of Christian Television Network
    The National Religious Broadcasters is an international association 
of Christian communicators with over 1,700 member organizations. Our 
members reach millions of listeners, viewers and readers through 
Television, Radio, Internet, and Film. Recent research has confirmed 
the strength of our broadcast platform. More than 141 million Americans 
listen to religious programming at least once a month. I currently 
serve as Chairman and CEO of our Association.
    I also currently serve as Chairman and CEO of Christian Television 
Network, a 24-hour per day TV network carried on cable and satellite. 
In addition, my wife, Karin, and I are the sole FCC licensees of two 
over-the-air TV stations--WLPC TV-26 Detroit, Michigan, and WLPN TV-61 
New Orleans, Louisiana.
    Let me begin by commending the members of this sub-committee for 
the important work you do and for the largely non-partisan way in which 
you approach that work. As a nation, we owe you a debt of gratitude for 
helping shepherd us through what has become an astonishing period of 
technological change in electronic media. Seemingly, every decision you 
make is scrutinized and criticized. Your willingness to examine the 
cable industries business model and it's potential restructuring is 
certainly a volatile issue. It is an almost impossible task and I 
commend you for giving it your best efforts.
    The proposal for A La Carte channel choice on cable television has 
a number of excellent benefits and a variety of things that commend it. 
Chief among them is the choice of channel selection provided to the 
consumer, and the associated price options it should also provide the 
subscriber. An A La Carte system is also much more consistent with a 
market-driven economy than one that has semblances or likenesses of a 
monopoly.
    Cable television has evolved into a form of natural monopoly today. 
Although satellite DBS service, such as DirecTV and Echostar, is 
providing some competition today, almost everyone agrees that ``Cable 
is King.'' As an illustration, cable offers a form of A La Carte 
service now--Video on Demand or VOD. VOD allows subscribers to watch 
``what they want to watch, when they want to watch it'' without the 
need to record it. On the VOD platform, if I want to watch ``60 
Minutes,'' I would not have to watch it at 7:00pm ET on Sundays, when 
CBS offers it, I can watch it at any time without recording it. Without 
the use of TIVO, or any other recording device, it would be available 
to me at any time, and I would have full VCR capabilities, including 
rewind, pause and fast-forward. This A La Carte type television service 
is ONLY available on cable--not satellite, and not free over-the-air 
broadcasting.
    It therefore seems odd, and somewhat disingenuous, for cable MSO's 
to fight so vehemently against a consumer choice service like A La 
Carte, especially when they are investing very significant resources 
(billions of dollars) into an A La Carte type product called Video on 
Demand (VOD).
    I sincerely believe that A La Carte can provide tremendous benefits 
for our country, and therefore I would be inclined to recommend support 
for it, but in my opinion, it also suffers from some very serious 
defects. At least as A La Carte was originally proposed. Chief among 
these defects are the uncertainties that A La Carte would create for 
``Must Carry'' stations.
    The Supreme Court of the United States has upheld an important 
governmental interest in preserving the benefits of free over-the-air 
local broadcast television. With the dramatic increase in cable and 
satellite penetration of U.S. households, free over-the-air 
broadcasters are dependent, now more than ever, on the Must Carry 
provisions of federal law. This is equally true of religious 
broadcasters. When our members purchase airtime on local broadcast 
affiliates, their potential viewing audience could be marginal without 
Must Carry. Without the presence of some basic tier, which must include 
all free over-the-air broadcasters, religious broadcasters would be 
irreparably harmed and an important voice in our cultural dialogue 
would be silenced. Practically speaking, it only makes sense to offer 
subscribers an initial basic tier of programming. In short, while A La 
Carte would ostensibly offer consumers more freedom to choose, in the 
end their choices could be reduced if the economic model that supports 
many broadcasters is damaged or destroyed. I am suggesting A La Carte 
to be over and above a basic tier.
    Let me emphasize that National Religious Broadcasters has not yet 
taken a position to support or oppose A La Carte outright. We believe, 
however, that there may be some compromise language that would be 
acceptable to our members. While I have not come today to offer the 
specifics of that compromise language, let me offer a description of 
what I believe it must include. First, for NRB to support A La Carte, 
it must include specific language that preserves the existing Must 
Carry provisions of federal law. In addition to the Must Carry tier of 
broadcast programs, another important class of programming must also be 
protected. These are the networks that secure cable carriage through 
fees paid to cable operators. A significant number of our religious 
programmers secure carriage on cable television in that manner.
    In light of this full discussion, a very significant point needs to 
be made at this point. In the current cable structure, high priority is 
not given to religious or minority programs. I can only speculate as to 
why there has been such a resistance to carrying religious and minority 
programming networks. The fact remains that religious broadcasters and 
minority broadcasters have consistently experienced great difficulty in 
gaining access onto cable television. Because of the resistance of 
cable operators to carry religious networks in particular, Must Carry 
became absolutely critical for many broadcasters. Beyond Must Carry, 
however, and in an A La Carte environment, I honestly believe religious 
and ethnic programming would fair excellently, but the bigger issue for 
us remains ACCESS. If we still do not have access in an A La Carte 
environment, this entire discussion remains fruitless.
    In the current issue of CableFAX's CableWorld magazine (a cable 
industry publication for July 5-18) the cover story feature's MSO cable 
executives positively affirming the benefits of VOD and other A La 
Carte style offerings that are targeting ethnic markets.
    Because cable executives, generally speaking, have not given fair 
carriage to religious and minority networks, A La Carte could be the 
answer! A recent survey discovered that over 80% of the African 
American community supports black media, if it's available to them. The 
African American community makes up 12% of the US population, but 
almost double the percentage (23%) of cable viewership. BET (Black 
Entertainment Television) is still the only black TV network on cable 
with full nationwide carriage. They have segmented themselves in to one 
basic subculture--Hip Hop/Urban programming. The problem is that much 
of BET's programming, targeted toward black America, does not meet 
decency standards. I do not mean to sound judgmental or callous, but a 
large percentage of their programming is considered offensive, 
indecent, and in some cases plain filthy. There is a tremendous need in 
our country to raise children in a morally clean atmosphere. Some of 
what BET does is excellent, but there is a tremendous need for 
wholesome family-oriented programming targeting the inner city. All we 
need is a chance to have access. All we want is a chance.

    If an A La Carte platform will give other religious and minority 
networks greater access, then that's what we need. The article I 
mentioned earlier in CableWorld, illustrated this fact with Hispanic or 
Latino networks. A La Carte actually seems to be most beneficial to an 
ethnic or minority market.
    In conclusion, whether an A La Carte system is made available or 
not, what is absolutely necessary, is the need to review the current 
cable TV structure. Giving consumers a broader and better choice makes 
a lot of sense. Giving a larger number of broadcasters and a broader 
range of other programmers a greater opportunity for access and 
carriage contributes to a healthier culture.
    Mr. Chairman, I would like to thank the entire committee for the 
opportunity and privilege to address this extremely important issue.

    Mr. Upton. Thank you. Mr. Baxter.

                  TESTIMONY OF THOMAS G. BAXTER

    Mr. Baxter. Good morning, Mr. Chairman, Congressman Markey 
and members of the committee. My name is Tom Baxter, and I am 
president of Time Warner Cable. Thank you for the opportunity 
to participate in today's hearing.
    I have been in this industry for more than 25 years, and 
there has never been a more exciting time. This country has 
developed the best, most advanced television system anywhere. 
We are the envy of the world. A key reason we have gotten to 
this point is the ability of cable operators and programmers to 
work together to create and offer new and innovative products 
and services.
    As a result of the policies adopted by this committee in 
1996, the cable industry did invest nearly $85 billion in 
private risk capital to rebuild and upgrade its facilities. As 
a result, Time Warner Cable and other cable companies are able 
to provide consumers with more choice and control over their 
video programming.
    Now, the concept of a la carte and theme-tiered mandates 
may seem seductive, but going down that path is unnecessary and 
will ultimately lead to higher prices for consumers. As the 
Nation's second largest cable operator, serving 11 million 
video customers in 27 States, Time Warner Cable must provide 
our customers the broadest possible choice of high quality 
programming at attractive prices or risk losing customers to 
our competitors. Today, more than one out of four subscribers 
obtain video programming from a company other than their local 
cable operator. We ignore the consumer at our peril, and we are 
listening hard to make sure we get it right.
    Our experience with the vast majority of customers tells us 
that we best meet their needs today with a mix of bundled 
program packages, but our video offerings also go beyond 
bundles. For example, Time Warner Cable offers certain 
programming on a per-program basis, and in some cases, viewers 
can pick from individual programs on a subscription basis. Our 
mix of products and services is not written in stone. It 
remains fluid and it evolves in response to market conditions 
and ever-changing consumer preferences.
    A la carte or theme-tier requirements, whether mandated or 
voluntary, will increase costs to consumers. To make this 
happen, cable operators will have to scramble every channel and 
provide every subscriber with a set-top box for every 
television in their home that does not yet have one. This could 
come down to a cost of more $4 per box. For the average cable 
household with three TV sets, that could add up to $150 a year. 
Today, in Time Warner Cable service areas, fewer than half our 
customers have a box capable of doing this.
    Cable operators will have to also create marketing 
infrastructures that allow individual subscribers to select 
unique combinations of channels. We need to create new billing 
systems to address the many possible permutations of subscriber 
options. In addition, cable operators will have to devote 
bandwidth to duplicating existing programming rather than offer 
increased high definition and other advance services. 
Government requirements that programmers make these services 
available a la carte will increase the cost of these 
programming services themselves.
    Finally, we share the committee's concern about indecency 
and violence on television, and I am pleased to say that the 
cable industry has been at the forefront of efforts to provide 
parents with tools to control and manage content that comes 
into their homes. For example, most advanced analog set-top 
boxes have the ability to block specific channels. If the 
consumer does not have that box, cable operators will provide 
one at no cost to the consumer upon request. Our digital boxes 
provide consumers with even greater flexibility and control, 
allowing parents to block specific programs based on TV and 
movie ratings.
    Now, to ensure that everyone knows about these tools, the 
cable industry has also recently launched a comprehensive new 
consumer outreach program. As part of that program, Time Warner 
Cable has run more than 31,000 public service announcements in 
the past few months. We have sent educational mailers to more 
than 4 million customers, educators and local community 
leaders. We remain committed to ensuring that our subscribers, 
your constituents, are not knowledgeable about the tools 
available to them.
    Mr. Chairman and committee members, we are bringing 
consumers an expanding array of video entertainment in new and 
innovative ways. A regulatory environment that allows us to 
respond to consumers and stay competitive best serves the 
public. I thank you again for the opportunity to appear, 
discuss this important issue, and I look forward to your 
questions.
    [The prepared statement of Thomas G. Baxter follows:]
  Prepared Statement of Thomas G. Baxter, President, Time Warner Cable
    Good morning Mr. Chairman, Congressman Markey, and members of the 
Committee. My name is Tom Baxter, and I am President of Time Warner 
Cable. I would like to thank you for the opportunity to participate in 
today's hearing. This is an exciting time to be in the cable industry. 
Since 1996, the cable industry as a whole has invested nearly $85 
billion in private risk capital to rebuild and upgrade its facilities, 
including $10.6 billion in 2003 alone.
    Fueled by this significant investment and driven by technological 
advancements, Time Warner Cable and our industry colleagues are now 
able to offer American consumers a vast array of entertainment and 
communications services over integrated state-of-the-art networks. No 
longer just a one-way means of delivering a pre-set menu of 
programming, video technology today empowers consumers by giving them 
control, convenience and choice. New enhanced digital products such as 
Video on Demand, Subscription Video on Demand, and Digital Video 
Recorders have made video a two-way interactive experience.
    Given the choices available to cable consumers today, the cable 
industry is particularly interested in this hearing on the 
appropriateness of government mandates related to ``a la carte'' or 
``themed-tier'' offerings. While such mandates may have some 
superficial appeal as a panacea for addressing concerns ranging from 
consumer choice to rates to indecent or violent programming, we believe 
the imposition of these mandates is unwarranted and in many important 
respects would be counter-productive. I've already described the choice 
that we provide consumers today, rendering it unnecessary for the 
government to dictate the nature of program offerings. In addition, 
mandated a la carte or theme-tiered requirements would increase costs 
to consumers and reduce program diversity. Finally, the cable industry 
not only recognizes, but has taken concrete measures to address 
concerns related to indecent and violent programming. In my time this 
morning, I would like to explore each of these areas.
cable operators provide consumers unprecedented choice, convenience and 
               value in a highly competitive environment
    As the nation's second largest MSO, serving nearly 11 million video 
subscribers in 27 states, Time Warner Cable offers subscribers a wide 
array of entertainment and communications services. And we do so in a 
highly competitive environment. Today, the American television consumer 
can choose from a variety of multichannel video providers, including 
satellite providers such as DirecTV and EchoStar, and alternate 
broadband providers like RCN/Starpower. In fact, more than one out of 
four subscribers now obtains multichannel video programming from a 
company other than their local cable operator. To be successful, cable 
operators must provide customers the broadest possible choice of high-
quality programming or risk losing customers to our competitors. 
Satellite and other providers are working hard to lure them away. And 
the Internet is poised to affect video distribution in unimaginable 
ways. We want to give consumers the choices and offerings they desire. 
We ignore the customer at our peril, and we are listening hard to make 
sure we're getting it right.
    Our experience with the vast majority of our customers tells us 
that we meet their needs best today with a mix of ``bundled'' program 
packages and expanded viewing options. Bundling lowers costs and 
enhances the efficiency of distributing video to the home, and 
customers appreciate the convenience and value inherent in this basic 
approach. The fact that all other competing multichannel video 
programming providers offer service in a similar fashion confirms our 
view.
    Nevertheless, our video offerings, which include basic and expanded 
basic packages, digital cable, video on demand, subscription-based 
video on demand, High Definition Television (HDTV), and Digital Video 
Recording (DVR) functionality, go beyond bundles. For example, in 
addition to our traditional basic and expanded basic packages, Time 
Warner Cable offers certain video programming on a per channel basis 
(HBO, Showtime, Starz), on a per program basis (VOD) and, in some 
cases, viewers can pick from individual programs on a subscription 
basis (SVOD). The mix of products and services offered is not written 
in stone, but remains fluid and evolves in response to market 
conditions and changing consumer preferences.
    Of course, it is in Time Warner's interest to figure out what 
customers want beyond what they are getting and make it available to 
them quicker and better than our competitors. As technology and 
consumer preferences continually evolve, we need to remain sensitive to 
the changing possibilities and the evolving needs of our customers. VOD 
and SVOD are the two most recent examples of how technology and 
consumer preferences have evolved to help launch new offerings.
    With customers demanding and getting more choice and more control, 
there is no justification for government intervention in this dynamic 
marketplace. Government mandates that interfere with this process pose 
a dangerous risk, as attempts to write inflexible rules to substitute 
for dynamic marketplace forces would inevitably be a ``cure worse than 
the disease.''
    In addition a government mandate is unlikely to keep pace with 
rapidly evolving technology or consumer preferences in relation to that 
technology. Today's mandate may look ``cutting edge,'' but tomorrow it 
may look, feel and (in fact) be hopelessly out of date. That is, 
today's definition of ``choice'' may not be consistent with what 
consumers want--or what technology can deliver--tomorrow. It may end up 
locking consumers into outdated choices. A mandate might in fact 
supplant more responsive options for consumers in the future.
    Finally, there is no logical ``end point'' to such mandatory 
unbundling. Today, it may be program tiers. Tomorrow, it may be 
particular shows. There are serious First Amendment concerns raised by 
a government mandate that tells cable operators what programming should 
be selected for presentation to customers and how to present it. 
Inevitably, there will be pressure to regulate the retail price of 
individual channels, which in turn will lead to scrutiny of wholesale 
pricing and programming costs and the imposition of related accounting 
and auditing rules reminiscent of old-style utility regulation that is 
wholly inappropriate for the competitive digital video marketplace.
              a la carte will increase costs to consumers
    Any a la carte requirement would cause three major cost increases. 
First, to ensure that subscribers receive only those channels that they 
affirmatively choose, cable operators would have to scramble every 
channel and would have to provide every subscriber with a set-top box 
for each TV set. That would add more than $4 per box per month to a 
subscriber's cable bill, an increase of more than 10% over the average 
cable bill just to support a la carte on a single TV set. For the 
average cable household with three TV sets, that would add up to about 
$150/year--reason enough by itself not to go down the a la carte road.
    Second, cable operators would have to create a marketing 
infrastructure allowing each subscriber to select a unique combination 
of channels. They would also have to create new billing systems to 
address the myriad possible permutations of subscriber options. In 
addition, customer service representatives would have to spend much 
more time on each call with a customer, which would add to the direct 
costs imposed on both cable operators and subscribers who would face 
longer hold times.
    Third, and perhaps most importantly, a government requirement that 
programmers make their services available a la carte would increase the 
cost of video programming services. It would require programmers to 
embark upon a new marketing task of gigantic proportions: they would 
have to persuade each individual subscriber to sign up for their 
specific service. In such circumstances, most if not all video 
programmers would reach fewer households, leading to a loss of revenue 
from advertising, which currently accounts for more than half their 
revenues. Inevitably, video programming services would try to make up 
the shortfall by raising license fees.
    All these additional costs--investment in set-top boxes, investment 
in an a la carte infrastructure, higher license fees for video-
programming services--would eventually be passed on to cable 
subscribers. Subscribers might receive only the channels on which they 
place the highest value. But they might pay more for those few than 
they now pay for many. And they would no longer have the option of 
occasionally watching the channels they lost.
    I've already described how we give consumers choice over the 
services they buy, and we will continue to explore new ways to do so. 
But whether and when a la carte is employed is something that can and 
should be addressed in the marketplace, not by regulatory fiat.
 cable is taking steps to address concerns about indecent and violent 
                              programming
    The cable industry shares the concerns of many members of this 
Committee about indecency and violence on television. Cable is the only 
medium--not broadcast TV, radio or the daily newspaper--that offers its 
content in a way that permits customers to choose what comes into their 
home. Cable has been at the forefront of efforts provide parents with 
the tools to control and manage the content that comes into their 
homes. For example, most advanced analog set-top boxes have the ability 
to block specific channels. If a customer does not have such a box, 
cable operators will provide one, at no cost to the consumer, upon 
request. And our digital boxes provide customers with even greater 
control, allowing parents to block specific programming based on TV or 
movie ratings. As such, mandating an a la carte or themed-tier regime 
to address concerns in this area is simply unnecessary.
    Taking seriously its responsibility to help protect children from 
inappropriate programming, the cable industry recently launched a 
comprehensive new consumer outreach campaign. This campaign, in which 
Time Warner is actively participating, is designed to increase 
awareness about the tools and the resources cable provides so that 
families can control programming that comes into their homes and make 
educated and responsible decisions about television viewing. From the 
launch of a new website created by Cable-In-the-Classroom to Public 
Service Announcements to media literacy workshops conducted in 
coordination with the National Parent Teachers Association, the cable 
industry is taking concrete steps to ensure that cable customers are 
better informed about the options they have to control programming they 
think is unsuitable for their children.
    Time Warner is taking action as well. We have run PSA's educating 
our customers about parental controls more than 31,000 times in the 
past few months. We have sent educational mailers to more than four 
million customers, fifteen hundred educators and more than a thousand 
local elected officials and community leaders. And our divisions are 
engaged in a wide range of activities tailored to their local 
communities, from offering demonstrations of how parental controls work 
to distributing literature in retail centers and company events to 
airing information on local access channels. There is no need for 
regulation in this area.
                               conclusion
    Mr. Chairman and Committee Members, we are bringing consumers an 
expanding array of video entertainment in new and innovative ways, and 
we remain committed to responding to customer needs. For the reasons 
discussed this morning, there is no basis to believe consumers would be 
better off with more government regulation in this marketplace. A 
regulatory environment that allows us to respond to consumers and stay 
competitive best serves the public. I thank you again for the 
opportunity to appear to discuss this important issue and I look 
forward to your questions.

    Mr. Upton. Mr. FitzPatrick.

                  TESTIMONY OF PAUL FITZPATRICK

    Mr. FitzPatrick. Good morning, Mr. Chairman and----
    Mr. Upton. You have got to hit that mic button.
    Mr. FitzPatrick. Good morning. Can you hear me?
    Mr. Upton. Now we can hear you.
    Mr. FitzPatrick. Good morning, Mr. Chairman and members of 
the subcommittee. I am Paul FitzPatrick. I serve as executive 
vice president and chief operating officer of Crown Media. We 
operate the Hallmark Channel and the Hallmark Movie Channel. 
These two advertiser and license fee supported programming 
networks are distributed by cable and DBS systems and other 
multichannel video programming distributors.
    Hallmark Channel and Hallmark Movie Channel offer award-
winning family friendly programming, including original movies 
and miniseries made by Hallmark Entertainment, the world's 
largest producer of major television movies and miniseries, 
acquired movies and series such M*A*S*H, Touched by an Angel 
and later this fall the series JAG. Our channels are also the 
exclusive home for movies from the Hallmark Hall of Fame 
collection. We also air the award-winning series on adoption, 
which is about the compelling process of parents and children 
in the adoptive mode.
    The Hallmark Channel and the vast majority of non-broadcast 
cable programming services rely principally upon two sources of 
revenue, as you have heard this morning: License fees paid by 
the distributor on a per-subscriber, per-month basis and 
advertising sold on the programming network or networks. 
Because of the broad appeal of our programming, we launched the 
Hallmark Channel based upon a business plan of widespread 
distribution on highly penetrated packages of popular 
programming services. Broad distribution is essential to 
maximize both subscription and advertising revenues and to 
control costs.
    Launched just 3\1/2\ years ago, in 2001, Hallmark Channel 
is seen in 62 million homes. It is already a top 10 rated cable 
network, which is, frankly, quite remarkable since we are 
competing against 15- to 25-year-old networks. In today's 
world, services such as ours needs to be distributed in 50 and 
even 60 million homes to generate truly meaningful advertising 
revenues. Even at this level advertisers are increasingly 
interested in such networks only if their distribution is 
steadily increasing, the programming is meeting viewers' 
expectations and that network can provide unique promotional 
benefits that distinguish the Hallmark Channel, for example, 
from other buying opportunities, and there are many, as you 
have heard this morning.
    A la carte or theme-tiered carriage would change the 
fundamental economics of the marketplace for non-premium 
services such as ours. Based upon my 20 years of experience, 
with programming networks such as the Weather Channel and the 
Golf Channel, a la carte would result in lost subscribers and 
substantially reduced licensed fees and advertising revenues. 
this would be compounded by increased marketing costs. I am 
convinced that such regulation would be harmful to consumers 
and programming diversity.
    Consider the revenue impact of only a modest subscriber 
loss. A typical cable network's annual advertising revenues 
range from about $1 to $6 per subscriber depending on that 
network's category or genre, its target audience and its brand 
identity. If a programming service is 70 million subscribers 
generating about $3 per subscriber in advertising revenues, 
lost 20 percent of its subscriber base due to a la carte--I 
believe the level, frankly, is going to be more in the 50 
percent range--that channel, based upon that 20 percent loss, 
would lose over $40 million in advertising revenue in that 
first year alone, and that says nothing of the lost license 
fees. While experiencing these substantial revenue losses, 
programmers will have to spend significantly more just to 
market their services to individual subscribers and then to 
keep them, just as HBO does, for example. The only way to 
compensate for this phenomenon would be to raise prices, 
ultimately borne by the consumer.
    These revenue and cost effects would trigger other domino-
like consequences. One, lower revenues would result in a 
significant curtailment in programming investment. Existing 
programmers would be forced to cut programming costs, resulting 
in unfulfilled consumer expectations. Operating economies of 
scale, built up under the current marketplace framework, would 
be lost, making the launch of new networks unlikely. Under this 
scenario, we could not have launched earlier this year our 
second linear channel, Hallmark Movie Channel.
    Two, as an independent network, Hallmark Channel does not 
have the same cross-promotional opportunities as programmers 
that are part of a larger network group with a broadcast 
network or deeply distributed sibling networks. A la carte 
distribution likely would lead to increased consolidation, 
reducing the number of diverse, independent, First Amendment 
speakers.
    Three, subscribers will lose other advances and 
improvements. We have been able to bring to viewers some of our 
movies in the enormously compelling high-definition format and 
through video-on-demand and pay-per-view offerings. A la carte 
and theme-tiers would undercut the economics that have allowed 
us to branch out with these additional valuable services.
    When we launched Hallmark Channel, we understood the 
regulatory environment and the additional challenges, such as 
must-carry and retrans. We built our plan to meet those 
challenges. A la carte distribution or mini-tiers would 
undermine what we and other programmers have achieved. Hallmark 
Channel's experience and the vitality and diversity of 
programming overall confirm that the marketplace today is 
working well overall. Viewers are the beneficiaries.
    Thank you, Mr. Chairman. I would be happy to talk about 
experiences such as the one that we have had with family 
tiering and the actions that we had to take to accelerate our 
distribution in that kind of environment.
    [The prepared statement of Paul FitzPatrick follows:]
 Prepared Statement of Paul Fitzpatrick, Executive Vice President and 
          Chief Operating Officer, Crown Media Holdings, Inc.
    Mr. Chairman, Congressman Markey, and members of the Subcommittee, 
I am Paul FitzPatrick and I serve as Executive Vice President and Chief 
Operating Officer of Crown Media Holdings, Inc. and Crown Media United 
States, LLC (``Crown Media''), which operates the Hallmark Channel and 
Hallmark Movie Channel in the United States. These two advertiser and 
license-fee supported programming networks are distributed by cable and 
direct broadcast satellite (``DBS'') systems and other multichannel 
video program distributors. Thank you for giving our organization the 
opportunity to discuss this morning the potential effects of a la carte 
or ``themed-tier'' distribution on programming services such as 
Hallmark Channel.
    Government-mandated a la carte or ``themed tier'' carriage would 
change the fundamental economics of the marketplace for non-premium 
programming services like ours. Based upon my 20 years of experience 
with programming networks and review of the likely financial impacts of 
a la carte carriage, I am convinced that such regulation would result 
in higher prices to consumers, lower quality programming, and a 
reduction in the diversity of programming available to viewers. 
Further, such regulation would lead to a reduction in ``independent'' 
first amendment speakers or content owners and providers. I thought 
that it would be helpful to take a look at these issues and the basis 
for my views in the context of the Hallmark Channel.
    The Hallmark Channel is an advertiser and license-fee supported 
programming service that provides award-winning, familyoriented 
programming, including original movies and series, mini-series and 
first-run presentations from Hallmark Entertainment and third parties, 
as well as syndicated programs. For example, Hallmark Channel this year 
will air 15-18 original movies and mini-series, such as ``King 
Solomon's Mines'' and ``The Long Shot,'' starring Marsha Mason. In 
addition we air ``acquired'' movies, such as the original and remake of 
the ``Parent Trap,'' and series, such as ``Mash,'' ``Touched by an 
Angel,'' ``Doctor Quinn Medicine Woman,'' ``The Waltons,'' classic 
westerns and comedies, and, later this fall, ``JAG.'' In addition, we 
produce and air award-winning series such as ``Adoption,'' which tells 
compelling stories about the adoptive experience and received the 
National Angel Award from the Congressional Coalition on Adoption 
Institute. And speaking of award winning programming, Hallmark Channel 
and Hallmark Movie Channel are the exclusive ``home'' for movies from 
the ``Hallmark Hall of Fame Collection'' after their initial airing on 
broadcast television. The Hallmark Channel is now distributed to 
roughly 62 million homes in the United States, primarily through analog 
cable and highly-penetrated DBS distribution.
    The Hallmark Movie Channel, launched earlier this year, features 
top-rated movies and mini-series, many of which are produced by 
Hallmark Entertainment, the world's largest producer of made-for-
television movies and mini-series. By the way, Hallmark Entertainment 
movies comprised 12 of the 25 highest-rated movies aired this season by 
ABC, CBS and NBC.
The Rise of the Hallmark Channel Exemplifies the Expanded Programming 
        Choices Available to Viewers and the Growing Popularity of 
        Advertiser-Supported Non-Broadcast Programming Services.
    Cable television and DBS subscribers currently enjoy a wider 
variety of programming services than ever before. Digital cable 
upgrades and expanded satellite capacity have enabled the distribution 
of more programming services and the introduction of new services like 
HDTV, video on demand and digital video recorders. More and more 
programmers are developing and promoting original movies and series. As 
the FCC recently concluded in its tenth annual video competition 
report, ``the vast majority of Americans enjoy more choice, more 
programming and more services than any time in history'' due to 
improved technology, upgrades in cable distribution plant, and 
increased investment in programming.
    Not only are there a growing number of non-broadcast programming 
networks, but also their popularity is increasing steadily. There are 
about 350 national, satellite-delivered, non-broadcast programming 
networks (compared to about 100 in 1994), more than 80 additional 
regional programming networks, and at least 60 new networks in various 
stages of development. The popularity of these services is reflected in 
their increasing viewership share. The combined audience share of non-
broadcast television networks has climbed steadily from a 29 share in 
1993 to a 55 share in 2003. This increasing share of viewership 
reflects not only the sheer number of programming options offered by 
cable and satellite distributors, but also the fundamentally improved 
quality and increasing popularity of the available programming.
    The Hallmark Channel's own story of subscriber and ratings growth 
illustrates this phenomenon. The Odyssey Channel, its predecessor, had 
achieved only limited distribution to 26 million homes by 2000, nearly 
half of which received the channel on a limited part-time basis. 
Consequently, it could make only limited investments in programming and 
marketing. Because of this limited distribution, the prospects for 
meaningful advertising revenues and revenue growth were equally 
limited.
    In 2001, Crown Media launched Hallmark Channel and redoubled its 
efforts to expand distribution and to increase consumer awareness of 
the channel and its programming. For example, Crown Media renegotiated 
its agreement with DIRECTV to retier Hallmark Channel from DIRECTV's 
``Family'' package to its highly-penetrated ``Total Choice'' package, 
which immediately increased its DIRECTV distribution more than ten-
fold. We made this effort and substantial investment because, 
notwithstanding the expected appeal of a smaller tier directed at 
families, viewership of the Hallmark Channel was low and distribution 
of the ``Family'' package remained limited. Likewise, Crown Media was 
able to negotiate subscriber commitments with a number of major cable 
operators that yielded many millions of additional subscribers.
    This rapid subscriber growth has yielded increased subscriber and 
advertising revenues which have enabled Hallmark Channel to develop 
more and better original programming and to pursue more attractive 
programming acquisitions. The Hallmark Channel has invested over $500 
million in programming production and acquisition. The result has been 
a dramatic improvement in viewership and ratings. For the first half of 
2004, Hallmark Channel has ranked consistently among the top ten cable 
networks in total day household rating--a remarkable achievement when 
its distribution and tenure are compared with those of the other more 
widely distributed and established networks in the Top 10. We reached 
an all-time ratings high and delivered double-digit ratings growth when 
compared to 2002-03 household ratings for both total day and prime 
time. These ratings data are consistent with and supported by recent 
surveys of viewers that yielded similarly compelling results. Ninety-
five percent of viewers rated the Hallmark Channel positively 
(``excellent/very good/good''). More than 8 out of 10 viewers of 
Hallmark Channel are likely to recommend it to others to watch. 
Consequently, the Hallmark Channel consistently is among the channels 
most requested by viewers in systems where it is not currently carried.
Advertiser-Supported Networks Such As Hallmark Channel Depend Upon 
        Broad and Highly-Penetrated Distribution.
    In the midst of this burgeoning popularity and viewership 
endorsement, a move to a la carte distribution would not only impede 
future growth, but also reverse the progress we've made. Why? The 
answer is in the economics and the business model upon which we have 
built the Hallmark Channel.
    The Hallmark Channel and the vast majority of non-broadcast cable 
programming services rely principally upon two sources of revenue: 
license fees paid by the distributor on a ``per subscriber, per month'' 
basis; and advertising sold on the programming network. Broad 
distribution through carriage in the most popular packages of 
programming services is essential to maximize revenues and control 
costs. As a result, Hallmark Channel and most other advertiser 
supported programming services seek to require distributors to place 
their networks on widely distributed tiers. Crown Media's affiliation 
agreements typically require MVPDs to distribute Hallmark Channel on 
basic or expanded basic or a specific tier such as ``Total Choice,'' to 
achieve a distributor-wide level of penetration; to provide a specified 
number of service subscribers; and/or to satisfy some other 
distribution requirement. Such distribution commitments have been 
essential to ``growing'' the channel to where it is and to our 
prospects for completing the job.
    There has been some suggestion by the FCC in the past and perhaps 
by others that programming services may survive with a subscriber base 
of 15 to 20 million subscribers,1 but that is inconsistent 
with Crown Media's experience in today's marketplace. With nearly 26 
million full- and part-time subscribers, the performance of the 
Hallmark Channel's predecessor was stagnant and its financial prospects 
were dim. Although Nielsen may rate a programming service with 20 
million subscribers, few advertisers will buy advertising and the cost 
per thousand (CPM) rates generally are not competitive. Advertisers are 
interested in such networks only if they are emerging, i.e. their 
distribution is steadily and rapidly increasing.
---------------------------------------------------------------------------
    \1\ See, e.g., Implementation of Section 11(c) of the Cable 
Television Consumer Protection and Competition Act of 1992, 14 FCC Rcd. 
19098 (1999) (``Horizontal Ownership Limits-Third Report'') at  40-
41; Annual Assessment of the Status of Competition in the Market for 
the Delivery of Video Programming, 13 FCC Rcd. 24284 (1998) at  152.
---------------------------------------------------------------------------
    The Hallmark Channel's experience suggests that the more realistic 
benchmark for meaningful advertising revenues is now approaching 50 to 
60 million subscribers. Subscribers to the Hallmark Channel more than 
doubled from 2000 to 2003 with distribution topping 56--million in 
2003. As a result of that growth, coupled with improved ratings, 
advertising revenues increased by more than four times, with the 
largest percentage increase in advertising revenues occurring when 
distribution approached 56 million and more subscribers. Crown Media is 
projecting that an approximate increase in subscribers of 20% from 2003 
to 2004, coupled with a further improvement in ratings, will yield more 
than a 70% increase in advertising revenues. In our view, these data 
support the conclusion that substantially greater advertising revenues 
are available to programming services with 50 to 60 million subscribers 
and beyond--a level of subscribership minimally associated with a 
viable broad-based entertainment programming network in today's 
competitive marketplace. Our business mandate is for the Hallmark 
Channel to reach the 70 million subscriber threshold level in the near 
term.
    Even with these levels of national distribution, programming 
networks which have not achieved full distribution still encounter 
challenges in local markets. For example, such networks often have 
difficulty in obtaining program listings and articles in newspapers and 
specialty publications in markets in which they are not fully 
distributed. Likewise, television critic reviews of new shows and 
similar publicity often are unavailable. Unless a programmer has 
achieved widespread distribution in a market, advertising to develop 
viewership and brand recognition also is usually cost-prohibitive.
A La Carte Distribution Would Have Stifled Hallmark Channel's Growth 
        and Would Reverse its Successes.
    The launch of Hallmark Channel was based upon a business plan of 
widespread distribution by cable and DBS operators on highly-penetrated 
packages of popular programming services. Shifting advertiser-supported 
programming services from such tiers or dismantling those packages to 
create ``mini-tiers'' or a la carte carriage would have nullified our 
business plan. The opportunity to achieve rapidly-increased 
distribution would not have existed. Instead, Crown Media would have 
had to convince each cable system to launch Hallmark Channel and then 
convince individual households to subscribe to it. This kind of broad 
retail campaign would have been cost-prohibitive, and it would have 
been virtually impossible to obtain the minimum number of subscribers 
needed for a viable advertiser-supported service.
    As an independent network, the Hallmark Channel does not have the 
same cross-promotional opportunities as programmers that are part of 
larger network groups with a broadcast network or deeply distributed 
``sibling'' networks. Moreover, because the Hallmark Channel did not 
launch until 2001, it has not had the opportunity to build brand 
awareness or brand ``equity'' over the past 15 to 25 years as have many 
of the fully-distributed networks of the media conglomerates. A la 
carte distribution likely would lead to increased consolidation because 
only the multi-channel media giants would have the financial 
wherewithal and promotional outlets to pursue the kind of marketing 
required to convince individual subscribers to make the purchase 
decisions for their channels.
    If the Hallmark Channel were forced into an a la carte or mini-tier 
world, it likely would lose a substantial number of subscribers--if for 
no other reason than the difficulty of effectively marketing Hallmark 
Channel to individual viewers. Our affiliate relations and marketing 
staffs have a limited budget and are directed at marketing Hallmark 
Channel to distributors and developing the brand. The extent of such 
subscriber losses also would depend upon the retail pricing decisions 
of other programming services, their marketing resources and efforts, 
and the marketing decisions of cable and DBS operators, which also 
would have little or no experience with the marketing of dozens of 
advertiser-supported programming services.
    Available marketplace experiences indicate that the Hallmark 
Channel's loss of distribution likely would exceed 50%. According to 
Bear Stearns, HBO--which has been marketing a la carte services for 
decades and has the best known brand name in the business--achieves 
only ``approximately 30% penetration of basic cable subscriptions.'' 
2 Regional sports networks, before they converted from a la 
carte to basic carriage, routinely achieved less than 10% penetration. 
Likewise, the nationally-distributed and marketed Golf Channel, for 
which I served as chief operating officer, originally was launched as 
an a la carte channel, but it could not achieve a sustainable level of 
distribution. Consequently, it was relaunched as an advertiser and 
license-fee supported network. The channel is a wonderful success 
today.
---------------------------------------------------------------------------
    \2\ See, Bear Stearns, ``A La Smart?,'' March 29, 2004, at 4.
---------------------------------------------------------------------------
    As I noted above, a 20% increase in Hallmark Channel's 
subscribership and improved ratings are likely to yield more than a 70% 
increase in advertising revenues. Thus, although we believe that 
subscriber losses would be very substantial in an a la carte world, 
even a modest decrease in subscribers would cause a much larger 
percentage decrease in advertising revenues. Consider the following 
example of this potential impact. Typically, annual advertising 
revenues range from $1.00 to $6.00 per subscriber for programming 
services, depending upon programming genre, target audience, and brand 
identity. If a programming service with 70--million subscribers and 
generating $3.00 per subscriber in advertising revenues lost only 20% 
of its subscriber base due to a la carte (and I expect the loss would 
be greater), it would lose $42 million in advertising revenues in the 
first year alone. A greater initial subscriber loss or subsequent 
erosion of subscribers would only make the revenue picture bleaker. Of 
course, these lost advertising revenues are only part of the picture; 
there also would be lost subscriber revenues unless license fees were 
increased.
    Further, in addition to these kinds of numerical projections, a la 
carte distribution will introduce another layer of uncertainty, which 
is likely to affect adversely the advertising market and revenues. For 
example, advertiser-supported services such as the Hallmark Channel 
have no experience with the level of churn to be expected in an a la 
carte world. Consequently, in addition to the uncertainty and 
variability inherent in ratings, programmers will have month-to-month 
variations in subscribership--in contrast to their broadcast network 
competitors, which will have government-mandated universal 
distribution. Thus, as one example, the level of predictability 
necessary for the ``up front'' advertising market will be difficult if 
not impossible to achieve.
Government Mandated A La Carte Distribution or Mini-Tiers Will Increase 
        Costs to Consumers and Decrease Diversity.
    There is no doubt that moving programming from, or dismantling, 
highly penetrated programming packages such as the traditional expanded 
basic tier would adversely affect subscriber and advertising revenues. 
Many programming services, whose business plans were built upon the 
current statutory and regulatory scheme, would cease to exist. 
Certainly, the scores of planned programming services would be 
foreclosed from ever entering the market.
    If a programmer could reinvent itself in this environment and 
survive, it would have to compensate for the lost subscriber and 
advertising revenues in two ways--by increasing subscriber fees and 
reducing costs. However, that same programmer would have to increase 
its marketing budget exponentially because it is now selling to the 
more than 90 million households subscribing to cable and DBS television 
rather than to its distributors. Consequently, this substantial 
increase in marketing cost would make it that much more difficult to 
reduce costs, and any such reductions necessarily would involve 
programming expenditures.
    For a programming service such as the Hallmark Channel, which has a 
modest monthly license fee and relies heavily on advertising revenues, 
this increase in license fee would be substantial--some multiple of its 
existing fee. Cable operators would be unlikely to absorb the increase 
in license fees for all of the programmers being shifted to mini-tiers 
or a la carte carriage, and they would certainly pass some or all of 
the license fee increases through to the subscriber. There can be no 
doubt that the price of the Hallmark Channel to viewers would increase 
by several orders of magnitude.
    Programming diversity would be adversely affected in at least four 
ways. First, as noted above, it is highly unlikely that new program 
networks would be launched. The economies of scale that we have 
achieved have enabled us to bring our second linear channel, Hallmark 
Movie Channel, to the marketplace. Second, existing programmers would 
be forced to cut programming costs. Again, our experience with the 
Hallmark Channel is instructive. As the channel's subscriber and 
advertising revenues have increased, Crown Media has substantially 
increased its programming budget and pursued original programming 
initiatives. If its subscriber and advertising revenues were reduced, 
we would have to reduce its programming expense substantially. Third, 
some (probably many) networks simply would not survive a move to a la 
carte carriage, particularly new programming networks and those 
targeted toward niche markets. And fourth, a la carte or themed tiers 
would lead to a reduction of diverse ``independent'' content providers 
because the economic burdens would be so great that only the large 
media companies with substantial operating economies would be left to 
compete. And even they would not be guaranteed success.
    Finally, subscribers would lose still other advances and 
improvements. We have also been able to bring to viewers some of our 
movies in the enormously compelling High Definition format and through 
Video on Demand and Pay per View offerings. A la carte and themed tiers 
will undercut the economics that have allowed us to branch out with 
these additional valuable services.
    In short, cable subscribers would pay more and receive less. 
Because the economics of the programming industry would be altered 
significantly by an a la carte approach, there can be no guarantee that 
monthly cable bills would be less under an a la carte system. In fact, 
I would expect the opposite--cable rate increases for many consumers 
with diminishing numbers of programming services from which to choose 
over the long term and declining quality of programming produced by the 
surviving networks.
                               conclusion
    When we launched Hallmark Channel, we understood the regulatory 
environment and the additional challenges, such as must-carry and 
retransmission consent, that the channel faced. We built our business 
plan to meet those challenges, and we are naturally pleased that our 
distribution, ratings, advertising and consumer acceptance have 
increased dramatically each year. Mandated a la carte distribution or 
mini-tiers would undermine what we and other programmers have achieved. 
Further, if broadcasters were still accorded must-carry or 
retransmission consent rights to the basic tier, the imbalance would 
become greater and the competitive picture worse. They would continue 
to enjoy universal distribution with a powerful cross-promotional 
engine for their other programming services.
    The cost of mandatory mini-tiers and a la carte distribution would 
be reflected not only in increased subscriber bills, but also in 
reduced programming choices and quality. The Hallmark Channel's 
experience and the vitality and diversity of programming overall 
confirm that the current marketplace is working well. Viewers are the 
beneficiaries.
    Again, I appreciate having this opportunity to discuss these 
important issues with the members of the Subcommittee.

    Mr. Upton. Ms. LaRue.

                   TESTIMONY OF JANET M. LaRUE

    Ms. LaRue. Mr. Chairman, thank you. Members of the 
committee, good morning. My name is Janet LaRue. I am Chief 
Counsel for Concerned Women for America in--here in Washington, 
DC. Thank you for the invitation to participate this morning.
    I can tell you that of our half-million members across the 
country in every state, this is a very important issue--
consumer choice in subscription television. Our constituents 
would like to know why it is that they have to pay for TV 
programming they do not want to watch in order to see 
programming they do want, because we don't have to pay for food 
we don't intend to eat, we don't pay for trips we don't intend 
to take, and we don't pay for magazines we don't intend to 
read.
    As has been made clear this morning, subscription 
television is pervasive. We know that, based on the FCC and 
other estimates, even from the industry, that the number of 
MVPD subscriber homes now accounts for 88 percent of all 
television households. And so most subscribers do not want to 
pay for unwanted or offensive programming, and that is what our 
concern is.
    In the current system, MVPDs offer subscribers three tiers 
of programming before they may subscribe to other channels. 
Federal law requires that all subscribers must buy the first 
tier, which has to include the local broadcast channels and 
community access channels. The second tier is a package of 
channels selected by the industry that requires subscribers to 
buy channels they do not want in order to buy channels they do 
want.
    For example, my son sent me an e-mail yesterday when he 
learned that I would be speaking here saying, ``I pay $49. I 
get 98 channels. I watch 15. I only want 15. I only want to pay 
for them. And I don't want my young daughters having access to 
Spike TV when they are looking for a decent cartoon.''
    Within that second tier package, there are several channels 
that include sexually explicit programming, which is a major 
complaint of most subscribers, and certainly our constituents 
who object to paying for programming they do not intend to 
watch. As Mr. Deal pointed out, the American people would like 
to hold the keys to the gate of their home.
    CWA commissioned a Wirthlin Poll this past April of 1,000 
respondents on the subject of cable television, which revealed 
the following. Of 1,000 respondents, 62 percent subscribe to 
cable television. Sixty-six percent prefer to choose for 
themselves the programming for which they pay. Sixty-six 
percent of non-cable subscribers said that they were more 
likely to subscribe if they could choose what is included in 
their basic package. This means more customers for the 
industry.
    Eighty percent said subscribers should not have to pay for 
a package of programming that might include channels they do 
not want to view. Seventy-three percent said that cable 
providers should voluntarily enforce decency standards in that 
basic package, which would screen out sexually explicit or 
violent programming if subscribers have no control over which 
channels are included in their basic cable package.
    The Supreme Court has referred to cable TV as, 
``pervasive,'' and includes patently offensive programming. The 
court has made it clear that restrictions on cable TV indecency 
can be justified, because cable TV is now as pervasive as 
broadcast television. A la carte pricing or tiering, we 
believe, is a free market solution, and it would give consumers 
complete control over what comes into their homes and would 
help them control their cable bills.
    We believe that Congress should act if the industries 
remain unresponsive to consumers. The FCC's ninth annual report 
on cable/satellite/video competition reveals that many hold 
monopoly power within their region. Only 10 percent of cable 
franchise territories face head-to-head competition from 
another cable company.
    Consumer choice will not necessarily cost more. In Canada, 
there is a la carte channel selection offered on several of the 
largest cable systems, and subscribers save about 30 percent 
compared to subscribers who select the average number of 
channels Americans tend to watch. Cable choice and a la carte 
pricing would require cable channels to be more responsive to 
their target audience, if they wish to survive, improve the 
programming of niche channels, and encourage cable channels to 
serve the public.
    I grew up hearing that in a free market economy, if you 
build a better mousetrap, the public will beat a path to your 
door. We don't believe that consumers should have to subsidize 
bad mousetraps. CWA is urging the industries to voluntarily 
provide consumer choice in the second tier, expanded basic 
package, or at least self-imposed decency standards in that 
package.
    Last week the Seattle office of Cable Communications filed 
comments with the FCC stating, ``Because cable operators have 
not been responsive to the demand for customized programming, 
the FCC should establish regulations that facilitate consumers' 
choice, whether this is accomplished by requiring cable 
companies to offer a la carte programs, theme-tiered programs, 
or some other options.''
    If the industries remain unresponsive, CWA urges Congress 
to act in the public interest and mandate either consumer 
choice or impose decency standards within that basic package. A 
free market flourishes with competition and consumer choice.
    And, in closing, may I suggest to the members, if you 
haven't already done so, that you speak to your constituents 
when you are back in your home districts. Most of what has been 
shared here this morning is by representatives who represent an 
industry. And with all due respect, I have heard comments today 
that are pretty patronizing of the American people.
    I hear concerns about increased costs and decreased 
choices. Let us let the American people decide if they are 
willing, if necessary, to pay a little more for the programs 
they want rather than paying the higher and higher cable bills 
they are paying for programming, most of which they don't want. 
And so let us let the American people make that choice.
    Thank you.
    [The prepared statement of Janet M. LaRue follows:]
 Prepared Statement of Janet M. LaRue, Chief Legal Counsel, Concerned 
                           Women for America
    Mr. Chairman and Members of the Committee, good morning. My name is 
Janet M. LaRue. I am chief counsel for Concerned Women for America 
(CWA) in Washington, D.C. Thank you for inviting me to speak today on 
the important issue of consumer choice with respect to subscription 
television.
    More than 94 million homes subscribe to multichannel video 
programming distributors (MVPDs), according to a Federal Communications 
Commission (FCC) report. Of those, about 66 million subscribe to cable 
while the remainder subscribes to direct broadcast satellite (DBS). The 
number of MVPD subscriber homes accounts for 88.29 percent of all 
television households.1
---------------------------------------------------------------------------
    \1\ Kleder, Martha, ``The Case for A La Carte Cable Pricing: Don't 
Want Their MTV? Let the Free Market Work Its Magic,'' available at: 
http://www.cwfa.org/articles/5468/CFI/family/index.htm.
---------------------------------------------------------------------------
    In the current system, cable TV operators offer subscribers three 
tiers of programming. Before they may subscribe to other channels, 
federal law requires that all subscribers ``must buy'' the first level, 
which has to include local broadcast channels and community-access 
channels.
    The second tier is a package of channels selected by the MVPDs that 
requires subscribers to buy channels they do not want in order to buy 
channels they do want.2
---------------------------------------------------------------------------
    \2\ Kleder, Martha, ``Give Us Cable Choice for Decency's Sake!'' 
available at: http://www.cwfa.
org/articledisplay.asp?id=5175&department=CFI&categoryid=papers.
---------------------------------------------------------------------------
    The average cable customer watches only 12 to15 channels on a 
regular basis, but cable companies bundle 50 to 75 channels in the 
expanded basic package, and upwards of 200 in digital cable packages. 
That is like going to the store for a dozen eggs and being told you 
must buy at least six dozen, which is more than you can consume, 
including many that are cracked and rotten.
    My comments will focus on this second tier ``expanded basic'' 
package. Within that second tier package there are several channels 
that include sexually explicit programming, which is a major complaint 
of most cable subscribers who object to paying for offensive and 
indecent programming they do not want in their homes.
    This forced consumption of channels increases the cost to 
consumers. A recent report of the Federal Communications Commission 
(FCC) concludes that cable subscription prices have increased five 
times faster than the rate of inflation.
    Under the cable bundling system, even nonsports fans are forced to 
pay for very costly programming such as ESPN. Sports fans, too, face 
higher cable bills because of channel bundling.
    In response to our constituents' concerns and requests for help, 
CWA commissioned a Wirthlin poll on April 16-19, 2004, with 1,000 
respondents, on the subject of cable TV. The poll results clearly show 
that a large majority of American cable TV subscribers are dissatisfied 
with their current ``no-choice cable service'':

1. Of 1,000 respondents, 62 percent subscribe to cable television.
2. Current cable subscribers (619) were asked: ``As a cable customer, 
        would you prefer to choose for yourself the programming to be 
        included in your basic cable subscription or is the cable 
        company's pre-arranged basic package satisfactory?'' Sixty-six 
        percent said they would prefer to choose for themselves.
3. Noncable subscribers (381) were asked: ``Would you be more or less 
        likely to subscribe to cable television if you were able to 
        choose the programming to be included in your basic cable 
        package?'' Sixty-six percent responded that they were more 
        likely to subscribe, with 39 percent of them indicating that 
        they were much more likely to subscribe.
    That means more customers for cable and satellite TV companies if 
they will allow their customers to choose the programs they want.
4. When asked: ``Do you think that cable customers should be required 
        to pay for a basic package of programming that might include 
        channels that they don't want to view?'' Eighty percent of the 
        respondents answered ``No.''
    The poll results are undeniable. Americans are dissatisfied with 
paying for somebody else's choice. They want to choose what they pay 
for and nothing else.
    Telling consumers to block-out unwanted programming they are forced 
to pay for is no choice--it is unreasonable and insulting. We do not 
pay for food we do not want to eat. We do not pay for magazines we do 
not want to read. We do not pay for trips we do not want to take. And 
we are tired of paying for programs we do not want to watch, many of 
which offend our morals and religious values.
    The First Amendment, especially with respect to regulations on 
sexually explicit and pornographic material, has been my area of 
expertise for many years. I have lectured on the subject in numerous 
law enforcement conferences across the country, testified on 
pornography legislation before Congress, state and local legislatures, 
and authored numerous amicus curiae briefs that have been filed in the 
U.S. Supreme Court, federal circuit courts of appeal, and state 
appellate courts. The protection of children, families, and society in 
general from the serious harms resulting from exposure to sexually 
explicit and indecent material is a top priority of CWA and my 
department, in particular.
    The Supreme Court has repeatedly recognized the harm to children 
from exposure to pornography and the right and need of government to 
assist parents to protect their minor children from exposure. The Court 
has characterized protecting children from exposure to pornography as a 
``transcendent interest'' of government because it concerns ``the 
health, safety, welfare and morals of its community by barring the 
distribution to children of books recognized to be suitable for 
adults.'' 3
---------------------------------------------------------------------------
    \3\ Ginsberg v. New York 390 U.S. 629, 636 (1968). See U.S. v. 
Playboy Entertainment Group, Inc., 529 U.S. 803 (2000); Sable 
Communications of Cal., Inc., v. FCC, 492 U.S. 115 (1989); Ashcroft v. 
ACLU, 535 U.S. 564 (2002); U.S. v. American Library Association, 539 
U.S. 194 (2003); Ashcroft v. ACLU, 2004 U.S. LEXIS 4762 (June 29, 
2004).
---------------------------------------------------------------------------
    The Court has referred to cable TV as ``pervasive'' and includes 
``patently offensive programming'':
          Cable television broadcasting, including access channel 
        broadcasting, is as ``accessible to children'' as over-the-air 
        broadcasting, if not more so . . . ([C]hildren spend more time 
        watching television and view more channels than do their 
        parents, whether their household subscribes to cable or 
        receives television over the air). Cable television systems, 
        including access channels, ``have established a uniquely 
        pervasive presence in the lives of all Americans.'' . . . 
        ([C]able households spend more of their day, on average, 
        watching television, and will watch more channels, than 
        households without cable service). ``Patently offensive'' 
        material from these stations can ``confront the citizen'' in 
        the ``privacy of the home,'' FCC v. Pacifica Foundation, 438 
        U.S. 726 (1978), supra, at 748, with little or no prior 
        warning.'' 4
---------------------------------------------------------------------------
    \4\ Denver Area Educational Telecommunications Consortium, Inc., v. 
FCC, 518 U.S. 727, 744-45 (1996).
---------------------------------------------------------------------------
    In a more recent case addressing cable TV, the Court made clear 
that restrictions on cable TV indecency can be justified:
        Cable television, like broadcast media, presents unique 
        problems, which inform our assessment of the interests at 
        stake, and which may justify restrictions that would be 
        unacceptable in other contexts . . . No one suggests the 
        Government must be indifferent to unwanted, indecent speech 
        that comes into the home without parental consent.5
---------------------------------------------------------------------------
    \5\ U.S. v. Playboy Entertainment Group, Inc., 529 U.S. 803, 813 
(2000).
---------------------------------------------------------------------------
    While government-imposed content-based regulations on speech are 
presumptively unconstitutional and, therefore, subject to the highest 
level of scrutiny by the courts, content-neutral regulations are not. 
Regulations that would require cable and satellite choice for consumers 
in the second-tier, expanded basic package of programming would be 
content-neutral because they would apply to all programming.
    Although subscribers are primarily concerned with indecent and 
offensive programming, they want choice with respect to all types of 
programming, whether it is a sports channel, gardening, cooking or MTV. 
``A la carte'' pricing, the free market solution, would give consumers 
complete control over what comes into their homes and would help them 
control their cable bills.
    It is disturbing enough that broadcast radio and TV brings 
offensive programming into American homes, even though it is without 
charge to the viewer. It is unthinkable that cable and satellite 
companies are permitted to force subscribers to pay for indecent and 
offensive programming over their objections.
    A second, but less effective solution than consumer choice, is for 
the industry to apply the same decency standards that are applicable to 
broadcast TV and radio. Our last polling question asked respondents if 
they agree or disagree with the following statement:
          ``When cable customers have no control over which channels 
        are included in their basic cable package, the cable providers 
        should voluntarily enforce decency standards in that basic 
        package, which would screen out sexually explicit or 
        graphically violent material.''
          Seventy-three percent of respondents said that they agree, 
        with 55 percent strongly agreeing.
    A 2004 report, by the First Amendment Center in collaboration with 
American Journalism Review magazine, released June 28, found that 55 
percent of respondents agreed with the following statement: 
``Government officials should have the power to regulate during the 
morning, afternoon and early evening hours those cable television 
programs that contain references to sexual activity.'' 6
---------------------------------------------------------------------------
    \6\ Available August 1, 2004, at: http://www.ajr.org.
---------------------------------------------------------------------------
    While there are about a dozen major cable companies nationwide, 
those companies act as monopolies in their local communities by county 
charter.
    Satellite systems, while starting to nibble at cable's customer 
base, are not yet a true competitor, and thus have no direct impact on 
cable prices. As Gene Kimmelman of Consumer Union notes, the cable 
industry is 3.5 times larger than dish systems, many DBS customers live 
where cable is not available, and dish placement restrictions prevent 
many customers from choosing that system over cable.
    Cry as they do about price gouging from program producers, cable 
companies are in their own consolidation race, and often hold 
monopolies in some communities, thanks to community charters barring 
competition.
    While the cable industry comprises about 11 equal-sized 
competitors, according to the FCC's ninth annual report on cable/
satellite video competition, many hold monopoly power within their 
region. That point-of-sale monopoly, called clustering, has increased 
75 percent since 1994. Only 10 percent of cable franchise territories 
face head-to-head competition from another cable company.7
---------------------------------------------------------------------------
    \7\ 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, 
31 December 2002.
---------------------------------------------------------------------------
    Kimmelman maintains that satellite video distribution systems do 
not compete directly with cable, and therefore have had no impact on 
cable costs. He notes that the cable industry is 3.5 times larger than 
satellite and that many satellite customers live in areas not served by 
cable.8
---------------------------------------------------------------------------
    \8\ Kimmelman, Gene, Testimony before the Senate Commerce, Science 
and Transportation Committee, 6 May 2003.
---------------------------------------------------------------------------
    That lack of competition makes it easy for cable companies to 
simply pass the added costs on to their customers. It also makes them 
reluctant to embrace reform ideas such as a la carte pricing, where 
customers pay only for the channels they wish to receive. Such pricing 
strategies in the current media environment would reduce the number of 
households reached by many cable channels, and would in turn reduce the 
amount the cable companies can charge for advertising.
    Subscribers do not accept the industry's claim that consumer choice 
will necessarily cost more. That is not the case in Canada.
    There, ``a la carte'' channel selection is offered on several of 
Canada's largest cable systems. Subscribers save about 30 percent 
compared to subscribers who select the average number of channels 
Americans tend to watch. Canadian subscribers receive a basic tier with 
approximately 30 channels, and may then pick one, five, 10, 20 or 30 
additional channels ``a la carte'' for a price per channel that drops 
as subscribers purchase more channels. Canadian viewers who select the 
average number of channels that U.S. consumers tend to watch pay about 
30 percent less than the cost of typical digital cable services in the 
U.S.9
---------------------------------------------------------------------------
    \9\ Kimmelman, Gene and Cooper, Mark, Consumer's Union letter to 
House of Representatives, 27 April 2004.
---------------------------------------------------------------------------
    Even if it were true that consumer choice would cost subscribers 
more, many would rather pay more for programming they want than to pay 
for dozens of channels they do not want.
    Currently, our nation has 10 major cable companies, but none of 
them competes with each other. That head-to-head competition between 
wired cable services within a community is called ``overbuilding'' and 
it occurs in only 2 percent of the nation's markets. Where it does 
occur, cable bills decrease sharply.10
---------------------------------------------------------------------------
    \10\ Kleder, Martha, ``Monopoly is More Than a Game: U.S. Senate 
Hearing on Cable Hears Calls for Competition and Choice,'' (citing 
Federal Communications Commission (FCC), Annual Assessment of the 
Status of Competition in the Market for the Delivery of Video 
Programming, Ninth Annual Report, FCC 02-338, December 31, 2002, 
available at: http://www.cwfa.org/articles/5702/CFI/papers/index.htm).
---------------------------------------------------------------------------
    Cable choice/a la carte pricing would require cable channels to be 
more responsive to their target audience if they wish to survive. A la 
carte pricing would improve the programming of niche channels, and 
encourage cable channels to serve their public.
    A la carte pricing would give the consumer leverage against 
channels that push the envelope of decency and routinely violate 
community standards. For example, FX, a cable channel that now forces 
itself into every cable-subscribing home through its placement on the 
expanded basic-cable tier, would either have to tame shows like Nip/
Tuck that push the boundaries of common decency, or become a niche 
channel through loss of subscribers.11 The MTV channel, 
targeted at children, would have to do the same with its 
programs.12
---------------------------------------------------------------------------
    \11\ Kleder, Martha, ``Give Us Cable Choice for Decency's Sake!''
    \12\ Examples of graphic sexuality in programming included in the 
expanded basic cable tier are available for Nip/Tuck at: http://
www.parentstv.org/ptc/niptuck/main.asp. For MTV's Wild Boyz, 24 Hour 
Spring Break, Full Body Search: Miami, Real World: Las Vegas, MTV Video 
Music Awards, Real World/Road Rules: Battle of the Sexes, Real World/
Road Rules: The Gauntlet, Real World/Road Rules: Inferno, Real World: 
San Diego, Newlyweds: Nick and Jessica, The Osbournes, at: http://
www.parentstv.org/ptc/publications/email/plain.asp.
---------------------------------------------------------------------------
    CWA is urging the subscription TV industries to voluntarily provide 
consumer choice in the second-tier, expanded-basic package, or at least 
impose decency standards in the expanded basic package. Thus far, the 
industry has shown little response to what the majority of their 
customers want.
    If the subscription television industries continue to ignore the 
very people from whom they extract billions of dollars, Congress should 
act to re-balance the national media toward the public interest in the 
wake of a decade of media consolidation, and require multi-billion 
dollar industries to provide consumer choice. Deregulation, done in the 
name of a free market, was justified. Yet, a market is not truly free 
when customers have their choices and purchases dictated by others.
    Thank you.

    Mr. Upton. Thank you all for your testimony.
    At this point, we will begin the questions of the members 
on the subcommittee.
    Mr. Kimmelman, appreciated your testimony, and I just have 
to go back to the basic question. What if with a la carte--let 
us say it happens, and what is channel, let us say, ABC decides 
that they are going to ask for $10 a subscriber to carry the 
channel on a stand-alone basis. It sounds a little outrageous 
in terms of higher cost to me. I am sure that it would sound 
outrageous to you as well.
    Who is going to--what if that--if that cable operator is 
forced to pass that along to the consumer, that doesn't sound 
to me like a system that is going to provide consumers with 
more choices at a cheaper rate. And, therefore, wouldn't 
Congress need to then regulate retail and wholesale prices to 
make it work? Is that not the basis/thesis of that argument, 
which then reverses----
    Mr. Kimmelman. Mr. Chairman, in an unregulated market, ABC 
could try to charge anything it wants to, and it could shoot 
itself in the foot. And its friends in the cable industry could 
go along and increase the amount of damage it does by just 
raising prices that way, if that is what they wanted to do. I 
believe what they would do----
    Mr. Upton. But isn't it the same with a la carte? Isn't it 
exactly the same argument? Isn't it going to bring--reregulate 
the whole system?
    Mr. Kimmelman. We are suggesting that you keep a basic 
tier, so that broadcast channels wouldn't be affected by that. 
But even assume for a minute that ABC owns a channel, and it 
wants to charge $10 for a la carte, I believe ABC has gone out 
of its way to talk about how reasonably priced ESPN is as the 
most expensive channel at no more than $2.50 a subscriber.
    I would be hard-pressed to see them justify in the 
marketplace those kind of prices. I can't imagine cable 
operators would be willing to pay that. I can't imagine they 
wouldn't be willing to discuss that with their own customers 
and that there would be a lot of marketplace pressure for those 
prices to actually go down.
    I believe what would happen with an a la carte option is 
you would get a lot of transparency and opening to a lot of 
secret negotiations now that have been characterized as 
onerous, in some cases coercive, and those practices would 
probably not be able to be sustained with that kind of public 
visibility.
    Mr. Upton. Mr. FitzPatrick, you think about your testimony 
there, underscore your testimony. I think in essence you said 
with a la carte that in all likelihood Hallmark would not make 
the list. Is that your thought?
    Mr. FitzPatrick. Well, I was referring specifically, Mr. 
Chairman, to the recently launched earlier this year Hallmark 
movie channel. Basically, I think when you are building a 
business, a cable network business, and your objective is to 
build scale and build audience, which we have been able to do 
over the last 3 years, you are able to eventually reach a point 
where, as a result of marketplace research, talking to 
customers, talking to consumers, ascertaining what other needs 
and wants are, in this particular instance we ascertained that 
there was a great interest in a movie channel built around the 
Hallmark brand and the Hallmark library.
    But in order for us to move forward into the marketplace 
with a viable second linear service, I believe that the a la 
carte environment would preclude, had it existed a year ago, 
would have precluded us from launching the service just because 
the path to getting to that kind of distribution scale would 
have made that absolutely impossible to accomplish.
    Mr. Upton. Mr. Pyne, as I listened to Ms. LaRue talk about 
Canada, which I guess does have I guess, based on your 
testimony, some type of a la carte system, how does that--how 
do you see rates and access to channels as you relate to the 
channels that you provide to Canada versus the United States?
    Mr. Pyne. With respect to our company or----
    Mr. Upton. Right.
    Mr. Pyne. I would like to point out just as part of our 
testimony that we will be filing with the FCC, simultaneously 
with testimony for this, we actually have detailed information 
about the situation in Canada. My understanding of Canada is 
that, in fact, as Congressman Towns pointed out, the structure 
of the market is very similar to what we have here in the 
United States, in that there is a regulated broadcast of the 
most popular channels.
    In fact, in Canada, for those channels that do have the 
broadest distribution, in fact they are required to be in that 
basic bundle, similar to the situation here in the United 
States. ESPN has a 30 percent investment in an ESPN classic 
type service in Canada, which is a very different service than 
ESPN. And, in fact, in that case, it is offered as part of a 
digital tier. But, quite frankly, its penetration is less than 
5 percent. It is about--it has 485,000 customers, and it has 
lost money every year that it began since 2001.
    So while Canada does offer some a la carte opportunities, 
it is for niche services, and it is not--it is only after 
Canadians have an opportunity or are required to buy a bundle 
of other services that are much more broadly distributed, 
similar to here in the United States.
    Mr. Upton. Maybe we can get into that--into a second round, 
because my time has expired.
    Let me go with Mr. Wynn.
    Mr. Wynn. Thank you, Mr. Chairman.
    Mr. Kimmelman, I applaud your good intentions on behalf of 
the consumer, but I am concerned that you have not really laid 
out how a la carte addresses some of the concerns. For example, 
I believe as Reverend Plummer was saying that he had not been 
able to get on for a variety of reasons, as well as many other 
niche programmers.
    Two basic questions. How do they get on in an a la carte 
system? And, two, how do they sustain themselves if they have 
relatively lower viewerships, which I think was an argument 
that was raised by Mr. Liggins in terms of emerging companies. 
Why are they better served if they have lower revenues, lower 
viewership, and lower capitalization? How do they survive?
    I hate run-on questions, but I am going to include this. 
Would they not ultimately, if they survive, be absorbed by 
larger media conglomerates, thereby losing the diversity that 
we debated at length in this committee on the subject of media 
ownership? Same basic concept.
    Sorry about the length of the question.
    Mr. Kimmelman. And I appreciate it, Mr. Wynn. That is a 
very important question. Let me start off by saying I don't 
believe a la carte is a panacea to solve every problem out 
there. I have been doing this for a long time and talked about 
a lot of different things that need to be done about 
discrimination.
    Let me suggest a way in which I think a la carte can work. 
We are, first off, saying there ought to be a basic tier with 
local programming, so that broadcasters have their right to get 
the--meet the local needs of the community in a basic tier with 
public access channels. We are also suggesting that every cable 
operator, every satellite provider, can offer the packages that 
include TV One today, that include BET today.
    They still can package it that way. And if there is a small 
viewership, or for whatever reason they put it in a package 
today, my question is, in a world where you can put it in a 
package tomorrow, but it also could be available as an 
individual channel, why in the world wouldn't they keep putting 
it in the package? What would change? Some people may want to 
pick a channel a la carte.
    Mr. Wynn. That is what I am saying. If they put it in a 
package, then we haven't changed anything. It is not a la carte 
if it is in a package, big package, small package. It is a 
package, and there are economies of scale associated with the 
package. When you pull it out and say, ``This is A, this is B, 
this is C,'' etcetera, ``pick what you want,'' how does that 
small station make it? I just don't--I don't see that.
    Mr. Kimmelman. A small station that is available----
    Mr. Wynn. Not a small station, but you----
    Mr. Kimmelman. A small station that is available in a 
package, and then also available a la carte, would it be able 
to attract a niche market audience? There are a lot of minority 
programmers who are suggesting that they think they would at 
least have some chance, who today are blocked by the 
gatekeeper. The gatekeeper Mr. Deal referred to is one of four 
or five media giants who either has an affiliate it wants to 
favor and will put on somebody else, or just doesn't want to 
put that programming on.
    Mr. Wynn. How do you address the advertising argument? That 
is----
    Mr. Kimmelman. Oh, I would love to address the advertising 
argument. What I suggested was, out of 330 channels, most of 
them aren't getting advertising revenue. They are getting some 
license fees, or they are going on for free and they are 
desperate to get capital to get on. And if they don't make it 
in 4 or 5 years, like Mr. Liggins said, they probably get 
dropped. Hundreds of them have been in that situation.
    Most people are watching the top 20 channels. That is where 
the real advertising revenue is. But if you have something that 
is attractive to a niche audience, and you can--and I 
understand there is marketing costs. None of this is simple. 
But if you can draw advertisers into a small, focused, target 
market, you have a better chance of surviving possibly than 
most of these people who are not even getting on today.
    But most of them who are on, I am suggesting, sir, are not 
getting advertising revenue. I mean, let me give----
    Mr. Wynn. Well----
    Mr. Kimmelman. Let me just give you an example. If you are 
Ford Motor Company----
    Mr. Wynn. My time is running, because I am watching the 
clock. If they can't--if their niche is so narrow that they 
can't attract advertisers, how do they get on?
    Mr. Kimmelman. Advertisers pay for eyeballs. If you are--I 
am----
    Mr. Wynn. But you don't have many eyeballs if you don't 
have that viewership. That is the whole thrust of this.
    Mr. Kimmelman. Well, yes.
    Mr. Wynn. Without a package, you don't have the eyeballs. 
Without the eyeballs, you don't have the advertising.
    Mr. Kimmelman. Two hundred fifty out of--275 out of 330 
channels aren't even getting a quarter of a million eyeballs, 
so I am just suggesting that----
    Mr. Wynn. But they are in a package.
    Mr. Kimmelman. [continuing] with due respect you can be--if 
you are in front of 60 million households, it is most likely 
because you do have eyeballs. But I will guarantee you no 
advertiser is going to pay for its company's ads to go in front 
of 60 million people who never turn it on. The bottom line is 
you ultimately need people to watch.
    A la carte, in conjunction with a package, may provide a 
new avenue for some people to get their first step to get on 
and demonstrate that they have got quality programming. You 
have got a lot of programmers out there who say, ``We have got 
quality. We have got financing. They won't let us on.'' Why not 
give them a chance in the marketplace to show they can?
    Mr. Wynn. Why wouldn't their costs--their rates be high? If 
they are not using advertising revenue, what----
    Mr. Kimmelman. For the very same reason that some of them 
aren't charging cable operators today. They are desperate to 
get out there and get distribution. They will take a hit up 
front to try to get on. They can't survive long that way. But 
if somebody wants to watch it, they will finally get 
viewership.
    A lot of these channels are not getting ad revenue. A lot 
of them are not in a position to charge cable operators even a 
penny to get on. They are desperate to try to get out. If the 
cable--my question is simple. If the cable operator will take 
it for free today and put it on expanded basic tier, why won't 
they do that tomorrow just because somebody could also get that 
channel a la carte?
    The point is, if nobody will pick it a la carte, then it is 
in the tier. And it is just the way these folks want to have 
it, and they can keep doing their business the way they want 
to. If some people pick it a la carte, they may actually expand 
their audience base, and advertisers may see there is a greater 
potential to support that programming.
    Mr. Wynn. Thank you, Mr. Chairman.
    Mr. Upton. Mr. Deal?
    Mr. Deal. Thank you, Mr. Chairman. I want to thank my 
colleagues for their kind comments and for their attendance at 
this hearing. I do think it is an important issue and one that 
I don't think will go away.
    First of all, I thank the panelists, too. But, you know, I 
have heard from two of the big six conglomerates here today, 
and with the business philosophy that you gentlemen have 
espoused, we would all be driving Edsalls, simply because Ford 
thought it was a good idea. The public didn't. The public 
doesn't agree with you on this issue as well.
    Mr. Hooks, let me ask you--you are a small--you represent 
the small cable independent operators in this country. Is that 
correct?
    Mr. Hooks. Yes, sir.
    Mr. Deal. Do you all own the programming that produces 
these programs?
    Mr. Hooks. No, sir, I do not.
    Mr. Deal. All right. You have told us the problems that you 
have about your constituency objecting to, I believe, Undressed 
and Striperella when they are trying to get the cartoons. Are 
you free to discuss with me today in this meeting or afterwards 
the terms and conditions that are dictated to you by the big 
guys who are selling that programming as to why you can't break 
it up, how much you're charging the customers? Are you free to 
tell me that?
    Mr. Hooks. No, sir.
    Mr. Deal. Why not?
    Mr. Hooks. Contractually, I am disallowed to do so.
    Mr. Deal. Mr. Baxter here got a contract keeps you from 
doing that?
    Mr. Hooks. Yes, sir.
    Mr. Deal. Mr. Baxter, will you waive that today?
    Mr. Baxter. Congressman, I am not in the programming 
business. I am in the cable television----
    Mr. Deal. I think the answer is no?
    Mr. Baxter. There is a different part of Time Warner that 
distributes programming.
    Mr. Deal. Okay. We have heard that answer, too.
    Mr. Baxter. Yes, sir. I am----
    Mr. Deal. Mr. Pyne, will you waive it?
    Mr. Pyne. We are currently--we have programming obligations 
to----
    Mr. Deal. That is somebody else's job, too? Okay.
    Mr. Pyne. No, no, no. No. I am the one responsible for 
negotiating the contracts, but we have contractual obligations 
that----
    Mr. Deal. Those are contractual obligations you dictate, 
right?
    Mr. Pyne. [continuing] going both ways.
    Mr. Deal. That is contractual obligations you dictate, that 
you will not reveal the terms and conditions and you will not 
let any of your folks who buy your programming reveal it 
either, is that right?
    Mr. Pyne. They are, in fact, mutual between--I mean, we 
can't talk to----
    Mr. Deal. Mr. Hooks is willing to waive it. Will you waive 
it?
    Mr. Pyne. I am actually not in a position to----
    Mr. Deal. I think the answer is no. It is obvious this 
whole process is surrounded in secrecy. This committee has 
written a letter to the FCC asking them to investigate it. I 
want to guarantee the members of this committee the FCC is 
going to come back and tell us, ``We can't get the information, 
because the big guys have sealed the lips of the people they do 
business with, and they won't tell us either.'' Mr. 
FitzPatrick, I thank you for being here. Let me tell you, I 
like your programming, and I want to tell you I don't think 
there's a person in this room that objects to the Hallmark 
channel being on an expanded basic tier. But, you know, 
sometimes we tell a lot by not who is here to testify but those 
who are not here to testify.
    Now, you are on expanded basic tier, is that right?
    Mr. FitzPatrick. We are overwhelmingly----
    Mr. Deal. All right.
    Mr. FitzPatrick. [continuing] on the most highly 
penetrated, but not in all cases.
    Mr. Deal. All right. You may be on basic in some cases.
    Mr. FitzPatrick. No. In some cases, we are, for example, 
on--on the EchoStar platform, we are on a tier that penetrates 
roughly about 30 percent of their entire universe.
    Mr. Deal. All right. But in that expanded----
    Mr. FitzPatrick. Much to my chagrin.
    Mr. Deal. But in that expanded basic, are such things as 
the programs we have heard about, the FXs who are not here, the 
Spike TV who is not here, the Undressed, the Striperella who 
are not here, they are in that same advanced package with you, 
is that right?
    Mr. FitzPatrick. I believe that is the case, depending upon 
the----
    Mr. Deal. Do you need their listeners and their watchers 
and their viewers and the revenue that they produce to justify 
your existence in the expanded basic package?
    Mr. FitzPatrick. I am sorry, Congressman. I----
    Mr. Deal. Do you need the revenue from these somewhat 
questionable, racy programs to justify your existence on the 
expanded basic package?
    Mr. FitzPatrick. I don't know if it is so much--I don't 
think it is a case of, do we need the revenue from them, if I 
understand your question. I think what we need is to be in a 
neighborhood in which the variety of services are available to 
a great majority of subscribers on that system.
    And as a result of the way we watch as human beings, as we 
watch television, with that remote most of the time, that 
surfing experience that people have--I mean, I have heard this 
morning this discussion about the number of channels that 
people watch on average being 15, 16, 17. That may be a 
statistic that is true, if you measure it by time spent--an 
hour or 2 a week or whatever the metric is--but I think that 
there are many, many more channels--in fact, our experience and 
our----
    Mr. Deal. I hate to interrupt you, but my time is about to 
expire. You are the poster boy for independents here in this 
testimony today. You are not attempting to justify these others 
who are in the same tier packages as you, because their 
programming and the audience they target is different from 
yours, is that not right?
    Mr. FitzPatrick. It is different.
    Mr. Deal. All right. Now, since you are the poster boy for 
the independents, are you truly independent? You know, we have 
talked about the five big conglomerates, and we had two--that 
Liberty Media. Is not Liberty Media one of your major 
stockholders?
    Mr. FitzPatrick. They are a stockholder. They are not a 
major stockholder. They hold less than 10 percent of our 
company, and they have absolutely no control over our operating 
strategies or our operating----
    Mr. Deal. But they are one of the big six.
    Mr. FitzPatrick. Well, Mr. Chairman, they are not a cable 
operator in this country.
    Mr. Deal. Mr. Liggins, you are the poster boy for the 
minority contractors and the minority broadcasters in this 
hearing here today. Let me ask you, though, your target is 
African-American targets, but you are not owned by African-
American stockholders, are you? In fact, you are--one of your 
biggest owners at 39 percent is Comcast, is it not?
    Mr. Liggins. That is correct. But my company, which is 
owned by my mother and myself and is a public company--we 
control it--owns 40 percent of the network. And when we 
actually buy our investors out, we will own 51 percent of the 
network. But most importantly, we put up $74 million of the 
entire $130 million.
    So as far as I am--and we control the Board. And so as far 
as I am concerned, it is more our network than anybody else, 
since we put most of----
    Mr. Deal. Well, just answer the question Reverend Plummer 
posed. Are you carried fully by Time Warner?
    Mr. Liggins. We do not have a deal with Time Warner as of 
yet, but we are working on it diligently.
    Mr. Deal. Mr. Chairman, I appreciate your indulgence. I 
hope you will have a chance to ask extra questions.
    Mr. Upton. Mr. Doyle?
    Mr. Doyle. Thank you, Mr. Chairman. This has been a most 
interesting hearing.
    I hear a lot of different dynamics as I have listened to 
the testimony today. And I think we all know what consumers 
want. They would love to just pick only the channels they want 
to watch and pay nothing for it. I mean, that is--I have been 
in politics long enough to know that.
    I just had a conversation with USAirways this morning in 
Pittsburgh, and, you know, the head of USAirways complained 
that people get on the internet today and, you know, they want 
to be able to fly from here to California, not have to have any 
layovers on the way, and they want to pay $120 for it. And that 
is why the airline industry is going bankrupt.
    Now, is that reality? I guess that is the question we are 
asking ourselves. You know, can that system really work? And 
then, I hear the access challenges here, too, how a company 
like Mr. Liggins, how does he get access to a network, if he 
has to do it person by person? If you have to go up there and 
sign up subscribers, how do you get to that magic, whatever 
that number is, 20 million, so that you can justify being on 
their--or Reverend Plummer also?
    You know, how do you make sure that, if we are going to 
have diversity, how does that happen? And then, the small 
operators that don't like the idea that they have to pretty 
much take what is given to them by the big guys that own a lot 
of the programming--I mean, we have a lot of different dynamics 
that take place.
    I went to Penn State University. The football team took all 
the revenue in, and they basically paid for all--the paid for 
the wrestling team and the volleyball team, and everything in 
between. If we didn't have a football program at Penn State, we 
wouldn't have any other sport at Penn State either.
    So I guess, you know, the question we have as we look at 
this issue is, you know, how do we put a system forth that is--
where there is competition and where consumers benefit?
    And I just--Mr. FitzPatrick, maybe I will ask you the first 
question. Your station seems to offer programming that would be 
considered, if there were a family friendly tier, you would 
probably fit into that kind of tier program. Would you agree 
with that hallmark?
    Mr. FitzPatrick. Well, I do generally speaking. But, again, 
like everything else, it is in the eyes of the beholder. I 
mean, we make--we don't make movies that typically you might 
find, for example, on Mr. Pyne's service, the Disney Channel--
that is, all PG-13 or PG. We make movies based upon classic 
literature with very compelling stories about the human 
experience that might, in the eyes of a viewer, feel that that 
is not particularly suitable to a 13-year-old or to an 11-year-
old, but is to a teen in the household.
    I mean, generally speaking, I would answer the question 
yes. But if I could just for a minute----
    Mr. Doyle. But you disagree with a government-mandated 
family friendly tier. Is that your testimony?
    Mr. FitzPatrick. I do.
    Mr. Doyle. You do.
    Mr. FitzPatrick. I disagree with a mandated family tier or 
any other kind of tier.
    Mr. Doyle. And why is that?
    Mr. FitzPatrick. For all of the reasons that we have 
indicated--I have indicated in my testimony this morning--the 
marketplace, let the marketplace work. We think that, generally 
speaking, it does work well--I mean, to the point that it is 
taking Mr. Liggins time to get distribution for his new 
channel. I can tell you as an entrepreneur I have been involved 
in starting up two cable networks, including one against the 
retransmission consent network.
    The marketplace and the competitive marketplace allowed us, 
with that particular service, to eventually meet that 
retransmission consent channel. It takes take. When you go 
knocking on a cable operator's door, whether you are trying to 
get bundled in a highly penetrated package or some other kind 
of tier, as Mr. Baxter and Mr. Hooks will tell you, it takes 
time to make that capacity available. I mean----
    Mr. Doyle. Do you think that----
    Mr. FitzPatrick. [continuing] these folks have spent $85 
billion upgrading plant. It is not all for linear channels. 
Thirty percent of their bandwidth is being put aside for video 
on demand, for internet protocol telephone service, for high-
speed access. There are all kinds of competing requirements and 
interest for that bandwidth, and it takes time. If you have 
patience, if you have a good product----
    Mr. Doyle. Let me just ask a question, since my--do you 
think that you could break into a market with a channel like 
yours if it weren't for guaranteed carriage in a--on an 
expanded basic tier? Would you have been able to do this if--
just if it were a la cart?
    Mr. FitzPatrick. Well, Mr. Congressman, the guaranteed 
carriage is a result of: 1) Do we have a compelling vision? 2) 
Do we have a brand? 3) Do we have a negotiation over terms and 
conditions that are beneficial ultimately to the consumer based 
upon value and price? That is how we were able to drive our 
distribution to 62 million homes today, not because somebody 
immediately said we are going to guarantee you getting into 
every single home. And it also took time to do that. So----
    Mr. Doyle. Do you think you could have done it under an a 
la carte system, though?
    Mr. FitzPatrick. We could not do it under an a la carte 
system. Absolutely not. And more----
    Mr. Doyle. If I could just--if I could borrow some time 
here, there were some very compelling arguments or statements 
this morning about viewership, number of channels watched, 300 
channels. You need--this business needs a foundation of 
networks that number somewhere in the 60, 70 range, that drive 
that basic advertising revenue model.
    Once a network has economies of scale, then you can go out 
and you can launch additional service, in which the requisite 
requirements for advertising dollars is not as great as the 
mother load, as the mother ship. That is how a lot of services 
were able to be launched. And as far as the 339 national 
networks that are out in the marketplace today on--not 
including the 84 regional networks that are sports and regional 
news services, out of that 339 a lot of those are pay services.
    They are, if you will, services that do not require the 
kind of advertising scale that the mother ship requires. And 
so, ultimately, it gets down to the question of whether or not 
the American public is watching cable programming, and the 
answer is a resounding yes. The viewer shares today, both in 
prime time and certainly in total day, from where this business 
was 10 years ago, 5 years ago, 3 years ago, cable shares, 
multi-channel shares of viewing, exceed now the broadcast 
networks.
    There is a reason for that. The consumer is voting with a 
strong affirmative, ``We like generally what you are giving 
us.'' Do they have particular issues as we have heard this 
morning about particular services? Of course. But does that 
mean we throw the baby out with the bath water because we have 
got a problem? I would suggest to the committee that that is 
the wrong approach.
    Thank you, Mr. Chairman.
    Mr. Upton. Mr. Whitfield?
    Mr. Whitfield. Thank you, Mr. Chairman. And I also want to 
thank the committee staff for arranging this hearing, and Mr. 
Deal for pushing the issue, and the panel for taking time to be 
here with us.
    I might say that, as this hearing has emerged--and I came 
here with a rather open mind--I found myself more interested I 
think in the state of the wholesale and retail distribution of 
the programming than I have the a la carte side of the issue. 
And I know that, Reverend Plummer, you--when you were speaking 
from the heart--you made a comment about your efforts to have 
your programming fully carried.
    And you made a comment that you had a fear of retribution 
at some point. I was wondering if you would elaborate on that a 
little bit.
    Rev. Plummer. There is a comment in the industry, ``Cable 
is king.'' When it appears as though, as is the case here for 
me, I am not standing against a la carte. In fact, because of 
the condition of the cable industry right now where there is an 
access problem, we have been told as religious broadcasters for 
years, ``Be patient. Be patient. Just wait.''
    Because we have such ability to mobilize many people in 
communities throughout America, the cable industry has 
interpreted that as being adversarial, and has warned us time 
and time again, ``If you go out and stir up the community, if 
you go out and do this, we will never give you carriage.'' And 
so to go out and make the cable industry look as though they 
are doing something unkind to religious broadcasters does not 
fare well with them.
    And so we have been told time and time again, ``Don't do 
that. Don't make noise.'' And so for me to make comment now 
that I personally was approached and went into, you know, great 
detailed discussions about equity in our own network, and when 
I did not choose to do that, I still have not been given 
access. And so for me to stand publicly and make that statement 
alone is a potential for retribution for me that you will never 
get on now, you will never get access.
    Mr. Whitfield. And which company was trying to obtain 
equity in your company?
    Rev. Plummer. It was Comcast.
    Mr. Whitfield. Comcast. Okay.
    Now, Mr. Hooks, you have discussed a lot about the practice 
of wholesale and retail distribution, the way it is being 
conducted today. And your primary complaint is--or concern for 
your viewers is--that in order to get a program you have to 
take the entire package, is that correct?
    Mr. Hooks. Yes. If I could expand on that--and my 
environment is probably a little different. Smaller market 
environments are struggling a little more with bandwidth. And 
if you looked at my bandwidth, it is all used up by the big 
five through retransmission and bundling requirements. So 
products like yours, and some of these niche programs, I have 
got a real problem. I don't have any channel space.
    In fact, in my markets, we have got a real dilemma. We have 
got a high growth of Spanish-speaking people, and I don't have 
Spanish-speaking programming. And I don't know how to get it, 
because they are independent and they are not part--I mean, it 
seems to me unless you get part of the big five, that is the 
way you force your way in and it eats up all our bandwidth.
    Mr. Whitfield. So you don't have any shelf space?
    Mr. Hooks. In other words, I could make better choices for 
my community if I had some flexibility.
    Mr. Whitfield. Now, Nickelodeon is a popular channel or 
program.
    Mr. Hooks. Yes, sir.
    Mr. Whitfield. But in order to get Nickelodeon you have to 
have MTV, and you have to take Spike, is that correct?
    Mr. Hooks. Yes, sir.
    Mr. Whitfield. Now, our friend from Pennsylvania mentioned 
that Penn State Football carries the entire program, the 
athletic program. Nickelodeon is the most popular program of 
the ones that you have through Viacom. So what would be the 
rationale that Viacom would require you to take Spike?
    Mr. Hooks. Well, they package them up, and you are incented 
contractually to take the whole package. Otherwise, you pay 
damages for not doing it. So there is some flexibility not to 
do it, if you are willing to pay the difference.
    Mr. Whitfield. So if you don't do it, you pay damages?
    Mr. Hooks. Well, I call it damages. The pricing all 
changes. It is kind of like if someone was going to sell you 
three cars, and they will sell you each of them for half price, 
but if you buy one, I will charge you----
    Mr. Whitfield. And, contractually, you cannot talk about 
the pricing, is that correct?
    Mr. Hooks. No, sir.
    Mr. Whitfield. Okay. Well, Mr. Chairman, this has been an 
interesting hearing. I do hope that we have an opportunity to 
get more into the wholesale and retail programming in this----
    Mr. Upton. Would you yield just for a followup question----
    Mr. Whitfield. Yes.
    Mr. Upton. [continuing] I might ask Mr. Plummer as it 
related to your question.
    Mr. Whitfield. I would be happy to yield, and then I would 
yield the balance of my time to Mr. Deal.
    Mr. Upton. Okay. Let me just ask a followup question. You 
know, I was one, Reverend Plummer, that supported must carry 
back--way back when.
    Rev. Plummer. Yes.
    Mr. Upton. If for some reason we didn't have must carry, 
would you support a la carte?
    Rev. Plummer. Well, first of all, the Supreme Court of the 
United States, as you know, has upheld----
    Mr. Upton. I know. But let us say we did away with it. They 
affirmed--I think the Court said that we were proper in 
insisting on must carry. But let us say we did away with it. We 
passed a law and said you didn't have to have it, and it is out 
there for the consumers to decide, do you really want to carry 
your local broadcast station? I presume--I am not from 
Southfield, but I presume you are broadcast as well, right?
    Let us say that I live in Southfield. Would your network 
survive if you had a la carte and you didn't have must carry?
    Rev. Plummer. Personally, I--you are asking me personally? 
I will answer two ways. First of all, let me answer it as it 
relates to our industry. Must carry has been vital for the 
carriage----
    Mr. Upton. No, I know that, and I support it.
    Rev. Plummer. All right.
    Mr. Upton. That is not the argument. I supported must 
carry. Some on this committee, by the way, didn't and still 
don't.
    Rev. Plummer. All right.
    Mr. Upton. That will be in debate another day.
    Rev. Plummer. I believe--first of all, there was a study 
done by the Black Enterprise Group that said 80 percent of 
African-Americans support black media, whether print, radio, or 
television. In the markets that my networks are in, we are a 
household name. People actually send us hundreds of thousands 
of dollars over and above their cable fees. That is consistent 
throughout America when it comes to religious broadcasters 
specifically.
    There has been billions of dollars that Americans have sent 
to ministries, have sent to religious broadcasters, over and 
above their cable fee, in order to get that programming or at 
least keep it on the air, whether they buy programming from a 
network or whether they actually have access through must 
carry. I personally believe that religious networks, minority 
networks, could survive in a properly designed a la carte 
system.
    And so I think that we are using some loose definition of 
what a la carte system means. Whether it is pure or, you know, 
a mandated type of a system, I think that if there was indeed a 
basic tier, which I think everyone understands that that makes 
sense, over and above that, yes, I do believe that there would 
be networks like mine and others who would survive.
    Mr. Upton. Mr. Deal's time is rapidly expiring.
    It was the answer, not the question.
    We will have another--a second round.
    Let us see, Mr. Stupak?
    Mr. Stupak. Thank you, Mr. Chairman.
    Let me ask this question of everyone on the panel. And if 
you would, just give me a yes or no answer, so we can get a 
couple questions in during my 5 minutes.
    Should consumers be allowed to know how much they pay for 
each channel, like the cost of ESPN versus the cost of Disney 
or the Comedy Channel? Let us start with Mr. Kimmelman.
    Mr. Kimmelman. Absolutely.
    Mr. Liggins. I don't think so.
    Mr. Stupak. You don't think so?
    Mr. Liggins. No.
    Mr. Stupak. Okay.
    Mr. Hooks. Okay.
    Mr. Pyne. No.
    Mr. Stupak. No?
    Rev. Plummer. Yes.
    Mr. Baxter. No.
    Mr. FitzPatrick. No.
    Ms. LaRue. Absolutely.
    Mr. Stupak. I guess it is a tie vote.
    Those who said no, why shouldn't consumers have right to 
know? Mr. Liggins?
    Mr. Liggins. I personally think that the commercial terms 
between entities, whether they be companies or employees, are--
should have some strict confidentiality, unless, of course, 
there is some, you know, sort of, you know, public good to it. 
But what I pay my secretary is nobody's business and----
    Mr. Stupak. Well, we are not asking what you pay your 
secretary. But if ESPN is costing me two bucks, and Disney is 
costing me a buck----
    Mr. Liggins. I understand. But at the end of the day, what 
a cable operator pays my company to provide programming, I 
don't want my competitor to know that. I don't want anybody to 
know that. I have to negotiate.
    Let us say I have a better deal with one cable operator 
than the other. I certainly wouldn't want that out in the open, 
so they could negotiate against me. I wouldn't want, you know, 
the terms of a contract that I have with a high profile 
personality, so my competitor can come and offer them more 
money. You know, so that stuff actually, I believe, makes cost 
of--the cost of doing business go considerably higher, which 
will always ultimately get passed on to the consumer.
    Mr. Stupak. Well, wouldn't the cost of business be how many 
subscribers you have versus non-subscribers?
    Mr. Liggins. I am sorry?
    Mr. Stupak. I mean, isn't the cost that you charge people, 
isn't that based upon how many subscribers you have?
    Mr. Liggins. No. Well, a couple things. One, the cost of 
doing business--what we charge a subscriber, what we charge a 
cable operator has everything to do with what it costs us to 
run our business. We have to pay for programming, and one of 
the things I----
    Mr. Stupak. So whatever it costs to run your business, you 
have got to pass that on to the consumer, don't you?
    Mr. Liggins. Well, Mr. Baxter is trying to keep, you know, 
rates down to consumers, so his job is to get the lowest 
possible rate for me. My job is to try to get the best possible 
rate from him. He usually wins, you know, and so----
    Mr. Stupak. Sure.
    Mr. Liggins. [continuing] you know, that----
    Mr. Stupak. But in the ultimate plan, it is the consumer 
that pays, no matter who wins or loses. The consumer has to pay 
for that, whatever service they have, right?
    Mr. Liggins. Ultimately, in a free market economy, yes, the 
consumer--prices that people charge are dictated by the demand 
that the consumer has in the marketplace.
    Mr. Stupak. Do you believe--I am not picking on you. We are 
just having----
    Mr. Liggins. Sure.
    Mr. Stupak. [continuing] a good discussion here. Do you 
believe the rural areas pay more than urban areas?
    Mr. Liggins. I don't know the answer to that question. I am 
not versed enough.
    Mr. Stupak. Does anyone want to try that one? Mr. Hooks?
    Mr. Hooks. Yes, I will tell you they do.
    Mr. Stupak. They do?
    Mr. Hooks. Yes. In fact, rural customers subsidize the 
customers in the urban areas. It is just a fact.
    Mr. Stupak. Mr. Pyne?
    Mr. Pyne. I am sorry. If I may add----
    Mr. Stupak. Sure.
    Mr. Pyne. [continuing] I think here within the small--as 
Mr. Hooks will know, within the small rural--there are a 
thousand small rural operators around the country, there is 
something known as the National Cable Television Cooperative. 
And part of the role of that organization is to represent its 
membership. I mean, it represents close to 8 million 
subscribers around the country, and it tries to negotiate deals 
on par with cable programmers, as with all of the other cable 
operators.
    I would just like to point out that ESPN recently was made 
public--was released publicly but negotiated a long-term deal 
with the cooperative. That actually--that contractually 
obligates ESPN to provide the same pricing as other cable 
operators in its size group. And, in fact, to date--I think 
this--again, public, it was in multi-channel news----
    Mr. Stupak. Well----
    Mr. Pyne. [continuing] 95 percent of the members have 
already signed up for----
    Mr. Stupak. If it is the same pricing, why shouldn't 
consumers then know how much we are paying for ESPN versus 
Disney?
    Mr. Pyne. Well, I think the--just like--in our opinion, 
just like other commercial relationships, whether it is in the 
supermarket business or other retail outlets, the commercial 
negotiations that go on between the entities are generally 
private. We would like to preserve that privacy.
    In addition, I think there are many other factors that go 
into the pricing, such as local ad sales. All of our networks, 
except for Disney Channel, which is not ad supported, but our 
networks offer local time to the cable operators. Depending on 
the network, that is actually revenue back to the cable 
operator.
    Mr. Stupak. Mr. Chairman, if I may, can I just ask Mr. 
Kimmelman--mention why consumers should know the price, since 
he represents the consumers here, and then finish it up with 
that. Thanks.
    Mr. Kimmelman. Well, thank you, sir. We are being told, 
``Trust us. We package the programming for you. We help you 
with the choice.'' I am just now being told cable operators try 
to keep prices down for consumers. I haven't seen that with 
them skyrocketing five times inflation.
    If we are not going to regulate, the least we need is some 
transparency in the marketplace, so there can be marketplace 
pressures among the players. How much more value is there in 
ESPN programming versus network programming versus TV One? I 
mean, these are things--people aren't being given the option of 
picking the individual channel. Maybe they should know 
something about what the component parts are and why.
    And out of the $75 billion invested, how much is being paid 
for by their $50 a month cable modem service on top of their 
$50 a month expanded basic fee, etcetera, etcetera? It is not 
like Penn State Football, because there it is football fans who 
decide they want to go to the games. And there is some 
governance board for Penn State University that hopefully has 
some openness.
    This is people who don't want to watch football having to 
pay for it, or people who don't want to watch offensive 
programming having to pay for it. That is the difference.
    Mr. Stupak. Well, I can't figure out why anyone would want 
to watch Penn State Football anyway, so----
    Mr. Upton. As a Wolverine fan, we are looking forward to 
watching Penn State Football.
    And next year, too.
    Mr. Shimkus?
    Mr. Shimkus. Thank you, Mr. Chairman. This is a very 
interesting hearing, and I appreciate your calling it. I do 
appreciate my friend Nathan for pushing this issue.
    I want to read a couple of companies here. We have got TV 
One, Radio One, TBS, Cartoon Network, CNN, Time for Kids, 
Looney Tunes, Kids WB, Hanna-Barbera, Touchstone Pictures, 
NASCAR, ESPN, Hallmark, Disney. A lot of this issue deals with 
smut and pornography and issues that, you know, we are--just 
kind of have concerns with.
    I would like for you all--and, really, I think there is 
three of you represented in this whole list. Today we rolled 
out kids.us again. All of you ought to have a site on the 
kids.us website. There is no reason CNN should not have a 
CNN.kids.us. There is no reason that Touchstone Pictures should 
not have touchstonepictures.
kids.us. Likewise, ESPN. Come talk to me. We need to make this 
happen.
    I do--Viacom has been the whipping boy in this committee 
for a long time, and I have been one of the ones doing the 
whipping. But I have to tell you that today they have put up on 
the kids.us site nickjr.kids.us and nick.kids.us. That joins 
abc.kids.us, that joins smithsonian.kids.us, and the like. So 
if you want a child-safe site for kids on the internet with no 
hyperlinks, no instant messaging, no chat rooms, no hyperlinks, 
which are all the things that we know that are being used to go 
after our young children, the kids.us site is the place to be.
    And I am the unofficial spokesman and marketeer for them, 
and I am doing that job. Yes, sir.
    Mr. Baxter. Congressman, speaking for Time Warner, we will 
look into that. It sounds like a very good idea. And I just 
want to make a--just a quick statement to kind of respond to 
Congressman Deal.
    We are all parents here, you know, and there are things on 
television I don't like either. But, you know, what I do is I 
block out the channels or I block out the programming. And the 
cable industry has made it very clear, has advertised the heck 
out of the idea, we will give you a box, we will give you all 
the tools you need today to block out programming that you find 
offensive.
    And we think that is a good idea. We are not doing this as 
a PR gesture, because, you know, for the 28,000 people that 
work for Time Warner Cable in 27 states, we are all parents. We 
feel the same way you do. We share your concerns, and we are 
doing everything we can today to make sure that parents have 
those tools.
    Mr. Shimkus. If I can reclaim my time--and I think--let me 
ask just two--this revolves around a couple basic questions, 
because most of us--this is a pretty good hearing, because 
everyone is sitting around listening to your testimony, and we 
are listening to the questions and answers. And that is not 
always normal in Congressional hearings.
    Can an individual today, an individual in their home, block 
out channels that they don't want to receive on their cable TV 
system? And let us--yes or no, if you can. Mr. Kimmelman?
    Mr. Kimmelman. With great difficulty, if the cable company 
will cooperate, and you still have to pay for the programming 
that you didn't want to get.
    Mr. Shimkus. Yes. But that makes an assumption, and I am 
going to get to the second question. And I will--so the answer 
is yes.
    Mr. Kimmelman. It is not clearly yes, sir, because I cannot 
go to a cable company in an analog cable system and know that 
they will do everything----
    Mr. Shimkus. Okay. I am running out of time.
    Mr. Kimmelman. [continuing] are suggesting.
    Mr. Shimkus. Mr. Liggins?
    Mr. Liggins. From what I understand in the industry, the 
industry offers that. I have never tried it.
    Mr. Shimkus. Okay. Let us try it, and we will find out.
    Mr. Hooks?
    Mr. Hooks. Yes.
    Mr. Shimkus. Thank you.
    Mr. Pyne?
    Mr. Pyne. Yes.
    Mr. Shimkus. Mr. Plummer?
    Rev. Plummer. Only if they know how to.
    Mr. Shimkus. Who?
    Rev. Plummer. The consumer.
    Mr. Shimkus. Yes. I mean, I think there is----
    Rev. Plummer. But yes. Technically, yes.
    Mr. Shimkus. Okay. Thank you.
    Mr. Baxter?
    Mr. Baxter. Absolutely.
    Mr. Shimkus. Mr. FitzPatrick?
    Mr. FitzPatrick. Absolutely. And I would also say, 
Congressman, that with respect to this issue of educating 
parents and kids, we are supporting this initiative of the 
industry. We run spots on the Hallmark Channel, but we also 
have established a link to Hallmark.com.
    Mr. Shimkus. Okay. I am running out of time. Kids.us, 
remember that, Hallmark.kids.us.
    Mr. FitzPatrick. Yes, Hallmark.com.
    Mr. Shimkus. Ms. LaRue?
    Ms. LaRue. Yes, thank you. I would love to respond to that. 
And I would analogize to this----
    Mr. Shimkus. Don't analogize. Yes or no.
    Ms. LaRue. Well, I am not a provider. I can't tell you 
whether they are blocking something.
    Mr. Shimkus. Well, you have just heard 1, 2, 3, 4, 5, 6, 7 
people who are experts in the industry say yes.
    Ms. LaRue. That they can block it.
    Mr. Shimkus. That the individuals can block their channels.
    Ms. LaRue. My response is this. If I go into a restaurant 
this afternoon, and my meal is unacceptable and I complain, and 
they tell me, ``Well, we will bring you a trash can with your 
bill''----
    Mr. Shimkus. Well, no, wait.
    Ms. LaRue. [continuing] I wouldn't find that----
    Mr. Shimkus. That is not the question.
    Ms. LaRue. Wait, wait. I wouldn't find that acceptable.
    Mr. Shimkus. I am on your side.
    Ms. LaRue. And----
    Mr. Shimkus. I have got a good record with you all. I am 
a----
    Ms. LaRue. One more----
    Mr. Shimkus. I am a religious----
    Ms. LaRue. One more.
    Mr. Shimkus. But you just heard all these people say that 
the individual consumer can block out a channel if they don't 
want----
    Ms. LaRue. And consumers aren't satisfied with that. That 
is my point.
    Mr. Shimkus. Wait, wait, wait. That is not the question. 
The question is: can the consumer block out the signal on the 
cable system in their home?
    Ms. LaRue. Even if they can, they are not satisfied with 
that.
    Mr. Shimkus. The other question, Mr. Chairman, that I would 
like to ask--I don't have time--is, we are making the 
assumption that if the--if a la carte goes through, that it is 
going to be cheaper to receive the channels that you want. That 
is the assumption that I think I hear. I don't have enough 
time. Maybe someone else can ask that.
    Mr. Chairman, thank you for the time.
    Mr. Upton. Mr. Rush?
    Mr. Rush. Thank you, Mr. Chairman.
    I want to ask Mr. Liggins and also Reverend Plummer this 
question. I am going to be pretty clear here. I am one member 
of this committee. All right? And when I got on this committee, 
I got on for the purpose of increasing ownership, 
telecommunications ownership, for minorities, and also to 
provide better and more quality, family oriented programming 
for minorities.
    And my question simply is: will a la carte help me or 
hinder me in this pursuit? You know, and that is my question.
    Mr. Liggins. I would like to answer that. And the answer is 
no, and the reason is pretty simple. Hallmark Channel has 62 
million homes today. They get paid for those 62 million homes. 
I have got 4 million homes today. However, if I go to buy 
programming from a Hollywood studio, or if I go to producers or 
writers to produce it, they don't distinguish between what they 
charge Hallmark at 62 million households or TV One at 4 million 
households.
    It costs the same amount of money whether my audience is 
larger or whether it is smaller. And for us, we launched TV One 
because African-Americans, basically 13 percent of the U.S. 
population, has had basically one channel for 25 years, which 
we thought was a crime.
    But they don't just need a second channel. They need a 
second channel of high quality content that serves a segment of 
that audience that isn't being served, and for us that is the 
over 30 African-American audience. And we are going to--we skew 
the network female.
    So the quality level for us has to be such that people will 
look at this channel as something that is answering a need that 
they haven't had before. And if the quality level isn't there, 
then, you know, people will react negatively to it, and we 
won't achieve diversity of programming, diversity in zone 
ownership.
    And in a la carte, you just--if you got 100 percent of 
every African-American television household, that is 13.5 
million households, that is a losing network, that is a losing 
network in--for advertisers, that is a losing network if you 
actually get paid for every last one of those households, 
unless you are getting paid 30 cents, 50 cents, a dollar. You 
know, our channel is probably charging, you know, 10 cents, 
because the other homes that aren't African-American are 
subsidizing it.
    Mr. Rush. Reverend Plummer?
    Rev. Plummer. Yes, I would respectfully disagree with Mr. 
Liggins' premise. First of all, the African-American population 
is about 12 percent of the whole country. And yet blacks make 
up almost a quarter of the whole cable viewership in America. 
Twenty-three percent I think is the number.
    HBO--African-Americans make up 33 percent of the revenue of 
HBO, $100 million a month African-Americans are paying HBO. And 
so I think the discussion of a la carte and the whole issue of, 
if there were, you know, African-American or family friendly or 
other type of networks that were available to the African-
American community, since that is the focus of your question, I 
am absolutely convinced that there would--they would be 
channels of choice. They would be channels of choice for that 
community. And not only African-Americans, I mean, my network 
is predominantly--it features predominantly African-Americans.
    Cox Cable in Baton Rouge gave us analog channel 20 carriage 
just recently, which is unusual in the cable industry. I think 
everybody at the table would agree with that, in this day and 
age, for a new network to come to fruition.
    In Baton Rouge, our viewership among whites are even larger 
than the viewership among blacks. And yet we feature the 
largest majority of African-Americans on our network. We have 
become one of the most popular channels in the whole Baton 
Rouge DMA--the Cox system. And so I am saying that, if provided 
a choice, I believe that America would choose some of these 
other networks.
    The challenge for us as programmers is to be compelling, to 
be relevant in our programming, and so I applaud the committee 
for continuing this discussion. I at least encourage you to 
continue the discussion, and don't just throw this away, you 
know, out of pocket.
    Mr. Rush. Mr. Chairman, if I have got a little time left, I 
just want to switch to Mr. Hooks.
    Mr. Hooks, can you explain to me your relationship with the 
National Cable Television Cooperative? And just as importantly, 
can you explain how this cooperative negotiates pricing on your 
behalf?
    Mr. Hooks. That is correct. I am on the board of the 
National Cable Television Cooperative as well. Yes, smaller 
operators--probably 99 percent of all smaller operators with 
small systems--obtain their programming through the co-op. It 
is a way to consolidate larger numbers, put them together and 
get better pricing.
    But I want to be clear that, as a co-op and being on the 
board, we are not satisfied on the total universe that we have 
equal and fair treatment. And I think we have reasonable 
evidence of that. I just can't divulge that to you, so--but 
just in response to Mr. Pyne that that is correct, when he 
mentioned the end arrangement that we just went through, and we 
are very thankful for that. But I would ask, is he going to 
step up on the rest of his programming and divulge how that 
fits with the rest of the larger operators versus us as well.
    Mr. Upton. Mr. Walden?
    Mr. Walden. Thank you, Mr. Chairman. I want to thank you 
for scheduling this hearing as well. I find the issues quite 
fascinating, and I hope we continue to pursue them.
    Mr. Hooks, Mr. Pyne I believe referenced the co-op 
negotiation that you all belong to and engage in. How many 
members again are in--how many viewers are in that co-op?
    Mr. Hooks. Yes. Let me explain something to you all, so you 
understand the infrastructure of the co-op. The co-op allows 
you to pick and choose what you want to buy, so what happens 
here, we are not as powerful as one company. And the reason we 
are not is every company has a little bit of different lineup. 
So we actually represent 14 million customers.
    Mr. Walden. Fourteen million.
    Mr. Hooks. Yes. But about 6 million of those customers 
represent buying one or two products from the co-op. So a lot 
of times the reason we say 8 million, when you take the top 50 
channels, typically we are representing about 8 million 
customers that are probably buying 75--60, 75 percent of all of 
the top 50 programs.
    Mr. Walden. All right. And, Mr. Liggins, didn't you say 
that a network that has 13 million subscribers couldn't exist 
today? Basically, financially, it would be very hard?
    Mr. Liggins. A network--unless it has got an enormous 
license fee. A network that had 13 million subscribers that, 
you know, had $2.50--provided their programming costs were 
reasonable--could survive. A network like ours could not, and 
most startup networks targeted toward----
    Mr. Walden. Maybe I am mixing apples and oranges, but it 
seems to me that on one hand we argue that the co-op has great 
bargaining power with 6 to 8 million viewers, and that you are 
arguing 13 million viewers isn't enough to sustain a network. 
So how much bargaining power do you think that co-op really 
has, then?
    Mr. Hooks. We question it.
    Mr. Walden. Not enough, from your perspective.
    Mr. Hooks. No. No, sir.
    Mr. Walden. I am sure Mr. Pyne probably believes he has had 
his arm twisted off.
    Mr. FitzPatrick. Could I just maybe help on this?
    Mr. Walden. Yes.
    Mr. FitzPatrick. I think there is a difference between the 
number of subscribers that the membership systems have within 
the NCTC versus the number of viewers that are measured for 
purposes of ratings in advertising dollars. And so someone 
might have 13 million members, but you might have a rating 
point of .1.
    Mr. Walden. Right.
    Mr. FitzPatrick. Do the math. You don't get many ad 
dollars.
    Mr. Walden. Right.
    Mr. FitzPatrick. If that is helpful----
    Mr. Walden. No. I understand they are a little different 
equation, but, still, if I am the network negotiating this, I 
am also looking for eyeballs out there, because that is what my 
advertisers are looking for. Correct, Mr. Pyne? I mean----
    Mr. Pyne. That certainly is correct.
    Mr. Walden. So, I mean, you must--when you negotiate these 
agreements with others, what--give me a range of the size of 
companies you reach agreements with in terms of subscribers.
    Mr. Pyne. Well, I mean, we pride ourselves in talking 
with--or negotiating with companies ranging--in fact, in the 
last retransmission consent round we had a company that was 20 
subscribers all the way up to----
    Mr. Walden. They had a lot of leverage.
    Mr. Pyne. [continuing] all the way up to 22 million, which 
is the current size of Comcast.
    Mr. Walden. All right.
    Mr. Pyne. So we do--we----
    Mr. Walden. From 20 to 22 million.
    Mr. Pyne. Twenty to 22 million.
    Mr. FitzPatrick. But that doesn't necessarily mean you get 
all of 22 million.
    Mr. Walden. I understand.
    Mr. Pyne. In the total universe, just to--for reference of 
this, cable and satellite is 91 million homes in the United 
States.
    Mr. Walden. All right. Thank you. That helps.
    I guess what I hear about back home is I may like ESPN, but 
I have to buy all of these other things in the tier. And, you 
know, it looks like ESPN rates are going up, what, 20 percent a 
year or something. Is viewership keeping up with that?
    Mr. Pyne. Well, in terms of the recent--I mean, over the 
past years, it has been very public. The rate increases with 
ESPN have been higher. But interestingly, in the last 6 months, 
the company has worked with various cable operators, and they 
include Cox Communications, Charter Communications, 
Cablevision, and the NCTC, in reaching deals which actually 
will bring the price increases from the 20 percent that you 
referred to down to the single digits. And that is our effort 
to ameliorate the rate increases on the long term and work with 
our cable----
    Mr. Walden. How----
    Mr. Pyne. The ratings of ESPN have never been stronger. In 
fact----
    Mr. Walden. Okay.
    Mr. Pyne. [continuing] even though we have just entered 
into these long-term deals with lower license fees, the--I 
mean, lower increases, the ratings have never been stronger.
    Mr. Walden. The ratings have never been stronger. Have your 
ad rates continued to go up or down, or where are they in this 
mix? Because that has got to be the other part of your 
financial equation.
    Mr. Pyne. Well, that is absolutely correct. I mean, similar 
to ESPN is--relies, as do many cable programming networks, on a 
dual revenue stream.
    Mr. Walden. Right.
    Mr. Pyne. But, clearly, we are--I mean, our--obviously, if 
ratings go up, the ad--advertisers are willing to pay more. 
But, clearly, that is a market condition, because in a poor ad 
market or when the economy is not in great shape, that will--
you know, that will have an impact.
    Mr. Walden. Does ESPN, just itself, not with the other--
what else gets packaged with ESPN? Let me ask that first. What 
do you require one of these folks to take if they get ESPN?
    Mr. Pyne. ESPN--if a cable customer--if a cable provider 
only wants ESPN, they just have to take ESPN. There is that 
option. Now, there are pricing incentives to----
    Mr. Walden. To take other programs.
    Mr. Pyne. [continuing] a broader package. But--and, in 
fact, in the other--the entertainment side of the Walt Disney 
Company today, a cable provider can, in fact, take any one of 
the networks that it chooses and----
    Mr. Walden. So an a la carte--you basically have a la 
carte, then?
    Mr. Pyne. No, no, no. In doing a deal----
    Mr. Walden. At the wholesale level?
    Mr. Pyne. At the wholesale level, a company can decide to 
carry ABC Family----
    Mr. Walden. Right.
    Mr. Pyne. [continuing] and not SoapNet or--and, in fact, if 
you look at the Nielsen numbers, ABC Family is in 88 million 
homes across the United States. Disney Channel is only in 84 
million homes.
    Mr. Walden. All right. Mr. Hooks, do you want to comment 
on, from your perspective, how this works?
    Mr. Hooks. One, I am glad to hear ESPN is doing so well now 
that they lowered their forecasted increases for the next 5 
years. So that is interesting. There seems to be some 
flexibility and improved viewership by doing it.
    You know, I mean, we certainly put pressure on ESPN 
starting about a year ago on their phenomenal increases, and I 
appreciate the political environment I think for bringing 
attention to it. And I appreciate ESPN for addressing it and 
reanalyzing their business plan and adjusting it accordingly.
    But I still stand strong. I mean, the big five have a lot 
of programs they own. And you have heard some of the niche 
programming, the way they are getting on is getting through big 
companies. And I still want to point out that we are trying to 
provide the most product we can to our consumer, and that 
typically runs you down the road of falling into the package 
process. So we don't have much--go ahead. I am sorry.
    Mr. Walden. I am going to have to cut you off.
    Reverend Plummer, I just have one quick question for you. 
You said Comcast had tried to get an equity interest in your 
company, and you declined. Have any of the other operators 
tried to do the same thing?
    Rev. Plummer. No, I haven't had that discussion. 
Interesting, what I discovered during those whole discussion 
periods, which even included this year, I was told--first of 
all, kind of the platform is that each one of these major cable 
operators do not compete against each other in the various 
markets. And so they are really not direct competitors.
    And what I was told is that, you know, once there is a 
relationship with one of the major cable operators that the 
other cable operators would pretty much fall in line and begin 
to give carriage.
    Now, Mr. Liggins could probably speak more to whether or 
not that is factual or not, but, you know, what I was told was 
that once there is an equity relationship with one of the major 
MSOs, that at that point you are on a different scale and a 
different level, and your discussions and negotiations with the 
others are a whole lot easier, and you are a whole lot 
different.
    Mr. Walden. I would love to ask Mr. Liggins, but I am out 
of time.
    Mr. Upton. Mr. Gonzalez?
    Mr. Gonzalez. Thank you very much, Mr. Chairman.
    When we started off the discussion, there were some 
observations, and we always use comparison and analogies. And 
as we go through this, because I think it is really going to be 
a matter of philosophies and the proper role of Congress, we 
talk about regulation, the cable industry, free enterprise, 
level playing fields, market forces, the reality is we have a 
whole lot to say where that all goes, and whether there really 
is a level playing field, whether there is really going to be 
competition.
    We have had people allude to Penn State Football basically 
subsidizing swimming and everything else. Those big football 
programs and everything weren't subsidizing boxing, swimming, 
and everything else. It was women's sports as a result of Title 
IX, as a result of regulation, as a result of legislation, that 
recognize the unequal treatment of women in that particular 
environment.
    And then it was because of that regulation, its 
application, interpretation by the courts, and mandates that 
resulted in all of that--now, I am not saying that is where we 
are all heading in this thing. But eventually we will if we 
don't resolve some of the problems.
    We all agree that there is something wrong with the system. 
The patient is ill. Someone started with let us go ahead with 
the old axiom in the medical profession, ``First, do no harm.'' 
The problem with that is, if we are the physicians, we can also 
do some other things that the medical profession often does. We 
have found the cure. Unfortunately, it will kill you, and that 
is what we really need to avoid.
    And I sense that--we all say we are going to keep an open 
mind. My concern is, all right, let us fix the system. Let us 
make it a more fair system. Let us give consumers choices and 
such. But at what cost? And my question to all of you all--and 
it is a simple one--I have three--I will have about 3 minutes 
that you all can use.
    Whatever system we replace what we presently have--and I 
understand that where you have minority programming, startup 
programming, new programming, even the system we have that 
opens the door to that opportunity is not a good one, because 
the big players all end up owning a big share of it. I am not 
so sure that is fair. And then, maybe that is the cost of 
entry, and maybe we can improve on that.
    But whatever the substitute is, how does it promote and how 
does it accommodate new programming? Am I coming strictly from 
a minority standpoint? You know, Congressman Rush pointed out 
some real concerns that we share because of the communities 
that we represent, because if you put our two communities 
together here in the United States, it is substantial.
    So all I--my simple question to you is: your proposals, 
does it really promote, accommodate, and make things a lot 
easier when we are talking about this type of programming that 
I referred to? And we can start with Mr. Kimmelman.
    Mr. Kimmelman. I don't think there is any guarantees, Mr. 
Gonzalez, but I think that when the Reverend Plummer says that 
there is programming out there, there is audience there, it is 
not a number--how many people there are just in a population, 
13 million African-Americans, it is how many will actually take 
it. And if 13 million people--if half of 13 million people 
actually took something, it would be one of the most viewed 
networks in America.
    The door is closed today in the curtain system. You have 
got to blow it open. A la carte is one way. Changing the mind-
set of the advertising community, changing the mind-set of 
consumers that you could actually pick what you wanted, may 
create that opening an opportunity for new programmers, diverse 
sources from diverse communities.
    Mr. Gonzalez. Mr. Liggins?
    Mr. Liggins. I think that in order to facilitate more new 
niche programming that it--and for it to be successful, that 
niche programming has to be offered to the widest possible 
audience. If I had all 13.5 million African-American 
households, they are not just going to watch TV One. They are 
still going to watch ESPN. They are still going to watch 
Lifetime.
    And if I am going to be successful, I also need the non-
African-American viewers or households that might tune in to my 
channel. Probably about 20 to 40 percent of our audience is 
going to be non-African-American, and that contributes also to 
the success of the network. And so, therefore, what you can do, 
what the system can do, is continue to put, you know, pressure 
on us programmers to provide the programming, distributors to 
carry it, and make it widely available to people.
    Mr. Gonzalez. Mr. Hooks?
    Mr. Hooks. Yes. Generally, in the rural markets, the 
biggest problem we still have--and I want to keep emphasizing 
it--is retransmission and tying programming through the big 
five. And, consequently, I do not have much shelf space, and I 
can't always make the best decision because I, nor my customer, 
have control, really, for what is being delivered to their 
home.
    And, frankly, if I had more control, I wouldn't bundle all 
of the services I have. I would make available more room that 
then could open up slots for me to add specialty programming. 
And in my particular case, I really need to add Spanish 
programming. I have got a shortage of it. I am booked up with 
the big five, and it is hard to take things away from the 
consumer, as you can imagine, that they have already got. And 
so I just have very little flexibility, and I think it all 
comes back to retransmission and the tying of programming that 
they put on us.
    Mr. Gonzalez. And we will continue until the chairman tells 
me we have run out of time, which I know that we have.
    Thank you. I appreciate it. I would like to follow up at a 
later date one on one on your responses.
    Thank you, Mr. Chairman.
    Rev. Plummer. Mr. Chairman, I know the time is out, but if 
I may just briefly respond to the point. The cable industry's 
own CABLE World magazine, in the current issue right now, 
really affirms the benefits of--it is a whole article about 
Hispanics and Latino networks that they have bundled, and so 
this is something that they have voluntarily done. It has not 
been by regulation.
    My request would be, to Mr. Baxter and others, give us a 
chance. Just give us a chance, just like you are doing with the 
Hispanic networks. And so regulation wouldn't have to be 
necessary. Just give us the opportunity is all we are asking.
    Mr. Upton. Mr. Bass?
    Mr. Bass. Thank you, Mr. Chairman. I am going to spend 2 
minutes questioning, and I am going to yield 3 minutes to Mr. 
Deal. So I don't want people to go on long.
    Mr. Kimmelman--I am going to cut you off. Mr. Kimmelman, 
can you respond to Mr. FitzPatrick's contention from his 
testimony that advertising supporting networks such as Hallmark 
Channel depend on broad and highly penetrated distribution. A 
la carte distribution would have stifled Hallmark Channel's 
growth and reversed its successes, and government mandated a la 
carte distribution, or mini tiers, will increase cost to 
consumers and decrease diversity.
    Mr. Kimmelman. I respectfully disagree, because we are 
talking about a la carte in conjunction with other tiers that 
are available. So his Hallmark Channel could still be carried 
on tiers, and some people might want to buy it individually. 
And distribution is step one. You have to have eyeballs, he 
said it himself before. And when people watch, whether it is on 
a la carte or on a tier, advertisers will support it.
    Mr. Bass. Mr. Pyne, in your testimony, you note that the 
retransmission consent economic analysis concluded that your a 
la carte pricing for retransmission consent carriage of the ABC 
signal was found to be, in your own words, ``reasonable'' and 
within the bounds of the fair market value. If that is indeed 
the case and your ABC product is fairly priced and widely 
desired by consumers, why are you so concerned about offering 
consumers greater freedom in selecting their programs amongst 
your other products? Forty seconds.
    Mr. Pyne. Well, I think as I have stated--if I just may 
clarify that ABC always makes a stand-alone cash offer. So 
there is no obligation to have any other programming that we 
make available. In terms of the other question, as I think I 
pointed out, I mean, we make available each of the programs to 
the cable providers on an individual basis to decide. In other 
words, if someone--and we have one provider out there who only 
carries ABC Family and SoapNet, and there is nothing that--I 
mean, that--we allow that to happen.
    Clearly, we believe our programming has tremendous value. 
Certainly, Disney Channel is one of the highest-rated networks 
out there, and we work very hard to make----
    Mr. Bass. So you are saying that stations--that the 
customers can select from any of your other products?
    Mr. Pyne. The cable providers, in terms of the commercial 
negotiation, can make that determination.
    Mr. Bass. I see.
    Mr. Pyne. Our goal is certainly to get the broadest 
distribution possible.
    Mr. Bass. Mr. Deal?
    Mr. Deal. Thank you for yielding.
    Mr. Chairman, I would, first of all, like to ask unanimous 
consent to insert in the record a variety of letters and 
reports, some of which have been referred to by Mr. Markey, 
some by other members of the committee, and I have them here in 
a package. I won't try to enumerate them right now.
    Mr. Upton. Without objection.


    
    
    Mr. Deal. Thank you.
    Let me tell you something that is coming out in this 
hearing that causes me grave concern. If we are interested in 
niche markets, if we are--if we are interested in the issue of 
availability of new people to get into the system, it appears 
to me that the comment of incestuous relationships, it should 
be of major concern.
    We have heard the fact that if you are going to get in now, 
you are going to have to let one of the big boys buy into you. 
Witness, 39 percent ownership by Comcast in your program, Mr. 
Liggins.
    Let me tell you something that concerns me from an overall 
statistical standpoint, and this is one of the reports that is 
in the things I have admitted. The Center for Creative Voices 
points this out. The five giant media conglomerates, two of 
whom are here today, control approximately a 75 percent share 
of broadcast and cable primetime viewing.
    Of the 91 major cable television networks, each providing 
more than 16 million homes, they--on more than 80 percent--are 
owned or co-owned by just six media glomerates, the same five 
giant media conglomerates plus Liberty Media, which owns an 
interest in Mr. FitzPatrick's station.
    They then say these five giant media conglomerates also are 
controlling the new programming that is coming into the system. 
Of the 40 new series aired in 2002, 77.5 percent were either 
owned in whole or in part by the same four networks, up from 
56.3 percent the prior season, a 37 percent increase in 1 year, 
and up from just 12.5 percent in 1990, from 12.5 percent in 
1990 to 77.5 percent in 2002. We see these big fellows getting 
more and more control over everything.
    Now, the question was asked: do we have to create new laws 
to solve this problem? I submit we don't. All somebody has to 
do, either by way of legislation or by court interpretation, is 
to simply say that television programming is a commodity or a 
service under the auspices of our current antitrust laws, just 
like other commodities and services are.
    And we would not even be engaged in a debate about trying 
to prop up things that people don't want, and the reason we are 
trying to prop them up and make people pay for things they 
don't want, we won't even tell them how much they are paying 
for the things they don't want. Now, is the logic and common 
sense of that?
    Mr. Baxter, I appreciate the fact that the cable industry 
has said, ``We will provide you with a box, and we will block 
the programming you don't want.'' You know what the irony of 
that is? And you do it at no cost. The irony of that is your 
argument for why we couldn't let people select in the first 
place is because the cost of the box to let them select was 
prohibitively high.
    I have a hard time in common sense saying that it costs too 
much to let you select on the front end, but we will let you 
select out on the other end with a box that doesn't cost you 
anything.
    Now, let us go back to one of my other major concerns. And 
I apologize, it is hard for a southerner to talk this fast, and 
I don't mean to sound----
    I don't mean to sound like I am being inconsiderate or rude 
to any of you, but time constraints are important.
    Let me tell you about one of my other concerns. Mr. Pyne, 
you suggest to us that, if we really want to deal with this 
thing, we just need a new definition of indecency. I would ask 
you, if we had a new definition of indecency, would you include 
the Gay and Lesbian Channel, Undressed, Striperella, FX, Spike 
TV, in what would be an expanded basic program channel? Would 
they meet whatever definition you want to write for an expanded 
basic channel?
    Mr. Pyne. I mean, I am personally not suggesting writing 
the indecency standards. I mean, currently today the--our Kids 
Business--and, clearly, Disney and ABC Family has a major 
interest in quality programming for children--but, in fact, the 
Kids Business that we have on the cable networks have the exact 
same standards as the broadcast networks. I mean, that is just 
a matter of the current FCC----
    Mr. Deal. Wouldn't you----
    Mr. Pyne. In addition, if I just may add one thing, I mean, 
my understanding is for--I mean, Sex and the City was--it was a 
popular show on HBO. When it is appearing on TBS, there will be 
a different version of it.
    Mr. Deal. Yes. So you would have a hard time justifying, 
under any acceptable new standard of the definition of 
indecency, that those would meet that kind of criteria, and yet 
they are already in that expanded basic programming. Now, what 
I find inconsistent is this free market system, this business 
of choice of people in our society, the best determiners of 
what is indecent are the people who are having to pay for 
something.
    You know, what you think is indecent and what we may define 
as indecent may not meet their definition of indecent. We have 
the opportunity, with just a little bit of tweaking and 
cooperation from the participants here, to be able to say to 
the consumer, just like the Supreme Court Justice said when he 
asked, ``What is pornography?'' I know it when I see it. Let 
them decide what they want to see. Let them be the ultimate 
people who make those choices.
    Now, I appreciate the arguments of economy of scale. I 
think there are legitimate arguments about that. I would simply 
suggest to the industry, if you don't want something to happen 
in the nature of across-the-board antitrust constraints, the 
industry is going to have to do some things. Nobody is 
objecting. Nobody is saying it is a mandatory a la carte. We 
are simply saying, ``Give better choices out there. If you are 
going to tier things, make them more friendly and compatible.''
    You are not going to find anybody coming here and 
justifying the existence of any of these racier channels. That 
is why they are not on the panel today. They wouldn't dare 
darken the door of this committee and try to justify their 
existence on an expanded basic channel, and they are only there 
because some of you folks put them there. They hide behind the 
secrecy of the system, and that is simply not right.
    The history of the American public is they will only 
tolerate that so long. I think we are approaching that point. I 
hope the industry will respond with some better solutions on 
its own. We don't need to legislate on this issue. We need for 
you to help us solve the problem.
    And I would simply say one thing. If you want an expanded 
basic channel, why don't you make it like somebody who orders a 
combination meal at one of the restaurants around here? He gets 
to select three out of five choices for his sides. We don't get 
any choices like that.
    If you did that, you would then open up more opportunities 
for new channels like Reverend Plummer is talking about. You 
would then open up more opportunities for Hispanic channels, 
because now they are being denied, because, as Mr. Hooks says, 
just the space is just simply not there.
    Mr. Chairman, you have been most kind----
    Mr. Upton. I have been.
    Mr. Deal. [continuing] and lenient.
    And I thank you. And I thank--once again, I thank the 
members of the panel, and I thank all of my colleagues for 
their participation.
    Mr. Upton. Mr. Engel?
    Mr. Engel. Thank you, Mr. Chairman. A lot of the questions 
have been asked, and I am not sure there are more to be asked. 
But I want to just throw a few things out, and perhaps some of 
the panelists can answer.
    When I first heard about a la carte, I thought it was a 
really great idea. You know, I also have experience having--
being a consumer, where you hear constituents say to you, you 
know, there are 80 channels on TV and nothing to watch. People 
feel that all of these channels are--they are not interested in 
it, so wouldn't it be great if we could pick and choose and 
just do that.
    But the more I looked into it, I found that it wasn't as 
easy as that, because people in the industry are saying, I 
think this is what they are saying, that if we were to go to a 
la carte people would have less channels, would wind up with 
less channels, and the cost would be greater.
    So, of course, if we ask the public, do you want to pick 
and choose, everyone will say yes, because it is done on the 
premise that, well, if I am paying $50 a month for, I don't 
know, 50 channels, if I only get 20 channels, then I will be 
paying $20 a month. But, of course, it doesn't work that way. 
And so, to me, it is really a balancing.
    Now, I have a letter here from the borough president of my 
home county, the Bronx in New York City, where he is--he writes 
a letter to Chairman Powell against the a la carte system. And 
what he is saying, essentially, that by bundling the programs 
you do have lots of channels for minorities, for African-
Americans, for Latinos, and that if you had a la carte his big 
fear is that that would change and you would see a lot of these 
stations fall off.
    [The letter follows:]

    
    
    Mr. Engel. I know in the testimony that I have heard today 
you have people who advocate it, say that won't be the--won't 
happen, and others say it might.
    Mr. Liggins, I wanted to ask you, because you have a 
startup channel and you are in a position, I wanted to ask you 
about the cost. How much did it cost for your channel to get 
going? And what have you had to do to get people to be aware of 
and watch your channel and ask you about profits, if you are 
making profits, and, if not, now when would you expect to, 
because I think you are probably someone that the borough 
president is worried about.
    Mr. Liggins. We are in a unique situation in that we also 
own a platform of radio stations, about 13 million listeners. 
And so we utilize that platform to get people--make people 
aware of the channel. But even with that formidable marketing 
machine, we still have to operate the channel economically in a 
manner that provides acceptable programming quality-wise.
    And for us, that is probably about $30 million a year over 
a 4 or 4\1/2\ year period. You know, call it $130 million. And 
we won't break even until the end of that 4 to 4\1/2\ year 
period. That is when we stop losing money. So hopefully the 
next 4 to 4\1/2\ years is the time period in which we begin 
making money.
    If we had--if we didn't have those radio stations, and we 
had to market that on our own, you could easily add, I believe, 
another $10 million a year. So another $40 million a year. So 
$170 or $180 million for a startup network, which is very, 
very, very difficult for anybody to pull off, particularly 
somebody who is a real startup small entrepreneur. And I think 
in an a la carte world with less subs to go after, it makes it 
even more difficult, not easier.
    Mr. Engel. So banding together, you know, to have a 
marketable package, is something that would help--or that 
helps, if stations would be alone in a la carte, that would 
make it more difficult to have startup channels, if these 
channels wouldn't be distributed.
    Mr. Liggins. Absolutely. Because hopefully when I cut my 
deal with Cox Communications, I am not only going to get New 
Orleans, I am going to get San Diego. San Diego has got an 8-
percent African-American population. New Orleans has a 40 
percent African-American population. I will get paid for subs 
or households in both of those areas, which helps me offset the 
$130 million.
    Mr. Engel. Thank you.
    Mr. FitzPatrick. Congressman, could I just give----
    Mr. Engel. Yes, absolutely.
    Mr. FitzPatrick. [continuing] the committee two quick 
personal experiences on the a la carte example, one with 
respect to the Golf Channel and the other with respect to 
Hallmark. When the Golf Channel was launched, it was launched a 
la carte. And after 1 year, the channel was in 600,000 homes, 
going nowhere fast, $135 million investment. We weren't going 
to make it.
    We needed to be bundled in a highly penetrated package or 
packages. Today the Golf Channel is in 60 million homes, 
successful.
    The Hallmark Channel resided on a family tier on the 
DirecTV platform, 3\1/2\, 4 years ago, 500,000 to 750,000 
subscribers, out of then an 8.5 million subscriber base. Dead 
in the water. The tier comprised eight or nine services, some 
of which I believe were--comprised Disney services. We were 
going nowhere. That tier was going nowhere. No one was buying 
it.
    We had a choice: stay dead in the water or enter into a 
negotiation to get us into a highly penetrated package. We did 
that, and today we are in 11.5 million DirecTV homes versus 
700,000 homes 3\1/2\ years ago. The importance of being bundled 
or being packaged, of being in an environment where people can 
surf and find you, is absolutely critical.
    And the second point is this is not just about getting 
distribution scale. It is also about seeing your advertising 
ratings go up. Our ratings are now outpacing our distribution 
by three to one. Our distribution growth this year will grow 20 
percent. Our advertising revenues will grow 75 to 80 percent. 
That is because we have got scale, and that is because we are 
able to make investments in programming.
    And to the point that Mr. Liggins made earlier, and a darn 
good one, which is ultimately we are all competing with a 
limited amount of dollars to get programming or to make 
programming, but all things in time, he can't go out and 
acquire the kinds of programming that we can or make 
programming that we can today at 62 million homes. But we 
couldn't do that 4 years ago or 3 years ago. We were where he 
was. We needed scale to be able to get that kind of investment 
opportunity to go out and get good programming that our 
subscribers want and that the results are showing.
    And the last point, if I could--forgive me. The point about 
inflation, the prices of cable, I would ask the committee to 
think about the following. Now back to the newspaper analogy. 
When you buy the Sunday paper, whether it is The Washington 
Post, The Detroit News, The Los Angeles Times, The New York 
Times, Atlanta Constitution, that is more expensive than a 
daily paper. That might be 25 cents, 30 cents, 50 cents, 75 
cents as we just heard about USA Today.
    The Sunday papers are much more expensive. Why? Because 
they are bigger. Sometimes we can pull a muscle in our back 
picking up that newspaper on Sunday. The newspaper publisher is 
asking us to pay because they are giving us a lot more product. 
The cable industry has given the American people hundreds of 
more channels, high-speed access, video on demand, telephony, 
and many, many other services that did not exist 5 years ago. 
And I would ask the committee to think about that analogy.
    Thank you.
    Mr. Engel. Well, I wanted to just end--my time is up, but I 
want to just say, Mr. FitzPatrick, I think that you are 
pointing out that there are two sides to every coin. And I just 
think that it is not as cut and dry, as far as I am concerned, 
that a la carte would lower prices, and also, in terms of 
making it harder to--for new companies or new channels to 
flourish.
    Again, nothing is black and white. I think each panelist 
has made excellent points. But I think this is something to--
that we have to grapple with. And I thank you. I think it has 
been helpful.
    Mr. Upton. Mrs. Cubin?
    Mrs. Cubin. Thank you, Mr. Chairman. I, too, think that 
this is something that we have to grapple with. I came into 
this hearing opposed to a la carte. And I won't say that I have 
changed my mind, but I certainly have left a door open.
    Mr. Deal's questions and explanations have, you know, 
really caused me to be more or less on alert. I don't for 1 
minute think that if we go a la carte that the rates will be 
cheaper. You know, I think the high-cost channels will be--you 
know, the way bookkeeping goes, you can expense ESPN or Disney 
on--you know, on anything you want to.
    And so--and I think that is what would happen, because it 
seems to me that the five--the big five--it is kind of like 
Burger King advertisement, Have it Your Way. Only the big five 
is ordering, you know, Have it Your Way for Me, what I have to 
have. And I think we need to do something about this.
    I am going to just ask one question, and I would like any 
of you who would like to respond to do so, and then I will 
yield to Mr. Deal. Why is there a difference between the 
programming cost in large and small markets? Doesn't it cost 
the same to produce regardless of who views it?
    Because I am going to tell you something, this is where I 
am going to plant my feet and take a stand, because rural 
residents are always getting the short end of the stick, and 
they have, until--you know, until more people were elected to 
this Congress from rural areas than urban areas, and we are not 
going to stand for it. So anyone who wants to, please answer 
that question.
    Mr. Hooks. May I make one response? We are a growing 
company right now, and I am buying small systems from large 
companies, in the top five or six cable companies. And so the--
I mean, it doesn't cost them any more to deliver to me, so, I 
mean, I am just supporting the fact that I know my prices go 
up, I know I have less flexibility as far as tying and bundling 
that the major companies have, because I also have got to 
change my lineup, stuff like that.
    So I am just supporting it is a true fact--and I can 
witness that--that as I buy, you know, systems from larger 
companies I am basically facing changes that they are not faced 
with.
    Mr. Liggins. I just wanted to--I am not a cable operator, 
but I think there is a difference between small company and 
small community, because I know a lot of the large companies, 
like Cox and Adelphia, and even some charter systems, they are, 
you know, three very big MSOs, serve a lot of rural 
communities. And they actually get very good rates, and I am 
sure they pass those on to the consumers. So Mr. Hooks has a 
smaller company, and that is why he probably works with the 
cooperative versus necessarily small communities.
    And, plus, one of the best deals out there for multichannel 
distribution is in satellite. EchoStar, which competes with the 
cable operators vigorously, I think offers 60 channels for 
$29.95, which--again, I am not an operator--but I think it is 
one of the best deals that I have seen out there. And a lot of 
their customers are C&D counties and small rural communities.
    Mr. Hooks. May I just finish up by saying--maybe this will 
add some clarification, and I want to compliment Hallmark 
Channel for their success, because they got distribution 
without tying, bundling, and retransmission. My point is, that 
is the problem. That is where it is--is when you own a network 
and you start playing games on retransmission consent, and you 
start doing tying and bundling, that is where we get in 
trouble.
    And it shows proof when you look at Hallmark Channel. It is 
a very friendly company to the cable industry. They did it 
without doing all of that. So I still think the system works. 
There is just this one little glitch we have got.
    Mr. Baxter. I would just echo that, you know, Time Warner 
has, you know, tons of rural customers. And I think it would be 
a mistake just to kind of look at a big company. I mean, we 
operate in 27 states, and we have cable systems that have 1,000 
or 2,000 customers in them, and we have, you know, the 
Manhattan cable, which has over a million.
    So we are very diversified and diverse in the kind of 
communities we serve, so it is not all--even though we are the 
second largest cable operator, that doesn't mean we don't 
operate in all parts of the country, in all different parts of 
the country.
    Mrs. Cubin. Thank you. This is something we need to look 
further into, but I would like to yield my remaining time to 
Mr. Deal and ask unanimous consent to give him an extra 2 
minutes.
    Mr. Upton. Without objection.
    Mr. Deal. Thank you, Mr. Chairman. Thank the gentlelady for 
yielding.
    First of all, I would like to also ask unanimous consent to 
include in the material that I previously offered a filing made 
by the Broadband Service Providers with the FCC, and I thank 
Mr. Goodman for their willingness to step out and make a 
proposal.
    We have heard comments about, let us give some other things 
a try. Their proposal is to let us give voluntary a la carte a 
try. We need a venue in which to experiment with this other 
approach, and I commend them for their courage and willingness 
to make this filing. I hope that the big five will cooperate in 
allowing us to test the market in a voluntary a la carte 
fashion, and I would like to include that in the material.
    And one--promise, final concluding comment--Mr. 
FitzPatrick, I understand your newspaper analogy. But, you 
know, we have a saying in Georgia about the Atlanta Journal 
Constitution and I would suggest to you that if the Atlanta 
Journal Constitution did the written media version of 
Striperella, FX, and all of these others that we have alluded 
to, we wouldn't even wrap our fish in it anymore.
    Thank you, Mr. Chairman. I yield back to the gentlelady.
    Mr. FitzPatrick. Point well taken.
    Mr. Upton. Thank you both. And I think we are just about 
ready for a series of votes.
    Mr. Kimmelman, I have--maybe I will follow up on one 
question Mrs. Cubin asked, and, Mr. Baxter, I will direct it to 
you. And that is, she raised the question of setting perhaps 
higher rates in rural areas than in urban areas. Do you see 
that? Is that something that----
    Mr. Baxter. Well, I think the question is--I think there is 
a bandwidth of rates. Again, I am not on the programming side 
of it.
    Mr. Upton. Is that true? I mean, you said----
    Mr. Baxter. But I think--I mean, I think there are volume 
discounts. I don't think volume discounts are alien. That 
happens in this country, and there are volume discounts in 
other industries. And I think that is probably what is going on 
here.
    Mr. Upton. Are they significant rates? I mean, I--do you 
think 30 percent different----
    Mr. Baxter. No. I think the----
    Mr. Hooks. I got those numbers from our group at NCTC, so--
--
    Mr. Baxter. I would be--I am sure there are better people 
to comment on the size of the different----
    Mr. Upton. Mr. Pyne, would you be able to comment on that?
    Mr. Pyne. Well, I think, as I pointed out earlier, with the 
recent ESPN deal that was--that I mentioned, I mean, clearly we 
were taking into account that the National Cable Television 
Cooperative, which is the--in the sort of top five of cable 
companies, if you take it as a whole, it was given actually a 
contractual obligation by us, by our company, that its pricing 
would be similar to other MSOs of its size. So in that--we were 
trying to--we were trying to deal with that issue in that 
negotiation.
    Mr. Upton. Mr. Hooks, did you want to respond to that, too?
    Mr. Hooks. Yes. I would just say we need disclosure on the 
terms of the contracts, and that would answer all of the 
questions.
    Mr. Upton. We are having a series of votes. We will be 
adjourning here momentarily.
    Mr. Kimmelman, I want to go back to the a la carte, in 
terms of how it would work. I think we are all--Mr. Deal I know 
indicated about the FCC's response. We are all waiting for that 
response, and I look forward to getting it.
    You say that rate regulation would not be necessary. You 
submit that the programmers would police themselves, not charge 
unreasonable rates. How is that different than the current 
system, whereas Mr. Pyne indicated Disney offers ABC for a 
stand-alone price, but few, if any, cable operators actually 
choose to take up that single offer? Wouldn't you need rate 
regulation to make a la carte something different than we 
already have today in the marketplace? Yes or no.
    Mr. Kimmelman. Mr. Chairman, I would suggest absolutely 
not, even though I have recommended regulation at previous 
times before this committee. I don't think--absolutely not, 
because just think about what you have heard this morning and 
this afternoon. These programmers desperately, desperately want 
to be in a package, whether they are startup or existing. They 
desperately want to be there. These cable operators 
desperately, desperately want to have them in a package.
    When one of them comes in with a high price, and the 
negotiation goes off kilter, right now it is either the 
consumer pays a big price increase or the screen goes black. 
And that is not a very good situation. If you had the package, 
and you had an opportunity for a la carte, the programmers and 
the operators have to alter their negotiations somewhat.
    And I would suggest to you that that is a marketplace where 
there is a tempering of price increases and a desire, because 
for whatever reasons--I can't explain them all, but for 
whatever reasons we have all heard they desperately want to be 
in that package, and they desperately want the consumer to buy 
the package. They don't want them to go a la carte.
    If you just give the consumer the option, it may be 1 
percent, it may be five, it may be nobody. The fact that they 
can choose it is going to help us in this marketplace.
    Mr. Upton. That is what Mr. FitzPatrick was saying with the 
Golf Channel. By being part of the package, they have seen 
their revenues increase, their eyeballs increase, whereas with 
a la carte they were sinking big time.
    Mr. Kimmelman. And they may have screwed up by the way they 
did that, and I am not suggesting that he--the Golf Channel----
    Mr. Upton. It sounds like they did okay.
    Mr. Kimmelman. You know, the Golf Channel should be in any 
package they can negotiate it in. But if people want to buy it 
separately, that would be interesting, too. And it would change 
the negotiating process.
    Mr. Upton. That was the point was that they were losing 
as--they probably wouldn't have survived if they had stayed an 
a la carte. Is that right, Mr. FitzPatrick?
    Mr. Kimmelman. When the Disney Channel----
    Mr. FitzPatrick. That is correct, Mr. Chairman.
    Mr. Kimmelman. [continuing] charged $10 a sub for an 
individual channel, it didn't do that well either. In a 
package, it does better. Maybe $10 was a little high.
    Mr. Upton. Mr. Liggins?
    Mr. Liggins. Yes. I just want to make one final comment. I 
heard a term used earlier when we were talking about TV 
programming. That term was commodity. Television programming is 
not oil, it is not wheat. Jerry Seinfeld, Brett Favre, Alex 
Rodriguez, and Will Smith, these guys don't consider themselves 
commodities.
    And, you know, when we start talking about cable rates and 
their link to programming, you have to remember that the talent 
of an athlete or an actor or a singer is actually ultimately 
what drives the cost of programming, because you have to get 
them to perform and then show it. And to then try to take that 
and commoditize it in the cable or satellite rate is very 
difficult.
    Mr. Baxter. If I could just add on to that, if it is okay, 
Mr. Chairman, to block something out, we can provide somebody 
with a box. If you go a la carte or go to these theme channels, 
we have to give everybody a box. You know, and we are talking--
you know, we have 11 million customers. About half of our 
customers don't have a box today. That is 5 million customers 
who have to get a box. They have two sets per household. We are 
into tens of millions--10 million boxes, huge amounts of money 
here.
    So as you look at a la carte, there are costs that are 
significant that you just can't overlook or look the other way, 
that come with this notion of a la carte or themed channels.
    Mr. Upton. Mr. Pyne, you wanted to say something?
    Mr. Pyne. Yes, if I just may add one remark with regard to 
Disney Channel moving from an a la carte to a basic. And I will 
continue if you want me to. Certainly, when Disney Channel--
when it started, it was in the $10 to $16 price range as an a 
la carte, similar to other pay networks then and today.
    And essentially it never got more than 5 million a la carte 
subscribers. We, in fact, tested the number of approaches--a la 
carte, we tested tiering, we had tested packaging, but what we 
found was--and something that I think, as Mr. Baxter pointed 
out, within the a la carte there is something called churn, and 
churn is where customers come on and off in a given cycle. And 
we found--and for pay and tier services, that is generally 5 to 
6.5 percent a year--a month, which means that it is somewhere 
60 to 78 percent per year.
    What we found ourselves as a pay a la carte service is 
focusing all of our revenues in transactional marketing to keep 
subscribers versus into programming. Since the conversion from 
a pay to basic, we have dramatically increased the--two things. 
One is the programming--original programming has increased over 
109 percent over the last 5 years, and that is because of the 
broader universe.
    In addition, we have increased the level--we have actually 
more than doubled the level of minority viewership by--as 
opposed to only targeting a certain segment because that is--
those are the--those may be able to purchase, we are actually 
representing the broad diversity of our audience and of the 
American public.
    Mr. Upton. I appreciate all of your comments. And I must 
confess that we don't have a lot of time left on this series of 
votes, so we look forward to the FCC response, and additional 
questions may be coming your way. Appreciate your time this 
morning and this afternoon.
    Thank you.
    [Whereupon, at 1:44 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
       Prepared Statement of the Grocery Manufacturers of America
    The Grocery Manufacturers of America (GMA) appreciates the 
opportunity to provide the food, beverage and consumer product 
manufacturers' perspective on the use of Radio Frequency Identification 
(RFID) technology. GMA and its member companies believe this technology 
offers benefits for consumers and acknowledge and share concerns 
regarding consumers' privacy as it relates to the use of this emerging 
technology. We are committed to working with the technology providers, 
consumers, the Administration and the Congress as RFID technology is 
implemented and more widely adopted.
    GMA is the world's largest association of food, beverage, and 
consumer product companies. With U.S. sales of more than $500 billion, 
GMA members employ more than 2.5 million workers in all 50 states. The 
organization applies legal, scientific, and political expertise from 
its member companies to vital food, nutrition, and public policy issues 
affecting the industry. Led by a Board of 42 Chief Executive Officers, 
GMA speaks for food, beverage and consumer product manufacturers at the 
state, federal and international levels on legislative and regulatory 
issues.
                             the technology
    For more than four years, the Auto-ID Center at Massachusetts 
Institute of Technology (MIT) has been developing supply chain 
applications for RFID technology that promise to deliver significant 
benefits to the economy and consumers. RFID has been around since WWII 
and is already used in many applications from the Speed Pass at the gas 
station to EZ pass at toll booths. RFID is the name given to the 
technology that involves tags that emit radio signals and devices 
called readers that pick up the signal. The electronic product code or 
EPC establishes a standards-based approach to using RFID technology to 
uniquely identify an entity or object that has an EPC tag attached to 
it. The EPC is essentially a radio enabled bar code, which can be read 
wirelessly. Other pieces of the EPC network enable the information from 
the tag to be analyzed and shared between supply chain partners.
    The Auto-ID Center's work on the development of the EPC stands out 
as one example of how public, private, and academic interests can unite 
to support research and development, and help move technology forward 
to benefit society. The Auto-ID Center (now known as the Auto-ID Labs) 
is supported by many of the world's leading companies and organizations 
including many in the food, beverage and consumer products industry. 
EPCglobal, a joint venture between EAN International and the Uniform 
Code Council, was chartered last September to develop open, global 
standards for use of the EPC Network and currently has a subscriber 
base of more than 200 companies representing a cross section of major 
industries around the world. EPCglobal is responsible for the orderly 
adoption and implementation of the EPC system worldwide.
    Similar to the license plate on a car, an Electronic Product Code 
(EPC) is a way to uniquely identify a pallet, case or individual 
product. It is the next generation of today's Universal Product Code 
(UPC), known commonly as the ``bar code.'' Instead of the familiar 
printed strip, a tiny silicon chip holds a unique number that 
identifies a product. The tag, like today's barcode, cannot be read and 
understood without passing by a reader that is connected to a data 
infrastructure. The major improvement of EPC over the barcode is that 
it does not need ``line of sight'' to be read, but instead uses radio 
waves which makes the reading of transactions much faster.
    Connected to a network, EPC technology will allow companies for the 
first time to manage their global supply chain in real time, at any 
time--offering never before available benefits. Some of those benefits 
include:

 Streamlining inventory control on a global scale;
 Deterring theft and counterfeiting;
 Keeping shelves stocked with products desired by consumers;
 Speeding the placement of new products; and
 Easing removal of expired products.
    Though much of the research is focused on business and supply chain 
applications of the technology, the EPC ultimately promises consumer 
benefits as well. Consumers may see improved checkout procedures and 
customer service. Other benefits could include:

 Better availability of products; and
 Swifter and more effective food and product safety recalls.
    It is also important to note that EPC technology can offer 
solutions to government, such as:

 Improved customs handling and border controls;
 Enhanced Department of Defense (DoD) logistics management; and
 Better security for moving luggage through airport terminals.
    Within the food, beverage, and consumer products industry, RFID is 
a part of a broad range of e-commerce activities designed to make the 
supply chain more effective and efficient. From a manufacturer's 
perspective, some of the benefits of EPC/RFID include the elimination 
of manual counting and recounting of products in distribution. 
Warehouses, trucks, backrooms, and shelves will contain readers that 
will automatically and continually track products and maintain 
perpetual and accurate inventory data. Out-of-stocks--a problem which 
plagues the consumer packaged goods industry--could be virtually 
eliminated through preset triggers which would automatically call for 
replenishment. This would also allow for theft to be measured and 
controlled in real time, and will increase the ability to identify 
counterfeit products. Additionally, product recalls will be conducted 
in a much more efficient and effective manner through continuous 
monitoring of products throughout the supply chain.
                   status of epc/rfid implementation
    Currently, manufacturers are conducting pilot studies on the use of 
EPC/RFID in select warehouses, backrooms, trucks and manufacturing 
plants. While it is clear that broad implementation of EPC/RFID on 
individual items tracked to the store level is still years away, many 
retailers are eager to adopt case and pallet level tagging to enhance 
supply chain efficiencies. In addition, several manufacturers have been 
leading initiatives to use EPC/RFID to reduce theft in the supply 
chain, especially for high value goods, and look forward to realizing 
benefits from the day-to-day use of the technology.
    As with any new technology, many hurdles stand between current 
capabilities and ultimate implementation. These include:

 Difficulty in reading radio frequencies through metals and liquids.
 Upgrading chip quality and consistency to improve read rates.
 Avoiding interference with other radio frequency technologies, such 
        as those used in warehouses, manufacturing plants, stores, etc.
 Developing software to help sort vast amounts of data into meaningful 
        information.
 Improving the ability to read all cases on a pallet.
 Making RFID affordable for many consumer product manufacturers.
    These issues must first be addressed in a reliable and cost-
efficient manner before we are likely to see widespread adoption of 
EPC/RFID.
                          public policy issues
    While EPC/RFID can produce major benefits, the technology also 
raises public policy issues that must be addressed in a proactive and 
responsible way. Chief among those issues are concerns about consumer 
privacy, which some legislators and advocacy groups are already trying 
to address by proposing legislation that specifically regulates RFID. 
GMA believes RFID-specific legislation is unnecessary because the 
existing legal framework, industry self-regulation, and market forces 
provide consumers ample protection against potential abuses of the 
technology. In addition, premature legislation could also inadvertently 
stifle many of the beneficial uses of this technology (food security, 
bioterrorism) as well as technological solutions to public policy 
concerns.
    Under Section 5 of the Federal Trade Commission Act, the FTC has 
authority to regulate unfair or deceptive practices in and affecting 
commerce. In recent years, the Commission has used this authority to 
develop a substantial body of law regulating the manner in which 
businesses collect and use consumers' personal information, 
particularly online. In addition, the Commission enforces specific 
privacy laws such as the Children's Online Privacy Protection Act, the 
Fair Credit Reporting Act, and the Gramm-Leach-Bliley Act. This body of 
law is readily applicable to consumer privacy concerns about 
potentially unfair or deceptive uses of RFID technology.
    The protections of Section 5 of the FTC Act and other statutes 
enforced by the Commission are not technology-specific. Section 5 was 
not amended with the advent of radio or television, nor during the 
emergence of concerns about online consumer privacy. While there have 
been some laws enacted to deal with certain aspects of emerging 
technologies, FTC consumer protection enforcement, including 
enforcement of general consumer privacy protections, stems primarily 
from existing prohibitions against deception and unfairness. 
Specifically, the FTC has brought several consumer privacy cases on the 
theory that a company's failure to abide by its stated privacy policies 
constitutes a deceptive practice under the Act.
    In conjunction with its enforcement activities, the FTC has long 
encouraged companies to make privacy policies available to consumers. 
Many of the retailers and manufacturers, who are at the forefront of 
implementing EPC/RFID, already publish and abide by privacy policies 
that provide consumers protection against misuse of their personal 
information. Retailers and manufacturers know that consumers, as well 
as the FTC, hold them to the promises made in their privacy policies. 
They recognize that it will be necessary to update these policies to 
notify consumers when EPC/RFID technology is in use, how they collect 
and use information from EPC tags, and any choices consumers have. 
Given that consumer trust is paramount in the branded consumer products 
business, it is very much in the manufacturers' interest to ensure that 
consumers are comfortable with this new technology and fully understand 
the privacy policies by which they abide.
    State law enforcers and the plaintiffs' bar have also been active 
in the consumer privacy arena. Their cases, while arising from consumer 
protection principles similar to those found in Section 5, have often 
focused on violations of unstated policies, for example, the failure to 
disclose that consumer personal information has been shared with 
another company.
    These precedents demonstrate that basic consumer protection 
principles such as deception and failure to disclose were able to 
evolve to protect privacy in the online context. With the framework 
already in place, these principles are readily applicable in the 
context of RFID. There is no reason to believe, even in the absence of 
a law that specifically mentions ``radio frequency identification,'' 
that the Commission, state law enforcers, and the plaintiffs' bar will 
stand by in the face of abuses of RFID technology. Like the internet, 
RFID is simply another method by which consumers and businesses can 
share information. Any privacy concerns it raises are virtually 
identical to those raised by information collection on the internet, 
and the same solution should apply; market forces and government 
encourage businesses to provide privacy policies, and the promises 
contained in those policies are enforced.
    Self-regulation has an important role in encouraging responsible 
use of EPC/RFID. In January 2004, the GMA Board of Directors formally 
adopted privacy guidelines established by EPCglobal. They are available 
at www.epcglobalinc.org. The guidelines will continue to evolve as 
technological applications and consumer opinions develop, but they 
already address important aspects of a sound privacy policy--consumer 
notice, choice, and education, as well as records use, retention and 
security. Specifically, the guidelines focus on the need for consumer 
notification and choice when RFID tags are present in or on products 
available for purchase. In addition, they affirm companies' commitment 
to use, maintain, and protect records generated though EPC/RFID in 
compliance with all applicable laws, including privacy laws.
    Of course, even in the absence of legal and self-regulatory 
incentives, retailers and manufacturers have ample incentives to deal 
fairly with their customers. Retailers and manufacturers of brands rely 
on repeat business. Repeat business depends on consumer confidence in 
the seller. Thus, when a shopper goes into a supermarket for a favorite 
brand of food, the whole supply chain recognizes that the shopper's 
trust in the businesses that brought that brand to the market is 
critical to his or her decision to return again and again. In addition, 
manufacturers have invested hundreds of millions of dollars to create 
consumer confidence, trust and loyalty to their brands. It is, 
therefore, in the industry's interest to act responsibly when 
implementing this new technology in order to maintain that trust.
    Some believe that we need new laws to address RFID. Enacting laws 
and promulgating regulations now would likely do more harm than good. 
New laws specifically regulating RFID could stifle development of the 
technology before its benefits are fully recognized. Since the 
currently-known benefits of the technology arise in interstate 
commerce, a patchwork of state regulations of RFID would be 
particularly problematic. The appropriate approach is to monitor the 
situation and assess whether there are privacy concerns that 
legitimately arise as this technology develops and then ask whether 
they are concerns that cannot be addressed through industry self-
regulation and the application of the unfairness and deception 
principles of the FTC Act.
    Thank you for the opportunity to provide our perspective on this 
emerging technology. As the industry adopts EPC/RFID, we are committed 
to doing so in a way that protects consumer privacy and offers consumer 
benefits. We look forward to working with the Committee on this and 
other important issues in the future.