[Senate Hearing 108-1028]
[From the U.S. Government Publishing Office]




                                                       S. Hrg. 108-1028
 
         ESCALATING CABLE RATES: CAUSES AND POTENTIAL SOLUTIONS

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 25, 2004

                               __________

    Printed for the use of the Committee on Commerce, Science, and Transportation
    
    
    
    
    
    
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South 
CONRAD BURNS, Montana                    Carolina, Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West 
OLYMPIA J. SNOWE, Maine                  Virginia
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois        BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  RON WYDEN, Oregon
GEORGE ALLEN, Virginia               BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
                                     MARIA CANTWELL, Washington
                                     FRANK R. LAUTENBERG, New Jersey
      Jeanne Bumpus, Republican Staff Director and General Counsel
             Robert W. Chamberlin, Republican Chief Counsel
      Kevin D. Kayes, Democratic Staff Director and Chief Counsel
                Gregg Elias, Democratic General Counsel
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 25, 2004...................................     1
Statement of Senator Allen.......................................    13
Statement of Senator Breaux......................................     8
Statement of Senator Brownback...................................     9
Statement of Senator Burns.......................................     4
Statement of Senator Cantwell....................................    40
Statement of Senator Inouye......................................    10
    Prepared statement...........................................    10
Statement of Senator Lautenberg..................................    11
Statement of Senator Lott........................................     7
Statement of Senator McCain......................................     1
    Prepared statement...........................................     3
Statement of Senator Nelson......................................    13
Statement of Senator Rockefeller.................................    37
Statement of Senator Smith.......................................    12
Statement of Senator Snowe.......................................    38
Statement of Senator Stevens.....................................    11
Statement of Senator Sununu......................................    41
Statement of Senator Wyden.......................................     6

                               Witnesses

Bodenheimer, George, President, ESPN, Inc., and ABC Sports.......    63
    Prepared statement...........................................    65
Goldstein, Mark L., Director, Physical Infrastructure Issues, 
  General Accounting Office; Accompanied by Amy Abramowitz, 
  Assistant Director, Physical Infrastructure Issues, General 
  Accounting Office; and Michael E. Clements, Ph.D., Senior 
  Analyst, Physical Infrastructure Issues, General Accounting 
  Office.........................................................    14
    Prepared statement...........................................    17
Johnson, Rodger, President and CEO, Knology, Inc. and Chairman, 
  Broadband Service Providers Association........................   108
    Prepared statement...........................................   110
Kimmelman, Gene, Director, Consumers Union.......................    66
    Prepared statement...........................................    68
Praisner, Hon. Marilyn, Chair, TeleCommUnity and Chair, National 
  Association of Counties' Telecommunications and Technology 
  Steering Committee.............................................   102
    Prepared statement...........................................   104
Robbins, James O., President and Chief Executive Officer, Cox 
  Communications, Inc............................................    43
    Prepared statement...........................................    45


         ESCALATING CABLE RATES: CAUSES AND POTENTIAL SOLUTIONS

                              ----------                              


                        THURSDAY, MARCH 25, 2004

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:32 a.m. in room 
SR-253, Russell Senate Office Building, Hon. John McCain, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. Good morning. Today the Committee examines 
the continued escalation of cable rates, everybody's favorite 
topics. The FCC's most recent report found the overall average 
monthly rate for consumers subscribing to a cable or satellite 
service increased 8.2 percent from 2002 to 2003. Since 1996, 
cable rates have increased 56 percent, or nearly three times 
the rate of inflation.
    In order to better understand the cause of soaring cable 
rates, I asked the General Accounting Office to conduct a 
review of these increases. GAO released its report last fall 
and its principal finding was not surprising. Competition 
matters.
    As stated in the first sentence of the report, quote, 
``competition leads to lower cable rates and improved 
quality.'' You know, Senator Burns, I'm not sure if that's a 
viable use of taxpayer dollars to come up with such a profound 
statement that competition leads to lower cable rates and 
improved quality.
    Anyway, more surprising though was the significant impact 
that competition from a wired competitor has on cable rates and 
the insignificant impact competition from satellite television 
has on these rates. The GAO report found that competition from 
another wired competitor resulted in the incumbent cable 
operator's rates being 15 percent lower. A subsequent study 
from GAO suggests that in some markets the presence of wired 
competitor may reduce rates an astounding 41 percent. By 
contrast, GAO concluded that satellite service has a minimal 
effect on lowering incumbent cable prices.
    Unfortunately, only 2 percent of all markets have a wired 
competitor. But the implication of these findings is that 
incumbent cable companies face little price competition and 98 
percent of consumers are being taken to the cleaners as a 
result. I look forward to hearing suggestions today about 
whether there are barriers to entry that need to be addressed 
to facilitate more competition to cable. But we must also 
consider other solutions that will give consumers more control 
over how they purchase video services.
    When it comes to purchasing cable channels beyond the basic 
tier today, consumers have all the choice of a Soviet election 
ballot. One option, take it or leave it. You want ESPN, you 
must buy 40-plus channels of expanded basic. You want CNN, you 
must buy 40-plus channels of expanded basic. You want Comedy 
Central, well you get the idea.
    This dearth of choice comes from an industry that has 
proclaimed its indignation at the injustice of being forced to 
carry unwanted broadcast stations. The cable industry 
challenged the so-called must-carry rules of the 1992 Cable Act 
to the Supreme Court. Today it's arguing at the FCC about the 
gross inequity that would result from cable systems being 
forced to carry unwanted digital channels under a multicast 
must-carry regime, while the current must-purchase regime for 
consumers is equally unfair. So I encourage the industry to 
find a consistent message for itself. If they want choices, 
provide the same choices to your consumers.
    Not surprisingly, cable channels argue that giving 
consumers more choice over what they purchase is threatening to 
their respective business plans. Any business that has the 
benefit of conscripted purchasers would be foolish to give up 
that guaranteed revenue, but in a free market, sellers must 
convince buyers to purchase their services. There are no 
guarantees.
    Moreover, no one has suggested that cable companies should 
be prohibited from continuing to offer an expanded basis tier. 
An a la carte pricing model would merely add more pricing 
choices for consumers. The cable industry regularly touts the 
value its expanded basic tier delivers to consumers, noting 
that it, quote, costs less than taking a family of four to a 
movie or a professional sporting event. If the expanded basic 
tier is of such great value, then one would expect few 
consumers to choose per-channel pricing, and the Chicken Little 
predictions from the industry about the impact of expanding 
consumer choice should prove baseless.
    If, on the other hand, consumers reject the expanded basic 
tier in large numbers, then it would demonstrate that today's 
must-purchase regime is unfair to consumers. Just yesterday, 
consumer choice was dealt another blow. Although a reported 91 
percent of Cablevision customers chose not to purchase the Yes 
Network when given the choice last year, an arbitrator's 
decision will compel all expanded basic customers to take the 
channel. And, as one would expect, the rates of these 
subscribers will go up.
    If anyone doubts the public interest in more choice, then I 
should read the correspondence that comes into my office. A few 
months ago I received an e-mail from a gentleman who wrote, and 
I quote, a year ago I had 40 channels and was happy. Then my 
cable company rewired the town. No one asked them to do it. 
Then they increased our channels to 70. No one asked them to do 
it. Then they doubled our rate. They said take it or leave it. 
I asked for the 40 channels back and a lower bill. They said 
no. I'd like the idea of a la carte.
    We'll certainly have more discussion on this issue today. I 
thank the witnesses for being here and I would also like to 
include for the record a letter addressed to me from the 
Parents Television Council, who are strongly in favor of the a 
la carte system because of the aspect of indecency. And they 
raise a legitimate question, is that the cable companies 
proudly announce that they will be providing easier ways to 
block channels that they don't want their children to see, yet 
subscribers are still paying for the channel.
    Senator Wyden.
    [The prepared statement of Senator McCain follows:]

   Prepared Statement of Hon. John McCain, U.S. Senator from Arizona
    Today, the Committee examines the continued escalation of cable 
rates. The FCC's most recent report found the overall average monthly 
rate for consumers subscribing to a cable or satellite service 
increased 8.2 percent from 2002 to 2003. Since 1996, cable rates have 
increased 56 percent or nearly 3 times the rate of inflation.
    In order to better understand the cause of soaring cable rates, I 
asked the General Accounting Office (GAO) to conduct a review of these 
increases. GAO released its report last fall, and its principal finding 
was not surprising: competition matters. As stated in the first 
sentence of the report: ``Competition leads to lower cable rates and 
improved quality.''
    More surprising was the significant impact that competition from a 
wired competitor has on cable rates, and the insignificant impact 
competition from satellite television has on these rates. The GAO 
report found that competition from another wired competitor resulted in 
the incumbent cable operator's rates being 15 percent lower. A 
subsequent study from GAO suggests that in some markets the presence of 
wired competitor may reduce rates an astounding 41 percent. By 
contrast, GAO concluded that satellite service has a minimal effect on 
lowering incumbent cable prices.
    Unfortunately, only 2 percent of all markets have a wired 
competitor. But the implication of these findings is that incumbent 
cable companies face little price competition, and 98 percent of 
consumers are being taken to the cleaners as a result.
    I look forward to hearing suggestions today about whether there are 
barriers to entry that need to be addressed to facilitate more 
competition to cable. But we must also consider other solutions that 
will give consumers more control over how they purchase video services.
    When it comes to purchasing cable channels beyond the basic tier 
today, consumers have all the ``choice'' of a Soviet election ballot. 
One option take it or leave it. You want ESPN? You must buy 40-plus 
channels of expanded basic. You want CNN? You must buy 40-plus channels 
of expanded basic. You want Comedy Central? Well, you get the idea.
    This dearth of choice comes from an industry that has proclaimed 
its indignation at the injustice of being forced to carry ``unwanted'' 
broadcast stations. The cable industry challenged the so-called ``must 
carry'' rules of the 1992 Cable Act to the Supreme Court. Today it is 
arguing at the FCC about the gross inequity that would result from 
cable systems being forced to carry unwanted digital channels under a 
``multicast must carry'' regime. Well, the current ``must purchase'' 
regime for consumers is equally unfair. So, I encourage the industry to 
find a consistent message for itself--if they want choices, provide the 
same choices to your customers.
    Not surprisingly, cable channels argue that giving consumers more 
choice over what they purchase is threatening to their respective 
business plans. Any business that has the benefit of conscripted 
purchasers would be foolish to give up that guaranteed revenue. But in 
a free market, sellers must convince buyers to purchase their services. 
There are no guarantees.
    Moreover, no one has suggested that cable companies should be 
prohibited from continuing to offer an expanded basic tier. An a la 
carte pricing model would merely add more pricing choices for 
consumers. The cable industry regularly touts the value its expanded 
basic tier delivers to consumers noting that it ``costs less than 
taking a family of four to a movie or professional sporting event.'' If 
the expanded basic tier is such a great value, then one would expect 
few consumers to choose per-channel pricing, and the ``chicken little'' 
predictions from the industry about the impact of expanding consumer 
choice should prove baseless. If, on the other hand, consumers reject 
the expanded basic tier in large numbers, then it would demonstrate 
that today's ``must purchase'' regime is unfair to consumers.
    Just yesterday, consumer choice was dealt another blow. Although a 
reported 91 percent of Cablevision customers chose not to purchase the 
YES Network when given the choice last year, an arbitrator's decision 
will compel all. expanded basic customers to take the channel. And as 
one would expect, the rates of these subscribers will go up.
    If anyone doubts the public interest in more choice, they should 
read the correspondence that comes into my office. A few months ago I 
received an e-mail from a gentleman who wrote, ``A year ago I had 40 
channels and was happy. [Then my cable company] rewired the town. No 
one asked them to do it. Then they increased our channels to 70. No one 
asked them to do it. Then they [doubled our rate]. They said take it or 
leave it. I asked for the 40 channels back and a lower bill. [T]hey 
said no. I like the idea of ala carte.''
    We will certainly have more discussion on this issue today. I thank 
the witnesses for being here.

    Senator Wyden. Mr. Chairman, thank you. If I could go after 
Senator Burns, I know he's got a tight schedule and----
    The Chairman. As long as we can keep Senator Burns from 
appropriating, the more taxpayers are safe.
    [Laughter.]
    Senator Wyden. I will pass on the chance to be part of that 
debate.
    The Chairman. Senator Burns.

                STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. Thank you very much, Mr. Chairman, and 
thanks for holding this hearing today, and I apologize. I'll 
make my statement and then move along. I do have the Secretary 
of the Interior coming up today, one of your favorite persons, 
and we'll try to hold everything in due bounds, and by the way, 
when you were talking about a la carte, the last time we were 
talking about that we mentioned something in the Style section 
of the Washington Post. Is there anything--and I noticed the 
press table back there immediately went to the Style section 
whenever it started to be--was used as a prop on that day and I 
don't know what's in there today, but if there's something in 
there we'll get the press to start reading the paper and doing 
things like that.
    I ultimately--I'm going to go along with that high-priced 
report saying market discipline imposed by competition is far 
more effective in protecting consumers than any government 
regulation. And we paid quite a lot for that report and so I, 
maybe right now I concur, it's probably worth the money.
    Competition does force companies to innovate in order to 
keep their customers and attract new ones. Right now you know 
the cable industry has expended about, since 1996 over $80 
billion to upgrade its systems to do, in order to compete with 
a host of not only information services, but what we get in our 
news and also offering high-speed services into areas where 
they never had broadband access services before.
    So I'm pleased that there's a healthy competition in multi-
channel video services in my state of Montana. A decade ago, if 
Montana had problems with their cable service, they really 
didn't have a good alternative, but that's not the case today. 
Echostar, DirecTV offer over 500 channels of digital video and 
CD-quality music. In fact, close to 40 percent in Montana 
households subscribe to a direct broadcast satellite service.
    Even though cable doesn't reach every household in Montana, 
where cable is deployed it competes head to head with satellite 
providers. The competition makes certain that my constituents 
do have a choice.
    In Montana, we've benefited greatly by--we have a new owner 
now of the systems up there that bought out all the AT&T 
systems. The commitment that they have made to Montana to 
deliver new services and to compete in other areas is really a 
breath of fresh air in our state.
    Like others in the cable industry who have invested 
billions of private risk capital to upgrade the digital, the 
people are making significant investments in the system that 
they purchased in Montana and they're--as they move forward.
    I'm concerned about, however, the perception that 
government is considering new regulations on cable service that 
would be enough to make an already tight capital market dry up. 
Right now on expansion capital investments and the capital--the 
money markets, low interest rates are providing an opportunity 
to move forward on new and improved services. Without access to 
affordable capital, making these investments necessary to 
upgrade cable systems would not be possible. It just takes good 
old hard money.
    I'd like to address the idea of the a la carte requirement 
on cable operators. I have serious reservations about that. The 
wisdom of mandating such a system on an a la carte approach, 
many of the most popular and compelling content available on 
cable would no longer exist. We wouldn't see Biography or 
National Geographic, A&E, Discovery, or dozens of other 
networks. They would struggle and probably some would fail. 
Each network has a loyal following, but as a stand-alone 
service, their revenue would also suffer and the price to 
sustain that service would be too high.
    Many of these channels depend on advertising revenue. I can 
remember I bought cable 100 years ago, well it wasn't quite 
that long ago but it seems like it, because there wasn't any 
advertising on it, and guess what? We got advertising on it. 
But nonetheless, that's the way it goes and out of that 
industry I can also understand that.
    But many of these channels depend on advertising revenue 
for two-thirds of their revenue streams. In fact, these 
channels could not even be initially launched under an a la 
carte system, so the current system model of cable programming, 
which has allowed these channels to find an audience and 
eventually reach a national critical mass of subscribers which 
advertisers demand would be completely undermined by that 
system.
    As I've said before, cable offers a product just like any 
other newspaper. I buy the Billings Gazette reluctantly, no not 
really. Well, they, you know, I only--I may read only the 
business section, my neighbor may only read the sports section, 
but I don't expect to be able to buy just the business section 
on its own. Newspapers rely on different content to attract the 
broadest audience possible so they can maximize their 
advertising revenue. The broadcast industry is no different.
    If newspapers were required to sort out their different 
sections, I'm sure that we would see a difference in the cost 
of what we pay for newspapers and also what we pay for 
advertising. So I think we should look at this. It's a great 
populist idea, but it may be an idea that has a hard time--and 
my Blackberry, that's really my pacemaker, going off here--
enterprising system and I think throughout the country.
    And also, you know, I know there are a lot of people that 
look upon the cable industry as a utility, and we don't want to 
get too far afield in that kind of thinking, because it is a 
service. So without government involvement, the cable industry 
has really evolved into a huge industry. Today consumers have 
probably more selection of what they want to watch, who they 
want to hear, and what they want to learn than any time in the 
broadcast industry. If we disrupt that economic model, I'm 
afraid--that foster the development of hundreds of channels 
available today, the impact on consumers would be immediate and 
I think it would not be good.
    So, Mr. Chairman, thank you for holding this hearing. I've 
got to go over and leave. I apologize that my presence will be 
missed here, I know, but nevertheless I have other duties to 
take care of. And thank you, I want to thank my good friend 
from Oregon for allowing me to proceed, and thank you, Mr. 
Chairman.
    The Chairman. Thank you. I would request that my colleagues 
make their opening statements as brief as possible. We have----
    Senator Burns. I'm done.
    [Laughter.]
    Senator Burns. I got my plow out of the ground.
    The Chairman. Thank you. Senator Wyden.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, Mr. Chairman, and it just seems 
to me it's not going to be acceptable to consumers to find that 
every time they turn around cable rates go up, triple the rate 
of inflation. And consumers keep waiting for prices to level 
off somehow, and instead, millions of our consumers are being 
force-fed new channels and new features that certainly many 
don't want.
    And I looked at the GAO report in some detail and there are 
some important issues that need to be examined with respect to 
a la carte offerings. For example, the GAO report says that a 
basic cable package today averages around 25 channels. The next 
tier up, expanded basis, averages about 36 more. So that is a 
pretty big jump from 25 straight to 61. And right now a 
consumer must choose one or the other and isn't free to decide 
which particular channels would be included in either package.
    So it seems to me that even if you didn't go to some of the 
full a la carte pricing options that have generated so much 
industry opposition, it ought to be possible to provide 
consumers with a broader range of choices and still more stable 
pricing. And my sense is that the ball is in the industry's 
court right now. If the industry continually makes the 
argument, look, you're not going to have these additional 
channels that you want for, say, programming that's important 
for a minority group, something I support, without all these 
extra prices, a lot of us aren't going to swallow that argument 
anymore.
    I think it's our view that the industry has sufficient 
technological expertise and business savvy to figure out a way 
working with the Congress of the United States to make sure 
that people are in a position to decide for themselves what 
choices they want or whether they want more channels and the 
additional prices.
    So I think it's important that we go through some of the 
technical issues this morning, Mr. Chairman. Certainly the 
technical barriers to a la carte ought to be shrinking. The GAO 
notes that advanced converter boxes and TVs with built-in 
converter box capability are growing. More common to some of 
the issues to a la carte pricing seem to be moving in the 
direction of consumer choice.
    I'm glad you're holding this hearing. I look forward to 
working with you and people from a variety of positions on this 
to figure out a way so we can align the choices people want in 
this country to prices they can afford, and I thank you.
    The Chairman. Senator Lott.

                 STATEMENT OF HON. TRENT LOTT, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Lott. Thank you, Mr. Chairman. Thanks for having 
this hearing, and I have a prepared statement I'd like to 
actually put into the record.
    The Chairman. Without objection.
    Senator Lott. Mr. Chairman, also I would like to take just 
a moment to recognize the fact that we had the 25th anniversary 
of C-SPAN last week, March 19, and C-SPAN, I believe, has been 
a tremendous facilitator of public discourse, has given people 
access to what we are doing. Sometimes it amazes me when I talk 
to people and they say, well, I just saw somebody speaking on 
C-SPAN. They actually watched the debate in the Senate. That's 
pretty spooky.
    But I think C-SPAN has done a tremendous job. I think the 
cable industry deserves credit for carrying it over these 
years, and I hope it has many years of success to come.
    My relationship with cable goes back to 1967 when I tried 
to get a cable franchise in my home area in Mississippi. It was 
opposed, I remember, by the local radio station, who wound up 
eventually getting the franchise after I left to come to 
Washington. I think cable has done a tremendous job and we want 
to work with you to make sure that you continue to provide this 
great service to the people for a profit.
    But I also have to tell you, you better listen to the 
constituents or you're going to have trouble. We've gone 
through this before. When your rates get too high, and you 
start acting irresponsible, we regulate you. When we regulate 
you, that is not a good idea. It limits what you can do, and 
then we come along and we deregulate you.
    But I've always tried to warn the cable industry there is a 
point when people will rebel. They will only pay so much, and 
once you get up over that level, you're going to have trouble, 
because they're going to holler at us and then we're going to 
take it out on you. And I think you're knocking on that door.
    You need to also remember that television is now like 
telephones used to be. It's a part of--people feel like it's 
theirs, they own it. It's a part of their psyche. They're 
attached to it. And if you don't give them good service that's 
affordable and flexible, they're going to look for other 
competitors, and I think cable is underestimating some of the 
competition they're going to have in the future.
    So my first word of caution is to you, do something about 
your rising rates or you're going to have trouble. And second, 
I don't like mandating the a la carte option. You ought to do 
it. People want that. Put yourself in their shoes. Use common 
sense. I have all these channels that I get here in the 
District of Columbia and I should--I'd like to obliterate 100 
of them. And I also think that ESPN, the sports people, if they 
don't start getting their charges under control to pay salaries 
that are ridiculous, you're going to have an explosion on your 
hands with the American people there too. We'll only go so far 
to watch a football game, and I think that you're pushing the 
limits.
    So my reason for being here is that I do think this is an 
important industry, it's a dynamic, changing industry. You have 
to be prepared to change with it. You better pay attention to 
your competition, you better pay attention to what you charge, 
and you better pay attention to what you make available to the 
people. This is fair warning. I'm not prepared to mandate or 
regulate rates now or a la carte options, but if you don't do 
something about it, we will.
    Thank you, Mr. Chairman.
    The Chairman. Senator Breaux.

               STATEMENT OF HON. JOHN B. BREAUX, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Breaux. Thank you, Mr. Chairman. Sounds like my 
good Republican colleague from Mississippi was arguing for 
price controls for the NBA and NFL.
    Senator Lott. Well, they need to control themselves. In a 
free enterprise system you exercise restraint or you get into 
trouble and that is democracy.
    Senator Breaux. Thank you, Mr. Chairman, for having the 
hearing. This Committee has been doing a lot of work this week. 
We've had a number of very significant hearings and I think 
this is one too.
    I question the premise that in a competitive world it is an 
appropriate role of Congress to regulate prices. We made a 
decision in 1996 the cable industry had competition and it was 
no longer necessary to regulate the rates that they charged 
because of the advent of direct broadcasting and other 
competitive models. We find today that about 75 percent of the 
viewers of cable and about 25 percent of direct broadcasting 
services determine how people view what comes into their homes, 
and Congress has made a decision that is competition.
    I think there's a legitimate role for Congress to regulate 
monopolies. I mean, that's the essence of what we should do. If 
there's only one provider of one particular service, whether 
it's energy or transportation or television or what have you, 
there's a legitimate role for Congress to be involved in 
setting prices when there is a monopoly.
    But Congress has made a decision that in this area there is 
not a monopoly. We made a decision not to regulate rates. The 
question now becomes whether we should maybe not regulate rates 
but we should regulate the method of which people sell their 
products. I think Senator Conrad was talking about, do we 
mandate that newspapers don't sell the sport page because maybe 
some people don't watch it, or maybe sell only the money 
section of the paper because somebody would want that. No. I 
mean, that's up to the private sector to go out and do and 
market their products.
    I mean, the a la carte, I think it would be presumptuous to 
say that Congress should tell this industry how they should 
market their products and that they have to give it under an a 
la carte type of basis as opposed to packing the deals. I think 
the idea even from my perspective indicates some problems that 
other channels would end up paying substantially more if in 
fact that was the case.
    So I think it's good to have this hearing. I hope we have 
some good discussions about my concerns that I've expressed and 
look forward to the witnesses.
    The Chairman. Senator Brownback.

               STATEMENT OF HON. SAM BROWNBACK, 
                    U.S. SENATOR FROM KANSAS

    Senator Brownback. Thank you, Mr. Chairman, for holding the 
hearing. I want to put my full statement into the record.
    The Chairman. Without objection.
    Senator Brownback. A couple of quick thoughts. I find the 
GAO report quite actually reassuring but not all that 
surprising in their finding that, this is a quote, from 
competition from wire-based and direct satellite, broadcast 
satellite operators, leads to lower cable rates, improved 
quality and service on cable operators. That's competition. I 
think that's the way to go.
    In following up on what Senator Breaux said though, I want 
to make two thoughts to the cable industry if I could. One is, 
the Parents Television Council, and the Chairman has just 
provided this letter to me, is pressing, and this is a group 
that I've supported and worked with for some time, saying why 
do you have to, if you want good homes, if you want Better 
Homes and Gardens, why do you have to take Playboy as well? And 
I don't know that that's a forced pairing that people have to 
take, but there is--there are pairings that are occurring that 
people don't like. And I would hope the cable industry would 
look at that and maybe again reflect on what are you forcing 
together here and are there ways that you can put the packages 
together differently that people could have options that they 
would find more palatable to them.
    And I'm just, I'm asking to look at that again. And I know 
you're constantly probably reviewing those sort of packages. If 
you could look at that, it would be helpful.
    I would note as well, because of the indecency bill that 
we've got moving forward and the very strong interest on cable 
being a part of that, I had a meeting with some of the cable 
groups saying that, well, we're going to look at what we can do 
internally to do self-regulation on decency material. I would 
urge that forward as well so that people within the industry 
would start to address these issues of decency that I think 
most people, 75, 80 percent, maybe more, people get their 
television through cable looking at it as nearly that 
ubiquitous way of receiving television that was the reason that 
was given by the Supreme Court previously not to have cable 
regulated similarly. It wasn't ubiquitous. You're getting close 
to having that standard now.
    I think these would be very helpful if the industry would 
voluntarily address some of these indecency issues on their 
self-regulation, would be a positive move to take forward and 
hopefully that will move forward.
    Thank you, Mr. Chairman.
    The Chairman. Senator Inouye.

                STATEMENT OF DANIEL K. INOUYE, 
                    U.S. SENATOR FROM HAWAII

    Senator Inouye. Thank you very much, Mr. Chairman. I have a 
prepared statement.
    The Chairman. Without objection, it'll be in the record.
    Senator Inouye. I'm just wondering, Mr. Chairman, if we 
began regulating rates, what will happen to programs like C-
SPAN, which they are now supporting? And I guess less than 1 
percent of the population would watch that, and if we have it a 
la carte, how many people will take C-SPAN? And yet we know 
that it's an important part of democracy. Many other programs 
of that nature.
    And so I'm going to be listening, sir. Thank you.
    [The prepared statement of Senator Inouye follows:]

 Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
    This hearing presents the Committee with an important opportunity 
to examine some of the root causes of increasing cable rates, their 
impact on consumers, and possible solutions. We are all well aware of 
the troubling trend of cable rates increasing faster than the rate of 
inflation. The more difficult task we face, however, is identifying a 
reasonable and effective solution. Any solution must ensure that the 
cable industry continues to have the resources to make the investments 
necessary to deliver a full array of video, Internet, and competitive 
voice services, while also ensuring that all cable customers receive 
high quality services at reasonable prices.
    In order to offer consumers new and innovative video and non-video 
services, to their credit, cable companies have invested more than $75 
billion to upgrade their systems. But clearly cable customers should 
not shoulder the burden of non-video investment costs in their monthly 
cable bill. Marketplace, or if necessary, regulatory solutions may be 
required to create a business model that encourages investment and 
still gives customers value for the services they purchase.
    Additionally, higher programming costs and investment expenditures 
have contributed to higher cable rates. In order to bring consumers the 
sports and entertainment programming they want to see, cable companies 
have had to pay higher programming costs. According to the General 
Accounting Office, between 1999 and 2002, programming costs increased 
approximately 48 percent. Sports programming costs alone increased 59 
percent.
    A concept that has recently garnered interest would rethink cable's 
existing business model. In the name of consumer choice and lower 
prices, some have proposed adopting an ``a la carte'' approach that 
would empower consumers to choose which channels they want to receive 
and pay for. Today, consumers can choose what they want to watch from a 
menu of hundreds of channels, but they are required to pay for all of 
them.
    At first blush, consumers has simple appeal. However, before moving 
forward, we must answer this question: ``Will a new model actually 
result in more consumer choice and control at lower prices or less 
choice at higher prices as niche channels go dark, new channels fail to 
launch, and surviving channels cost more?''
    I do not have the answer, but I am concerned that pursuing an ``a 
la carte'' approach may cause more problems than it solves. If existing 
competition from Direct Broadcast Satellite and cable overbuilders has 
failed to place adequate downward pressure on cable prices, perhaps 
creating incentives to encourage competition would be a more prudent 
option.
    I look forward to the testimony of the panel.

    The Chairman. Thank you, sir. Senator Stevens.

                STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Senator Stevens. Mr. Chairman, I thank you for the hearing. 
I have three other hearings but I did want to come by and 
express my point of view that I am troubled about the growing 
concern of the consumers that they have to buy packages that 
contain materials they don't want. I share Senator Brownback's 
point of view and really share the point of view expressed by 
Senator Lott and Senator Breaux.
    It does seem either there are two new elements at play 
here. One is the industry's new announcement, and the second is 
the developing digital cable market-driven solutions. I think 
on the Internet now you can pull down song-by-song for a very 
small cost. It used to be you had to buy a package. I think as 
the demand comes and as these concerns are heard by the 
industry, competition will bring about some change. I hope it 
does.
    I do hope the industry's listening though, because those 
market-driven solutions have to come along pretty fast or 
Congress will have to act.
    Last, I will say, if you haven't visited the home of the 
future that Microsoft has got out in Seattle, you certainly 
ought to go do it, because if that is the future, it is totally 
digital-driven living and personal solution of every type of 
application you can think of at a small fee that the homeowner 
will pay. And I think if competition will take us sooner to 
that solution where we have really total personal choice at a 
cost that is less than these packages today, that is the 
ultimate solution that will benefit the American consumer. 
Thank you very much.
    The Chairman. Senator Lautenberg.

            STATEMENT OF HON. FRANK R. LAUTENBERG, 
                  U.S. SENATOR FROM NEW JERSEY

    Senator Lautenberg. Thank you, Mr. Chairman. The issue that 
we're discussing today is very important to my constituents in 
New Jersey and I'm sure that's reflected across the country. I 
don't hear as much about the highlighted issues like gay 
marriage or immunity to gun manufacturers dealers as I do about 
the increasing cost of cable service. Letters from cable 
consumers complaining about rapid price increase in the cost of 
cable service have been streaming into my office, and I believe 
that the people who write to me have good reason to be upset.
    And it's important here to distinguish between the so-
called basic and expanded basic cable programming packages. 
According to the New Jersey Board of Public Utilities, the 
average cost of basic, which is regulated by the state, has 
actually decreased from $13.23 in 1999 to $12.44 in March 2004. 
The rate for this stable 27 channels on basic is in stark 
contrast to the 75 percent increase in the price for expanded 
basic service, which has great appeal for lots of people. From 
March 1999 to today, the price for expanded basic grew from 
$17.76 a month to $31.09 a month. Consumers are rightfully 
upset.
    The cable industry has argued that such an increase is 
justified given the industry's massive capital investment in 
network infrastructure improvements. And while these 
improvements provide consumers with new, enhanced services, a 
greater number of video channels and high-speed Internet access 
and telephony, I know also that the cable companies point to 
significant increases in the cost of programming, particularly 
sports programs.
    And I grant these arguments, but I wonder why, if they're 
true, that the cable companies don't give the consumers greater 
flexibility to choose and pay for the channels that they prefer 
to watch. A pure a la carte pricing structure has its own 
problems. Some shows just many not generate the audience, and 
I've had discussions with many of the people from the industry, 
necessary to sustain them. But I believe that the industry 
could show leadership in this area and develop price structures 
that give consumers more choices, translating that into lower, 
not higher rates.
    And I want to credit the industry, leaders like Robert 
Sachs from the National Cable Television Association, cable 
executives like Brian Roberts of Comcast, and today's witness, 
James Robbins of Cox Communications, for making it easier for 
consumers to block unwanted channels. That's a good first step.
    The logical next step is to relieve consumers of the burden 
or paying for lots of channels that they don't want, and I 
encourage the industry to diversity in pricing, just as it has 
diversified programming.
    Thanks, Mr. Chairman.
    The Chairman. Senator Smith.

              STATEMENT OF HON. GORDON H. SMITH, 
                    U.S. SENATOR FROM OREGON

    Senator Smith. Thank you, Senator McCain, Mr. Chairman. I'd 
like to put my full statement in the record if I may.
    The Chairman. Without objection.
    Senator Smith. And simply summarize my observation that as 
a consumer of television, I'm amazed at the amount of 
competition, assaults on cable, and I think far better than we 
to regulate how they market competition will ultimately drive 
this better than we can.
    I join in Senator Brownback's concern about bundling things 
which are out of category or inappropriately bundled, but I 
also want to say that, and it may not be a perfect analogy, but 
if the Federal Government told me that in order to sell 
Campbell's Soup I had to sell 30 million pounds of peas before 
I could sell 20 million pounds of corn, it would be a terrible 
distortion of a marketplace, and I think these men and women of 
cable are--I think are getting the message, but I think 
understanding what you bundle and how you market and how you 
make their bottom line is important for us to permit and then 
watch the marketplace work, because it will do a better job 
than we can.
    And so, with that, Mr. Chairman, I'll include my statement 
in the record and listen with interest to this discussion.
    The Chairman. Thank you. Senator Nelson.

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Thank you, Mr. Chairman. Cable rates 
certainly deserve the close scrutiny of this committee. It's up 
to us to help make sure that the cable customers are getting 
their money's worth. There are clear reasons why the cable 
prices have risen. The industry has invested $70 billion in the 
modern infrastructure. Cable's now the leading provider of 
high-speed Internet and it's beginning to offer the voice over.
    The cable industry is also paying greater costs to secure 
the programming, but we need to ask ourselves whether these 
substantial costs justify the rapidly rising rates that are 
being charged to the customers.
    And then, on the question of a la carte, I am naturally 
inclined to want to keep a package because of threatening the 
viability of the cable industry, but I think back to the first 
experience that I had when I was in the House of 
Representatives, my home town of Melbourne, Florida, was chosen 
as the pilot project to run the raunchiest cable program on the 
Playboy channel. And I said, why Melbourne, Florida? The 
customers had no choice and I couldn't get any satisfaction 
back then. Ultimately it had such a public outcry that it was 
offered more as an extra instead of the regular basic package, 
but I must say that concerns me.
    Thank you.
    The Chairman. Senator Allen. I would remind my colleagues 
we're 40 minutes now into the hearing and we are not finished 
with opening statements.

                STATEMENT OF HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you for your patience, Mr. Chairman. I 
look forward to this hearing as well. We all are going to 
examine why cable prices have increased over time. A lot of it 
is because of their investment. The cost of programming, 
obviously, if it's positive, popular such as ESPN, those sports 
teams are paying their athletes salaries and so that's going to 
go up, but it's also popular and good for advertising revenues.
    I would also like to point out a lot of advancements in 
addition to the programming options and news and greater sports 
and other entertainment is that there are better quality 
opportunities in advanced services, whether that is the 
Internet, the broadband Internet access, high definition TV, 
and other services.
    And I, Mr. Chairman, I'll just put my statement in the 
record. The issue of a la carte I think as an instinctive 
people like it initially. Then I do think we need to examine 
though what the impact of that would be on prices, and I look 
forward to listening to our witnesses, who, and in my view, we 
do have more competition, because not only is cable a cable, 
but also satellite.
    And as these substantial investments go forward, and I 
think it's one of the more positive aspects of the 
communications, economic sector, let's make sure that what 
we're doing is appropriate to make sure that the programming is 
diverse, available, and affordable, and I thank you, Mr. 
Chairman.
    The Chairman. Thank you. Senator Rockefeller.
    Senator Rockefeller. Mr. Chairman, What we will be hearing 
this morning is of great importance to the people of West 
Virginia.
    The Chairman. Thank you very much, Senator Rockefeller.
    Mr. Mark Goldstein is the Director of Physical 
Infrastructure Issues at GAO. He's our first witness. And for 
the record, Mr. Goldstein, you might mention who is 
accompanying you.

       STATEMENT OF MARK L. GOLDSTEIN, DIRECTOR, PHYSICAL

       INFRASTRUCTURE ISSUES, GENERAL ACCOUNTING OFFICE;

       ACCOMPANIED BY AMY ABRAMOWITZ, ASSISTANT DIRECTOR,

       PHYSICAL INFRASTRUCTURE ISSUES, GENERAL ACCOUNTING

    OFFICE; AND MICHAEL E. CLEMENTS, Ph.D., SENIOR ANALYST,

            PHYSICAL INFRASTRUCTURE ISSUES, GENERAL

                       ACCOUNTING OFFICE

    Mr. Goldstein. Thank you, Mr. Chairman. I'm accompanied 
today by Amy Abramowitz, the Assistant Director at the General 
Accounting Office, who conducted the study, and Michael 
Clements, the analyst in charge of the study.
    The Chairman. Welcome to both of you. Thank you. Please 
proceed.
    Mr. Goldstein. Thank you, Mr. Chairman and Members of the 
Committee. I'm pleased to be here today to report on our work 
on cable rates and competition of the cable television 
industry. In recent years, cable television has become a major 
component of the American entertainment industry, with more 
than 70 million households receiving television service from a 
cable operator.
    While competition is emerging, especially from Direct 
Broadcast Satellite, or DBS, cable rates continue to increase 
at a faster pace than the general rate of inflation. As you 
know, in October 2003, we issued a report to you on these 
topics. We also issued a report to the Senate Judiciary 
Subcommittee on Antitrust on similar topics. My statement today 
will summarize the major findings from our October 2003 report 
with additional information from our February 2004 report.
    First, wire-based competition is limited to very few 
markets. Cable subscribers in about 2 percent of all markets 
have the opportunity to choose between two or more wire-based 
competitors. However, in those markets where this competition 
is present, cable rates were about 15 percent lower than cable 
rates in similar markets without wire-based competition in 
2001.
    DBS operators have emerged as a nationwide competitors to 
cable operators, and this has been facilitated by the 
opportunity of DBS companies to provide local broadcast 
stations. Competition from DBS operators has induced cable 
operators to lower cable rates slightly, and DBS provision of 
local broadcast stations has induced cable operators to improve 
the quality of their service.
    These findings from our 2003 report are based on a 
statistical model of over 700 cable franchises throughout the 
United States. For our February 2004 report, we further 
examined the impact of wire-based competition by looking at 12 
markets, six with and six without wire-based competitions.
    The findings are remarkably similar to our October 2003 
report. Of the six markets with wire-based competition, cable 
rates are 15 to 41 percent higher--lower, excuse me--in five of 
the six markets compared to similar markets without wire-based 
competition.
    Second, we found that a number of factors contributed to 
increase in cable rates. On the basis of data from nine cable 
operators, programming expenses and infrastructure investment 
appear to be the primary cost factors that have been increasing 
in recent years. During the past 3 years, the cost of 
programming has increased at least 34 percent. During the same 
period, the cost of sports programming has increased 59 
percent. Also, since 1996, the cable industry has spent over 
$75 billion to upgrade its infrastructure. These two factors 
were the most commonly reported to us by industry participants 
as contributing to increasing cable rates.
    Third, some industry representatives told us that the 
nature of ownership affiliations may indirectly influence cable 
rates. We did not find that ownership affiliations between 
cable networks and broadcasters, or between cable networks and 
cable operators, are associated with higher license fees.
    However, we did find that both forms of ownership 
affiliation are associated with a greater likelihood that a 
cable operator would carry a cable network. In other words, 
cable networks owned by a broadcaster or cable operator were 
more likely to get carried on a cable system than independent 
cable networks.
    Fourth, subscribers have little choice regarding the 
specific networks they receive with cable television service. 
Adopting an a la carte approach where subscribers could choose 
to pay for only those networks they desire would provide 
consumers with more individual choice, but it could require 
additional technology and could alter the current business 
model of the cable network industry, wherein cable networks 
obtain roughly half of their overall revenues from advertising.
    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. We believe that a 
variety of factors, such as the pricing of a la carte service, 
consumers' purchasing patterns, and whether certain niche 
networks would cease to exist with a la carte service make it 
difficult to ascertain how many consumers would be better off 
and how many would be worse off under an a la carte approach.
    Finally, some consumer groups have suggested that re-
regulation of cable rates needs to be considered, since they 
believe it is the only alternative to mitigate increasing cable 
rates and the market power they believe that cable operators 
possess. However, others have noted problems with past efforts 
at regulating the cable industry.
    Other options put forth include modifications to the 
program access rules, promoting additional wireless 
competition, and modifying the retransmission consent process. 
Any options designed to help bring down cable rates could have 
other unintended effects that would need to be considered in 
conjunction with the benefits of lower rates. We are not making 
any specific recommendations regarding the adoption of any of 
these options at this time.
    Mr. Chairman, that concludes my prepared statement. I'd be 
happy to respond to any questions that you or other Members of 
the Committee may have at this time.
    [The prepared statement of Mr. Goldstein follows:]

                             GAO Highlights
Telecommunications
Subscriber Rates and Competition in the Cable Television Industry
Why GAO Did This Study
    In recent years, rates for cable service have increased at a faster 
pace than the general rate of inflation. GAO agreed to (1) examine the 
impact of competition on cable rates and service, (2) assess the 
reliability of information contained in the Federal Communications 
Commission's (FCC) annual cable rate report, (3) examine the causes of 
recent cable rate increases, (4) assess the impact of ownership 
affiliations in the cable industry, (5) discuss why cable operators 
group networks into tiers, and (6) discuss options to address factors 
that could be contributing to cable rate increases.
    GAO issued its findings and recommendations in a report entitled 
Telecommunications: Issues Related to Competition and Subscriber Rates 
in the Cable Television Industry (GAO-04-8). In that report, GAO 
recommended that the Chairman of FCC take steps to improve the 
reliability, consistency, and relevance of information on cable rates 
and competition in the subscription video industry. In commenting on 
GAO's report, FCC agreed to make changes to its annual cable rate 
survey, but FCC questioned, on a cost/benefit basis, the utility of 
revising its process to keep the classification of effective 
competition up to date. GAO believes that FCC should examine whether 
cost-effective alternative processes could help provide more accurate 
information. This testimony is based on that report.
What GAO Found
    Competition leads to lower cable rates and improved quality. 
Competition from a wire-based company is limited to very few markets. 
However, where available, cable rates are substantially lower (by 15 
percent) than in markets without this competition. Competition from 
direct broadcast satellite (DBS) companies is available nationwide, and 
the recent ability of these companies to provide local broadcast 
stations has enabled them to gain more customers. In markets where DBS 
companies provide local broadcast stations, cable operators improve the 
quality of their service.
    FCC's cable rate report does not appear to provide a reliable 
source of information on the cost factors underlying cable rate 
increases or on the effects of competition. GAO found that cable 
operators did not complete FCC's survey in a consistent manner, 
primarily because the survey lacked clear guidance. Also, GAO found 
that FCC does not initiate updates or revisions to its classification 
of competitive and noncompetitive areas. Thus, FCC's classifications 
might not reflect current conditions.
    A variety of factors contribute to increasing cable rates. During 
the past 3 years, the cost of programming has increased considerably 
(at least 34 percent), driven by the high cost of original programming, 
among other things. Additionally, cable operators have invested large 
sums in upgraded infrastructures, which generally permit additional 
channels, digital service, and broadband Internet access.
    Some concerns exist that ownership affiliations might indirectly 
influence cable rates. Broadcasters and cable operators own many cable 
networks. GAO found that cable networks affiliated with these companies 
are more likely to be carried by cable operators than nonaffiliated 
networks. However, cable networks affiliated with broadcasters or cable 
operators do not receive higher license fees, which are payments from 
cable operators to networks, than nonaffiliated networks.
    Technological, economic, and contractual factors explain the 
practice of grouping networks into tiers, thereby limiting the 
flexibility that subscribers have to choose only the networks that they 
want to receive. An a la carte approach would facilitate more 
subscriber choice but require additional technology and customer 
service. Additionally, cable networks could lose advertising revenue. 
As a result, some subscribers' bills might decline but others might 
increase.
    Certain options for addressing cable rates have been put forth. 
Although reregulation of cable rates is one option, promoting 
competition could influence cable rates through the market process. 
While industry participants have suggested several options for 
addressing increasing cable rates, these options could have other 
unintended effects that would need to be considered in conjunction with 
the benefits of lower rates.
                                 ______
                                 
      Prepared Statement of Mark L. Goldstein, Director, Physical 
         Infrastructure Issues, U.S. General Accounting Office
    Mr. Chairman and Members of the Committee:

    I am pleased to be here today to report on our work on cable rates 
and competition in the cable television industry. In recent years, 
cable television has become a major component of the American 
entertainment industry, with more than 70 million households receiving 
television service from a cable television operator. As the industry 
has developed, it has been affected by regulatory and economic changes. 
Since 1992, the industry has undergone rate reregulation and then in 
1999, partial deregulation. Additionally, competition to cable 
operators has emerged erratically. Companies emerged in some areas to 
challenge cable operators, only to halt expansion or discontinue 
service altogether. Conversely, competition from direct broadcast 
satellite (DBS) operators has emerged and grown rapidly in recent 
years. Nevertheless, cable rates continue to increase at a faster pace 
than the general rate of inflation. As you know, on October 24, 2003, 
we issued a report to you on these issues, and issued a subsequent 
report to the Senate Judiciary Subcommittee on Antitrust, Competition 
Policy and Consumer Rights on similar issues.\1\ My statement today 
will summarize the major findings from our October 2003 report, and 
additional findings from our February 2004 report.
---------------------------------------------------------------------------
    \1\See U.S. General Accounting Office, Telecommunications: Issues 
Related to Competition and Subscriber Rates in the Cable Television 
Industry, GAO-04-8 (Washington, D.C.: Oct. 24, 2003) and U.S. General 
Accounting Office, Telecommunications: Wire-Based Competition Benefited 
Consumers in Selected Markets, GAO-04-241 (Washington, D.C.: Feb. 2, 
2004).
---------------------------------------------------------------------------
    At the request of this committee, we have (1) examined the impact 
of competition on cable rates and service; (2) assessed the reliability 
of the information contained in the Federal Communications Commission's 
(FCC) annual cable rate report on the cost factors underlying cable 
rate increases, FCC's current classification of cable franchises 
regarding whether they face effective competition, and FCC's related 
findings on the effect of competition; (3) examined the causes of 
recent cable rate increases; (4) assessed whether ownership of cable 
networks (such as CNN and ESPN) may indirectly affect cable rates 
through such ownership's influence on cable network license fees or the 
carriage of cable networks; (5) discussed why cable operators group 
networks into tiers, rather than package networks so that customers can 
purchase only those networks they wish to receive; and (6) discussed 
options to address factors that could be contributing to cable rate 
increases.
    To address these issues, we developed an empirical model (our 
cable-satellite model) that examined the effect of competition on cable 
rates and service using data from 2001;\2\ conducted a telephone survey 
with 100 randomly sampled cable franchises that responded to FCC's 2002 
cable rate survey, and asked these franchises a series of questions 
about how they completed a portion of FCC's survey that addresses cost 
factors underlying annual cable rate changes; interviewed 
representatives of the cable operator, cable network, and broadcast 
industries; and developed empirical models that examined whether 
ownership of cable networks by broadcasters or by cable operators 
influenced (1) the level of license fee (our cable license fee model) 
or (2) the likelihood that the network will be carried (our cable 
network carriage model) based on data from 2002. For a more detailed 
description of our scope and methodology, see appendix I.
---------------------------------------------------------------------------
    \2\Our model was based on data from 2001 since this was the most 
recent year for which we were able to acquire the required data on 
cable rates and services and DBS penetration rates when we began our 
analysis.
---------------------------------------------------------------------------
    This testimony is based on our report issued October 24, 2003, for 
which we did our work from December 2002 through September 2003. We 
provide additional information based on our report issued February 2, 
2004, for which we did our work from May 2003 to December 2003. We 
preformed our work for both assignments in accordance with generally 
accepted government auditing standards.
    My statement will make the following points:

   Wire-based competition is limited to very few markets; 
        according to FCC, cable subscribers in about 2 percent of all 
        markets have the opportunity to choose between two or more 
        wire-based operators. However, in those markets where this 
        competition is present, cable rates are about 15 percent lower 
        than cable rates in similar markets without wire-based 
        competition in 2001. In our February 2004 report, we examined 6 
        markets with wire-based competition in depth and found that 
        cable rates in 5 of these 6 markets were 15 to 41 percent lower 
        than similar markets without wire-based competition in 2003. 
        DBS operators have emerged as a nationwide competitor to cable 
        operators, which has been facilitated by the opportunity to 
        provide local broadcast stations. Competition from DBS 
        operators has induced cable operators to lower cable rates 
        slightly, and DBS provision of local broadcast stations has 
        induced cable operators to improve the quality of their 
        service.

   As we mentioned in our May 6, 2003, testimony before this 
        Committee, certain issues undermine the reliability of 
        information in FCC's cable rate report, which provides 
        information on cable rates and competition in the subscription 
        video industry.\3\ Because the Congress and FCC use this 
        information in their monitoring and oversight of the cable 
        industry, the lack of reliable information in FCC's cable rate 
        report may compromise the ability of the Congress and FCC to 
        fulfill these roles. To improve the quality and usefulness of 
        the data FCC collects annually, we recommend that the Chairman 
        of FCC take steps to improve the reliability, consistency, and 
        relevance of information on rates and competition in the 
        subscription video industry.
---------------------------------------------------------------------------
    \3\See U.S. General Accounting Office, Telecommunications: Data 
Gathering Weaknesses In FCC's Survey Of Information on Factors 
Underlying Cable Rate Changes, GAO-03-742T (Washington, D.C.: May 6, 
2003).

   We found that a number of factors contributed to the 
        increase in cable rates. On the basis of data from 9 cable 
        operators, programming expenses and infrastructure investment 
        appear to be the primary cost factors that have been increasing 
        in recent years. During the past 3 years, the cost of 
        programming has increased at least 34 percent. Also, since 
        1996, the cable industry has spent over $75 billion to upgrade 
---------------------------------------------------------------------------
        its infrastructure.

   Some industry representatives believe that certain factors 
        related to the nature of ownership affiliations may also 
        indirectly influence cable rates. We did not find that 
        ownership affiliations between cable networks (such as CNN and 
        ESPN) and broadcasters (such as NBC and CBS) or between cable 
        networks and cable operators (such as Time Warner and 
        Cablevision) are associated with higher license fees--that is, 
        the fees cable operators pay to carry cable networks. However, 
        we did find that both forms of ownership affiliations are 
        associated with a greater likelihood that a cable operator 
        would carry a cable network.

   Today, subscribers have little choice regarding the specific 
        networks they receive with cable television service. Adopting 
        an a la carte approach, where subscribers could choose to pay 
        for only those networks they desire, would provide consumers 
        with more individual choice, but could require additional 
        technology and could alter the current business model of the 
        cable network industry wherein cable networks obtain roughly 
        half of their overall revenues from advertising. 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. A variety of factors--such as the pricing of 
        a la carte service, consumers' purchasing patterns, and whether 
        certain niche networks would cease to exist with a la carte 
        service--make it difficult to ascertain how many consumers 
        would be better off and how many would be worse off under an a 
        la carte approach.

   Certain options for addressing factors that may be 
        contributing to cable rate increases have been put forth. Some 
        consumer groups have suggested that reregulation of cable rates 
        needs to be considered, although others have noted problems 
        with past efforts at regulation. Other options put forth 
        include reviewing whether modifications to the program access 
        rules would be beneficial, promoting wireless competition, and 
        reviewing whether changes to the retransmission consent process 
        should be considered. Any options designed to help bring down 
        cable rates could have other unintended effects that would need 
        to be considered in conjunction with the benefits of lower 
        rates. We are not making any specific recommendations regarding 
        the adoption of these options.
Background
    Cable television emerged in the late 1940s to fill a need for 
television service in areas with poor over-the-air reception, such as 
mountainous or remote areas. By the late 1970s, cable operators began 
to compete more directly with free over-the-air television by providing 
new cable networks, such as HBO, Showtime, and ESPN. According to FCC, 
cable's penetration rate--as a percentage of television households--
increased from 14 percent in 1975 to 24 percent in 1980 and to 67 
percent today. Cable television is by far the largest segment of the 
subscription video market, a market that includes cable television, 
satellite service (including DBS operators such as DIRECTV and 
EchoStar), and other technologies that deliver video services to 
customers' homes.
    To provide programming to their subscribers, cable operators (1) 
acquire the rights to carry cable networks from a variety of sources 
and (2) pay license fees--usually on a per-subscriber basis--for these 
rights. The three primary types of owners of cable networks are large 
media companies that also own major broadcast networks (such as Disney 
and Viacom), large cable operators (such as Time Warner and 
Cablevision), and independent programmers (such as Landmark 
Communications).
    At the community level, cable operators obtain a franchise license 
under agreed-upon terms and conditions from a franchising authority, 
such as a local or state government. During cable's early years, 
franchising authorities regulated many aspects of cable television 
service, including subscriber rates. In 1984, the Congress passed the 
Cable Communications Policy Act, which imposed some limitations on 
franchising authorities' regulation of rates.\4\ However, 8 years later 
in response to increasing rates, the Congress passed the Cable 
Television Consumer Protection and Competition Act of 1992. The 1992 
Act required FCC to establish regulations ensuring reasonable rates for 
basic service--the lowest level of cable service, which includes the 
local broadcast stations--unless a cable system has been found to be 
subject to effective competition, which the act defined.\5\ The act 
also gave FCC the authority to regulate any unreasonable rates for 
upper tiers (often referred to as expanded-basic service), which 
include cable programming provided over and above that provided on the 
basic tier.\6\ Expanded-basic service typically includes such popular 
cable networks as USA Network, ESPN, and CNN. In anticipation of 
growing competition from satellite and wire-based operators, the 
Telecommunications Act of 1996 phased out all regulation of expanded-
basic service rates by March 31, 1999. However, franchising authorities 
can regulate the basic tier of cable service where there is no 
effective competition.
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    \4\Under the 1984 Act and FCC's subsequent rulemaking, over 90 
percent of all cable systems were not subject to rate regulation.
    \5\Under statutory definitions in the 1992 Act, substantially more 
cable operators were subject to rate regulations than had previously 
been the case.
    \6\Basic and expanded-basic are the most commonly subscribed to 
service tiers--bundles of networks grouped into a package--offered by 
cable operators. In addition, customers in many areas can purchase 
digital tiers and also premium pay channels, such as HBO and Showtime.
---------------------------------------------------------------------------
    As required by the 1992 Act, FCC annually reports on average cable 
rates for operators found to be subject to effective competition 
compared with operators not subject to effective competition. To 
fulfill this mandate, FCC annually surveys a sample of cable franchises 
regarding their cable rates. In addition to asking questions that are 
necessary to gather information to provide its mandated reports, FCC 
also typically asks questions to help the agency better understand the 
cable industry. For example, the 2002 survey included questions about a 
range of cable issues, including the cost factors underlying changes in 
cable rates, the percentage of subscribers purchasing other services 
(such as broadband Internet access and telephone service), and the 
specifics of the programming channels offered on each tier.
    Some franchise agreements were initially established on an 
exclusive basis, thereby preventing wire-based competition to the 
initial cable operator. In 1992, the Congress prohibited the awarding 
of exclusive franchises, and, in 1996, the Congress took steps to allow 
telephone companies and electric companies to enter the video market. 
Initially unveiled in 1994, DBS served about 18 million American 
households by June 2002. Today, two of the five largest subscription 
video service providers are DIRECTV and EchoStar--the two primary DBS 
operators.
Competition Leads to Lower Cable Rates and Improved Quality and 
        Service among Cable Operators
    Competition from a wire-based provider--that is, a competitor using 
a wire technology--is limited to very few markets, but where available, 
has a downward impact on cable rates. In a recent report, FCC noted 
that very few markets--about 2 percent--have been found to have 
effective competition based on the presence of a wire-based 
competitor.\7\ Our interviews with cable operators and financial 
analysis firms yielded a similar finding--wire-based competition is 
limited. However, according to our cable-satellite model that included 
over 700 cable franchises throughout the United States in 2001, cable 
rates were approximately 15 percent lower in areas where a wire-based 
competitor was present. With an average monthly cable rate of 
approximately $34 that year, this implies that subscribers in areas 
with a wire-based competitor had monthly cable rates about $5 lower, on 
average, than subscribers in similar areas without a wire-based 
competitor. Our interviews with cable operators also revealed that 
these companies generally lower rates and/or improve customer service 
where a wire-based competitor is present.
---------------------------------------------------------------------------
    \7\See Federal Communications Commission, Annual Assessment of the 
Status of Competition in the Market for the Delivery of Video 
Programming, Ninth Annual Report, FCC 02-338 (Washington, D.C.: Dec. 
31, 2002).
---------------------------------------------------------------------------
    For our February 2004 report to the Senate Judiciary Subcommittee 
on Antitrust, Competition Policy and Consumer Rights, we developed an 
alterative methodology to examine the relationship between cable rates 
and wire-based competition. In particular, we developed a case-study 
approach that compared 6 cities where a broadband service provider 
(BSP)--new wire-based competitors that generally offer local telephone, 
subscription television, and high-speed Internet services to 
consumers--has been operating for at least 1 year with 6 similar cities 
that do not have such a competitor. We compared the lowest price 
available for cable service in the market with a BSP to the price for 
cable service offered in markets without a BSP.
    We found that cable rates were generally lower in the 6 markets we 
examined with a BSP present than in the 6 markets that did not have BSP 
competition. However, the extent to which rates were lower in a BSP 
market compared to its ``matched market'' varied considerably across 
markets. For example, in 1 BSP market, the monthly rate for cable 
television service was 41 percent lower compared with the matched 
market, and in 2 other BSP locations, cable rates were more than 30 
percent lower when compared with their matched markets. In two other 
BSP markets, rates were lower by 15 and 17 percent, respectively, in 
the BSP market compared to its matched market. On the other hand, in 1 
of the BSP markets, the price for cable television service was 3 
percent higher in the BSP market than it was in the matched market.
    In recent years, DBS has become the primary competitor to cable 
operators. The ability of DBS operators to compete against cable 
operators was bolstered in 1999 when they acquired the legal right to 
provide local broadcast stations--such as over-the-air affiliates of 
ABC, CBS, Fox, and NBC--via satellite to their customers.\8\ On the 
basis of our cable-satellite model, we found that in areas where 
subscribers can receive local broadcast stations from both primary DBS 
operators, the DBS penetration rate is approximately 40 percent higher 
than in areas where subscribers cannot receive these stations from the 
DBS operators. In terms of rates, we found that a 10 percent higher DBS 
penetration rate in a franchise area is associated with a slight rate 
reduction--about 15 cents per month. Also, in areas where both primary 
DBS operators provide local broadcast stations, we found that the cable 
operators offer subscribers approximately 5 percent more cable networks 
than cable operators in areas where this is not the case. During our 
interviews with cable operators, most operators told us that they 
responded to DBS competition through one or more of the following 
strategies: focusing on customer service, providing bundles of services 
to subscribers, and lowering prices and providing discounts.
---------------------------------------------------------------------------
    \8\In 1999, the Congress passed the Satellite Home Viewer 
Improvement Act, which allows satellite operators to provide local 
broadcast stations to their customers. Prior to this act, satellite 
operators were limited to providing local broadcast stations to 
unserved areas where customers could not receive sufficiently high-
quality, over-the-air signals. This practice had the general effect of 
preventing satellite operators from providing local broadcast stations 
directly to customers in most circumstances.
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Concerns Exist about the Reliability of FCC's Data for Cable Operator 
        Cost Factors and Effective Competition
    As we mentioned in our May 6, 2003, testimony before this 
Committee, weaknesses in FCC's survey of cable franchises may lead to 
inaccuracies in the relative importance of cost factors reported by 
FCC. Cable franchises responding to FCC's 2002 survey did not complete 
in a consistent manner the section pertaining to the factors underlying 
cable rate increases primarily because of a lack of clear guidance. 
These inconsistencies may have led to unreliable information in FCC's 
report on the relative importance of factors underlying recent cable 
rate increases. Overall, we found that 84 of the 100 franchises we 
surveyed did not provide a complete or accurate accounting of their 
cost changes for the year. As such, an overall accurate picture of the 
relative importance of various cost factors, which may be important for 
FCC and congressional oversight, may not be reflected in FCC's data.
    FCC's cable rate report also does not appear to provide a reliable 
source of information on the effect of competition. FCC is required by 
statute to produce an annual report on the differences between average 
cable rates in areas that FCC has found to have effective competition 
compared with those that have not had such a finding. However, FCC's 
process for implementing this mandate may lead to situations in which 
the effective competition designation may not reflect the actual state 
of competition in the current time frame. In particular, FCC relies 
exclusively on external parties to file for changes in the designation. 
Using data from FCC's 2002 survey, we conducted several tests to 
determine whether information contained in franchises' survey 
information--which was filed with FCC in mid-2002--was consistent with 
the designation of effective competition for the franchise in FCC's 
records. We found some discrepancies. These discrepancies may explain, 
in part, the differential findings regarding the impact of wire-based 
competition reported by FCC, which found a nearly 7 percent reduction 
in cable rates, and our finding of a 15 percent reduction in cable 
rates.
    Because the Congress and FCC use this information in their 
monitoring and oversight of the cable industry, the lack of reliable 
information in FCC's report on these two issues--factors underlying 
cable rate increases and the effect of competition--may compromise the 
ability of the Congress and FCC to fulfill these roles. Additionally, 
the potential for this information to be used in debate regarding 
important policy decisions, such as media consolidation, also 
necessitates reliable information in FCC's report. As a result, we 
recommended that the Chairman of FCC improve the reliability, 
consistency, and relevance of information on cable rates and 
competition in the subscription video industry by (1) taking immediate 
steps to improve its cable rate survey and (2) reviewing the 
commission's process for maintaining the classification of effective 
competition.\9\ In commenting on our report, FCC agreed to make changes 
to its annual cable rate survey in an attempt to obtain more accurate 
information, but questioned, on a cost/benefit basis, the utility of 
revising its process to keep the classification of effective 
competition in franchises up to date. We recognize that there are costs 
associated with FCC's cable rate survey, and we recommend that FCC 
examine whether cost-effective alternative processes exist that would 
enhance the accuracy of its effective competition designations.
---------------------------------------------------------------------------
    \9\See U.S. General Accounting Office, Telecommunications: Issues 
Related to Competition and Subscriber Rates in the Cable Television 
Industry, GAO-04-8 (Washington, D.C.: Oct. 24, 2003), page 45 for a 
full discussion of our recommendations.
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A Variety of Factors Contribute to Cable Rate Increases
    Increases in expenditures on cable programming contribute to higher 
cable rates. A majority of cable operators and cable networks, and all 
financial analysts that we interviewed told us that high programming 
costs contributed to rising cable rates. On the basis of financial data 
supplied to us by 9 cable operators, we found that these operators' 
yearly programming expenses, on a per-subscriber basis, increased from 
$122 in 1999 to $180 in 2002--a 48 percent increase.\10\ Almost all of 
the cable operators we interviewed cited sports programming as a major 
contributor to higher programming costs. On the basis of our analysis 
of Kagan World Media data, the average license fees for a cable network 
that shows almost exclusively sports-related programming increased by 
59 percent, compared to approximately 26 percent for 72 nonsports 
networks, in the 3 years between 1999 and 2002.\11\ Further, the 
average license fees for the sports networks were substantially higher 
than the average for the nonsports networks (see fig. 1).
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    \10\Using data from Kagan World Media, we found that the average 
fees cable operators must pay to purchase programming (referred to as 
license fees) increased by 34 percent from 1999 to 2002.
    \11\The seven national sports networks that we included in our 
analysis were ESPN, ESPN Classic, ESPN2, FOX Sports Net, The Golf 
Channel, The Outdoor Channel, and the Speed Channel.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The cable network executives we interviewed cited several reasons 
for increasing programming costs. We were told that competition among 
networks to produce and show content that will attract viewers has 
become more intense. This competition, we were told, has bid up the 
cost of key inputs (such as talented writers and producers) and has 
sparked more investment in programming. Most notably, these executives 
told us that networks today are increasing the amount of original 
content and improving the quality of programming generally.
    Although programming is a major expense for cable operators, 
several cable network executives we interviewed also pointed out that 
cable operators offset some of the cost of programming through 
advertising revenues. Local advertising dollars account for about 7 
percent of the total revenues in the 1999 to 2002 time frame for the 9 
cable operators that supplied us with financial data. For these 9 cable 
operators, gross local advertising revenues--before adjusting for the 
cost of inserting and selling advertising--amounted to about $55 per 
subscriber in 2002 and offset approximately 31 percent of their total 
programming expenses.\12\
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    \12\Advertising sales revenues net of expenses incurred to insert 
and sell local advertising would offset a lower percentage of cable 
operators' programming expenses.
---------------------------------------------------------------------------
    In addition to higher programming costs, the cable industry has 
spent over $75 billion between 1996 and 2002 to upgrade its 
infrastructure by replacing degraded coaxial cable with fiber optics 
and adding digital capabilities. As a result of these expenditures, FCC 
reported that there have been increases in channel capacity; the 
deployment of digital transmissions; and nonvideo services, such as 
Internet access and telephone service.\13\ Many cable operators, cable 
networks, and financial analysts we interviewed said investments in 
system upgrades contributed to increases in consumer cable rates.
---------------------------------------------------------------------------
    \13\For example, FCC reported that approximately 74 percent of 
cable systems had system capacity of at least 750 MHz, and that 
approximately 70 percent of cable subscribers were offered high-speed 
Internet access by their cable operator in 2002.
---------------------------------------------------------------------------
    Programming expenses and infrastructure investment appear to be the 
primary cost factors that have been increasing in recent years. On the 
basis of financial data from 9 cable operators, we found that annual 
subscriber video-based revenues increased approximately $79 per 
subscriber from 1999 to 2002. During this same period, programming 
expenses increased approximately $57 per subscriber. Depreciation 
expenses on cable-based property, plant, and equipment--an indicator of 
expenses related to infrastructure investment--increased approximately 
$80 per subscriber during the same period. However, because these 
infrastructure-related expenses are associated with more than one 
service, it is unclear how much of this cost should be attributed to 
video-based services. Moreover, cable operators are enjoying increased 
revenues from nonvideo sources. For example, revenues from Internet-
based services increased approximately $74 per subscriber during the 
same period.
Some View Ownership Affiliations as an Important Indirect Influence on 
        Cable Rates
    Several industry representatives and experts we interviewed told us 
that they believe ownership affiliation may also influence the cost of 
programming and thus, indirectly, the rates for cable service. Of the 
90 cable networks that are carried most frequently on cable operators' 
basic or expanded-basic tiers, we found that approximately 19 percent 
were majority-owned (i.e., at least 50 percent owned) by a cable 
operator, approximately 43 percent were majority-owned by a 
broadcaster, and the remaining 38 percent of the networks are not 
majority-owned by broadcasters or cable operators (see fig. 2).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Note: Cable networks were assumed affiliated if the ownership 
interest was 50 percent or greater.

    Despite the view held by some industry representatives with whom we 
spoke that license fees for cable networks owned by either cable 
operators or broadcasters tend to be higher than fees for other cable 
networks, we did not find this to be the case. We found that cable 
networks that have an ownership affiliation with a broadcaster did not 
have, on average, higher license fees (i.e., the fee the cable operator 
pays to the cable network) than cable networks that were not majority-
owned by broadcasters or cable operators. We did find that license fees 
were statistically higher for cable networks owned by cable operators 
than was the case for cable networks that were not majority-owned by 
broadcasters or cable operators. However, when using a regression 
analysis (our cable license fee model) to hold constant other factors 
that could influence the level of the license fee, we found that 
ownership affiliations--with broadcasters or with cable operators--had 
no influence on cable networks' license fees.\14\ We did find that 
networks with higher advertising revenues per subscriber (a proxy for 
popularity) and sports networks received higher license fees.
---------------------------------------------------------------------------
    \14\In the cable license fee model, we regressed the average 
monthly license fee for 90 cable networks on a series of variables that 
might influence the license fee. See GAO-04-8 for a list of variables 
included in that model.
---------------------------------------------------------------------------
    Industry representatives we interviewed also told us that cable 
networks owned by cable operators or broadcasters are more likely to be 
carried by cable operators than other cable networks. On the basis of 
our cable network carriage model--a model designed to examine the 
likelihood of a cable network being carried--we found that cable 
networks affiliated with broadcasters or with cable operators are more 
likely to be carried than other cable networks. In particular, we found 
that networks owned by a broadcaster or by a cable operator were 46 
percent and 31 percent, respectively, more likely to be carried than a 
network without majority ownership by either of these types of 
companies. Additionally, we found that cable operators were much more 
likely to carry networks that they themselves own. A cable operator is 
64 percent more likely to carry a cable network it owns than to carry a 
network with any other ownership affiliation.
Several Factors Generally Lead Cable Operators to Offer Large Tiers of 
        Networks Instead of Providing A La Carte or Minitier Service
    Using data from FCC's 2002 cable rate survey, we found that with 
basic tier service, subscribers receive, on average, approximately 25 
channels, which include the local broadcast stations. The expanded-
basic tier provides, on average, an additional 36 channels. In general, 
to have access to the most widely distributed cable networks--such as 
ESPN, TNT, and CNN--most subscribers must purchase the expanded-basic 
tier of service. Because subscribers must buy all of the networks 
offered on a tier that they choose to purchase, they have little choice 
regarding the individual networks they receive.
    If cable operators were to offer all networks on an a la carte 
basis--that is, if consumers could select the individual networks they 
wish to purchase--additional technology upgrades would be necessary in 
the near term. In particular, subscribers would need to have an 
addressable converter box on every television set attached to the cable 
system to unscramble the signals of the networks that the subscriber 
has agreed to purchase.
    According to FCC's 2002 survey data, the average monthly rental 
price for an addressable converter box is approximately $4.39. Although 
cable operators have been placing addressable converter boxes in the 
homes of customers who subscribe to scrambled networks, many homes do 
not currently have addressable converter boxes or do not have them on 
all of the television sets attached to the cable system. Since cable 
operators may move toward having a greater portion of their networks 
provided on a digital tier in the future, these boxes will need to be 
deployed in greater numbers, although it is unclear of the time frame 
over which this will occur. Also, consumer electronic manufactures have 
recently submitted plans to FCC regarding specifications for new 
television sets that will effectively have the functionality of an 
addressable converter box within the television set. Once most 
customers have addressable converter boxes or these new televisions in 
place, the technical difficulties of an a la carte approach would be 
mitigated.
    If cable subscribers were allowed to choose networks on an a la 
carte basis, the economics of the cable network industry could be 
altered. If this were to occur, it is possible that cable rates could 
actually increase for some consumers. In particular, we found that 
cable networks earn much of their revenue from the sale of advertising 
that airs during their programming. Our analysis of information on 79 
networks from Kagan World Media indicates that these cable networks 
received nearly half of their revenue from advertising in 2002; the 
majority of the remaining revenue is derived from the license fees that 
cable operators pay networks for the right to carry their signal (see 
fig. 3).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Note: Although cable networks have other sources of revenues, 
advertising and license fee revenues comprise the vast majority of 
cable network revenues.

    To receive the maximum revenue possible from advertisers, cable 
networks strive to be on cable operators' most widely distributed tiers 
because advertisers will pay more to place an advertisement on a 
network that will be viewed, or have the potential to be viewed, by the 
greatest number of people.\15\ According to cable network 
representatives we interviewed, any movement of networks from the most 
widely distributed tiers to an a la carte format could result in a 
reduced amount that advertisers are willing to pay for advertising 
time. To compensate for any decline in advertising revenue, network 
representatives contend that cable networks would likely increase the 
license fees they charge to cable operators. Because increased license 
fees, to the extent that they occur, are likely to be passed on to 
subscribers, it appears that subscribers' monthly cable bills would not 
necessarily decline under an a la carte system. Moreover, most cable 
networks we interviewed also believe that programming diversity would 
suffer under an a la carte system because some cable networks, 
especially small and independent networks, would not be able to gain 
enough subscribers to support the network.
---------------------------------------------------------------------------
    \15\Most contracts negotiated between cable networks and cable 
operators specify the tier that the network must appear on. We were 
told that cable networks include these provisions in their contracts 
because their business models are developed on the basis of a wide 
distribution of their network.
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    The manner in which an a la carte approach might impact advertising 
revenues, and ultimately the cost of cable service, rests on 
assumptions regarding customer choice and pricing mechanisms. In 
particular, the cable operators and cable networks that discussed these 
issues with us appeared to assume that many customers, if faced with an 
a la carte selection of networks, would choose to receive only a 
limited number of networks, which is consistent with the data on 
viewing habits. In fact, some industry representatives had different 
views on the degree to which consumers place value on networks they do 
not typically watch. While two experts suggested that it is not clear 
whether more networks are a benefit to subscribers, others noted that 
subscribers place value in having the opportunity to occasionally watch 
networks they typically do not watch. Additionally, the number of cable 
networks that customers choose to purchase will also be influenced by 
the manner in which cable operators price services under an a la carte 
scenario. Thus, there are a variety of factors that make it difficult 
to ascertain how many consumers would be made better off and how many 
would be made worse off under an a la carte approach. These factors 
include how cable operators would price their services under an a la 
carte system; the distribution of consumers' purchasing patterns; 
whether niche networks would cease to exist, and, if so, how many would 
exit the industry; and consumers' true valuation of networks they 
typically do not watch.
Industry Participants Have Cited Certain Options That May Address 
        Factors Contributing to Rising Cable Rates
    Industry participants have suggested the following options for 
addressing the cable rate issue. This discussion is an overview, and we 
are not making any specific recommendations regarding the adoption of 
any of these options.

   Some consumer groups have pointed to the lack of competition 
        as evidence that reregulation needs to be considered because it 
        might be the only alternative to mitigate increasing cable 
        rates and cable operators' market power. However, some experts 
        expressed concerns about cable regulation after the 1992 Act, 
        including lowering of the quality of programming, 
        discouragement of investment in new facilities, and imposition 
        of administrative burdens on the industry and regulators.

   The 1992 Act included provisions to ensure that cable 
        networks that have ownership relationships with cable operators 
        (i.e., vertically integrated cable operators) generally make 
        their satellite-delivered programming available to competitors. 
        Some have expressed concern that the law is too narrow because 
        it applies only to the satellite-delivered programming of 
        vertically integrated cable operators and it does not prohibit 
        exclusive contracts between a cable operator and an independent 
        cable network. Given these concerns, some have suggested that 
        changes in the statutory program access provisions might 
        enhance the ability of other providers to compete with the 
        incumbent cable operators while others have noted that altering 
        these provisions could reduce the incentive for companies to 
        develop innovative programming.

   DBS operators have stated that they are currently not able 
        to provide local broadcast stations in all 210 television 
        markets in the United States because they do not have adequate 
        spectrum to do so while still providing a wide variety of 
        national networks. As part of the so-called carry one, carry 
        all provisions, these companies are required to provide all 
        local broadcast stations in markets where they provide any of 
        those stations. Some suggest modifying the carry one, carry all 
        provisions to promote carriage of local stations in more 
        markets. However, any modifications to the DBS carry one, carry 
        all rules would need to be examined in the context of why those 
        rules were put into place--that is, to ensure that all 
        broadcast stations are available in markets where DBS providers 
        choose to provide local stations.

   In the 1992 Act, the Congress created a mechanism, known as 
        retransmission consent, through which local broadcast station 
        owners (such as local ABC, CBS, Fox, and NBC affiliates) could 
        receive compensation from cable operators in return for the 
        right to carry their broadcast stations. Today, few 
        retransmission consent agreements include cash payment for 
        carriage of the local broadcast station. Rather, agreements 
        between some large broadcast groups and cable operators 
        generally include provisions for carriage of broadcaster-owned 
        cable networks. As a result, cable operators sometimes carry 
        cable networks they otherwise might not have carried. 
        Alternatively, representatives of the broadcast networks told 
        us that they did not believe that cable networks had been 
        dropped and that they accept cash payment for carriage of the 
        broadcast signal, but that cable operators tend to prefer 
        carriage options in lieu of a cash payment. Certain industry 
        participants with whom we met advocated the removal of the 
        retransmission consent provisions and told us that this may 
        have the effect of lowering cable rates, but others have stated 
        that such provisions serve to enable television stations to 
        obtain a fair return for the retransmitted content they provide 
        and that retransmission rules help to ensure the continued 
        availability of free television for all Americans.

    Mr. Chairman, this concludes my prepared statement. I would be 
happy to respond to any questions you or other Members of the Committee 
may have at this time.
                                 ______
                                 
                   Appendix I: Scope and Methodology
    To respond to the first issue--examine the impact of competition on 
cable rates--we used an empirical model (our cable-satellite model) 
that we previously developed that examines the effect of competition on 
cable rates and services.\1\ Using data from the Federal Communications 
Commission's (FCC) 2001 cable rate survey, the model considers the 
effect of various factors on cable rates, the number of cable 
subscribers, the number of channels that cable operators provide to 
subscribers, and direct broadcast satellite (DBS) penetration rates for 
areas throughout the United States. We further developed the model to 
more explicitly examine whether varied forms of competition--such as 
wire-based, DBS, multipoint multichannel distribution systems (MMDS) 
competition--have differential effects on cable rates. In addition, we 
spoke with an array of industry stakeholders and experts (see below) to 
gain further insights on these issues.
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    \1\See U.S. General Accounting Office, Telecommunications: Issues 
in Providing Cable and Satellite Television Services, GAO-03-130 
(Washington, D.C.: Oct. 15, 2002).
---------------------------------------------------------------------------
    The second issue consists of two parts. To respond to part one--
assess the reliability of the cost justifications for rate increases 
provided by cable operators to FCC, we conducted a telephone survey 
(our cable franchise survey), from January 2003 through March 2003, of 
cable franchises that responded to FCC's 2002 cable rate survey. We 
drew a random sample of 100 of these cable franchises; the sample 
design was intended to be representative of the 755 cable franchises 
that responded to FCC's survey. We used data from FCC, and 
conversations with company officials, to determine the most appropriate 
staff person at the franchise to complete our survey. To ensure that 
our survey gathered information that addressed this objective, we 
conducted telephone pretests with several cable franchises and made the 
appropriate changes on the basis of the pretests. We asked cable 
franchises a series of open-ended questions regarding how the franchise 
staff calculated cost and noncost factors on FCC's 2002 cable rate 
survey, how well the franchise staff understood what FCC wanted for 
those factors, and franchise staff's suggestions for improving FCC's 
cable rate survey. All 100 franchises participated in our survey, for a 
100 percent response rate. In conducting this survey, we did not 
independently verify the answers that the franchises provided to us.
    Additionally, to address part two of the second issue--assess FCC's 
classifications of effective competition--we examined FCC's 
classification of cable franchises regarding whether they face 
effective competition.
    Using responses to FCC's 2002 cable rate survey, we tested whether 
the responses provided by cable franchises were consistent with the 
various legal definitions of effective competition, such as the low-
penetration test. Further, we reviewed documents from FCC proceedings 
addressing effective competition filings and contacted franchises to 
determine whether the conditions present at the time of the filing 
remain in effect today.
    To address the third, fourth, fifth, and sixth issues (examine 
reasons for recent rate increases, examine whether ownership 
relationships between cable networks and cable operators and/or 
broadcasters influence the level of license fees for the cable networks 
or the likelihood that a cable network will be carried, examine why 
cable operators group networks into tiers rather than sell networks 
individually, and discuss options to address factors that could be 
contributing to cable rate increases), we took several steps, as 
follows:

   We conducted semistructured interviews with a variety of 
        industry participants. We interviewed officials and obtained 
        documents from FCC and the Bureau of Labor Statistics. We 
        interviewed 15 cable networks--12 national and 3 regional--from 
        a listing published by the National Cable and 
        Telecommunications Association (NCTA), striving for a mixture 
        of networks that have a large and small number of subscribers 
        and that provide varying content, such as entertainment, 
        sports, music, and news. We interviewed 11 cable operators, 
        which included the 10 largest publicly traded cable operators 
        and 1 medium-sized, privately held cable operator. In addition, 
        we interviewed the four largest broadcast networks, one DBS 
        operator, representatives from three major professional sports 
        leagues, and five financial analysts that cover the cable 
        industry. Finally, we interviewed officials from NCTA, 
        Consumers Union, the National Association of Broadcasters, the 
        National Association of Telecommunications Officers and 
        Advisors, the American Cable Association, the National Cable 
        Television Cooperative, and the Cable Television Advertising 
        Bureau.

   We solicited the 11 cable operators we interviewed to gather 
        financial and operating data and reviewed relevant Securities 
        and Exchange Commission filings for these operators. Nine of 
        the 11 cable operators provided the financial and operating 
        data we sought for the period 1999 to 2002. We also acquired 
        data from Kagan World Media, which is a private communications 
        research firm that specializes in the cable industry. These 
        data provided us with revenue and programming expenses for over 
        75 cable networks.

   We compared the average license fees among three groups of 
        networks: those that are majority-owned by a broadcaster, those 
        that are majority-owned by a cable operator, and all others. We 
        preformed t-tests on the significance of these differences. We 
        also ran a regression (our cable license fee model) in which we 
        regressed the license fee across 90 cable networks on the age 
        of the network, the advertising revenues per subscriber (a 
        measure of network popularity), dummy variables for sports and 
        news programming, and a variety of factors about each 
        franchise.

   We conducted several empirical tests on the channel lineups 
        of cable operators as reported to FCC in its 2002 cable rate 
        survey. We developed an empirical model (our cable network 
        carriage model) that examined the factors that influence the 
        probability of a cable network being carried on a cable 
        franchise, including factors such as ownership affiliations and 
        the popularity of the network. Further, we developed 
        descriptive statistics on the characteristics of various tiers 
        of service and the channels included in the various tiers.

    The Chairman. Thank you very much. Why do satellite service 
providers have such a poor competitive effect on incumbent 
cable operators' rates?
    Mr. Goldstein. Mr. Chairman, they do have some effect and 
we believe that that effect is actually growing. The data that 
we used was the latest available to create our model, which is 
2001. Our sense is that that has--is changing and has changed 
since them. Ms. Abramowitz may actually be able to offer some 
more insight from that model actually.
    Ms. Abramowitz. Yes, I think that one of the interesting 
things that we found when we first looked at the effect of the 
DBS industry on cable rates that was back in a report that we 
did in the year 1999, and we actually found an inverse effect, 
that is, where DBS was more penetrated. Cable rates were 
actually higher, which is not what you'd expect based on the 
economics.
    When we looked at it again based on 2001 data, it had 
turned around, albeit a very slight pricing effect, but we 
think that that does reflect that it is becoming a much more 
competitive service, more people in major cities see it as a 
competitive service because they can get the local channels. 
And we think as you look at this over time it's likely that, in 
addition to the effect it's had on the quality of cable by 
inducing more infrastructure investments and more channels, it 
may also have a bigger price effect in the future.
    The Chairman. On the issue of a la carte, Mr. Goldstein, I 
was a little disappointed in that you post it as an either/or 
kind of situation. What some of us are advocating is allowing 
people to buy a package or buy a la carte. That renders moot 
this argument as to who would have to pay more under what 
circumstances. In other words, if I'm a consumer and I only 
want to buy one channel, maybe I should be able to, maybe I 
want to as I--as you can when you go to the market you can buy 
one basket of a lot of different items or you can buy those 
items separately.
    So, and by the way, this analogy of when I buy a newspaper 
and I don't have to--I have to purchase the business section 
and the sports section, what about when you go to the store and 
you buy a news magazine, you don't have to buy Sports 
Illustrated and Auto Mechanics along with it? That seems to me 
that's a little more of an analogy than saying you're not going 
to buy parts of a newspaper. You pick up a news magazine, 
there's business, there are sports, et cetera, but I don't have 
to buy Sports Illustrated and I don't have to buy Business Week 
and I don't have to buy Motor Trend and I don't have to buy all 
of these others.
    So, you know, I mean, it's ridiculous to make the kind of 
comparison frankly that's being made. But why--what's wrong, 
Mr. Goldstein, of providing the consumer with the opportunity 
of buying a tier and a package or buying separately? What's 
your problem with that?
    Mr. Goldstein. Mr. Chairman, we actually think that an a la 
carte approach would facilitate greater choice for consumer. 
What we were simply doing is raising some of the issues we 
believe are out there that need to be considered. There are 
still millions of homes that would not have access because they 
don't have addressable set-top boxes and virtually everyone we 
talked to in our study told us that for contracting and 
business model-type reasons, whether it was the industry, the 
financial analysts, or advertising, that it would be very 
difficult to understand who might be better off and who would 
be worse off.
    The Chairman. Do your experts have anything to add to that?
    Ms. Abramowitz. I guess the only thing that I would add is 
that, in the context of is it an either/or, if you offered that 
choice that people could take individual channels, you 
basically would need to scramble all of the channels. Otherwise 
people would be able to get everything whether they paid for it 
or not, and that's wherein the technology issues comes into 
play.
    The Chairman. But isn't that where digital is making this 
problem a lot less?
    Ms. Abramowitz. Absolutely. With time that issue will go 
away.
    Mr. Goldstein. It's unclear at this point how long it will 
take. Some say it's just a couple years, some say it is longer.
    The Chairman. Well, obviously nobody's interested in 
setting cable rates. That experiment has been tried. Obviously 
the status quo, when you have inflation three times the rate of 
inflation at least, cable rates going up, and you have 
increasing concentration where the programmers are also the 
broadcasters who are also the network owners who also own the 
cable that it makes it very easy to just pass those costs right 
on down the line.
    It seems to me we have a problem here, Mr. Goldstein, and 
that is that are we going to have cable be affordable as more 
and more Americans go to either cable or DBS. Are they going to 
be able to afford it? I would argue that probably the bulk of 
the over-the-air television today is watched by lower income 
Americans, and to say that I have to, I'm going to force that 
low income American to pay a very large amount of money for 
channels that he or she or their family will never watch, will 
never watch, it seems to me unfair.
    So if someone wants to buy a package, let them buy a 
package, but also let them buy a single cable. And to the 
announcement that they're going to help you block a channel 
that you're having to pay for, to me that's a bit of Alice in 
Wonderland behavior here.
    And finally, as Senator Brownback brought up, there is this 
problem of offensive programs which parents don't want and so, 
it seems to me, they shouldn't be required to block it out if 
they don't want it and still pay for it. I'd be glad to hear 
your response to that generalization and diatribe.
    Mr. Goldstein. Never a diatribe, Senator. I think in 
general, as I've mentioned, we would agree that a la carte does 
provide opportunities for choice. We think that over time it 
may be possible for the industry to work out issues and trying 
to find some ground in which they could offer some other 
options. We were told, however, that, whether you even went to 
mini-tiers or something like that, the same type of business 
model problems would crop up.
    So it's unclear to us, you know, absent simply trying it 
and understanding what kinds of rates would be set, what kind 
of consumer choice would exist, what kind of diversity might or 
might not exist, exactly how it might transpire. But I can 
sympathize with your----
    The Chairman. Well, let me give you a model, a grocery 
store. I go down and I buy a loaf of bread. I don't have to buy 
broccoli and a quart of milk along with it.
    Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. Mr. Goldstein, 
let's look at sports costs, because it seems to me this is a 
pretty clear example where there are absolutely no incentives 
to keep sports programming costs down and it seems to me the 
concept of a la carte pricing might change that. You've got a 
situation now where in effect the sports channels pay the 
leagues a gazillion dollars for TV rights and then all of 
that's made up with the sky-high contracts with sports leagues 
and teams and the cost of programming just goes up and up.
    Start by telling me what incentives exist today to hold 
down the costs of sports programming.
    Mr. Goldstein. Senator, I'm not really sure that that was 
part of what we looked at. One of the things that we did find 
is that if you----
    Senator Wyden. But if you would, tell me what incentives in 
today's world of pricing would exist. I would just like your 
opinion, because I've given you an example of why I think a la 
carte would work in that area. So if you would, in your 
opinion, tell me what incentives exist today to hold down 
sports programming costs.
    Mr. Goldstein. I think, Senator, actually when it comes to 
sports programming, if there was an area where a tiering 
process could work, the most likely place that it could work 
would be the sports world, because you have the technology that 
you would need for a broad a la carte doesn't apply here 
because it's fairly narrow, you can block. You have a very 
obviously loyal base of fans that would be eager and willing to 
have that kind of a property.
    But when we talked to the sports leagues and sports 
networks, we still encountered the same kind of issues that we 
did more broadly with a la carte in that they were not eager 
to--they said they would not be eager to sell their programming 
in that it would limit the size of the audience that would see 
their shows and obviously affect advertising.
    Senator Wyden. Well, I appreciate your at least saying that 
this an area where conceivably it could work, because right 
now, and it's sort of a textbook for walking through this whole 
question, there aren't any incentives today, and in fact, all 
the incentives are for just paying the leagues a boatload of 
money. The leagues make up for it with these gigantic contracts 
and the consumer gets shellacked by it, and I appreciate your 
answer.
    Let me ask you if I might about your finding with respect 
to infrastructure investment. You said that this was one of the 
key areas that led to price increases. Everybody thinks 
advanced infrastructure is great, more channels, digital 
service, high-speed Internet access. But you've got a situation 
again where a lot of folks are paying for the upgrades, and how 
is it fair in your opinion if they don't want that?
    Mr. Goldstein. Senator, we didn't----
    Senator Wyden. I'm asking for your opinion. I just would 
like--you gave me your opinion with respect to sports 
programming, but give me your opinion on----
    The Chairman. Senator Wyden, could I remind you that they 
really are asked to conduct studies and they'd like to keep 
their job.
    [Laughter.]
    Senator Wyden. All right.
    Mr. Goldstein. Thank you, Mr. Chairman.
    Senator Wyden. Then how does it ensure that markets are 
competitive with that kind of approach? That's a factual 
question. Tell me how that promotes more competitive markets.
    Mr. Goldstein. I think I'll ask Ms. Abramowitz if she would 
take this for me.
    Senator Wyden. Good.
    Mr. Goldstein. Thank you. She doesn't like her job.
    [Laughter.]
    Ms. Abramowitz. I think that the----
    Senator Wyden. This is an area you looked at.
    Ms. Abramowitz. Absolutely. I think that the infrastructure 
investment that was, you know, very considerable is basically a 
reflection of the coming competition from the DBS industry. 
When DBS came into the market in the mid-1990s, most cable 
systems in this country were not digital, and DBS came in with 
this huge offering of channels compared to a standard cable 
package, and that's really what drove that infrastructure 
investment.
    Now, you're right that in the end what it provided to 
consumers was a variety of services, many of which a particular 
consumer may not be interested in purchasing. In the market, 
the prices sort of get set based on what sort of the average 
consumer is interested in buying, and the number of cable 
channels did increase dramatically and from before the 
digitalization to after and I think that's a lot of the reason 
some of those costs were passed on to consumers, but it also is 
passed on in the form of digital tiers and cable modem 
services.
    Senator Wyden. Now, small cable operators in my state, Mr. 
Goldstein, have said that in order to get a channel they know 
their subscribers want, sometimes they have to take a bunch of 
additional channels as well because the same media conglomerate 
owns the multiple channels and wants them all carried. So, in 
effect, the local cable operator can't just select the channels 
it wants.
    What I'd like to know is how common is that practice? There 
are some questions with respect to the statute and it being 
rooted in retransmission consent, but how common is that?
    Mr. Goldstein. Our understanding is that it's very common. 
It happens all the time and throughout the country.
    Ms. Abramowitz. Right. I think almost everyone we spoke to 
described contracts where multiple channels were sold at the 
same time, particularly if they were broadcast owned.
    Senator Wyden. Well, Mr. Chairman, without asking Mr. 
Goldstein his opinion with respect to the implications of it, 
but it seems to me that these answers indicate to me that if an 
additional, an individual cable system wanted to try a new 
business model perhaps on the theory that consumers want more 
choice, my sense is there are a lot of reasons for doing that, 
and I look forward to exploring with you the ways to get it 
done. Thank you.
    The Chairman. Thank you, Senator Wyden. Senator Lott.
    Senator Lott. Just one more question in this area, Mr. 
Chairman, so we can hear the rest of the witnesses. Did GAO's 
research find evidence that small cable operators are in an 
unfair bargaining position when negotiating with large media 
companies for carriage rights of their networks? I assume 
that's an area you did get into.
    Mr. Goldstein. I do not think that we found that, sir.
    Senator Lott. You don't think they were in an unfair----
    Mr. Goldstein. That they were in an unfair position.
    Ms. Abramowitz. I mean, generally.
    Senator Lott. I'd like to think about that.
    Ms. Abramowitz. Generally, you know, we did speak to 11 
cable operators and we made sure that some of them weren't the 
big guys. That is an issue that they have concern about that 
they don't know what kind of bargaining or what kind of rates 
the bigger carriers get, including the DBS carriers that 
they're directly competing against, but most of that 
information is within confidential contracts and we didn't see 
any specifics on how different those prices might be.
    Senator Lott. So there are concerns but you didn't find any 
evidence that that was actually occurring?
    Ms. Abramowitz. Exactly.
    Senator Lott. Thank you.
    The Chairman. Senator Breaux.
    Senator Breaux. Thank you, Mr. Chairman, and thank the 
panel. I think you all really did a good job overall in the 
report. I think it's very extensive and you did a good job. Two 
points--and then a short question--on the comparing the cable 
rates increases of the CPI I think at best is an unfair 
comparison. I mean, we struggle with this CPI comparison to 
everything over a long period of time. It just doesn't work. 
CPI only reports the increases or decreases in prices of a 
product. It doesn't consider the cost of producing the product 
and it doesn't consider increases in the quality of the 
product. It just says, well, this product sold for $10 in 1990 
and now it's $20 in the year 2000. It doesn't take into 
consideration the increase in the cost of producing a product 
or the quality improvements in the product itself. So at best 
it's a very unreliable comparison at best.
    Second thing, it seems to me that if Congress decides that 
competition exists in a particular market, no matter what it 
is, then competition in the marketplace determines what the 
prices are. If a monopoly exists in something that's essential 
to the public, well then Congress has a legitimate reason to 
regulate the prices, the type of service, how they sell that 
service, how they market that service.
    But when Congress has made a decision, as this Congress 
has, and--well, in 1996--that competition existed sufficiently 
to deregulate this industry, then in my opinion deregulation 
means not just deregulating the price they sell the product 
for, but also certainly deregulating how they advertise and how 
they market and how they package those products.
    If we made that fundamental decision, which we have, then 
you just can't pick and choose, say, well, we won't regulate 
the price, we're going to regulate how they market their 
products. You can't have it like that. It's either a 
deregulated market or it's a regulated market and there's a 
legitimate reason for a regulated market when competition 
doesn't exist, but I don't think your report suggests that when 
you have 75/21 percent split.
    My question is, it seems like your report also is a pretty 
strong indictment of the FCC's looking at this particular 
issue. You point out, as we've mentioned, that the FCC survey 
of cable franchises may actually lead to inaccuracies. That's a 
pretty strong statement from GAO. Can you elaborate on why you 
think the FCC, which is in charge of this area, is providing 
information that may well lead to inaccuracies, because 
Congress depends on their recommendations.
    Mr. Goldstein. Yes, Senator, we can. In fact, not only did 
we think that there were inaccuracies, we found inaccuracies 
when we went through their data. And I'll ask Ms. Abramowitz to 
detail some of that, but there were inaccuracies in a number of 
different areas frankly.
    Ms. Abramowitz. Basically we found two things. One was that 
FCC asks the cable operators to report what were the causes of 
the rate increases. So for a given rate increase over the year, 
you know, what were the key factors that caused that. And there 
was a little confusion among the cable operators we spoke to 
about how that was supposed to be filled out, and what we found 
was that different cable operators were doing it different 
ways. Sometimes even within a cable operator it was being 
filled out a regional level. There was really no consistency.
    Additionally, they asked for that to be reported in a way 
that the cost changes summed up to the rate change for the 
year, which is a very regulatory environment kind of a 
question. The form really did date back to the regulated era. 
In fact, it sort of wasn't really something that could be 
reported that way now that they're free to set their rates as 
they want to. They don't have to justify a rate increase or 
decrease.
    And we made a recommendation to the FCC to change some 
things on that form and they have done it. The survey that's in 
the field right now is I understand from FCC officials quite a 
bit different.
    The other area had to do with which franchise areas were 
deemed to be competitive. FCC's process is basically a legal 
process laid out in the 1992 law that determines whereby cable 
operators can submit information that indicates that they face 
effective competition, a legally defined term, and if FCC finds 
that that's the case, they grant them effective competition.
    When we were doing our study, we wanted to make sure that 
what was called competitive was competitive from an economic 
sense, and so we went back and basically looked at every single 
one of the franchise areas in our model and we found that some 
places that had had an effective designation at some time in 
the past really did not have a competitor and vice versa, that 
there was competition in that area, but that it had never been 
filed for.
    So we made changes for our purposes on that. We also 
recommended that FCC look at their procedure, but they really 
feel that they need to stick with some of the legally mandated 
way that they go about that.
    Senator Breaux. Thank you. That's interesting information, 
because we depend so much on what the FCC tell us in these 
areas. If they have what I would consider a fundamental flaw in 
some of their analysis, I mean, that needs to be corrected. In 
one area you think it is and the other area dealing with 
effective competition, you look at in sort of an economical 
technical term as opposed to the real world actually 
competition, and they haven't changed that and you indicate 
they probably don't want to change that.
    Mr. Goldstein. Senator, we suggested to them that there 
were a number of options they might consider, including looking 
at effective competition not just once but on an occasional 
basis so they could keep this information updated, and that 
they felt that really on a cost-benefit basis it would not be 
useful for them to do that.
    Senator Breaux. OK. Thank you all. Thank you for the 
report. Thank you, Mr. Chairman.
    The Chairman. Senator Smith.
    Senator Smith. Thank you, Mr. Chairman. I'd like to pursue 
the a la carte option. It's my understanding that there are a 
number of channels that are now well-accepted and subscribed, 
the History Channel, maybe Discovery Channel, the Golf Channel, 
that when they were a la carte weren't making it and were going 
to die, but when bundled they ultimately attracted enough 
viewership they could probably survive an a la carte offering.
    That leads me to wonder if we're dictating what gets a la 
carte and what gets bundled. We may miss some programming that 
ultimately could develop into very popular programming. Could 
you comment on that? Is my perception accurate in that?
    Mr. Goldstein. I think it is. One of the concerns we had 
frankly in talking to people was that you would actually be 
losing some channels and some networks and it's based on lack 
of viewership that couldn't get enough subscribers, couldn't 
get enough advertisers.
    Senator Smith. So allowing cable to bundle does help the 
consumer because it gives us more choices. Is that correct? The 
economics wouldn't allow some to survive if they were not 
bundled?
    Mr. Goldstein. That's a distinct possibility. As I said, 
that is certainly something that was brought up.
    Senator Smith. Isn't that the case with the History Channel 
in the past, the Golf Channel in the past, Discovery Channel in 
the past? Do you know?
    Mr. Goldstein. I don't specifically know. Do you know?
    Ms. Abramowitz. I think the Golf Channel we heard that it 
was an a la carte offering it was first or one some kind of----
    Senator Smith. And was going to die if it did not get 
bundled?
    Ms. Abramowitz. And it wasn't doing well when it was put on 
the tier.
    Senator Smith. OK.
    Ms. Abramowitz. But other than that we don't have any 
specifics.
    Senator Smith. All right. Thank you, Mr. Chairman.
    The Chairman. Senator Allen.
    Senator Allen. My friend from West Virginia was talking on 
some other medium. Let me ask you a question, Mr. Goldstein. In 
your report, Senator McCain, our Chairman, made some good 
points here. Number one, no price fixing, which is good. At 
least we have that one off. I do agree with the logic of 
Senator Breaux though that if you have deregulation and we're 
going to have competition and primarily the competition is 
satellites.
    The question here, and the issue is a concern for the cost 
increases, I think that's the main point. If everyone could get 
cable for $10-a-month and 250 channels, I don't think we'd be 
having a concern. Maybe we would, but you don't sell peas on at 
a time, you sell them by a bag. You buy a bag of apples are 
cheaper in a bag of apples than one apple.
    Senator Smith. We'll sell them any way we can.
    Senator Allen. I know, I know, but volume--I'll make you a 
witness whether you sell peas one by one or cheaper by the 
pound. At any rate, we're trying to find out what the costs 
here are, and it seems to me that the cost increases come from 
two areas. One is programming costs. Second, the infrastructure 
investments and the labor costs of an operation.
    Insofar as the programming costs, and folks, thank gosh the 
sports leagues are charging more. Well, heck, people want to 
watch it. Look at the top cable programming. They want to watch 
ESPN and primarily it's professional football and college 
football, to a lesser extent other sports.
    A constraint that is going to come about, and you're seeing 
it in hockey, which the Chairman and I are seeming to be the 
most avid viewers of hockey and we love the sport and it's 
great live, but it doesn't get the market, their ratings are 
low. Therefore, the NHL, when they get into their labor 
agreements, they're going to have to figure out something to 
make that league economically viable because they can't get the 
revenue, as much as Mr. Eisner love their Mighty Ducks and 
ESPN, nonetheless they don't get the viewership. Therefore, 
they can't sell the ads because people are watching it and 
they're not going to get the revenue. Football does get the 
revenue.
    I am not one who thinks that the government ought to be 
complaining about what any entertainer receives for getting on 
stage and singing, performing, or for those athletes who are 
for a short time of their life be able to make some money while 
also risking injury. And so the fact that they get paid a lot 
of money, that's the marketplace all working in a whole large 
sense of the way it ought to be, and it's consumer demand and 
their attraction.
    Now, you get into the infrastructure investments and labor 
costs. In these areas, can you from GAO give us the reflection 
of the cost in programming, infrastructure investments and 
labor costs and how they have increased in recent years as a 
percentage in those different areas? Because I've seen a figure 
that shows cable has invested--this is all cable companies--
about $75 billion in investments over the years. The 
programming is better, of better quality, in addition to the 
opportunity for broadband.
    But if you figure $75 billion, that comes out to about 
$1,000 of investment per customer, so if you could verify from 
your accounting procedures and surveys, how much of an increase 
has there been in programming costs, how much of an increase, 
percentage increase, has there been in the costs of upgrading 
the system to make cable viewing more attractive? And whether 
or not cable viewing has increased by viewers obviously due to 
those upgrades in the infrastructure.
    Mr. Goldstein. Sure. Let me try to help you a little on 
that, Senator. We found that with respect to programming 
overall, it had gone up 34 percent. Sports programming had gone 
up 59 percent in the 3-year period that we looked at it.
    With respect to infrastructure, we did not and were unable 
to really distinguish between the components of it, given the 
way the market works today in an unregulated environment in 
terms of, obviously people are better off in cable because 
there are--infrastructure has helped provide better quality, 
more channels. But obviously infrastructure investments have 
also been used to improve other things, other services that the 
industry provides.
    So in that way we were not able to sort of segregate out 
and separate the components of it.
    Senator Allen. Do you have a--is the $75 billion, did you 
find that the----
    Mr. Goldstein. Yes, sir, that's the figure that we use, $75 
billion that we found.
    Senator Allen. And how many cable subscribers are there?
    Mr. Goldstein. I believe it's about 70 million, sir.
    Senator Allen. So $1,000 per customer is a----
    Mr. Goldstein. You're in the ballpark.
    Senator Allen.--ballpark figure, using a sports analogy, 
might as well. Have you noticed what are the most popular--
while the increase in sports programming, those increases are 
59 percent, have you been able to determine if viewership of 
sports programming has gone up over this period of time?
    Mr. Goldstein. I don't think we specifically looked at that 
for this report, sir.
    Senator Allen. The ratings, all right, that's more for 
them. Have you found--were you able to determine whether or not 
people are watching cable TV more with these upgrades than they 
had been previously?
    Mr. Goldstein. We reported on other studies and other 
things in our report that certainly suggest that there is more 
viewership and that even there are some studies out there that 
would show that the cost per viewer hour has gone down as a 
result of--that people are watching, that people certainly are 
watching more. There's more to watch and they're watching it 
more of the time.
    Senator Allen. So what you're--by that logic, they're 
getting more value.
    Mr. Goldstein. That is certainly one--one can say that.
    Senator Allen. Thank you. Thank you, Mr. Chairman.
    The Chairman. Senator Rockefeller.

           STATEMENT OF HON JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. Thank you, Mr. Chairman. Mr. 
Goldstein, there are a lot of independent, smaller operators, 
you've already referred to them, that have cable networks and 
they worry a lot about media consolidation because they say 
that when that happens it makes it very difficult for them to 
obtain carriage of what they have to offer from cable and 
satellite operators on fair terms. Now, you've already 
addressed the concept of fair terms. I was a little bit 
confused by that.
    So you say specifically in your testimony that cable 
networks owned by broadcast or cable operators are 46 and 31 
percent more likely to be carried than independent, smaller 
independent networks, of which you say there are many. In your 
view, why is that and why should that be allowed to stand?
    Mr. Goldstein. I think we found that really only 38 percent 
of the networks are still independent, are not carried by their 
broadcaster or a cable operator. We don't really have an 
opinion on whether it should be allowed to stand or not in that 
instance, but it clearly is an instance of consolidation and 
perhaps is one that ought to be looked at more.
    Senator Rockefeller. That is an issue?
    Mr. Goldstein. Yes, sir.
    Senator Rockefeller. Second question is, in your testimony 
you have an interesting sentence. You say adopting an a la 
carte approach where subscribers choose to pay for only those 
networks they desire, which is kind of an American concept, 
would provide consumers with more individual choice, and so 
you're kind of rocketing off on a sentence here. And then it 
changes sharply, but could require additional technology that 
could alter the current business model of the cable network 
industry, et cetera, et cetera, et cetera.
    And my reaction to that is that may very well be true on a 
temporary basis, but there's always alteration of technology, 
there are always costs involved. But allowing people 
essentially, I mean, if it's an ESPN or Outdoor Life that my 
folks from West Virginia want to watch and they don't want to 
watch a whole lot of other things, I mean, just here in 
Washington you have to go through dozens and dozens of things 
that you never ever watch to try and find what you do want to 
get.
    Why are you so concerned about the predictable additional 
costs of making adjustments, as opposed to the end result, 
which is consumers getting what they want and only paying what 
they want?
    Mr. Goldstein. Senator, I don't think that we are against 
it frankly. I think all we're saying is that there are 
impediments that we were told about that we wanted to report to 
the Congress. It's obviously a policy issue for Congress to 
ultimately decide whether or not to forward.
    Senator Rockefeller. You say it doesn't overshadow a la 
carte. It just happens to be in the same sentence. It 
overshadows the first part of your sentence.
    Mr. Goldstein. We may have an editing issue. But in essence 
I don't, again, we don't really have a position on it. The 
press, when we came out with this report, indicated that GAO 
was against a la carte. I don't believe that we are against it. 
We simply felt that it was important to talk about the 
impediments that we were being told by the industry that would 
exist for a la carte.
    Senator Rockefeller. Would they not be short-term 
impediments, though, one-time impediments for the most part?
    Mr. Goldstein. Certainly the technology, the addressable 
set-top box issue, the technology issue will go away over some 
period of years, no question, maybe shorter than longer 
depending on who you ask. There's no question about that at 
all. Obviously there are larger issues that would have to be 
dealt with by the industry in terms of the business model and 
making that more effective if a la carte was going to be 
implemented.
    Senator Rockefeller. Thank you.
    The Chairman. Senator Snowe.

              STATEMENT OF HON. OLYMPIA J. SNOWE, 
                    U.S. SENATOR FROM MAINE

    Senator Snowe. Thank you, Mr. Chairman. Obviously it's 
disconcerting these cable rates have gone up more than 40 
percent over the last 5 years and 85 percent of our households 
have cable service in America. So it is in our interest to make 
it as affordable as possible. We deregulated. We recognized 
that hopefully there would be some price competition, so it's 
interesting to examine some of the factors that have 
contributed to driving up the escalating costs of basic cable 
rates.
    And I know that the GAO report examined the a la carte 
approach. Did you ever look at sub-tiering packages? Because 
could that be a hybrid alternative to looking at the a la carte 
approach, which I recognize could have some adverse 
consequences. But what about doing some sub-tiering packaging? 
For example, have a sports channel package or a family package 
or old movies package or whatever? To break down some of the 
basic packages, not to three or four, but to an array that 
offers consumers choices.
    I think that's the issue here. Is there another way of 
exploring this issue without contributing to further escalating 
the increases, or obviously having an adverse impact on the 
cable industry?
    Mr. Goldstein. Senator, I think we--I would answer in two 
ways. One way is that I'd indicated a little earlier that with 
respect to a sports tier, that if there were any kind of tier 
that might be implementable in sort of--that could be done 
fairly easily, it would be a sports tier given that the 
technology for doing a simple tier like that would not be a 
problem. There's obviously a loyal fan base there.
    But I also indicated that the kind of issues that came up 
with a la carte in general were raised by the sports leagues 
and the sports networks in our discussions with them.
    We also have talked about mini-tiers and we discussed mini-
tiers as well as broad a la carte in our report, and the 
industry and the financial analysts and advertising executives 
that we talked to said that the business model kinds of issues 
would not change with respect to mini-tiers either, that it's 
the same issues frankly in their opinion.
    Senator Snowe. You mean, it would change, it would still 
change advertising behavior?
    Mr. Goldstein. That's correct. That was their view.
    Senator Snowe. So you couldn't do any alterations with the 
current approach?
    Mr. Goldstein. That was, I mean that was certainly the view 
of most of the people that we talked to, that's correct, that 
the difficulties----
    Senator Snowe. But you examined the a la carte approach, 
that they would start from scratch and picking and choosing 
which services and programming they would use, but could you do 
something beyond that that is broader in categories?
    Mr. Goldstein. I mean, you might be able to. We would have 
to look at it more. We did not do that.
    Senator Snowe. I see. What about the retransmission costs? 
I mean, the impact of retransmission and must carry on some of 
the programmings with basic networks, do what extent does that 
contribute to increasing the costs?
    Mr. Goldstein. I think we found sort of a mixed bag there 
and I'll ask Ms. Abramowitz actually to answer that if she 
will.
    Ms. Abramowitz. We looked directly at whether license fees 
for cable networks that were owned by broadcasters were higher 
than license fees for other cable networks, and we did it a 
couple of ways, trying to hold constant the popularity of the 
network, whether it was a sports network, how long the network 
had been around. We didn't find the license fees, broadcast, 
cable-owned--rather, broadcast-owned cable networks to be 
higher.
    We did that work because we did hear from a variety of 
cable networks and cable operators that they felt that these 
rates were higher. So we did not find evidence of a price 
differential on the license fee. We did, however, as I think 
Mark mentioned, find that those networks were more likely to be 
carried by cable operators.
    Senator Snowe. What contractual factors contributed, 
because you said technological, economic, and contractual 
factors explain the practice of grouping networks?
    Mr. Goldstein. Our understanding from our discussions is 
that most of the networks, this is required in their contracts 
to be, for the tiers that they're placed on.
    Senator Snowe. And so does that limit consumer choices?
    Mr. Goldstein. Sure.
    Senator Snowe. So are there any other ways of examining 
the, I think the fundamentals of the way in which the programs 
are grouped that could offer choices to consumers beyond a la 
carte, based on what you know?
    Ms. Abramowitz. I guess the one thing that we would say 
definitely came out of our work was that going forward on the 
digital tiers there are more often mini-tiers within digital 
tiers that you can buy, and a lot of people we spoke with did 
say that that's the future, that there is probably going to be 
more choice as the society in general moves to digital tiers, 
HD tiers, and so forth to be able to have more choice on the 
consumer side.
    Senator Snowe. I see. So you have to move on digital in 
order to get that, because they do it now?
    Ms. Abramowitz. Well, then you have the set-top boxes that 
gives the cable operator the opportunity to target what exactly 
you want.
    Senator Snowe. There's going to be some, I think that it's 
anything else is sort of the balance that has to be struck in 
this process. Obviously we don't want to turn the whole 
industry on its head and we understand that advertising is 
important, but on the other hand, consumers also deserve 
choices. Cable is part of the way in which most households in 
America receive their entertainment, the news and otherwise, 
and so when it's limiting those choices, when we went to 
deregulation, there's going to be competition, there has been 
consolidation in the industry. That's the other factor.
    Would you say that that's also contributed to escalating 
rates as well, because it limits competition?
    Mr. Goldstein. We--when we looked at the issue of 
consolidation of licenses, we did not find that there was an 
ownership effect on license fees just on carriage, so we did 
not find actually----
    Senator Snowe. Just on carriage, yes.
    Mr. Goldstein.--a price increase.
    The Chairman. Senator Cantwell.

               STATEMENT OF HON. MARIA CANTWELL, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Cantwell. Thank you, Mr. Chairman. Mr. Goldstein, I 
know we've been talking a lot about business models here in the 
digital age. I know your report dealt a little bit with the 
availability of content, but I'm just struck. I ran across a 
Wired article that said the future will be fast, but it won't 
be free, in which basically it said flat-rate billing isn't 
commercially viable in an era when consumers consume 1,000 
times as much data as another consumer. And if you're 
downloading a million bits-per-second, the cost of those bits 
aren't trivial anymore and that entertainment companies who are 
peddling video online really need to look at pay-per-view, pay-
per-hour, as the logical consequences.
    So I know you looked more clearly at the models that exist 
today and a little bit about the competition in satellite and 
DBS. But aren't we really talking about the digital era 
drastically being able to change the delivery system of bits 
and measure that for consumers and then thereby allow for a 
different development of business models?
    Mr. Goldstein. Senator, there are probably lots of models 
you could look at. I think that's right, but I confess they 
weren't part of the study that we did, so it's really hard for 
me to respond to that question.
    Senator Cantwell. Well, I understand it probably is, it's 
probably a more logical question from some of those in the 
audience, but yet it's really hard for an industry to embrace 
changing their business models, and I'm sure the music industry 
probably had a heart attack when they realized that consumers 
could pay for one song and download it as opposed to a CD with 
14 songs on it.
    Mr. Goldstein. No question.
    Senator Cantwell. But I think that they are starting to 
embrace that. I have a specific question though. Did you look 
at the issue of whether programming should be available over IP 
as an additional source of competition in programming?
    Mr. Goldstein. We did not directly, no. We did note 
obviously that the industry is changing, but we didn't look at 
any specific other ways that it would be----
    Senator Cantwell. Since the satellite--you note that it did 
provide some competition. Wouldn't that provide additional 
competition in business models for consumers if more content 
and programming was just available over IP?
    Mr. Goldstein. Sure, certainly would.
    Senator Cantwell. And don't you think that in general that 
who's going to be able to tell in 5 years who these companies 
are? Aren't cable companies going to be into telecom voice over 
IP and aren't telecom companies going to be into digital video 
delivery?
    Mr. Goldstein. Sure. You don't need a crystal ball to see 
that coming, absolutely.
    Senator Cantwell. OK. Well, I guess I'll----
    Mr. Goldstein. But again, we didn't' go into that in our 
study.
    Senator Cantwell. And why not? I'm just curious as to why 
not.
    Mr. Goldstein. It simply, it wasn't among the objectives 
that we talked about with the Committee and how we developed 
the study initially.
    Senator Cantwell. But if you see it as a crystal ball, 
don't you see it also as a harbinger of opportunity for 
consumers to get more?
    Mr. Goldstein. It's clearly something that ought to be 
looked at more, no question about it. Within the confines of 
what we were looking at at this point, we didn't include it.
    Senator Cantwell. OK, thank you, Mr. Chairman.
    The Chairman. Senator Sununu.

               STATEMENT OF HON. JOHN E. SUNUNU, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Sununu. Thank you, Mr. Chairman. I want to begin by 
stressing a distinction that I think needs to be made in these 
discussions, and that's the distinction between choice and 
diversity. We talk about consumer choice and we want to empower 
consumer to decide what they want to buy, what they want to 
order, what they want to see, and there's something very 
American about that.
    But that is really distinct from the concept of diversity, 
which is the number of channels that they might get to choose 
from, the range, the breadth, the scope of the programming, and 
the difference between the channels. And they're not the same 
and I think to point that out we can go back to some of the 
questions Senator Rockefeller was asking about and the response 
was, well, if you mandate a la carte or you mandate an a la 
carte system, there might be some technology upgrades and he 
made the point that those might be one-time costs and indeed 
they might.
    But I would argue that with mandated a la carte or any 
mandated choice system, even if we think it's a good idea, 
there are other costs that may be permanent, costs associated 
with a shift in advertising dollars, a reallocation of 
advertising dollars, and a change in economics of some of these 
channels, like the History Channel I think was mentioned, Arts 
and Entertainment, and those are true costs if those channels 
are no longer available.
    So there may be one-time technological costs, but there are 
other costs that may actually limit the diversity and limit the 
scope of programming that's available even as we achieve what 
we may think is an important objective of giving consumers more 
power. So I want to keep those two concepts separate as we 
pursue these ideas.
    It was mentioned briefly but I want to get your numbers if 
you have them available that a cost per viewer hour was going 
down. I thought that was interesting. I thought I saw some 
smiles when someone equated length of viewing as an increase in 
value. And that may well be the case, but did you track cost 
per viewer hours and what has happened to those numbers over 
time?
    Mr. Goldstein. Senator, that was not our study. We mention 
as a footnote in our study that there is an academic study that 
came out not long ago that does talk about.
    Senator Sununu. And can you--do you recall what the figures 
were, what the rough decline was in the cost per hour viewed?
    Ms. Abramowitz. It was a very slight reduction in the price 
when you take into account over, I don't know how many years, 
the number of--the fact that people view more cable. I mean, a 
lot of it's a shift from broadcast viewing to cable viewing.
    Senator Sununu. It was flat, maybe a slight reduction in 
cost.
    Ms. Abramowitz. I can't remember the exact number.
    Senator Sununu. And, of course, no characterization made 
for the quality of the programming, I assume. Can you think of 
any other product or industry where government regulates an a 
la carte pricing structure or a pricing regulation similar to 
the a la carte proposals that you considered in your study?
    Mr. Goldstein. Not off the top of my head, but again, it 
wasn't part of what we looked at. It probably would be useful 
to do that in the future if Congress was looking to adopt this.
    Senator Sununu. Well, it certainly is helpful to have some 
kind of analogous situation where you can determine what the 
actual impact is on customers. And finally, you say there was 
no correlation between price and consolidation or affiliation 
among the cable provider and the networks or consolidation 
within the industry?
    Mr. Goldstein. We specifically looked for it and we did not 
find it.
    Senator Sununu. Did you look hard?
    Ms. Abramowitz. It was the license fee, it wasn't the price 
to consumers. So we were looking to see, did network A with 
these characteristics but owned by a broadcast network, was it 
higher license fee than network B that had similar 
characteristics in terms of like how popular it was. And we 
looked at that statistically and didn't find any difference.
    Senator Sununu. Terrific. Well, I appreciate your work and 
I appreciate the fact that it was actually a very readable 
study. That's always helpful. Thank you, Mr. Chairman.
    The Chairman. Thank you. I want to thank you, Mr. 
Goldstein, and I would point out that you point out cable 
operators who have invested large sums in upgraded 
infrastructures, which generally permit additional channels, 
digital service, et cetera, and those expenses are now being 
borne by analog customers. I think there's a fundamental 
unfairness associated with that. We'll pursue that with the 
next panel. I thank you very much.
    Our next panel, Mr. Jim Robbins, President and CEO of Cox 
Communications; Mr. George Bodenheimer, President of ESPN and 
ABC Sports; Mr. Gene Kimmelman is the Director of Consumers 
Union; the Honorable Marilyn Praisner of the Montgomery County 
Council; and Mr. Rodger Johnson, President and CEO of Knology, 
Incorporated.
    Thank you witnesses for being here. Thank you for their 
patience, and Mr. Robbins, I want to assure you that we are 
happier that you're back than you are happy to be back. Thanks. 
And I would like to say, Mr. Robbins, we do appreciate your 
continued willingness to come and testify before this 
committee. We do appreciate that, even if sometimes you and I 
might disagree from time to time, but I do appreciate your 
willingness and cooperation with this committee. I think it's 
been very helpful to process. We'd like to begin with you.

 STATEMENT OF JAMES O. ROBBINS, PRESIDENT AND CHIEF EXECUTIVE 
               OFFICER, COX COMMUNICATIONS, INC.

    Mr. Robbins. Thank you, Mr. Chairman, and one old Navy guy 
likes to help out another old Navy guy any way we can. I will 
commend you on the number of Senators. I don't think I've seen 
so many in one place since watching C-SPAN.
    The Chairman. I think they are hearing from their 
constituents.
    Mr. Robbins. Well, Mr. Chairman, distinguished Members of 
the Commerce Committee, thank you for the opportunity to join 
you again about cable television prices. As you are aware, the 
GAO's analysis confirms that cable price increases reflect 
significant expenditures by cable operators in infrastructure, 
programming, and customer service.
    The consumers have benefited tremendously from Cox 
Communication's network and customer service improvements. 
Since 1996, Cox has invested considerably more than $12 billion 
of private risk capital to provide consumers and businesses 
digital video, high-speed Internet, local and long-distance 
telephone service. For cable TV customers, this investment 
translates into improved picture quality, highly reliable 
service, and more channel choices.
    Our investment has also created the most robust high-speed 
Internet service on the market today and an unprecedented 
competitive choice for facilities-based lifeline local and 
long-distance telephone service.
    With these advanced products have come considerable 
customer service improvements due to our investment in 
technology, skilled talent, and training. The end result for 
our customer is a tremendous value proposition, great 
convenience, and high satisfaction correlates directly to Cox's 
infrastructure and customer service investments.
    Keeping cable TV affordable is a business imperative for 
Cox. We are on the same side as you on that one. Due to 
formidable competition from direct satellite, direct broadcast 
satellite and other providers, this year Cox's average price 
adjustment is approximately 3 percent, down from 5.3 percent 
last year, and those are both well below industry average.
    That price discipline, coupled with Cox's technological 
advances and superior customer care, has resulted in lower DBS 
penetration in Cox markets, about half the industry average. 
But price discipline is increasingly difficult in the face of a 
rapid, unrestrained rise in the cost of programming, as 
affirmed in the GAO report. Cable price increases are driven 
largely by rapidly rising programming costs.
    Over the past 3 years, FCC and GAO data indicate that 
sharply rising programming costs are the largest driver of 
increased cable prices. I have submitted for this hearing 
record an economic paper by William Rogers, a Northwestern 
University professor and former FCC chief economist. The paper 
demonstrates that for the period studied from 1999 to 2002, 
rising programming costs accounted directly for 42 percent of 
cable price increases across the industry.
    At Cox, the number is even higher because our retail rate 
increases are significantly less than the industry average. 
From 1999 to 2002, more than half of our rate increases were 
directly attributable to programming cost increases. In 2002, 
that number was 66 percent, meaning that after covering direct 
programming cost increases, one-third of what we took in was 
left to cover all other increases, indirect costs including 
labor, customer service, and technology investments.
    A significant contributing factor in the rise of 
programming costs is the continued misuse of the retransmission 
consent right. If Congress wants to address the problem of 
rising cable rates, it should consider reforming retransmission 
consent, particularly as it is being used for the big four 
television networks to foist unwanted challenges at inflated 
prices on cable customers.
    Since retransmission consent was legislated in 1992, 
numerous channels have been added to Cox Cable customers' 
channel lineups at additional cost, primarily due to 
retransmission consent negotiations, not because of consumer 
need, choice, or demand.
    In addition, license fees for existing cable channels 
affiliated with broadcast networks have increased significantly 
due to the leverage created by the ability of these broadcast 
networks to withhold distribution of their local stations.
    It is troubling to me that a consumer in Roanoke, Virginia, 
as an example, may be required to pay more for a cable channel 
because a broadcast network is leveraging its retransmission 
rights. That misuse of retransmission consent in no way 
benefits, for example, the local viewers of network-owned and 
operated station in Orange County, California. It only benefits 
the media conglomerate that owns the station.
    Contrary to the findings of the GAO's case study wire-lined 
overbuilds in Cox markets have had little impact on Cox's cable 
rates, which reflect the steep fee increases we're facing for 
cable programming. In fact, as submitted in detail for the 
record of this hearing, Cox Cable prices are virtually the same 
in Cox markets that face overbuild competition as they are in 
those that do not.
    We continue to increase the value proposition for our 
customers as we introduce numerous service enhancements, 
including digital cable, high-definition television, digital 
video recorders, and entertainment on demand. Introduction of 
new technology also means enhanced tools to give parents more 
control over what their children are watching, including V-chip 
and program blocking. In particular, digital technology 
provides a highly secure, encrypted environment for all adult 
programming as well.
    For analog customers, Cox is providing traps to help them 
block programming they find unpalatable. And finally, Cox is 
launching a company-wide consumer education program to help 
parents understand all of their parental control options, as 
well as where to find all the great family friendly programming 
that's available on cable. Meanwhile, Cox customers continue to 
have access to a low-priced, regulated, lifeline basic-tier 
priced at roughly $12 a month featuring 15 to 25 channels of 
programming.
    The GAO report notes that the a la carte sale of cable 
networks could drive up costs for cable customers. We agree. 
This technical and economic model does not work and is not in 
consumers' best interests, as it results in higher prices and 
fewer program choices.
    Competition is working and that, in our judgment, is what 
best serves American consumers. The GAO report agrees that 
competition spurs investment and provides more choice and value 
for consumers. Robust competition exists today in among cable 
operators, DBS providers, overbuilders and telephone companies. 
That competition will keep prices in check for the benefit of 
American consumers.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Robbins follows:]

 Prepared Statement of James O. Robbins, President and Chief Executive 
                   Officer, Cox Communications, Inc.
    Mr. Chairman and distinguished members of the Commerce Committee, 
thank you for the opportunity to again join you to testify about cable 
television prices.
    As you are aware, the GAO's analysis confirms that cable price 
increases reflect significant expenditures by cable operators in 
infrastructure, programming and customer service.
    Consumers have benefited tremendously from Cox Communications' 
network and customer service improvements.
    Since 1996, Cox has invested considerably more than $12 billion of 
private risk capital to provide consumers and businesses digital video, 
high-speed Internet, and local and long distance telephone service.
    For cable TV customers, this investment translates into improved 
picture quality, highly reliable service and more channel choices. Our 
investment also has created the most robust high-speed Internet service 
on the market today and an unprecedented competitive choice for 
facilities-based, lifeline local and long distance telephone service. 
With these advanced products have come considerable customer service 
improvements, due to our investment in technology, skilled talent and 
training.
    The end result for customers--a tremendous value proposition, great 
convenience and high satisfaction--correlates directly to Cox's 
infrastructure and customer service investments.
    Keeping cable TV affordable is a business imperative for Cox, due 
to formidable competition from Direct Broadcast Satellite and other 
providers. This year, Cox's average cable price increase is 
approximately 3 percent, down from 5.3 percent last year, and well 
below the industry average. That price discipline, coupled with Cox's 
technological advances and superior customer care, has resulted in 
lower DBS penetration in Cox markets--about half the industry average.
    But price discipline is increasingly difficult in the face of the 
rapid, unrestrained rise in the cost of programming. As affirmed in the 
GAO report, cable price increases are driven largely by rapidly rising 
programming costs.
    Over the past three years, FCC and GAO data indicate that sharply 
rising programming costs are the largest driver of increased cable 
prices. I have submitted for this hearing record an economic paper by 
William Rogerson, Northwestern University Professor and former FCC 
chief economist. This paper demonstrates that, for the period studied 
from 1999 to 2002, rising programming costs accounted directly for 42 
percent of cable price increases across the industry. At Cox the number 
is even higher, because our retail rate increases are significantly 
less than the industry average. From 1999-2002, more than half of our 
rate increases were directly attributable to programming cost 
increases. In 2002, that number rose to 66 percent, meaning that after 
covering direct programming cost increases, just one-third of our price 
increases were left to cover ALL other increased indirect costs, 
including labor, customer service and technology investments.
    A significant contributing factor in the rise of programming costs 
is the continued misuse of retransmission consent rights. If Congress 
wants to address the problem of rising cable rates, it should consider 
reforming retransmission consent, particularly as it is being used by 
the Big Four television broadcast networks to foist unwanted channels, 
at inflated rates, on cable customers. Since retransmission consent was 
legislated in 1992, numerous channels have been added to Cox Cable 
customers' channel lineups, at additional cost, primarily due to 
retransmission consent negotiations--not by consumer need, choice or 
demand. In addition, license fees for existing cable channels 
affiliated with broadcast networks have increased significantly, due to 
the leverage created by the ability of these broadcast networks to 
withhold distribution of their local stations. It's very troubling to 
me that a consumer in Roanoke, Virginia may be required to pay more for 
a cable channel because a broadcast network is leveraging its 
retransmission rights. That misuse of retransmission consent in no way 
benefits, for example, the local viewers of the network-owned and 
operated station in Orange County, California--it only benefits the 
media conglomerate that owns the station.
    Contrary to the findings of the GAO's case study, wireline 
overbuilds in Cox markets have had little impact on Cox's cable rates, 
which reflect the steep fee increases we're facing for cable 
programming. In fact, as submitted in detail for the record in this 
hearing, Cox Cable prices are virtually the same in Cox markets that 
face overbuild competition as they are in those that do not.
    We continue to increase the value proposition for Cox Cable 
customers as we introduce numerous service enhancements including 
digital cable, HDTV, Digital Video Recorders and Entertainment-on-
Demand. The introduction of new technology also means enhanced tools to 
give parents more control over what their children are watching, 
including the V-chip and program blocking. In particular, digital 
technology provides a highly secure, encrypted environment for adult 
programming, as well. For analog customers, Cox is providing traps to 
help them block programming they find unpalatable. And finally, Cox is 
launching a companywide consumer education program to help parents 
understand all of their parental control options, as well as where to 
find all of the great family-friendly programming available on cable. 
Meanwhile, Cox customers continue to have access to a low-priced, 
regulated lifeline basic tier, priced at roughly $12 a month, featuring 
15 to 25 channels of programming.
    The GAO report notes that the a la carte sale of cable networks 
could drive up costs for cable customers. We agree. This technical and 
economic model does not work and is not in consumers' best interest as 
it results in higher prices and fewer program choices.
    Competition is working and best serves American consumers.
    The GAO report agrees that competition spurs investment and 
provides more choice and value for consumers. Robust competition exists 
today among cable operators, DBS providers, overbuilders and telephone 
companies and will keep prices in check, to consumers' benefit.
    Thank you.
                                 ______
                                 
                               Attachment

  The GAO Report: An Accurate Assessment of Cable Price Increases and 
                        Their Underlying Causes

Bottom Line
    The GAO Report supports Cox's long-standing positions on a range of 
important issues, including: (1) the legitimate business factors, 
including programming cost increases, that contribute to cable service 
price increases; (2) the competitive state of the video programming 
marketplace; (3) the pernicious effects of rising sports programming 
costs and TV network retransmission consent negotiations on cable 
customers; and (4) the reliance on competition, rather than regulation, 
as the best means of protecting consumers' interests.
Rate Increases
    The GAO Report concludes that: ``Several key factors--including 
programming costs and infrastructure investments--are putting upward 
pressure on cable rates. . . . Additionally, cable operators have 
increased spending on customer service, which typically is now 
available 24 hours a day, 7 days a week.'' Report at 4-5. These 
increased costs are not all being passed through to basic cable 
customers, however. According to GAO, ``most franchises told us that 
their actual annual cost increases for the year covered by the 2002 
survey exceeded their rate change for expanded basic service.'' Report 
at 14.\1\
---------------------------------------------------------------------------
    \1\As GAO observes, ``in unregulated markets, . . . costs are an 
important factor in price setting by companies, but several other key 
factors, such as consumer demand and the competitiveness of the market, 
also influence the market price. Thus, costs and prices need not move 
in tandem.'' Report at n. 16.
---------------------------------------------------------------------------
    Statistics included in the GAO Report, the FCC's Annual Rate Survey 
and other industry studies indicate that, between 1999 and 2002, 
programming cost increases in particular accounted for a large share of 
all basic cable price increases. Although programming costs represented 
a smaller percentage of total cable operator costs over that time 
period, they played a much larger role in basic cable service price 
increases.\2\ Indeed, because Cox's rate increases have been lower than 
the industry average, the effect of programming cost increases on Cox's 
basic cable price increases has been even more significant: programming 
cost increases accounted for more than half of Cox's basic cable price 
increases from 2000 to 2003, and they represented two-thirds of Cox's 
basic cable rate increases last year.
---------------------------------------------------------------------------
    \2\See ``Correcting the Errors in the ESPN/CapAnalysis Study on 
Programming Cost Increases,'' by William P. Rogerson, Professor of 
Economics, Northwestern University.
---------------------------------------------------------------------------
    While Cox's programming costs have increased on average 12 percent 
annually since 2000, its basic cable prices on average have increased 
annually less than 6 percent. Over the past four years, the price for 
Cox's lifeline basic service has increased even more slowly, rising 
just 3 percent from $11.66 in 1999 to roughly $12.00 in 2003.
Video Competition
    GAO has found that ``[c]ompetition from wire-based and DBS 
operators leads to lower cable rates and improved quality and service 
among cable operators.'' Report at 3. In particular, the Report 
concludes that ``DBS has become an important competitor to cable 
operators nationwide.'' Report at 10.
    In the face of these competitive pressures, Cox's cable price 
increases have been moderated and are below industry averages. Cox also 
has taken a variety of steps to enhance the value of its products, to 
the benefit of video and non-video customers alike. Cox customers 
continue to have access to a low-priced, lifeline basic tier, which is 
priced at roughly $12.00 a month and typically includes 15 to 25 
channels of programming (such as local over-the-air television 
stations, PEG and leased access channels, a TV channel guide and public 
service channels such as C-SPAN). Cox's expanded basic offering is 
purchased by roughly 95 of its video customers and, on average, 
contains 45 to 55 channels for around $26.50. In recent years, Cox also 
has launched advanced video services, including digital cable tiers, 
HDTV, Digital Video Recorder (DVR), and entertainment-on-demand, all of 
which have been enthusiastically embraced by its customers.
    In addition, to better compete in the marketplace, Cox has 
successfully launched an array of non-video services, including high-
speed Internet access (with approximately 1.8 million customers) and 
local residential phone service (with over 900,000 customers). Each of 
these services has been enthusiastically embraced by Cox's customers, 
is competitively priced, and has brought much-needed competition to its 
respective industry sector.
Sports Programming Costs
    The GAO Report found that ``[p]rogramming costs incurred by cable 
operators have risen considerably--on average by as much as 34 
percent--in the last 3 years and, in particular, programming costs 
associated with cable networks showing sporting events have risen even 
more--on average by 59 percent--during the same time frame.'' Report at 
4. ``Conversely, for the 72 nonsports networks, the average increase in 
license fees for the same period was approximately 26 percent. Further, 
the average license fees for the sports networks were substantially 
higher than the average for other networks.'' Report at 22.
    In Cox's experience, sports programming prices are skyrocketing. 
Today, Cox customers pay $2.61 for ESPN alone--an amount equivalent to 
the costs of the other seven top-rated cable networks combined. Some 
sports networks are seeking up to 35 percent annual rate increases. Yet 
less than a quarter of Cox's customers are avid sports fans. Indeed, 
ESPN and Fox Sports together account for just 8 percent of viewing, but 
a full 32 percent of Cox's programming costs.
    Although the GAO Report raises a number of important concerns about 
a pure a la carte approach, it observes that ``[c]reating a separate 
tier for sports channels may be viable because this genre of 
programming has a loyal base of customers.'' Report at 6. At present, 
Cox is contractually obligated by the powerful sports channels to place 
them on Cox's most popular programming tier.\3\ As a result, virtually 
all of Cox's customers are forced to foot the bill for this expensive 
programming and its exorbitant annual rate increases. If the sports 
networks do not moderate their annual rate increases to a reasonable 
level, Cox will explore the possibility of placing them on a separate 
sports tier. In order to maximize consumer welfare, however, this 
decision must be made by Cox in discussions with cable programmers, and 
not by government regulators.\4\ Reasonable marketplace behavior by 
sports channel owners, not government legislation, is the answer.
---------------------------------------------------------------------------
    \3\See also GAO Report at 33-34 (``one individual responsible for 
negotiating program contracts for cable operators noted that all of the 
top 40 to 50 networks specify that their networks appear on either the 
basic or expanded-basic tier'').
    \4\See ``Cable Program Tiering: A Decision Best and Properly Made 
by Cable System Operators, Not Government Decision Makers,'' by 
Professor William P. Rogerson, Professor of Economics, Northwestern 
University.
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Retransmission Consent
    GAO documents the expanding vertical integration of the broadcast 
networks into cable programming. In particular, the Report finds that 
cable networks today are far more likely to be majority-owned by one of 
the four major television networks than they are to be majority-owned 
by cable operators: Of the 90 cable networks that are most frequently 
carried on cable operators' basic or expanded basic tier, 
``approximately 19 percent were majority-owned (i.e., at least 50 
percent owned) by a cable operator,'' while ``approximately 43 percent 
of the 90 networks were majority owned by a broadcaster.'' Report at 
26-28.
    Retransmission consent has been an important tool used by the 
television networks to obtain cable carriage of their affiliated cable 
networks. According to GAO, retransmission consent agreements ``often 
include, as part of the agreement between cable operators and 
broadcasters for the right of the cable operator to carry the broadcast 
station, a simultaneous agreement to carry one or more broadcast-owned 
cable networks.'' GAO also cites numerous reports that, as a result, 
``cable operators sometimes carry networks they might not otherwise 
have carried, and this practice can make it difficult for independent 
cable networks to be carried by cable operators.'' Report at 29. GAO 
accordingly recommends that policymakers should ``review[] whether 
changes to the retransmission consent process should be considered.'' 
Report at 6.
    Like many cable operators, Cox has been met with frequent demands 
from the major TV networks in retransmission consent negotiations that 
it carry network-affiliated cable channels that its customers may not 
want in order to secure carriage of the networks' owned-and-operated 
television stations. Cox agrees with GAO that the major television 
networks' retransmission consent tactics warrant further investigation.
Competition, Not Regulation, Is the Answer
    GAO correctly concludes that competition in the video marketplace 
protects consumers' interests. Report at 6 (``Although re-regulation of 
cable rates stands as a possible option, taking steps to promote 
competition would help to reduce cable rates by leveraging the normal 
workings of the marketplace.'')
    Cox agrees that the private sector, not the government, holds the 
key to moderating cable price increases in the future. Cox will 
continue its longstanding efforts to curb operating cost increases 
within its control. But cable programmers and operators also must work 
closely together to develop reasonable approaches to programming cost 
increases so that cable prices can increase more moderately in the 
future.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 ______
                                 

   Cable Program Tiering: A Decision Best and Properly Made by Cable 
              System Operators, Not Government Regulators

  November 10, 2003 by William P. Rogerson,* Professor of 
                   Economics, Northwestern University
---------------------------------------------------------------------------

    \*\This Study was prepared for and funded by Cox Communications 
Inc.
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1. Introduction
    At the moment, most cable TV systems include sports programming 
such as ESPN and many regional sports networks (RSNs) as part of the 
expanded basic tier of programming for which subscribers pay a single 
monthly fee. The decision of which tier to place this programming in is 
not regulated by government, i.e., it would be perfectly legal for 
cable systems-if they were able to negotiate contracts with programmers 
that permitted this-to offer sports programming (or almost any other 
type of programming for that matter) on a separate program tier for 
which subscribers were charged an additional price.
    An issue that has received attention from policy makers, industry 
participants, and the press in the last year is that the license fees 
that cable systems pay for certain sports programming have been 
increasing considerably faster than the license fees they pay for non-
sports programming, so that the cost of sports programming has begun to 
consume a very significant and ever-growing share of total programming 
cost. For example, at a recent investor's conference, James Robbins, 
the CEO of Cox, reported that it pays $2.61 per subscriber per month 
for ESPN, which is more than the cost of the seven top-rated non-sports 
ad-supported networks combined. He also reported that ESPN was asking 
for a 20 percent annual increase in its fees from Cox while Fox Sports 
has proposed a 35 percent increase next year.\1\ In its recent report 
on prices in the cable TV industry the GAO concluded:
---------------------------------------------------------------------------
    \1\New York Times, ``Sports Fan is the Prize, of the Victim in 
Cable Fight,'' October 6, 2003, page C1 and C4.

        ``Almost all of the cable operators we interviewed cited sports 
        programming as a major contributor to higher programming costs. 
        On the basis of our analysis of Kagan World Media data, the 
        average license fees for a cable network that shows almost 
        exclusively sports-related programming increased by 59 percent 
        in the 3 years between 1999 and 2002. Conversely, for the 72 
        nonsports networks, the average increase in license fees for 
        the same period was approximately 26 percent. Further, the 
        average license fees for the sports networks were substantially 
        higher than the average for other networks.''\2\
---------------------------------------------------------------------------
    \2\See GAO, Issues Related to Competition and Subscriber Rates in 
the Cable Television Industry, GA0-04-8, October 2003 at 22, (``GAO 
Study'').

    The increasing expense of sports programming has raised the issue 
of whether or not it might be desirable for cable systems to offer 
certain high priced sports programming either as individual channels 
(this is often referred to as offering the channels ``ala carte'') or 
as part of a separate program tier consisting perhaps of a small number 
of sports channels.\3\ Rationales for this suggestion include both the 
idea that it may not be fair or economically sensible to ``force'' 
viewers who are not interested in sports to pay for this high-priced 
programming, and the idea that producers of sports programming might 
somehow be induced to keep prices lower if their products were offered 
on a separate tier.
---------------------------------------------------------------------------
    \3\0ffering sports channels a la carte or as part of a small tier 
of sports channels would probably have much the same effect and I will 
not distinguish between these two alternatives in this paper. To ease 
the exposition I will generally use the term ``offer programming on a 
separate tier'' to refer either to offering the programming a la carte 
or offering it as part of a group of channels outside of the expanded 
basic tier for an extra fee.
---------------------------------------------------------------------------
    This has, in turn raised two different public policy issues.
    Issue #1: Should government require cable systems to offer certain 
sports channels on a different tier of service than the expanded basic 
tier?
    Issue #2: Should government prohibit cable systems from offering 
certain sports channels on a different tier of service than the 
expanded basic tier?
    The reason that the first issue has arisen is of course obvious. If 
it is the case that consumers would be better off if these channels 
were offered on a separate tier and if it is the case that this outcome 
will never occur so long as cable systems are not required to do so, 
then a case for requiring cable systems to do this could be made. 
Senator John McCain, the Chairman of the Senate Commerce Committee, has 
raised this issue in recent committee hearings when he stated:

        ``While not the only cause of cable rate increases, soaring 
        sports programming costs passed along to all expanded basic 
        cable subscribers certainly appear to play a role. I fail to 
        understand why any customer should be forced to pay for 
        programming they do not want. I look forward to hearing the 
        thoughts of our witnesses on the merits of a la carte pricing 
        or tiering of cable channels to give consumers more control 
        over their cable bill.''\4\
---------------------------------------------------------------------------
    \4\See Statement of Senator John McCain, Chairman, Senate Committee 
on Commerce, Science, and Transportation, Full Committee Hearing on 
Media Ownership: Video Services, May 6, 2003.

    He also asked the GAO to produce a report on pricing in the cable 
TV industry and one of the issues he specifically asked it to address 
in its report was the issue of why cable operators group networks into 
tiers, rather than package networks so that customers can purchase only 
those networks they wish to receive.''\5\
---------------------------------------------------------------------------
    \5\See GAO Study, October 2003 at 1.
---------------------------------------------------------------------------
    The reason that the second issue has arisen is perhaps not quite so 
obvious. In response to rising sports programming license fees, some 
cable systems have begun to consider whether or not it would make sense 
for them to place certain sports channels on separate tiers of service 
which subscribers would pay extra for. Producers of sports programming 
have generally reacted quite negatively to this idea.\6\ Besides 
indicating that they would resist such proposals in any negotiations 
between themselves and cable systems, some programmers have also made 
the point that they believe that consumers would be harmed if cable 
systems were able to negotiate such agreements with programmers. If it 
is true that consumers would be harmed if cable systems offered sports 
programming on a separate tier of service, and if it is true that cable 
systems are seriously considering doing this, then a case could be made 
for prohibiting cable systems from offering sports programming on 
separate tiers of service. This is why the second issue has arisen.
---------------------------------------------------------------------------
    \6\See for example New York Times, ``Sports Fan is the Prize, or 
the Victim in Cable Fight,'' October 6, 2003, pages C1 and C4. It 
describes ESPN's and News Corp.'s reaction to the suggestion of James 
Robbins, the CEO of Cox, that one solution to rising sports fees might 
be to offer some sports programming on separate tiers of service. It 
quoted Peter Chemin, President and Chief Operating Officer of News 
Corp. which produces many regional sports networks as stating that the 
idea of tiering was ``a nonstarter.'' Robert Alger, President and Chief 
Operating Officer of Disney, which owns ESPN, was quoted as describing 
Mr. Robbin's comments as ``comic relief.''
---------------------------------------------------------------------------
    One particular programmer that has made arguments along this line 
is ESPN.
    ESPN has publically distributed a study by Economists Inc. entitled 
``Consumer, Operator, and Programmer Benefits from Bundling Cable 
Networks''\7\ that argues that bundling packages of networks together 
can in many cases be efficient and benefit both consumers and firms. A 
sheet of talking points that ESPN has distributed along with this paper 
states ``A-la-carte would be bad for consumers-People will pay more and 
get less.''\8\ Undoubtedly one of ESPN's main goals in making these 
arguments is to dissuade policy makers from adopting regulations that 
would require cable systems to offer ESPN on a separate tier of 
service. However, ESPN also appears to be suggesting that policy makers 
should consider prohibiting or at least strongly discouraging cable 
systems from offering ESPN on a separate tier of service in the event 
that they want to do. this.
---------------------------------------------------------------------------
    \7\Economists Inc., Consumer, Operator, and Programmer Benefits 
from Bundling Cable Networks, July 2002, (``Economists Inc. Study'').
    \8\Undated sheet entitled ``ESPN Key Points'' which was attached to 
copies of the Economists Inc.(2002) study distributed to members of 
Congress and their staffs.
---------------------------------------------------------------------------
    Cox Communications has asked me to provide my own economic analysis 
of the issue of whether or not it would ever make sense for policy 
makers to prohibit or at least strongly discourage cable systems from 
offering certain high priced sports networks such as ESPN on separate 
tiers of service, and, in particular, to specifically consider whether 
the Economists Inc. study distributed by ESPN provides any compelling 
evidence or arguments in support of this proposition.
    My conclusion is that it would be a bad policy for government to 
either prohibit or discourage a cable system from offering programming 
on a different tier of service than expanded basic if the cable system 
determined that this was a good business strategy and was able to 
negotiate an agreement with the producer of the programming which 
permitted this. I base this conclusion on four points. First, standard 
economic theory provides a compelling argument that government's 
current policy of not regulating the tiering structure of programming 
is the most desirable policy. Standard economic theory suggests that 
some bundling and tiering of programming is likely to be efficient, 
that the precise form of the efficient tiering scheme is likely to 
depend in complex ways on market conditions that cable systems will 
understand much better than regulators, and that cable systems will 
generally have an incentive to choose efficient tiering schemes because 
cable systems can charge subscribers higher prices by providing them 
with packages of services that they value more highly.
    Second, a well accepted and standard business practice for most 
cable systems is to offer high cost special interest programming on 
separate tiers of service instead of including them in expanded basic. 
For example, almost all cable systems offer premium movie channels and 
certain premium sports packages on separate tiers of service. The 
common sense reason for this is simply that when the cost of any 
particular special interest programming grows too high, the 
transactions costs of separately selling subscriptions to the program 
are outweighed by the difficulties that are caused by forcing people to 
buy an expensive product they may not want. The fact that cable systems 
have become interested in offering certain sports channels on separate 
tiers as their costs have skyrocketed is therefore completely 
consistent with normal well-accepted business practices in this 
industry that make good economic sense.
    My third point is that I do not believe that the Economists Inc. 
study distributed by ESPN provides any specific arguments or evidence 
to suggest that government should prohibit a cable system from offering 
a sports channel on a separate tier if the cable system wanted to and 
was able to negotiate an agreement with a programmer that permitted 
this. The thrust of the paper by Economists Inc. is to argue that 
government should not require cable systems to offer sports programming 
on a separate tier because they believe that cable systems will 
generally have the incentive to choose an efficient tiering structure. 
Nowhere in their paper do they attempt to explicitly argue that it 
would be a good policy for government to prohibit or discourage a cable 
system from offering sports programming on a separate tier of service 
if the cable system wanted to do this. This would, in fact, be 
inconsistent with their central point which is that cable systems ought 
to have a reasonably good incentive to choose the efficient tiering 
structure.
    My fourth point is that an economic analysis of the nature of the 
bargaining problem between programmers and cable systems suggests that 
cable systems might be able to provide programmers with better 
incentives to keep programming prices low by placing their programming 
on a separate tier of service instead of bundling it together with 
large numbers of other programs. One incentive for a programmer to keep 
its license fees low is created by the fact that cable systems will 
pass through some of these license fee increases to subscribers in the 
form of higher subscription prices and this will therefore reduce 
demand for the programmer's product. It is straightforward to show 
using standard economic theory that this pass-through effect is muted 
when a program is bundled together with many other programs. Therefore, 
to some extent, cable systems may be able provide sports programmers 
with more powerful incentives to keep their programming costs lower by 
placing their products in a separate tier and allowing consumers to 
directly respond to price increases by not purchasing the programming 
if they wish.
    Since the main focus of my paper is on the policy issue of whether 
or not it would ever make sense for government to prohibit or at least 
discourage a cable system from placing certain programming on a 
separate tier if it wanted to do so, I have not focused specifically on 
the related issue of whether or not it might ever make sense for 
government to require cable systems to place certain programming on a 
separate tier even if they wanted to include it in expanded basic. 
However, it should be clear that the implication of the economic theory 
I outline above is that it would also generally be a bad idea for 
government to consider this type of regulatory intervention. Since 
economic theory suggests that cable systems should have a relatively 
good incentive to bundle and package programming into tiers in ways 
that will provide maximum value to their customers, there is in general 
no ``market failure'' that requires government intervention. Therefore 
I believe that government's current policy of essentially not 
regulating most program tiering decisions of cable systems is generally 
the correct policy.
    My paper is organized as follows. I provide some general background 
information on program tiering in Section 2. Then I explain each of the 
four points I list above in Sections 3-6. Finally I draw a brief 
conclusion in Section 7.
2. Background
    Cable TV systems typically offer subscribers access to a group of 
approximately 60 channels of programming often referred to as the 
expanded basic programming tier for a single monthly fee. This group of 
channels is divided into the basic service tier (BST) which consists of 
primarily local broadcast stations and the major cable program service 
tier (CPST) which constists of the remaining channels. Cable TV systems 
are required by regulation to sell subscriptions to the BST without 
requiring subscribers to purchase any other channels.\9\ With this one 
exception mandated by regulation, subscriptions to subgroups of 
channels or individual channels within the expanded basic tier are not 
sold separately. Rather, to subscribe to any channel or subgroup of 
channels within the expanded basic tier, consumers must subscribe to 
the entire tier. Subscribers generally can also purchase access to 
various additional channels for extra fees. Often many of the 
additional channels are also packaged into tiers instead of being made 
individually available. However, some channels of programming that are 
unusually expensive such as premium movie channels or certain premium 
sports channels are sold individually.
---------------------------------------------------------------------------
    \9\The price of the BST is subject to regulation unless the cable 
system faces competition from another wireline provider of video 
services. The FCC reports that such competition currently exists in 
only 2 percent of cable markets. See FCC, In the Matter of Annual 
Assessment of the Status of Competition in the Market for the Delivery 
of Video Programming: Ninth Annual Report, MB Docket No. 02-145, 
December 31, 2002 at para. 115.
---------------------------------------------------------------------------
    Except for the requirement that cable systems offer access to the 
BST, the way that cable TV firms design their various tiers of 
programming is largely unregulated.\10\ That is, cable systems are 
basically free to decide which tier of service to place any channel in, 
so long as they are able to negotiate contracts with programmers that 
permit this. Governrnent essentially does not interfere with whatever 
arrangements cable systems and programmers are able to negotiate with 
one another for the tiering of programs.
---------------------------------------------------------------------------
    \10\0ne additional requirement is that the cable system must 
require consumers to subscribe to the BST in order to subscribe to any 
other channels.
---------------------------------------------------------------------------
    In this paper I will use the terms ``offer programming on a 
separate tier'' or ''unbundle programming'' synonymously to mean 
offering programming either by itself or as part of larger package of 
programs for a separate fee over and above the fee paid for access to 
the expanded basic tier.
3. The Economics of Whether Or Not Government Should Regulate the 
        Program Tier Structure of Cable Systems
A. The General Argument
    The current ``hands off' regulatory policy is consistent with and 
supported by basic economic theory. The relevant economic theory can be 
summed up in three principles. First, it is likely that some bundling 
is efficient. While it is true that bundling can harm consumers by 
reducing their choice, it can also benefit consumers if there are extra 
transactions marketing and equipment costs associated with selling each 
channel separately that can be avoided by bundling.\11\ Second, 
determining the efficient pattern of bundling will generally be a 
complex issue which depends on difficult to determine market 
information such as consumer preferences and the technology of 
production. In most cases, firms in the industry will be much better 
informed about these sorts of factors than government regulators.\12\ 
Third, it seems likely that profit maximizing firms will generally have 
an incentive to bundle products efficiently. This is simply because 
they can charge consumers more money by providing them with packages of 
products that better fill their needs. Since firms will be generally be 
much better able to determine what sorts of bundling arrangements might 
produce efficiencies and since they will generally have an incentive to 
adopt efficient bundling arrangements, it therefore makes sense to 
delegate this decision to firms.
---------------------------------------------------------------------------
    \11\See the Economists Inc. Study, July 2002 for a much fuller 
discussion of the potential benefits of bundling.
    \12\For example, in its recent report on cable industry prices, the 
GAO specifically investigated the issue of whether consumers might be 
made better off if cable systems were required to unbundle more 
programming and decided that it could draw no conclusion on this issue. 
The report states: ``Thus, there are a variety of factors that make it 
difficult to ascertain how many consumers would be made better off and 
how many would be made worse off under an a Ia carte approach.'' See 
GAO Study, October 2003 at 37.
---------------------------------------------------------------------------
B. Regulation of Bundling and Monopoly Power
    Except for the BST, government essentially does not regulate the 
prices that cable systems charge to subscribers. It is probably fair to 
say that there is a fairly wide range of views among economists, policy 
makers, consumer activists, and industry representatives regarding how 
much market power is possessed by cable systems. Therefore it is 
interesting ask whether or not and how the economic argument that 
regulation of bundling is unnecessary is related to the issue of 
whether or not cable TV systems have market power or not. I will make 
two basic points in this regard.
    First, and most important, the conclusion that there is no general 
need for government regulation of bundling does not depend critically 
on the precise level of competition that exists in this industry. This 
is because even a firm with market power will generally want to supply 
its customers with their most preferred mix and packaging of products 
because it will be able to charge consumers the highest possible price 
by so doing. Therefore, while various groups may disagree on the extent 
to which cable systems have market power, they should all still be able 
to agree that there is no good case for extensive regulation of program 
tiering structure.
    Second, and related, the idea that regulation of program tiering 
could somehow substitute for regulation of market power is simply 
incorrect. People who believe that cable systems have so much market 
power that their prices should be regulated should still not be in 
favor of regulating the program tiering structure of cable systems. If 
a firm has market power, it will be able to charge high prices for 
whatever bundles of products that it sells. Allowing government to 
regulate how firms with market power bundle products will only increase 
the likelihood that the firms do not offer the most efficient bundle of 
products, but will not prevent them from charging monopoly prices for 
whatever bundles of products they do sell.
C. Bundling and Price Discrimination
    The above two subsections have presented the argument that, to the 
extent that bundling . is a way to reduce transactions and marketing 
costs, it is likely that cable systems will have appropriate incentives 
to correctly balance the costs and benefits of bundling and therefore 
choose efficient levels of bundling. There is also one other motivation 
that firms may have for bundling products together that could possibly 
apply to the case of cable TV. This motivation for bundling is often 
referred to as the price discrimination motive since it is related to a 
firm's motivation to try to charge different consumers different prices 
for the same product depending upon what they are willing to pay for 
it.\13\ The essential idea is that when there is some negative 
correlation between individual consumers' valuation of different 
products,\14\ that a firm can sometimes charge higher prices to 
everyone by bundling the goods together.
---------------------------------------------------------------------------
    \13\See William James Adams and Janet L. Yellen, ``Commodity 
Bundling and the Burden of Monopoly,'' The Quarterly Journal of 
Economics, August 1976,90, 475-498; Richard Schmalensee, ``Gaussian 
Demand and Commodity Bundling,'' The Journal of Business, January 1984, 
57, S211-S230; R. Preston McAfee, John McMillan and Michael D. 
Whinston, ``Multiproduct Monopoly, Commodity Bundling, and Correlation 
of Values,'' The Quarterly Journal of Economics, May 1989, 104, 371-
383; and Gregory Crawford, ``The Discriminatory Incentives to Bundle: 
The Case of Cable Television,'' October 7, 2002, unpublished 
manuscript, Duke University.
    \14\For example this would be true if on average a viewer with a 
high willingness to pay for sports programming has a low willingness to 
pay for nonsports programming and a viewer with a high willingness to 
pay for non sports programming has a low willingness to pay for sports 
programmmg.
---------------------------------------------------------------------------
    If this is the motivation for bundling, the issue of whether or not 
firms will always pursue bundling strategies that benefit consumers is 
somewhat murkier. In particular it is easy to create examples where 
bundling can make consumers worse off but equally easy to create 
examples where bundling makes consumers better off.\15\ I think a fair 
characterization of the consensus view of economists at this point is 
that they simply do not know whether this type of bundling is likely to 
benefit or harm consumers. However, since regulation is costly and can 
create other distortions, the fact that this type of bundling cannot be 
shown to be systematically harmful to consumers is sufficient reason 
for most economists to conclude that there is no reason to regulate 
this type of bundling.
---------------------------------------------------------------------------
    \15\The Economists Inc. study provides an example in its appendix 
where bundling is profitable and consumers are made better off by 
bundling. See Adams and Yellen (1984), Figure 4 at 482 for an example 
where bundling is profitable and consumers are made worse off by 
bundling.
---------------------------------------------------------------------------
    This is of course a somewhat weaker conclusion than the one that 
applies to the case of bundling motivated by reduction of transactions 
costs. For the case of transactions costs, economic theory suggests 
that firms will generally have an incentive to engage in bundling that 
benefits consumers. For the case of price discrimination, economists 
simply cannot say at this point whether there appears to be any 
systematic tendency for such bundling to make consumers better off or 
worse off.
    However, economic theory still does not suggest a general need for 
regulation of bundling in this case. Furthermore, it is not clear to 
what extent the motivation of price discrimination applies to the 
bundling decisions in cable TV. Therefore, consideration of this 
alternate motivation for bundling does not appreciably change my 
conclusion that government is unlikely to be able to make consumers 
better off by regulating the way that cable systems bundle programming 
together.
4. Cable Systems Generally Follow the Practice of Unbundling Special 
        Interest High Cost Programming
    A common sense proposition supported by real world behavior is 
that, when programming is only of interest to a minority of viewers and 
is extremely costly, that it should be offered at a separate price 
rather than included in the expanded basic bundle. This is because the 
cable system needs to charge a fairly high price to recover the costs 
of the programming but only a fraction of the population would be 
willing to pay such a high price. The cable system would risk losing 
too many general viewers with no interest in the costly programming if 
it included it in the expanded basic package and tried to raise prices 
enough to cover the cost. In such a case it makes more sense for the 
firm to charge a separate high price for the programming and only sell 
it to people willing to pay this high price.
    Cable systems appear to already follow this general principle and I 
believe that policy makers and the public already accept its common 
sense. In particular the most costly programming that most cable 
systems show are the premium movie channels, pay per view channels, and 
premium sports packages and all of these are generally sold separately 
instead of being included in the expanded basic tier. The fact that 
cable systems have begun to express an interest in moving certain 
sports programming out of the expanded basic tier as the costs of this 
programming have begun to skyrocket strikes me as being completely 
consistent with the general practice that cable firms have always 
followed to place unusually expensive special interest programming on 
separate tiers of service instead of including it in expanded basic.
5. The Economist Inc. Study Does Not Provide Any Support for the 
        Proposition That Government Should Prohibit Cable Systems from 
        Offering Sports Programming on a Separate Tier of Service
    A careful reading of the study that ESPN has distributed by 
Economists Inc. reveals that the study provides no specific arguments 
or evidence in support of the proposition that government could help 
consumers by forcing cable systems to offer certain programming such as 
ESPN on expanded basic when the cable systems would rather offer it on 
a separate tier. This is not a question that the paper even raises, 
much less answers. Rather, the sole focus of the paper is to support 
the proposition that government should not force cable systems to offer 
certain programming such as ESPN on a separate tier of service if the 
cable systems would rather offer it as part of expanded basic.
    The Economists Inc. study makes two basic economic points to 
support its position. These are that:

  (i) there are good economic reasons to believe that some amount of 
        bundling of programming is likely to be efficient

  (ii) when cable systems find it profitable to bundle this will also 
        generally benefit consumers.

    However, the Economists Inc. study does NOT attempt to argue that 
circumstances exist where a cable system might find it profitable to 
place programming on a separate tier but consumers would be better off 
if the cable system was forced to offer it as part of the expanded 
basic tier. The example in the Appendix to the Economists Inc. study is 
an example where the cable system finds it profitable to bundle and 
consumers are also made better off by this. It is NOT an example where 
the firm finds it profitable to unbundle but consumers would be made 
better off if the cable system was forced to bundle.
    In my opinion arguments (i) and (ii) made by the Economists Inc. 
study in support of the proposition that government should not require 
unbundling are simply part of the standard view of the economics 
profession on the economics of bundling that private firms will 
generally have an incentive to bundle to the extent this is efficient 
and there is therefore no need for extensive government regulation. In 
particular, while this conventional view supports the proposition that 
there is no need for mandatory unbundling, it also supports the 
proposition that there is no need for mandatory bundling either. 
Therefore although the Economists Inc. study did not explicitly address 
the issue of mandatory bundling, the arguments they have made would 
generally be consistent with the view that there is no need for 
mandatory bundling.
6. Unbundling May Help Reduce Program Costs
    Until this point in the paper I have implicitly taken the view that 
program costs are exogenously determined and the only question of 
interest is how a cable firm should arrange its program tiers given the 
exogenously determined program costs. However, I believe that this 
viewpoint does not take into account one of the benefits that consumers 
may receive when programming is placed in a separate tier. Namely, 
placing programming in a separate tier may actually reduce the 
incentives for programmers to attempt to negotiate higher prices with 
cable systems and therefore also decrease programming costs. At least a 
share of these cost savings would likely be passed on to consumers and 
this would provide an extra benefit to consumers.
    When a sports programmer considers asking for a price increase, one 
factor that the programmer considers is that, to some extent, the cable 
system will pass through some of this increase to subscribers in the 
form of higher subscription prices and that this will, in tum, reduce 
demand for the programmer's product. That is, cable system pass-through 
of programming price increases is a factor which provides the 
programmer with a stronger incentive to keep its prices lower. It is 
straightforward to show using completely standard economic models, that 
the pass through effect for a program will be larger if the program is 
offered separately at its own price rather than as part of a large 
package of programs at a single price. The result is that a programmer 
will charge a lower price for programming if his program is offered on 
a separate tier than if it is bundled together with other programs. I 
provide a simple example in an appendix to this paper which illustrates 
this point. In the example, the cable system finds it profitable to 
unbundle programs because this induces programmers to lower their 
license fees. Furthermore, consumers also benefit from unbundling 
because this results in lower subscription prices.
    This idea is very intuitive. When a program is offered to consumers 
as part of a large package, the effect of price changes of any 
particular program on subscriber demand for the package will be muted 
and this reduces the incentive of individual programmers to keep prices 
low. When a program is placed on a separate tier, a programmer 
experiences a much larger and direct loss of demand when it raises its 
prices and this provides the programmer with a large and immediate 
incentive to keep prices lower.
7. Conclusion
    Economic theory suggests that government's current policy of not 
extensively regulating the program tier structure of cable TV systems 
is a sensible policy. In particular, it is unlikely that consumers 
would benefit if government prohibited a cable system from offering 
certain costly sports programming such as ESPN on a separate tier of 
service if the cable system wished to do this and was able to negotiate 
an agreement with a programmer which permitted it.
                                Appendix
Introduction
    The purpose of this appendix is to present a simple example which 
illustrates the idea that a downstream cable system can provide 
stronger incentives for upstream programers to charge lower license 
fees by offering programs on separate tiers instead of bundling them 
together.
The Example
    I will assume that there are two programmers called programmer 1 
and programmer 2 that each sell a different program to a single cable 
system which in turns sells subscriptions to consumers. I will assume 
that the inverse demand curve of subscribers for each program is the 
same and is given by

    (1) pi = A - B qi

where pi denotes the price of a subscription to program i, 
qi denotes the quantity of subscriptions to program i sold, 
and A and Bare positive constants. I will also assume that any given 
consumer has the same willingness to pay for each program.\16\ This 
means that the inverse demand curve for the bundle of both products is 
simply the vertical sum of the two inverse demand curves for each 
program and is given by
---------------------------------------------------------------------------
    \16\That is, I assume that consumers who are willing to pay a high 
amount for one program are also willing to pay a high amount for the 
other program. In fact, I make the extreme assumption that the 
willingness to pay for programs is perfectly correlated in the sense 
that each consumer has the same willingness to pay for each program. 
This assumption implies that there is no price discrimination motive 
for bundling and therefore considerably simplifies the analysis. The 
same incentive effect as identified in this example would exist in more 
complex cases where there is also a price discrimination motive for 
bundling but the analysis would be considerably more complicated.

---------------------------------------------------------------------------
(2) pb = 2A - 2 Bqb

where Pb denotes the price of a subscription to the bundle 
of both programs and qb denotes the number of subscriptions 
sold. Finally I will assume that all costs of production are zero.
    The pricing game occurs in two stages. At the first stage each 
programmer chooses a license fee that it charges the cable system for 
its program. Let wi be the per subscriber license . fee that 
programmer i charges. Then at stage 2, the cable system chooses its 
retail price or prices. I will solve this game both for the case where 
the programs are sold as a bundle for a single price Pb and 
where the programs are sold for separate prices, p1 and 
p2.
The Case of No Bundling
    First suppose that the cable system sells each program separately. 
As usual, the equilibrium of a two stage game is solved by working 
backwards. When the programs are sold separately, the cable system 
plays a separate identical game with each programmer. Begin by 
considering the cable system's behavior at stage 2 if the license fee 
wi has been set for program i at the first stage. The cable 
system is a monopolist facing the linear demand curve given by (1) with 
costs wi. It is straightforward to calculate that it chooses 
the price and quantity given by

(3) pi = (A + wi)/2

(4) qi = (A - wi)/2B.

    Now consider programmer i's decision at stage 1. Programmer i is a 
monopolist with demand curve given by (4) and zero costs. It is 
straightforward to calculate that it chooses a license fee equal to

(5) wi = A/2.

Substitution of (5) into (3) yields

(6) pi = 3A/4.

Therefore the sum of program fees is given by

(7) p1 + p2 = 3A/2.

    Therefore each programmer chooses a license fee of A/2 and the 
cable system charges a price of 3A/4 for each program. Consumers 
purchasing both programs pay a price of 3A/2.
The Case of Bundling
    Now suppose that the cable system bundles the two programs 
together. Once again, begin by considering the cable system's behavior 
at stage 2 if prices of w1 and w2 have been set 
at stage 1. The cable system is a monopolist facing the linear demand 
curve in (2) with costs given by w1 + w2. It is 
straightforward to calculate that the price and quantity chosen by the 
cable system are given by

(7) pb = (2A + w1 + w2)/2.

(8) qb = (2A - w1 - w2)/B.

    Now consider the flrst stage. At the flrst stage we solve for a 
Nash equilibrium in license fees given that the each programmer faces 
the demand curve given by (8) at the second stage. It is 
straightforward to calculate that the Nash equilibrium has each 
programmer charge the license fee

(9) wi = 2A/3.

Substitution of (9) into (7) yields

(10) pb = 5A/3.

Therefore each programmer charges a price of 2A/3 and the price of the 
bundle of the programs is 5A/3.
Conclusion
    By comparing the two solutions, it is clear that license fees and 
retail prices are both lower when the programs are unbundled. 
Furthermore it is also straightforward to check that the cable system 
earns higher profits when the programs are unbundled. Therefore the 
cable system would prefer to offer each program separately and, 
furthermore, this makes consumers better off. This is because the 
upstream programmers are induced to charge lower license fees when the 
programs are unbundled.
                                 ______
                                 

  Correcting the Errors in the ESPN/Cap Analysis Study on Programming 
                             Cost Increases

    November 11, 2003 by Professor William P. Rogerson,* 
            Professor of Economics, Northwestern University
---------------------------------------------------------------------------

    \*\This study was prepared for and funded by Cox Communications 
Inc.
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1. Introduction
    Since the deregulation of all but limited basic cable TV prices in 
1996, Congress and the FCC have both closely monitored the performance 
of the cable TV industry. A chief focus of concern has been measuring 
the extent to which the prices that consumers pay for subscriptions to 
cable TV have risen and whether or not these price rises can be 
explained by increases in the costs of providing cable television. One 
particular issue that has arisen is the extent to which price rises 
simply reflect rising programming costs. In particular, cable TV firms 
have argued that a substantial share of the price increases that 
consumers have experienced simply reflects a pass-through of increases 
in the license fees that cable TV firms are charged by producers of 
programming for the right to show the programming to their subscribers. 
Programmers, on the other hand, have argued that increases in license 
fees constitute a relatively minor share of the total cost increases in 
the cable industry, and that the blame lies elsewhere.
    Perhaps surprisingly, no straightforward answer has been 
forthcoming to this simple question. For years, as part of its survey 
of cable TV prices, the FCC has asked cable TV firms to provide their 
own estimate of how big an effect programming price increases have had 
on the prices that they charge subscribers, and has reported the 
average response as part of its annual survey of cable prices.\1\ 
However, it has not been clear how to interpret these estimates since 
firms are given no explicit formula for calculating the effect. In a 
recent report on cable TV prices, the GAO gathered, reviewed and 
presented various cost and price data as part of its analysis and 
provided the qualitative conclusion that ``programming expenses and 
infrastructure investment appear to be the primary cost factors that 
have been increasing in recent years.''\2\ It did not, however, provide 
any specific numerical estimate of the share of price increases that 
can be explained by programming increases. A recent ESPN sponsored 
study\3\ by Cap Analysis used publically available data to estimate 
cost increases for the cable industry over the period from 1999 to 2002 
for all categories of costs and calculated that cost increases due to 
increases in programming costs constituted 20 percent of the total cost 
increases that had occurred over this period. It argued that this was a 
relatively small share and that increases in programming costs 
therefore did not play a major role in explaining increases in cable 
subscription prices relative to other cost factors.
---------------------------------------------------------------------------
    \1\For the most recent such report, see In the Matter of Section 3 
of the Cable Television Consumer Protection Act of 1992, Docket 92-266, 
Report on Cable Industry Prices, July 8, 2003 at 13, (``FCC Report on 
Cable Industry Prices'').
    \2\See GAO, Issues Related to Competition and Subscriber Rates in 
the Cable Television Industry, GA0-04-8, October 2003 at 12-15, (``GAO 
Report').
    \3\Jeffrey A. Eisenach and Douglas A. Trueheart, CAP Analysis, 
Rising Cable TV Rates: Are Programming Costs the Villain?'' October 23, 
2003, (``ESPN/Cap Analysis Study'').
---------------------------------------------------------------------------
    The very simple point that I make in this short paper is that there 
is a straightforward calculation that the ESPN/Cap Analysis study could 
have performed with data on subscription prices and programming costs 
that would have provided much more illuminating and economically 
meaningful information about the extent to which price increases in 
cable TV subscription prices can be explained by increases in the 
licensing fees for programming. Namely, given data on estimated 
programming cost increases, it is straightforward to calculate the 
amount that cable TV subscription prices would have had to rise in 
order to just recover the estimated increases in programming costs. The 
actual amount that subscription prices for cable TV rose can be 
calculated from FCC data. Dividing the amount that subscription prices 
would have had to rise in order to just cover increased programming 
costs by the actual amount that subscription prices rose provides a 
natural measure of the share of price increases that can be attributed 
to rising program costs.
    Note that the amount that subscription prices would have had to 
rise in order to cover increased programming costs is not necessarily 
exactly the same value as the amount that subscription prices actually 
did rise because of increases in programming costs.\4\ This is because 
a profit maximizing firm facing a downward sloping demand curve may 
generally find it optimal to pass through only a portion of program 
cost increases. Nonetheless, for the practical purpose of assessing the 
performance of the cable industry, I think that policy makers' main 
interest is in simply determining whether or not prices have been 
rising faster than they would have had to rise in order to cover all 
cost increases and the approach I suggest is the correct one to analyze 
this question.
---------------------------------------------------------------------------
    \4\That is, one could conduct the thought experiment of asking what 
the subscription price for cable TV would have been if program costs 
had remained constant. The difference between the actual subscription 
price and this hypothetical subscription price could be interpreted as 
the amount that prices actually rose because of program cost increases.
---------------------------------------------------------------------------
    Using FCC data, I calculate that between 1999 and 2002 the price of 
expanded basic cable TV service increased by $7.06 per subscriber per 
month.\5\ Based on estimated program cost data from the ESPN sponsored 
study, I calculate that during this same time period the net cost\6\ of 
expanded basic programming increased by $2.96 per subscriber per month. 
Therefore based on this data, 42 percent of the increases in expanded 
basic cable TV prices over this period were necessary to cover the 
increased cost of programming--a percentage roughly twice the figure 
posited in the ESPN/Cap Analysis study. This supports cable firms' 
claims that a significant share of increases in the subscription prices 
for expanded basic cable TV in recent years can be attributed to rising 
programming costs over this same period.
---------------------------------------------------------------------------
    \5\As will be described in more detail below, prices and costs are 
calculated for what is often called the expanded basic tier of 
programming which typically contains about 60 channels including local 
broadcast channels and most major advertiser supported cable networks 
delivered on an analog system.
    \6\As will be described below, the cost of program license fees is 
to some extent offset by income earned from advertising and the 
appropriate measure of the cost of license fees to use is license fees 
net of income earned from advertising.
---------------------------------------------------------------------------
    The remainder of this paper is organized as follows. In Section 2 I 
present the calculation of the amount that subscription prices would 
have had to increase in order to just cover the increased cost of 
programming. I then compare this value to the actual amount by which 
prices rose. In Section 3 I briefly explain why it would be difficult 
to extend the method I have used here to the case of other input costs. 
In Section 4 I explain why the calculation the ESPN/Cap Analysis study 
performed does not provide meaningful information on the extent to 
which subscription price rises for cable TV can be explained by 
increases in programming costs. Finally, I draw a brief conclusion in 
Section 5.
2. Calculation of the Subscription Price Increase Necessary to Cover 
        Increased Programming Costs
    Cable systems typically offer subscribers access to a group of 
approximately 60 channels over an analog system which includes local 
broadcast stations plus the most popular advertiser supported cable 
networks for a single monthly fee. This group of channels is sometimes 
called the expanded basic service tier and is the most commonly 
purchased service tier in most cable systems.\7\ Subscribers generally 
can also purchase access to various premium channels and pay per view 
channels for additional fees. For the purposes of this paper I will 
focus on the expanded basic service tier.
---------------------------------------------------------------------------
    \7\This group of channels is divided into the basic service tier 
(BST) which consists primarily of local broadcast stations and the 
major cable programming service tier (CPST) which consists of the 
remaining stations. Access to the BST can be purchased separately but 
the vast majority of subscribers purchase both the BST and the major 
CPST.
---------------------------------------------------------------------------
    Using FCC data on cable TV prices charged to subscribers, I 
calculate that the average monthly price that subscribers have paid for 
an expanded basic subscription increased from a value of $29.41 in 
1999\8\ to a value of$36.47 in 2002\9\ (which is the most recent year 
for which data is available.) Therefore the price of cable service 
increased by $7.06 over this period.\10\
---------------------------------------------------------------------------
    \8\See FCC Report on Cable Industry Prices, February 14, 2001. The 
data reported for 1999 separately reports the price for systems facing 
effective competitive and for systems not facing effective competition 
but does not report a weighted average price for both groups. The 
average price for systems facing effective competition was $27.78 and 
the average price for systems not facing effective competition was 
$29.52. I calculated a weighted average price using the weight of 6.1 
percent for the group facing effective competition and a weight of 93.9 
percent for the group not facing effective competition, which were the 
weights the FCC began to use the following year when it first 
calculated the weighted average price. See FCC Report on Cable Industry 
Prices, April 4, 2002, at note 22, page 7.
    \9\See FCC Report on Cable Industry Prices, July 8, 2003 at 9.
    \10\The prices reported above are for programming and do not 
include the price of equipment (converter and remote) which is reported 
separately. Since consumers do not need this equipment to subscribe to 
expanded basic and since such equipment is available for sale from 
third parties in any event, equipment prices should be unrelated to 
programming costs. The GAO (GAO Report, October 2003) follows the same 
procedure in its recent report on cable industry prices, i.e., when it 
reports FCC data on subscription prices it does not include the 
equipment charge.
---------------------------------------------------------------------------
    I will now turn to calculating the amount by which prices would 
have had to increase in order to cover the increase in operators' 
programming costs over that same time period. Cable systems typically 
earn some revenue from selling advertising time on the programs they 
show. Of course they also incur some costs selling this advertising, 
but the net revenues they earn from selling advertising are generally 
positive and therefore offset part of the cost of purchasing 
programming. To account for this fact, I will calculate the increase in 
net programming costs instead of the increase in gross programming 
costs where net programming costs are defined as

        Net Programming Cost = Gross Programming Cost - Net Advertising 
        Revenue

and net advertising revenue is defined as

        Net Advertising Revenue = Gross Advertising Revenue - Cost of 
        Selling Advertising.

The ESPN sponsored study reports that over the period from 1999 to 
2002, the estimated license fees that cable systems paid for expanded 
basic programming increased from $6.70 per subscriber per month to 
$10.20 per subscriber per month\11\ for a change of$3.50 per subscriber 
per month. Using the terminology described above, these are the gross 
programming costs, so $3.50 is the change in gross programming costs. 
Unfortunately, neither the ESPN sponsored study nor any other 
publically available source that I am aware of presents data on net 
advertising revenues for the expanded basic tier. Using data provided 
by the GAO and Cox Communications, I estimate that net programming 
costs are equal to approximately 84.5 percent of gross programming 
costs, i.e., that net advertising revenue offsets approximately 15.5 
percent of programming costs.\12\ As described above, the ESPN study 
reports that the change in gross program costs was $3.50. Therefore the 
change in net program costs is 84.5 percent of this value or $2.96.\13\
---------------------------------------------------------------------------
    \11\See ESPN Study, October 23,2003, Figure Four at 11.
    \12\The only information the GAO provides on advertising revenues 
is that gross advertising revenues offset 31 percent of gross program 
costs in its sample of firms for 2002 (GAO Report(2003) at 25). While 
the GAO reports that ``there are significant costs of selling 
television ads,''(GAO Report (2003) at 25), it unfortunately does not 
provide any numerical estimate of the size of these costs. I was 
informed by Cox Communications officials that selling costs of 
advertising are approximately equal to 50 percent of gross advertising 
revenues for them. Using this figure and the GAO figure that gross 
advertising revenues are 31 percent of gross program costs, yields the 
estimate that net advertising revenues are equal to 15.5 percent of 
gross program costs.
    \13\As a check on the accuracy of this estimate, I used another 
method to estimate this value as well. The ESPN sponsored study reports 
the value of gross advertising revenues per subscriber across all tiers 
of service. These were $2.48 per subscriber per month in 1999 and $3.73 
per subscriber per month in 2002 for a change of $1.25 (ESPN Study at 
15). To apportion these revenues between expanded basic and other tiers 
I used the figure from the ESPN sponsored study that in 2002 
programming costs for expanded basic were 65 percent of total 
programming costs. If 65 percent of total advertising revenues are 
earned by expanded basic, then this yields an increase in expanded 
basic gross advertising revenues of 81 cents. If net revenues are half 
of gross revenues (as discussed above), then the change in net revenues 
would be 41 cents. Subtracting this value from the gross programming 
cost increase of $3.50 yields a net programming cost increase of 3.09 
which is somewhat higher than the estimate of $2.96 I derived above. 
Under this alternate estimate, increased programming costs would 
therefore explain 44 percent of the actual increase in the subscription 
price of cable TV.
---------------------------------------------------------------------------
    In conclusion, over the period 1999 to 2002, FCC data demonstrate 
that actual subscription prices for cable TV rose by $7.06. During this 
same period, using the cost estimates set forth in the ESPN/Cap 
Analysis study, the net cost of this programming rose by $2.96. 
Therefore 42 percent of the actual rise in subscription prices for 
cable TV can be explained by the rise in programming costs in the sense 
that this is the amount prices would have had to rise in order for 
cable systems to recover their increased programming costs. This figure 
is twice as large as the percentage of increased programming costs to 
total increased costs calculated in the ESPN/Cap Analysis study.
3. Problems With Applying This Method to Other Classes of Input Costs
    A natural ``next question'' to consider given the above results, 
would be to examine cost increases of other inputs. In an ideal world 
one would be able to determine the increases in the costs of all 
inputs, calculate the subscription price rise that would have been 
necessary to cover these cost increases, then compare this value to the 
actual value of price increases to assess the performance of the 
industry, and, in particular, to determine whether or not price rises 
have simply covered increased costs or contributed to increased 
profits. The problem with pursuing this next question is that, while 
the cost of programming is unambiguously a direct cost of providing 
expanded basic service, most other categories of costs are much less 
directly associated with any particular product and instead must be 
allocated among products. In particular, it seems likely that a 
relatively large share of increased capital costs and perhaps also a 
share of increased operating costs may have been incurred in order to 
permit firms to offer more advanced products than expanded basic 
service, such as digital tiers of service (including pay per view and 
video on demand), broadband Internet connections, and telephony.
    In my opinion, any attempt to allocate a portion of these cost 
increases to basic analog service (in order to determine if prices for 
expanded basic service have risen by more than would have been 
sufficient to cover all cost increases of expanded basic service) would 
require a long list of assumptions which would be open to question and 
controversy. Attempting to construct and defend a set of allocation 
rules for other costs is a complex undertaking that is beyond the scope 
of this paper. My point in this paper is that the ESPN/Cap Analysis 
study could have used a simple, unambiguously correct way of 
determining how much cable subscription prices would have had to rise 
to cover increased programming costs because programming costs are a 
direct cost of providing this service, and I have restricted myself to 
conducting this calculation.
4. The ESPN/Cap Analysis Study
    My conclusion that increased programming costs play an important 
role in explaining increased subscription prices for cable TV 
contradicts the conclusion of a recent ESPN sponsored study by Cap 
Analysis\14\ that downplays the significance of increased program costs 
relative to other cost increases. Specifically this study concludes:
---------------------------------------------------------------------------
    \14\Jeffrey A. Eisenach and Douglas A. Trueheart, CAP Analysis, 
Rising Cable TV Rates: Are Programming Costs the Villain?'' October 23, 
2003, (``ESPN/Cap Analysis Study'').

        ``. . . while the costs of producing and acquiring programming 
        are rising for cable networks and cable operators alike, basic 
        cable programming costs account for only about 20 percent of 
        the cost increases faced by cable operators in recent years. 
        Operating costs and capital expenditures are a far more 
        significant source of cost increases than programming.''\15\
---------------------------------------------------------------------------
    \15\ESPN/Cap Analysis Study, 2003, at 16-17.

    While I agree with the conclusion of this study that operating 
costs and capital costs have been increasing for the cable industry and 
that a share of these cost increases ought to be attributed to expanded 
basic analog cable service, I completely disagree with the approach the 
study took to evaluate the relative importance of various classes of 
cost increases with respect to their effect on expanded basic 
subscription prices. In my opinion the study makes two fundamental 
conceptual errors. First, the study treats annual investment 
expenditures as annual operating expenses instead of amortizing them as 
any elementary economics textbook would suggest. Second, as discussed 
above, a major share of the increased capital costs and also a share of 
the increased operating costs are likely not directly associated with 
providing basic analog cable service. Rather they are associated with 
providing digital video service (including pay per view and video on 
demand), broadband Internet connections, and local telephony. However, 
the study simply compares aggregate cost increases for the firm as 
whole. The argument that the increased costs that cable firms have 
incurred to provide advanced services are large relative to increased 
programming costs does not diminish the extent to which cable 
subscription prices have had to rise in order to cover increased 
programming costs. To put this another way, my calculation that cable 
subscription prices would have had to rise by $2.96 per subscriber per 
month over the period from 1999 to 2002 in order for cable systems to 
recover their increase in estimated programming costs is a correct 
calculation independent of how large any other cost increases have 
been.
5. Conclusion
    A simple and natural way to measure the extent to which increases 
in subscription prices for cable TV can be explained by or attributed 
to increases in the cost of programming is to calculate the amount that 
subscription prices would have had to rise in order for cable systems 
to recover the increased programming costs and then compare this 
increase to the actual increase. Using industry wide data for the 1999-
2002 period, I calculate that 42 percent of the price rises that 
actually occurred can by explained by or attributed to increases in 
estimated programming costs. Therefore it appears that increases in 
programming costs do account for a significant share of the increases 
in subscription prices for cable TV that have occurred over this time 
period.

    The Chairman. Thank you very much. Mr. Bodenheimer.

          STATEMENT OF GEORGE BODENHEIMER, PRESIDENT, 
                   ESPN, INC., AND ABC SPORTS

    Mr. Bodenheimer. Thank you, Mr. Chairman and Members of the 
Committee. I appreciate the opportunity to speak with you this 
morning. I am President of both ESPN and ABC Sports. ESPN is 
the distributor of two of the largest all-sports programming 
networks, ESPN and ESPN2, as well as ESPN News, a 24-hour 
sports news channel, and ESPN Classic. We are also driving the 
digital transition with our high-definition service, ESPN Hi-
Def, and we are expanding our reach with the recently launched 
ESPN Deportes, our 24-hour Spanish language network.
    Eighty-five percent of Americans say they are sports fans, 
and expanded basic cable in particular offers them a fantastic 
array of sports viewing options. Sports are clearly one of the 
most important reasons why people subscribe to cable. 
Therefore, I would like to be very clear on one very important 
issue. It would be a consumer disaster for Congress to force 
ESPN and other channels out of the expanded basic lineup. Doing 
so would not address concerns over the retail price of cable or 
indecency. Instead, consumers will be angry and highly 
dissatisfied if their favorite sport or college team or 
conference is taken out of expanded basic and available only to 
them as a premium service for which they must pay more.
    As to indecency, neither a la carte nor the family tier 
concept would be an effective tool. Existing V-chip and related 
blocking technology offer better, less intrusive alternatives. 
Providing a reasonable and uniform decency standard is 
applicable to all channels on the basic and expanded basic 
tier.
    We were pleased to have cooperated with GAO in its report 
preparation and we concur with its primary conclusions. First, 
competition, not regulation, is the most effective way to 
provide consumers with the best products, the broadest choices, 
and the best prices.
    Second, program costs are not the primary driver of cable 
prices. It is simply wrong to blame ESPN for the retail price 
decisions of cable operators. And ESPN's new distribution deals 
with moderating rate increases respond to concerns that 
Congress and this committee may have had about the impact of 
ESPN's rates going forward.
    We also agree with GAO that a la carte distribution 
schemes, whether for all services or just directed at a 
particular genre, will only produce higher prices for all 
customers, less choice, and the extinction of many channels 
that serve specific but important audiences. A la carte would 
force consumers to pay more for their programming and to rent 
or buy set-top boxes they don't now need or want. Every 
television would need such a box to activate a la carte, and at 
$3 to $4 rental per box per month, consumers would be looking 
at much higher costs for fewer channels.
    Today, as you know, less than half of all televisions in 
America have a set-top box. A la carte would force all channels 
to expend millions of dollars in marketing and cable providers 
to spend huge sums on transaction costs to account for the 
churn brought about by people adding and dropping channels.
    These costs would most likely be borne by customers, again 
in the form of higher, not lower rates. Make no mistake about 
it. Whether you call it a family tier or a la carte, the 
consumer would be hit with higher costs and less choice. Cable 
TV is a tremendous entertainment value, and for a growing and 
significant number of Americans, satellite is offering a 
similarly compelling choice for multi-channel video. Indeed, 
consumers today have a wide array of purchase options, from 
broadcast basic cable at about $14 a month to satellite 
packages starting at $25 a month to the latest wireless video 
service that offers popular cable networks and high definition 
broadcast signals for $20 per month.
    It's clear that choice and competition have taken hold. 
Government regulation causing the breakup of expanded basic 
would not serve any positive purpose. Consumers will not be 
happy or grateful if ESPN and other cable channels are ripped 
out of basic service so that cable subscribers are charged 
extra fees to see the programming they enjoy today as part of 
their basic cable subscription.
    Thank you, Mr. Chairman. I look forward to responding to 
your questions.
    [The prepared statement of Mr. Bodenheimer follows:)

         Prepared Statement of George Bodenheimer, President, 
                       ESPN, Inc. and ABC Sports
    Thank you Mr. Chairman and members of the Committee. I appreciate 
the opportunity to speak with you this morning. I am President of ESPN 
and ABC Sports.
    ESPN is the distributor of two of the Nation's largest all sports 
programming networks, ESPN and ESPN2 as well as ESPNEWS, a 24-hour 
sports news channel, and ESPN Classic. We are also driving the digital 
transition with ESPN HD and we are expanding our reach with the 
recently launched ESPN Deportes, our 24-hour Spanish-language network.
    ESPN is, of course, not the only network delivering sports 
programming to consumers. Sports programming is on all four major 
broadcast networks, many top cable networks and all told more than 30 
national and regional cable networks carry major sports properties. 
Sports programming is extremely popular and the acquisition of sports 
rights is highly competitive.
    If you are a sports fan, and 85 percent of Americans say they are, 
expanded basic cable in particular offers you a fantastic array of 
sports viewing options and sports are clearly one of the most important 
reasons why people subscribe to cable. Therefore, I would like to be 
very clear on one very important issue: it would be a consumer disaster 
for Congress to force ESPN and other channels out of the expanded basic 
lineup. Doing so will not address concerns over the retail price of 
cable or indecency. Instead, consumers will be angry and highly 
dissatisfied if their favorite sport or college team or conference is 
taken out of expanded basic and available only as a premium service for 
which they must pay more. As to indecency, neither a la carte nor the 
``family tier'' would be an effective tool. Existing v-chip and related 
blocking technology offer better, less intrusive alternatives provided 
a reasonable and uniform indecency standard is applicable to all 
channels on the basic and expanded basic tier.
GAO Report
    We were pleased to have cooperated with GAO in its report 
preparation and we concur with its primary conclusions. First, 
competition, not regulation, is the most effective way to provide 
consumers with the best products, the broadest choices and the best 
prices. Second, programming costs are not the primary driver of cable 
prices. It is simply wrong to blame ESPN for the retail price decisions 
of cable operators, and ESPN's new distribution deals with moderating 
rates respond to concerns Congress or this committee may have had about 
ESPN's impact going forward.
    We agree with GAO that a la carte distribution schemes--whether for 
all services or just directed at a particular genre--will only produce 
higher prices for all cable customers, less choice and the extinction 
of many channels that serve specific but important audiences. A la 
carte will force consumers to pay more for their programming and to 
rent or buy set-top boxes they don't need or want. Every television 
would need such a box to activate a la carte and at $3 to $4 rental per 
box per month, consumers are looking at much higher costs, for fewer 
channels. Today, as you know, less than half of all televisions in 
America have a set-top box. A la carte will force all channels to 
expend millions of dollars in marketing and cable providers to spend 
huge sums on transaction costs to account for the churn brought upon by 
people adding and dropping channels. These costs will most likely be 
borne by customers, again in the form of higher, not lower, rates. Make 
no mistake about it, whether you call it a ``family tier'' or a la 
carte, the consumer will be hit with higher costs and less choice.
Cable and Satellite Value and Choice
    Cable TV is a tremendous entertainment value, and for a growing and 
significant number of Americans, satellite is offering a similarly 
compelling choice for multi-channel video. Indeed, between the two, 
it's clear that choice and competition have taken hold. Consider these 
facts:

   Consumers already can choose to avoid programming they don't 
        want by subscribing to the broadcast basic tier. Some 10 
        percent of cable subscribers take only this service--over 25 
        channels in most markets for an industry average cost of about 
        $14;

   The major satellite providers, DIRECTV and Dish Network, are 
        the fastest growing multi-channel distributors offering 
        packages of 60 or more video channels starting at around $25 a 
        month;

   An average cable system offers between 60 and 70 channels 
        for about $40 month and a growing array of other popular 
        service like cable modems for Internet access and high-
        definition television;

   Just in the past few months a new wireless service called 
        U.S. Digital Television began offering subscribers in several 
        cities a package of local high-definition broadcast signals and 
        11 of the most popular cable networks, including ESPN and 
        ESPN2, for $20 a month.

    Indeed, consumers' today have a wide array of purchase options and 
competition is here and growing. Government regulation causing the 
breakup of expanded basic would not serve any positive purpose. 
Consumers will not be happy--or grateful--if ESPN and other cable 
channels are ripped out of basic service so that cable subscribers are 
charged extra fees to see the programming they enjoy today as part of 
their basic cable subscription.
    Thank you.

    The Chairman. Thank you very much. Mr. Kimmelman, welcome 
back.

            STATEMENT OF GENE KIMMELMAN, DIRECTOR, 
                        CONSUMERS UNION

    Mr. Kimmelman. Thank you, Mr. Chairman. On behalf of 
Consumers Union, the print and online publisher of Consumer 
Reports, I appreciate being invited back. Mr. Chairman, I 
almost don't know where to start. I'd like to lay out a few 
other facts that haven't been highlighted this morning, but 
I'll start with the one the GAO really did highlight. Per 
Senator Breaux's comment about Congress deciding to deregulate, 
the GAO found that in the few communities where there are two 
cable wires, you can get the same programming, the same 
infrastructure expansion, the same services, for 15 to 41 
percent cheaper than where there is one cable companies and two 
satellite companies available. Isn't that important?
    There has been a lot of statements made about the danger of 
distorting markets and Congress intervening. Congress is the 
biggest abuser of markets in this area. By giving away spectrum 
that was not auctioned off, by giving away franchises to 
monopoly cable companies, you've distorted the market from the 
get-go. We've got a digital transmission, we've got now 
proposals to prevent piracy, which in other words is prevent 
consumers from even copying something in their own home, with 
government oversight. Isn't it time to give some government 
respect to consumers' choices of what they want to watch?
    Let's look at some of the facts. In return for all the 
investment cable has made, they have digital-tier services 
priced $15 to $20 a subscriber, they have cable modem high-
speed services, they have additional advertising revenue, they 
have pay services, and those services cover the costs of the 
infrastructure investment with no need to raise basic rates. 
And yet the GAO has found that rates are going up almost three 
times faster than inflation, but not where there are two cable 
wires. What does that mean?
    We can't change this overnight, but in reality, where 
there's digital service, you can offer consumers choice. In 
Canada, you can get from at least three major cable operators 
and a number of small ones, a digital package that's a basic 
package and you can pick 5 or 10 of your favorite channels for 
about 30 percent less than what cable operators offer their 
digital customers in the United States. I suggest we look into 
that.
    Mr. Chairman, I think it's really time to call everybody's 
bluff on this one. When I have to hear that the cable companies 
that drive up every consumer's bills month in, month out, year 
in, year out, and the programmers who drive up consumers' bills 
month in, month out, year in, year out, are the ones who are 
protecting consumers by blocking their choice and saying we're 
making you better off, something seems really fishy, something 
seems really wrong.
    I urge you, Mr. Chairman, I urge you, Members of the 
Committee, to just do an experiment. Just ask the FCC to do a 
proceeding starting with digital-quality service to require 
that whenever the cable companies and the programmers put in 
anti-piracy devices, they put in consumer choice devices. 
Wherever everything is digitally capable and they can offer a 
la carte and there are no price increases involved, that they 
be allowed to offer every package, every single package they 
want with one simple government intervention, everything in 
that package also has to be offered a la carte.
    So every channel that needs a boost to get started, if it 
could be in a package today, it could be in a package tomorrow 
and the next day. But if somebody didn't want that package, 
they could select the channel individually. Nielsen shows that 
on average American families, small cable systems only watch 
about 12 channels a month and larger systems watch no more than 
17 channels a month. Seventy-five percent of viewing is of 20 
channels. Are they the same channels? Go back and look at 
what's popularly rated today versus 10 years ago. Most of the 
channels that were high-rate, big viewership then are the same 
now. There are some new ones but not too many. Most of them 
that were not top 15 were top 25 then. That's what people want 
to see. Why not give them the choice?
    Mr. Chairman, I just think it's time that rather than 
having theoretical debates, it's appropriate to do something 
for consumers. These rates keep going up every year, and 
whether you are for deregulation or you're for something else, 
something isn't working when the prices keep going up and yet 
where there are two cable wires they're not going up the same 
way.
    We really need you to look at this seriously, and if the 
FCC fines in doing an experiment that everybody's prices go up, 
as was just said, stop it. If the FCC finds that major 
important programming that we find valuable from C-SPAN on 
isn't available, stop it. We would want you to stop it. But 
please try it. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Kimmelman follows:]

 Prepared Statement of Gene Kimmelman on behalf of Consumers Union and 
                     Consumer Federation of America
    Consumers Union\1\ and Consumer Federation of America\2\ believe 
that cable television's continuous 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. Indeed, 
according to the Bureau of Labor Statistics which measures cable rate 
increases and 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 over that 
same period.\4\
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    \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.
    \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 percent while cable 
prices rose 56 percent, 2.7 times faster than inflation.
---------------------------------------------------------------------------
    One major explanation for these extreme price increases is the lack 
of competition facing cable companies. The fact is large cable 
operators simply do not compete with one another. Not one of the 
incumbent cable operators has ever expanded its infrastructure into an 
already-wired community and competed head-to-head. Instead, the major 
cable operators have through mergers and acquisitions become national 
firms, operating in regional clusters. These regionally dominant firms 
are positioned to keep out the few potential competitors who consider 
entering the cable arena.\5\ In markets where 98 percent of Americans 
live, a single cable operator dominates multi-channel video 
distribution with a market share exceeding 80 percent. (See Appendix A 
for a thorough analysis of cable's excess market power.)
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    \5\For example, in Philadelphia, where Comcast has used 
``terrestrial bypass'' to deny must-have sports programming such as the 
Philadelphia Flyers and the 76ers from satellite competitors, satellite 
penetration is 3.7 percent, compared to 10 percent of TV-viewing 
households nationwide. See Patricia Horn, ``As Competition Lags for 
Cable TV, Prices Continue to Rise,'' Philadelphia Inquirer, June 3, 
2001, page C01.
---------------------------------------------------------------------------
    Another contributor to soaring cable rates is the inability of 
satellite television to provide the pressure needed to keep cable rates 
down. Satellite has yet to emerge as an effective competitor to cable 
despite its growth in reaching more consumers and congressional efforts 
to help make satellite more competitive with cable. The General 
Accounting Office recently found that the presence of a second cable 
operator to compete head-to-head leads to consumers saving 15-41 
percent\6\ off their bills, or an average of over $5.00 per month.\7\ 
In contrast, the presence of satellite had almost no effect on prices, 
lowering rates an average of only about 20 cents per month.\8\ If we 
had head-to-head competition nationwide, consumers could save more than 
$5 billion a year on those bills.\9\
---------------------------------------------------------------------------
    \6\General Accounting Office, ``Wire-Based Competition Benefited 
Consumers in Selected Markets'': GAO-04-241, February, 2004, pg. 4.
    \7\General Accounting Office, ``Issues Related to Competition and 
Subscriber Rates in the Cable Television Industry,'' GAO-04-8, October 
2003, Appendix IV, p. 60.
    \8\Id., pp. 60-61.
    \9\While we hope that satellite will ultimately have a price 
disciplining effect in those communities where satellite offers local 
broadcast stations, it is clear that the single most important variable 
in cable prices is whether there is a cable over builder in a 
particular community. Wire-to-wire competition does hold down cable 
rates and satellite does not seem to do the trick. The U.S. General 
Accounting Office describes this phenomenon:

    Our model results do not indicate that the provision of local 
broadcast channels by DBS companies is associated with lower cable 
prices. In contrast, the presence of a second cable franchise (known as 
an overbuilder) does appear to constrain cable prices. In franchise 
areas with a second cable provider, cable prices are approximately 17 
percent lower than in comparable areas without a second cable provider.

    In other words, where there are two satellite providers and one 
cable operator in a market, prices are 17 percent higher than where 
there are two cable companies and two satellite providers in a market.
---------------------------------------------------------------------------
    Satellite's growth as an effective competitor to cable has been 
hampered by technological constraints. For instance, satellite has so 
far failed to provide local TV channels in many areas, subscribers' 
homes must have unobstructed south-facing views to pick up signals, and 
satellite often requires more expensive equipment than cable. Also, 
cable has a competitive edge because it can offer consumers the 
advantage of television programming and a high-speed Internet service 
bundled together that delivers more capacity at a lower cost per 
megabit.
    Unfortunately, just as satellite seemed positioned to begin to 
discipline cable pricing, the News Corp./DirecTV merger eliminated 
DirecTV's incentives to drive down cable prices, leaving EchoStar with 
virtually no capability to check cable price increases. This merger 
created a behemoth that has the power to raise prices across the board. 
News Corp's Chairman and CEO Rupert Murdoch publicly confessed this 
strategy after the purchase when he said, ``we're not going into a 
price war with anyone.''\10\
---------------------------------------------------------------------------
    \10\Ronald Grover, ``Direct Talk about DirecTV.'' Business Week, 
January 19, 2004, pg. 61.
---------------------------------------------------------------------------
    While the Federal Communications Commission (FCC) appropriately 
imposed merger conditions that prevent News Corp. from discriminating 
against cable and satellite providers, or unfairly bundling their most 
popular channels, the Commission failed to address News Corp. 
incentives to charge itself and all other distributors inflated prices 
for News Corp.'s programming.
    In this transaction, the largest satellite provider has combined 
with one of the largest programming providers to create an unmatched 
vertical conglomerate. Even if News Corp. has to bargain with cable, it 
has every incentive to drive up the price it charges to itself, to its 
cable competitors, and to EchoStar using programming as its profit 
center. Mr. Murdoch is able to maximize his profits by raising 
programming prices for the more than 80 million potential cable/
satellite viewers, rather than drive down prices to slowly grow his 12 
million DirecTV customer base (which he controls, but reaps about 30 
cents for every dollar of DirecTV profits). By charging DirecTV a high 
price for News Corp. programming, he is able to establish a price floor 
for programming that the rest of the cable industry and EchoStar will 
have to pay to obtain those same channels.
    To make matters worse, the proposed merger between Comcast and 
Disney signals where the market as a whole is moving--towards 
significant vertical consolidation, where each big multichannel 
distribution system owns popular programming channels. Whether Comcast 
is eventually successful in a bid for Disney or not, cable and 
satellite distributors have plotted a course towards owning the most 
popular programming entities. For example, Comcast wants to own the 
most popular marquee programming, which will put the company in the 
driver's seat for and give them a cut of the prices it charges for 
ESPN, the ABC network, the Disney Channel, A&E, Lifetime, the History 
Channel, and ABC Family.
    What's next? There are currently only about four companies 
logically positioned to combine with a cable distributor to create this 
kind of vertical firepower: GE/NBC, Time Warner, Viacom/CBS, and 
Disney/ABC. It seems that now the vertical genie has popped out of the 
bottle, there can only be greater pressure to combine programming and 
distribution assets. Collectively, these deals are likely to result in 
an arms race of cable programming price increases. Each vertically 
integrated media giant will have the same incentives to get top dollar 
for their programming. Will one of these giants refuse to pay top 
dollar for the other's channels, running the risk that other will 
retaliated in kind? Not likely. We believe it is much more probable 
that each media giant will pay high prices for each other's channels, 
knowing that all cable and satellite providers will have to pay as much 
or more for the same programming. The result: prices will keep 
spiraling upward for cable and satellite customers.
    What is to be done? We urge Congress to intervene aggressively and 
force the FCC to do its job to ensure cable competition. The FCC has 
turned a blind eye to these obvious problems, failing to impose 
meaningful horizontal or vertical constraints that would keep these 
trends in check. But even if the agency reversed course today, it could 
not change fundamental market problems overnight. In the interim, we 
urge Congress to help empower consumers so they can begin to lower 
their cable bills by allowing them choose and pay for only those 
channels they watch.
    By requiring that cable operators offer ``a la carte'' programming 
in conjunction with any other packages they wish to offer--the market 
power of the consumer's pocket book can be unleashed to begin to help 
lower programming costs, increase incentives for programmers to provide 
quality fare to consumers, and give viewers the opportunity to not pay 
for content they find objectionable or too expensive.\11\
---------------------------------------------------------------------------
    \11\Consumers Union also believes that programmers should be 
required under a new set of nondiscrimination requirements to sell 
their channels to cable and satellite operators on a similar individual 
basis as we pointed out to the Committee in testimony last year. See 
written and oral statement of Gene Kimmelman before the Senate 
Committee on Commerce, Senate Commerce, Science, and Transportation 
Committee, Cable Television and the Dangers of Deregulation, May 6, 
2003.
---------------------------------------------------------------------------
    Although cable operators vastly overstate the role of programming 
costs as a cause of rising cable rates, programming costs are a part of 
the problem. Cable operators have proven unwilling or incapable of 
bargaining down programming costs. As discussed earlier, this reflects 
the fact that they own a significant part of the most popular and 
expensive programming and they do not face effective competition from 
subscribers. Therefore, ownership weakens their interest in controlling 
these costs and they know they can always pass them through to 
consumers in the basic or expanded basic tiers. The best way to 
introduce discipline into the market is to let consumers vote with 
their feet (and their pocketbooks) by refusing to pay for channels they 
think are too expensive.
    Few people regularly watch all the channels they must buy on cable. 
To purchase the small number of channels that consumers watch most, 
they must buy large service tiers from cable operators, ranging from 
40, 50 to 75 channels or more. As the GAO cited, recent Nielsen Media 
Research data show the average consumer watches about 17 channels 
regularly\12\, with the top 20 channels accounting for approximately 
three-quarters of all viewing.\13\ Unless cable companies charge 
outrageous prices for each channel, many consumers could save 
significant money on their monthly cable bill by selecting only the 
channels they actually watch. As Appendix B demonstrates, most of the 
channels consumers watch today are the very channels they watched years 
ago.
---------------------------------------------------------------------------
    \12\GAO-04-08 Issues Related to Competition and Subscriber Rates in 
the Cable Television Industry, October 2003.
    \13\Consumer Federation of America and Consumers Union, The 
Continuing Abuse Of Market Power By The Cable Industry: Rising Prices, 
Denial Of Consumer Choice, And Discrimination In Access, p. 24.
---------------------------------------------------------------------------
    Giving consumers the choice to select only those channels they want 
also provides a unique solution to the growing public concern about 
violent and indecent programming. While technology such as the V-Chip 
allows consumers to block distasteful programming, many consumers find 
it insulting to have to pay for the very programming they find 
offensive. Instead of forcing consumers to buy service tiers that 
include programs they never watch or channels they find objectionable, 
policymakers should require cable operators to let people pick and pay 
for only those channels they want.
    Some cable operators might argue that technology prevents them from 
offering a la carte programming. While cable operators likely will have 
to make software adjustments inside the cable network to offer a la 
carte, systems that have been upgraded for digital cable would not 
require new technology in consumers' homes. And as cable operators will 
have to build in functionality to fight piracy (i.e., the plug-and-play 
proceeding at the FCC) in the next year, now is the right time to 
consider enabling equipment to handle a la carte options. In Canada, a 
number of cable companies already offer consumers a la carte 
options.\14\
---------------------------------------------------------------------------
    \14\A quick Internet search shows many Canadian cable operators--
from the largest (Rogers) to some of the smallest (Northern Cablevision 
and Whistler Cable)--offer a la carte programming.
---------------------------------------------------------------------------
    Cable operators have voiced concerns that they will have diminished 
advertising revenues if consumers are permitted to choose the cable 
channels they want to pay for and watch. However, advertising is based 
on total television viewership. Those who claim more choice in cable 
television programming means fewer advertising dollars are saying, in 
effect, that a la carte means people will watch less television. In 
fact, the opposite may be true; as consumers choose from a wider 
palette of options that will better cater to individual tastes, more TV 
viewership may be the result. People will simply be watching and paying 
for the programs they want.
    Furthermore, the use of a la carte selection would enable 
advertisers to know more about their audiences, allowing the 
possibility of enhanced revenues from more targeted demographic 
information. Programmers should be able to charge more and advertisers 
should be willing to pay more for access to the viewers, because of the 
preference indicated by a willingness to pay for the programming. This 
will be a win-win situation because advertising will be more efficient 
at reaching a targeted audience.
    We would also like to allay some of the concerns that may be raised 
about certain cable channels suffering in an a la carte world. Appendix 
C shows that the most popular national cable channels are financially 
backed by broadcast networks or large cable companies. These entities 
need no special bundling ``subsidy'' to launch their programming. And 
Appendix D shows a sample of national channels launched by independent 
companies. Since most of these channels find it hard, if not impossible 
to be carried in cable's expanded basic tiers, it is difficult to 
imagine that they would be worse off under an a la carte system.
    Rather than allowing each and every spurious argument raised now by 
some cable operators to delay action on this issue, we urge Congress to 
instead listen carefully to what the industry itself said about a la 
carte pricing little more than a year ago. In testimony before this 
Committee in 2003, cable operators big and small endorsed pricing cable 
channels a la carte.
    James Gleason, President and Chief Operation Officer of 
CableDirect, a small cable operator serving just 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.''\15\
---------------------------------------------------------------------------
    \15\Testimony of James Gleason, Hearing on Media Ownership, 
Committee on Commerce, Science and Transportation, May 6, 2003, p. 53.
---------------------------------------------------------------------------
    Charles Dolan, Chairman of Cablevision, one of the largest cable 
operators with over 4 million homes in the Northeast, told this panel: 
``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.'' He 
continued with an analogy I've heard repeated since then, ``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?''\16\
---------------------------------------------------------------------------
    \16\Testimony of Charles Dolan, Hearing on Media Ownership, 
Committee on Commerce, Science, and Transportation, May 6, 2003, p. 56.
---------------------------------------------------------------------------
    If the FCC can force manufacturers to rebuild entire classes of 
technology to fight piracy and adhere to the Plug and Play 
specifications, and if the FCC can plant a Broadcast Flag 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.
                               Appendix A

  The Continuing Abuse of Market Power by the Cable Industry: Rising 
Prices, Denial of Consumer Choice, and Discriminatory Access to Content

                           Table Of Contents
                                Contents
Executive Summary

I. Introduction

A. Purpose

B. The FCC's Failure to Ask the Hard Questions

II. The Supply Side

A. Market Power 101

B. GAO's Video Market Structure Analysis

1. Horizontal Market Power

2. Vertical Market Power

C. High-Speed Internet

D. Cash Flow Analysis

1. All Revenues, All Costs

2. Cash Flow for Traditional Video Services

III. The Demand-Side

A. Estimation of Quantity Adjusted Price Changes

B. Bundling, the Demand Curve and Consumer Surplus

IV. Long-Term Trends

A. Price

B. Quantity

V. Conclusion

Endnotes
                                 ______
                                 

  The Continuing Abuse of Market Power by the Cable Industry: Rising 
    Prices, Denial of Consumer Choice, and Discrimination in Access

Executive Summary
    Eight years after the passage of the Telecommunications Act of 
1996, which deregulated cable prices, this study shows that cable 
operators still possess market power in the multichannel video market. 
The result is price increases that far exceed the rate of inflation--
almost three times faster than inflation in recent years -and the 
continued restriction of consumer choice to a small number of ever 
larger, ever more expensive bundles. The cost imposed on consumers by 
this abuse of market power is between $4.5 and $6 billion per year, 
compared to what prices would be in a competitive market.
    Cable operators attempt to obscure the existence and abuse of 
market power with two arguments. First they claim that programming 
costs explain the massive increase in the price of basic and expanded 
basic service. Second, they claim that consumers are getting much 
greater value for their dollar; so that quality adjusted prices have 
declined. Neither claim stands up to close scrutiny.
Exercise of Market Power on the Supply Side
Prices
    Econometric studies by the General Accounting Office and the 
Federal Communications Commission show that where cable faces direct 
head-to-head overbuilder competition the price of cable service is much 
lower.

   A recent GAO report found that in situations where cable 
        faces competition overbuilders, prices are 15 percent lower. 
        Econometric analyses have consistently found this result of a 
        decade. Unfortunately, less than two percent of cable customers 
        enjoy the benefits of that competition.

   A recent GAO analysis found that a cable system owned by a 
        large national operator has prices that are over 5 percent 
        higher than if it is not. FCC econometric models show even 
        larger effects.

   When the FCC models add in a specific variable for regional 
        clustering, a dramatic trend in the industry, they find that 
        clustering has an added effect of further raising price.

   The vast majority of cable subscribers are now served by one 
        of a handful of huge-multiple system operators that have 
        expanded their grip on the industry through mergers and 
        clustering, who adds as much as an additional 8 percent to the 
        consumers bill.
Market Structure
    Cable's market power stems from a lack of effective competition. 
Even at the national level, the multichannel video market has become 
concentrated; the problem is much greater at the local level.

   In markets where 98 percent of Americans live, a single 
        cable operator dominates multichannel video distribution with a 
        market share that exceeds 80 percent.

    The largest cable operators never compete with one another. Instead 
they have grown to huge national firms through mergers using swaps of 
systems to create regional clusters that undermine the ability of 
overbuilders to launch competition. Large operators and clustered 
systems have more muscle to thwart competition and impose price 
increases.

   They can distribute programming terrestrially and refuse to 
        make it available to competing distribution systems. This is 
        becoming increasingly important as vertically integrated 
        companies dominate ``must have'' regional sports programming.

   They can extract exclusivity deals from independent 
        programmers, thereby denying programming to competing 
        distribution media.

   They have more leverage over local governments to obstruct 
        the entry of overbuilders

    Direct Broadcast Satellite does not have a significant or 
substantial ability to discipline cable pricing abuse. Satellite is a 
niche product that has had its greatest success in areas where cable 
was unavailable or among customers who wanted high quality digital 
services with large numbers of channels (before cable could offer such 
a package).

   Cable has surpasses satellite in the number of subscribers 
        to digital video service.

   It is bundling high-speed Internet and basic cable service 
        to further erode the ability of satellite to compete.
Discrimination in Access
    Cable operators discriminate against unaffiliated service providers 
in both the video and the high-speed Internet product space. Cable 
operators are 64 percent more likely to carry networks that they own, 
than the networks provided by others. Broadcasters have used their 
retransmission rights to also gain preferential carriage deals for 
their shows. As a result, independent programmers are placed at a 
severe disadvantage.
    Cable operators dominate the residential market for advanced high-
speed Internet access, with an 83 percent market share. By refusing to 
allow unaffiliated Internet Service Providers to compete for Internet 
access customers over the cable modem platform, cable operators have 
foreclosed a critical high-end market, which dramatically reduces 
competition for Internet service. Virtually no voluntary carriage 
agreements have been signed by cable operators.
Cash Flow
    A close look at cable's financial operations shows that rising 
costs cannot explain the rising price of traditional video services.

   In the aggregate, price increases far exceed the increase in 
        programming costs.

   An allocation of non-programming operating costs based on 
        historical patterns shows that operating cash flow from 
        traditional video services has increased by approximately 70 
        percent on a per subscriber basis since the passage of the 
        Telecommunications Act.

    Sale of advanced services, digital tiers and high speed Internet, 
which were the motivation behind the recent system upgrades, has 
skyrocketed. The upgrades are paying for themselves.

   High-speed Internet is now the second largest income stream 
        and digital tiers are the third largest streams of income for 
        the cable operators, bringing in a combined $10 billion per 
        year.
The Shape of Market Power on the Demand Side
    Cable operators claim that adding more channels to their bundles 
increases the value of he package. Unfortunately, consumers are not 
given a choice of which channels to purchase. They must take nothing, 
almost nothing (basic) or almost everything (expanded basic). With the 
addition of the digital tier, they have another option, but cable 
operators have been moving popular channels (like HBO) to the digital 
tier to drive consumer bills up even farther.
    Because the cable operators restrict consumer choice to this small 
set of bundles, it is impossible to know how consumer welfare has 
changed and wrong to claim that every show adds equally to consumer 
value.

   The average consumer watches about 17 channels regularly, 
        but the bundles have four times that number.

   The top twenty shows account for approximately three 
        quarters of all viewing.

   Almost nobody watches the bottom 30 channels in the bundle. 
        Only about one out of every 250 households where these shows 
        are available watches them on any given day.

    The economics literature has long recognized that bundling by firms 
possessing market power can be anti-consumer and anticompetitive. When 
different consumers have strong preferences for different channels, 
putting them into bundles forces each consumer to pay for many channels 
he or she does not want in order to get the channels he or she does 
want.
    A detailed analysis of one of the most popular and expensive 
channels, ESPN, which has been a focal point of controversy, shows that 
approximately four-fifths of cable subscribers would not pay the price 
of ESPN if they were given a choice. By forcing consumers to pay for 
the show in a bundle, wealth is transferred from consumers to cable 
operators (and the programmer).
    A recent analysis that claims that the BLS over states price 
increase and that prices have fallen on a quality adjusted basis is 
riddled with analytic and measurement errors. The analysis double 
counts the quantity of programming and vastly overvalues the shift from 
viewing over the air to viewing cable. Watching an hour rerun of the 
same show on cable, instead of a broadcast station is assumed to 
increase consumer value by one hour, even though the exact same show is 
watched. Correcting these errors shows that the BLS cable price index 
yields, at best a lower limit on the quality adjusted price increases.

   In contrast to the 15 percent real decline that the NCTA 
        analysis claims, the BLS shows a 27 percent increase. The 
        actual quality adjusted price increase could be as high as 40 
        percent.

    The embedded base of excess prices and the entrenched market power 
of the cable operators, reinforced against satellite and extending into 
the high-speed Internet, confront policy makers with a critical 
problem. After two decades of abuse, and eight years after the Telecom 
Act of 1996, it is clear that policymakers made a mistake in 
deregulating cable. It is time for policymakers to take steps to 
promote real competition and protect consumers from further abuse.
                               Appendix A
Introduction
A. Purpose
    Proceedings at the Federal Communications Commission (FCC),\1\ a 
series of General Accounting Office (GAO) reports\2\ and contract 
negotiations between cable operators and programmers\3\ have stimulated 
an unprecedented round of finger pointing and release of data about the 
cable television industry. The goal is to justify and/or place blame 
for the dramatically increasing price of cable service.\4\ Cable 
operators claim the programmers made them do it. Programmers have fired 
back, suggesting that basic rates have been increasing to support the 
rollout of advanced video and new, non-video services. The finger 
pointing drives home a simple point: consumers are paying a 
dramatically higher price for their monthly cable service. Or, are 
they?
    Several of the existing industry studies are framed as responses to 
consumer analyses that have documented the abuse of market power by 
cable operators. Comcast\5\ and the National Cable Telecommunications 
Association (NCTA)\6\ assert that when consumer advocates complain 
about the total price of cable service, they are failing to take into 
account that the monthly bill includes more networks and are confusing 
real prices with nominal prices. NCTA goes so far as to offer a new 
approach to indexing cable prices as an alternative to the Bureau of 
Labor Statistics (BLS) cable Consumer Price Index (CPI). The FCC's 
Tenth Annual Report (In the Matter of Annual Assessment of the Status 
of Competition in the Market for the Delivery of Video Programming) 
cites this analysis as further support for its conclusion that 
competition in the multichannel video market is robust and repeats the 
industry arguments.\7\
    This paper shows that the most frequent complaint voiced by 
consumer advocates--that cable ``rates have risen and continue to rise 
almost three-times faster than inflation,''\8\--is correct. The 
consumer advocate comparison of cable rates to inflation states the 
numerator and the denominator of the real fraction in a fashion that is 
more meaningful to consumers and policymakers because it gives the 
reference points. Moreover, the paper argues that, if anything, the BLS 
cable price index is more likely to be understating price increases 
than overstating them. The bottom line is that the market power-based 
abuse of consumers by cable operators has been growing since the 
passage of the Telecommunications Act of 1996. After two decades of 
blatant abusive pricing, cable operators have begun to encounter some 
resistance, so increases may slow, but that does not mean the abuse 
will be reduced or eliminated. In response to criticism, the cable 
operators have simply launched new bundling strategies that shift the 
focal point of price increases and anticompetitive harm to other areas.
B. The FCC's Failure to Ask the Hard Questions
    The FCC's Annual Reports have steadfastly refused to address the 
serious questions raised about the cable market in a rigorous manner, 
but the Tenth Annual Report sinks to new lows. The FCC cannot even 
figure out how many cable subscribers there are. The two sources on 
which it relies for data (it never generates its own independent data) 
disagree by almost five million subscribers. In response, the FCC takes 
a most remarkable approach--it uses both sets of numbers--the lower 
figure for its financial analysis and the higher figure for its 
assessment of competing technologies (contrast Tables 1 and 4 to Table 
B-1). The Ninth Annual Report used the higher figure for both the 
financial and the competitive assessment analyses.
    As with most analyses at the Commission these days, slipping the 
lower figure into this report may be strategically motivated. If the 
FCC uses the higher figure and growth persists at the rate implicit in 
those figures, by this time next year cable will be well above 70 
percent of the TV market. This is a threshold that would trigger 
petitions to the FCC to regulate cable. If the FCC shifts to the lower 
figure, or claims the conflict between the two creates uncertainty, the 
regulation trigger would be put off several years. Here, as elsewhere, 
the failure of the FCC to develop solid independent data may harm 
consumers substantially.
    The FCC recognizes the dramatic increase in cable prices, but, like 
the industry, it emphasizes that ``concurrently with these rate 
increases, however, the number of video and non-video services 
increased, including a substantial increase in the number of video 
channels, increased use of cable (as measured by a substantial increase 
in cable viewership), and the addition of advanced service offerings 
which, of course, are paid for separately by consumers.''\9\ 
Unfortunately, the FCC admits that its approach to measuring prices 
cannot address the fundamental issue, since it is based on an 
assumption that this paper shows to be doubtful--``Per channel rates, 
however, value all additional channels the same even if consumers do 
not want new channels that are added to cable systems.''\10\ This paper 
shows that such an assumption is contradicted by consumer behavior. The 
cable video industry's bundling harms consumers.
    The FCC regurgitates the industry claim that rising programming 
costs have driven basic rate increases, but does not examine the 
contradictory evidence embedded in its own numbers. For example, it 
notes that programming costs went from $7.5 billion in 1998 and will 
exceed $9 billion in 2003.\11\ It later cites a figure of $9.2 billion 
for 2002.\12\ Over the 1998-2003 period, revenues for basic and 
expanded basic services increased by $7.3 billion. Thus, three quarters 
of the price increases cannot be explained by rising programming costs. 
Price increases exceeded programming cost increases by more than $5 
billion.
    The challenge of explaining away the excessive rate increase for 
basic and expanded basic service is made all the more difficult in 
light of the dramatic increase in revenues from advanced services. The 
FCC notes that dramatic rise of advanced service revenues citing 
``Kagan World Media reports it was high-margin, high-speed-data 
services that drove operating cash flow growth in 2002.''\13\ Moreover, 
it notes that Kagan sees this trend growing in 2003, since ``they 
expect high-speed data service `to contribute 12.4 percent to total 
residential revenue, the largest piece of the revenue pie after basic 
service.''\14\ Digital tier services are the third largest revenue 
stream for cable operators, having surpassed local advertising for the 
first time in 2003.\15\ The fact that these two advanced services now 
bring in $10 billion in revenue should force the Commission to 
challenge the claim that basic and expanded basic prices had to rise to 
pay for the upgrade of the system. This issue, which the Commission has 
never addressed, is a central theme of this report.
    The FCC's report goes on to claim that the bundling of advanced 
services with basic service ``may provide some discount on basic or 
expanded basic,''\16\ a proposition it does not even attempt to 
analyze, let alone prove. This paper shows that this bundling is anti-
competitive.
    The FCC notes several cable industry milestones in this report, but 
fails to follow up on them. For example, it notes that the national 
Multichannel Video Programming Distribution (MVPD) market exceeds the 
threshold for a moderately concentrated market as defined by the 
Department of Justice/Federal Trade Commission Merger Guidelines. The 
FCC hastens to add that ``it is unclear whether this is a potential 
competitive problem, because the delivery market is local, not national 
and because the main competitors to cable in both the upstream and 
downstream markets continue to grow in size.''\17\ This observation is 
not comforting for several reasons.
    As has traditionally been the case, the FCC makes no effort to 
assess the level of concentration in the local market. If it did so, it 
would find that local MVPD markets are generally six times as 
concentrated as the national market on which it focuses.\18\ Here the 
FCC encounters another contradiction. It continues to maintain that the 
clustering strategies of large multiple system operators might benefit 
consumers,\19\ even though the Commission's own analysis has 
consistently shown that clustering results in higher prices.\20\
    While it is true that the MVPD market is expanding, the FCC fails 
to note that its competitive assessment analysis shows that cable 
operators added more subscribers than all the other MVPD competitors 
combined.\21\ (Of course, the FCC may erase this observation by 
switching the numbers next year.) Moreover, the FCC fails to note that 
cable surpassed satellite in the number of digital subscribers for the 
first time in 2003.\22\ Thus, the competitive threat from satellite 
that the FCC claims should ease our concern about concentration in the 
cable market may be subsiding, if it ever existed. In fact, this paper 
reviews the evidence that satellite has failed to discipline cable's 
pricing abuse.
    The FCC's simplistic parroting of the industry arguments and 
failure to conduct rigorous, independent analysis continues to disserve 
consumers. As cable prices mount and the industry extends its market 
power into new areas, ``congress and American consumers deserve a 
better effort from the FCC.''\23\
II. The Supply Side
A. Market Power 101
    All of the industry studies, as well as the FCC report, ignore the 
fundamental public policy issues raised by the consumer analysis. 
Simply put, every dog has his day and every monopolist has his profit-
maximizing price. Unlike the hapless canine, however, who goes back to 
a dog's life when his day is done, when the monopolist hits his profit-
maximizing price, he goes on collecting excess profits. The abuse of 
consumers persists. What the cable industry economists have done in 
their recent papers defending cable industry prices is to focus on the 
scraps of consumer surplus left on the table by cable operators and 
ignore the submerged danger, the transfer of wealth and deadweight 
efficiency loss that result from the abuse of market power.\24\
    Launching from the simple observation that every monopolist leaves 
a little surplus in consumers' pockets, the cable industry analyzes the 
tip of the market power iceberg (see Exhibit 1a).\25\ The shaded area 
in Exhibit 1a is the focal point of the NCTA paper. Consumer surplus 
(or consumer benefits as the paper calls them) is measured as the 
difference between the value of a service to the consumer (as indicated 
by the demand curve) and the price the consumer pays for the service. 
If the value exceeds the price, the consumer buys the product.
                      EXHIBIT 1: Consumer Surplus
                      
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Exhibit 1b places the consumer surplus analysis in the framework of 
the complete picture of cable pricing\26\ as a classic diagram of the 
exercise of market power over price.\27\ It is well known in economics 
that the monopolist sets his price at the point where marginal revenue 
equals marginal cost. Even at that price there are consumers who are 
willing to pay the price because the value of the service exceeds the 
price for them, but consumers are still paying too high a price for the 
service. The monopolists have captured part of the consumer surplus and 
transferred it to their pockets (wealth transfers). Also, there are 
some consumers who give up cable or do not take it, when they would 
have if the price had been at a competitive level. Their loss is a 
deadweight efficiency loss. Because the elasticity of demand for cable 
service is low, wealth transfers are large relative to efficiency 
losses.
    The monopolist can do various things to increase his profits when 
he hits the profit-maximizing price (see Exhibit 1c).\28\ He can 
stimulate demand by adding value or by bundling. He can shift the 
supply curve by lowering his cost or changing his cost structure (and 
pocket an extra share of the cost savings because he does not face 
competition). Either or both of these may appear to be welfare 
enhancing because the quantity consumed increases, but the abuse 
actually may be increasing on a relative basis because more consumer 
surplus is being extracted.\29\ The relative size of the effects 
depends on the specific supply and demand curves. This is an empirical 
question. As depicted in Exhibit 1c, this paper demonstrates that both 
the total profit and the rate of profit on traditional video services 
have increased since the passage of the 1996 Act.
B. GAO's Video Market Structure Analysis
    The critical first question that must be answered is simple--is 
there evidence that market power is being exercised on the supply side? 
The GAO provides an affirmative answer. The GAO report affirms each of 
the supply-side problems of the multichannel video market that has 
afflicted the American public since the industry was prematurely 
deregulated in 1984 and further deregulated in 1996. Exhibit 2 shows 
the elasticities for dummy variables measuring various structural 
characteristics that affect the extent of competition, which were 
included in the regression analyses conducted by the GAO and the FCC.
1. Horizontal Market Power
    Head-to-head, wireline competition is the only market structure 
feature that significantly disciplines monopolistic pricing. In its 
most recent report, the GAO finds that head-to-head, wireline 
competition between cable operators lowers prices by 15 percent for 
basic and expanded basic service.\30\ Its earlier report had found a 17 
percent difference.\31\ Ironically, the Tenth Annual Report notes that 
the first report on cable competition found that head-to-head 
competition lowered prices by 16 percent.\32\ Recent FCC econometric 
models, which identified three types of head-to-head competitors (local 
exchange carriers (LECs), publicly owned systems (munis) and other 
private overbuilders (comp)), have consistently found large price 
effects from head-to-head, wireline competition.\33\ Unfortunately, 
less than two percent of American households enjoy the benefit of head-
to-head, wireline competition.\34\ The result is an abuse of market 
power that costs the American public about $4.5 billion per year in 
cable rates alone.\35\
 EXHIBIT 2: Impact Of Market Structure Characteristics On Monthly Rates
               (Regression Coefficients, dummy variables)
               
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Sources: Federal Communications Commission, Report on Cable Prices, 
April 4, 2002, Attachment D-1; General Accounting Office, Issues 
Related to Competition and Subscriber Rates in the Cable Television 
Industry, October 2003, Appendix IV, Table 3.

    Bigger monopolies are worse when it comes to consumer prices. In 
the GAO analysis, if a cable system is part of a large national 
operator, its prices are 5.4 percent higher than if it is not.\36\ The 
GAO called this horizontal concentration. FCC econometric models have 
been finding this to be the case for several years, with even larger 
effects of being part of a multiple system operator (MSO).\37\ When the 
FCC models add in a specific variable for regional clustering, a 
dramatic trend in the industry, they find that clustering has an added 
effect of further raising price.\38\ Being served by one of the mega-
multiple system operators, who have been expanding their grip on the 
industry through mergers and clustering, drives prices higher by more 
than 5 percent and perhaps as much as 8 percent. Thus, there could be 
as much as an additional $1.5 billion in consumer savings that could be 
wrung out of the cable market if it were deconcentrated.
    The important implication is that the theory used to allow large 
cable operators to become larger is not supported by the empirical 
evidence.\39\ That theory claimed that the combination of larger, 
clustered systems would create efficiency-based cost savings that would 
be passed on to the public because one big monopolist is no worse that 
two, contiguous smaller ones. Since large incumbents never overbuild 
one-another and compete, this theory claimed there was little to be 
lost. The econometric evidence suggests that there is considerable 
harm. It turns out that large operators and clustered systems have more 
muscle to thwart competition and impose price increases. They can 
distribute programming terrestrially and extract exclusivity deals from 
independent programmers, thereby denying programming to competing 
distribution media (overbuilders and satellite). They have more 
leverage over local governments to obstruct the entry of overbuilders.
    The large incumbent cable operators never competed by overbuilding 
a neighbor, they grow by merger. Policymakers surrendered to the cable 
urge to merge too easily. If cable operators knew they could not grow 
through mergers and really cared about size, they might compete by 
overbuilding one another.\40\
    Intermodal competition--between cable and satellite--does not 
effectively discipline cable's pricing power. In contrast to head-to-
head, wireline competition, which lowers cable bills by $5 per month, 
competition from satellite lowers bills by a mere $.15, according to 
the GAO.\41\ In other words, head-to-head, wireline competition is 
almost 40 times as effective as intermodal competition when it comes to 
price. In fact, in the GAO report, even satellite's very modest pricing 
effect is not statistically significant by traditional standards. It 
fails at the 5 percent level of significance. The FCC's econometric 
analysis does not find even this small price effect. It finds a 
statistically significant effect in the opposite direction.\42\
    To the extent that satellite has any competitive effect, it drives 
cable operators to offer more channels, but this effect stems from the 
decision of satellite to offer local programming. Where satellite 
offers local programming, cable operators offer about 5.4 percent more 
cable channels. Thus, satellite appears as a niche product that cannot 
discipline cable pricing abuse for the vast majority of cable 
subscribers who take only basic and expanded basic.\43\
    Exhibit 3 explores the implications of the most recent econometric 
findings on horizontal market power. Using the traditional measure of 
market power and the standard measure of the pricing abuse that 
results--the Lerner Index--it explores the relationship between the 
number and size of firms in cable markets and the mark-up of price over 
cost. A more advanced approach uses the level of concentration in the 
market (as measured by the HHI) in the Lerner Index instead of the 
simple number of firms. The mark-up of price above cost is inversely 
related to the extent of competition and the market elasticity of 
demand. The more competitive the market and the more elastic the 
demand, the less the ability to increase price. The analysis uses the 
econometric estimate of the elasticity of demand and the implicit 
levels of concentration The econometric estimate of a 20 percent mark-
up from a lack of head-to-head competition and horizontal concentration 
is consistent with, even a conservative estimate of, the pricing power 
suggested by the market structural conditions (demand elasticity and 
market shares) implicit in both the GAO and the FCC analyses.
2. Vertical Market Power
    Vertical relationships are exploited by cable operators. GAO finds 
that cable operators are majority owners of one-fifth of the top 90 
national networks. The GAO does not find price discrimination but it 
does find discrimination in carriage. That is, cable operators do not 
pay themselves more for their own shows, but they are much more likely 
to air them. The effect is quite large. Cable operators are 64 percent 
more likely to carry the programming in which they have a majority 
ownership stake. Cable operators who have a stake in programming also 
carry fewer channels overall. This result is consistent with prior 
academic studies.\44\
    A one-fifth share of the most popular programs is a very 
substantial stake in the programming market and it blunts cable 
operators' incentive to resist price increases. Cable operators own 
minority stakes in other networks. With their market power at the 
point-of-sale, cable operators know that they can pass costs through to 
consumers and they can assure that their own programs are carried much 
more frequently than those of others, thereby gaining a 
disproportionate share of the overall increase in programming costs.
    While no cable operator had pricing power in the programming market 
until recently, Comcast appears to have gained pricing power as a large 
purchaser of programming. Having achieved a large enough market share, 
it now has monopsony power over sellers of programming. Comcast is 
squeezing programmers to lower their fees at the same time it is 
announcing price increases for basic and expanded basic. It is both 
reallocating rents from programmers to itself\45\ and increasing the 
rents collected from consumers.\46\
    Rights of carriage matter a great deal in the cable industry. The 
decision of Congress to give broadcasters must carry/retransmission 
rights has enabled the broadcasters to gain a significant advantage for 
their programming, in terms of carriage. Programs owned by broadcasters 
are 41 percent more likely to be carried by cable operators. Clearly, 
independent programmers are at a severe disadvantage, as has been 
demonstrated time and again. Although the GAO report concludes that 38 
percent of the cable networks are majority owned by non-cable, non-
broadcast firms, a much smaller percentage, less than 20 percent, do 
not have a least some minority ownership of broadcasters or cable 
operators.
     EXHIBIT 3: Comparison of Empirical Estimates of Mark-Up Using 
       Alternative Measures of Concentration and Dummy Variables
       
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    While discrimination in carriage has implications for the pricing 
issue that is the central concern of this paper, it has much broader 
implications for public policy in the multichannel video market. Public 
policy has expressed a concern about promoting independent production 
and ensuring a diversity of content for decades. Two pending 
proceedings at the FCC directly involve the question of how 
concentration of ownership and the exercise of market power in the form 
of discriminatory access to distribution affect the content available 
to the public. In the horizontal limits proceeding, the FCC is charged 
with setting a limit on the market reach of a single cable 
operator.\47\ Similarly, in several of the media ownership proceedings 
the market reach of broadcasters (and the availability of cable as a 
distribution technology) is a central concern. The conclusion is 
overwhelmingly clear. Those who have Congressionally mandated rights of 
carriage are able to have their shows aired, those who do not have 
almost no chance of success.
C. High-Speed Internet
    Although high-speed Internet raises many important issues, from the 
point of view of video services pricing, it plays two important roles.
    First, it is cited by the industry and analyses as one of the 
causes for the increase in cable prices. Since the plant upgrade 
supports other streams of revenue, the GAO cautions, ``[f]irst, 
depreciation expenses (and therefore infrastructure investment) 
represent a joint (or common) expense for both video-based and 
Internet-based services. Because these expenses are associated with 
more than one service, it is unclear how much of this cost should be 
attributed to video-based services. Second, cable operators are 
enjoying increased revenues from these non-video sources.''\48\ The 
same is true for operating expenses. A large part of the increased 
expense is associated with the selling and servicing of advanced video, 
Internet and telephone service that ``have been spread across the 
entire revenue base--i.e., they are reflected in the prices paid by 
basic cable subscribers.''\49\
    Looking at a short period, 1999 to 2002, the GAO finds that 
revenues from Internet services alone are already almost equal to the 
increased depreciation expense of the cable plant upgrade. The GAO 
estimates that capital costs (depreciation expenses) have increased by 
$80 per subscriber, while Internet-only revenues increased by $74.\50\
    Second, cable operators have rapidly achieved positive cash flow 
from high-speed Internet services because of weak competitive forces. 
Cable operators are aggressively bundling high-speed Internet with 
video services to gain competitive leverage. Their market power over 
high-speed Internet access gives them an important anticompetitive 
tool. Cable has foreclosed competition for Internet access service over 
its platform.\51\ Controlling the platform diminishes the potential 
competition from video streaming over the Internet\52\ and becomes a 
lever against competition from other distribution technologies. Cable 
has an 83 percent market share of the residential advanced high-speed 
Internet market.\53\ Moreover, cable provides overwhelmingly (87 
percent) advanced service, while DSL is overwhelmingly (67 percent) not 
advanced.
    Discrimination was even more brutal in the Internet space as cable 
operators applied their business model to high-speed Internet access. 
Only a consent decree forced Time Warner to allow modest access, and 
intense scrutiny forced AT&T to make some minor concessions, but the 
recent AOL/AT&T carriage agreement is thoroughly anticompetitive.\54\ 
AOL has been unable to actually execute any carriage agreements with 
cable companies.\55\ Cable operators do not sell ISP services outside 
of their service territories where they have the leverage of their 
market power over cable facilities.
    With intramodal competition foreclosed, cable faces only weak 
intermodal competition. Cable has scoffed at the modest discounting 
efforts of the telecommunications-based DSL service providers.\56\ In 
fact, Comcast raised the price of stand-alone high-speed Internet on 
its newly acquired AT&T systems. The reason cable can ignore intermodal 
competition is simple; those discounted services are substantially more 
expensive on a megabit basis (see Exhibit 4). The cable operators 
ignore DSL pricing moves and harp on speed superiority in their 
advertising. Exhibit 4 also shows why dial up is not a substitute for 
high-speed access. It is far more expensive on a megabit basis. 
Moreover, dial-up lacks the other key feature of high-speed service--it 
is not always on. This distinction led the Justice Department to 
declare early on that high-speed Internet is a separate product from 
dial-up.\57\
    Satellite lacks the ability to offer a bundle of video and high-
speed Internet to compete effectively with cable. Cable recognizes this 
and is aggressively bundling high-speed Internet with basic cable 
service--offering a 25 percent discount on a bundle of basic cable and 
Internet compared to stand alone Internet service.\58\
    Looking carefully at specific product and geographic markets 
reveals little competitive overlap of different facilities (see Exhibit 
5).\59\ Intermodal competition is weak at best. Technological 
differences give different facilities an edge in different customer and 
geographic markets.\60\ Cable dominates the advanced residential high-
speed Internet market, with a 75 percent market share for residential 
market of speeds of greater than 200kbps in both directions.\61\ DSL, 
as deployed, is ill suited to multimedia video applications,\62\ but 
DSL dominates the non-residential market with a 95 percent market share 
because businesses are disinclined to use cable.\63\ For the next 
generation telephone network technologies, ``most experts agree that 
the VDSL business case isn't for everyone and won't\64\ realize its 
full revenue potential for decades.''\65\
    However, cable operators devote less than two percent of the 
capacity of their systems to cable modem service. They could easily 
expand that if they so desired. This gives them an immense advantage 
over telephone companies.\66\
D. Cash Flow Analysis
1. All Revenues, All Costs
    To assess whether the rate increases of recent years have been 
abusive, I analyze cash flow. I use 1995 as the base year, since the 
Telecommunications Act of 1996 was signed in early February. For 
several reasons, it is important to capture this whole period. Industry 
analyses, including that of the GAO, choose a very short time frame, 
1999 to 2002, and miss critical factors.\67\
          EXHIBIT 4: The Price of High-Speed Internet Service
          
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: Calculated by author from website visits.
    EXHIBIT 5: Market Segmentation Of Services Between Technologies
    
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: Federal Communications Commission, In the Matter of Annual 
Assessment of the Status of Competition in Markets for the Delivery of 
Video Programming, Fifth Annual Report, December 23, 1998, Table B-7; 
Ninth Annual Report, December 2002, Table Appendix B. High-Speed 
Services for Internet Access, December 2003, Table 1, 2 and 4; Local 
Telephone Competition: Status as of December 31, 2002, June 2003, 
Tables 1, 13; NCTA, Overview 2003: Mid-Year, p. 1.

    First, the upgrade of the cable plant began well before 1999, as 
did the post-1996 Act rate increases. By 1999, the cable industry had 
already upgraded one-third of its plant. Rates for basic + expanded 
service had already increased by 50 percent and net operating income 
(operating revenue minus operating costs) had increased by over 25 
percent. In fact, just one year after the passage of the 
Telecommunications Act of 1996 the issue of cable rate increases had 
already arisen. The FCC's January 1997 cable price report noted that 
``the Cable CPI increased at a 3.7 percent compound annual rate from 
January 1995 to December 1995, and at a 8.5 percent compound annual 
rate for the eleven months from January 1996 to November 1996.''\68\ 
The song and dance about the causes of the increases had already begun, 
when the Commission declared:

        we note from anecdotal evidence reported in both the trade 
        press and the general news media that cable operators have 
        attributed the recent increases in cable rates to higher 
        programming costs, system upgrades which provide additional 
        channels, and the pass through of the effects of general 
        inflation on operators' costs.\69\

    Second, the GAO report does not examine all of the revenues and 
costs consistently, since it never factors in advertising revenue. It 
appears to underestimate an important source of revenue, digital tier 
revenue, and an important cost stream, non-programming operating 
expenses. The GAO did not break out the revenues from advanced video 
services that are also made possible by the upgrade.
    Third, the upgrade of the physical plant was largely (80 percent) 
complete by year-end 2002 and capital outlays dropped off dramatically 
in 2003.\70\ Since penetration of high speed Internet is in its early 
stages, and advanced video services have not yet fully penetrated, 
cable operators are set to reap huge profits as advanced digital video 
and Internet services penetrate the market. In other words, capital 
costs are set to decline sharply, while revenues from the services that 
are supported by those capital costs are increasing sharply.
    For the eight-year period (1995-2003), there has been a $360 
increase in revenues per subscriber per year (see Exhibit 6).\71\ 
Revenues per subscriber per year have almost doubled, while the number 
of subscribers has increased by 10 percent. There for total revenues in 
absolute value have more than doubled.\72\ The new services (advanced 
video and Internet and to a much lesser extent cable telephony) have 
come to play a large role in total revenue, projected to make up about 
one-fifth of the total in 2003. Operating cash flow per subscriber 
(operating revenues minus operating costs) increased by $140 from 1995 
to 2003. This is an increase of 77 percent per subscriber and 90 
percent in absolute terms. This is cash flow that is available for 
capital service and excess profits.
2. Cash Flow for Traditional Video Services
    The GAO cautions that it is difficult to apportion capital costs 
between the traditional video business and the new lines of business. 
The same is true with operating expenses. An expert for Cox recognizes 
the problem, but conveniently punts:
             EXHIBIT 6: Increasing Revenues Per Subscriber
             
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: Federal Communications Commission, In the Matter of Annual 
Assessment of the Status of Competition in Markets for the Delivery of 
Video Programming, Fifth Annual Report, December 23, 1998, Table B-7; 
Ninth Annual Report, December 2002, Table 4; Tenth Annual Report, Table 
4.

        In particular, it seems likely that a relatively large share of 
        increased capital costs and perhaps also operating costs may 
        have been incurred in order to permit firms to offer more 
        advanced products than expanded basic service, such as digital 
        tiers of service (including pay per view and video on demand), 
        broadband Internet connections and telephony.

        In my opinion, any attempt to allocate a portion of those cost 
        increases to basic analog service (in order to determine if 
        prices for expanded basic service have risen by more than would 
        have been sufficient to cover all cost increases of expanded 
        basic service) would require a long list of assumptions which 
        would be open to question and controversy.\73\

    Considering a plausible scenario to assess the run-up in cash flow 
from traditional video businesses shows why the cable industry chooses 
not to show how much the cost of basic and expanded basic service have 
increased.\74\ Between 1995 and 1998, before advanced video and 
Internet were being widely sold to the public, operating expenses 
increased by about 4.5 percent per year.\75\ Between 1998 and 2002, 
operating costs increased by over 14 percent per year, more than three 
times the rate prior to the aggressive marketing of advanced and 
Internet services. There is good reason to believe that the increase in 
operating expenses was not due to traditional video services.
    From 1995 to 1998, cable operators added 3.3 million basic 
subscribers, just about as many as they added from 1998 to 2002.\76\ 
From 1995 to 1998, cable operators added 117 new advertiser supported 
cable networks, over 50 percent more such networks than they added from 
1998 to 2002.\77\ Thus a substantial expansion of subscribers and 
traditional video services occurred with modest increases in operating 
costs.
    There is no doubt that after 1998, operating costs to support 
advanced video and Internet services increased sharply. One can argue 
that there was some increase in non-programming operating costs 
attributable to basic and expanded basic, but little of the capacity 
added to cable systems was devoted to that purpose. Full upgrades add 
the equivalent of 70 or more 6-megahertz channels, only 10 of which 
have been dedicated to basic and expanded basic tiers of service. A 
cautious approach shows the impact.
    Exhibit 7 splits the cash flow into two streams. One stream is made 
up of traditional video (basic+expanded+pay tiers+pay per 
view+equipment+shopping+local advertising). The other stream is made up 
of advanced video and Internet. Operating cost increases have been 
apportioned under the following two sets of assumptions. All of the 
pre-1999 operating cost increases are attributed to traditional video. 
In one scenario, forty percent of the post-1999 operating cost 
increases is attributed to traditional video. This figure is suggested 
by an analysis prepared for ESPN, which estimates that the increase in 
programming costs in 1999 to 2002 was equal to 32 percent of the total 
increase in operating costs.\78\ In the second scenario, the post-1999 
increase is assumed to be 4.5 percent (the pre-1999 rate) plus $1 
additional each year for 2000-2003, which is the average annual 
increase in programming costs per subscriber in the 1999 to 2002 
period. In both cases, the results are similar.
   EXHIBIT 7: Cumulative Increases in Cash Flow Per Subscriber From 
                Traditional and Advanced Cable Services
                
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: Federal Communications Commission, In the Matter of Annual 
Assessment of the Status of Competition in Markets for the Delivery of 
Video Programming, Fifth Annual Report, December 23, 1998, Table B-7; 
Ninth Annual Report, December 2002, Table 4; Seventh Annual Report, p. 
102. Tenth Annual Report, Table 4. See text for assumptions.

    Cash flow grew sharply from traditional video service through 2001 
and then leveled out at a very high level. The leveling is due to a 
combination of increasing programming costs and continually mounting 
non-programming operating costs attributed to traditional video. Non-
programming operating expenses for traditional video are not likely to 
continue to rise at the assumed rate, certainly not for traditional 
video services. Therefore, the increase in the cash flow is likely to 
be permanent. Cash flow from traditional services increased as a 
percentage of revenue from those services. Cash flow from advanced 
video and Internet services was slightly positive early. It became 
negative with the major roll out of Internet services, but became 
sharply positive in 2003.
    The market structure and financial analysis in this section present 
a strong case that the conceptualization of the supply-side of the 
market in Exhibit 1 is correct. There is a continuing exercise of 
market power over traditional video services. Both the absolute size 
and the rate of profits on traditional video services appear to have 
increased over the period. In this sense, the consumer complaint about 
rising cable rates is fully justified.
III. The Demand-Side
    If consumer surplus is also growing rapidly, however, then that 
might blunt the public policy concern. NCTA seeks to demonstrate that 
there was a substantial increase in consumer surplus by claiming that 
the real price of quality-adjusted service has declined. Thomas Hazlett 
makes a similar claim, based primarily on the growth of subscribers and 
channels.\79\ In this section, I demonstrate that this basic claim is 
incorrect and the whole welfare improvement argument overstated.
A. Estimation of Quantity Adjusted Price Changes
    The cable industry estimates involve a series of analytic errors of 
commission and omission and the general claims of increases in consumer 
welfare have several fundamental flaws. First, there is a 
misspecification of the units of analysis. Referring to Exhibit 1, the 
quantity of cable consumed (measured on the X-axis) is counted by NCTA 
as the total number of viewing hours. Since the X-axis is the total 
amount of consumption, the amount paid (measured on the Y-axis) should 
be the total amount paid for the products consumed. However, for the Y-
axis in their welfare calculation, NCTA uses the BLS consumer price 
index for services. NCTA recognizes, however, that the BLS index has 
already been adjusted downward for increases in the quantity of 
channels available and other factors. Therefore, the NCTA double counts 
quantity changes. In the analysis below, I use the actual price paid 
for the total bundle of programs.\80\
    Second, NCTA chooses to start its analysis eighteen months after 
the passage of the Telecommunications Act of 1996, conveniently 
excluding eighteen months of the most rapid rate increases in the 
history of the industry. Third, there would also appear to be a 
mismatch between the estimate of increased viewing and the estimate of 
declining prices. Since viewing numbers are seasonal and January is 
roughly the mid-point of the season, I use January prices.\81\
    The cable industry estimates that in the 1995/1996 season, the 
average cable household watched 23.4 hours of advertiser supported 
cable networks per week (see Exhibit 8). I estimate that in January 
1996, which coincidentally is the month before the 1996 
Telecommunications Act was signed, the average monthly bill was $22.60. 
The average cost per weekly viewing hour to the consumer was $.966. The 
cable industry estimates that in the 2002/2003 season, the average 
cable household watched 34.7 hours of advertiser supported cable 
networks per week. I estimate the average price in January 2003 to be 
$41.60 per month. The average cost per weekly viewing hour was $1.199. 
That is a nominal increase of 24 percent. Inflation over the period was 
17.7 percent, so the real increase was 5.5 percent. This is a very 
different picture than the 15 percent decline that NCTA claims by 
double counting quality improvements.
                EXHIBIT 8: Cost of Viewing, 1996 & 2003
                
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: For hours of viewing, Cable TV Advertising, Weekly Viewing 
of Ad-Supported Cable per Cable Household, and Source: NCTA, Steven S., 
Assessing Quality Adjusted Changes in the Real Price of Basic Cable 
Service, attached to Comments of the National Cable Telecommunications 
Association, in Federal Communications Commission, In Re: The Annual 
Assessment of the Status of Competition in the Market for the Delivery 
of Video Programming, MB Docket No. 03-172, September 11, 2003, p. 12. 
Cable prices for noncompetitive systems from Federal Communications 
Commission, Report on Cable Prices, January 2, 1997, p. 12, May 7, 
1999, p. 9; June 15, 2000, p. 9; Feb 14, 2001; 9; April 4, 2002, p. 8; 
July 8, 2003, p. 10; General Price increases from Bureau of Labor 
Statistics, Consumer Price Index.
B. Bundling, the Demand Curve and Consumer Surplus
    These simple math problems are compounded by conceptual issues. 
Bundling is the central character in the current drama surrounding 
cable prices and this wreaks havoc with the NCTA estimate of consumer 
welfare. The failure of cable operators to offer cable channels on an 
unbundled basis makes it difficult to divine the demand curve for 
individual channels. NCTA mentions, in passing, that viewing is not 
evenly distributed, but that does not influence its calculation. NCTA 
assumes (or at least uses in every example and hypothetical case) that 
demand is linear and that elasticity does not change over time. Both of 
these assumptions are dubious at best. Cox assumes demand is linear, 
equal and uncorrelated across individual channels to work its example 
of consumer benefit from bundling.\82\ This, too, is dubious, at best.
    At least Cox recognizes that there are conditions under which 
bundling results in consumer harm. The conditions are:

        related to a firm's motivation to try to charge different 
        consumers different prices for the same product depending upon 
        what they are willing to pay for it. The essential idea is that 
        when there is some negative correlation between individual 
        consumers' valuation of different products, that firm can 
        sometimes charge higher prices to everyone by bundling goods 
        together.\83\

    Although Cox notes that: ``it is easy to create examples where 
bundling can make consumers worse off but equally easy to create 
examples where bundling makes consumers better off,'' it ignores the 
problem.\84\ Bundling demands greater attention.
    Comcast's approach provides a useful starting point. It presents 
cable bundling as a greengrocer who sells tomatoes for $2 per pound, 
but who might also sell five pounds for $7.50. The tomatoes are cheaper 
on a per unit basis in the bundle (a volume discount) although the 
total bill is greater. The fundamental problem is that greengrocers 
invariably give the consumer a wide range of choices. The consumer can 
buy half a pound of tomatoes, or three pounds, or take the five-pound 
discount, as his or her needs may dictate. Cable operators do not give 
consumers that much choice.
    In fact, cable operators give consumers almost no choice. 
Essentially cable consumers have three choices--take nothing, take 
almost nothing (basic), or take almost everything (expanded basic). If 
I really need two pounds of tomatoes for my spaghetti sauce, I have to 
take all five pounds and most of the other fruits and vegetables, even 
though the rest of it is of little value to me.\85\ My next door 
neighbor, who really needs two pounds of apples for her pie, is forced 
to buy five pounds of apples and the tomatoes and all the other fruits 
and vegetables, too. We both end up paying a higher price and, given 
the nature of the commodity, we cannot recapture the surplus through 
trade. It is conceivable that we could split the cost, but then I have 
to have my neighbors in my house all the time. If we buy one 
subscription and try to run a wire (or a wireless network) between our 
houses, the cable operators have us arrested for stealing their signal.
    NCTA's welfare analysis assumes a full hour of increased welfare 
when a consumer shifts from watching a broadcast show to watching a 
cable show. That is, if a consumer watches a rerun of ``Law and Order'' 
on USA, instead of NBC, NCTA claims the full hour as an increase in the 
consumer's welfare. There may be little welfare gain. If the consumer 
had shifted from watching ``West Wing'' to watching ``Law and Order,'' 
one could argue that there is a welfare gain, but it is only the 
marginal difference between the two. Because the shows are all forced 
into the bundle, we cannot tell what consumers would pay for them on a 
stand-alone basis.
    If total hours of viewing had increased as much as cable viewing, 
the assumption that every hour watched on cable represents a full hour 
of gained consumer welfare would be more plausible, but that is not the 
case. The increase in total viewing is considerably less than the 
increase in cable viewing. In contrast to the 5.7 percent per year 
increase claimed by cable operators for viewing of advertiser supported 
cable networks, the FCC cites estimates of less than a 1.5 percent per 
year increase in viewing over a similar period,\86\ while others show 
less than a one percent per year increase. A well respected industry 
source that estimates both total TV viewing hours and basic/expanded 
cable network viewing hours puts the total increase at 25 percent of 
the cable switching increase.\87\ Even if we assume that the entirety 
of increased TV viewing occurred in cable households, we would still 
conclude that the net increase in viewing was equal to slightly over 
one-third of the total increase in cable network viewing.
    If we assume that the actual increase in consumer welfare is equal 
to half the total increase in cable viewing (leaving some room for a 
marginal increase due to switching), the quality-adjusted cost would be 
$1.432 (see Exhibit 8). The increase in the price over the 1996-2003 
period would be 48 percent. Interestingly, the quantity and quality 
adjusted price as reported by the BLS increased by 49 percent over this 
period. If the increase in value in viewing were equal only to the 
increase in total viewing (i.e., valued \1/4\ at the margin), the 
effective price increase would be 66 percent over this period, almost 
fifty percent higher.
    The case against the BLS price index is not convincing. In fact, 
the BLS may be over-adjusting for quantity and quality because many 
channels are forced into the bundle that few people are watching. The 
top 10 cable programs account for 50 percent of all viewing that is 
significant enough to be registered by Nielsen. The top 20 shows 
account for 75 percent of all such viewing. The GAO reports that the 
typical household watches only 17 channels. People are being forced to 
buy a lot of shows they don't watch to get the ones they want. Although 
the bottom 30 shows that register 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 who are forced to pay for it in the bundle 
are not. For the bottom two shows, the ratio is 1 to 800. Over 250 
additional cable networks do not capture enough viewers to even 
register on the Nielsen scale.\88\
    A recent study by Deutsche Bank of the Cox-ESPN controversy 
reinforces the conclusion that bundling leads NCTA to overestimate the 
welfare gains (see Exhibit 9).\89\ ESPN is one of the most popular and 
the most expensive cable networks, yet seventy-eight percent of 
respondents said that they would not pay $2 per month for it if they 
were given the choice. Cox confirms this estimate, noting that less 
than a quarter of its subscribers are ``avid sports fans.''
    There is good reason to believe that the elasticity of demand for 
ESPN alone is a lot higher than for the bundle and that the bundling of 
sports programming into the most popular package is harming consumers. 
The three-quarters of cable viewers who say they would not pay $2 
dollars for ESPN, likely the three-quarters who are less than avid 
sports fans, are paying over $1.5 billion for it in the bundle (at 
Cox's cost).\90\ Exhibit 9 shows the wealth transfers and efficiency 
losses associated with ESPN. For every one dollar of consumer surplus, 
there is at least one dollar of wealth transfer. This does not include 
the wealth transfers associated with the overpricing of ESPN to those 
who would take it, which may equal another quarter of the consumer 
surplus. The deadweight efficiency losses are an additional cost 
associated with this anti-consumer bundling.
IV. Long-Term Trends
A. Price
    NCTA's hours of viewing approach to consumer welfare analysis 
vastly overstates the gain in welfare and the BLS number of channels 
approach may well be overstating the quality adjustment. Given this 
conclusion, it is instructive to note the long-term trends of cable 
pricing. I have pointed out that the FCC was already being challenged 
to explain dramatic rate increases in the January 1997 report on cable 
pricing. In that report, the Commission reproduced a graph it had used 
to show that rate regulation in the 1993-1995 period had shielded 
consumers from price increases (see Exhibit 10). The trend line and the 
price line, extended through September 2003, show that the Commission 
had squeezed out a small part of the excess profits during the short 
period of rate regulation, but the 1996 Act launched the industry on a 
trajectory that not only recaptured what had been lost during the short 
period of partial regulation, but has gone beyond what it had been 
extracting in the past. This reaffirms the depiction in Exhibit 1.
        EXHIBIT 9: Wealth Transfer and Consumer Surplus For ESPN
        
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: Deutsche Bank, Walt Disney Company, October 27, 2003, p. 
16.
                   EXHIBIT 10: Long Term Price Trends
                   
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: Bureau of Labor Statistics, CPI. Deregulated trend is a 
linear projections of January 1983-April 1993, Competitive, 
unconcentrated from Exhibit 15.
B. Quantity
    The aggressive bundling of cable programming, across video tiers 
and now between video and non-video services, complicates the consumer 
welfare analysis enormously. The claim that regulation hurt consumers 
is simply wrong. The number of subscribers has grown virtually every 
year since the inception of the industry (see Exhibit 11).
    A model that uses the long-term trend in income growth and price 
changes to predict cable subscribers explains 96 percent of the 
variance in cable growth. It suggests that cable subscription performed 
somewhat better than expected in the early-mid 1990, when rates were 
regulated momentarily, but somewhat worse than expected since rates 
were fully deregulated. Adding in competitive satellite (i.e., the 
number of satellite subscribers who live in areas where cable is 
available)\91\ fills the gap somewhat, but at the end of the period, 
there are fewer households subscribing than projected. This is the 
deadweight inefficiency we would expect to see as a result of the 
aggressive price increases and bundling of recent years. It is exactly 
the opposite of what the cable industry experts claim.
V. Conclusion
    The basic comparison that consumer advocates have made to reflect 
the pain inflicted by cable operators--that cable prices have been 
rising at almost three times the rate of inflation--is a solid and 
proper way to state the problem. The complaint that prices are rising 
too fast is valid--reflected in the increasing cash flow thrown off 
from traditional video services. There is no doubt that consumers are 
being harmed by a lack of effective competition for cable. That cable 
operators have ridden the wave of rising incomes and changing 
technologies does not demonstrate the positive quality of their 
pricing/bundling strategy. The claim that deregulation helps consumers 
because consumer welfare has increased begs the question of whether 
abuse of consumers has increased even more rapidly.
    The possibility of anti-consumer bundling has long been recognized 
in the economics literature. The data suggests that cable operators 
have pushed prices into the range where there is price resistance 
(i.e., the more elastic portion of the demand curve). That does not 
mean the abuse has stopped, it simply means it may not grow as quickly 
as in the past, but cable operators are aggressively finding ways to 
keep their producer surplus growing, like rebundling (retiering) 
programming to drive penetration of digital tiers.\92\ The recognition 
of the possibility of anticompetitive bundling in a dynamic or 
strategic sense is more recent, but no less important, especially as 
cable market power is ``swung'' into the high-speed Internet.\93\
    Bundling is one of the strategies that monopolists use to extract 
consumer surplus and the evidence is consistent with such an 
interpretation in this case. Public policy might attack bundling, but 
policy that controlled the rents directly would be preferable. Of 
course, real competition would be better still, but after two decades 
of failure of competition to develop and with the cable operators 
extending the anticompetitive, anti-consumer business model to the 
Internet, the need for action is critical.
     EXHIBIT 11: Income Growth as a Predictor of Cable Subscription
     
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Sources: Federal Communications Commission, In the Matter of Annual 
Assessment of the Status of Competition in Markets for the Delivery of 
Video Programming, Tenth Annual Report, January 5, 2004, Table 1; Ninth 
Annual Report, December 2002, Table B-1; Sixth Annual Report, Table C-
1; for 1995 through 2002; Paul Kagan Associates, History of Cable TV 
Subscribers and Revenues, 1997, for pre-1995; Income is real, per 
capita disposable income from Economic Report of the President 
(February 2003), p. 313.
                               Appendix B
                 Top Rated Cable Channels: Then and Now
             Compiled by Federal Communications Commission
                    Annual Cable Competition Report

------------------------------------------------------------------------
                                           1996 Ranking    2003 Ranking
                 Network                    (Primetime)     (Primetime)
------------------------------------------------------------------------
A&E                                                    7               8
------------------------------------------------------------------------
Cartoon Network                                        6               6
------------------------------------------------------------------------
Discovery                                              9              10
------------------------------------------------------------------------
ESPN                                                   3              14
------------------------------------------------------------------------
Lifetime                                               5               2
------------------------------------------------------------------------
Sci-Fi Channel                                        14              15
------------------------------------------------------------------------
TBS                                                    2               5
------------------------------------------------------------------------
The Learning Channel                                  12              12
------------------------------------------------------------------------
The Nashville Network (Spike TV)                      10              13
------------------------------------------------------------------------
TNT                                                    1               1
------------------------------------------------------------------------
USA Network                                            4               7
------------------------------------------------------------------------


------------------------------------------------------------------------
 
------------------------------------------------------------------------
               Channels that moved into Top 15 after 1996
------------------------------------------------------------------------
Disney                               MTV
Fox News                             Nickelodeon
------------------------------------------------------------------------
Sources: Federal Communications Commission, MB Docket No. 03-172, Third
  Annual Assessment of the Status of Competition in the Market for the
  Delivery of Video Programming at 180.
Paul Kagan Associates, Cable TV Programming, Prime-Time Ratings, July
  1996, at 10.
Kagan World Media, Day Part Ratings Averages, Prime Time (July), Cable
  Program Investor, Sept. 12, 2003, at 16.

                               Appendix C
                         The Top Cable Channels
             By Number of Subscribers and Primetime Ratings
             Compiled by Federal Communications Commission
       For Tenth Annual Cable Competition Report--January 5, 2004

------------------------------------------------------------------------
                                 Owners (Independent in Italics)
------------------------------------------------------------------------
ABC Family               Disney-ABC
------------------------------------------------------------------------
AMC                      Cablevision
------------------------------------------------------------------------
A&E                      Disney--ABC/General Electric--NBC/Hearst
------------------------------------------------------------------------
Cartoon Network          Time Warner--WB
------------------------------------------------------------------------
CNBC                     General Electric--NBC
------------------------------------------------------------------------
CNN                      Time Warner--WB
------------------------------------------------------------------------
C-SPAN                   Cable Consortium
------------------------------------------------------------------------
Discovery                Liberty Media--Fox/Cox Cable
------------------------------------------------------------------------
Disney Channel           Disney--ABC
------------------------------------------------------------------------
ESPN                     Disney--ABC
------------------------------------------------------------------------
ESPN2                    Disney--ABC
------------------------------------------------------------------------
Fox News                 NewsCorp--Fox
------------------------------------------------------------------------
Lifetime                 Disney--ABC/Hearst
------------------------------------------------------------------------
MTV                      Viacom--CBS
------------------------------------------------------------------------
Nickelodeon              Viacom--CBS
------------------------------------------------------------------------
QVC                      Liberty Media--Fox/Comcast Cable
------------------------------------------------------------------------
Sci-Fi                   General Electric--NBC*
------------------------------------------------------------------------
Spike TV (TNN)           Viacom--CBS
------------------------------------------------------------------------
TBS                      Time Warner--WB
------------------------------------------------------------------------
The Weather Channel      Landmark Communications
------------------------------------------------------------------------
TLC                      Liberty Media--Fox/Cox Cable
------------------------------------------------------------------------
TNT                      Time Warner--WB
------------------------------------------------------------------------
USA Network              General Electric--NBC*
------------------------------------------------------------------------
VH1                      Viacom--CBS
------------------------------------------------------------------------
*If General Electric/Universal merger is approved as pending
Sources:
Federal Communications Commission, MB Docket No. 03-172, Tenth Annual
  Assessment of the Status of Competition in the Market for the Delivery
  of Video Programming at 141-142.
NCTA, Top 20 Cable Networks, Cable Developments 2003, at 39-40.
Kagan World Media, Day Part Ratings Averages, Prime Time (July), Cable
  Program Investor, Sept. 12, 2003, at 16.

                               Appendix D
                 Examples of Independent Cable Channels
             Compiled by Federal Communications Commission
       For Tenth Annual Cable Competition Report--January 5, 2004

------------------------------------------------------------------------
       Cable Network                            Owners
------------------------------------------------------------------------
ACNTV (America's             America's Collectibles Network
 Collectibles Network)
------------------------------------------------------------------------
ANA Television               Middle East Broadcasting Centre (MBC)
------------------------------------------------------------------------
ART (Arab Radio &            Arab Media Corporation
 Television)
------------------------------------------------------------------------
Bloomberg Television         Bloomberg L.P.
------------------------------------------------------------------------
B Mania                      B Mania Television Network
------------------------------------------------------------------------
Canal SUR                    Canal SUR (Latin American and Mexican TV)
------------------------------------------------------------------------
China Central Television     State Administration of Radio, Television,
                              and Film--People's Republic of China
------------------------------------------------------------------------
Church Channel               Trinity Broadcasting Network
------------------------------------------------------------------------
Classic Arts Showcase        The Lloyd E. Rigler--Lawrence E. Deutsch
                              Foundation
------------------------------------------------------------------------
CSTV (College Sports         College Sports Television
 Television)
------------------------------------------------------------------------
Deep Dish TV                 Deep Dish TV
------------------------------------------------------------------------
Destiny Channel              Destiny Channel
------------------------------------------------------------------------
Do-It-Yourself Channel       Scripps
------------------------------------------------------------------------
Dream TV Network             Dreamland Development--Egypt
------------------------------------------------------------------------
ETWN: Global Catholic        Eternal World Television Network
 Network
------------------------------------------------------------------------
FamilyNet                    Southern Baptist Convention
------------------------------------------------------------------------
Filipino Channel             ABS-CBN
------------------------------------------------------------------------
Fine Living                  Scripps
------------------------------------------------------------------------
Food Network                 Jones Media Networks
------------------------------------------------------------------------
Free Speech TV (FSTV)        Free Speech TV
------------------------------------------------------------------------
Galavision                   Univision
------------------------------------------------------------------------
GolTV                        Tenfield--Uruguay
------------------------------------------------------------------------
Golden Eagle Broadcasting    Oral Roberts University
------------------------------------------------------------------------
Goodlife Television Network  Nostalgia Network, Inc.
------------------------------------------------------------------------
HDNet                        HDNet
------------------------------------------------------------------------
HDNet Movies                 HDNet
------------------------------------------------------------------------
HGTV (Home and Garden        Scripps
 Television)
------------------------------------------------------------------------
Horse Racing TV              Magna Entertainment Corp.
------------------------------------------------------------------------
HSN America's Store (Home    IAC/InterActiveCorp
 Shopping Network)
------------------------------------------------------------------------
HTV                          ITV1 West of Wales
------------------------------------------------------------------------
Inspirational Life           Inspiration Networks
 Television (I-LIFETV)
------------------------------------------------------------------------
Inspirational Network        Inspiration Networks
 (INSP)
------------------------------------------------------------------------
JCTV                         Trinity Broadcasting Network
------------------------------------------------------------------------
La Familia Network           Inspiration Networks
------------------------------------------------------------------------
Liberty Channel              Jerry Falwell Ministries
------------------------------------------------------------------------
Locomotion Channel           Corus Entertainment/Hearst Corporation
------------------------------------------------------------------------
MBC Network                  MBC Network
------------------------------------------------------------------------
MBC America                  MUNHWA Broadcasting Corporation
------------------------------------------------------------------------
Mun2                         Mun2
------------------------------------------------------------------------
NASA Television              National Aeronautics and Space
                              Administration
------------------------------------------------------------------------
National Jewish Television   Hineni International
------------------------------------------------------------------------
Oasis TV                     Oasis TV
------------------------------------------------------------------------
TBN                          Trinity Broadcasting Network
------------------------------------------------------------------------
UBC                          Urban Broadcasting Company
------------------------------------------------------------------------
Univision                    Univision
------------------------------------------------------------------------
Video Rola                   Entretenimiento Satelital
------------------------------------------------------------------------
Weather Channel              Landmark Communications
------------------------------------------------------------------------
WGN                          Tribune Company
------------------------------------------------------------------------

Endnotes
    \1\Federal Communications Commission, In Re: The Annual Assessment 
of the Status of Competition in the Market for the Delivery of Video 
Programming, MB Docket No. 03-172.
    \2\U.S. General Accounting Office (U.S. GAO), Issues Related to 
Competition and Subscriber Rates in the Cable Television Industry, 
October 2003; Telecommunications: Issues in Providing Cable and 
Satellite Television Service, October 15, 2003.
    \3\Fabrikant, Geraldine and Bill Carter, ``Cable's New Giant Flexes 
His Muscles,'' New York Times, October 20, 2003; ``Testimony of James 
O. Robbins,'' Senate Commerce Committee, May 6, 2003.
    \4\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).
    \5\Katz, Michael, An Economic Analysis of the Claims made by Dr. 
Mark Cooper in ``Cable Mergers, Monopoly Power and Price Increases,'' 
Commissioned by Comcast Corporation, July 28, 2003 (hereafter Comcast). 
The target of the Comcast paper is a short study prepared in January 
2003 entitled Cable Mergers, Monopoly Power and Price Increases 
(Washington, DC: Consumer Federation of America and Consumers Union, 
January 2003). This critique ignores several much longer documents 
including Consumer Federation of America, ``Comments of the Consumer 
Federation of America, Consumers Union, Center for Digital Democracy, 
The Office of Communications of the United Church of Christ, Inc., 
National Association of Telecommunications Officers and Advisors, 
Association for Independent Video Filmmakers, National Alliance for 
Media Arts and Culture, and the Alliance for Community Media,'' 2002; 
and ``Reply Comments of the Consumer Federation of America, Consumers 
Union, Center for Digital Democracy, and Media Access Project,'' 2003; 
Federal Communications Commission, In the Matter of Implementation of 
Section 11 of the Cable Television Consumer Protection and Competition 
Act of 1992, Implementation of Cable Act Reform Provisions of the 
Telecommunications Act of 1996, The Commission's Cable Horizontal and 
Vertical Ownership Limits and Attribution Rules, Review of the 
Commission's Regulations Governing Attribution of Broadcast and Cable/
MDS Interests, Review of the Commission's Regulations and Policies 
Affecting Investment in the Broadcast Industry, Reexamination of the 
Commission's Cross-Interest Policy, CS Docket No. 98-82, CS Docket No. 
96-85, MM Docket No. 92-264, MM Docket No. 94-150, MM Docket No. 92-51, 
MM Docket No. 87-154; and Cooper, Mark, Cable Mergers and Monopolies: 
Market Power in Digital Communications Networks (Economic Policy 
Institute, 2002).
    \6\Wildman, Steven S., Assessing Quality Adjusted Changes in the 
Real Price of Basic Cable Service, attached to Comments of the National 
Cable Telecommunications Association, in Federal Communications 
Commission, In Re: The Annual Assessment of the Status of Competition 
in the Market for the Delivery of Video Programming, MB Docket No. 03-
172, September 11, 2003 (hereafter NCTA).
    \7\Federal Communications Commission, Tenth Annual Report (In the 
Matter of Annual Assessment of the Status of Competition in the Market 
for the Delivery of Video Programming) Washington, DC, January 28, 2004 
(hereafter Tenth Annual Report).
    \8\``Testimony of Gene Kimmelman,'' Senate Commerce Committee, May 
6, 2003, cited in ESPN, p. 4.
    \9\Tenth Annual Report, para. 10.
    \10\Tenth Annual Report, para 139.
    \11\ 1ATenth Annual Report, para 30.
    \12\Tenth Annual Report, para 31.
    \13\Tenth Annual Report, note 73.
    \14\Tenth Annual Report, note 203.
    \15\Tenth Annual Report, Table 4.
    \16\Tenth Annual Report, footnote 11.
    \17\Tenth Annual Report, para. 140.
    \18\Cooper, Mark, Media Ownership Democracy in the Digital 
Information Age (Stanford: Center for Internet and Society, 2003), 
Chapter 6.
    \19\Tenth Annual Report, para. 136.
    \20\Tenth Annual Report, para 130-132.
    \21\See Tenth Annual Report, Table B-1.
    \22\Compare Tenth Annual Report, para 41 and 65.
    \23\Joint Statement of Commissioners Michael J. Copps and Jonathan 
S. Adelstein, Concurring'' January 28, 2004.
    \24\The only evidence that the industry paper gives on market power 
is provided by Comcast, which points to one indicator of market power, 
Tobin's q (the system sales price in comparison to the reproduction 
cost). Citing numbers from the 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. 92-145, December 31, 2002, p. 16), Comcast points out that 
(p. 19): the ``National Average Dollar Value Per Subscriber declined 
dramatically, falling from a peak of $5755 in 2000 to $2196 in January 
through June 2002.'' This statement fails to take into account the 
dramatic difference in the nature of the systems being transacted. The 
average number of subscribers transacted in the peak year Comcast cited 
was over 250,000 per system in 45 transactions for a total of over $66 
billion. The average number of subscribers in the first half of 2002 
was only 32,000 in 12 transactions for a total of less than $1 billion. 
If we compare small systems transacted in 2000 to the small systems 
transacted in 2002, we get a very different picture; see Federal 
Communications Commission, Seventh Annual Report, In the Matter of 
Annual Assessment of the Status of Competition in the Market for the 
Delivery of Video Programming, CS Docket No. 00-132, January 8, 2001, 
Table C-5. For example, there were 39 transactions in 2000 for systems 
with fewer than 100,000 subscribers. The average system price was 
approximately $2,666 per subscriber. Thus, the system price has 
declined by about 18 percent, which is modest compared to the stock 
market declines (see Couper, Elise A, John P. Hejkal, and Alexander L. 
Wolman, ``Boom and Bust In Telecommunications,'' Economic Quarterly, 
Fall 2003. The analysis also does not account for a decline in the 
reproduction costs, was also evident.
    \25\Comcast, p. 14, states the proposition as follows: ``As long as 
the increase in the monthly fee is less than the amount by which 
consumers value the new programming, they will be better off at the new 
`higher' price coupled with the additional programs.''
    \26\Scherer, F. M. and David Ross, Industrial Market Structure and 
Economic Performance (Boston: Houghton Mifflin, 1990), pp. 21-29.
    \27\Comcast, pp. 12-13; Cox, Appendix, uses this model as well.
    \28\Industry defenders frequently claim that rising prices cannot 
be caused by market power, since in frictionless theory the monopolist 
would immediately ascertain his profit-maximizing price and charge it 
(Comcast p. 14, Hazlett, Thomas, Cable TV: Has Deregulation Failed?, 
Manhattan Institute for Policy Research, November 21, 2003). Reality, 
of course is more complicated than that. Monopolists price politically, 
searching for what they can get away with before they evoke a reaction, 
especially in an industry whose rapacious behavior caused it to be 
reregulated once.
    \29\Cox, Appendix, argues that allowing the monopolist to 
reallocate rents from programmers will increase its rate of profit as 
well as consumer welfare under some circumstances.
    \30\U.S. GAO, 2003, Appendix IV.
    \31\U.S. GAO, 2002.
    \32\Tenth Annual Report, para. 83, citing First Annual Report, 
para. 57.
    \33\Federal Communications Commission, Report on Cable Prices, 
April 4, 2002, Attachment D-1; February 14, 2001, Attachment D-1; June 
2000, Attachment D-1; May 7, 1999, C-1.
    \34\Tenth annual Report, para. 16.
    \35\I assume that 98 percent of cable subscribers lack head-to-head 
competition (Federal Communications Commission, In the Matter of the 
Annual Assessment of the Status of Competition in the Market for 
Delivery of Video Programming: Ninth Annual Report, MB Docket No. 02-
145, December 31, 2002, para. 115) and 90 percent of those take 
expanded basic service (ESPN, p. 2). Therefore, 62 million cable 
households are the victims of abuse of market power. Their bills could 
be reduced by $8 per month as a result of genuine head-to-head 
competition and deconcentration of the industry.
    \36\U.S. GAO, 2003, Appendix IV.
    \37\FCC, Report on Cable Prices, April 4, 2002, Attachment D-1; 
February 14, 2001, Attachment D-1; June 2000, Attachment D-1; May 7, 
1999, C-1.
    \38\FCC, Report on Cable Prices, February 14, 2001, Attachment D-1; 
June 2000, Attachment D-1.
    \39\Tent Annual Report, para 132. Comcast once again has failed to 
notice the consistent empirical evidence that finds size and clustering 
increase prices, contradicting their claim that (pp. 18-19) ``there is 
no reason to think that consolidation of cable ownership at the 
national level will affect actual competition among cable system 
operators. Ironically, cable industry experts find that mergers of some 
monopolists matter (John B. Hayes, Jith Jayaratne, and Michael L. Katz, 
An Empirical Analysis of the Footprint Effects of Mergers Between Large 
ILECS, April 1, 1999, p. 1; citing ``Declaration of Michael L. Katz and 
Steven C. Salop,'' submitted as an attachment to Petition to Deny of 
Spring Communications Company L.P, in Ameritech Corp. and SBC 
Communications, Inc., for Consent to Transfer of Control, CC Dkt. No. 
98-141 (filed Oct. 15, 1998) and Petition to Deny of Spring 
Communications Company L.P, in GTE Corporation and Bell Atlantic 
Corporation for Consent to Transfer of Control, CC Docket. No. 98-184 
(filed Nov. 23, 1998)) and that size and alternative distribution 
opportunities affect bargaining (see Rogerson, William P. ``A Further 
Economic Analysis of the News Corp. Takeover of DirecTV,'' In the 
Matter of General Motors Corporation, Hughes Electronics Corporation, 
and the News Corporation Limited Application to Transfer Control of FCC 
Authorizations and Licenses Held by Hughes Electronics Corporation to 
the News Corporation Limited, MB Docket NO. 03-124, August 4, 2003).
    \40\Cooper, 2002, Chapter 7.
    \41\U.S. GAO, 2003, Appendix IV.
    \42\FCC, Report on Cable Prices, April 4, 2002, Attachment D-1.
    \43\Cooper, 2002, pp. 21-32.
    \44\See Cooper, 2002, pp. 44-47.
    \45\Fabricant and Carter.
    \46\Cox, Appendix A shows cable profits rising as programming costs 
fall.
    \47\``Comments of the Consumer Federation of America, et al., In 
the Matter of Implementation of Section 11 of the Cable Television 
Consumer Protection and Competition Act of 1992, Implementation of 
Cable Act Reform Provisions of the Telecommunications Act of 1996, The 
Commission's Cable Horizontal and Vertical Ownership Limits and 
Attribution Rules, Review of the Commission's Regulations Governing 
Attribution of Broadcast and Cable/MDS Interests, Review of the 
Commission's Regulations and Policies Affecting Investment in the 
Broadcast Industry, Reexamination of the Commission's Cross-Interest 
Policy, CS Docket No. 98-82, CS Docket No. 96-85, MM Docket No. 92-264, 
MM Docket No. 94-150, MM Docket No. 92-51, MM Docket No. 87-154
    \48\U.S. GAO, 2003, p. 27.
    \49\ESPN, p. 9.
    \50\Cox critics ESPN for comparing current revenues to total 
capital, a criticism that applies to Comcast even more forcefully, 
since ESPN at least reports annualized increases in debt costs, whereas 
Comcast provides no similar calculation. ESPN/s reporting of debt 
service misses the point, however, since part of the debt was incurred 
to fund acquisitions, not capital expenditures.
    \51\Only a consent decree forced Time Warner to allow modest 
access, and intense scrutiny forced AT&T to make some minor 
concessions, but the recent AOL/AT&T carriage agreement is thoroughly 
anticompetitive. ``A New Model for AOL May Influence Cable's Future,'' 
New York Times, August 26, 2002, p. C1; Gilmore, Dan, ``AOL 
Capitulates, Gives Up Struggle for `Open Access','' San Jose Mercury 
News, September 1, 2002.
    \52\Cooper, Mark, ``Open Access to the Broadband Internet: 
Technical and Economic Discrimination in Closed, Proprietary 
Networks,'' 71 University of Colorado Law Review, 71: 2000.
    \53\Federal Communications Commission, High-Sped Service for 
Internet Access: Status as of June 30, 2003, December 2003, Table 4.
    \54\``A New Model for AOL May Influence Cable's Future,'' New York 
Times, August 26, 2002, p. C.1; Gilmore, Dan, ``AOL Capitulates, Gives 
Up Struggle for `Open Access','' San Jose Mercury News, September 1, 
2002.
    \55\Hu, Jim, ``AOL's Unrequited Cable Love,'' CNET News.com, 
January 26, 2004.
    \56\Latour, Almar and Peter Grant, ``Verizon May Set Off Price 
War,'' Wall Street Journal, May 5, 2003.
    \57\U.S. Department of Justice v. AT&T Corp and MediaOne Group, 
Inc., May 26, 2000.
    \58\Conquering the high-speed Internet access as a neighbor market 
of video has additional advantages in preserving market power in the 
primary market (see for example, Carlton, Dennis W. and Michael 
Waldman, ``The Strategic Use of Tying to Preserve and Create Market 
Power in Evolving Industry,'' Rand Journal of Economics, Summer, 2002; 
Rubinfield, Daniel L. and Hal J. Singer, Open Access to Broadband 
Networks: A Case Study of the AOL/Time Warner Merger, 16 Berkeley Tech. 
L.J. 631, 2001; Ordover, Lansuz A. and Robert D. Willig, ``Access and 
Bundling in High Technology Markets,'' in Jeffrey A. Eisenach and 
Thomas M. Lenard (eds.), Competition, Innovation And The Microsoft 
Monopoly: Antitrust And The Digital Marketplace (Washington, D.C.: 
Progress and Freedom Foundation, 1999); Salop, Steven C., ``Using 
Leverage to Preserve Monopoly,'' in Jeffrey A. Eisenach and Thomas M. 
Lenard (eds.), Competition, Innovation And The Microsoft Monopoly: 
Antitrust And The Digital Marketplace (Washington, D.C.: Progress and 
Freedom Foundation, 1999). Bundling basic video with Internet access 
has the effect of undermining competition for video services (by 
driving basic into households and reducing the value of satellite). 
Bundling video content with Internet access reduces competition for 
video services, (See, e.g., Comments of the Competitive Broadband 
Coalition, Implementation of the Cable Television Consumer Protection 
and Competition Act of 1992, Cable Services Bureau Dkt. No. 01-290, at 
10-11 [Dec. 3, 2001]). Bundling also raises barriers to entry by 
forcing competitors to build larger packages to compete: ``AT&T is 
refusing to sell HITS to any company using DSL technology to deliver 
video services over existing phone lines because such companies would 
directly compete with AT&T's entry into the local telephone market 
using both its own cable systems and the cable plant of unaffiliated 
cable operators. AT&T simply does not want any terrestrial based 
competition by other broadband networks capable of providing bundled 
video, voice and data services.'' (Comments of the American Cable 
Association In the Matter of: Implementation of the Cable Television 
Consumer Protection and Competition Act of 1992, Development of 
Competition in Video Programming Distribution: Section 628(c)(5) of the 
Communications Act: Sunset of Exclusive Contract Prohibition, CS Docket 
No. 01-290 [filed Dec. 3, 2001]).
    \59\``Initial Comments of the California ISP Association, Inc.,'' 
Further Notice of Proposed Rulemaking in the Matter of the Computer III 
Remand Proceedings: Bell Operating Company Provision of Enhanced 
Services; 1998 Biennial Regulatory Review--Review of Computer II and 
ONA Safeguards and Requirements, Federal Communications Commission, CC 
Docket No. 95-20, 98-10, DA 01-620, April 16, 2001 (hereafter CISPA, 
2001a), p. 7; ``Comments of DirecTV Broadband, Inc,'' In the Matter of 
Appropriate Framework for Broadband Access to the Internet Over 
Wireline Facilities, Universal Service Obligations of Broadband 
Providers, Computer III Remand Proceedings: Bell Operating Company 
Provision of Enhanced Services; 1998 Biennial Regulatory Review--Review 
of Computer II and ONA Safeguards and Requirements, Federal 
Communications Commission, CC Docket No. 02-33, 95-20, 98-10, May 3, 
2002, p. 5; ``Comments of Cbeyond, et al.,'' In the Matter of 
Appropriate Framework for Broadband Access to the Internet Over 
Wireline Facilities, Universal Service Obligations of Broadband 
Providers, Computer III Remand Proceedings: Bell Operating Company 
Provision of Enhanced Services; 1998 Biennial Regulatory Review--Review 
of Computer II and ONA Safeguards and Requirements, Federal 
Communications Commission, CC Docket No. 02-33, 95-20, 98-10, May 3, 
2002 (Hereafter Cbeyond, et al., 2002), pp. 27-28.
    \60\National Research Council report entitled Broadband: Bringing 
Home the Bits, (Washington, D.C.: National Academy Press, 2002), pp. 
21, 152-154.
    \61\Federal Communications Commission, High-Speed Services for 
Internet Access, June 2003, Tables 1, 2; Local Telephone Competition: 
Status as of December 31, 2002, June 2003, Tables 1, 13; NCTA, Overview 
2003: Mid-Year, p. 1.
    \62\Young, Shawn and Peter Grant, ``How Phone Firms Lost to Cable 
in Consumer Broadband Battle,'' Wall Street Journal, March 13, 2003.
    \63\``Comments of Ad Hoc Telecommunications Users Committee,'' In 
the Matter of Review of Regulatory Requirements for Incumbent LEC 
Broadband Telecommunications Services, Federal Communications 
Commission, CC Docket No. 01-337, March 1, 2002, pp. 18-19.

    Cable modem service presents serious security and reliability 
issues that, while present for residential users, are of far greater 
concern when used to support business applications . . . In addition, 
service quality for cable modem service not equivalent to ILEC 
standards . . . Additionally cable modem transmission speeds are not 
consistent, due to the ``shared platform'' architecture . . . Finally, 
cable modem platforms do not offer business customers a sufficient 
level of security

    \64\Cable modem service presents serious security and reliability 
issues that, while present for residential users, are of far greater 
concern when used to support business applications . . . In addition, 
service quality for cable modem service is not equivalent to ILEC 
standards . . . Additionally cable modem transmission speeds are not 
consistent, due to the ``shared platform'' architecture . . . Finally, 
cable modem platforms do not offer business customers a sufficient 
level of security.
    \65\Kuhl, Craig, ``Writing the Business Case for VDSL,'' CED, April 
2000. Extensive documentation of the technology difference is provided 
in Cooper, Mark, Transforming the Information Superhighway into a 
Private Toll Road (Washington, DC: Consumer Federation of America, 
October 1999).
    \66\Hazlett, Thomas W. and George Bittlingmayer. The Political 
Economy of Cable ``Open Access.'' Joint Center, Working Paper 01-06, 
May, argue that there is a strategic under allocation of capacity to 
high-speed Internet.
    \67\Cox, Comcast and ESPN also focus on a short time frame.
    \68\Federal Communications Commission, Report on Cable Prices, In 
the Matter of Implementation of Section 3 of the Cable Television 
Consumer Protection Act of 1992, Statistical Report on Average Rates 
for Basic Service, Cable Programming and Equipment, MM Docket No. 92-
226, January 2, 1997, p. 7.
    \69\Id., p. 7.
    \70\U.S. GAO, 2003, p. 26.
    \71\Federal Communications Commission, In the Matter of Annual 
Assessment of the Status of Competition in Markets for the Delivery of 
Video Programming, Fifth Annual Report, December 23, 1998, Table B-7; 
Ninth Annual Report, December 2002, Table 4.
    \72\I report both revenue per subscriber and the total revenue 
because some costs are not incurred on a per subscriber basis.
    \73\Cox II, p. 8.
    \74\The GAO cautions that it is difficult to apportion capital 
costs between the traditional video business and the new lines of 
business. The same is true with operating expenses. The expert for Cox, 
recognizes the problem, but conveniently punts. Cox II, p. 8,

    In particular, it seems likely that a relatively large share of 
increased capital costs and perhaps also operating costs may have been 
incurred in order to permit firms to offer more advanced products than 
expanded basic service, such as digital tiers of service (including pay 
per view and video on demand), broadband Internet connections and 
telephony.
    In my opinion, any attempt to allocate a portion of those costs 
increases to basic analog service (in order to determine if prices for 
expanded basic service have risen by more than would have been 
sufficient to cover all cost increases of expanded basic service) would 
require a long list of assumptions which would be open to question and 
controversy.
    \75\Federal Communications Commission, Annual Assessment of the 
Status of Competition in the Market for the Delivery of Video 
Programming, Ninth Annual Report, p. 15; Seventh Annual Report; NCTA, 
Cable Pricing: Value and Cost, May 2003.
    \76\Federal Communications Commission, In the Matter of Annual 
Assessment of the Status of Competition in Markets for the Delivery of 
Video Programming, Fifth Annual Report, December 23, 1998, Table C-1; 
Ninth Annual Report, December 2002, Table B-1.
    \77\NCTA, Overview 2003: Mid-Year, p. 12.
    \78\ESPN, p. 12.
    \79\Hazlett.
    \80\Thinking about the cost of viewing to the public leads to 
another conceptual problem in the NCTA and Comcast analyses, one that 
has been recently highlighted by the ESPN analysis. ESPN points out 
they improve quality and increase audiences to increase their ability 
to sell advertising, as well as get more subscription revenues. Cox II, 
p. 6, nets advertising out from the cost of programming cable operators 
incur. That may make sense from the cable operator point of view, but 
not necessarily from the consumer point of view. Consumers have to 
watch the commercials and, ultimately, the cost turns up in the goods 
and services they buy. From a total social welfare analysis, the cost 
of advertising needs to be attributed to the cost of the total viewing 
time. The advertising revenue can be handled in a variety of ways, but 
it cannot be ignored.
    \81\Unfortunately, in 1996 the FCC shifted from a January cable 
price to a June cable price in its annual reports on cable prices. 
However, we can use the CPI to interpolate from June to January and 
only slightly underestimate the actual price increase (since quality 
adjustments over any short six month period are relatively minor). To 
the extent the industry was adding channels, this approach 
underestimates the price increase.
    \82\Cox, Appendix.
    \83\Cox, p. 13
    \84\Cox, p. 13,
    since regulation is costly and can create other distortions, the 
fact that this type of bundling cannot be shown to be systematically 
harmful to consumers is sufficient reason for most economists to 
conclude that there is no reason to regulate this type of bundling
    \85\The example offered by Cox assumes that all fruits and 
vegetables are equally valuable to consumers in exactly the same 
quantities.
    \86\Levy, Jonathan, Marcelino Ford-Levine and Anne Levine, 
Broadcast Television: Survivor in a Sea of Competition (Federal 
Communications Commission, OPP Working Paper, September 2002), p. 62; 
Albararan, Alan and Angel Arrese, ``Time and Media Markets: An 
Introduction,'' in Albararan and Arrese (Eds.), Time and Media Markets 
(Mahwah, NJ: Lawrence Earlbaum Associates, 2003), p. 2.
    \87\Veronis Suchler Stevenson, Communications Industry Report: 
Forecast Summary, 2003, p. 48.
    \88\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. Those claims are inconsistent with the data in this 
paper (U.S. GAO, 2003, pp. 34-37).
    \89\Deutsche Bank, Walt Disney Company, October 27, 2003.
    \90\This assumes that the non-avid sports fans would pay nothing 
for it, given the choice.
    \91\Cooper, 2002, pp. 26-32.
    \92\USPIRG, The Failure of Cable Deregulation: A Blueprint for 
Creating a Competitive, Pro-consumer Cable Television Marketplace 
(August 2003), pp. 18-19.
    \93\Carlton and Waldman.

    The Chairman. Thank you very much, Mr. Kimmelman. The 
Honorable Marilyn Praisner of Montgomery County Council, 
welcome.

           STATEMENT OF HON. MARILYN PRAISNER, CHAIR,

        TELECOMMUNITY AND CHAIR, NATIONAL ASSOCIATION OF

          COUNTIES' TELECOMMUNICATIONS AND TECHNOLOGY

                       STEERING COMMITTEE

    Ms. Praisner. Thank you very much, Mr. Chairman, and thank 
you very much for including local government in this panel this 
morning. We very much appreciate the opportunity. Local 
governments have for a long time been eager and anxious for our 
constituents to have the benefits of every technology that's 
available, including especially, of course, because of the 
long-standing relationship, cable systems. We are anxious to 
have multiple providers in our communities.
    As was said, I'm testifying today as Chair of TeleCommUnity 
and the National Association of Counties' Telecommunications 
and Technology Steering Committee. TeleCommUnity is an alliance 
of individual local governments and their associations which 
seek to focus attention in Washington on the principles of 
federalism and comity for local government interests in 
telecommunications, and I believe you're familiar with NACO, 
the association of the Nation's 3,000-plus counties in this 
country.
    You have my written testimony and I'll only make a couple 
of comments. Number one, local governments agree with you that 
only real competition creates downward pressure on rates, and 
real competition for cable exists when a second wire line 
provider is present.
    Two, we believe FCC actions have frustrated local rate 
regulation efforts and that some work is necessary in that 
area. And number three, a la carte pricing as an additional 
choice for consumers may be an improvement over the current 
tier pricing system if it provides consumers direct control and 
choice over the channels they buy and avoids price manipulation 
by the cable operator, and we believe it warrants further 
study.
    My personal experiences are similar to those that were 
cited by the Honorable Chairman this morning with his 
communications and those that I'm sure you're getting from your 
constituents who are also the constituents of my colleagues 
across this country. Consumers are complaining about the cable 
operators' annual rate increases greater than the local rate of 
inflation. They're complaining about cable services moved 
between tiers with little or no explanation or notice. They're 
complaining about bundling of cable modem and video services, 
which discourage DSL competition, and they're complaining about 
being forced to pay for digital converters to buy pay-per-view 
and pay channels. They claim that they are not offered the 
lowest available prices or accurate descriptions of their 
purchasing options when they call the company.
    Most of these problems, we believe, are caused by lack of 
effective competition. Without wire line competition, cable 
rates and these frustrations will continue to rise. On the 
issue of DBS, we believe DBS does not constrain cable rates. It 
is not a true competitive alternative for major television 
market cable customers. Equipment is not interchangeable, it 
does not offer two-way high-speed data services comparable to 
cable model, it doesn't always offer local broadcast signals, 
and it cannot carry the very important to us local public, 
educational, and government access programming.
    Competitive broadband providers including cable system 
overbuilders have complained to us of incumbent cable operators 
using aggressive marketing tactics to drive these small 
competitors out of the market. We believe any legislation to 
respond to escalating cable rates should include encouragement 
of wire line competition and protection of competitors' access.
    As for a la carte pricing, we believe it may have merit and 
deserves to be studied further. It could be a means to provide 
consumers greater control over what they purchase and 
definitely could permit parents greater control over what 
programming comes into their home.
    If the Committee seeks to expand a la carte opportunities, 
we would recommend careful study perhaps of several different 
approaches. We also urge you though to require the cable 
industry to provide additional information unavailable to us 
and you now. For example, cable operators do not make known 
their channel programming costs, programming launch fee 
revenue, and corporate allocation of volume discounts. And it 
is evident that cable operators are not sharing their internal 
cost efficiencies with consumers.
    The Committee should also consider its oversight and 
instruction to the FCC. There are numerous ways in which the 
FCC has not established or interpreted its rate regulation 
rules in a manner to protect subscribers. Congress should 
instruct the FCC to implement rules that protect the consumer 
from abuse and reflect the reality of today's non-competitive 
markets. We also need a more effective process for supporting 
local rate regulation.
    In conclusion, local government has used its cable 
franchise authority to promote deployment of advanced services, 
and to the extent it can, has protected subscribers. We share 
your desire to increase wire line competition and reduce 
subscriber rates, and we stand ready to work with you on this 
important issue to our shared constituents. Thank you very 
much.
    [The prepared statement of Ms. Praisner follows:]

 Prepared Statement of Hon. Marilyn Praisner, Chair, TeleCommUnity and 
    Chair, National Association of Counties' Telecommunications and 
                     Technology Steering Committee

         The Case for Competition and Effective Rate Regulation

Introduction
    Good Morning Mr. Chairman, Senator Hollings and Members of the 
Committee. My name is Marilyn Praisner. I am a member of the County 
Council of Montgomery County, Maryland. I am testifying today as the 
Chair of TeleCommUnity and the Chair of the National Association of 
Counties' Telecommunications & Technology Committee. TeleCommUnity is 
an alliance of individual local governments and their associations, 
which seeks to refocus attention in Washington on the principles of 
federalism and comity for local governments' interests in 
telecommunications. NACo is the national association of the Nation's 
3,066 counties and seeks to ensure county officials' voices are heard 
and understood in the White House and the halls of Congress.
I. Only Real Competition Results in Lower Rates
    Mr. Chairman, in response to the GAO's cable rate report, you are 
quoted as stating:

        ``Consumers in the few markets with a choice of a second cable 
        company pay 15 percent less for cable. The apparent implication 
        for all other consumers is that they continue to be fleeced by 
        their cable operators.\1\''
---------------------------------------------------------------------------
    \1\Frank Ahrens, GAO Suggests Competition Good for Cable Washington 
Post, October 25, 2003.

    We agree with your conclusion and thank you for the invitation to 
testify this morning.
    In my testimony I seek to impart four thoughts:

   Local governments agree with you that only real competition 
        creates downward pressure on rates -and real competition for 
        cable exists only when a second wireline provider is present.

   Local rate regulation was thought to be a substitute rate 
        restraint in the absence of competition, but FCC actions have 
        frustrated rate regulation efforts by local franchising 
        authorities. In addition, there are real limitations found in 
        the Telecommunications Act which limits regulation to the basic 
        programming tier. For example, were a local government to 
        determine that an operator's basic rate was above that set by a 
        competitive market, operators can limit choices on the 
        regulated tier and move attractive programming to an 
        unregulated tier. The result being that subscribers pay the 
        higher rate selected by the operator.

   A la carte pricing could be a definite improvement over the 
        current tier pricing system if it provides consumers direct 
        control and choice over the channels they buy and the content 
        that is coming into their homes while avoiding price 
        manipulations by the cable operator.

   A la carte pricing is not, however, a solution to the real 
        problem with cable--the lack of effective competition in the 
        transmission platform. This monopoly transmission ownership 
        gives the cable operator monopoly pricing power over the 
        consumers and monopsony pricing power over the programmer.
II. Without Wireline Competition, Cable Rates Will Continue to Rise
    Two studies, one conducted by the GAO at the request of this 
Committee, and a second study done by the FCC, have independently 
documented that cable rates are lower in areas where a competing cable 
service is available from a second wireline provider. The GAO study 
found cable rates to be 17 percent lower, and the FCC found rates were 
8 percent lower. The challenge arises in that according to the FCC, 
only 2 percent of the 33,246 cable communities have overbuild cable 
competition, and it appears that the cable industry intends to keep it 
that way.
    The GAO found that the seven largest cable operators serve 83.8 
percent of all cable subscribers and the top seven do not compete 
against each other in any market. These numbers take on even greater 
meaning when the size of incumbent MSO and competitors are compared. 
The total subscriber counts of the three largest overbuild/competitive 
cable operators combined serve only slightly more than half the number 
of subscribers of Mediacom, the seventh largest MSO. The competitive 
cable operators together serve less than four percent of the number of 
subscribers Comcast serves. Comcast is the Nation's largest cable 
operator with over 21 million subscribers.
    The National Association of Telecommunications Officers and 
Advisors, the association that represents local cable regulators, 
testified before the Senate Judiciary Subcommittee on Antitrust, 
Competition and Business and Consumer Rights on February 11, 2004. In 
that testimony, NATOA ratified the findings of the FCC and GAO, 
described in detail various problems that have prevented the success of 
cable overbuilds, and pointed to specific legislative changes that 
might open the door to more overbuilders. However, experience with 
overbuilding makes local government believe that competition will 
continue to be scarce.

   Direct Broadcast Satellite (DBS) Service Does Not Constrain 
        Cable Rates. While the cable industry has touted the threat 
        posed by DBS, both the GAO and FCC in their research failed to 
        conclude that DBS competition has a limiting effect on cable 
        rates. The National Cable Television Association (``NCTA'') 
        claimed otherwise to the FCC, stating that cable's market power 
        is restrained to the extent that there are competitive 
        alternatives available to customers if a cable operator 
        attempted to raise its prices. Local governments believe there 
        are several factors that prevent DBS from being a true 
        ``competitive alternative'' for major television market cable 
        customers and thus from restraining cable prices:

    Non-Interchangeable Equipment. It is easier for 
            customers to switch between wireline competitors using 
            cable modem and set-top boxes than it is for customers to 
            switch between dish systems and cable boxes.

    No High-Speed Two-way Service. DBS does not offer two-
            way high-speed data services comparable to DSL or cable 
            modem. This means a DBS subscriber must still subscribe to 
            a wireline service.

    Provision of Local PEG and Broadcast Channels. In the 
            GAO study, 47 percent of respondents cited the ability to 
            receive local broadcast and cable channels from the same 
            provider as a major reason for selecting cable, and DBS 
            providers confirm that provision of local broadcast 
            channels increases subscription rates. Yet local broadcast 
            channels are offered by DirecTV or Echostar in only 62 of 
            210 television markets and local channels are offered by 
            both providers in only 41 markets. In addition, DBS does 
            not carry local Public, Educational and Government Access 
            (PEG) programming.
III. Consolidated Cable Incumbents Are Using Aggressive Marketing to 
        Eliminate Wireline Competitors
    It is apparent that cable operators understand that other wireline 
providers provide the greatest competition. Competitive broadband 
providers, including nascent cable system overbuilders, have complained 
of incumbent cable operators using aggressive marketing tactics to 
drive these small competitors out of the market entirely--including 
deeply discounted introductory rates, e.g., $24.95 per month for 200 
channels compared to $77.90 per month in a neighboring community 
without wireline competition; cash bonuses, e.g., $200 to switch to the 
incumbent's cable service and another $200 to switch to the incumbent's 
Internet service; and forgiveness of old debt owed by subscribers to 
the incumbent. It is also unclear whether the neighboring community's 
rates are being increased to offset the discounted price offered in the 
competitive neighborhood.
    The NATOA testimony in February attached a detailed study of these 
practices which the Committee will find useful and informative. All of 
these factors together mean:

   Cable prices go down when there is wireline competition;

   Cable prices do not go down when there is no wireline 
        competition or when there is competition only from non-wireline 
        providers.

    We believe any effective legislative attempt to reduce cable rates 
should focus in part on encouraging wireline competition. Any 
legislative reform of programming requirements should examine how cable 
operators may be using vertical integration and monopsony power to 
control competitors' access to programming to discourage competition. 
This issue should be addressed explicitly before considering cable 
operator requests for more control over programming.
IV. A La Carte Offerings Are An Improvement Over Current Tiers, but 
        Alone Will Not Protect Consumers.
    Cable rates will continue to rise significantly so long as cable 
incumbents exercise substantial monopoly and monopsony pricing power 
over cable consumers. Programming cost increases are not the primary 
culprit. The increases in cable rates since 1992 continue to run more 
than twice the rate of inflation. Programming costs explain only about 
20-30 percent of this phenomenon.
    In my jurisdiction, Montgomery County, Maryland, consumers have 
brought me a range of complaints about the dominant cable operator. We 
are seeing very high prices, with annual increases faster than the 
local rate of inflation. Cable rates have gone up each of the last 
three years by 3 to 4 times the rate of inflation. The ``basic 
preferred'' tier went up 9 percent and the ``packages'' went up 18 
percent.
    We are seeing the same price differentials attributable to cable 
overbuilds observed by GAO. For example, in the District of Columbia, 
where there is competition to Comcast, rates are $5.50/month lower for 
expanded basic ($3.00 lower for cable modem with cable TV and $3.00 
lower for cable modem without cable TV.) DC and Montgomery County are 
same metro area and prices and costs for programming and operations 
should be same. Cox TV (in Fairfax County) is $3.00/month lower for 
expanded basic and $6.00 lower for cable modem services with and 
without cable TV.
    We are seeing cable services being moved between and among tiers 
with little or no explanation or warning. Consumers routinely complain 
that they are not offered the lowest available prices or accurate 
descriptions of their purchasing options when they call the company. 
The company is bundling cable modem and video services together in a 
manner that confuses any comparison pricing with DSL. The company 
appears to be forcing consumers to pay for digital converters and 
digital tier services when the consumer is seeking to buy pay-per-view 
and pay channels, despite the anti-buy-through language of the Federal 
law.
    Most of the problem is caused by lack of effective competition. 
This allows cable operators to exercise their maximum pricing power to 
charge ``whatever the market will bear'' and to offer a quality of 
service only sufficient to maintain subscribership, not sufficient to 
make customers happy. Local government had hoped the 1992 Cable Act 
amendments would result in some pricing restraints. Other than the 
period of the FCC-imposed rate freeze in 1993-94, however, Federal rate 
regulation has not changed the price trend line. In part, this is 
because the 1992 amendments are unnecessarily complex and obtuse. In 
part, this is because the FCC over the last twelve years has not 
aggressively sought to restrain cable prices within the power Congress 
granted.
    For this reason, NACo and TeleCommUnity would support a la carte 
offerings as part of a general repair to the existing cable rate 
regulation system. A la carte could be a means to provide consumers 
greater control over what they purchase. It might reduce some cable 
operator monopsony pricing power over programmers, similar to the must-
carry/retransmission developments for over-the-air broadcasters. We 
also agree that a la carte offerings could permit parents greater 
control over what programming comes into their home. This does not 
necessarily mean lower prices for all consumers. A la carte offerings 
will not fully insulate consumers from aggressive pricing by cable 
operators holding substantial monopoly pricing power.
    It is also important to carefully consider whether and how to 
mingle a la carte channels with the existing tier system of rate 
regulation. In the past, cable operators used their control over a la 
carte tier pricing as a means to charge more, not less, per channel.\2\
---------------------------------------------------------------------------
    \2\In its study, the GAO agrees with much of what NACo and 
TeleCommUnity feel about a la carte offerings. The GAO concluded: ``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 this were to occur, it is possible that cable rates could 
actually increase for some consumers.''
---------------------------------------------------------------------------
    In 1994, the initial cable rate regulation rules exempted single-
channel a la carte offerings. Operators began offering a la carte 
channels on a single and a la carte tier package basis. The single 
channel price, however, was so high that it only made sense to purchase 
a la carte channels as a tier package. However, because each channel in 
the a la carte tier was technically available as a single a la carte 
channel, cable operators claimed that the a la carte tier package was 
not subject to rate regulation (as other programming tiers were). On an 
ad hoc basis, the FCC permitted this a la carte tier arrangement so 
long as six or fewer channels were packaged together. Ultimately, the 
FCC found no sufficient justification for the tier restructuring 
``other than to avoid rate regulation.'' Despite this finding, however, 
the FCC neither prohibited this evasion, nor sanctioned the operators 
for trying to avoid compliance with rate regulation rules.
    We believe the FCC's response provides an explicit warning to the 
Committee if it seeks to expand a la carte offerings without 
fundamentally reconsidering the existing rate regulation structure. The 
FCC's ruling has provided an implicit incentive for cable operators to 
aggressively interpret the existing rate rules to their benefit.
A La Carte Pricing Could Result in Channel Substitution, Not Lower 
        Rates
    Local government is not in a position today to recommend a 
particular form of a la carte roll-out. Our experience with cable rate 
regulation demonstrates the law of unintended consequences when the 
cable industry is able to game the system to its benefit. For now, we 
recommend the Committee study several different approaches. We remain 
committed to the goal that a package of basic PEG, broadcast and cable 
services should be available to all residents at a reasonable, fixed 
and predictable price. In addition, the rollout of digital technology 
offers the opportunity for true a la carte offering of all other 
services not part of a basic package. However, the problem is complex 
on a mixed analog/digital system. In this mixed world, operator-owned 
programming interests may affect decisions as to which channels will be 
offered as part of a non-basic package or as a la carte channels.
    This is especially true with the growing convergence of cable 
companies and entertainment companies. Congress should be concerned 
about channel substitution which does not necessarily save the consumer 
money. For example, assume in New York City that Cablevision agrees to 
carry YES Network, drop ESPN from its expanded-tier programming, and 
make ESPN available as a separate a la carte channel. If there are no 
substantial savings in programming costs between YES and ESPN, or if 
programming cost savings are not passed onto subscribers, then the 
subscriber who did not want sports programming would see no price 
reduction, and the subscriber who wanted ESPN will have to pay the same 
price to receive ESPN-less programming or a larger price to receive the 
same programming with ESPN.
V. Cable Operators Have Not Presented Verifiable Programming Cost Data
    Despite cable operators' claims that prices have risen as a result 
of programming cost increases, they have never provided local 
government with verifiable programming cost and revenue data to 
evaluate the impact of programming costs on cable rates. 
Notwithstanding the fact that a Justice Department investigation and an 
informal SEC inquiry related to the accuracy of operator-reported data 
are currently pending, Congress should require the cable industry to 
provide specific information about all channel programming costs, 
programming launch fee revenue, and corporate allocation of volume 
discounts.

   Actual Programming Costs. Cable operators submit only their 
        basic tier channel programming costs to local governments as 
        part of the rate regulation process and do not routinely submit 
        any programming costs to the FCC. Thus, cable operators do not 
        disclose to any regulatory body what they are paying for most 
        of their programming.

   Accounting Treatment of Launch Fee Revenue. Cable operators 
        receive substantial ``launch fees'' from programmers--i.e., 
        fees for adding new channels to cable systems, for advertising 
        new channels on existing channels, in program guides, on or 
        with subscriber bills, and for other channel launch-related 
        services--but do not uniformly treat them as programming 
        revenues which offset total programming costs.

   Allocation of Volume Discounts. Cable operators often delay, 
        or refuse to comply, with local government requests to disclose 
        terms of their programming contracts, thus making it difficult 
        to determine how volume discounts are allocated. In at least 
        one instance, franchise-level reported programming costs were 
        greater than the operator's actual costs because the operator 
        negotiated volume discounts for programming, but charged its 
        local franchises as if no discount had been obtained, booking 
        the difference as profit for the corporate parent.

    According to the 2001 Annual Report COMCAST filed with the SEC:

        ``[O]n behalf of the company, Comcast secured long-term 
        programming contracts . . . Comcast charged each of the 
        Company's subsidiaries for programming on a basis which 
        generally approximated the amount each subsidiary would be 
        charged if it purchased such programming from the supplier . . 
        . and did not benefit from the purchasing power of Comcast's 
        consolidated operations.''
VI. The FCC Has Complicated the Regulation of Cable Rates
    The Committee needs to consider its oversight and instructions to 
the FCC. In the view of local government, the FCC has not adopted cable 
rate regulations that ensure reasonable rates.\3\ There are numerous 
ways in which the FCC has failed to establish or interpret rate 
regulation rules in a manner that ensures reasonable rates for 
subscribers. FCC inaction and delays make local rate regulation less 
effective, encourage operators to use the FCC appeals process as a 
means for running out the clock, and ultimately deny subscribers the 
protection from unreasonable rates that Congress intended. We need to 
establish a more effective process for supporting local rate 
regulation.
---------------------------------------------------------------------------
    \3\Local government has participated in all of the FCC's dockets 
reviewing and considering changes to its rate regulation rules. We are 
happy to share these detailed comments and critiques of the current 
rules with the Committee as you request.
---------------------------------------------------------------------------
V. Conclusion
    Local government has used its cable franchising authority to 
promote deployment of advanced services and has protected subscribers 
to the extent it has not been preempted by the FCC or Congress.
    Increased wireline competition is needed to reduce subscriber 
rates.
    Congress should:

   Require operators to disclose actual programming costs.

   Review the lessons to be learned from the 1994 a la carte 
        tier pricing rules before implementing a la carte pricing in 
        2004.

   Instruct the FCC to implement rate regulation and a la carte 
        rules in a manner that prohibits unreasonable rates, eliminates 
        consumer abuses, and reflects the reality of today's non-
        competitive markets.

    The Chairman. Thank you very much. Mr. Johnson, welcome.

        STATEMENT OF RODGER JOHNSON, PRESIDENT AND CEO,

         KNOLOGY, INC. AND CHAIRMAN, BROADBAND SERVICE

                     PROVIDERS ASSOCIATION

    Mr. Johnson. Thank you, Mr. Chairman, and thank you for the 
opportunity to participate in this hearing and provide 
additional testimony regarding competition in the cable 
television market. I'm pleased to represent both Knology and 
the Broadband Service Providers Association, which is a trade 
association that includes the companies that the GAO has 
referred to as wire-based competitors in its most recent study 
sponsored by yourself and Senators DeWine and Kohl.
    Consumers are reaping the benefits of a $6 billion capital 
investment in new competitive networks. These new GAO reports 
again document that customers and communities served by 
broadband service providers, or BSPs, realize from 15 to 41 
percent lower cable television rates than in communities where 
there is no wire-based competition. BSPs have shown that they 
not only provide consumers with demonstrable benefit for 
pricing and services, but they also are proving the economic 
strength of their business model. This is attested to by 
Knology's successful completion of its recent IPO, its initial 
public offering. This is the first IPO in the telecom or media 
sector in over 3 years.
    These BSP systems are models for the type of competition 
envisioned by Congress in passing the Telecommunications Act in 
1996. The key issue for policymakers today, however, is whether 
current legislation fully supports the continuing development 
of competition for video services. Knology and the BSPA are 
primarily concerned with three issues that if not addressed 
could slow the deployment of new competitive broadband 
networks.
    First, regulators must not equate competition between cable 
and satellite with wire-based head-to-head competition. In our 
experience, despite the fact that satellite has 22 percent 
national market share, a fully upgraded cable provider often 
maintains a market share approach in 90 percent in local 
markets where it is only competing against satellite providers. 
We do not believe that 90 percent or more of subscribers 
concentrated with one provider should be deemed fully 
competitive.
    Senators DeWine and Kohl have sponsored a new GAO study to 
evaluate specific market structures as a follow-on to the work 
that's already been done and we ask for your added support. The 
goal of having this data by early in the fall and we would also 
request that this market analysis become a part of the FCC's 
next annual assessment competition at the end of this year.
    The second key issue that we would like to talk about is 
the continued access to content necessary to compete, 
specifically the protections of the 1992 Cable Act were limited 
to satellite-delivered programs. This type of protection was 
both necessary and effective to support the development of the 
satellite segment of our industry. This was policy that truly 
encouraged the development of competition, and these principles 
of fair access to content need to be extended to all types of 
delivery technology, whether it's satellite or terrestrial in 
nature, and made a permanent foundation for the development of 
future desired competition.
    Third, the BSP industry is threatened by other types of 
anti-competitive actions by incumbent operators, such as 
targeted predatory pricing campaigns or other conduct designed 
to prevent entrance from getting a foothold in a particular 
market. Predatory pricing strategies are frequently subsidized 
by significantly higher prices in surrounding markets that do 
not yet have the benefit of facilities-based competition. The 
FCC has recognized the public harm inherent in predatory 
pricing and has also disagreed that targeted discounts merely 
reflect healthy competition.
    Finally, given that there was a lot of discussion earlier, 
I'd like to offer some comments regarding possible a la carte 
policies. As you evaluate any a la carte policy, we strongly 
suggest that consumer-focused a la carte policies should only 
be considered in conjunction with digitally delivered content. 
Implementing these structures on current analog channels would 
be both costly and problematic, as channels in the analog tier 
cannot be manipulated electronically.
    There is significant momentum to migrate our systems and 
content to digital delivery and the application of any a la 
carte policies for consumer delivery of content should be 
considered in conjunction with that digital migration.
    As a condition for carrying certain programming services 
that are demanded by a subset of our subscribers, we, as you 
are aware, are under today's program access structure required 
to bundle that programming with less desired programming on a 
tier available to all subscribers. The end result is that 
consumers frequently pay for high cost content or other content 
that they truly don't want. An alternative a la carte policy 
could require that distributors or providers be given a la 
carte access to individual channels from content providers 
without any kind of artificial placement requirements, thus 
allowing the providers to compete by offering their own unique 
content bundles.
    Go back to the either/or scenario that you alluded to 
earlier. This could produce lower prices to consumers without 
immediately requiring a pure a la carte offering across the 
board. Driven by freer competition, it's likely that you'll see 
more focused packages for content from sports, family, movies, 
education, or a variety of other target content categories. 
Today's structure creates bundles heavily influenced by content 
producers, resulting in forced carriage and forced placement of 
high-cost or low-demand content.
    In closing, the BSPA and the broadband service providers 
have shown that in markets that they serve, consumers enjoy the 
benefits of lower prices for broadband services. In order to 
continue to expand the availability of competitive broadband 
services, policy markers need to recognize that the market for 
cable television is not yet fully competitive and take care to 
prevent incumbents from erecting any artificial barriers. 
Moreover, access to content is a threshold issue that needs to 
be addressed.
    I want to thank you again for this opportunity and look 
forward to your questions.
    [The prepared statement of Mr. Johnson follows:]

Prepared Statement of Rodger Johnson, President and CEO, Knology, Inc. 
         and Chairman, Broadband Service Providers Association
    Good morning. I want to express my appreciation to Senators McCain 
and Hollings for this opportunity to participate in this hearing and 
provide additional testimony regarding competition in the cable 
television market. I am pleased to represent both Knology and the 
Broadband Service Providers Association (BSPA), a trade association 
that represents companies the GAO referred to as wire-based competitors 
in its most recent studies sponsored by Senators McCain, DeWine and 
Kohl.
    Consumers are reaping the benefits of a $6 billion capital 
investment in new competitive networks. These new GAO Reports again 
document that customers in communities served by Broadband Service 
Providers, or BSPs, realize from 15 percent to 41 percent lower cable 
television rates than consumers in communities where there are no wire-
based competitors.
    BSPs have shown that they not only provide consumers with 
demonstrable benefit on pricing and services, but they are proving the 
economic strength of their business model. This is attested to by 
Knology's successful completion of it's Initial Public Offering. This 
is the first IPO in the telecom/media sector in over three years.
    These BSP systems are models for the type of competition envisioned 
by Congress in passing the Telecommunications Act of 1996. The key 
issue for policy makers today, however, is whether current legislation 
fully supports the continuing development of competition for video 
services. Knology and the BSPA are primarily concerned with three 
issues that, if not addressed, could slow the deployment of new 
competitive broadband networks.
    First, regulators must not equate competition between cable and 
satellite with wire-based head-to-head competition. In our experience, 
despite the fact that satellite has a 22 percent national share, a 
fully upgraded cable provider often maintains a market share of 90 
percent or greater in local markets when it is only competing against 
satellite providers. We do not believe that a market with 90 percent or 
more of subscribers concentrated with one provider should be deemed 
fully competitive.
    Senator's DeWine and Kohl have sponsored a new GAO study to 
evaluate specific market structures. We ask for your added support for 
this study with the goal of having data by early fall. We further 
request that this market analysis become part of the FCC's next annual 
assessment of competition at the end of this year.
    The second key issue is ensuring continued access to the content 
necessary to compete. Specifically, the protections of the 1992 Cable 
Act were limited to satellite-delivered programming. This type of 
protection was both necessary and effective to support the development 
of the Satellite segment of our industry. This was policy that truly 
encouraged the development of competition. These principles of fair 
access to content need to be extended to all types of delivery 
technology, whether it is satellite or terrestrial, and made a 
permanent foundation for the development of future desired competition.
    Third, the BSP industry is threatened by other types of anti-
competitive actions by incumbent operators, such as targeted predatory 
pricing campaigns and other conduct designed to prevent entrants from 
getting a foothold in a particular market. Predatory pricing strategies 
are frequently subsidized by significantly higher prices in surrounding 
markets that do not yet have the benefit of facilities-based 
competition. The FCC has recognized the public harm inherent in 
predatory pricing and also disagreed that targeted discounts merely 
reflect healthy competition.
    We would also like to offer some comments regarding possible a la 
carte policies. There has been recent discussion about the potential 
for an a la carte policy to help contain rising cable rates on the 
bundles of channels that consumers are forced to buy in today's 
structure. As you evaluate any a la carte policy, we strongly suggest 
that consumer focused a la carte policies should only be considered in 
conjunction with digitally delivered content. Implementing these 
structures on current analog channels would be both costly and 
problematic as channels in the analog tier cannot be readily 
manipulated electronically. There is significant momentum to migrate 
our systems and content to digital delivery and the application of any 
a la carte policies for consumer delivery of content should be 
considered only in conjunction with migration to digital.
    Today's program access structure gives significant power to both 
vertically integrated and independent content producers. As a condition 
to carrying certain programming services that are demanded by a subset 
of our subscribers, we are required to bundle that programming with 
less desired programming on a tier available to all subscribers. The 
end result is that consumers frequently pay for high cost content or 
other content they really don't want and some industry segments, like 
Sports, have artificially inflated their revenues. An alternative a la 
carte policy could require that distributors be given a la carte access 
to individual channels from content providers without artificial 
placement requirements. This would allow distributors to compete by 
offering unique content bundles to meet consumers' real desires. This 
could produce lower prices to consumers without requiring a pure a la 
carte offering to consumers that cannot be technically supported for 
many years. Driven by freer competition, it is likely that you would 
see more focused packages of content for sports, family, movies, 
education or a variety of other target content categories. Full and 
free competition can help determine the level of a la carte offering 
desired by consumers. Today's structure creates bundles heavily 
influenced by the content producers resulting in both forced carriage 
and forced placement of high cost or low demand content.
    In closing, Broadband Service Providers have shown that in markets 
they serve, consumers enjoy the benefits of lower prices for broadband 
services. In order to continue to expand the availability of 
competitive broadband services, policymakers need to recognize that the 
market for cable television is not fully competitive and take care to 
prevent incumbents from erecting artificial entry barriers. Moreover, 
access to content is a threshold issue that needs to be addressed as 
part of the new Telecom Legislation expected in 2005. I want to again 
thank you for this opportunity to be here and look forward to your 
questions.

    The Chairman. Thank you very much, Mr. Johnson. Mr. 
Robbins, I'd like to congratulate the cable industry on its 
recent decision to allow customers who are offended by the 
content on particular cable channels to block such channels at 
no additional cost. However, a number of parents groups sent me 
a letter making this point. Why should parents have to 
subsidize cable channels that undermine their core values and 
beliefs? Why should a parent who wants their child to benefit 
from educational programs on the Disney Channel or the 
Discovery Network also have to pay for offensive material?
    In other words, they're paying you because they are 
required to because it is a package only, and then you're 
allowing them to block it and they're still paying for what 
you're blocking. Help me out here, Mr. Robbins.
    Mr. Robbins. Well, I--Mr. Chairman, I certainly understand 
the dilemma there, but I think that just begins to go at the 
whole a la carte issue, which is essentially saying, pick and 
choose what you want, and that frankly is long-term where this 
industry is going to go with video on demand. But there's 
something like a $30 billion or $40 billion bridge to get over 
to make that technology available to every television set in 
America.
    So as consumers demand that more, and that is happening, 
that will be the world of the future, but there's a huge 
investment that has to go in beforehand. I honestly think the 
marketplace is driving us in that direction, and I think the 
notion of government getting involved in refunding onesies and 
twosies is a disastrous scenario for government and for the 
American consumer, to say nothing of the industry.
    The Chairman. Well, as I said before, when I go buy a 
newspaper, I don't have to buy Sports Illustrated, Popular 
Mechanics, and a number of other periodicals along with it. 
That's a much more valid comparison than buying parts of a 
newspaper. But--go ahead. Mr. Robbins, I mean, we just have a 
fundamental disagreement here.
    Mr. Bodenheimer, I don't know of any ESPN in America that's 
available a la carte, do you?
    Mr. Bodenheimer. I'm sorry, any ESPN?
    The Chairman. Programming that's available a la carte, do 
you?
    Mr. Bodenheimer. Well, it depends how you look at it. We 
have----
    The Chairman. That's not part of a package where they 
receive other channels. That's what I mean by a la carte.
    Mr. Bodenheimer. You can buy ESPN--are you talking about 
the distributor, the cable operator, or the consumer?
    The Chairman. I'm talking about the consumer. I don't know 
of any consumers in America that can say I just want ESPN 
alone.
    Mr. Bodenheimer. There are ESPN products that are available 
by itself, ESPN High Definition, for example, is available in 
and of, by itself once you have bought through up into a tier. 
That's how many cable operators are offering it now.
    The Chairman. But you bought in through a tier. I'm talking 
about just--look, here's my point. In Canada, I've got four 
different cable companies, this is a little bit like the drug 
reimportation program, you've got four different cable 
companies you can subscribe to where ESPN is a la carte, but 
yet subscribers in the United States of America don't have that 
same ability.
    Mr. Bodenheimer. I think, and have said numerous times in 
the last year or two as this conversation has come to light, 
that an expanded basic package in America is perhaps the 
greatest entertainment value that's ever been created. If you 
look at where this industry has come in the last 25 years, 
there are 90 million Americans that seem to agree with me and 
agree with that premise.
    So my point of view is, what we have assembled with the 
cable operator and now the satellite operators are a 
tremendously popular service.
    The Chairman. I understand your opinion and your great 
success, but I find it interesting that in Canada they can 
purchase ESPN on an a la carte basis, and I know of no place in 
the United States where you can.
    Mr. Kimmelman, do you want to comment real quick because 
I've got a couple other questions?
    Mr. Kimmelman. Just real fast, Mr. Chairman. They should be 
able to have that basic package and they should be able to get 
90 million people, but why shouldn't some of those 90 million 
be able to buy it separately, number one. And number two to Mr. 
Robbins, we appreciate the effort of the cable industry to help 
consumers block, but please help me out here. I've gone to your 
website, I've gone to the website of half-a-dozen cable 
companies. I can't figure out how to block anything but a 
digital channel. You mentioned blocking off of analog. I mean, 
I've got people who are technical experts trying to figure out 
how to navigate your website and all I see is digital 
promotion, digital promotion, but it's virtually--talk about 
Soviet style presentation. The blocking is a wonderful concept, 
but how do you get it?
    The Chairman. Mr. Robbins, you can respond to that, but I 
also would like for you to respond, the issue I'm--last May you 
appeared before this committee, and I quote you, the issue that 
I'm here to speak to is a combination of high priced and 
broadly mandated distribution in program offerings. That's what 
has happened in the sports world. My issue is, let's go to a 
tier, let us let the consumer choose whether they want to pay 
for that high priced service or not. It's no more complicated 
than that. I'm suggesting that when services like ESPN get over 
a dollar a wholesale level per month, that the consumer be 
given the opportunity to choose whether or not they want that 
and price it accordingly.
    In your written testimony today after you have made an 
agreement with ESPN, in your written testimony today you state 
that a la carte pricing, quote, does not work and is not in 
consumers' best interest, as it results in higher prices and 
fewer program choices. When did you find yourself on the road 
to Damascus?
    Mr. Robbins. As soon as Mr. Bodenheimer got real in his 
pricing for futures and we got there----
    The Chairman. But I thought you were articulating a 
principle there last May, not a situation.
    Mr. Robbins. I'm on the same page as you, Mr. Chairman, 
that I want the lowest possible rates I can possibly afford to 
give to my customers. My efforts last spring to move ESPN, the 
highest priced service we have, to a tier was to get the 
attention of the Walt Disney Company and to bring them to 
reasonable levels of prices.
    We were in the marketplace successful in doing that. It's 
not totally fixed. You've heard many comments here about the 
sports business model being broken. I still think it is broken. 
We made a huge step forward without disrupting an entire 
industry in our agreement with Mr. Bodenheimer.
    The Chairman. Well, I apologize to the Members of the 
Committee. This is the Commerce Committee, not the Sports 
Committee, but we seem to be spending a lot of time on sports. 
But I do think that the reason why we're doing that is the 
largest single cause of increase in subscriber costs is the 
cost of the programming, and that's why we are focusing a lot 
of attention on that.
    My time is expired, but please respond, Mr. Robbins.
    Mr. Robbins. Well, my----
    The Chairman. Go ahead, please.
    Mr. Robbins. More than often than I'd like to, but that is 
exactly why we went to the amount of trouble that we did to try 
to reign in the largest segment of our cost, which was the 
sports programming cost. We have made a major step forward in 
realigning the balance, if you will, between sports programming 
providers and distributors. So that's what we were working on, 
that's why the noise last year, and that's why I'm happy to 
tell you that we've got a settlement that's moving in the right 
direction.
    The Chairman. Last year you said, I'd like to make sure the 
record shows that it's been mentioned here earlier that we are 
in the sports programming business. We're indeed in Louisiana. 
We offer that on a tier to give our customers the choice. 
Apparently that's not the case anymore.
    Mr. Robbins. No, that is the case. You can buy it on basic, 
you can buy it on a tier, whatever way you want. The price 
varies. Obviously if you go to a tier which doesn't have--has 
broad distribution, the price is considerably higher than if 
you have it on basic.
    The Chairman. Well, I'll send you the information we got 
off your website. Senator Breaux. I'm sorry, Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. I want to stay at 
this sports issue, Mr. Bodenheimer, because 2 hours ago I 
started this hearing by saying I didn't think there were any 
incentives to hold sports costs down. The General Accounting 
Office, in response to my questions, said that the area where 
it was most likely to make sense to have a tiered model was in 
the sports area, and I want to walk you through a couple of 
these issues.
    Let me stipulate, I got to go to college on a basketball 
scholarship, so I live for sports. I think people are going to 
choose it under any of these kinds of scenarios. And you said 
that competitional discipline prices, I think we all agree with 
that, and certainly for the most part high prices scare away 
consumers so that producers have incentives to keep the price 
down.
    But even given what we have just seen in discussion with 
you all and Mr. Robbins with Chairman McCain, consumers don't 
get to decide in this area whether the price is too high. In 
fact, they're not even going to know what the price of ESPN is 
because it's all bundled into one broad kind of package.
    So my question is, given that consumers don't get to see 
the price, don't even get to decide for themselves whether that 
price makes sense for them, take us specifically through the 
incentives that now exist for ESPN to hold down costs?
    Mr. Bodenheimer. Well, with all due respect to the GAO, it 
couldn't be any more simple. Like any businessman, I'm incented 
to keep my expenses low when I have a limit on what kind of 
revenues that I can bring in. ESPN has two principal revenue 
streams. We have the revenue we get from our distributors, the 
cable and the satellite operators, and as you just heard Mr. 
Robbins say, we came to an agreement whereby he was satisfied 
we had reached an appropriate value for ESPN, but I have capped 
that now for 9 years.
    On the advertising side, I couldn't be in a more 
competitive world. There's about $12 billion of advertising up 
for grabs every year in the national cable advertising business 
and I have a sales force that fights tooth and nail for every 
unit we can buy--excuse me, sell. So I can't just dictate how 
much ad revenue we're going to bring in.
    So on my two major revenue streams, I'm capped on my 
affiliate side and I'm in a dog fight with 100 other cable 
networks and broadcast networks for ad revenues, so that's my 
incentive to keep my costs low.
    Senator Wyden. I think it's fine to say you and some other 
powerful interests should negotiate and try to bargain, but 
what you're excluding is the big bargaining force out there, 
which is the consumer and the consumer knowing what prices are. 
And I think you still have locked those people out of what is 
just economics 101, markets driven by consumers.
    So given the fact that you have some bargaining power, 
given advertisers and the like, what gives the consumer any 
bargaining power knowing that, in effect, they can't even find 
out what the price is for your service because of the bundling 
of the package?
    Mr. Bodenheimer. Well, two things there. Number one, as the 
industry has progressed, more and more people are reporting 
what wholesale costs are paid by cable operators and satellite 
in the newspaper. In fact, I saw today in the USA Today over my 
morning coffee what our wholesale figures, so it's certainly 
not in a shroud of secrecy.
    Senator Wyden. You're saying consumers are able now to 
figure out wholesale prices in this area?
    Mr. Bodenheimer. It's in the USA Today today and the point 
that DirecTV is making that they don't wish to pay any further 
programming increases. They printed a bar chart.
    Senator Wyden. If you had a la carte pricing in the sports 
area, the area where GAO said it was most likely, wouldn't you 
have a situation where sports channels would worry that if they 
had to pay NBA or NFL these huge sums, that that could serve as 
a price restraint because you'd have to worry about the sky-
high contracts and you could end up having sports programming 
to drop?
    Mr. Bodenheimer. I'm sorry. I don't follow your question.
    Senator Wyden. See, if you had a la carte pricing, sports 
channels would have to worry that if they paid the NBA and the 
NFL a gazillion dollars for a particular contract, they might 
end up losing subscribers, because that would ripple all the 
way through the system. What is wrong with that argument?
    Mr. Bodenheimer. I have to worry about that every day under 
the existing environment. I've got to negotiate contracts with 
cable and satellite operators. These contracts are continuously 
evolving as you've seen right here in this committee. There are 
disputes over what the fair value of that is. I've got to deal 
with the advertisers, I got to keep my ratings up. I'm in that 
fight every day, Senator.
    Senator Wyden. I don't think you have to worry about it at 
all. You cook your deal with the advertisers and some of these 
other powerful interests and the consumer pays whatever it's 
going to be because we know consumers love sports. And what 
Senator McCain and I are trying to do is get you to tell us 
about how you're going to let the consumer use the marketplace 
in line with the free enterprise system, and you have locked 
them out. Consumers want sports, I certainly want sports, and 
now you've got a situation where we're going to tell you you 
can get sports as long as you pay for all of these ballooning 
costs. We think that's wrong.
    Mr. Bodenheimer. May I just----
    Senator Wyden. If I might, I only have another minute. Mr. 
Chairman, I want to let Mr. Bodenheimer have another comment if 
I could ask one last question.
    Mr. Bodenheimer. Thank you very much. I just want to add 
one point. There is an awful lot of sports programming on 
broadcast television. I happen to run one of those divisions. 
Those broadcast stations are carried in the broadcast basic, 
and 10 percent of Americans, of television homes, 10 million 
people today already make the election that you just said 
doesn't exist. They say, I've got enough sports on my broadcast 
basic for $12 and I'm happy with that.
    That often gets overlooked here. Ten percent of Americans 
don't select the big broad cable package that ESPN has offered.
    Senator Wyden. And 90 percent of the consumers by your 
calculus have no marketplace power. They don't even know what 
the price is. That's what's wrong and hopefully we'll change 
it.
    Mr. Kimmelman, if I can get just one question for you. With 
respect to cable consolidation, if a small handful of cable 
companies continue to have this level of marketplace 
domination, isn't that going to continue to affect programming 
choices and also prices?
    Mr. Kimmelman. Absolutely, and I would just broaden it, 
Senator Wyden. It's a small handful of media companies, because 
in this instance it is cable companies who own programming, 
like Time Warner, it is ESPN owned by Disney, which also owns 
ABC, which may be bought by Comcast, a major cable company. It 
is DirecTV, one of those two satellite companies out there who 
are supposed to be competing against cable now owned by 
Newscorp, the owner of the Fox network, Fox regional sports 
channels, FX, and on. It is a handful of companies who all make 
their money from programming and only three distribution 
channels to the public in most communities, one cable, two 
satellite. If they can control the price of the programming 
going out on both, they control prices and they control what 
you get to see, and I see an ever-escalating spiral as these 
few companies gain more power.
    Senator Wyden. Thank you, Mr. Chairman.
    The Chairman. Thank you. Mr. Robbins, I'll send you off 
your Website, it has Cox sports television on the expanded 
basic. That's from your Website. Senator Smith.
    Senator Smith. To follow up on my colleague from Oregon's 
questioning, what percentage of sports is watched on networks 
and what percent is watched on cable? And I'm also hearing here 
that most of the cable is owned by the networks. Is that right?
    Mr. Bodenheimer. I'll try the first part of your question. 
I don't have this down in my head, Senator, but I'll estimate 
that cable sports is 30, 35, 40 percent of sports viewing in 
the country measured by ratings.
    Senator Smith. Sixty-five percent being on networks?
    Mr. Bodenheimer. Correct.
    Senator Smith. And isn't a fact that most of what goes--are 
all the cable companies owned by networks or are there some 
that--OK, I didn't think so, but I think I've heard there are a 
few. ABC owns a cable company. Wouldn't most of the increases 
to athletes from TV revenue go then through the networks and 
not the cable, or is it all just factored in?
    Mr. Bodenheimer. We as a TV network, whether we had our 
broadcast hat on or cable and we have no control over what the 
athletes are paid by the team owners.
    Senator Smith. Do you feel pressure from them, from the 
leagues to--that they're passing those on to you though? Do you 
ever push back? That's what I'm asking.
    Mr. Bodenheimer. No, I push back a regular part of my day.
    Senator Smith. OK. I want that to come out because I hope 
everybody understands there are market forces here that may not 
be perceptible by us on this dais.
    Mr. Bodenheimer. Well, on that note--excuse me for 
interrupting, I didn't allow you to finish.
    Senator Smith. No, I want people to understand as best we 
can to understand all of the market forces that are in play 
that we may not perceive through just a quick look at your 
industry.
    Mr. Bodenheimer. You're seeing input costs and other 
expenditures moderate on a variety of levels. One example is 
the rate of increase that we have been seeking, which Mr. 
Robbins spoke about and that we're doing with other cable 
operators. The rights fees that sports leagues are getting, not 
necessarily what they're asking for but what they're settling 
for is moderating in some cases. Whether that plays out to the 
top echelon of sports leagues remains to be seen, but it is 
moderating. And even retail cable pricing this year has 
moderated itself on a retail basis.
    So I think you're seeing some flattening of the marketplace 
that you were asking about.
    Senator Smith. Mr. Robbins, one thing I have heard that is 
of concern to me about bundling, and I'm obviously revealing to 
you my bias against our getting involved in telling you how to 
market your product, but I think you lose the moral high ground 
if you're bundling pornographic channels with Nickelodeon and 
family offerings, and I would plead with you to post haste stop 
anything like that.
    Mr. Robbins. Senator, I don't think we've ever been there. 
I think what was referred to----
    Senator Smith. But the implication is here in this hearing 
that that's happening. Are you telling me that's not happening?
    Mr. Robbins. Let me be very clear. There was a reference 
here by one of your distinguished colleagues about the Playboy 
Channel with--I have it written down actually because I wanted 
to mention it--but the Playboy Channel has always been a pay 
channel, separately encrypted, locked out, never been on any 
kind of expanded basic tier of service.
    Senator Smith. I don't know it because I don't take it, but 
the implication is here that's happening. Are there quasi-
pornographic channels that you bundle that are not pay?
    Mr. Robbins. No, sir.
    Senator Smith. Now how about the letter that Senator McCain 
read though, the people are writing to the Chairman that 
they're subsidizing these other things. Are you refuting that? 
Are you refuting the premise of the letter to Senator McCain 
that you're not bundling things that your customers are 
subsidizing? They want Nickelodeon and they're having to pay 
for some quasi-pornographic material?
    Mr. Robbins. No, there is no mixture in the analog universe 
with pornographic channels, or again, the specific reference to 
the Playboy Channel. That is a pay service----
    The Chairman. We're talking about things like MTV, Mr. 
Robbins, that parents may find offensive. I may not.
    Senator Smith. And that's why I talked about it as quasi-
pornographic, because I do think if you can segregate, you will 
strengthen your position if you can segregate these kinds of 
offerings. If they are currently being bundled, I would try to 
regain the moral high ground to make sure they're not. I say 
that as someone who is not unfriendly to your industry. I want 
to see you succeed and I do believe, I want to say for the 
record, I do believe that many of the concerns being expressed 
by my colleagues will soon be remedied by a very vigorous 
marketplace that is emerging. If you're making a lot of money, 
you're soon going to have a lot of company. If your industry is 
making a lot of money, you're going to attract competition.
    Mr. Robbins. Senator, with all due respect, I think we 
have. The telephone companies are coming at us with a 
vengeance. The satellite companies are coming at us with a 
vengeance. Every day in our business is election day. People 
can turn off their cable and go to satellite. They can turn off 
and go to broadcast. They don't need us to live. Our future 
rests on how well we are serving our customer.
    Let me just come back to the indecency point though. You 
talked about Playboy and other channels. Some people may find 
MTV indecent. I don't watch MTV particularly, but therein lies 
I think a very tough call about First Amendment, and I don't 
want to introduce all of that here, but we in the industry I 
think are extremely sensitive to what's going on, not only in 
the country but here in Washington, and are doing everything we 
can to give our customers choices such as the blocking 
capabilities that have been reported earlier this week.
    We appreciate your sensitivity. I like where you're coming 
from with respect to this industry. We need to fix our own 
problems. We don't need your help to do so.
    Senator Smith. I appreciate if you would be sensitive to 
that and if you can, segregate Nickelodeon and MTV, I think 
that that gives you a strong position, and so whatever 
technologies you have there I would recommend them and I, 
again, would reiterate for the record, I think that competition 
is coming, and you know that and there--hopefully if we hold 
this hearing next year that will be reflected in the kind of 
results in consumer choices that are available that we can 
ascertain. Thank you.
    The Chairman. Mr. Robbins, I'm not setting my standards. 
I'm talking about standards that parents have about programs 
that they might find offensive or unacceptable for their 
children to watch. This letter, which I'll give you a copy of, 
from the Parents Television Council, has some very graphic 
examples which I will not read now, which I'll give to you, 
which are on MTV and Comedy Central's South Park and others 
that are part of your basic package.
    So we return to the fundamental question, should people pay 
for channels that they don't want that they are going to be 
able to block thanks to your--or hopefully will be able to 
figure it out--should they pay for channels that they don't 
want their children to view? That's the problem with a basic 
package.
    Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman. Mr. Johnson, I 
think you were pretty clear in your testimony in how you look 
at bringing competition to this marketplace. The first thing 
you said was that there needed to be fair access to content 
from all technology delivery. So are you recommending that we 
go back in and change the Satellite Act to be specific about 
other types of technology?
    Mr. Johnson. No, no, no. I think the Satellite Act has 
accomplished what it was intended to accomplish when it was put 
into effect. I do think it has broadened the competitive base 
that we see in place in the marketplace. I think what we do 
need to look at, and since we've been on a sports junket here, 
some of the terrestrial-delivered news and sports programming 
is often precluded from the little guys in the marketplace. And 
what it does, it creates a competitive disadvantage for us 
and----
    Senator Cantwell. So are you talking about compulsory 
licensing from content providers? How would you achieve the 
goal of having it technology neutral?
    Mr. Johnson. What we would argue is the same availability 
be provided to competitive providers of content that is 
terrestrially delivered as it provided for content that is 
delivered by satellite.
    Senator Cantwell. So but we'd have to change that. We could 
come with a new----
    Mr. Johnson. Yes, yes.
    Senator Cantwell. You're just saying----
    Mr. Johnson. The act, the act does not address terrestrial, 
OK?
    Senator Cantwell. So come up with a new act. Mr. Kimmelman, 
do you support that?
    Mr. Kimmelman. Yes, I think that's a step one. You need to 
do a lot more in terms of preventing discrimination between who 
owns the programming and distribution systems and others who 
seek to come in and compete.
    Senator Cantwell. So the other panelists support that 
legislation?
    Ms. Praisner. I think it needs to be looked at. I don't 
think that we can in local government, but we do know the 
challenge that overbuilders are having from a variety of places 
that have been indicated to us, so I think that needs to be 
explored.
    Senator Cantwell. Mr. Robbins, can you stand that 
competition?
    Mr. Robbins. Senator, we have competition in a number of 
our markets and----
    Senator Cantwell. So Cox would support that legislation?
    Mr. Robbins. I'm sorry?
    Senator Cantwell. So Cox would support that kind of 
legislation?
    Mr. Robbins. I'm not suggesting we would support that 
legislation. I'm suggesting that the marketplace is wide open. 
We have no exclusive franchises. Anybody can come in and I win 
every day because I provide better service and a better value 
for my customers than the next guy.
    Senator Cantwell. But if Mr. Johnson can't get access to 
that content, then how can he offer a better program? His point 
is that there should be more competition between distributors, 
and if everybody has access to the content, then distributors 
could offer different bundling options, and thereby see what 
consumer demand really is for those bundling options.
    Mr. Robbins. I hear you. I'm not sure that the overbuilders 
that are in our marketplaces have any problem getting any of 
the programming that we have.
    Senator Cantwell. Mr. Johnson?
    Mr. Johnson. We're not in any of Mr. Robbins' markets, so I 
can't speak to what Cox's policies are, but in certain markets, 
yes, we have, and a number of the other overbuilders that I 
speak for on behalf of the BSPA have challenges getting 
content. Mr. Robbins said that there are--they don't have any 
exclusive franchise agreements. We agree with that. There is no 
franchise exclusivity. We can go into any market. But Senator 
Cantwell, you're on the right tack, and that is content 
availability, not franchise availability.
    Senator Cantwell. Well, I think to this degree. I mean, I 
don't think we really know. I think in the online world right 
now we're finding out exactly what consumers do want and I 
think artists are probably adjusting. Artists had to come up 
with 13 or 14 other songs to put on a CD. I'm not sure they 
absolutely wanted to do that. So we're finding out what 
consumers really will buy on a pay-per-song or pay-per-view 
paid demand system, so I think there's a lot to learn.
    But certainly this seems like the most logical step to take 
right now to create competition, but it would be a compulsory 
license system. You also mentioned in your testimony that you 
thought that access to content ought to be considered in any 
kind of telecom legislation looking forward. Were you talking 
about just increasing the competition with other providers 
besides the----
    Mr. Johnson. I think what we're talking about is content 
ought to be available to, you know, let's just say the large 
telephone companies want to get into the video business and 
they decide to do it not on a satellite partnership basis. If 
they want to, they ought to have access to content too. It 
ought to be content availability for everybody, or else we'll 
end up in a situation like Mr. Kimmelman suggested, that a 
small group of people control what we all see and from whom we 
all see it or hear it.
    Senator Cantwell. Mr. Robbins, did you have----
    Mr. Robbins. Well, U.S. West is in competition with us in 
Omaha, Nebraska and they have all the services that we have.
    Senator Cantwell. But right now I think content providers 
are a little more in the driver's seat than people realize. 
They might be out in the audience but they're not really 
represented up here today. And that's the question is who's got 
the choke hold on the consumer. I think the Chairman is asking 
a very appropriate question about a la carte content, but I'm 
somewhat empathetic to the fact that these business models have 
to change and they have to change over time and that if you do 
it in a quick reaction, yes, it causes great havoc to an 
industry.
    But when switching from an analog to a digital world, we 
have a whole different ball game here, and the thing that we're 
ignoring is that IP, Internet protocol, delivery of content, 
dramatically changes the field. Why not have open competition 
to that and make content available to everybody? Let's see what 
people come up with as far as bundling and content. I'm seeing 
lots of yeses but----
    Mr. Robbins. I think that's the world we're going to. I 
said that earlier that I think we are going to that digital 
world over time. There's a $30 billion bridge to cross to get 
there, but I think we're going there, Senator.
    Senator Cantwell. So I'm heartened to think that you might 
believe, Mr. Robbins, that then open competition by everybody 
to that marketplace with some sort of content availability, 
either compulsory license or what have you is the way to go.
    Mr. Robbins. Well, I'm not sure of all of the implications 
of what you're saying there, but we're in the marketplace with 
all of my content providers every day struggling to figure out 
what our consumers want, trying to be responsive to their needs 
for convenience, for entertainment, so forth and so on.
    Senator Cantwell. I see my time is expired, but I think 
what I'm talking about, Mr. Robbins, is competition.
    Mr. Robbins. And I'm saying we're there.
    The Chairman. I think Mr. Johnson would like to----
    Mr. Johnson. One comment too. Earlier I think Mr. 
Bodenheimer said that it was wrong to say programming costs are 
the reason for rate increases. One of the things we did when we 
had to go through--for the last 2 years we've evaluated our 
rate increases in our markets and we looked at, and we actually 
published a document that said, here's what the percent 
programming cost increases were and here's what our rate 
increases were so we could share it with our consumers. We 
didn't name any channels or any programmers or what have you.
    But in every instance, our programming rate increases were 
significantly higher than what our consumer rate increases are. 
That is, that content area, that competition area is what's 
driving.
    Senator Cantwell. Thank you, Mr. Chairman.
    The Chairman. Did you want Mr. Kimmelman to comment?
    Senator Cantwell. Yes, if he has further comment.
    Mr. Kimmelman. Senator Cantwell, I think you're absolutely 
right about the transition to digital. It changes the entire 
ball game and I think as we have called for unbundling the 
services for consumers, I think Mr. Robbins makes a good point. 
Cable operators shouldn't be stuck in the middle either. They 
should be allowed to either buy ABC and ESPN and the whole 
package that Disney wants to sell or also buy individual 
channels from them. And maybe if you would split it up on both 
sides, both wholesale and retail, you would get the open market 
with a consumer-driven demand model that we're looking for.
    Senator Cantwell. Senator Sununu.
    Senator Sununu. Thank you, Mr. Chairman. As a general rule, 
I'm not a big fan of government intervention and regulation in 
prices, but with all of the discussion about the impact of the 
channel pricing and cable pricing on the cost, high cost of 
major league sports, I can't help but wonder if perhaps 
government price regulation for cable would have resulted in A-
Rod playing shortstop for the Red Sox.
    [Laughter.]
    Senator Sununu. With regard to content, Mr. Robbins, Cox 
has at least partial ownership in a number of channels, 
correct?
    Mr. Robbins. We have an interest in Discovery 
Communications, we have an interest in a regional sports 
network in Louisiana.
    Senator Sununu. Content, channels content, right?
    Mr. Robbins. Pretty small.
    Senator Sununu. But you're the best we have. We've got five 
people here, and in terms of having ownership of distribution 
and some ownership of the channels, my question is whether or 
not there's any limitation or discrimination on the 
availability of those channels or that content on your network 
versus overbuilders or any other networks with whom you 
compete?
    Mr. Robbins. No, in our Louisiana sports network, which is 
really built around the Hornets, that is available to other 
distributors in Louisiana. Again, they can get it on a tier 
where they pay more because there's obviously much less 
circulation, or they can get it as we provide it as part of our 
expanded basic service.
    Senator Sununu. Mr. Johnson, is that your experience that 
at least insofar as distributors? We talked about 
retransmission consent, but setting that aside for a moment, 
with regard to other competitors that own distribution, are you 
able to get the channels or the content that they might also 
have an interest in?
    Mr. Johnson. There are numbers of examples, and I'm 
speaking on behalf of our association right now as opposed to 
my company. We haven't run into that kind of a scenario in my 
company because we tend to be in secondary and tertiary markets 
as opposed to primary markets. But there are examples that the 
BSPA has and we'll be happy to provide those to this committee 
of examples where content has been denied by----
    Senator Sununu. If you could provide those I'd appreciate 
it, because I think the general concern that if someone is 
selling content into the market that they do so in a consistent 
way and a fair way is an important one.
    Mr. Robbins. And it generally goes back to the terrestrial 
question we were discussing earlier.
    Senator Sununu. Mr. Robbins, Chairman McCain talked about a 
situation or a concern where, with the upgrades and the new 
technology and the digital boxes being built out that has costs 
and the costs are reflected in, at least to a certain extent, 
the price of cable, but the concern might be that those who 
still have a basic analog package would be left holding the bag 
or be left having to absorb costs from which they do not 
benefit. How do you respond to that?
    Mr. Robbins. Senator, I thank you for asking that question 
because it's a critically important----
    Senator Sununu. Actually I was trying to help the Chairman 
here and drive home his point a little bit more, but please.
    Mr. Robbins. Well, anyway I can help the Chairman I want to 
do that too, but in fact we saw video competition coming as 
early as 1988 and decided at that point in time that we had to 
build out our networks for more robust capability, and it 
turned out that that has served us very well being able to 
provide Internet service, being able to provide telephone 
service. I think we're the leading provider of telephone over 
cable, whether it be circuit-switched or voice over IP.
    If, in fact, we had not done that, I submit to you the 
increases that we have passed on to our customers in the video 
side would have been higher. It is in fact the investments that 
we've made in greater capability that has allowed us to bring 
our video increases down below industry averages over the last 
few years.
    Senator Sununu. Mr. Johnson, you provide primarily in a 
digital format from the get-go?
    Mr. Johnson. Yes, we do.
    Senator Sununu. Do you have any----
    Mr. Johnson. We have a similar experience as Mr. Robbins as 
his firm. We have fully upgraded facilities in all of our 
markets, and we provide, as he does, all three services, video, 
voice, and data services. And I think that fact that we've been 
able to provide all three services has allowed us, when you're 
getting three revenue streams off of a single pipe into a home, 
to leverage that investment. It was a wise decision to upgrade 
the network.
    Senator Sununu. Mr. Kimmelman, you've been here a number of 
times before and you make among the more passioned arguments 
for some kind of price regulation in this area. But I'm curious 
to know, I think I mentioned it earlier, whether or not you're 
aware of a similar industry product where there is government 
requirement that a product be sold in an a la carte way that we 
can look to for some guidance as to what the impacts would be? 
You obviously think they'll be good. Some people have raised 
concerns. But where can we look for a comparison?
    Mr. Kimmelman. I would start with our own law, the 1992 
Cable Act. There is a government imprimatur very interestingly 
described as a re-regulation law, where government said, cable 
companies, you are fully deregulated other than your basic tier 
if you offer channels a la carte. Otherwise, you're price 
regulated. Interestingly, every cable company, as much as 
you've heard all their complaints about regulation, chose 
regulation over a la carte.
    In Canada for the last 4 or 5 years, digital services have 
been offered a la carte. Interestingly, the cable operators 
wanted to offer complete a la carte. The programmers were 
totally against it. The Canadian Government intervened to 
require a basic package. And Canada is a different culture and 
different forces at play, they want Canada content in their 
basic package, but we have examples of this. For digital 
services we have a la carte offerings with government 
intervention.
    I would submit that the 1992 Act was governmental 
intervention. They just selected regulation of price over a la 
carte.
    Senator Sununu. But you can't point to a market today or an 
industry today where this kind of a pricing structure is 
mandated?
    Mr. Kimmelman. Not where it is absolutely mandated.
    Senator Sununu. And is the Canadian tiering structure, is 
that mandated by government?
    Mr. Kimmelman. They mandate a basic tier for digital 
service and all the large cable operators in Canada are 
offering packages and a la carte, which is exactly what we're 
suggesting be tried here.
    Senator Sununu. And notwithstanding the differences in 
culture, you might encourage us to look there at least for some 
lesson?
    Mr. Kimmelman. I mean, consider the differences in culture 
obviously, but I would urge you to look there as an experiment. 
And I would also say just on Mr. Robbins' point, if what he 
says about Cox is accurate, I would say he's the only cable 
company who has not used revenue from Internet and pay services 
and all the digital services and put some of it away and then 
raised basic rates additionally beyond their investment. He'd 
be the only one.
    Senator Sununu. Given the government, the drug 
reimportation analogy that the Chairman used, I can't help but 
picture a scene of people driving north of the border and then 
driving home with spools of cable.
    [Laughter.]
    Senator Sununu. Thank you, Mr. Chairman.
    Mr. Robbins. Truth be known, Senator, the Canadians come 
down here to find out what a good marketplace we have, what a 
robust marketplace we have.
    The Chairman. Thank you very much. I want to thank the 
witnesses and point out that this is an important issue and it 
affects tens of millions of Americans and I think you can see 
by the participation of the members today that this is of great 
interest. And so, therefore, I know that all of you are very 
busy, but I do think that your time was well spent today and I 
think this hearing has been very helpful and I thank you.
    This hearing is adjourned.
    [Whereupon, at 12:15 p.m., the hearing was adjourned.]

                                  

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