[Senate Hearing 108-889]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-889
 
                            MEDIA OWNERSHIP

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 6, 2003

                               __________

    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

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas                JOHN B. BREAUX, Louisiana
GORDON SMITH, Oregon                 BYRON L. DORGAN, North Dakota
PETER G. FITZGERALD, Illinois        RON WYDEN, Oregon
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
                                     FRANK 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 May 6, 2003......................................     1
Statement of Senator Allen.......................................    21
Statement of Senator Burns.......................................     4
    Prepared statement...........................................     4
Statement of Senator Dorgan......................................    23
Statement of Senator Lautenberg..................................     5
    Prepared statement...........................................     6
Statement of Senator Lott........................................     7
    Prepared statement...........................................     8
Statement of Senator McCain......................................     1
    Prepared statement of George Bodenheimer, President, ESPN and 
      ABC Sports.................................................    24
Statement of Senator Nelson......................................     7
Statement of Senator Smith.......................................     7
Statement of Senator Stevens.....................................     2
Statement of Senator Sununu......................................    85
Statement of Senator Wyden.......................................     3

                               Witnesses

Dolan, Charles F., Chairman, Cablevision Systems Corporation.....    30
    Prepared statement...........................................    32
Gleason, James M., President and COO, CableDirect................    47
    Prepared statement...........................................    49
Hindery, Jr., Leo, Chairman and CEO, YES Network.................    63
    Prepared statement...........................................    65
Kimmelman, Gene, Director, Consumers Union.......................    34
    Prepared statement...........................................    36
Robbins, James O., President and CEO, Cox Communications.........    26
    Prepared statement...........................................    28
Shear, William B., Acting Director, Physical Infrastructure, U.S. 
  General Accounting Office; Accompanied by Amy Abramowitz, 
  Assistant Director.............................................     8
    Prepared statement...........................................     9

                                Appendix

Bodenheimer, George, President, ESPN and ABC Sports, letter, 
  dated May 27, 2003, to Hon. John McCain........................    92
Hollings, Hon. Ernest F., U.S. Senator from South Carolina, 
  prepared statement.............................................    91
Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared 
  statement......................................................    91


                            MEDIA OWNERSHIP

                              ----------                              


                          TUESDAY, MAY 6, 2003

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:33 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 we will be examining 
media ownership. In particular, we will examine competition in 
the market for video programming and distribution.
    Cable companies remain the dominant providers of 
subscription-video services. According to the Federal 
Communications Commission, these companies have more than 75 
percent of the market for delivering programming to consumers. 
Satellite companies and others have made some inroads over the 
past decade, but the market still belongs to cable.
    Consolidation in the market has resulted in a few very 
large cable companies with the lion's share of the subscribers. 
Likewise, a few content companies, including cable operators 
and broadcast networks, own a substantial number of cable 
channels. I do not subscribe to the notion that big is always 
bad in a corporate environment, but along the way to 
significant consolidation in the cable industry we have seen a 
pattern of annual rate increases imposed on consumers that 
greatly outpace the rate of inflation. Since 1996, cable rates 
have increased 50 percent, almost three times the rate of 
inflation.
    In its annual report on cable rates, the FCC last year 
found that, ``The overall average monthly rate for cable 
programming, services, and equipment increased by 7.5 percent 
for the 12-month period ending July 1st, 2001.'' The FCC is 
expected to release its next report any day now, but given the 
announcement of 6 to 7 percent increases by many of the largest 
cable companies, I do not expect much to change.
    Perennial price hikes are not the hallmarks of a 
competitive industry. In fact, the FCC report suggests that 
cable operators that face effective competition offer rates 
that are more than 6 percent lower than those companies that do 
not face effective competition. A subsequent GAO study suggests 
that even this number may be too conservative.
    Last year, the GAO found that, ``in franchise areas with a 
second cable provider, cable prices are 17 percent lower than 
in comparable areas without a second cable provider.'' Clearly, 
competition affects rates, but most cable companies face little 
competition.
    That is why I was disappointed last year when the FCC 
rejected the proposed merger of EchoStar and DirecTV. I thought 
the combined company would have been a better competitor to 
cable. Recently, Rupert Murdoch's News Corporation entered an 
agreement to acquire a significant interest in DirecTV. If 
approved, the combined company will control a multinational 
satellite distribution system, multiple film and television 
studios, several Major League sports teams, a national 
television broadcast network, more than 30 broadcast television 
stations, the most watched cable news channel, a national 
sports programming network, including multiple regional sports 
networks, multiple other cable channels, the national broadcast 
rights to Major League Baseball, half of the NASCAR racing 
season, every third Super Bowl, regional rights to 67 of 80 
teams in the NBA, NHL, and Major League Baseball, and 
significant publishing outlets. I think the latest proposal 
raises interesting questions that I hope to discuss today.
    A common refrain from cable companies is that rate 
increases are largely attributable to the cost of programming, 
especially sports programming. Last week, the Wall Street 
Journal reported, ``Some events always cause pain, like going 
to the dentist and paying taxes. For cable and satellite 
operators, the event is the annual rate increase notice from 
Walt Disney Company's popular ESPN sports network. Last 
Wednesday, ESPN once again delivered the bad news to operators, 
informing them of a 20 percent increase August 1st on a rate 
that is already one of the highest in the cable industry.''
    I am told that ESPN has provided proposals to cable 
companies indicating that the charge per subscriber in 2012 
could be as high as $14 per month. 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. I thank 
our witnesses for being here today.
    Senator Stevens?

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

    Senator Stevens. Mr. Chairman, I congratulate you on this 
hearing. I hope it is going to be ``hearings'' before we are 
through. But I do think we need to review what is going on in 
the cable industry and its relationship to the new concepts 
that you have mentioned with regard to direct service and 
Murdoch's new system.
    But I am also concerned about the new concepts of cable 
going into long-distance telephone service. They have refused 
to make any contribution to Universal Service fees, and there 
are other problems facing us now with respect to the ownership 
caps. I hope we will get into that, also.
    I oppose raising the cap above 35 percent to allow networks 
to buy up independent affiliates, but we have got some real 
problems about cross-ownership restrictions between newspapers 
and broadcasters. The whole subject needs a real series of 
hearings, I believe, and I hope you will be willing to get into 
those.
    I do not want to take a lot of time right now, but I do 
think that if these cable systems can be used to network long 
distance to avoid the Universal Service Fund, it is going to 
really destroy the whole concept of Universal Service before we 
are through. And I look forward to perhaps initiating the 
concept of having an Omnibus bill dealing with problems to 
telecommunications before this Congress is over.
    So I commend you for initiating this. I hope it is an 
``initiating,'' Mr. Chairman, and we should spend a lot of time 
on this in this Congress.
    Thank you.
    The Chairman. Thank you, Senator Stevens.
    Senator Wyden?

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

    Senator Wyden. Thank you very much, Mr. Chairman. I am very 
pleased you are holding this hearing, because, obviously, in a 
lot of communities cable rates have soared through the 
stratosphere, and there are important issues we ought to be 
looking at.
    I am particularly interested in examining three. The first 
deals with this matter of a la carte pricing. I mean, the 
average consumer simply wants a modest meal at a reasonable 
price. But, instead, as a result of the way these deals are 
structured, the consumer is being force fed a whole five-course 
feast and basically gets stuck with the bill. And the reality 
is a lot of senior citizens want, for example, a few channels, 
and they end up getting shellacked with a huge bill paying for 
a sports star to get a multimillion-dollar contract and maybe 
ends up playing in the minors, and the consumer gets the bill. 
So I think it is important we look at the a la carte pricing 
issue, and I am glad you are doing that.
    The second issue, of course, Mr. Chairman, is this question 
of media concentration, which I think is very troubling, 
because my sense is a few large companies are effectively going 
to become gatekeepers for content, making it almost impossible 
for independent programming to get carried. And the problem is 
really compounded. In my home State of Oregon, what you have 
had there is the small cable companies find that to get a 
channel they know their subscribers really want, they have to 
agree to take a bunch of additional channels, as well, because 
the same media conglomerate owns multiple stations and wants 
them all carried. So the local cable systems cannot select just 
the channels they want for their system; they are forced to buy 
things they do not want.
    So my sense is that there may be a new coalition in this 
country, and that is the consumer and many of the small cable 
companies going up against these media conglomerates who can 
own program channels and distribution channels and basically 
hammer anybody who gets in the way.
    So I am pleased you are holding this hearing and look 
forward to examining those three issues, in particular.
    The Chairman. Thank you.
    Senator Burns?

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

    Senator Burns. Thank you, Mr. Chairman, and thanks for 
holding this hearing. And you are doing exactly what we should 
be doing in oversight, and I congratulate you for that. I think 
it is very timely.
    I am going to submit my statement, Mr. Chairman. We want to 
hear from the witnesses this morning, in the absence of time. I 
do want to make a couple of points, though.
    I think we do have a competitive landscape out there. There 
is no doubt about that. In programming, maybe we should take 
some time to look at that. I want to ask some questions about a 
la carte. I am concerned about that. The only reason I want the 
style section in the Washington Post is because that is where 
the crossword puzzle is. If they would relocate that, well, 
maybe I would want to buy the Washington Post a la carte, but I 
do not think that is going to happen.
    And with regard to what Senator Stevens, what he brought 
up, on Universal Service and the addition of new services on 
cable, we are very supportive of that, but also we will be 
hosting a summit between the FCC and the Joint Board and 
Members of Congress and some of the industry to a summit coming 
up. We do not have all of it put together yet, Mr. Chairman, 
and I think we should get a roundtable and find out exactly the 
direction we should be going, as far as Universal Service is 
concerned. And it would entail all of the Commerce Committee, 
and we hope that maybe we would bring some facts to life in how 
to fix this thing. But we are all going to have to work 
together in order to get it done.
    And thanks, again, for holding this hearing.
    [The prepared statement of Senator Burns follows:]

   Prepared Statement of Hon. Conrad Burns, U.S. Senator from Montana
    Mr. Chairman, thank you for calling for this hearing in what I 
understand is to be the second in a series of hearings on media 
ownership. Today's focus will be on the state of competition in the 
cable marketplace.
    Fortunately, we do have competition in multichannel video services 
in Montana. A decade ago if you had problems with your cable service, 
you didn't have a good alternative. This is not the case today, 
however. EchoStar and DirecTV offer 500 channels of digital video and 
CD quality music. In fact, close to 40 percent of 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 market discipline imposed by competition is far more effective 
in protecting consumers than any government regulation. Competition 
forces companies to innovate in order to keep their customers and 
attract new ones. That's just what the cable industry has done, 
investing billions to upgrade its systems in order to offer new 
services like high speed Internet access.
    One of my top priorities is making certain every household and 
business in Montana has access to high speed Internet service. In many 
cases, rural communities are not seeing the tremendous benefits of the 
wonders of the digital age. We must make certain that everyone in rural 
America has access to the same digital services enjoyed by those who 
live in urban areas. We can't effectively grow our economy, create new 
jobs, guarantee access to advanced health care services and provide new 
educational opportunities to our children until we make sure high speed 
Internet access is available across this nation.
    Ensuring access to broadband service is not a one-technology 
solution in a rural, mountainous state like Montana. Cable, telephone 
companies, satellites and new wireless technologies will all play a 
role in making sure that broadband is available everywhere and that 
people have a choice of providers.
    In allowing the full array of broadband delivery mechanisms to be 
made available to rural consumers, we must be more aware than ever of 
the true costs of regulation. We all know how regulation impacts the 
ability of an industry to raise money and invest in the future. Just 
look at what happened when Congress regulated the cable industry a 
decade ago. The industry could not obtain the capital necessary to 
invest in new programming or create new services. It wasn't until the 
deregulation provided by the 1996 Telecommunications Act that cable was 
able to raise capital and begin to deploy new advanced digital 
services.
    Finally, I wish to specifically address the issue of a la carte 
pricing. I have serious reservations about imposing such a system on 
cable operators. While as a consumer, it would be wonderful to choose 
and pay for only a favorite section of a newspaper, for instance, this 
type of system would have many unanticipated damaging effects. To 
continue the analogy, newspapers rely on different content to attract 
the broadest audience possible so as to maximize advertising revenue. 
If newspapers were required to separate the ``Style'' section from the 
``Business'' section, the cost of content would simply spike upward 
because of the fracturing of the core audience into niches. In a 
similar fashion, by potentially increasing the price consumers have to 
pay to individual channels on television, an a la carte cable-pricing 
system would be a disservice to millions of cable subscribers 
throughout this country.
    Competition is working to the benefit of Montana consumers, and 
consumers across the country. I hope this Committee does not stifle 
investment in new advanced services, like high speed Internet, by 
imposing new unneeded government regulation. Thank you, Mr. Chairman.

    The Chairman. Thank you.
    Senator Lautenberg?

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

    Senator Lautenberg. Mr. Chairman, I would join my 
colleagues in congratulating you for holding this hearing. The 
subject is one that almost pervades our telephone calls and 
visits from constituents, and with good reason, because cable 
has become almost a commodity for people. And when you look at 
the rate increases between 1996 and 2002, cable rates increased 
by 45 percent.
    Now, I am sure we are going to hear discussions about what 
constitutes basic programming and what constitutes expanded 
programming. And expanded programming, of course, is adding the 
costs for other services, but it does not mean that the basic 
cable operator does not have an opportunity to increase their 
revenues and, likely, their profits.
    So I want to submit my statement for the record, Mr. 
Chairman, but I do want to add one thing, and that is the 
pending merger, in particular, that needs scrutiny, and that is 
News Corporation's acquisition of the controlling interest in 
DirecTV. Now, on its face, it may appear to be fostering 
competition, since DirecTV, a direct-broadcast satellite 
service, is compared to cable, but the media empire, News 
Corporation, what that chairman, Rupert Murdoch, has put 
together, is already quite extensive.
    In the New York area, for instance, it includes two VHF 
broadcast stations, a daily newspaper, a broadcast network, a 
movie studio, a satellite service, and four cable networks. And 
by gaining control of the DirecTV platform, they would have 
considerable leverage to extract higher licensing fees, which 
would drive subscriber costs up. And such concentration in the 
media also raises concern about the ability of people to have 
access to fair and balanced news coverage.
    The issues are complicated, the stakes are enormous. The 
Committee, Mr. Chairman, has much work to do to start out. And, 
once again, I commend you for getting us started, and I look 
forward to hearing from our witnesses.
    [The prepared statement of Senator Lautenberg follows:]

             Prepared Statement of Hon. Frank Lautenberg, 
                      U.S. Senator from New Jersey
    Mr. Chairman,
    I congratulate you for holding this hearing on cable rates, the 
effect of mergers on competition in the cable and satellite TV 
industry, and related issues.
Cable Rates
    There are very few issues that can compete with consumer concern 
over cable rates in terms of generating constituent mail and phone 
calls!
    I'm sure that every Member of this Committee has heard from 
thousands of constituents who are--pardon the pun--irate about their 
rates. And with good reason: between 1996 and 2002, cable rates 
increased by 45 percent. That's nearly three times the rate of 
inflation.
    We will hear testimony from cable operators that part of the 
increase is attributable to $70 billion in capital investments which 
are providing subscribers with greatly enhanced services.
    Cable operators will also tell us that much of the increase is due 
to exploding costs for so-called ``Expanded Basic'' programming and 
that they have little leverage to influence such costs because of 
government-mandated ``must buy'' and ``retransmission consent'' 
provisions.
    Programmers, on the other hand, will argue that so-called a la 
carte pricing would be bad for consumers. And they will argue that 
sports channels like ESPN serve as the ``anchor store in the mall'' and 
make it possible for niche channels to survive.
    Because the Federal Communications Commission (FCC) has authority 
to regulate the rates for such programming, and because Congress has 
oversight responsibility, we are going to have to referee this dispute 
that goes to the heart of what our constituents are complaining about.
Concentration in the Industry
    I'm concerned about industry mergers and their effect on 
competition. In just one year--between July 2001 and June 2002--there 
were 28 transactions, including the biggest and third biggest cable 
operators, AT&T and Comcast.
    Now, the ten largest operators serve 85 percent of all cable 
subscribers. Not surprisingly, where there is competition, prices are 
lower. But in too many markets, there is little or no competition, and 
consumers suffer as a result.
News Corporation's Acquisition of DirecTV
    There is one pending merger in particular that needs scrutiny: 
that's the News Corporation's acquisition of a controlling interest in 
DirecTV. On its face, it might appear to be fostering competition since 
DirecTV, which is a Direct Broadcast Satellite (DBS) service that 
competes with cable.
    But the media empire News Corp. chairman Rupert Murdoch has put 
together is already quite extensive. In the New York metropolitan area, 
for instance, it includes two VHF broadcast stations, a daily 
newspaper, a broadcast network, a movie studio, a satellite service, 
and four cable networks. By gaining control of the DirecTV platform, 
Mr. Murdoch would have considerable leverage to extract higher 
licensing fees, which would drive subscriber costs up. Such 
concentration in the media also raises concern about the ability of 
people to have access to fair and balanced news coverage.
Conclusion
    These issues are complicated and the stakes are enormous. The 
Committee has much work to do to sort out and evaluate competing claims 
and interests on behalf of our constituents. Today, we're starting that 
process and I look forward to hearing from our witnesses.

    The Chairman. Senator Smith?

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

    Senator Smith. Thank you, Mr. Chairman, for holding this 
hearing. I am pleased to note that in spite of the downturn in 
the telecommunications market, the cable industry continues to 
invest in broadband facilities and the deployment of advanced 
services to consumers. And, particularly, they are doing this 
not just in urban areas, but also in rural areas. I believe 
this is happening, in part, because of increased competition 
and deployment of advanced services by satellite and telephone 
companies, as well.
    On another note, as the Committee continues to deal with 
broadband and open competition in the media market, I want to 
express my support for maintaining the open nature of the 
Internet. We need to continue to keep the broadband market open 
and assure that customers continue to have access to content 
and the applications of their choice on a nondiscriminatory 
basis.
    So I look forward, Mr. Chairman, to hearing our witnesses 
today. Thank you.
    The Chairman. Senator Nelson?

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

    Senator Nelson. Thank you, Mr. Chairman.
    Mr. Chairman, we have had several hearings to find ways to 
stimulate investment in broadband, yet cable has gone ahead, 
without government incentives, to make broadband investments 
that have benefited consumers. We ought to take a close look at 
the cable rates. We need to make sure consumers are getting 
their money's worth, but we need to look at what the industry 
is now offering consumers and determine if the services fit the 
cost structure.
    And, finally, Mr. Chairman, programming costs are only part 
of the reason cable rates have gone up. Their $70 billion 
network investment, a good investment for consumers, is also 
reflected in the retail rates.
    So I am looking forward to your hearing, Mr. Chairman.
    The Chairman. Thank you, Senator Nelson.
    Senator Lott?

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

    Senator Lott. Mr. Chairman, I would like to hear the 
witnesses. I have a statement that I would like to have 
included in the record, please.
    The Chairman. Without objection, thank you.
    [The prepared statement of Senator Lott follows:]

  Prepared Statement of Hon. Trent Lott, U.S. Senator from Mississippi
    Mr. Chairman, thank you for holding this important hearing today on 
media ownership issues in the video programming and distribution 
markets. Media ownership issues are a key area of jurisdiction for this 
Committee, and I am pleased that we are taking the time to carefully 
review these matters to insure that the American people are well-served 
by the media marketplace. Cable and direct broadcast satellite offer 
the American people the opportunity to receive a multitude of programs 
and services in their homes. It is positive to see that there are an 
increasing number of options and offerings for consumers in the video 
programming and distribution markets, and I am interested in hearing 
more details about the current state of the industry from the witnesses 
today.
    While there are positive developments in this industry, there are 
also some aspects of the industry which this Committee needs to 
consider more closely. I hope that the testimony today will bring a 
greater understanding of the current challenges and successes in the 
cable and satellite industries, and I am happy that the Committee is 
devoting this time today for a thoughtful and careful look at this 
sector of the media marketplace.

    The Chairman. Our first witness is Mr. William Shear, of 
the General Accounting Office.
    Mr. Shear, you are accompanied by Ms. Abramowitz. Is that 
correct?
    Mr. Shear. Yes.
    The Chairman. All right.
    Welcome, Mr. Shear. Please proceed with your opening 
statement, and thank you for your appearance before the 
Committee.

        STATEMENT OF WILLIAM B. SHEAR, ACTING DIRECTOR, 
       PHYSICAL INFRASTRUCTURE, U.S. GENERAL ACCOUNTING 
   OFFICE; ACCOMPANIED BY AMY ABRAMOWITZ, ASSISTANT DIRECTOR

    Mr. Shear. Mr. Chairman, Members of the Committee, I am 
pleased to be here this morning before you to discuss 
preliminary observations from GAO's work on cable television 
rates.
    At this Committee's request, we examined, first, the 
reliability of information that cable companies provide to the 
FCC about cost factors underlying cable rate increases. And, 
second, we examined the FCC's process to update and revise how 
cable franchises are classified, in terms of whether they face 
effective competition, a statutorily defined term.
    To address the reliability of information that the FCC 
collected, we randomly sampled 100 cable franchises that 
responded to the FCC's 2002 annual cable-rate survey. To 
examine the FCC's process for classifying cable franchises as 
to whether they face effective competition, we reviewed whether 
these classifications continue to accurately reflect current 
circumstances.
    There are four tests of finding out effective competition 
in a franchise area--the low-penetration test, when few 
households in a franchise area subscribe to cable service; the 
competitive provider test, when two companies provide video 
service; the municipal test, when a government authority offers 
video-programming service; and the local-exchange carrier test, 
when a local telephone company provides video service.
    Our preliminary analysis suggests that some of the FCC's 
information on cable companies is inconsistent and potentially 
misleading. In particular, our analysis indicates that FCC's 
survey does not provide a reliable source of information on the 
cost factors underlying cable rate increases.
    We have found two key causes of variation in how companies 
completed the survey. First, the FCC provided minimal 
instructions or examples on how the portion of the survey 
covering the cost factors underlying rate increases should be 
completed. As a result, we found that cable companies made 
varying assumptions about how to complete the survey. For 
example, 83 of the 100 franchises we surveyed entered zero for 
infrastructure investments, even though 33 told us that there 
had, in fact, been additional costs for such upgrades that 
year.
    Second, the FCC survey form requires that the dollar 
amounts reported for the factors that might underlie rate 
changes add up to the reported rate increase for the year. In 
the absence of guidance on how to achieve the requisite 
balance, cable companies approached the question in varying 
ways. In particular, most of the companies told us that they 
adjusted, thereby possibly misreporting, one of the five cost 
factors for the purpose of the required balancing.
    With respect to our second objective, on competitive 
status, our preliminary findings show possible inaccuracies in 
FCC's current classification of cable franchises. We found that 
FCC's classification might not always reflect current 
conditions. We found instances where information in the survey 
responses of some franchises would suggest that the criteria 
for effective-competition finding that was made in the past 
might no longer be present. However, a finding of effective 
competition is only changed if a formal process is instituted. 
We found only two instances where a petition was filed that 
resulted in a reversal of an effective-competition finding.
    We are conducting additional work on the issues discussed 
today, and a more complete analysis will be included in our 
final report to you, which we plan to issue in October. In 
addition to topics I discussed today, we will be providing a 
more comprehensive analysis of the factors underlying cable 
rate increases, the impact of competition on cable rates and 
service, and cable tiering issues.
    Mr. Chairman, that concludes my oral summary. Amy and I 
would be happy to answer any questions.
    [The prepared statement of Mr. Shear follows:]

   Prepared Statement of William B. Shear, Acting Director, Physical 
             Infrastructure, U.S. General Accounting Office

    Mr. Chairman and Members of the Committee:
    I am pleased to be here today to provide preliminary observations 
from our ongoing work on cable television rates. Over 65 percent of 
American households are currently cable television subscribers. As you 
have noted, Mr. Chairman, cable television rates have been rising 
faster than the rate of general inflation for many years. At the 
request of this Committee, we are providing preliminary observations 
today on two issues: (1) the reliability of the information that cable 
companies have provided to the Federal Communications Commission (FCC) 
in 2002 regarding the costs factors underlying their recent cable rate 
increases, and (2) FCC's process for updating and revising the 
classification of cable franchises as to whether they are facing 
effective competition--a statutorily-defined term. We plan to issue a 
report with our final analysis of these and other issues in October 
2003.
    To address the reliability of information that the FCC collected, 
we randomly sampled 100 of approximately 700 cable franchises that 
responded to the FCC's 2002 cable rate survey. \1\ We selected a random 
sample of 100 cable franchises so that we could make estimates about 
the entire population of about 700 cable franchises that responded to 
the FCC. We asked these franchises a series of questions about how they 
completed a portion of the FCC's survey that asks about the cost 
factors underlying annual cable rate changes. To examine the FCC's 
process for classifying cable franchises as to whether they face 
effective competition, we reviewed how various franchises were 
classified according to the FCC's information and whether these 
classifications continue to accurately reflect current circumstances.
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    \1\ FCC samples between 700 and 800 of the universe of roughly 
10,000 cable systems using a stratified sampling approach based on the 
status of effective competition and the size of the cable operator.
---------------------------------------------------------------------------
    Our work has focused on examining whether the FCC's annual report 
on cable rates is providing reliable information on the causes of rate 
increases and the competitive status in video markets. In summary, our 
preliminary analysis suggests that some of the FCC's information on 
cable companies is inconsistent and potentially misleading. In 
particular:

   Our preliminary analysis of the responses provided by 100 
        cable franchises indicates that the FCC's 2002 survey does not 
        provide a reliable source of information on the cost factors 
        underlying cable rate increases. We found two key causes of 
        variation in how companies completed the survey. First, the FCC 
        provided minimal instructions or examples on how the portion of 
        the survey covering the cost factors underlying rate increases 
        should be completed. As a result, we found that cable companies 
        made varying assumptions about how to complete the survey. 
        Second, the FCC survey form requires that the reported dollar 
        amounts reported for factors that might underlie rate changes--
        5 cost factors and a non-cost factor are included on the form--
        sum to the reported rate increase for the year. In the absence 
        of guidance on how to achieve this requisite balance, cable 
        companies approached the question in varying ways. In 
        particular, most of the companies told us that they adjusted 
        one of the 5 cost factors for the purpose of the required 
        balancing, thereby misreporting actual cost changes that had 
        occurred.

   Our preliminary findings show possible inaccuracies in the 
        FCC's current classification of cable franchises regarding 
        their effective competition status. We found indications that 
        there are cases in which a finding of effective competition in 
        a particular franchise area that might have existed in the past 
        no longer seemed accurate. Nevertheless, the determination of 
        effective competition remained in effect because the 
        franchising authority had not filed a petition that would 
        challenge that finding. In fact, we found that such petitions 
        are rare.

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 
in mountainous or remote areas. By the late 1970s, cable began to 
compete more directly with free over-the-air television by providing 
new networks--available only on cable systems--such as HBO (introduced 
in 1972), Showtime (introduced in 1976), and ESPN (introduced in 1979). 
According to the FCC, cable's penetration rate--as a percent of 
television households--increased from 14 percent in 1975 to 24 percent 
in 1980 and to 65 percent by 2002. Cable television is by far the 
largest segment of the subscription video market, a market that 
includes cable television, satellite service (direct broadcast 
satellite (DBS) providers such as DirecTV), and other technologies that 
deliver video services to customers' homes.
    Cable companies deliver video programming to customers through 
cable systems. These systems consist of headends--facilities where 
programming from broadcast and cable networks is aggregated--and 
distribution facilities--the wires that carry the programming from the 
headend to customers' homes. Depending on the size of the community, a 
single headend can serve multiple communities or several headends may 
be required to serve a single large community. At the community level, 
cable companies obtain a franchise license under agreed-upon terms and 
conditions from a franchising authority, such as a township or county. 
In some cases, state public service commissions are also involved in 
cable regulation.
    During cable's early years, franchising authorities regulated many 
aspects of cable television service, including franchise terms and 
conditions and subscriber rates. In 1984, the Congress passed The Cable 
Communications Policy Act, which imposed some limitations on 
franchising authorities' regulation of rates. \2\ 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 the FCC to establish regulations ensuring reasonable rates 
for basic service--the lowest level of cable service that includes the 
broadcast networks--unless a cable system has been found to be subject 
to effective competition, which the Act defined. The Act also gave the 
FCC authority to regulate any unreasonable rates for upper tiers (often 
referred to as expanded-basic service), which includes cable 
programming provided over and above that provided on the basic tier. 
\3\ Expanded-basic service typically includes such popular cable 
networks as USA Network, ESPN, CNN, and so forth. In anticipation of 
growing competition from satellite and wire-based providers, the 
Telecommunications Act of 1996 phased out all regulation of expanded-
basic service rates by March 31, 1999. However, franchising authorities 
retain the right to regulate basic cable rates in cases where no 
effective competition has been found to exist.
---------------------------------------------------------------------------
    \2\ The 1984 Act restricted regulation to only basic services for 
cable systems not subject to effective competition. In its rulemaking, 
the FCC initially said that effective competition existed if three or 
more over-the-air broadcast signals existed in a given market. Under 
this narrow definition, over 90 percent of all cable systems would be 
subject to effective competition and therefore not subject to rate 
regulation.
    \3\ Basic and expanded-basic are the most commonly subscribed to 
service tiers--bundles of networks grouped into a package--offered by 
cable companies. In addition, customers in some areas can purchase 
digital tiers and also premium pay channels, such as HBO and Showtime.
---------------------------------------------------------------------------
    As required by the 1992 Act, the FCC annually reports on cable 
rates for systems found to have effective competition compared to 
systems without effective competition. To fulfill this mandate, the FCC 
annually surveys cable franchises regarding their cable rates. In 2002, 
the survey included questions about a range of cable issues including 
the percentage of subscribers purchasing non-video services and the 
specifics of the programming channels offered on each tier to better 
understand the cable industry.
    Until recently, cable companies usually encountered limited 
competition in their franchise areas. Some franchise agreements were 
initially established on an exclusive basis, thereby preventing wire-
based competition to the incumbent cable provider. 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. Still, only limited wire-based 
competition has emerged, in part because it takes large capital 
expenditures to construct a cable system. However, competition from DBS 
has grown rapidly in recent years. Initially unveiled in 1994, DBS 
served over 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 companies.
    In a recently released report, we found that competition in the 
subscription video market can have a significant impact on cable rates. 
\4\ Using an econometric model, we found that franchise areas with a 
second wire-based video provider had rates approximately 17 percent 
lower than similar franchise areas without such a competitor. \5\ We 
did not, however, find that competition from DBS providers is 
associated with lower cable prices, although we did find that where DBS 
companies provide local broadcast networks to their customers, cable 
companies provide more channels than in areas where DBS companies do 
not provide local broadcast channels. Moreover, we also found that DBS 
providers obtain a substantially higher level of subscribers in areas 
where they are providing local broadcast channels.
---------------------------------------------------------------------------
    \4\ See, U.S. General Accounting Office, Telecommunications: Issues 
in Providing Cable and Satellite Services, GAO-03-130 (Washington, DC: 
Oct. 15, 2002).
    \5\ In a similar analysis, the FCC found that cable rates in 
franchise areas with a wireline competitor were nearly 7 percent lower 
than in franchise areas without such as competitor. See, Federal 
Communications Commission, Report on Cable Industry Prices, FCC 02-107 
(Washington, DC: April 4, 2002).
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FCC's Cable Rate Survey Does Not Appear To Provide a Reliable Source of 
        Information on the Cost Factors Underlying Cable Rate Increases
    FCC's annual cable rate survey seeks information on cable 
franchises' cost changes that may underlie changes in cable rates 
during the preceding year. To evaluate the reliability of these 
statistics, we asked 100 of the approximately 700 franchises that the 
FCC surveyed in 2002 to describe how cost change information that they 
provided to the FCC was calculated. Figure 1 shows the actual portion 
of the FCC survey which franchises completed to provide their cost 
change information.


    Our discussions with cable franchises indicated considerable 
variation in how franchises completed this section of the 2002 FCC 
cable rates survey. Our preliminary observations indicate that there 
are two causes for the resulting variation: (1) there were insufficient 
instructions or examples on how the form was supposed to be completed, 
leading to confusion among cable operators regarding what to include 
for the different cost factors and how to calculate each of them; and 
(2) the requirement that the cost and non-cost factors sum to the 
reported annual rate increase caused many cable operators to adjust one 
or more of the cost factors, thereby resulting in data that might not 
provide an accurate assessment of the cost factors underlying cable 
rate increases.
    Lack of adequate instructions. Our interviews with 100 cable 
franchises indicate that the lack of specific guidance regarding the 
cost change section of the survey caused considerable confusion about 
how to fill out the form. Every franchise that we spoke with said it 
was unclear what the FCC expected for at least one of the 6 factors (5 
cost factors as well as a non-cost factor); 73 of the 100 franchises 
said that the instructions were insufficient. In particular, several 
cable representatives we interviewed noted that there were no 
instructions or examples to show how to calculate investment, what 
types of cost elements should go into the other costs category, and 
what the FCC meant by non-cost factors. This lack of guidance created 
considerable variation in the approaches taken to develop the cost 
factors. Table 1 provides information on the approaches cable 
franchises used to complete the portion of the survey pertaining to 
cost and non-cost factors underlying rate changes.

  Table 1: Summary of Approaches Used by Cable Franchises to Calculate
                        Cost and Non-Cost Factors
------------------------------------------------------------------------
Type of cost/non-cost factor    Discussion of how franchises approached
  (line of the FCC survey)                    this factor
------------------------------------------------------------------------
License or copyright fees,    Most of the cable companies told us they
 existing and new programs     used specific cost data on existing
 (lines 52 and 53)             programming costs to develop the cost
                               changes associated with increases in
                               existing programming.
                              Thirty-nine of the 47 franchises that
                               reported an increase in new programming
                               costs said they used actual information
                               to calculate these cost changes.
                              Some companies took a standard company-
                               wide approach to estimating programming
                               costs as opposed to estimating the costs
                               for each individual franchise.
                              Some companies combined cost changes for
                               all programming without separating
                               existing from new programs.
------------------------------------------------------------------------
Head-end or  distribution     Eighty-three of the 100 franchises we
 facility investment (line     surveyed entered zero for these
 54)                           infrastructure investments. Of these, 33
                               told us that there had, in fact, been
                               additional costs for such upgrades that
                               year. The reasons provided to us for
                               leaving it blank included concern that it
                               would be too difficult to determine how
                               much of these costs would be
                               appropriately allocated to a certain
                               video service or franchise.
                              Some cable companies performed significant
                               calculations to estimate how much should
                               be allocated to the support of video
                               services, while other estimates did not
                               include detailed cost calculations.
------------------------------------------------------------------------
General inflation (line 55)   Fifty-seven of the 100 franchises
                               estimated inflation by using either FCC
                               or Bureau of Labor Statistics' inflation
                               factors.
                              Other companies left the inflation factor
                               blank because they assumed that most
                               inflation would be captured in the other
                               cost factors.
------------------------------------------------------------------------
Other cost changes (line 56)  Sixty-four of the 100 franchises filled in
                               a zero for the other cost factor. Of
                               these 64 franchises:
                                Thirty-two told us that there were, in
                               fact, cost changes that would have
                               appropriately been captured in the other
                               category;
                                Seventeen told us that they did not
                               understand what items should be included
                               in other costs; and
                                Fifteen told us that by the time they
                               got to this line on the form, they had
                               already accounted for enough costs to
                               offset the reported rate increase and
                               thus, they did not evaluate whether there
                               were any costs that should be included as
                               other costs.
------------------------------------------------------------------------
Non-cost-related factors      Eighty-seven of the 100 respondents said
 (line 57)                     they did not understand what non-cost
                               factors would cover, and as a result, 76
                               of the respondents left the non-cost
                               factor blank.
                              Those that did enter a number for this
                               factor cited such items as a change in
                               profit margin or the need to establish
                               uniform rates across franchises.
------------------------------------------------------------------------
Source: GAO Survey of 100 Cable Franchises

    Requirement that factors sum to the reported annual rate change. 
Our survey of 100 cable franchises that responded to the FCC's 2002 
cable rates survey indicated that a second source of confusion relates 
to the requirement that the sum of the underlying cost and non-cost 
factors (see fig. 1 lines 52-57) equal the change in the franchise's 
cable rates (see fig. 1 line 51). This portion of the FCC's survey was 
originally designed during the 1990s when both basic and expanded-basic 
services were regulated. At that time, cable companies were required to 
justify any rate increases the cable company implemented based on cost 
increases that it had incurred during the year. An FCC official told us 
that the rate/cost factor portion of the form was designed to mirror a 
regulatory form that was used at that time to justify rate changes. 
When expanded-basic services were deregulated in March 31, 1999, the 
FCC realized that cost factors would no longer necessarily equal the 
yearly rate change because companies were no longer required to tie 
rate changes to explicit cost factors for regulatory purposes. \6\ In 
the 1999 cable rates survey, the FCC added the non-cost line in this 
section of the survey and continued to require that the cost factors 
and the non-cost factor sum to the reported annual rate change.
---------------------------------------------------------------------------
    \6\ In unregulated markets, for example, 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 market price.
---------------------------------------------------------------------------
    FCC officials told us that cable operators could use the non-cost 
factor element to make up any difference (positive or negative) between 
their changes in costs and rates. However, based on our findings, it 
appears that this may not have been clearly communicated to cable 
franchises. We found that only 10 franchises took this approach and 
instead, most franchises told us that they chose to change their 
estimate of one or more of the cost factors. In most cases, cable 
representatives told us that this meant reducing other cost factors 
because 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. \7\ In other words, most franchises--84 of the 
100 franchises we spoke with--did not provide a complete or accurate 
accounting of their costs changes for the year. The following are some 
examples of how the franchises we surveyed chose to equalize the cost 
factors with the rate change.
---------------------------------------------------------------------------
    \7\ Many franchises said that their profit margins for basic and 
expanded cable services decreased in 2002, but many said that those 
decreases were offset by increased profits from other services, such as 
cable Internet and digital cable. The 3 franchises that said that their 
rate increase exceeded their cost increases made the two balance by 
entering a positive number in non-cost-related factors.

   Fifteen franchises said they entered dollar values in the 
        factors until the entire rate increase was justified and did 
---------------------------------------------------------------------------
        not consider the remaining cost factors;

   Twenty franchises said they chose to adjust the dollar 
        estimates in existing and/or new programming in order to 
        balance costs and rates;

   Seven franchises said they chose to adjust the costs 
        included for investment in order to balance costs and rates;

   Twenty-seven franchises said they chose to adjust the amount 
        of their inflation estimate to ensure that costs and rates were 
        in balance;

   Twenty-six franchises said they chose to adjust the other 
        costs factor to ensure that costs and rate changes were in 
        balance; and

   Four franchises said they adjusted more than one of the cost 
        factors in order to balance costs and rates. For example, one 
        franchise chose to adjust all of the factors by a uniform 
        percentage in order to retain a constant ratio of cost 
        increases.

FCC's Process for Updating and Revising its Classification of the 
        Competitive Status of Cable Franchises May Lead to 
        Classifications That are No Longer Accurate
    The 1992 Cable Act established three conditions for a finding of 
effective competition, and a fourth was added in the 1996 Act. 
Specifically, a finding of effective competition in a franchise area 
requires that the FCC has found one of the following conditions to 
exist:

   Fewer than 30 percent of the households in the franchise 
        area subscribe to cable service (low-penetration test).

   At least two companies unaffiliated with each other offer 
        comparable video programming service (through a wire or 
        wireless--e.g., DBS--service) to 50 percent or more of the 
        households in the franchise area and at least 15 percent of the 
        households take service other than from the largest company 
        (competitive provider test).

   The franchising authority offers video programming service 
        to at least 50 percent of the households in the franchise area 
        (municipal test).

   A local telephone company or its affiliate (or any other 
        company using the facilities of such carrier or its affiliate) 
        offers video programming, by means other than direct broadcast 
        satellite, that is comparable to that offered by the cable 
        provider in the franchise area (LEC test). \8\

    \8\ For this test to be applicable, the telephone company and the 
cable provider must be unaffiliated.
---------------------------------------------------------------------------
        Franchising authorities have primary authority to regulate 
        basic cable rates. However, these rates may only be regulated 
        if the cable system is not facing effective competition. Under 
        the FCC rules, in the absence of a demonstration to the 
        contrary, cable systems are presumed not to face effective 
        competition. The cable operator bears the burden of 
        demonstrating that it is facing effective competition. \9\ Once 
        the presence of effective competition has been established, the 
        franchising authority is no longer authorized to regulate basic 
        cable rates. FCC does not independently update or revise an 
        effective competition finding once it is made. An effective 
        competition finding may be reversed if a franchising authority 
        petitions to be recertified to regulate basic rates by 
        demonstrating that effective competition no longer exists. 
        However, such petitions are rare.
---------------------------------------------------------------------------
    \9\ In some cases, franchise authorities do not wish to regulate 
rates and cable companies may choose not to file for a determination of 
effective competition, even if conditions warrant.
---------------------------------------------------------------------------
        Our preliminary review of the approximately 700 cable 
        franchises that responded to the FCC's 2002 cable rates survey 
        suggests that the agency's lack of any updates or reexamination 
        of the status of competition in franchise areas may lead to 
        some classifications of the competitive status of franchises 
        that do not reflect current conditions. For example:

   Forty-eight of the 86 franchises in the sample that the FCC 
        had classified as satisfying the low-penetration test for 
        effective competition actually reported current information to 
        the FCC on their operations that appeared, based on our 
        preliminary calculations, to indicate that current penetration 
        rates are greater than the 30 percent threshold. \10\ Ten cable 
        franchises appeared to have a penetration rate exceeding 70 
        percent--a full 40 percentage points above the legislated low-
        penetration threshold.

    \10\ We calculated the penetration rate by dividing the number of 
franchise subscribers by the number of households in the franchise 
area, as reported by the cable company to the FCC.
---------------------------------------------------------------------------
   Forty of the 262 franchises in the FCC survey that had been 
        classified as having effective competition by the FCC also 
        reported that the franchising authority was currently 
        regulating basic service rates. This would not be in accord 
        with the statutory requirement. It is possible that such an 
        inconsistency could occur because cable companies incorrectly 
        completed the FCC's survey in some fashion.

   Although the survey form asks the cable franchise whether 
        they face effective competition in the franchise area, those 
        responses are not always consistent with information maintained 
        by the FCC regarding whether there has been an official finding 
        of effective competition. When the FCC's information conflicts 
        with the survey response, the FCC overrides the answer provided 
        by the cable franchise. We found that the FCC staff overrode 
        the survey responses on effective competition for 24 percent of 
        all franchises in its 2002 survey.

        Also, we have searched for instances in which franchising 
        authorities sought to have a finding of effective competition 
        reversed. We found two instances in which the FCC reversed a 
        finding of effective competition. However, in one of these 
        instances involving ten franchises in Delaware, some of the 
        franchises appear to remain classified as having effective 
        competition even though the FCC reversed the position in 1999.

        In its 2002 Report on Cable Industry Prices, the FCC 
        acknowledges that the classification of the competitive status 
        of some franchises may not reflect current conditions. Some 
        franchises that face competition may not have filed a petition, 
        and therefore are not classified as facing effective 
        competition. Also, some franchises may have previously met the 
        criteria for a finding of effective competition, but because of 
        changing circumstances may not currently meet the criteria and 
        remain classified as facing effective competition.

Additional GAO Work on Cable Rate and Competition Issues
    We are conducting additional work on the issues discussed today and 
a more complete analysis will be included in our final report, which we 
plan to issue in October 2003. In addition to the topics discussed 
today, we will be providing a more comprehensive analysis of the 
factors underlying recent cable rate increases, the impact of 
competition on cable rates and service, and cable tiering issues.
    Mr. Chairman, this concludes my prepared remarks. We would be 
pleased to answer any questions you or other Members of the Committee 
may have.

    The Chairman. Thank you, Mr. Shear.
    What you are telling us in your report is that the FCC's 
methodology that they are presently employing will not give us 
a totally accurate depiction of the state of the cable rates at 
this time. Is that basically what you are saying?
    Mr. Shear. That is basically what we are saying. And what 
we are focusing on is really conducting economic analysis of 
what determines cable rates and reasons for the increases. So 
we are focusing on that----
    The Chairman. Can you provide recommendations to the FCC to 
make their methodology accurate?
    Mr. Shear. We are very glad to say that we have a very 
constructive relationship and will be working with FCC with 
certain ideas. At this point, we are focusing on things such as 
providing better guidance examples to the cable companies to 
fill out the information better. But we are going to have a 
dialogue with FCC as far as their options for improving the 
survey and the costs that could be involved to FCC of improving 
the survey.
    The Chairman. From the information you do have, whether the 
increase is 6 percent or 17 percent lower, the rates are where 
competition exists, does not the status suggest that consumers 
are being gouged on cable rates where there is ineffective 
competition? Or is it too early to tell?
    Mr. Shear. I would not want to characterize--I will say 
this quite heartily, that--as far as what words are ascribed to 
it. We certainly stand behind our estimate, based on previous 
work, that we think the differential between competitive and 
non-competitive markets, the way we define it, which is an 
economically based definition, we think that 17 percent is a 
more realistic number, in terms of what wireline competition 
can bring to a particular marketplace.
    The Chairman. So do the annual rate increases that most 
Americans face suggest a lack of effective competition to you, 
in the industry as a whole?
    Mr. Shear. The differential suggests a lack of competition, 
that competition does have a major effect on rates. Effective 
competition is not evident in many markets. As far as the rate 
increases, we are still, as we go forward, we are going to be 
addressing reasons for the rate increases in both competitive 
and noncompetitive markets.
    Ms. Abramowitz. And I would just like----
    The Chairman. From the review you have conducted so far, 
what factors do you believe are contributing the most to the 
yearly increases in cable rates?
    Mr. Shear. I mean, I think programming costs always come 
up, and it certainly shows up in the survey as a major cost. 
Our question is what the relative magnitude is. And as we go 
forward with this work, we are collecting a lot of information 
through SEC disclosures, analyst reports, from program 
providers, from cable operators to try to get a better handle 
on, more specifically, what types of cost increases are 
underlying the rate increases.
    The Chairman. In your report last year, so far DBS had not 
posed an effective--in your views, had not posed effective 
competition to cable. Do you think over time that will happen?
    Mr. Shear. I will ask Amy to answer that question. She was 
the assistant director on that assignment.
    Ms. Abramowitz. I think you are right, that we did not find 
a pricing effect of DBS, but we did find other important 
effects. In particular, DBS made much more headway, in terms of 
their market share, where they were rolling out local to local, 
and that was a very strong finding. And we also found that, 
where DBS had rolled out local to local, that the quality, in 
terms of the number of channels of the cable providers, was 
higher.
    Additionally, in our preliminary work so far, we have found 
some discussions of changes in what cable companies are doing 
on price; in particular, how they are structuring their tiering 
to respond to some of the low-priced DBS offerings. So I think 
as DBS becomes more penetrated, it is certainly possible that 
there will become a stronger pricing effect in addition to the 
quality effect that it has.
    The Chairman. Mr. Shear, given your surveys and looking at 
this entire issue so far, and I understand it is preliminary--
--
    Mr. Shear. Yes.
    The Chairman.--we will receive a final report in October--
what do you think of this a la carte idea? We all know that 
people now have to purchase channels that they will never 
watch. A lot of senior citizens in Sun City do not watch ESPN, 
and yet they pay for it. There are a lot of programs that are 
just obviously thrown in that people are required to purchase 
whether they want to or not. What do you think, so far, of this 
whole--do you have any preliminary ideas about this a la carte 
idea?
    Mr. Shear. We are exploring the a la carte idea, and we are 
also exploring the idea of what you could call ``mini tiers.'' 
And we are doing it in a context that we are mindful of some of 
the economic and technical limitations that could be involved 
in going all the way to an a la carte basis. But, in terms of 
the data that we are collecting and analyzing, we are trying to 
see how feasible, even from a statutory point of view, but how 
feasible, from a statutory, from a economic, from a technical 
point of view, it would be to move in the direction of, if not 
a la carte, toward more mini tiers.
    The Chairman. Many tiered rather than straight a la carte.
    Mr. Shear. Right.
    The Chairman. Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    The Chairman. We have another panel. I would tell my 
colleagues----
    Senator Wyden. I just have a couple of quick questions.
    The Chairman. I am not asking you to restrain, but I would 
appreciate if we did not run too much over time, because we 
have another panel. But we will have a second round, if 
necessary, with this witness.
    Senator Wyden. Thank you, Mr. Chairman. Just a couple of 
quick questions, if I might.
    When I looked at the FCC's report on cable prices in 2001, 
I saw two disturbing observations. The Federal Communications 
Commission found that cable operators owning two or more cable 
systems had rates averaging 23 percent higher than single-
system operations, and it found that cable operators with a 
large number of subscribers tended to charge more than their 
smaller counterparts. Has GAO found any evidence which would 
dispute the proposition that the larger the cable operator, the 
higher the rates?
    Mr. Shear. Based on our work to date on this assignment, we 
have not examined that issue, as far as size of the cable 
operator, but it is certainly something that we can and will 
consider as we go forward.
    Senator Wyden. Have you found any evidence that would 
dispute it? Because it seems to me the Federal Communications 
Commission already raised the serious prospect that that is the 
case, and I would like to know if you have found any evidence 
to the contrary.
    Ms. Abramowitz. I think, actually, that that finding is 
fairly similar to one that we found in our report 6 months ago 
that did an econometric model, although the magnitude I do not 
believe was----
    Senator Wyden. All right, one last question, if I might, 
because I think the evidence is pretty clear on that, that the 
larger the operator, the higher the rates. And I would like to 
have you continue to explore that proposition.
    The other question I had is, Have you looked at anything 
that would relate to where cable rates go after a major merger? 
Because this, again, based on the evidence that I see, is one 
of the reasons we are seeing rates spike up.
    Either of you.
    Ms. Abramowitz. We have not done----
    Mr. Shear. Yeah, I will----
    Ms. Abramowitz.--any work on that specifically. But going 
forward, I mean, I think that would be an appropriate thing to 
look at. And since there has been a recent merger, it certainly 
would open the opportunity to do our model again in a year or 
two.
    Senator Wyden. OK.
    Thank you, Mr. Chairman.
    The Chairman. Thank you. I do not mean to rush the Members. 
We will take all the time necessary. I did want to mention we 
have another panel, but we will take whatever time is 
necessary.
    Senator Stevens?
    Senator Stevens. Thank you. A couple of questions.
    I did not hear. What timeframe did you review?
    Mr. Shear. We reviewed survey responses that came to FCC in 
2002, so these are the survey responses that FCC will be using 
in their cable rate report that should be out shortly.
    Senator Stevens. I asked the question because was not that 
a pretty poor year for business, in general? And were not 
revenues down during that year?
    Mr. Shear. To us, at this stage, we have to take into 
account, as we go forward, basically what the economic 
environment is. At this stage, what we are reporting on is 
basically how accurate, how reliable are the data provided by 
the survey to provide an analysis of cable rates and reasons 
for their increase.
    Senator Stevens. And did you review programming costs as 
well as cable rates?
    Mr. Shear. In terms of programming costs, the stage we are 
at now is we have just begun to kind of meet with programmers 
to gather information about programming costs, and this will be 
in our work that will be included in our October report.
    Senator Stevens. Ms. Abramowitz, I did not quite understand 
your comment about the impact of the direct-broadcasting 
concept. I assume you are talking about Murdoch's entry in the 
market?
    Ms. Abramowitz. No, I am just talking generally about the 
impact of the presence of DBS on cable rates. And in the study 
that we did 6 months ago----
    Senator Stevens. Could you pull that mike down a little 
bit?
    Ms. Abramowitz. Oh, I am sorry.
    Senator Stevens. Just from the--that is it.
    Ms. Abramowitz. The study that we did 6 months ago, we were 
asked to look at the competitive dynamic between DBS and cable 
rates, what impact the presence of DBS in the market, 
particularly if local to local was offered, had on cable rates. 
And our model was largely designed to focus on that. And what 
we found was that while the presence of DBS, and, in 
particular, the provision of local into local, had a very 
profound impact on the penetration of DBS, we did not find that 
cable rates were lower where local to local was present.
    Senator Stevens. Did you examine at all, the uniformity of 
costs? For instance, did you differentiate between those who 
pay Universal Service fees and those who do not?
    Ms. Abramowitz. No, the model was not designed to look at 
that.
    Senator Stevens. Thank you very much.
    The Chairman. Senator Lautenberg?
    Senator Lautenberg. I wanted to review one thing with Mr. 
Shear, and that is the 1996--Congress decided to sunset the FCC 
rate regulation on the upper-tier programming on March 31, 
1999. This was based on a belief that cable operators would 
face competition from satellite and television providers; 
others, wireless cable telephone companies. Satellites emerged, 
just pertinent to the discussion you were just having, as the 
only significant competitor to cable, partly due to the 
Satellite Home Viewer Act of 1988 and the Improvement Act of 
1999.
    Do you see a need for congressional action to increase 
competition between cable and satellite?
    Mr. Shear. I think your question is very closely related to 
the Chairman's, as far as what's the effect of satellite on 
cable rates. So we are going to be--as we go forward, we are 
going to be further analyzing the issues of what determines 
cable rates, cable rate increases. And we certainly expect that 
our October report will provide some input into decisions 
having to do with oversight of the cable industry.
    Senator Lautenberg. Yes, do you recommend any other options 
for keener competition and better control of the rates as a 
result of that competition?
    Mr. Shear. We do not have any recommendations at this time. 
I will say that as far as other work on cable, on the cable 
industry, that we are doing for another committee, that we are 
looking at questions of the role of over-builders, in terms of 
the competitive landscape.
    Senator Lautenberg. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Burns?
    Senator Burns. I just was interested in the line of 
questioning by the Chairman, and I think most of my questions 
were like that. I have just got a couple of questions here.
    Did you survey advertising sales on the cable?
    Ms. Abramowitz. We are collecting information on 
advertising. And, in fact, we also met with an advertising firm 
to better understand how advertising plays into cable revenues. 
And we are, in our data collection, asking for company-wide 
advertising revenues for 5 years, to look at that.
    Senator Burns. And while you are doing that, I would 
suggest that you look into what channels on a cable system are 
most requested----
    Ms. Abramowitz. Yes.
    Senator Burns.--and also would derive income from that. I 
know there is a lot of--I know whenever we buy, or I used to 
buy, cable, we had a request of where we would like to be 
placed, on what channel and whatever. Now, some cable systems 
do not give you an option to do that. They just say, ``Well, 
you have just got to take us. You know, we will place the 
advertising.''
    How about, did you survey the capital investment that was 
made by cable companies to upgrade their systems, to broaden 
their capacity, and to make way for broadband and Internet 
services? Also the telephone services that some of them have 
gone into. How about--into capital investment, especially to 
facilitate broadband two-way interconnect?
    Ms. Abramowitz. Well, in terms of FCC's data, there is 
information that the cable companies are asked to submit about 
any infrastructure investment related to video. And so that 
information is in their survey. We are giving all of the major 
cable companies a template of financial information that we are 
asking them to fill out going back about 5 years, and 
infrastructure investments is one of the things that we are 
asking and trying to gather.
    Senator Burns. In my State of Montana, in which we are 
rural, and we have the highest penetration of satellite 
television of just about any state in the world--40 percent of 
my state is hooked to the satellites. Now, mainly that is 
necessity, because we have got a lot of dirt between 
lightbulbs, and you are not going to get a cable by every 
house. But, also, we have--even in the areas where cable does 
go by the home, we still have a high, high penetration by the 
satellite people. And so I think most of mine--and we will hear 
from some witnesses in a little bit, and I have some questions 
for them that will maybe bring this more to light--but I would 
suggest that you study the investment, what they have done. 
Because we know 2000 was not a great revenue year for the 
entire telecommunications industry. Wall Street began to look 
at all companies, from a standpoint of investment, was not a 
very good investment. So I would like to know how these 
companies made their investment. And I have been told it is 
huge.
    Also, on the point of Senator Wyden, of the larger--the 
larger the cable system, the higher the rates--there also has 
to be some comparison of services, too. And some of the smaller 
companies do not offer all the services.
    On the a la carte situation, did you survey any cable 
company operating anywhere in this country that offered a lower 
rate for a sort of a Volkswagen approach to cable? In other 
words, to receive local to local news or programming and maybe 
PBS and some bare-bones offerings in any of the cable systems 
for those folks who did not care whether they watched it, 
kicked it, hit it, or ``throwed'' it.
    Mr. Shear. I think we have observed that, normal 
distinctions between basic and expanded service, but as far 
as--I do not think we have located a cable company yet that 
would break down, I think, in the way that you are suggesting.
    Senator Burns. Thank you very much.
    The Chairman. Senator Smith?
    Senator Smith. Thank you, Mr. Chairman.
    I wonder if during your study, did you include the 
investments that cable made on advanced services, like 
broadband, in coming up with your report?
    Mr. Shear. We have not to date. As Amy just pointed out, we 
are collecting information. We have a template we are providing 
to the cable companies that will include certain questions 
about their infrastructure investments.
    Senator Smith. I would be very interested to know whether 
cable rates have gone up as a result of these broadband 
investments, because I think that that is an important 
calculation and certainly something I hope you will answer for 
us.
    Mr. Shear. Yes.
    Senator Smith. Thank you, Mr. Chairman.
    The Chairman. Senator Nelson?
    Senator Nelson. Mr. Shear, what questions are you asking on 
your survey on programming?
    Mr. Shear. I will refer to Amy on that.
    Ms. Abramowitz. We are meeting with about 15 to 20 cable 
networks, and we have a template of questions that we are 
asking about the underlying costs that they face in producing 
their programming. And often they will discuss that pretty 
extensively and what kinds of increases they are charging to 
the cable companies. And so we are basically trying to have a 
discussion so that we can better understand the nature of the 
industry. And we made sure to pick programmers that have an 
array of types of situations, so we have some that are news 
producers, some that are sports producers, and so forth, so we 
try to get as much a flavor as we can.
    Senator Nelson. So from the answers to those questions, you 
feel like you are going to have your arms around the question 
of programming cost.
    Ms. Abramowitz. That, and we also purchase data from an 
industry vendor called Kagan, which is widely used in the 
industry, and we are actually asking the programmers that we 
meet with whether the data reflects pretty accurately their 
true prices. And so we are trying to cross check that.
    Senator Nelson. Do you have any of those answers, thus far?
    Ms. Abramowitz. We're just in the midst of analyzing that, 
and it would be premature at this point.
    Senator Nelson. Thank you.
    The Chairman. Senator Allen?

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

    Senator Allen. Thank you, Mr. Chairman.
    The key things that people are looking at here in this 
Committee in this important hearing on cable and competition 
and so forth is the quality and the costs and how it is all 
attributed. Senator Burns and Senator Smith have addressed 
this, and this is just some common sense, and maybe we will get 
some basic facts for you as we carry forward in this 
deliberation.
    Clearly, there is a lot of investment, and maybe you do not 
have the amount, but there are just tens of billions of 
dollars. I have a figure of $70 billion of investment. So, 
clearly, when you have an investment, you are going to first, 
as a business, have to pay off the debt. They did not pay cash 
for that, so that is going to be a cost and will be reflected 
in the cable rates. To the extent, as Senator Burns and Senator 
Smith and I share their interests in determining how much of 
the cost of cable, which is, on average, supposedly $40 a 
month--if we can all stipulate it is about $40 a month--how 
much of that is attributed to some investments, whether it is 
broadband, which many of us are in favor of--some of it is 
telephony and so forth.
    Insofar as actual programming costs, as best I can 
determine, programming cost is about $11 a month of that $40. 
Can you confirm, deny or----
    Mr. Shear. Well, I think the FCC survey indicates a higher 
number. Again, we are looking into programming costs.
    Senator Allen. What is the programming cost, preliminarily, 
if you have that?
    Ms. Abramowitz. I think the number that you gave, in terms 
of what underlies the $40 or so, is not dissimilar to what we 
are hearing, but we are still collecting that information.
    Senator Allen. Well, if the programming costs, whether it 
is $11 or $12, have you all determined that--let us assume it 
is $11, whatever that amount is--that also the cable companies 
are able to use ESPN, as I understand, which is the number-one 
viewed cable station, and most people got cable because of 
sports, motion pictures, in wartime they would like to watch 
the news. CNN was the precursor of many others. Regardless, are 
the cable operators able to offset some of that cost by local 
ad revenue? Are you familiar with that?
    Ms. Abramowitz. Oh, yes.
    Mr. Shear. Yes. Yes, they can.
    Senator Allen. Well, I think what would be helpful for us 
is to get all the components straight. When we were trying to 
determine what is a fair cost, although I am not who 
necessarily likes to be telling some in the private sector what 
is a fair cost or a fair rate of return, but the cable 
companies are granted monopolies, at least in local areas; 
however, there is competition. Maybe it is a monopoly on cable; 
however, there is satellite, and there are other options. And I 
think the more competition we get, the better quality will be 
and the better process you will find.
    Ms. Shear. Senator Allen, this is really getting to the 
heart of what we are trying to do in producing a report for 
this Committee, which is really trying to get a handle on the 
various cost factors that underlie cable rates.
    Senator Allen. Well, I think that over the years, just from 
my impression, having lived in a place like Montana, I suppose, 
not quite as rural, but, nevertheless, they would not even 
deliver the newspaper to our house, so I thought it was great 
once the--much less get cable or satellites or any of the rest 
of it.
    I actually think that the programming has been increased; 
it is better. The costs have gone up, but I think it could be 
helpful for us to know what those actual programming costs are 
and what the other business ventures are or the cost of, 
obviously, financing that debt. And I would look forward to 
seeing your more complete report.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Dorgan?

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much.
    I understand this hearing is more about cable systems, but 
I would like to just ask if there is a way to take a bigger 
bite at this issue. My colleague, Senator Allen, talked about 
the advantage of competition, and I certainly agree with that. 
I think choice and price in a competitive environment is what 
benefits the consumers. And I think the evidence is all around 
us that in the range of media industries, whether it is 
television, radio, newspapers, cable, we are seeing galloping 
concentration. I mean, this is like the development of a 
monopoly board that--and it is happening very, very rapidly and 
in a very serious way. And it will constrict and restrict 
competition, in my judgment.
    And the question is, is anyone, the GAO or others, taking a 
more global look at this issue? And I ask the question, because 
the FCC is apparently dressed, ready and poised, to begin 
marching backward once again, in June, loosening the ownership 
limits, and a majority of the Members of this Committee have 
written the FCC asking that they come up and show us what they 
are planning to do and give us an opportunity to reflect on it.
    But are you taking a look at a global view of this issue of 
competition in a broader range of media industries?
    Mr. Shear. We are focusing----
    Senator Dorgan. Or can you?
    Mr. Shear.--we are focusing on cable rates in the cable 
industry, so we hope that it provides useful input in dealing 
with media-ownership issues. But we are not addressing, 
ourselves, media-ownership issues.
    Senator Dorgan. Well, your work is helpful. And, Mr. 
Chairman, it might be useful, in addition to that work, to have 
the charge expanded at some point to a larger, more global look 
at the media industries and the galloping concentration that is 
occurring, because it does inevitably pinch the juices of 
competition, and I think everyone in this Committee believes 
that competition is good, competition is what gives consumers 
more choices at better prices.
    The Chairman. Thank you, Senator Dorgan. As you know, we 
have been trying, to some degree, to look at different aspects 
of this because of the enormity of the problem, but I agree. 
And it seems to vary from media to media. We had a very 
interesting hearing on Clear Channel and radio concentration 
some time ago, as you know. North Dakota played a prominent 
role in the discussions.
    Finally, Mr. Shear and Ms. Abramowitz, Mr. Hindery is one 
of the witnesses in the next panel who has been involved in 
literally every aspect of this industry, and in his testimony 
he says, ``We do know that today only a handful of cable 
companies control access to more than 90 percent of the 
Nation's television households, that today more than half the 
channels available on the dial are owned by a company 
affiliated with the cable industry and that everyday 
independent nonaffiliated programmers, small and big alike, are 
discriminated against.'' That is a pretty strong statement.
    Do you have any agreement or disagreement, or is it too 
early to tell, with that statement? Either Mr. Shear and/or Ms. 
Abramowitz.
    Mr. Shear. I would say that, based on our work, it is too 
early to tell, but it certainly raises a lot of the questions 
that we are posing as we go forward with this work.
    The Chairman. Ms. Abramowitz?
    Ms. Abramowitz. Yes, I mean, I would agree that the issues 
that you mentioned that are in his testimony are issues that 
are coming up in all of the conversations that we are having, 
and I think that there will be some discussion of that in our 
final report.
    The Chairman. Thank you. I thank the witnesses, and we look 
forward to seeing you when you have your final report. It will 
be some very interesting discussions. I thank you.
    Our next panel is Mr. James Robbins, the president and CEO 
of Cox Communications; Mr. Charles Dolan, chairman of 
Cablevision Systems Corporation; Mr. Gene Kimmelman, director 
of the Consumers Union; Mr. James Gleason, president and COO of 
CableDirect; and Mr. Leo Hindery, chairman and CEO of YES 
Network. Please come forward.
    And as the panel comes forward, I would like to, because 
they are not here on the panel today, ESPN and ABC are not 
here, so I would like to read a statement made by Mr. George 
Bodenheimer, who is the president of ESPN and ABC Sports. And I 
quote his press release, ``Ripping ESPN and other population 
networks out of basic cable and charging more for them is not 
pro-consumer. This would produce a firestorm of protests from 
cable subscribers. With cable at $40 and the net cost of ESPN 
about $1, there is no basis to take that step.''
    This statement will be made part of the record.
    [The prepared statement of Mr. Bodenheimer follows:]

   Prepared Statement of George Bodenheimer, President, ESPN and ABC 
                                 Sports

     ``Ripping ESPN and other popular networks out of basic cable and 
charging more for them is not pro consumer. This would produce a 
firestorm of protest from cable subscribers. With cable at $40 and the 
net cost of ESPN at about $1, there is no basis to take that step.''

ESPN Reaffirms Value to Cable
    ESPN responded emphatically to the cable industry's 
misrepresentation of the network's impact on retail rates, the 
understatement of ESPN's value, as well as certain cable operators' 
calls for government regulation of the industry in today's Senate 
Commerce Committee hearing and in the media.
    ESPN and ABC Sports President George Bodenheimer said, ``Our 
affiliates negotiated and freely signed agreements with our current 
rate provisions, because they recognize and receive tremendous value in 
exchange. In calling for regulation, they are looking for the 
government to give them leverage in private contract negotiations.
    Operators continually fail to publicly acknowledge the direct and 
indirect revenue they generate from ESPN's industry-leading local ad 
sales. This local ad sales revenue offsets a significant portion of the 
wholesale cost. As a result, the net wholesale cost for ESPN is about 
$1.00 a sub per month.
    Cable television as packaged today at $40 a month provides the 
greatest value in today's entertainment marketplace, and ESPN is a 
major contributor to cable's success.''

Reality of Cable Economics
    Bodenheimer continued, ``The reality of cable economics is that 
programming costs are not the most significant factor in driving retail 
rates. Most cable operators have a very healthy business and a positive 
economic outlook. Cable retail rate increases go well beyond covering 
the incremental cost of programming each year. Retail rate adjustments 
are also covering debt service, paying for acquisitions and recouping 
infrastructure investment.
    According to industry reports, the total cost of license fees paid 
to programmers for expanded basic cable carriage is approximately 
$11.00 per sub per month while the average cost of expanded basic cable 
service to the consumer is about $40. By paying only about 25 percent 
of its retail price for programming, cable operators' cash flow margins 
for expanded basic service are on average between 30 and 40 percent. By 
focusing only on the cost side and ignoring revenue directly and 
indirectly associated with ESPN services, they are trying to use 
programmers in general and ESPN in particular as the scapegoats to 
justify their retail price increases and preserve their high margins.''
    Bodenheimer said, ``Operators have invested $70 billion over the 
past five to six years in new technologies, which are generating high-
margin revenue from digital cable, pay packages, video on demand, 
broadband and high-speed modem sales. The ESPN brand and content is a 
major driver of these new revenue streams.''

Operators' Ownership of Networks and Carriage Treatment
    Bodenheimer added, ``Also, many of the major cable operators who 
criticize sports programming costs and ESPN actually have interests in 
regional sports networks, national networks carrying sports and sports 
teams. Most regional sports networks owned by the operators are on 
basic cable and sold at comparable wholesale prices. These competing 
networks all stand to gain from potential limitations imposed on 
ESPN.''

A La Carte Not Pro Consumer
    ``Ripping ESPN and other popular networks out of basic cable and 
charging more for them is not pro consumer,'' said Bodenheimer. ``This 
would produce a firestorm of protest from cable subscribers. With cable 
at $40 and the net cost of ESPN at about $1, there is no basis to take 
that step.
    Also, there are very significant technical and economic realities 
associated with a la carte which would cost consumers. Subscribers who 
don't have set-top boxes (more than half of the cable universe) would 
be forced to pay an additional monthly fee to receive ESPN and other 
popular services. The loss of ad sales revenue would be substantial, 
and the resulting loss would be borne by cable subscribers. The 
consumer would ultimately pay more for a tier, and the price of the 
service for the remaining bundle of expanded basic services would not 
come down materially, if at all.''
    ESPN televises some of basic cable's most highly rated programming. 
ESPN carried 18 of the top 20 most-viewed programs on ad-supported 
cable last year. Ratings have increased over the past year. In 2002 and 
2003 ESPN has made significant programming additions including the NBA, 
Wimbledon, the French Open, the Women's NCAA Basketball Tournament and 
more.

Fact Sheet on Affiliate Rates
    ESPN's affiliation agreements were signed freely by operators.

   ESPN's cost reflects the enormous value it delivers to 
        operators.

    Programming is only one portion of the costs that affiliates 
reflect in retail rates.

   Operators' public focus on ESPN's wholesale cost alone 
        ignores completely the substantial revenue ESPN and other 
        networks generate through local ad sales and launch and 
        marketing support, which significantly offsets its license fee.

   It is estimated that ESPN networks alone will generate 
        almost three-quarters of a billion dollars in local ad sales 
        revenue in 2003.

   Operators pay about $11/sub/month for basic cable 
        programming of which over $4/sub/month is recouped through 
        local ad sales alone.

   Cable industry has spent $70 billion upgrading its 
        infrastructure over last 5-6 years (NCTA).

   By selling the new products and services made possible by 
        these upgrades, operator revenues from these services are 
        increasing dramatically.

   Content, like ESPN, is driving much of this revenue.

   What's the problem here?

   The monthly wholesale net cost of ESPN is about $1.00/sub/
        month.

    What is all this public posturing by cable operators about?

   Preserving their 30-40 percent cash flow margins

   Paying for acquisitions, debt service and infrastructure 
        improvements through retail price increases and ``blaming'' 
        programmers

   If their ``solution''--tiering/a la carte--worked, they'd 
        use it with their owned regional sports networks; history and 
        economics show they don't

    Consumers are being misled

   Multiple System Operators (MSOs), like Cox, have a positive 
        economic outlook and growing new businesses.

   Moving ESPN to a tier would ultimately cost consumers more 
        and they would get less; the price of the remaining bundle of 
        services would not come down.

   A huge disservice to the 86 percent of Americans who 
        consider themselves sports fans.

   Sports is a key driver of cable.

   ESPN delivers hundreds of teams, colleges, 65 men's/women's 
        sports and more.

    Cable is a great value.

   As packaged today at approximately $40 a month, cable 
        provides the greatest entertainment value today.

   Operators should focus on the value rather than the 
        wholesale cost of cable.

    The Chairman. Welcome. We will begin with you, Mr. Robbins. 
Thank you for coming today.

     STATEMENT OF JAMES O. ROBBINS, PRESIDENT AND CEO, COX 
                         COMMUNICATIONS

    Mr. Robbins. Mr. Chairman, good morning. I am sorry, I am 
taking a minute to get settled in here. You have got a lot of 
witnesses today, and I will try and be very quick.
    Distinguished Members of the Commerce Committee, Mr. 
Chairman, thank you for the opportunity to testify about cable 
rates today. I would like to address two related issues of 
great concern. First, rising programming costs and the consumer 
benefits of tiering of expensive channels; and, second, network 
broadcasters' abuse of retransmission consent rules and the 
harm for consumers of vertical media consolidation.
    First, programming costs are driving up cable prices. Any 
business that retails a wholesale product is subject to market 
forces. Gas prices go up at the pump when the cost of a barrel 
of oil rises. Likewise, cable prices increase when programming 
costs escalate. It would be shortsighted to regulate gas prices 
at the pump without addressing the influences that drive them. 
Likewise, it is perilous to regulate cable rates without 
examining inflated programming prices and the contractual 
distribution obligations imposed by programmers that are 
driving up cable prices for everyone.
    The Federal Government has recognized the right of cable 
operators to pass through the entire cost of programming to its 
customers. In 1992, our expanded basic cable programming costs 
were 12 percent of basic revenue. Today, video programming is 
our single-largest expense, behind salaries and labor, 
comprising about 30 percent of our total costs.
    Emboldened by operators' lawful ability to pass programming 
costs through to consumers, some programmers are seeking 
outrageous fees for their networks. Last year, we paid 12 
percent more for programming. Our total programming expenses 
topped $1 billion. But with two robust satellite competitors 
adding a combined 40,000 new customers a week, no cable 
operator can afford to hike prices by double digits annually.
    Last year, Cox's average cable price increase was 5.3 
percent, less than the 6.4 percent national average. Meanwhile, 
our video margins are collapsing. Over the last 5 years, Cox's 
average programming cost per subscriber has grown twice as fast 
as the average revenue per subscriber.
    Since 1996, Cox has invested $12 billion in its network to 
provide advanced video, Internet, and telephone services. This 
network was built with private risk capital, not customer 
subsidies. Today, Internet and telephone services are fueling 
our growth. Had we lacked the foresight to invest in our 
platform and operations to deploy new products, we would be a 
dying business today.
    Sports programming prices, in particular, are skyrocketing. 
ESPN, last week, announced a 20 percent annual rate hike, 
another 20 percent increase. Our research indicates that less 
than a quarter of our customers are avid TV sports viewers, 
but, unfortunately, all of our customers are forced to foot the 
bill for pricey sports programming, since Cox is contractually 
obligated by ESPN to sell its network on our expanded basic-
service lineup.
    Tiering represents an intriguing solution to improve 
consumer choice and restore an acceptable price-value 
proposition for the most expensive networks. I propose that 
networks that charge Cox a wholesale price of more than $1 per 
subscriber per month be placed on an optional-service tier that 
consumers choose whether or not to buy. If operators had the 
flexibility to sell these networks, sports channels or others, 
on an optional tier, consumers would gain a significant 
opportunity to manage their cable expenditures. Likewise, 
programmers would be motivated to keep their prices reasonable 
to remain on expanded basic cable lineups.
    Second, network broadcasters' retransmission consent abuses 
are harming cable consumers. Congress established the 
retransmission consent process to protect and benefit local 
broadcasters local programming presence. Today, as media 
consolidation proliferates, networks owning broadcast stations 
and cable channels manipulate negotiations out of the local 
market to leverage nationwide carriage of new, unproven cable 
networks in exchange for retransmission consent in a few 
markets.
    As an example, in early 2000, Cox experienced an ugly 
battle with News Corp, which demanded nationwide digital 
carriage of two new cable networks in exchange for 
retransmission consent for its TV stations in four Cox markets, 
including WTTG, the Washington, D.C., FOX station. Local 
customers lost by going without FOX on their cable lineups for 
6 days during college bowl season and NFL playoffs before FOX 
provided, again, its signal to Cox. And Cox customers 
nationwide were forced to pay more for new, unproven cable 
channels.
    Clearly, unreasonable network demands cost consumers dearly 
in the form of inflated cable bills and diminished capacity for 
local cable operations and local broadcasters to tailor their 
programming lineups to suit local communities. Additionally, 
forced carriage of unproven cable channels consume scarce 
network bandwidth that could impede the availability of such 
national services as high-definition television.
    Cox Communications provides significant value, such as 
favorable channel position and improved reach, to broadcasters. 
Policymakers have expressed emphatically that lifeline basic 
cable prices should not increase faster than the rate of 
inflation. Thus, Cox must oppose excessive retransmission 
consent demands for carriage of free, over-the-air, television 
signals.
    As I have noted, Mr. Chairman, massive integrated media 
companies owning broadcast stations and cable networks already 
wield tremendous leverage in programming and retransmission 
consent negotiations at consumers' expense. Relaxing the 35 
percent television ownership cap will further harm by 
bolstering the leverage of big media conglomerates.
    Additionally, the vertical-ownership threat posed by News 
Corp's controlling stake in DirecTV could be fraught with peril 
for consumers if News Corp is allowed to flex its programming 
and distribution muscle to dramatically inflate its programming 
prices while giving preferential treatment to its own networks.
    Finally, I urge all of you to carefully consider these 
important issues and to thoroughly examine and address the 
myriad powerful forces that influence cable prices before 
concluding how best to keep cable services accessible and 
affordable for American consumers.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Robbins follows:]

    Prepared Statement of James O. Robbins, President and CEO, Cox 
                             Communications

    Mr. Chairman and distinguished Members of the Commerce Committee, 
thank you for the opportunity to testify about cable rates. On behalf 
of my customers and your constituents, I know you share my concern 
about this important subject. Today, I'd like to address three related 
issues of great concern: first, rising programming costs and the 
consumer benefits of tiering expensive channels; second, network 
broadcasters' abuse of Retransmission Consent rules; and third, 
vertical integration, coupled with horizontal media consolidation, and 
its harm for consumers.
First, Soaring Programming Costs are Driving Up Cable Prices.
    Providing high value, affordable services to customers is hugely 
important to me. Cox Communications is proud to be fulfilling the 
promise of the 1996 Telecommunications Act by delivering the 
convenience and flexibility of a full-service array of video, high-
speed Internet and telephone services from one provider via a single 
network.
    Unfortunately, however, cable prices are rising, and soaring 
programming costs are largely to blame. Any business that retails a 
wholesale product is subject to market forces. Gas prices go up at the 
pump when the cost of a barrel of oil rises. Likewise, cable prices 
increase when programming costs escalate. It would be shortsighted to 
regulate gas prices at the pump without addressing the influences that 
drive them. Likewise, it's perilous to regulate cable prices without a 
thorough examination of the programming side of the business, and the 
supply chain that drives our rates.
    Sports programming prices, in particular, are skyrocketing. Today, 
some sports networks demand 20 percent annual rate hikes. When A-Rod 
signs a baseball contract for $25 million a year, the team and league 
hike their TV broadcast rights fees. Networks bid aggressively to 
obtain these rights, and seek to recoup their investment through hefty 
programming fees charged to cable distributors. I believe that the only 
people making money in the sports business are sports programmers, like 
ESPN, and ball players--at the expense of American consumers.
    The Federal Government has recognized the right of cable operators 
to pass through the entire cost of programming to its customers. In 
1992, our expanded basic cable programming costs were 12 percent of 
basic revenue. Today, video programming is our single largest expense, 
aside from salaries and labor, comprising about 30 percent of total 
costs.
    Emboldened by the operators' lawful ability to pass programming 
costs through to consumers, some programmers are seeking outrageous 
fees for carriage of their networks. Last year alone, Cox's programming 
costs were up 12 percent--exceeding $1 billion.
    But with two robust satellite competitors adding a combined 40,000 
new customers a week, no cable provider can afford to hike prices by 
double digits year over year. Last year, Cox's average cable price 
increase was 5.3 percent, less than the 6.4 percent national average.
    Meanwhile, our video margins are collapsing. Over the last 5 years 
Cox's average programming cost per subscriber has grown twice as much 
as average revenue per subscriber.
    Since 1996, Cox has invested $12 billion in its network to provide 
advanced video, Internet and telephone services. This network was built 
with private risk capital--not customer subsidies. Today, Internet and 
telephone services are fueling our growth. Had we lacked the foresight 
to invest in our platform and operations to deploy new products, we'd 
be a dying business today.
    Cable providers are contractually obligated to sell most 
programming in broad service packages, which include a wide variety of 
programming. Our research shows that less than 20 percent of our 
customers are avid TV sports viewers. But sports programming is 
disproportionately driving up cable prices for everyone.
    Tiering presents an intriguing solution to restore an acceptable 
price value proposition for the most expensive networks--perhaps those 
that charge Cox a wholesale price of more than $1 per subscriber. If 
operators had the flexibility to sell these networks--sports channels 
or others--on a separate tier, consumers would gain an opportunity to 
manage their cable expenditures by choosing whether or not to buy 
certain programming. Likewise, programmers would be motivated to keep 
their prices reasonable to remain on expanded basic cable line-ups.
Second, Network Broadcasters' Retransmission Consent Abuses are 
        Harming Cable Consumers.
    Congress established the Retransmission Consent process to protect 
and benefit local broadcasters' local programming presence. Today, as 
media consolidation proliferates, networks owning broadcast stations 
and cable channels manipulate Retransmission Consent negotiations out 
of the local market to leverage nationwide carriage of new, unproven 
cable networks in exchange for Retransmission Consent in a few markets.
    In early 2000, Cox experienced a nasty public Retransmission 
Consent battle with NewsCorp, which demanded nationwide digital 
carriage of Fox Movie Channel and Fox Sports World, in exchange for 
Retransmission Consent for its television stations in four Cox markets, 
including WTTG, the Washington, D.C., Fox station. Not only did our 
customers lose by going without Fox on their cable lineups for six days 
during college bowl season and the NFL play-offs before Fox provided 
its signal to Cox, but Cox customers nationwide were forced to pay more 
for new, untested cable channels.
    Clearly, unreasonable network demands cost consumers dearly in the 
form of inflated cable bills and diminished capacity for local cable 
operations and local broadcasters to tailor their programming line-ups 
to suit local communities. Additionally, forced carriage of unproven 
cable channels consumes scarce network bandwidth that could impede the 
availability of such nascent services as high definition television.
    Cox Communications provides significant value to broadcasters in 
the form of favorable channel position, improved reach and more. Policy 
makers have expressed the strong preference that life-line basic cable 
prices should not increase faster than the rate of inflation. Thus, it 
is critical that Cox oppose excessive Retransmission Consent demands 
for carriage of free over-the-air television signals.
3. Increasing the 35 Percent Television Ownership Cap Will Further 
        Bolster the Leverage of Programmers and Broadcasters at 
        Consumers' Expense.
    As I've noted, massive vertically integrated media companies owning 
broadcast stations and cable networks already wield tremendous leverage 
in programming and Retransmission Consent negotiations. Allowing big 
media conglomerates to acquire even more TV stations nationwide will 
strengthen already outrageous Retransmission Consent demands, driving 
up cable prices, reducing consumer choice and limiting bandwidth for 
future advanced services.
    The vertical ownership threat posed by NewsCorp's recent purchase 
of a controlling stake in DirectTV could also be fraught with peril for 
consumers, if News Corp is allowed to flex its programming and 
distribution muscle to dramatically inflate prices for its programming 
while giving preferential treatment to its own networks. This tactic, 
combined with its already formidable leverage over cable operators for 
Retransmission Consent for its broadcast stations reaching 41 percent 
of the market, could further reduce the localism that the 35 percent 
television ownership cap is intended to protect.
    I urge all of you to carefully consider these important issues and 
to thoroughly examine and address the myriad powerful forces that 
influence cable prices before concluding how best to keep cable 
services diverse, accessible and affordable for American consumers.

    The Chairman. Thank you.
    Mr. Dolan? Would you pull the microphone over in front of 
you? Thank you.

 STATEMENT OF CHARLES F. DOLAN, CHAIRMAN, CABLEVISION SYSTEMS 
                          CORPORATION

    Mr. Dolan. Good morning, Mr. Chairman and Members of the 
Committee.
    I am Charles Dolan, chairman of Cablevision Systems 
Corporation. We are a cable and programming company. Our cable 
company serves a market of 4 million homes in New York, 
Connecticut, and New Jersey. Our programming company produces 
sports, news, and entertainment programming for the New York 
City area. We also originate six regional sports channels for 
areas outside of New York, and we operate national cable 
networks such as American Movie Classics and the Independent 
Film Channel.
    I appreciate this opportunity to present our perspective on 
the issues before the Committee. And as you will note, our 
perspective is very similar to Cox's.
    Capital spending has long been a way of life for the cable 
industry. Operating a cable system involves continuous 
investment to extend and upgrade facilities, especially of 
late. In the last few years, the cable industry has invested 
close to $70 billion, as Senator Nelson mentioned a bit ago, to 
bring advanced digital services to its customers. Cablevision, 
like other companies, has introduced total addressability, 
HDTV, VOD, highspeed Internet access, and IP telephony.
    Particularly important, this new technology gives our 
customers greater choice, the power to create the menu they 
want on the television screens in their homes. 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 the 
shopping mall.
    Unfortunately, our customers' shopping carts face a 
littered road ahead, debris left over from our industry's long 
technological and legislative history. Unwanted programming is 
being forced into the home, particularly sports programming.
    The cable bill at the end of the month is increasing, 
against the customers' wishes. It may be time to address some 
of the industry rules and practices that have had these 
unintended consequences. Three of these, and I call them 
``must-buys,'' are in particular need of reconsideration.
    Government-mandated must-buy. The customer cannot buy what 
he wants from cable until after he has bought the package of 
programming our government tells him he must buy.
    Expanded basic. Now, after the cable customer buys what the 
government tells him he must, he finds the channels that 
interest him embedded in a large package of programming. Our 
industry then tells him he must buy all of these channels in 
this package, even if most of them are of little or no interest 
to him, before he is allowed to have any one of them.
    Retransmission consent. This is government-granted 
authority exercised by network-owned and operated broadcast 
stations or network affiliates. Retransmission consent gives 
these stations the power to deny the national broadcast 
networks to local cable audiences. To carry the networks, the 
cable operator often must agree to compel his customers to buy 
cable programming owned by the broadcast stations whether these 
customers want it or not.
    So those are the three. Government must-buy through 
mandatory basic, industry must-buy through expanded basic, 
network must-buy through retransmission consent. These three 
must-buys are the building blocks of ever-escalating cable 
prices. Like any tower made of such unwieldy blocks, when built 
too high, it must inevitably come tumbling down. What customers 
want today, what they are beginning to insist upon, is the 
right to select. The cable customer objects to being told that 
he must pay for programming he does not want in order to be 
provided the programming he prefers.
    Cablevision's recent dispute with the YES Network is a case 
in point. When the YES Network came into existence, it demanded 
from Cablevision nearly four times more than we had paid the 
year before for the same programming. YES insisted that every 
expanded basic subscriber pay for this programming, whether or 
not these subscribers had any interest in the Yankees or 
baseball or sports.
    Cablevision believes that it is the right of the Yankees to 
set any price they wish for their programming. Cablevision 
believes, also, that it is the right of each subscriber to 
accept or reject that price.
    Accordingly, Cablevision offered to carry the Yankees and 
let YES set the price, the price that each interested customer 
would pay. YES blacked out the Yankees on Cablevision for a 
year and a half before they grudgingly accepted the principle 
of that offer.
    What has happened since? Of 2 million Cablevision 
subscribers offered the opportunity to accept the Yankees at 
$1.95 or less per month, fewer than 9 percent have accepted to 
date. Ninety-one percent so far have said no thanks.
    With the YES experience as context, I respectfully urge you 
to consider a few specific statutory changes. These would 
remove impediments to greater customer choice and give 
customers more control over their cable costs.
    First, the statutory must-buy in the Cable Act ought to be 
eliminated. The must-carry provisions of the Cable Act already 
compel cable operators to carry all local broadcast stations 
within a market, even those which may be of marginal interest. 
The must-buy provisions go a step further. They require 
customers to purchase that tier of programming as a 
prerequisite to the purchase of programming they want. Because 
of must-buy, our customers are required to purchase all of our 
broadcast basic tier, adding about $13 to their monthly bill, 
regardless of whether or not they wish to receive this 
government-mandated tier.
    To help the dairy industry, I ask, would the government 
insist that all customers entering a supermarket to buy a loaf 
of bread be required to buy a dozen eggs and a quart of milk 
before they can purchase their bread?
    Second, Congress should establish as a goal that no program 
vendor may demand, as a condition of carriage, that the cable 
operator require all his customers to buy that vendor's 
programming. Let the customer decide.
    Third, retransmission consent for broadcast signals should 
be reevaluated. Commercial broadcast networks and their 
affiliates are using a valuable government resource, free 
broadcast spectrum, to leverage carriage of an increasing 
number of their own cable program channels as a condition of 
access to the national broadcast networks. As a result, cable 
operators are forced to carry, and consumers forced to 
purchase, more and more broadcaster-owned cable programming.
    These unfair tying practices are being employed in 
negotiations over digital carriage, as well. They have had the 
perverse effect of making it increasingly difficult for cable 
or independent programmers without such leverage to launch new 
services.
    It is not surprising that retransmission consent has led to 
a dramatic expansion of control of cable programming by 
national broadcasters from eight channels before the 1992 Cable 
Act to 54 today. Overall, all broadcasters now control 63 cable 
networks.
    In this vein, the Committee should note that News Corp's 
announced acquisition of DirecTV will seriously compound this 
problem. As Senator Lautenberg noted, in New York, for example, 
where News Corp owns two VHF broadcast stations, a daily 
newspaper, a broadcast network, a movie studio, a satellite 
service, and multiple cable networks, woe be to the cable 
operator who hesitates to accept News Corp's retransmission 
demands.
    In closing, I appreciate the opportunity provided by the 
Committee to review adjustments to federal policies. Such 
adjustments will, in my view, facilitate the beneficial 
transition to more customer choice. They will reduce the 
pressure to raise cable rates.
    I look forward to answering your questions.
    [The prepared statement of Mr. Dolan follows:]

 Prepared Statement of Charles F. Dolan, Chairman, Cablevision Systems 
                              Corporation

    Good morning, Mr. Chairman, and Members of the Committee.
    I am Charles Dolan, Chairman of Cablevision Systems Corporation. We 
are a cable and programming company. Our cable company serves a market 
of 4 million homes in New York, Connecticut and New Jersey. Our 
programming company produces sports, news and entertainment programming 
for the New York City area. We also originate six regional sports 
channels for areas outside of New York, and we operate national cable 
networks such as American Movie Classics and the Independent Film 
Channel.
    I appreciate this opportunity to present our perspective on the 
issues before the Committee.
    Capital spending has long been a way of life for the cable 
industry. Operating a cable system involves continuous investment to 
extend and upgrade facilities, especially of late. In the last few 
years, the cable industry has invested close to $70 billion to bring 
advanced digital services to its customers. Cablevision, like other 
companies, has introduced total addressability, HDTV, VOD, high-speed 
Internet access and IP telephony.
    Of course, this investment is intended to make our services more 
attractive to our customers and more competitive in the marketplace. 
Particularly, the new technology that our industry is installing gives 
our customers greater choice, the power to create the menu they want on 
the television screens in their home.
    Cablevision wishes to offer more for less to everyone. Cablevision 
wants its customers to be able to pick and choose among its services, 
selecting what appeals to them, rejecting what doesn't, determining for 
themselves how much they will spend, just as they do everyday in the 
supermarket or the shopping mall.
    Unfortunately, our customers' shopping carts face a littered road 
ahead. Debris left over from our industry's long technological and 
legislative history. Unwanted programming is being forced into the 
home, particularly sports programming. The cable bill at the end of the 
month is increasing against the customer's wishes.
    It may be time to address some of the industry rules and practices 
that have had these unintended consequences. Three of these are in 
particular need of reconsideration:

   Government Mandated ``Must-Buy''--the customer cannot buy 
        what he wants until after he has bought what the government 
        tells him he must buy;

   Expanded Basic--after the customer buys what the government 
        tells him he must, then before he is permitted any choices of 
        his own he is required to buy the programming that the industry 
        tells him comes first; and

   Retransmission Consent--this is government granted authority 
        exercised by network owned and operated broadcast stations, or 
        network affiliates. Retransmission consent gives these stations 
        the power to deny the national broadcast networks to local 
        cable audiences. To carry the networks, the cable operator 
        often must agree to compel his customers to buy cable 
        programming owned by the broadcast stations whether they want 
        it or not.

    Government must buy through mandatory basic! Industry must buy 
through expanded basic! Network must buy through retransmission 
consent!
    These three are the building blocks of ever-escalating cable 
prices. Like any tower made of such unwieldy blocks, when built too 
high, it must inevitably come tumbling down.
    What customers want today, what they are beginning to insist upon, 
is the right to select. The customer objects to being told that he must 
pay for programming he doesn't want in order to be permitted the 
programming he prefers.
    Cablevision's recent dispute with the YES network is a case in 
point.
    When the YES Network came into existence, it demanded from 
Cablevision nearly four times more than we had paid the year before for 
the same programming. YES insisted that every expanded basic subscriber 
pay for this programming whether or not they had any interest in the 
Yankees or baseball or sports.
    Cablevision believes that it is the right of the Yankees to set any 
price they wish for their programming. Cablevision believes also that 
it is the right of each subscriber to accept or reject that price. 
Accordingly, Cablevision offered to carry the Yankees and let YES set 
its own price. YES blacked out the Yankees on Cablevision for a year 
and a half before they grudgingly accepted the principle of that offer. 
What has happened since? Of 2 million Cablevision subscribers offered 
the opportunity to accept the Yankees at $1.95 or less per month, fewer 
than 9 percent have accepted to date, 91 percent so far have said ``no 
thanks.''
    With the YES experience as context, I respectfully urge you to 
consider a few specific statutory changes. These would remove 
impediments to greater customer choice and give customers more control 
over their cable costs.
    First, the statutory ``Must-Buy'' in the Cable Act must be 
eliminated. The must-carry provisions of the Cable Act already compel 
cable operators to carry all local broadcast stations within a market, 
even those that may be of marginal interest.
    The ``Must Buy'' provisions go a step further. They require 
consumers to purchase that tier of programming as a prerequisite to the 
purchase of programming they want. Because of ``Must Buy,'' our 
customers are required to purchase all of our broadcast basic tier, 
adding about $13.00 to their monthly bill, regardless of whether or not 
they wish to receive this government mandated tier.
    To help the dairy industry, for example, would the government 
insist that all customers entering a supermarket to buy a loaf of bread 
be required to buy a dozen eggs and a quart of milk before they can 
purchase their bread?
    Second, Congress should establish as a goal that no program vendor 
may demand as a condition of affiliation that the cable operator 
require all his customers to buy that vendor's programming.
    Let the customer decide!
    Third, retransmission consent for broadcast signals must be 
reevaluated. Commercial broadcast networks and their affiliates are 
using a valuable government resource--free broadcast spectrum--to 
leverage carriage of an increasing number of their own cable program 
channels as a condition of access to the national broadcast networks. 
As a result, cable operators are forced to carry--and consumers forced 
to purchase--more and more broadcaster-owned cable programming as part 
of their expanded basic package regardless of consumer interest in that 
programming. These unfair ``tying'' practices are being employed in 
negotiations over digital carriage as well. They have had the perverse 
effect of making it increasingly difficult for cable or independent 
programmers without such leverage to launch new services.
    It is not surprising that retransmission consent has led to a 
dramatic expansion of control of cable programming by national 
broadcasters, from 8 channels before the 1992 Cable Act, to 54 today. 
Overall, all broadcasters now control 63 cable networks.
    In this vein, the Committee should note that News Corporation's 
announced acquisition of DirecTV will seriously compound this problem. 
In New York, for example, where News Corp. owns two VHF broadcast 
stations, a daily newspaper, a broadcast network, a movie studio, a 
satellite service and four cable networks, woe be to the cable operator 
who hesitates to accept News Corp.'s retransmission demands.
    In closing, I appreciate the opportunity provided by the Committee 
to review adjustments to federal policies. Such adjustments will, in my 
view, facilitate the beneficial transition to more customer choice. 
They will reduce the pressure to raise cable rates.
    Thank you.

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

     STATEMENT OF GENE KIMMELMAN, DIRECTOR, CONSUMERS UNION

    Mr. Kimmelman. Thank you, Mr. Chairman. On behalf of 
Consumers Union, the print and online publisher of the Consumer 
Reports Magazine, I appreciate the opportunity to testify this 
morning.
    Many of you were involved in these debates in the 1980s and 
1990s. I want you to think back about whether what we have done 
in moving from government control of media to more market 
forces, if it has really succeeded at what you thought and the 
American people thought we were trying to get out of that.
    Let us look at the markets today. You have heard from the 
Chairman that cable rates are up 50 percent. We have done an 
analysis of this and looked at the programming costs using FCC 
data and looked at all the infrastructure investments that were 
made, and they are enormous, annualized that and looked at the 
revenue from advertising that has come in, and it has grown in 
lockstep with these programming cost increases, and looked at 
all the new revenue--cable modem services, mini-tiers, pay 
services, and what not--and, low and behold, we find that, on 
an annualized basis, those new revenue streams can cover 
virtually all of the costs of programming and infrastructure 
investment without these cable rate increases. And as the GAO 
pointed out to you this morning, they are not done, but they 
have found that in the communities where there are two cable 
companies, two wires competing head to head, and two satellite 
companies, compared to the communities where there are two 
satellite companies and one cable company in the market, prices 
are, on average, 17 percent lower for the same programming, 
approximately. Now, that is only a few percent of the American 
population. If all consumers had that differential, same 
programming, approximately, the same infrastructure, they would 
be saving about $5 billion a year in cable expenditures.
    Now, we know that what has happened in the last 20 years is 
cable has consolidated dramatically. The two largest companies, 
Comcast and AOL Time-Warner, today control more than half the 
ownership interest in cable systems around the country. The 
biggest cable companies do charge more, and, Senator Burns, I 
believe the FCC measures that looking at a per-channel basis, 
as well as overall cost.
    And we all heard about how clustering, moving cable systems 
adjacent to each other into one company, ownership structure 
would reduce cost, bring efficiencies. The FCC said it should 
bring down prices. The FCC has found the opposite. Prices are 
higher where cable systems are clustered.
    Now, the national television networks have done the same 
thing. They have expanded and consolidated, two large networks 
now owning stations serving more than 40 percent of all 
consumers in the country, gone in-house with most of their 
production studio arrangements after financial interests and 
syndication rules were eliminated. And today we have four 
networks and AOL Time-Warner that are programming juggernauts 
in prime-time viewing. Those five companies control about the 
same audience share as the three big networks did 40 years ago. 
Just imagine.
    And now News Corp is buying DirecTV, the largest satellite 
television company in the country. Is this going to change the 
picture and bring us more competition? I sure wish it would, 
but I am afraid it is going to be the opposite. As the Chairman 
pointed out, News Corp owns the FOX television network, with 
about 35 broadcast stations around the country, cable 
properties, FOX News, FX, other cable stations, production 
studios, as has been mentioned. They own interest in more than 
20 sports channels around the country, with rights to 67 teams 
in the NBA, the NHL and Major League Baseball. DirecTV has a 
major package of Sunday NFL games. They have a college football 
package and college basketball package.
    This is even more powerful programming brought together 
under one roof with a company that received retransmission 
rights in 1992 because it needed to get on cable systems to 
reach its customers. With DirecTV, it no longer needs to get on 
cable systems to reach its customers. I believe the cable 
executives have it right; it is time to review retransmission 
consent as it pertains to News Corp in this transaction.
    Now, many Wall Street analysts believe, as we do, that News 
Corp is not likely, with all of this ownership of programming, 
to have an incentive to drive down cable and satellite prices 
for consumers, unfortunately. Instead, they will have the 
opposite incentive, to jack up prices for their own 
programming, pass them along to the cable companies, charge 
themselves, and pass it along to their only satellite 
competitor. Everybody pays more for News Corp's programming, 
News Corp makes more money, the consumer pays more, regardless 
of how he or she gets television service.
    In other words, this is really a bad deal for consumers, 
and we are going to be asking the Department of Justice to 
scrutinize it carefully and impose severe restrictions.
    I hope this is not quite the kind of marketplace that you 
thought, in the 1980s and 1990s, that we were trying to move 
toward in getting consumers more choices and better prices for 
media services. I hope you agree with us that now is the time 
to fix some of these problems.
    First, we want you to stop the FCC from doing anything that 
would allow the national television networks to squeeze out 
more local programming from local stations. Now is not the time 
for more nationalism; it is time to reinvigorate local content 
on television.
    We want you to stop the FCC from doing anything that would 
enable the strongest local broadcasters to join up with the 
strongest newspapers in their community, the two major sources 
of news and information in local markets, and dominate 
distribution of news through one corporate entity.
    And we want you to prevent all forms of discrimination. You 
have just heard about some from the cable industry. I find it 
amusing that they worry about how they are squeezed. They are 
the ones who pull the trigger on the prices for consumers. They 
are the ones who tell the consumer what the package is, in most 
cases, and what they have to pay. They are right, programmers 
should not have too much leverage; but they are wrong, they 
should not have too much leverage.
    We want you to review all forms of discrimination in 
putting together programming packages on the wholesale and 
retail level and finally, importantly, let the consumer choose 
what channel he or she wants to watch and buy at a fair price, 
and make sure the market delivers that.
    Thank you.
    [The prepared statement of Mr. Kimmelman follows:]

    Prepared Statement of Gene Kimmelman, Director, Consumers Union
Summary
    It began in 1984 with the Cable Communications and Policy Act, and 
a simple and appealing proposition: lift the shackles of regulation on 
the cable industry and competition will flourish, resulting in lower 
prices and more choices for consumers. It progressed to broadcast 
programming with the elimination of public interest programming 
obligations, and the decision to eliminate the limit on network 
ownership of prime time programming and culminated in the 1996 
Telecommunications Act with the lifting of limits on broadcast station 
ownership. Consumers were told not to fear deregulation; competition 
and the antitrust laws would prevent excessive concentration.
    Today, almost 20 years later, the evidence of failed promises is 
everywhere.

   The expected benefits of cable deregulation have not been 
        realized. Robust competition did not materialize, the industry 
        consolidated into a few dominant firms, and rates charged to 
        consumers skyrocketed (see Table 1, p.46). Except during a 
        four-year period in the early 1990s when Congress re-regulated 
        cable prices, rates have risen and continue to rise almost 
        three-times faster than inflation. Since passage of the 1996 
        Telecommunications Act, cable rates have risen over 50 percent. 
        \1\

   The broadcast networks, which once were limited to ownership 
        of a quarter of prime time production, now own almost three 
        quarters. Independent production has all but disappeared from 
        the high volume viewing of prime time, both over-the-air and 
        through the cable wire.

   Two of the largest national broadcasters have exceeded the 
        cap set by Congress on the permissible number of stations they 
        may own. Concentration in radio markets has advanced at a 
        shocking pace.

    Yet these facts have not weakened many policymakers' enthusiasm for 
allowing more deregulation and more mergers across all media industries 
and markets.
    The recently announced proposed merger between the News Corporation 
(``News Corp./Fox'') and Hughes Electronics Corporation's satellite 
television unit ``DirecTV,'' combined with the Federal Communications 
Commission's (FCC) current efforts to relax or eliminate media 
ownership rules that restrict ownership of multiple television 
stations, newspapers and radio stations both locally and nationally, 
threaten to harm meaningful competition between media companies. Most 
importantly, this lack of competition will mean that control of media 
that Americans rely upon most for news, information and entertainment 
could eventually be placed in the hands of a few powerful media giants.
    Consider the powerful interaction of the FCC's rush to lift media 
ownership rules and the proposed merger between a major network and the 
largest direct broadcast satellite (DBS) network. In the next month, 
the FCC is likely to relax ownership rules in a manner that would open 
the door to further concentration of ownership in a few hands, 
consolidation of outlets in national chains and conglomeration of 
control over different types of media. The FCC is considering:

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

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

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

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

    Unfortunately, the antitrust laws are not enough to prevent the 
excessive consolidation in the marketplace of ideas that would result 
from any combination of transactions under these relaxed rules. 
Antitrust has never been used effectively to promote competition in and 
across media where there is no clear way--like advertising prices--of 
measuring competition/diversity in news sources, information and points 
of view presented through the media.
    Consumers Union \2\ and the Consumer Federation of America \3\ 
believe Congress should review and alter the laws that enabled industry 
consolidation spurred by excessive deregulation to weaken or undermine 
competitive conditions in media markets. The News Corp./DirecTV merger 
is likely to lead to higher prices for both satellite TV and cable TV, 
since the combined company can maximize its earnings by inflating the 
prices it charges for its broad array of popular programming that all 
cable and satellite customers purchase. And this transaction, in 
conjunction with relaxed media ownership rules, will spur a wave of 
mergers among the remaining national broadcast networks, satellite and 
cable giants.
    We believe it is time for Congress to intervene and finally deliver 
more choices and lower prices for the media services consumers want, 
and to prevent excessive relaxation of media ownership which threatens 
the critical watchdog function media companies play in our Nation's 
democracy. It is time for Congress to drop the rhetoric and look at the 
reality of deregulated video markets. Congress should:

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

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

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

   Strengthen, rather than weaken, media ownership rules, to 
        prevent companies from owning the most popular sources of news 
        and information in both the local and the national markets.

The News Corporation/DirecTV Merger
    If competition in the multichannel video market had performed up to 
its hope and hype, the News Corp./Fox/DirecTV merger might not be so 
threatening. But in light of the failure of deregulation, it presents a 
problem for public policy that cannot be ignored. There are two points 
of power in the marketplace--distribution and program production. The 
problem with News Corp./Fox is that it combines the two.
    The reach of News Corp./Fox's media empire is truly staggering. The 
following are highlights of some News Corp./Fox properties in the U.S.:

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

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

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

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

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

    News Corp./Fox's merger with DirecTV adds a new, nationwide 
television distribution system to News Corp./Fox's programming/
production arsenal. DirecTV is the Nation's largest satellite 
television distribution system, with more than 11 million customers and 
the ability to serve all communities in the United States.
    News Corp./Fox's vast holdings provide it with leverage in several 
ways. ``The biggest, most powerful weapon News Corp./Fox has is `a 
four-way leverage against cable operators, competing with satellite and 
using the requirement that cable get retransmission consent to carry 
Fox-owned TV stations, while potentially leveraging price for Fox-owned 
regional sports networks and its national cable and broadcast networks 
. . . ''' \4\
    One of News Corp./Fox's most important weapons is significant 
control over regional and national sports programming. Mr. Murdoch 
often describes sports programming as his ``battering ram'' \5\ to 
attack pay television markets around the world. As David D. Kirkpatrick 
noted in an April 14, 2003 New York Times article regarding Mr. 
Murdoch's control over sports programming:

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

        With DirecTV, Mr. Murdoch can start a new channel with 
        immediate access to its subscribers, currently 11 million. He 
        has other leverage in Fox News, now the most popular cable news 
        channel, and essential local stations in most major markets 
        around the country. \6\

    It is important to consider the ramifications of Mr. Murdoch's 
control of over 40 percent of Fox broadcast stations nationwide, 
control of 11.2 million satellite subscribers, and his stranglehold 
over regional sports programming. With those extensive holdings, News 
Corp./Fox is in a position to determine what new programming comes to 
market, and to undercut competitive programming. The company will be 
able to decide what programming it does not want to carry and may be 
able to indirectly pressure cable operators (by offering a lower price 
for Fox programming as an inducement) not to carry programming that 
competes with Fox offerings. We believe Mr. Murdoch has a right as an 
owner to put whatever he wants on his system, but with the FCC moving 
to relax media ownership rules, companies like News Corp./Fox will have 
the ability to control key sources of news and information in an 
unprecedented manner.
    The merger between News Corp./Fox and DirecTV is extremely unlikely 
to stop skyrocketing cable rates and could very well exacerbate the 
problem. According to David Kirkpatrick's New York Times article: \7\

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

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

    While News Corp./Fox has agreed to abide by the FCC's program 
access requirements, \8\ this pledge could end up being nothing more 
than a tool for pumping up cable prices. That is, while News Corp./Fox 
agrees to make its programming available on non-discriminatory terms 
and conditions, there is absolutely nothing that would prevent News 
Corp./Fox from raising the price that it charges itself on its 
satellite system, in return for increased revenues from the other 70 
million cable households. If a cable system refuses to pay the 
increased price, then News Corp./Fox will be able to threaten cable 
operators to use its newly acquired satellite system to capture market 
share away from cable in those communities.
    An article in the Washington Post \9\ recently detailed the way 
this might work:

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

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

    And price is only the beginning of the problems in this industry. 
Even in the 500-channel cable universe, control of prime time 
programming rests in the hands of a very few media companies. Given the 
enormous power that will be concentrated in News Corp./Fox as a result 
of the DirecTV transaction, not only will the combined entity be able 
to insist on top dollar for its programming, it will be able to 
determine who makes it and who fails in the programming marketplace.
Cable Rates Have Escalated
    In 1984, proponents of cable deregulation argued that competition 
from broadcasters and hoped-for sources like satellite television would 
keep prices down for consumers. The actual result? Massive 
consolidation and skyrocketing rates. In response, Senators Danforth, 
Gorton, Inouye and others led the charge in the early 1990s to clamp 
down on some of the most egregious excesses resulting from cable 
deregulation. However, in the 1996 Telecommunications Act, Congress 
went in the opposite direction, deregulating cable when the industry 
promised that it would become an aggressive competitor to local phone 
companies, and new competitors were entering the cable market.
    But the cable industry has failed to deliver on its promises to 
Congress, regulators and the American people. Despite the growth of 
satellite TV, the promise of meaningful competition to cable TV 
monopolies remains unfulfilled. Cable rates are up 50 percent since 
Congress passed the 1996 Telecommunications Act, nearly three times as 
fast as inflation. \10\
    In response to constant consumer complaints regarding the ever-
escalating cost of cable service, cable providers explain that their 
hands are tied due to price increases from programmers and capital 
investments required to make new services available. The simple truth 
is that cable operators have been showing burgeoning profits to Wall 
Street, which runs at odds with what they have told their customers and 
policymakers.
    If programming costs were really the sole cause of rising prices, 
then the cable industry's operating margins--the difference when costs 
are subtracted from revenues--would not be rising. But the facts are 
just the opposite. The operating margin for the industry as a whole was 
projected to reach $18.8 billion per year in 2002, $7 billion more than 
it was in 1997. \11\
    Operating revenues per subscriber have also increased dramatically 
over that period, from $208 per year to $273. That is, after taking out 
all the operating costs, including programming costs, cable operators 
have increased their take per subscriber by over 30 percent.
    The increase in operating revenue is just under $5.50 per month. 
Basic rate increases over this period were about $8.50 per month. In 
other words, almost two thirds of the basic rate increases have been 
taken below the (operating cost) line. To put this another way, each $1 
per month price increase raises industry revenues by about $800 million 
per year. Basic rate increases are driving the increased operating cash 
flow of the industry.
    The fact that cable operators carry the basic rate increases 
directly to the bottom line underscores a second important point about 
the industry. The digital upgrade essentially pays for itself though 
the sale of digital tiers and high speed Internet to tens of millions 
of cable subscribers.
    The ability of cable operators to raise rates and increase 
revenues, even with rising programming costs, stems from the market 
power they have at the point of sale. They would not be able to raise 
prices and pass program price increases through but for that monopoly 
power.
Competition to Cable not Robust
    Head-to-head competition between cable companies is virtually 
nonexistent. Out of 3000 plus cable systems, head-to-head competition 
exists in fewer than 200, although another 150 have certified entry. In 
short, only about 10 percent of franchise territories have experienced 
head-to-head competition between cable companies. While a number of 
other communities have authorized additional overbuilding, this 
activity is slowing, as the regional bell operating companies pull back 
and pure overbuilders retrench. \12\
    Cable's dominance as the multichannel medium is overwhelming, with 
a subscribership of approximately two-thirds of all TV households. Its 
penetration is about 3\1/2\ times as high as the next multichannel 
technology, satellite. Because a large number of satellite subscribers 
live in areas that are not served by cable, competition in geographic 
markets is less vigorous than the national totals suggest.
    This monopoly at the point of sale is reinforced by a strong trend 
toward regionalization in which one company gains ownership of many 
firms in a region. Clustering has increased sharply since 1994, up by 
almost 75 percent. \13\ Just over one-half of all subscribers were 
clustered in 1997 but by 2000 four-fifths were. \14\ The FCC has found 
that clustering is associated with higher prices. \15\
    The failure of competition in multichannel video is most evident in 
local markets. Only one cable company serves over 95 percent of the 
homes passed in the country. \16\ Satellite has about 10 million 
subscribers in markets where cable and satellite meet. In these 
markets, there are only 8 million satellite only subscribers. This 
suggests that cable retains a market share at the point of sale of well 
over 85 percent. \17\ The antitrust concentration index (the 
Hirschmann-Herfindahl index or HHI) at the local level is above 7000. 
These market shares and levels of concentration make cable operators 
virtual monopolies. \18\
    The wave of concentration in the industry after deregulation is 
striking at the national level. When cable was deregulated in 1984, the 
distribution segment was not concentrated at all (HHI about 350), with 
the equivalent of about 30 equal sized competitors. A decade later, 
concentration had advanced to the point where the distribution segment 
had the equivalent of about 11 equal-sized competitors (HHI about 930). 
This is just close to the moderately concentrated threshold. Although 
the FCC claims that the Multichannel Video Program Distribution (MVPD) 
market falls just below the level of being moderately concentrated 
(HHI=954), it arrives at this conclusion by ignoring Comcast's 
substantial direct ownership interests in Time Warner Systems and 
Cablevision, as well as its stake in Time Warner Entertainment (TWE). 
Taking Comcast's ownership interests into account places the cable TV 
market into the moderately concentrated category.
    Satellite competition has failed to prevent price increases on 
cable because cable and satellite occupy somewhat different product 
spaces. First and foremost, the lack of local channels on satellite 
systems in many communities prevents satellite from being a substitute 
for cable; in fact, many satellite subscribers also purchase cable 
service for the express purpose of receiving local channels. And while 
many larger communities now receive local broadcast channels from 
satellite, service is not as attractive as cable in several respects 
and many consumers simply cannot subscribe. Many urban consumers cannot 
receive satellite services because of line of sight problems, or 
because they live in a multi-tenant dwelling unit where only one side 
of the building faces south.
    Restrictions on multiple TV set hookups also make satellite more 
costly. The most recent data on the average price for monthly satellite 
service indicates that consumers pay between $44 and $80 a month to 
receive programming comparable to basic cable programming. This monthly 
fee often includes two separate charges above the monthly fee for basic 
satellite programming--one fee to hook a receiver up to more than one 
television in the household, and another fee so consumers are able to 
receive their local broadcast channels.
    Satellite customers often subscribe to receive high-end services 
not provided (until the recent advent of digital cable) on cable 
systems, such as high-end sports packages, out of region programming, 
and foreign language channels. In essence, it is an expensive--but 
valuable--product for consumers that want to receive hundreds of 
channels.
    If satellite were a close substitute for cable, one would expect 
that it would have a large effect on cable. In fact, the FCC's own 
findings and data have contradicted the cable industry claims for 
years. The FCC found that satellite only ``exerts a small (shown by the 
small magnitude of DBS coefficient) but statistically significant 
influence on the demand for cable service.'' \19\ In the same 
econometric estimation, the FCC concluded that ``the demand for cable 
service is somewhat price elastic (i.e., has a price elasticity of 
minus 1.45) and suggests that there are substitutes for cable.'' \20\ 
This elasticity is not very large and the FCC recognizes that in using 
the adjective ``somewhat.'' The FCC also attempted to estimate a price 
effect between satellite and cable. If cable and satellite were close 
substitutes providing stiff competition, one would also expect to see a 
price effect. Most discussions in economics texts state that 
substitutes exhibit a positive cross elasticity. \21\ The FCC can find 
none. In fact, it found quite the opposite. The higher the penetration 
of satellite, the higher the price of cable. \22\
    The most recent annual report on cable prices shows that the 
presence of DBS has no statistically significant or substantial effect 
on cable prices, penetration or quality. \23\ This is true when 
measured as the level of penetration of satellite across all cable 
systems, or when isolating only areas where satellite has achieved a 
relatively high penetration. \24\ At the same time, ownership of 
multiple systems by a single entity, large size and clustering of cable 
systems results in higher prices. \25\ Vertical integration with 
programming results in fewer channels being offered (which restricts 
competition for affiliated programs). \26\
    In other words, one could not imagine a more negative finding for 
intermodal competition or industry competition from the FCC's own data. 
All of the concerns expressed about concentrated, vertically integrated 
distribution networks are observed and the presence of intermodal 
competition has little or no power to correct these problems. The 
claims that the cable industry makes about the benefits of clustering 
and large size--measured as price effects--are contradicted by the 
data. In fact, only intramodal, head-to-head competition appears to 
have the expected effects. The presence of wireline cable competitors 
lowers price and increases the quality of service.
    While we hope that satellite will ultimately have a price 
disciplining effect in those communities where satellite offers local 
broadcast stations it is clear that the single most important variable 
in cable prices is whether there is a cable overbuilder in a particular 
community. Wire-to-wire competition does hold down cable rates and 
satellite does not seem to do the trick. The U.S. General Accounting 
office describes this phenomenon:

        Our model results do not indicate that the provision of local 
        broadcast channels by DBS companies is associated with lower 
        cable prices. In contrast, the presence of a second cable 
        franchise (known as an overbuilder) does appear to constrain 
        cable prices. In franchise areas with a second cable provider, 
        cable prices are approximately 17 percent lower than in 
        comparable areas without a second cable provider. \27\

    In other words, where there are two satellite and one cable company 
in a market, prices are 17 percent higher than where there are two 
cable companies and two satellite providers in a market. If we had this 
type of competition nationwide, consumers could save more than $5 
billion a year on their cable bills.
Program Production
    The failure of competition in the cable and satellite distribution 
market is matched by the failure of competition in the TV production 
market. In the 1980s, as channel capacity grew, there was enormous 
expansion and development of new content from numerous studios. 
Policymakers attributed the lack of concentration in the production 
industry to market forces and pushed for the elimination of the 
Financial Interest in Syndication rules (Fin-Syn) that limited network 
ownership and syndication rights over programming. The policymakers 
were wrong.
    Following the elimination of the Fin-Syn rules in the early 1990s, 
the major networks have consolidated their hold over popular 
programming. The market no longer looks as promisingly competitive or 
diverse as it once did. Tom Wolzien, Senior Media Analyst for Bernstein 
Research, paints the picture vividly--he details the return of the 
``old programming oligopoly'':

        Last season ABC, CBS and NBC split about 23 percent [of 
        television ratings] . . . But if the viewing of all properties 
        owned by the parent companies--Disney, NBC, and Viacom--is 
        totaled, those companies now directly control television sets 
        in over a third of the TV households. Add AOL, Fox and networks 
        likely to see consolidation over the next few years (Discovery, 
        A&E, EW Scripps, etc.), and five companies or fewer would 
        control roughly the same percentage of TV households in prime 
        time as the three net[work]s did 40 years ago. The programming 
        oligopoly appears to be in a process of rebirth. \28\

    In addition, the number of independent studios in existence has 
dwindled dramatically since the mid-1980s. In 1985, there were 25 
independent television production studios; there was little drop-off in 
that number between 1985 and 1992. In 2002, however, only 5 independent 
television studios remained. In addition, in the ten-year period 
between 1992 and 2002, the number of prime time television hours per 
week produced by network studios increased over 200 percent, whereas 
the number of prime time television hours per week produced by 
independent studios decreased 63 percent. \29\
    Diversity of production sources has ``eroded to the point of near 
extinction. In 1992, only 15 percent of new series were produced for a 
network by a company it controlled. Last year, the percentage of shows 
produced by controlled companies more than quintupled to 77 percent. In 
1992, 16 new series were produced independently of conglomerate 
control, last year there was one.'' \30\
    The ease with which broadcasters blew away the independent 
programmers should sound a strong cautionary alarm for Congress. The 
alarm can only become louder when we look at the development of 
programming in the cable market. One simple message comes through: 
those with rights to distribution systems win.
    Of the 26 top cable channels in subscribers' and prime time 
ratings, all but one of them (the Weather Channel) has ownership 
interest of either a cable MSO or a broadcast network. In other words, 
it appears that you must either own a wire or have transmission rights 
to be in the top tier of cable networks. Four entities--AOL, Liberty/
Fox, ABC/Disney and CBS/Viacom--account for 20 of these channels.
    Of the 39 new cable networks created since 1992, only 6 do not 
involve ownership by a cable operator or a national TV broadcaster. 
Sixteen of these networks have ownership by the top four programmers. 
Eight involve other MSOs and 10 involve other TV broadcasters. 
Similarly, a recent cable analysis identified eleven networks that have 
achieved substantial success since the passage of the 1992 Act. Every 
one of these is affiliated with an entity that has guaranteed carriage 
on cable systems. \31\
    Moreover, each of the dominant programmers has guaranteed access to 
carriage on cable systems--either by ownership of the wires (cable 
operators) or by carriage rights conferred by Congress (broadcasters).

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

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

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

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

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

    These five entities have ownership rights in 21 of the top 25 cable 
networks based on subscribers and prime time ratings. They account for 
over 60 percent of subscribers to cable networks, rendering this market 
a tight oligopoly. Other entities with ownership or carriage rights 
account for four of the five remaining most popular cable networks. The 
only network in the top 25 without such a connection is the Weather 
Channel. It certainly provides a great public service, but is hardly a 
hotbed for development of original programming or civic discourse. 
Entities with guaranteed access to distribution over cable account for 
80 percent of the top networks and about 80 percent of all subscribers' 
viewing choices on cable systems.
    When we examine the ownership of broadcast and cable networks, we 
discover that almost three-quarters of them are owned by six corporate 
entities. \32\ The four major TV networks, NBC, CBS, ABC, Fox, and the 
two dominant cable providers, AOL Time Warner (which also owns a 
broadcast network) and Liberty (with an ownership and carriage 
relationship with Comcast and Fox), completely dominate the tuner. 
Moreover, these entities are thoroughly interconnected through joint 
ventures.
    If distribution rights win then an entity like News Corp./Fox/
DirecTV would create a powerhouse with guaranteed transmission rights 
on all three of the technologies used to distribute TV to the home. It 
will own broadcast stations, have must carry/retransmission rights on 
cable and satellite because of the broadcast licenses it holds, and own 
the largest satellite network. This is an immense power of distribution 
for a company that is vertically integrated into both broadcast and 
cable programming.
    In the 1992 Cable Act, Congress recognized that the Federal 
Government ``has a substantial interest in having cable systems carry 
the signals of local commercial television stations because the 
carriage of such signals is necessary to serve the goals . . . of 
providing a fair, efficient, and equitable distribution of broadcast 
services.'' \33\ Congress also recognized that ``[t]here is a 
substantial government interest in promoting the continued availability 
of such free television programming, especially for viewers who are 
unable to afford other means of receiving programming.'' \34\
    These governmental interests, as well as a finding that ``[c]able 
television systems often are the single most efficient distribution 
system for television programming,'' formed the original rationale 
behind Retransmission Consent. Because a majority of the country was 
receiving broadcast television service through cable, it was necessary 
to require that cable systems carry local broadcast signals. However, a 
merger between News Corp./Fox and DirecTV would change the landscape 
against which Retransmission Consent was created. Given that this 
transaction will provide News Corp./Fox with assets that no local 
broadcaster had in 1992 when Retransmission Consent was originally put 
in place--it will have a satellite distribution system capable of 
reaching a majority of the country--it seems that the original logic 
behind the rule is strained in the present circumstances. Not only will 
News Corp./Fox own its own transmission system, but it also owns other 
programming that it bundles with its network programming, which may 
give it too much market power in negotiating cable and other carriage 
agreements. Congress should revisit the necessity of Retransmission 
Consent as it pertains to stations owned and operated by News Corp./
Fox.
Conclusion
    Consumers Union and Consumer Federation of America believe that 
Congress should step in and help consumers get a better deal from cable 
and other media companies.
    Congress should impose a new set of nondiscrimination requirements 
that would enable all media distributors and consumers to purchase 
video programming and related services on an individual--as opposed to 
bundled--basis under terms that maximize competition and choice in the 
marketplace. Congress must reexamine the enormous market power and 
leverage that Retransmission Consent provides broadcast programmers--
particularly one like News Corp. which, as a result of the merger with 
DirecTV, will own a new nationwide video distribution system (in 
addition to its over-the-air broadcast distribution system). And 
Congress should require cable and satellite operators to offer 
consumers the right to select the channels they want to receive at a 
fair price--in other words, require an a la carte program offering from 
all video distributors. Since the average household watches only about 
a dozen channels of video programming, this requirement could empower 
consumers to help discipline excesses in cable (or satellite) pricing, 
and could possibly spur more competition.
    Congress must also carefully consider all the ramifications 
associated with the rulemakings on media ownership. If media ownership 
limits are significantly relaxed or eliminated by the FCC then the News 
Corp./DirecTV deal may look almost harmless in comparison to an 
avalanche of media mergers that ensue. It is completely unfair to force 
American consumers to accept inflated cable rates and inadequate TV 
competition. But excess consolidation in the news media is even worse: 
the mass media provides Americans the information and news they need to 
participate fully in our democratic society. Without ownership rules 
that effectively limit consolidation in media markets, one company or 
individual in a town could control the most popular newspaper, TV and 
radio stations, and possibly even a cable system, giving it dominant 
influence and power over the content and slant of news. This could 
reduce the diversity of cultural and political discussion in that 
community.
    The cost of deregulating media is very high. The cost of market 
failure in media markets is the price we pay when stories are not told, 
when sleazy business deals and bad accounting practices do not surface, 
when the watchdog decides that it would rather gnaw on the bone of 
softer news than chase down the more complicated realities that must be 
uncovered to make democracy function.
ENDNOTES
    \1\ Bureau of Labor Statistics, Consumer Price Index (March 2003). 
From 1996 until March 2003, CPI increased 19.3 percent while cable 
prices rose 50.3 percent, 2.6 times faster than inflation.
    \2\ 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.
    \3\ 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.
    \4\ Diane Mermigas, ``News Corp.'s DirecTV Monolith.'' Mermigas on 
Media Newsletter, (Apr. 16, 2003), quoting Tom Wolzien, a Sanford 
Bernstein Media Analyst.
    \5\ David D. Kirkpatrick, ``Murdoch's First Step: Make Sports Fans 
Pay.'' The New York Times, Apr. 14, 2003.
    \6\ Id., Emphasis added.
    \7\ David Kirkpatrick, ``By Acquiring DirecTV, Murdoch Gets Upper 
Hand.'' The New York Times, Apr. 10, 2003.
    \8\ ``As part of the acquisition, News Corp. and DirecTV has agreed 
to abide by FCC program access regulations, for as long as those 
regulations are in place and for as long as News Corp. and Fox hold an 
interest in DirecTV, as if News Corp. and its subsidiaries were 
vertically integrated programming vendors. Specifically, News Corp. 
will continue to make all of its national and regional programming 
available to all multi-channel distributors on a non-exclusive basis 
and on non-discriminatory prices, terms and conditions. Neither News 
Corp. nor DirecTV will discriminate against unaffiliated programming 
services with respect to the price, terms or conditions of carriage on 
the DirecTV platform.'' Fox Entertainment Group Press Release, ``News 
Corporation Agrees to Obtain 34 percent of Hughes Electronics for $6.6 
billion in Cash and Stock.'' (Apr. 9, 2003), http://www.newscorp.com/
feg/fegpress/feg_181.html.
    \9\ Frank Ahrens, ``Murdoch's DirecTV Deal Scares Rivals.'' 
Washington Post, Apr. 11, 2003.
    \10\ Bureau of Labor Statistics, Consumer Price Index (March 2003). 
From 1996 until March 2003, CPI increased 19.3 percent while cable 
prices rose 50.3 percent, 2.6 times faster than inflation.
    \11\ Federal Communications Commission, Ninth Annual Report, In the 
Matter of Annual Assessment of the Status of Competition in the Market 
for the Delivery of Video Programming, MB docket No. 02-145 (Dec. 31, 
2002).
    \12\ Federal Communication Commission, 2001b, p. 20, notes that 
cable operators in only 330 communities have been granted status as 
effectively competitive on the basis of overbuilding.
    \13\ Federal Communications Commission, 2002b, Table C-1.
    \14\ Kagan, 1998.
    \15\ Federal Communications Commission, 2002b, p. 31.
    \16\ Federal Communications Commission, 2002b, p. 20.
    \17\ Federal Communications Commission, 2001b, p.34, notes 
increasing urban subscribers, but figures show that satellite is still 
disproportionately rural.
    \18\ Rosston and Shelanski, 2002, p. 23, give a hypothetical local 
market with a cable firm having an 80 percent market share and 
satellite having 20 percent in making a point about the impact of 
concentration in national markets. They never discuss the local HHI, 
which would be 6800. This meets the antitrust definition of a monopoly.
    \19\ Report on Cable Industry Prices, February 14, 2002, p. 36.
    \20\ Report on Cable Industry Prices, February 14, 2001, p. 36.
    \21\ Pearce, George, The Dictionary of Modern Economics (MIT Press, 
Cambridge, 1984), p. 94. Cross Elasticity of Demand. The responsiveness 
of quantity demanded of one good to a change in the price of another 
good. Where goods i and j are substitutes the cross elasticity will be 
positive--i.e., a fall in the price of good j will result in a fall in 
the demand for good i as j is substituted for i. If the goods are 
complements the cross elasticity will be negative. Where i and j are 
not related, the cross elasticity will be zero. Taylor, John, B., 
Economics (Houghton Mifflin, Boston, 1998), p. 59.
    A sharp decrease in the price of motor scooters or rollerblades 
will decrease the demand for bicycles. Why? Because buying these 
related goods becomes relatively more attractive than buying bicycles. 
Motor scooters or rollerblades are examples of substitutes for 
bicycles. A substitute is a good that provides some of the same uses or 
enjoyment as another good. Butter and margarine are substitutes. In 
general, the demand for a good will increase if the price of a 
substitute for the good rises, and the demand for a good will decrease 
if the price of a substitute falls. Bannock, Graham, R.E. Banock and 
Evan Davis, Dictionary of Economics (Penguin, London, 1987).
    Substitutes. Products that at least partly satisfy the same needs 
of consumers. Products are defined as substitutes in terms of cross-
price effects between them. If, when the price of records goes up, 
sales of compact discs rise, compact discs are said to be a substitute 
for records, because consumers can to some extent satisfy the need 
served by records with compact discs. This account is complicated by 
the fact that, when the price of an item changes, it affects both the 
REAL INCOME 01 consumers and the relative prices of different 
commodities. Strictly, one product is a substitute for another if it 
enjoys increased demand when the other's prices rises and the 
consumer's income is raised just enough to compensate for the drop in 
living standards caused (pp. 390-391).
    Cross-price elasticity of demand. The proportionate change in the 
quantity demanded of one good divided by the proportionate change in 
the price of another good. If the two goods are SUBSTITUTES (e.g., 
butter and margarine), this ELASTICITY is positive. For instance, if 
the price of margarine increases, the demand for butter will increase 
(p. 99).
    \22\ Report on Cable Prices, p. 11.
    \23\ Federal Communications Commission, 2002b.
    \24\ Federal Communications Commission, 2001b, describes the DBS 
variable as the level of subscription. Federal Communications 
Commission, 2002b, uses the DBS dummy variable.
    \25\ The cluster variable was included in the Federal 
Communications Commission 2000a and 2001b Price reports. Its behavior 
contradicted the FCC theory. It has been dropped from the 2002 report. 
The MSO size was included in the 2002 report. System size has been 
included in all three reports.
    \26\ Vertical integration was included in Federal Communications 
Commission, 2002b.
    \27\ U.S. General Accounting Office, ``Report to the Subcommittee 
on Antitrust, Competition, and Business and Consumer Rights, Committee 
on the Judiciary, U.S. Senate: Issues in Providing Cable and Satellite 
Television Services.'' October 2002. In an important clarifying 
footnote, the report finds that:
    ``This was a larger effect than that found by FCC in its 2002 
Report on Cable Industry Prices (FCC 02-107). Using an econometric 
model, FCC found that cable prices were about 7 percent lower in 
franchise areas when there was an overbuilder. One possible explanation 
for the difference in results is that we conducted further analysis of 
the competitive status of franchises that were reported by FCC to have 
an overbuilder. We found several instances where overbuilding may not 
have existed although FCC reported the presence of an overbuilder, and 
we found a few cases where overbuilders appeared to exist although FCC 
had not reported them. We adjusted our measurement of overbuilder 
status accordingly.''
    \28\ Tom Wolzien, ``Returning Oligopoly of Media Content Threatens 
Cable's Power.'' The Long View, Bernstein Research (Feb. 7, 2003). 
Emphasis added.
    \29\ Coalition for Program Diversity, Jan. 28, 2003.
    \30\ Victoria Riskin, President of Writers Guild of America, West. 
Remarks at FCC EnBanc Hearing, Richmond, VA (Feb. 27, 2003).
    \31\ Federal Communications Commission, Ninth Annual Report, In the 
Matter of Annual Assessment of the Status of Competition in the Market 
for the Delivery of Video Programming, MB docket No. 02-145 (Dec. 31, 
2002).
    \32\ One of the more ironic arguments offered by the cable 
operators feeds off of the observation that broadcast networks have 
carriage rights. They argue that even if cable operators foreclosed 
their channels to independent programmers, these programmers could sell 
to the broadcast networks. This ignores the fact that cable operators 
control the vast majority of video distribution capacity. There are 
approximately 60 channels per cable operator on a national average 
basis (Federal Communications Commission, 2002b, p. 10). There are 
approximately 8 broadcast stations per DMA on a national average basis 
(BIA Financial, 2002). Each broadcast station has must carry rights for 
one station. They can bargain for more, particularly in the digital 
space, but the cable operators control more stations there as well. In 
other words, if we foreclose 85 percent of the channels, the 
programmers will be able to compete to sell to the remaining 15 percent 
of the channels. Needless to say, this prospect does not excite 
independent programmers.
    \33\ Public Law 102-385, Section 2(a)(9).
    \34\ Public Law 102-385, Section 2(a)(12).
    
    

    The Chairman. Thank you.
    Mr. Gleason?

 STATEMENT OF JAMES M. GLEASON, PRESIDENT AND COO, CableDirect

    Mr. Gleason. Thank you.
    I am the president of CableDirect, an independent cable 
business serving nearly 20,000 customers in more than 150 rural 
communities in nine States. I am also the chairman of the 
American Cable Association, and our members are small and not 
affiliated with programming suppliers. I also will echo some of 
the comments you have heard this morning, but I hope I bring 
them from the perspective of a small operator that is serving 
more small and rural areas.
    Due to the concentration of media ownership, there are 
really three very important issues that threaten the rural 
customers. The abusive conduct of a handful of the media 
conglomerates toward smaller market distributors and their 
customers, the adverse impact of the proposed FOX, News Corp, 
DirecTV merger on competition in small and rural markets, and 
the disproportionate regulatory burdens that I face compared to 
my satellite competitors.
    To begin, the abuse of conduct by a handful of media 
conglomerates is driving up consumer costs and taking away 
choice, particularly in small markets. The key question here 
is, who controls what your constituents see on their TV sets? 
The answer is these five conglomerates. Over the past 5 years, 
we have seen the explosion of consolidation in the programming 
industry that has led to sharply increased prices and reduced 
consumer choice. As has been mentioned, ESPN's fifth annual 
rate increase of 20 percent was just announced. The fact is the 
programming rates for 14 of the major programming networks has 
risen 67 percent over the last 5 years, an increase of more 
than five times the consumer price index.
    But there is more. As you have heard, in order for us to 
get ABC or a FOX affiliate, Disney and FOX will often force us, 
through retransmission consent, to take and pay for other 
channels we know our customers do not want. The abuse of 
retransmission consent goes farther. In order to get consent 
for a local broadcast station in one market, we have to carry 
satellite programming in other markets where they do not even 
own the broadcast station.
    One solution might be to offer the expensive programming in 
tiers or a la carte. But all of the programming companies force 
their programming onto the lowest, most basic levels of 
service.
    The Chairman. Mr. Gleason, can you document the allegations 
that you just made?
    Mr. Gleason. Certainly.
    The Chairman. We would appreciate that.
    Mr. Gleason. There is one flaw in what we get into, and, in 
most of our, if not all of our agreements, have confidentiality 
clauses which do not allow us to show what we have to do and 
what we have to comply with and what we have to pay.
    The Chairman. So it would be difficult for you to provide 
us with documentation.
    Mr. Gleason. It would be very difficult.
    [Laughter.]
    Senator Stevens. We could subpoena it.
    The Chairman. Senator Stevens says we could subpoena it, I 
guess. But those are very serious allegations----
    Mr. Gleason. Yes, they are.
    The Chairman.--Mr. Gleason. Go ahead.
    Mr. Gleason. So to break the stranglehold of programmers 
and give consumers any choice, we should do three things--
ensure the freedom to unbundle programming, revamp the laws 
dealing with retransmission consent and program access, and 
require the transparency and disclosure of programming costs. 
Today, programmers tie and bundle their services in a way to 
obtain one service, we are forced to pay for other services our 
customers do not request.
    Congress should amend telecommunication laws to provide 
that no programming provider can require that its services be 
carried on the basic or expanded basic levels of service. 
Rather, 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.
    Today, network owners use retransmission consent to tie and 
bundle their services in a way to force your constituents to 
pay for channels they do not want. ACA has provided the FCC 
with extensive evidence of abusive retransmission consent 
practices and has petitioned for an inquiry into this conduct, 
and we urge you to request the FCC to take immediate action on 
the inquiry.
    Furthermore, the retransmission consent laws were to put 
the local broadcasters on a more equal competitive footing with 
cable. Since then, media consolidation has turned the process 
on its head. Now the media conglomerates are using 
retransmission consent to evade market forces in order to 
artificially inflate their revenues.
    In terms of transparency and disclosure, as you mentioned, 
what consumer, local franchising authority, or your 
congressional office, knows what it costs to watch TV? The 
answer is no one. That is because the conglomerates resist the 
transparency by hiding their practices under the cloak of 
confidentiality requirements. Congress should amend the 
Communications Act to require programmers to make annual 
disclosures to local franchise authorities and the FCC. These 
disclosures should include what programmers charge cable 
business and how they mandate bundling or placement of their 
services. Moreover, Congress should direct the FCC to compile 
an annual comprehensive programming price index to show how 
much consumers are truly charged to watch television. The FCC 
should also compile a retransmission consent index to show 
consumers what it truly costs to receive their local broadcast 
stations.
    Concerning the merger of FOX, News Corp, and DirecTV, I 
feel it will create the world's largest vertically integrated 
programming distributor. This multinational behemoth will 
control access to programming, limit customer choice, raise 
programming prices, and eliminate competition in rural markets. 
Because of these concerns, we believe the government should 
place strict, easily enforceable conditions on any such merger. 
In addition, Congress should amend the programming access laws 
to extend them to vertically integrated satellite entities, 
just as these laws are applied to vertically integrated cable 
entities.
    And, finally, the smaller independent cable companies face 
a disproportionate burden of regulation compared to the free 
regulatory ride enjoyed by the satellite companies. Congress 
should reduce independent cable's regulatory burden and balance 
it with satellites.
    In conclusion, why should anyone here listen to what we 
have to say? If Cox and Cablevision feel they have no leverage 
with programmers, you can imagine the lack of leverage we have 
as a small cable operator in rural and small markets. The irony 
here is that the impact of these media ownership issues, if not 
addressed by Congress, will have the opposite outcome to what 
Congress desires. The potential outcome will not provide new 
advanced services, competition, or choice for consumers in 
small and rural marketplaces.
    Thank you.
    [The prepared statement of Mr. Gleason follows:]

 Prepared Statement of James M. Gleason, President and COO, CableDirect
I. Introduction
    Thank you, Mr. Chairman.
    My name is Jim Gleason, and I am the president and chief operating 
officer of CableDirect, an independent cable business currently serving 
40,000 customers in more than 250 rural communities in nine states--
Alabama, Colorado, Illinois, Indiana, Iowa, Mississippi, Missouri, 
Oklahoma and Texas.
    I also serve as the chairman of the American Cable Association, 
which represents more than 1,000 independent cable businesses serving 
almost 8 million customers primarily in smaller markets and rural areas 
across the United States. In fact, our American Cable Association 
members serve customers in every state and U.S. territory and also in 
nearly every congressional district.
    Unlike big companies you hear about, ACA members are not affiliated 
with programming suppliers, television networks, big cable, broadcast, 
satellite and telephone companies, major ISPs or other media 
conglomerates. We focus on smaller market cable and communications 
services, often in markets that the bigger companies chose not to 
serve. Because we live and work in these rural communities, we know how 
important it is to have advanced telecommunications services available 
and to be a provider of choice in these communities.
    ACA members are leading the industry in delivering advanced 
services in smaller markets. Far from living on the wrong side of the 
digital divide, millions of customers served by independent cable 
companies enjoy access to digital cable and broadband Internet services 
that are not available in some urban areas. Some ACA member systems 
have begun to deliver DTV broadcast signals as well, doing our part to 
move the transition forward. We also look forward to providing newer, 
advanced services to our customers in rural America too. Advanced 
services like digital broadcast television, high definition television, 
video-on-demand and cable and Internet telephony, to name a few.
    As you know, most of today's headlines in the communications world 
are about the large companies, such as the Fox/News Corp./DirecTV 
merger and the media giants created by the mergers of the 1990s and 
beyond.
    Just for the record, my small company is not the ``giant entrenched 
cable monopoly'' that others talk about so frequently. Rather, being on 
this panel makes me feel like a David among many Goliaths. The American 
Cable Association represents no Goliaths. We're simply small businesses 
in cable that happen to serve customers in rural America.
    We're here to speak for the millions of small-town customers and 
thousands of small-town businesses that are represented by every Member 
of this Committee.
    Quite frankly and ironically, we're the smaller-market and rural 
competitor to what may soon become the ``giant entrenched, vertically 
integrated satellite conglomerate''--Fox, News Corp., and DirecTV.
    I hope my testimony here today will help you serve your 
constituents by understanding the critical issues facing the 
multichannel video programming and distribution industry and the 
negative effects that continue to occur as a result of increasing media 
consolidation.
    These issues will have a significant impact on all Americans and 
could have a devastating effect on smaller markets and rural 
communities where our ACA members employ thousands and serve millions. 
I therefore ask for your consideration and hope you will agree that the 
industry is in need of congressional and regulatory review.
II. Competition and Choice are the Victims of Increasing Concentration 
        of Media Ownership.
    To me, the real benefit of this hearing is the opportunity to 
highlight the current status of customer choice in the multi-video 
services market, because competition really means customer choice. No 
choice, no competition. However, the irony here is that the status of 
competition and customer choice today, especially in rural areas and 
small towns, is already significantly limited because it is governed by 
an unlikely cast of players that do not live in rural America, do not 
focus on rural Americans' needs, and who have found anti-competitive 
means to extract enormous wealth from the pockets of rural consumers 
and businesses.
    Unless there is significant congressional and regulatory review of 
these issues, the situation is sure to get worse. Consumer choice and 
competition may be wiped out in the wake of the mergers creating these 
mighty communications giants. Let me tell you why.
    There are three very important issues that threaten consumer choice 
in smaller markets and rural America and that will derail the progress 
to provide advanced services in smaller markets:

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

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

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

III. Key Issues
1. The abusive conduct of a handful of media conglomerates is 
        threatening the ability of cable systems, particularly in 
        smaller markets, to compete. More importantly, these abuses are 
        driving consumer costs up while taking away choice. Congress 
        must act to address the worsening structural programming 
        problems caused by increasing media concentration.
    From our standpoint, this hearing provides an important and 
appropriate opportunity to highlight how little customer choice exists 
today in the multichannel video services market, especially in rural 
America. The fact is that the status of competition and customer choice 
today, especially in rural areas and small towns, is already 
significantly diminished because it is governed by an unlikely cast of 
players who neither live in rural America, nor focus on its needs.
    This unlikely cast includes several major media conglomerates that 
are mandating the cost and content of most of the services we provide 
in smaller markets. These include Disney/ABC/ESPN, Fox/News 
Corp.(DirecTV), General Electric/NBC, CBS Viacom/UPN, and AOL/Time 
Warner/WB. For smaller market cable systems, this is a fundamental 
problem that directly impacts our ability to provide a viable, 
competitive service to our customers. These major media conglomerates, 
which we call OPEC, the Organization of Programming Extortion 
Companies, have found through media consolidation the means to use 
market power to extract ever-increasing profits from consumers and 
businesses in smaller markets.
    Unless there is significant congressional and regulatory action to 
address these issues, the situation will only worsen. Without your 
intervention, consumer choice and competition, not to mention the 
deployment of advanced telecommunications services in rural areas, will 
disappear in the wake of this merger frenzy.
    A vitally important question here: Who controls what your 
constituents see on their TV sets? Not a small cable business like mine 
or any one of our ACA members. Customers and local franchise 
authorities are unaware of this, but their television choices are 
controlled by the five OPEC companies.
    Over the past 5 years we have seen an explosive consolidation in 
the programming industry that has led to sharply increased prices, less 
freedom to offer popular content, and little customer awareness as to 
why they are forced to buy the channels they do.
    For example, ESPN's fifth 20 percent increase in 5 years was 
announced just this past week.
    Imagine how your Committee would react if it were my cable company 
or any other cable operator that raised its rates 20 percent a year for 
5 years in a row. Frankly, the same indignation you would feel if my 
company raised rates like this must be focused on ESPN and other 
programmers, like Fox Sports, that raise rates like this every year.
    The fact is that programming rates for 14 of the major cable 
programming networks have risen 66.6 percent over the past 5 years--an 
increase of more than 5 times the Consumer Price Index (CPI) over the 
same period.
    In ESPN's case, one day after ESPN announced last week its fifth 
consecutive annual 20 percent increase, ESPN's parent company, Disney, 
announced a $400 million revenue increase for the 2nd Quarter of 2003, 
largely attributed to revenue growth at ESPN and other Disney 
programming networks.
    If you want to know why cable rates are increasing, this is a big 
reason why.
    But there's more.
    Obviously, some of our customers want ESPN or Fox Sports. But ABC-
Disney and Fox/News Corp. will not let us just buy ESPN or Fox Sports. 
Oftentimes, in order to get the local ABC or Fox affiliate, Disney and 
Fox will force us through retransmission consent to take and pay for 
other channels we know our customers don't want.
    This abuse of retransmission consent goes farther--in order to get 
consent to carry a local broadcast station in one market, our members 
are forced to carry Disney or Fox's satellite programming in other 
markets, where Disney and Fox do not even own the broadcast station.
    For example, is it really in the public interest for all of my 
customers to pay for recycled soap operas, a programming service for 
which most of them have absolutely no interest, just so some of my 
customers can be permitted to watch their ABC affiliate?
    Adding to the absurdity of the situation, these conditions for 
carriage often outlive the terms of the retransmission consent period 
for the local broadcast station by many years. As a result, these 
mandated conditions clog a cable system's channel capacity with OPEC 
programming while denying that capacity to independent, non-OPEC 
programmers. The end result is that these mandated OPEC conditions 
increase costs and decrease choice for consumers.
    It gets worse. One solution might be to offer the expensive 
services in tiers or a la carte. This would allow consumers to choose 
whether or not they wish to pay for the expensive services. But all of 
the OPEC programming companies force their programming onto the lowest, 
basic levels of service, making our companies and customers pay for all 
of their programming whether they want it or not. We must ask: Is this 
good for the consumer? Is this in the public interest? Is this why 
these companies get exclusive control over valuable spectrum?
    Consolidation has turned retransmission consent into extortion. 
Even more appalling is that fact that the OPEC companies embed in their 
contracts various ``non-disclosure'' terms. These provisions prohibit 
cable operators from telling any customer, even the local franchise 
authority or your Committee, the rates and terms for the distribution 
of the OPEC programming. Thus, rate increases and unfair bundling 
practices are kept hidden from the public and even from Congress. That 
is not the foundation for an open, functional and fully competitive 
marketplace, or one that is transparent and constructed to best serve 
consumers.
    I am sure you all remember the retransmission consent showdown in 
New York City between Time Warner and Disney over this very issue.
    After that enormous struggle between industry titans, imagine the 
odds a small company like mine has when negotiating with these OPEC 
programmers.
    The five major OPEC programmers control all broadcast networks and 
at least 50 other of the most popular stations. More than 90 percent of 
cable systems offer 30-90 channels, which, as you can see, are 
dominated by OPEC programmers.
    In fact, on your own Senate cable system more than 63 percent of 
the widely distributed channels on it are controlled by the OPEC media 
conglomerates.
    In order to assist your review of this situation, I have attached 
several charts that depict the realities a member of our association 
faces with regard to programming and channel capacity. I urge you to 
review these charts carefully in order to better understand the 
enormous power held by only a handful of consolidated media 
conglomerates.
    The irony here is that at a time when Congress wants our small 
cable businesses to provide our customers with more choice and greater 
value, media conglomerates like Disney/ABC/ESPN, Fox/News Corp./DirecTV 
and the other OPEC companies are restricting choice and raising costs. 
    If our smaller businesses and our customers are ever to regain any 
measure of control over the spiraling rates imposed by these voracious 
conglomerates, then Congress must intervene.
    The members of the American Cable Association and independent 
cable's buying group, the National Cable Television Cooperative, have 
for years sought meaningful dialogue with the OPEC programmers, but to 
no avail.
    More than a decade of debate and discussion on these issues with 
them has led to no positive change in their behavior.
    To break the stranglehold of control by the OPEC programmers and to 
give consumers and independent cable businesses any choice and control, 
Congress should act in three specific areas:

   ensure the freedom to unbundle OPEC programming;

   revamp the laws dealing with retransmission consent and 
        program access; and,

   require the transparency and disclosure of programming 
        costs.

    Unbundling: Today the OPEC programmers tie and bundle their 
services in such a way that to obtain one service our customers are 
forced to pay for other services they don't want.
    Congress should act to ensure that the programming conglomerates 
cannot force consumers and cable businesses to take bundled services or 
require that these services be carried on the lowest levels of service.
    If the programming conglomerates had exercised any self-control to 
stop this conduct, we wouldn't be here today asking Congress to act. 
But the abuse goes on.
    Congress should amend telecommunications laws to provide that no 
programming provider can require that its services be carried only on 
the basic or expanded basic level of service. Rather, to give consumers 
choice and to allow the market to determine what gets on TV, 
programmers should be required to make their services available as part 
of a separate programming tier, or even a la carte.
    The template for this congressional action has already been 
created. Both Mr. Dolan and Mr. Hindery on this panel and their 
respective companies, Cablevision Systems and the Yankees Entertainment 
Service (YES), are now allowing consumers to buy higher-priced 
programming services on either a tier or as a single, a la carte 
channel.
    And the consumers' call for more choice through tiering and a la 
carte has been heard by more than just ACA. The Chairman of this 
Committee has called for such change, which has been supported by 
several larger cable companies as well.
    However, this fundamental change to give consumers more choice 
through tiering and a la carte will not occur without congressional 
action.
    In the case of Cablevision and YES, it took the actions and efforts 
of the New Jersey Senate, U.S. Senator Frank Lautenberg, New York City 
Mayor Michael Bloomberg and New York State Attorney General Elliott 
Spitzer to compel this result.
    If it takes this kind of combined political pressure to force 
parties of equal bargaining power together, what likelihood do 
consumers in smaller markets and rural areas have to see the same 
changes without congressional action. Frankly, none.
    Therefore, Congress must help us give consumers greater choice by 
amending the Communications Act to allow us the right to offer all 
programming on a tiered or a la carte basis.
    Retransmission Consent: Today, as a result of unprecedented media 
consolidation, the OPEC programmers abuse retransmission consent laws 
simply to line their pockets. They do this by forcing your constituents 
to pay for unwanted programming in exchange for receiving their local, 
free over-the-air broadcast stations.
    ACA has provided detailed evidence of these abuses to the Federal 
Communications Commission and has asked the FCC to undertake an inquiry 
into these abusive retransmission consent practices. The FCC has so far 
not acted on this petition. We ask the Congress to urge the FCC to take 
immediate action on this inquiry.
    The retransmission consent laws when enacted in 1992 were designed 
to put local broadcasters on a more equal competitive footing with 
cable operators. Since then, unforeseen media consolidation has turned 
this process on its head. Now, the media conglomerates are using the 
retransmission consent laws to evade market forces in order to 
artificially inflate the revenues from their satellite programmers. The 
practical impact of this evasion by the media conglomerates is that 
rural and smaller market consumers have less choice and higher costs, 
effectively subsidizing urban markets.
    Congress should amend the retransmission consent laws to protect 
our consumers from being forced to pay for unwanted satellite 
programming just to see their local broadcast stations.
    Transparency and Disclosure: What consumer, local franchising 
authority or congressional office knows what it costs to watch TV? The 
answer is not one. That's because the OPEC conglomerates resist 
transparency by hiding their abusive practices under the cloak of 
confidentiality requirements.
    Who gets the blame when programmers force unpopular or costly 
programming on our basic tiers? Not them, but us.
    As ESPN's fifth consecutive 20 percent annual increase shows, 
programming prices continue to escalate far in excess of the rate of 
inflation, raking in enormous sums from consumers. It's greed run amok. 
One way to rein in the greed of programmers is to require transparency.
    Congress should amend the Communications Act to require programmers 
to make annual disclosures to local franchise authorities and the 
Federal Communications Commission. These disclosures should include 
what programmers charge cable businesses and how they mandate bundling 
or placement of their services.
    Moreover, Congress should direct the FCC to compile every year a 
comprehensive Programming Price Index to show Congress and consumers 
how much they are truly being charged to watch television. Every 3 
years the FCC should also compile and publish a Retransmission Consent 
Index to show consumers what it truly costs them to receive their local 
network television stations.
    Until there is transparency in the programming marketplace, 
consumers and their local providers of service will have little control 
over what is seen on TV, when it is seen on TV, or how much it will 
cost.
2. The adverse effect of the proposed Fox-News Corp.-DirecTV merger 
        will limit current competition and choice in U.S. markets--
        particularly in smaller and rural markets. The Federal 
        Communications Commission and Department of Justice must place 
        significant conditions on this merger, and Congress should also 
        extend and apply current program access laws to vertically 
        integrated satellite operators.
    Customers will also face less choice as a result of the vertically 
integrated satellite conglomerate that would be created from a Fox-News 
Corp.-DirecTV merger.
    The merger of Fox, News Corp. and DirecTV will create perhaps the 
world's largest vertically integrated programming distributor. This 
multi-national behemoth will possess global reach and control a 
television broadcast network, scores of broadcast affiliates, a 
significant number of cable and satellite programming channels, and a 
complete satellite distribution system with DirecTV's more than 10 
million customers. These facts alone will give Fox the ability to 
control access to programming, limit customer choice, raise programming 
prices, and eliminate competition in rural markets.
    The threat by a merged Fox/News Corp./DirecTV to use its 
programming leverage against other competitors is not theoretical. Upon 
completion of the merger, the conglomerate will have exclusive control 
over certain sporting events, including the NFL's Sunday Ticket and 
numerous regional sports networks.
    Last Friday, News Corp. proposed some ``voluntary conditions'' in 
its first FCC filing on the merger. These do not go nearly far enough. 
Even with the proposed conditions, News Corp. and its many broadcast 
and programming affiliates will still have an arsenal to increase costs 
and reduce choice for rural consumers.
    Because of these concerns, we believe the government must place 
strict and easily enforceable conditions on any such merger. In 
addition, Congress should amend the program access laws to extend them 
to vertically integrated satellite entities, just like these laws are 
applied to vertically integrated cable entities.
3. Smaller, independent cable companies face a disproportionate burden 
        of regulation, compared to the free regulatory ride enjoyed by 
        the giant satellite companies. Congress should reduce 
        independent cable's regulatory burden or balance it with 
        satellite's.
    We continually hear representatives of the direct broadcast 
satellite industry say how Congress should help DBS compete against the 
``giant, cable monopoly'' by reducing or eliminating the DBS regulatory 
burden.
    However, contrary to these DBS cries, two facts are clear:
    First, as we have already outlined, the new Fox/News Corp./DirecTV 
juggernaut will assemble an unparalleled array of content and 
distribution assets. Absent clear enforceable restrictions, the 
conglomerate will expand the use of this massive power to the detriment 
of choice, competition and consumers in rural America.
    Second, my company and the nearly 1,000 other small, independent 
cable businesses in the American Cable Association are obviously not 
the ``cable giants'' that DBS says it must compete against. Rather, we 
are and will be the competitor in smaller markets and rural areas. 
That's why preserving competition in rural markets is vital.
    But it's more than that. Right now direct broadcast satellite 
enjoys favored regulatory treatment that gives it a great advantage in 
the rural marketplace. Consider the following list and ask if this 
regulatory balance is fair. The average ACA member company serves 8,000 
subscribers, more than 9,992,000 fewer subscribers than the post-merger 
DirecTV. Fox and DirecTV cannot seriously maintain that they need 
governmental help to compete against smaller market cable companies.

                           Regulatory Burdens
------------------------------------------------------------------------
                                            Fox/DirecTV (10,000,000
Small Cable (Avg. 8,000 Subscribers)             Subscribers)
------------------------------------------------------------------------
Must-Carry in all Markets             Must-Carry only in selected
                                       markets
Retransmission Consent                Retransmission Consent
Emergency Alert Requirements          Limited Public Interest
                                       Obligations
Tier Buy-Through                      ..................................
Franchise Fees                        ..................................
Local Taxes                           ..................................
Signal Leakage/CLI                    ..................................
Rate Regulation                       ..................................
Mandatory Carriage of Broadcast on    ..................................
 Basic
Privacy Obligations                   ..................................
Customer Service Obligations          ..................................
Public Interest Obligations           ..................................
Service Notice Provisions             ..................................
Closed Captioning                     ..................................
Billing Requirements                  ..................................
Pole Attachment Fees                  ..................................
Public File Requirements              ..................................
------------------------------------------------------------------------

    In smaller markets and rural areas, the regulatory disparity that 
exists between independent cable and DBS must be addressed if Congress 
and federal policymakers want to ensure that multiple providers of 
video service are there to provide choice to consumers. This means that 
Congress should reduce, or at least equalize, the regulatory burdens on 
smaller cable.
IV. Conclusion
    Each one of the foregoing issues directly affects the market's 
ability to: (1) provide competition and choice in smaller markets; (2) 
give consumers control over what they see on television and how much 
they pay for it; and, (3) deploy advanced new services in rural 
communities.
    My company and the members of the American Cable Association are 
here today alongside the giants of the television, cable, satellite and 
telecommunications world. Why should anyone here listen to what we have 
to say?
    Because the nature of our businesses makes us uniquely sensitive to 
the needs of small and rural markets. We serve nearly 8 million 
consumers in nearly all congressional districts and, in fact, every 
state represented on this Committee.
    The irony here is that the impact of these media ownership issues, 
if not addressed by Congress, will have the opposite outcome to what 
Congress desires. This potential outcome will not provide advanced new 
services, competition and choice for consumers in the smaller and rural 
marketplaces.
    The American Cable Association and its members are committed to 
working with the Committee to solve these important issues.
    I would like to sincerely thank the Committee again for allowing me 
to speak before you today.
Exhibits
    1. ``Who Controls Your TV Set?''
    2. U.S. Senate Channel Card
    3. ACA Member Programming Pie Chart
    4. ACA Member Programming Bar Chart
    5. ACA Letter to Sen. McCain on media ownership, cable rates and 
programming increases; March 19, 2003 



                                 American Cable Association
                                     Pittsburgh, PA, March 19, 2003
Hon. John McCain,
Chairman,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

    Dear Chairman McCain:

    On behalf of the nearly 1,000 independent cable business members of 
the American Cable Association, I want to endorse the comments you made 
in your January 14, 2003 Commerce Committee hearing on the state of 
competition in the telecommunications industry. There is no question 
that the unprecedented consolidation of media ownership in the 
programming industry has driven up cable rates to our members' cable 
customers.
Higher Costs and Loss of Consumer Choice From The Mega-Mergers
    Our Association has been in the forefront of resisting mega-mergers 
that have led to higher programming costs for our customers. Since 1995 
at the FCC, FTC and Department of Justice, ACA has strenuously objected 
to the mergers of Disney and ABC (ESPN), Time Warner and Turner, Viacom 
and CBS. We predicted that permitting these combinations would lead to 
higher programming costs and reduced consumer choice. As you and others 
have noted, this is exactly what has happened.
    The effect of these mergers and media consolidation has been to put 
massive control of content and distribution into the hands of just a 
few--Disney/ABC, Fox/News Corp., General Electric/NBC and CBS/Viacom. 
In turn, the media conglomerates have used their content control and 
leverage to drive programming rates, and thus cable rates, up, while at 
the same time consumers, particularly in smaller markets and rural 
areas, have lost any choice in the price and package of services they 
receive.
    Currently, these conglomerates enjoy unfettered control to force 
their affiliated programming and ever-increasing programming rates on 
smaller cable operators and consumers.
The Latest Example: Retransmission Consent Abuses
    The latest example of the way in which concentration of ownership 
is pushing up cable rates is in broadcaster retransmission consent. For 
smaller cable operators and smaller market consumers, retransmission 
consent has become a vise. On one side of the vise are a handful of 
media conglomerates--Disney, Fox, Hearst-Argyle, Gannett, and a few 
others--with ever-increasing demands. On the other side are 
retransmission consent laws and outdated FCC market protection 
regulations. Squeezed in the middle are smaller cable operators and 
consumers.
    As a result, small cable companies and small market consumers must 
pay far more than their big city/big cable counterparts for access to 
local broadcast signals. The higher costs come in two forms. First are 
retransmission consent tying arrangements. To obtain access to a local 
network signal, Disney, Fox, Hearst-Argyle and other media 
conglomerates force carriage of, and payment for, affiliated satellite 
programming that neither consumers nor cable operators requested. 
Second, in this most recent round, cash-for-carriage demands have 
proliferated. The broadcaster affiliates of these conglomerates demand 
tying arrangements or sham cash ``alternatives'' of on average $0.70 
per customer per month. Gannett and Cox Broadcasting are demanding 
strictly cash for carriage, take it or leave it.
The Exploitation By Programming Conglomerates of Smaller Markets
    The quest by consolidated media owners for new revenue streams from 
smaller markets has washed away any pretense of localism. Smaller 
market consumers are the losers.
    This problem draws a bright line between big and small. First, this 
is a distinctly small cable problem. The big cable multiple system 
operators, with millions of customers and a range of other negotiation 
advantages, reportedly are receiving consent to carry local signals 
with little fanfare. \1\ Not so for smaller cable operators. Second, 
this is big broadcaster problem. When dealing with independent 
broadcasters and small affiliate groups, ACA members report mutually 
beneficial carriage arrangements. In short, a few media conglomerates 
are exploiting hundreds of smaller cable companies and millions of 
rural consumers.
---------------------------------------------------------------------------
    \1\ Most Cable MSOs Get Deals Done on Retransmission Consent, 
Communications Daily (January 10, 2003).
---------------------------------------------------------------------------
    In this retransmission consent round, in growing numbers, small 
cable operators are concluding that neither their businesses nor their 
customers can support the retransmission consent demands of the media 
conglomerates. This simply results in higher costs to their customers 
for nothing new. The broadcasters are withholding consent. Signals are 
being dropped in market after market. The consequence of these abuses 
of retransmission consent is either higher cable rates or loss of 
broadcast service. This cannot possibly be the outcome desired by 
leaders like you.
Remedies Are Possible
    As you are aware, one large-market cable MSO, Cablevision, settled 
a yearlong carriage dispute with the YES Network. YES demanded that the 
only way their network could be carried by Cablevision was on the basic 
level. This would have forced all Cablevision customers to pay for YES, 
whether or not they wanted to receive it. Cablevision said ``No.'' The 
result was New York City area cable subscribers did not receive 
approximately 120 Yankee games last year. Cablevision and YES settled 
the dispute by allowing the MSO to put the Yankees' games on a new 
sports tier and offer YES as an a la carte option.
    Cablevision said it is working to ensure that those who choose to 
receive sports services bear the cost, and those who do not are not 
forced to pay, thus aligning sports costs to consumer value.
    While this agreement is great news for consumers in the New York 
City area, it highlights how big MSO's are treated differently than 
smaller cable operators.
    The ACA agrees with your March 14, 2003, letter to the five CEO's 
of the largest cable companies where you challenged these operators to 
follow Cablevision's lead and provide their customers with similar 
choices, especially with respect to the most expensive programming 
services, like sports, that continue to drive up cable rates.
    All cable operators should have the ability to place programming on 
a tier or offer a la carte where cable customers can decide how best to 
spend their money according to their own interests and choices. But 
unless cable operators have big market leverage, like Cablevision, 
programmers--particularly the sports programmers--won't give them that 
right.
    Cable companies in smaller markets simply do not have the market 
leverage to negotiate the best deals for their customers. Programmers 
continuously turn a deaf ear to the needs of rural America. They simply 
refuse to negotiate agreements similar to the Cablevision/YES deal.
    I agree with you that the Cablevision deal is not a complete 
solution to the problem of skyrocketing programming rates, but it is an 
important first step to lowering cable rates by providing consumers 
with more choice. And this step must be expanded to all cable consumers 
and operators.
The ACA Response
    ACA has recently filed Reply Comments in the media ownership 
proceeding at the FCC with substantial evidence of pervasive 
exploitation of retransmission consent in smaller markets and the harm 
to the public interest in localism, choice, and reasonable rates for 
basic cable. ACA has also filed an urgent Petition for Inquiry into 
Retransmission Consent Practices. \2\ These filings contain numerous 
examples of retransmission consent abuse by the programming 
conglomerates. So far, the Commission has not acted on these filings.
---------------------------------------------------------------------------
    \2\ Petition for Inquiry into Retransmission Consent Practices, 
American Cable Association (filed October 1, 2002) (``Petition for 
Inquiry''); Petition for Inquiry into Retransmission Consent Practices, 
First Supplement, American Cable Association (filed December 9, 2002) 
(``Supplement'').
---------------------------------------------------------------------------
    ACA also strongly believes that programmers must be required to 
make their programming available to all consumers on a tiered or a la 
carte basis. We believe Congress must act to require this or the result 
will be that smaller market and rural consumers will have no chance to 
take advantage of the consumer benefits Cablevision was able to 
achieve.
Further Action on Media Concentration
    I urge that you, as Commerce Committee Chairman, take the lead in 
examining the egregious impact that media concentration has had on 
cable rates, particularly in the smaller markets of this country.
    Furthermore, I urge you and your Committee to explore and 
investigate how consumers and their providers can be given more choice 
in how programming services are priced, packaged and provided, without 
the enormous leverage of the media conglomerates, whose actions have 
driven programming and cable rates skyward without check.
    ACA stands ready to assist in this effort in any way.
        Most respectfully yours,
                                           Matthew M. Polka

    The Chairman. Thank you, Mr. Gleason.
    For the record, Mr. Murdoch was invited to testify here 
today, and he was unable to because of scheduling.
    Mr. Hindery?

  STATEMENT OF LEO HINDERY, JR., CHAIRMAN AND CEO, YES NETWORK

    Mr. Hindery. Good morning to you, Mr. Chairman, and to your 
fellow Senators.
    I am Leo Hindery. I am the chairman and CEO of the YES 
Network, which is a regional sports network that I formed in 
September 2001 to serve New York, Connecticut, and parts of New 
Jersey and Pennsylvania. YES has acquired, as its most notable 
programming, the long-term broadcast rights of the New York 
Yankees, the New Jersey Nets and the English football club, 
Manchester United, together with Big East and Ivy League 
conference sports.
    At its launch in March 2002, YES had negotiated long-term 
carriage agreements with DirecTV and with 36 of the region's 37 
cable operators. The only cable operator which did not agree to 
carry YES was the company Cablevision, the largest cable 
operator in our region, which also, notably, owns the area's 
only other regional sports networks and which previously owned 
the broadcast rights of the Yankees and the Nets. It took a 
federal antitrust suit, legislative initiatives throughout the 
area, especially in New Jersey, and several consumer lawsuits 
to finally convince Cablevision to carry YES, after a year of 
saying ``no way'' to us and to its customers.
    I am honored to have testified in front of this Committee, 
Mr. Chairman, numerous times over the past 15 years on the 
subjects of cable-industry regulation, cable rates, programming 
issues, and industry consolidation. Prior to founding YES, I 
was, as some of you may recall, CEO of AT&T Broadband and of 
its predecessor company, TCI.
    When I testified here in the past, I commented to the 
Senators that additional cable-industry regulation would 
probably not be required. Notably, I also promised, at least 
for the companies I managed, that customers should expect cable 
rate increases which would approximate general inflation, that 
consolidation would bring noticeable benefits to consumers, and 
that my company would never abuse its enormous market powers to 
the detriment of independent programmers. I believe the record 
will show that when I was around, TCI, and later AT&T, I kept 
those promises.
    Sadly, however, I find myself today deeply concerned about 
the future of independent programmers which do not have ready 
access to multichannel distributors simply because they are not 
vertically integrated. And I find it beyond irresponsible for 
cable industry leaders to blame programmers for their often 
excessive rate increases when the overall facts clearly belie 
this contention, and especially when more than half the 
channels--half the channels--available to consumers are 
actually owned by cable companies. I would also point out that 
more than half of the regional sports networks in the country 
are also owned by someone in the cable industry, including 
Cablevision and Cox.
    In 1974, 30 years ago, President Gerald Ford appointed a 
high-level Cabinet Committee to develop proposals for a new 
policy that would allow cable to be integrated into our 
Nation's communication media. Recommendation No. 1, 
recommendation No. 1 from the Committee, concluded that, 
``Control of cable distribution should be separated from 
control of programming and other services provided over the 
channels on those distribution facilities.''
    Notably, this recommendation was made fully a decade before 
the dramatic proliferation of cable-industry-owned programming 
services. And after reading all of the Committee's background 
materials, it is certainly clear that no one on that Committee 
contemplated a world like we have today, where, every day, 
independent programmers are held hostage by large, multichannel 
operators which either own numerous and significant competing 
programming services or which, through consolidation, have 
accumulated extraordinary amounts of market power. And they 
certainly did not envision a world, Mr. Chairman, where only 
seven cable companies, as you commented, would control access 
to more than 90 percent of the Nation's homes, and the largest 
would alone, access 40 percent.
    I have testified in front of you often in support of 
vertical integration and in support of cable-industry 
consolidation, and I would do so again today, if asked. And my 
testimony would reiterate the economies of scale which 
consumers should realize from consolidation, and it would 
reiterate that vertical integration can be a very positive 
force in the launch of new programming services.
    However, I no longer believe that additional regulation is 
uncalled for. Rather, I request that you pass, in the form of a 
short amendment to Section 616 of the Communications Act, 
legislation which will assure the vitality of independent 
programmers and assure that vertical integration will cease to 
be a discrimination tool for the Nation's larger cable 
operators.
    The cable-industry consolidation genie is out of the 
bottle, and he is not going back in; nor do I, personally, 
believe he should. However, I do believe that, as first 
contemplated by the Ford Committee 30 years ago, program access 
must now be embedded by legislation and by regulation into the 
operating practices of the cable industry.
    The reason I do not include the satellite-broadcast 
industry in this recommendation is that, with sensitivity, News 
Corp has already committed to full program access as a 
precondition to its pending acquisition of DirecTV. But now it 
is truly the cable industry's turn to fully embrace program 
access.
    Specifically, I am requesting that this Committee preserve 
the existence of independent, unaffiliated programmers and 
assure the vitality of all programming by incorporating three 
principles into Section 616 of the Communications Act.
    Those principles, which can be addressed with only a 
handful of additional words, are, first, there must be parity 
or nondiscrimination in the way programming services are 
treated, regardless of ownership. This extends to wholesale 
prices, to packaging, to consumers, and to positioning on the 
dial. In other words, a multichannel video-programming 
distributor should not be able to engage in conduct the effect 
of which is to restrain the ability of an unaffiliated video-
programming vendor to compete fairly.
    Second, all programmers should receive the fair market 
value of their programming, regardless of whether or not the 
programming service is affiliated or unaffiliated. Nothing 
more, but certainly nothing less.
    Third, cable operators must now make decisions related to 
program acquisitions, to pricing of programming to customers, 
and to packaging in a truly content-neutral manner. Content 
neutrality, as we all know, is, of course, a basic First 
Amendment principle in media. But if it is not made part of the 
proposed amendment to the Communications Act, then the reality 
is that any large cable operator, vertically integrated or not, 
can use the existing state of play, wherein so very many of the 
existing channels are already owned by companies in the cable 
industry, to thwart opportunities for independent, 
nonaffiliated programmers.
    In closing, Mr. Chairman, I would comment that no one 
really knows how multichannel television will continue to 
evolve, which is why the continuing oversight of this Committee 
and of the FCC is so vital. But we do know that today only a 
handful of cable companies control access to more than 90 
percent of the Nation's television households, that today more 
than half the channels available on the dial are owned by a 
company affiliated with the cable industry, and that every day 
independent nonaffiliated programmers, small and big alike, are 
discriminated against.
    We also know, from early firsthand experiences, that some 
of the cable industry's recent undertakings in the areas of 
packaging and bundling actually conspire to significantly 
further restrict consumer choice and access to unaffiliated 
independent video and now Internet services.
    It is time, Mr. Chairman, I believe, for the content 
playing field to be leveled, as first addressed by the Ford 
Committee, and for vertical integration to cease to be an 
opportunity for discrimination.
    Thank you all for your courtesy.
    [The prepared statement of Mr. Hindery follows:]

 Prepared Statement of Leo Hindery, Jr., Chairman and CEO, YES Network
    Good morning to you, Mr. Chairman, and to your fellow Senators.
    I am Leo Hindery, and I am chairman and CEO of the YES Network, 
which is a regional sports network that I formed in September 2001 to 
serve New York, Connecticut, and parts of New Jersey and Pennsylvania. 
YES has acquired, as its most notable programming, the long-term 
broadcast rights of the New York Yankees, the New Jersey Nets and the 
English football club Manchester United, together with Big East and Ivy 
League conference sports. At its launch in March 2002, YES had 
negotiated long-term carriage agreements with DirecTV and with 36 of 
the region's 37 cable operators. The only cable operator which did not 
agree to carry YES was the company Cablevision, the largest cable 
operator in our region which also, notably, owns the area's only other 
regional sports networks and which previously owned the broadcast 
rights of the Yankees and the Nets. It took a federal antitrust suit, 
legislative initiatives throughout the area, especially in New Jersey, 
and several consumer lawsuits to finally convince Cablevision to carry 
YES, after a year of saying ``no way'' to us and to its customers.
    I am honored to have testified in front of this Committee numerous 
times over the past 15 years, on the subjects of cable industry 
regulation, cable rates, programming issues, and industry 
consolidation. Prior to founding YES, I was, as some of you may recall, 
CEO of AT&T Broadband and of its predecessor company, TCI.
    When I testified here in the past, I commented to the Senators that 
additional cable industry regulation would probably not be required. 
Notably, I also promised, at least for the companies I managed, that 
customers should expect cable rate increases which would approximate 
general inflation, that consolidation would bring noticeable benefits 
to consumers, and that my company would never abuse its enormous market 
powers to the detriment of independent programmers. I believe the 
record will show that when I was around, TCI and later AT&T kept those 
promises.
    Sadly, however, I find myself today deeply concerned about the 
future of independent programmers which do not have ready access to 
multi-channel distribution simply because they are not vertically 
integrated. And I find it beyond irresponsible for cable industry 
leaders to blame programmers for their often excessive rate increases, 
when the facts clearly belie this contention and especially when more 
than half of the channels available to consumers are actually owned by 
cable companies.
    In 1974, thirty years ago, President Gerald Ford appointed a high-
level Cabinet Committee to develop proposals ``for a new policy that 
[would] allow cable to be integrated into our Nation's communications 
media.'' Recommendation number 1 from the Committee concluded that 
``control of cable distribution should be separated from control of 
programming and other services provided over the channels on those 
distribution facilities.'' Notably, this recommendation was made fully 
a decade before the dramatic proliferation of cable industry-owned 
programming services. And after reading the Committee's background 
materials, it is certainly clear that no one on the Committee 
contemplated a world like we have today, where every day independent 
programmers are held hostage by large multi-channel operators which 
either own numerous and significant competing programming services or 
which through consolidation have accumulated extraordinary amounts of 
market power. And they certainly did not envision a world where only 
seven cable companies would control access to more than 90 percent of 
the Nation's homes and the largest would alone access 40 percent.
    I have testified often in support of vertical integration and in 
support of cable industry consolidation, and I would do so again today 
if asked. And my testimony would reiterate the economies of scale which 
consumers should realize from consolidation, and it would reiterate 
that vertical integration can be a very positive force in the launch of 
new programming services.
    However, I no longer believe that additional regulation is uncalled 
for. Rather, I request that you pass, in the form of a short amendment 
to Section 616 of the Communications Act, legislation which will assure 
the vitality of independent programmers and assure that vertical 
integration will cease to be a discrimination tool for the Nation's 
larger cable operators.
    Much like the unwanted spam which Senators Burns and Wyden have 
taken bold steps to eliminate, every day viewers in America are forced 
to watch programming owned by the distributor which brings them the 
programming, rather than receiving programming which is not influenced 
by who owns it. The issues are substantially the same.
    The cable industry consolidation genie is out of the bottle, and he 
isn't going back in. Nor do I believe he should. However, I do believe, 
that as first contemplated by the Ford Committee thirty years ago, 
``program access'' must now be embedded, by legislation and by 
regulation, into the operating practices of the cable industry. The 
reason I do not include the satellite broadcast industry in this 
recommendation is that, with prescient sensitivity, News Corp. has 
already committed to full ``program access'' as a precondition to its 
pending acquisition of DirecTV. But now, it truly is the cable 
industry's turn to fully embrace ``program access.''
    Specifically, I am requesting that this Committee preserve the 
existence of independent, unaffiliated programmers and assure the 
vitality of all programming by incorporating three principles into 
Section 616 of the Communications Act. Those principles, which can be 
addressed with only a handful of additional words, are:

        First, there must be ``parity'', or nondiscrimination, in the 
        way programming services are treated, regardless of ownership. 
        This extends to wholesale prices, packaging to consumers and 
        positioning on the dial. In other words, as first raised by the 
        Ford Committee and later codified in part in the Communications 
        Act, a multichannel video programming distributor should not be 
        able to engage ``in conduct the effect of which is to restrain 
        the ability of an unaffiliated video programming vendor to 
        compete fairly.''

        Second, all programmers should receive the fair market value of 
        their programming, regardless of whether or not the programming 
        service is affiliated or unaffiliated. Nothing more, but 
        certainly nothing less.

        Third, cable operators must make decisions related to program 
        acquisitions, to pricing of programming to customers, and to 
        packaging in a truly content neutral manner. Content neutrality 
        is, of course, a basic First Amendment principle in media, but 
        if it is not made part of the proposed amendment to the 
        Communications Act, then the reality is that any large cable 
        operator, vertically integrated or not, can use the existing 
        state of play, wherein so very many of the existing channels 
        are already owned by companies in the cable industry, to thwart 
        opportunities for independent, nonaffiliated programmers.

    In closing, I would comment that no one really knows the way multi-
channel television will continue to evolve, which is why the continuing 
oversight of this Committee and of the FCC is so vital. But we do know 
that today only a handful of cable companies control access to more 
than 90 percent of the Nation's television households, that today more 
than half of the channels available on the dial are owned by a company 
affiliated with the cable industry, and that every day independent, 
nonaffiliated programmers, small and big alike, are discriminated 
against. We also know from early first-hand experiences that some of 
the cable industry's recent undertakings in the areas of packaging and 
bundling actually conspire to significantly restrict consumer choice 
and access to unaffiliated, independent video and Internet services. It 
is time, I believe, for the content playing field to be leveled, as 
first commented on by the Ford Committee, and for vertical integration 
to cease to be an opportunity for discrimination.
    Thank you for your courtesy.

    The Chairman. Thank you, Mr. Hindery. Can you document that 
every day independent nonaffiliated programmers, small and big, 
are discriminated against?
    Mr. Hindery. I can. I can, Mr. Chairman. And it is a 
perilous path for some, because, if you have been discriminated 
against, when you raise your head, as you know, it sometimes 
gets lopped off. I have commented to some that I think the only 
reason that the YES fight was able to rise to the visibility it 
did and to the success it did was it was regionally contained. 
But there are people, Senator, who will stand in front of you 
and your fellow Senators and back up those assertions.
    The Chairman. If you could provide that for the Committee, 
those instances and individuals, I would appreciate it.
    Mr. Robbins, do you want to respond to that?
    Mr. Robbins. Mr. Chairman, I would just suggest one missing 
point here. The issue that I am here to speak to is the 
combination of high price and broadly mandated distribution in 
programming offerings, and that is what has happened in the 
sports world. My issue is, let us go to a tier, let us let the 
consumer choose whether they want to pay for that high-priced 
service or not. It is no more complicated than that.
    The Chairman. Well, could you respond to the allegation 
that every day independent nonaffiliated programmers, small and 
big, are discriminated against?
    Mr. Robbins. I do not think I can, because we give fair 
hearing to every programmer that comes along, where we have 
reasonable business relationships. We accommodate those issues 
and those channels get carriage.
    The Chairman. Thank you.
    Mr. Robbins and the members of the panel, do you believe 
that a la carte or multi-tiered pricing would benefit 
consumers? And if you think so, do you believe that Congress 
should mandate it? Beginning with you, Mr. Robbins. I think I 
know your answer to the first part of it.
    Mr. Robbins. Well, my answer is, I would like to see the 
marketplace work. And if the marketplace is not working, then 
we are in a position where we are going to have a train wreck. 
And I would not like to see a train wreck.
    The Chairman. Mr. Dolan?
    Mr. Dolan. Well, I agree with Mr. Robbins' comments on 
that. I think it really begins with the program vendors. If the 
program vendors are prevented from denying their programming to 
the cable operator, unless he requires all of his customers to 
buy that programming, you have immediately set the market free. 
I think that is the fundamental difficulty that we have at this 
time.
    And if I understood the General Accounting Office testimony 
this morning, the increase in cable prices--in our case, of our 
operating expenses, 55 percent of them are due to programming--
if we are unable to control those costs, we are also unable to 
control the price that we will need to charge our customers for 
that programming if we are to remain in business.
    The Chairman. Thank you.
    Mr. Kimmelman?
    Mr. Kimmelman. I heard Mr. Gleason say before that 
programmers have too much leverage. I think he is right. But I 
believe these gentlemen to my left, cable operators, have too 
much leverage, as well. This should be consumer leverage, not 
industry leverage. This should be choice. I suggest----
    The Chairman. Since half the channels are owned by cable 
operators.
    Mr. Kimmelman. Absolutely right. And I believe the FCC data 
show--I am not clear what it will show in terms of intent, but 
the FCC data show that cable companies that own programming 
tend to carry their own programming, to the disadvantage of 
independent entities that have similar programming, not 
surprisingly.
    I would suggest, Mr. Chairman, that cable companies will 
assert their First Amendment right to put on whatever 
programming they like, and I think that is fair, but I do 
believe it would be appropriate to balance this with Congress 
requiring them to unbundle their programming and, at the same 
time, do approximately what Mr. Hindery is asking for. Let us 
get rid of discrimination in how the bundles are put together. 
Let us get rid of any discrimination and favoritism in how the 
programming is put together. Let us unbundle it all the way 
across the board and give consumers control of what they want.
    The Chairman. Mr. Gleason?
    Mr. Gleason. Yes, I think we have got to be able to tier 
cable programming, particularly with the escalation in costs. 
Yes, we are a cable operator, as well, but no one in our 
organization or myself owns any of the cable programming, so we 
are at a vast disadvantage when it comes to being able to 
decide what we are going to carry.
    To Mr. Hindery's comments on discrimination, I do not know 
if it is necessarily discriminatory or not, but I can, to a 
certain extent, agree with the independent programmers in that 
many times when we have to sign a programming agreement for one 
service of the major media conglomerates, we have got to agree 
to carry four, five, six, seven different services that they 
offer in order to get the service that has the highest ratings 
that our customers really desire. So I think when that happens 
and it fills up our dial, yes, it does make less room for 
independent programmers.
    Mr. Hindery. Mr. Chairman, briefly, I think there is such 
commonality among Mr. Kimmelman, Mr. Gleason, and myself. It 
can be handled so simply with this concept of parity, that you 
are treated fairly regardless of who owns you, and you are 
treated the same regardless of what you broadcast.
    The concern I had throughout the YES fight was the ongoing 
hypocrisy of the industry. Half of the regional sports networks 
in the country owned by the industry, including some of these 
gentlemen carried in basic, contractually mandated that we were 
highlighted outside of that milieu. One was even formed by one 
of these companies while we were having the fight in New York. 
It is the hypocrisy of the industry that has grown to distress 
me so, and that speeches are given against programmers every 
day, except their own. Practices are forced down programmers' 
throats, except their own.
    And it is a very simple fix, Mr. Chairman. It is a few 
words that simply says ``parity,'' as President Ford 
contemplated nearly 30 years ago, ``content neutrality,'' and, 
to Mr. Gleason's comment, ``fair market value of programming.'' 
No programmer should ask for more or less than that. And it 
would all level out. Much of the abuse that has crept into the 
system would all level out if those three principles were 
commonly embraced.
    The Chairman. Thank you. My time has expired.
    Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman.
    A question, if I might, for you, Mr. Kimmelman, but perhaps 
some of the other witnesses want to get into this, as well. I 
mean, what we have established in the course of the morning is 
that broadcasters own lots of cable channels. No question 
there. And cable companies, in effect, own many others. And my 
concern is, if the FCC now lifts the limits on ownership, all 
of the problems that have been established with respect to 
these cross-ownership interests are going to get worse.
    Mr. Kimmelman, do you share that view? And any of the other 
panel members are welcome to come in.
    Mr. Kimmelman. Absolutely, Senator Wyden. I think it is 
going to hit in two major forms. One is price, the most obvious 
one, that if you have market power and you can bundle your 
programming, you are going to keep driving the prices up. As we 
relax ownership rules across media, as well, and we allow more 
broadcast and cable combinations, now satellite and broadcast 
with the News Corp deal, you can leverage against one medium 
your strength in another market. So we are going to see price 
increases.
    But, even more importantly than that, we have seen those 
before, we are going to see a few national companies with an 
opportunity to own more local properties, more local broadcast 
stations, possibly the largest newspaper in a community, and 
this is not a huge problem, maybe, in terms of national news or 
international news; we have plenty of competition in that 
realm. But in the local market, think about it, for 70 percent 
of the communities in the country, there is only one local 
newspaper. And for most others, there are, at best, two. That 
is where most people get their news and information. If we put 
that in the hands of one company, it may be a benevolent, 
positive entrepreneur, and it may not be, and it certainly will 
not be a watchdog on its own business interests.
    Senator Wyden. Let me ask a question of the cable 
operators. Long-distance telephone rates have come down. Now, 
your rates are going up. And you all have said that it is 
because of investments that you are making in your network and 
various issues with respect to programming. But I would like to 
know at what point are you all going to turn to the question 
the consumers are talking about now, and that is holding the 
rates down?
    Mr. Dolan. Well, long-distance telephone rates, they--long-
distance people have no content costs, no programming costs. It 
is strictly the cost of operating their facility that they need 
to reflect in their prices. That is very different from a cable 
system, which, as I mentioned before, its principal cost is 
content, and it does not control those content costs.
    I think it is interesting that there is as much concern as 
I have heard this morning about cable control of programming in 
this market. You know, our company, Cablevision, has over 3 
million subscribers in one market. That is more than anybody 
else has in a single market. And, accordingly, we should have 
more leverage to accomplish that control than anybody else; but 
yet of over 200 programming services that Cablevision carries, 
we own ten.
    Senator Wyden. But the point is, in the technology 
business, where there is competition, costs and rates go down, 
and you are still not responding to the question. I want to 
know when you all are going to turn to the issue of trying to 
drive these rates down, because everybody else in the 
technology business, where you see some competition, seems to 
be going the other way.
    Mr. Dolan. Well, sir, I think that is the happy subject of 
this meeting today. We think the best way to reduce rates for 
the customer is to let the customer choose for himself what 
programming he will buy and what programming he will not buy. 
If he finds the programming to be not of value and overpriced, 
he will not buy it. And we all know that that is the way the 
market works. If it is not of value and overpriced, then either 
that supplier will not be there for long or he will reduce his 
price.
    Senator Wyden. I have been saying the a la carte concept 
and the idea of letting them tailor their desires for cable 
makes sense. I am just concerned, with all these cross-
ownership interests, if you all do not get at the question of 
bringing these rates down, there is going to be some other way 
in which these rates continue to soar, and you still have not 
responded to the question, other than to say that everybody 
else should be part of the solution.
    Sir?
    Mr. Robbins. Senator Wyden, I am sorry, I want you to know 
that, in the telephone business, our rates are 10 percent lower 
than the incumbent operator on a first line. They are anywhere 
from 30 to 50 percent lower on the second line. Our highspeed 
data offering is at a higher speed than the telephone companies 
have offered, and at a lower price until some very recent price 
announcements were made last week. So I submit to you that we, 
in fact, have taken the price lead on those services.
    Senator Wyden. All right.
    Mr. Kimmelman, one last question, if I might. What kind of 
safeguards should there be to make sure that there are some 
checks and balances? I mean, you have got the prospect of more 
consolidation, more mergers, and cable companies with extensive 
interests in a whole host of medias. And, again, it just looks 
virtually unfettered and unchecked. So you have any ideas with 
respect to safeguards you would recommend?
    Mr. Kimmelman. Absolutely, Senator Wyden. Let me first say 
that a la carte is a step forward, but let us remember here 
that it does not eliminate market power.
    Senator Wyden. That is the point.
    Mr. Kimmelman. It is still a price set by a cable operator 
and in negotiations with some very powerful programmers. So 
there would be more choice. I am not sure it gets at lower 
prices.
    On the safeguards issue, we think the FCC should be very 
cautious here and not relax its media-ownership rules as it 
relates to broadcast television and newspapers, particularly in 
light of the News Corp/DirecTV merger. We are going to ask the 
Justice Department to look at retransmission consent for News 
Corp, to look at its ability to leverage over the cable 
industry and over the--one other satellite company. There are a 
variety of safeguards that need to be put in place. And I 
believe, in general, Mr. Hindery is right, there are a number 
of legislative changes in law that would be very beneficial at 
this point.
    Senator Wyden. Thank you, Mr. Chairman.
    The Chairman. Senator Stevens?
    Senator Stevens. Thank you very much.
    I am interested in what you just said, Mr. Robbins, about 
your rates being 10 percent lower than the telephone service. 
But you do not pay Universal Service. Nine percent of their 
cost is Universal Service. You are not paying Universal Service 
costs.
    Mr. Robbins. Yes, we are. We are a full participant in the 
Universal Service Fund on our telephone revenues, Senator. I am 
glad you raised that, because I did want to correct that 
information.
    Senator Stevens. That is not my information at all.
    Mr. Robbins. Well, I will be happy to----
    Senator Stevens. I will be glad to have evidence to 
establish that.
    Mr. Robbins. I will be happy to submit all of the filings 
that we have made and make sure that record is very clear.
    Senator Stevens. Our information from the FCC does not 
agree with you, but I will be glad to go into that at another 
time.
    Mr. Robbins. I am very certain on that subject, Senator.
    Senator Stevens. I am told when that goes through the 
Internet, you do not pay.
    Mr. Robbins. We pay on telephone service into the Universal 
Service fund, phone-to-phone service. We have almost 800,000--
--
    Senator Stevens. But if you go through the Internet and go 
long distance through Internet, you do not pay. Is that right?
    Mr. Robbins. That is a much more complicated question. We 
are paying where we do phone-to-phone service.
    Senator Stevens. I am told that that is not true on cable 
modem. I do not want to spend a lot of time on that, but I 
would like to see you clarify that. But I do not think that the 
Universal Service concept can exist, can continue, unless both 
the direct broadcaster and your concept of Internet through 
cable make the contributions required for other providers.
    Mr. Robbins. Well, we have been an early participant from 
the beginning in our telephone service.
    Senator Stevens. I am talking about Internet access 
through--telephony through Internet.
    Mr. Robbins. I understand, and that is a much more 
complicated issue. I would be very happy to submit----
    Senator Stevens. You have got 1.6 million highspeed 
Internet customers now. If they are all using telephony through 
the Internet, you are not contributing to Universal Service.
    Mr. Robbins. I say, again, Senator, and I am sorry. We are 
contributing on our phone service; we are not contributing on 
our Internet service.
    Senator Stevens. Well, I think we ought to go into that 
sometime and find out how we are going to have the Universal 
Service survive in view of these new access concepts to long 
distance.
    Let me go into something else for each one of you, though. 
The Basic Cable Act requires that each cable operator provide a 
cable system that has a basic service tier. You do provide 
that, do you not? Basic tier? Both----
    Mr. Robbins. Yes, sir.
    Senator Stevens. And you determine what is in the tier, 
right? There are some requirements by law, as Mr. Dolan has 
mentioned, signals such as the low power and educational system 
in any public education with government access program required 
by a franchise that cable system provide other subscribers, but 
basically you each determine what the basic tier is, and that 
is available primarily for people who cannot afford anything 
else, right?
    Mr. Robbins. Yes, sir.
    Senator Stevens. Now, beyond that, the law says that you 
can provide additional signals, and those additional signals 
are determined by you, right?
    Mr. Robbins. The expanded basic service, which is above the 
basic package, yes, sir.
    Senator Stevens. Right. But now I am hearing that the cable 
systems would like some regulation from Congress to make 
certain that some of these portions that you previously have 
included can be separated out, such as ESPN. Is that right?
    Mr. Robbins. I am only----
    Senator Stevens. Am I hearing right? You are coming to us 
asking us for more regulation?
    Mr. Robbins. I did not state--I was quite clear in saying--
I thought I was clear; and if not, I want to be very clear 
now--that I would like this to work itself out in the 
marketplace. I am not asking for government regulation. But I 
am suggesting that when services like ESPN get over a dollar, 
at the wholesale level, per month, then the consumer be given 
the opportunity to choose whether or not they want that and 
price it accordingly.
    Senator Stevens. Well, I do not want to be too simplistic, 
but you own the pipe, and you can determine what goes into the 
pipe. Why can you not have 100 different tiers? You can 
determine that right now without any government regulation, can 
you not?
    Mr. Robbins. Yes and no, Senator. The technological 
limitations on the equipment that we have allow you to tier 
some services, not all, today. Now, Mr. Dolan has a broader 
view of that, I think, than I do.
    Mr. Dolan. It is, Senator, very difficult--it is impossible 
to tier the systems, to tier the expensive programs. You have 
ESPN saying to us that, ``You cannot have ESPN, you cannot 
carry it on your cable system unless you carry it in your 
expanded basic service,'' which is the lowest tier available to 
the subscriber. So, therefore, they are saying, ``Unless your 
require all of your subscribers to buy our service--do not 
offer it to them for any choice--all of them must buy it 
regardless of their interest or lack of interest in sports. And 
if you do not agree to that, you cannot have that service on 
your cable system.''
    Senator Stevens. But your simple answer is, you can offer 
individual tiers right now. You can say, ``OK, if you do not 
want to give it to us the way we say, we are not going to carry 
you.''
    Mr. Dolan. We could say that, sir, but the ESPN, MTV, CNN, 
the YES Network, they all have their constituencies, and if you 
take that position with that supplier and the effect is to deny 
that programming to your market, your cable system is going to 
be in trouble. The customer does not want to hear that you have 
some quarrel with your supplier and, therefore, they cannot 
have that programming.
    Senator Stevens. Well, I am sorry I do not have enough 
time. Mr. Hindery, I particularly appreciated some of the 
quotes I have read of you in your past positions with regard to 
the impact of the newly negotiated contracts in the sports 
field. We are all talking about the problem of increasing 
costs, but clearly those people in the sports field are 
entering contracts with players that are far beyond anyone's 
imagination 5, 10 years ago. I think we have to get into that 
sometime.
    But the difficulty that I have is--for instance, I am told 
by my staff that programming costs as a percentage of Cox 
revenues actually declined from 23 percent to 21 percent last 
year, while programming costs as a percentage of Cox's costs 
have gone down from 39 percent to 32 percent last year. That 
seems to indicate that 68 percent of the costs that Cox has 
right now has nothing to do with programming.
    Mr. Robbins. Senator----
    Senator Stevens. And yet you are asking us to relieve you 
from the costs of programming. Now, if 68 percent of your cost 
is not effected by those programs, such as ESPN, why are you 
here asking us to give you greater powers?
    Mr. Robbins. Senator, I am here to try and make clear on 
the video side of our business--the numbers that you have there 
have to do with our overall revenues--our telephone business, 
our highspeed Internet business, our video business--and 
obviously they have taken the program costs as a percentage of 
those overall revenues. I think the way that apples should be 
compared to apples is the program costs should be compared to 
the video revenues. And video revenues as a percentage--I am 
sorry, video costs as a percentage of revenues have gone from 
12 percent to 30 percent over the last 5 years of our video 
costs. So I just--we are mixing apples and oranges with the 
numbers, Senator.
    Senator Stevens. Well, again, I am out of time, but my 
staff also advised me the FCC figures show that your cable 
profit margin hovers between 30 and 40 percent. Despite the 
economy, despite the recession, your profits are going up. And 
you are coming here to complain about paying someone else more 
money.
    Mr. Robbins. Senator, I am not complaining. I am trying to 
demonstrate the conundrum that we have with high-priced sports 
programs and mandatory broad carriage. That is the single issue 
that is driving video-programming rates, which was what this 
hearing was called for. And I have been trying to make that 
point clear, I guess, unsuccessfully, and I apologize.
    Senator Stevens. No, no.
    Mr. Robbins. That is the connection that I am----
    Senator Stevens. No apology is required. I think we have 
got such a complex question here, I wish we could have even 
more time, Mr. Chairman. I would like to----
    Mr. Dolan. Mr. Chairman, may I add a comment?
    Senator Stevens.--visit with you more. I thank you very 
much for your statement. And I have watched you through your 
steps through the industry, and I think you have a background 
we should rely on heavily because of your experience on all 
facets of this industry.
    Thank you very much, Mr. Chairman.
    The Chairman. Mr. Dolan, you wanted to comment?
    Mr. Dolan. Yes, if I just may add to that. The question of 
cable profits, that really ought to be examined. I hope the GAO 
will do that. In our case, we have been in business for 30 
years, and we are hopeful that our first profit will occur next 
year. And we are not here really to ask you to give the cable 
company any more power. I think both Mr. Robbins and I are 
asking you to give the cable customer more power.
    The Chairman. Mr. Hindery, do you want to respond?
    Mr. Hindery. I have got to tell you, Mr. Chairman, that a 
business that does not make a profit in 30 years----
    [Laughter.]
    Mr. Hindery.--and they are still flying here in the 
airplane, it is not a bad business.
    [Laughter.]
    Mr. Hindery. You know, you cannot--to Senator Stevens' 
comment, Mr. Chairman, you cannot lay the blame for rate 
increases on programmers like this industry is trying to do 
today. Senator Stevens was right, I gave many speeches saying 
that exorbitant rate increases should not be tolerated in this 
industry or in any industry. But it is a phantom, a phantom, to 
blame on programmers these continuing rate increases far, far 
in excess, as you pointed out in your opening statement, of 
general inflation. And we have got to get down to the nub, 
which is fairness.
    You cannot have more than 50 percent of the signals, Mr. 
Chairman, be owned by the industry and then have them blame 
programming. You know, I met you recently at an event, and I 
said, ``You know, it is sort of like the old Pogo thing, I met 
the enemy and it is me.'' It is either one way or it is the 
other way.
    And it is that hypocrisy that is just rankling, which is--
abusive practices by any vendor should be curtailed. But to 
blame the programming industry for these rate increases is 
simply wrong. The numbers belie that, and the GAO report is 
heading in that direction, Mr. Chairman.
    And there are a lot of wonderful things that could happen 
to improve, as Mr. Kimmelman said, the rights and role of the 
consumer in this debate. But it is not sitting here blaming 
ESPN. That is not--that is just smoke and mirrors, Mr. 
Chairman.
    The Chairman. Mr. Gleason and Mr. Kimmelman, this is an 
equal-opportunity committee.
    [Laughter.]
    Mr. Gleason. Well, from the small guys sitting here, I feel 
like I am in my typical position. We have got the big guys 
sitting down here at the end saying that it is programming's 
fault, and I actually do sympathize with them. We have got Mr. 
Hindery over here on the programming end now saying, well, it 
is not really the programmers, because it is the big 
programmers that are owned by the industry. And we find 
ourselves, as the small cable operators here, in neither one of 
these positions. Yet I can tell you that due to the drastic 
programming increases, that is why our retail rates are going 
up. We rely, in the small end of the business, more heavily on 
our video end of the business.
    Mr. Robbins is exactly right. They are developing new 
revenue streams in telephony and whatnot, and we are rolling 
out highspeed data and digital services as rapidly as we can, 
but the fact of the matter is, in rural America, we rely more 
heavily still on our basic cable service for our revenue 
streams. And when we see costs, wholesale costs, go up 16 
percent--in ESPN's case, 20 percent a year--there is nothing we 
can do but to raise rates.
    Additionally, if I can respond to Senator Stevens' 
comments, he said, ``Do you choose what we put on our most 
basic lineup?'' The answer, to a certain extent, is no. Our 
programming contracts require us to put certain programmers--in 
fact, most of them--on certain levels of service.
    So, for example, if we decided for a--let us say we wanted 
to put The Weather Channel on our most basic lineup, and I have 
heard Senator Burns say before that is a pretty important thing 
out where we live. Out in the places of the country we live in, 
the weather is an important thing.
    We cannot do that. Our other programming contracts say, 
``No, if you put The Weather Channel down there, then you have 
got to put me down there.'' So we say, ``Well, we cannot do 
it.'' Even if our customers tell us they would like to have The 
Weather Channel on our lowest, most basic form of service. So, 
therefore, we put them on expanded basic. And then everybody 
says, ``Well, we have got to be on expanded. If you are going 
to put weather there, we have got to be on expanded.''
    So here is how this goes. And we, as the smaller operators, 
do not have the leverage of any of these people here to make 
any of these drastic changes that need to happen in our 
industry to control retail rates.
    The Chairman. Mr. Kimmelman?
    Mr. Kimmelman. Gosh, I always wished I could do play by 
play. Here is my take on it. The cable industry is, ``Please 
help us. Please help us. We are raising rates too much. The 
marketplace is not working right. Blame the programmers.'' They 
were given the right to do whatever they wanted except for one 
thing, carry local broadcast signals and public access on the 
basic tier. They can put anything else in it they want, or not 
put it in if they want.
    The Chairman. So they should not be able to demand of Mr. 
Gleason that he put certain things in any tier.
    Mr. Kimmelman. Well, what they are saying is, ``The market 
is making me do this. Please help.'' Well, there is power in 
certain programming. It is very popular. People do not want to 
watch the Super Bowl 3 weeks later. They want to watch it when 
it happens. They want to watch the World Series when it 
happens. That yields market power, and the same for popular 
programming. They do not like the fact that they have to pay a 
lot to the programmer, but somehow they find a way to just pass 
it along to the consumer anyway.
    I sympathize with the small cable company that does not 
have all the same revenue streams from other services. And yet 
what we find is, as they upgrade to digital and as they provide 
cable-modem service all over the same plant, 20, 30, 40 percent 
of their customers are taking it yielding a new revenue stream. 
You have got to look at that revenue stream, and you have got 
to look at the increased advertising revenue that comes in to 
offset the cost of programming.
    So I think we have got quite a game going on here with 
nobody putting everything on the table.
    Mr. Hindery. Could I just offer--I totally sympathize----
    The Chairman. I apologize, Senator Lautenberg.
    [Laughter.]
    Mr. Hindery. I totally sympathize with Mr. Gleason, who 
sits out in rural America with small systems that just are in 
the video business. The fundamental premise, Mr. Chairman, is 
that 90 percent of the Nation's homes are now owned by seven 
companies. With all respect to Mr. Gleason, his problems are 
real, and they need to be addressed, much like Senator Stevens 
often tries for his constituents in Alaska, and Senator Burns. 
But 90 percent of the Nation's homes are owned by seven 
companies that own all of this content. It is not Mr. Gleason's 
issue to solve; nor is it mine. It rests, with all respect, 
down there.
    Senator Stevens. Well, I just wish I was back practicing 
antitrust law. I think I would own one of your networks, 
because there are some antitrust violations going on here. That 
is all there is to it.
    [Laughter.]
    The Chairman. Mr. Robbins, you should be eligible for a 
response, and then we will go on.
    Mr. Robbins. Well, I would take exception to the statistics 
that Mr. Hindery pointed out. The Disney company is one, Viacom 
is another, that is not in the distribution business. So I do 
not know where this enormous amount of leverage that Mr. 
Hindery is talking about is coming from.
    Anyway, let me stop there.
    Mr. Dolan. Well, Mr. Hindery routinely finds us to be 
masters of monopoly and hypocrisy, and I do not agree with him 
about that. But I do agree with him that the nub of this 
meeting is fairness, and if, as Mr. Hindery asserts, that there 
is no problem with the price of programming, then there should 
be no problem with letting the subscriber choose whether or not 
to buy that programming at the price that is asked by Mr. 
Hindery and by others.
    The Chairman. Well, then I would say that we would hope, 
then, that there would be no confidential agreements that 
required Mr. Gleason to carry certain programs on the basic 
tier.
    I want to thank Senator Lautenberg for his patience. This, 
I think, was a very important discussion.
    Senator Lautenberg. I agree. Mr. Chairman----
    The Chairman. I thank Senator Lautenberg.
    Senator Lautenberg.--no problem, because I think a lot of 
interesting information was brought out in that exchange, and 
often we do not have interesting information.
    [Laughter.]
    Senator Lautenberg. So it is kind of nice to watch them 
duke it out here, but it would be nice to also be able to get 
to the truth.
    Mr. Hindery, you took exception to Mr. Dolan's statement 
about the first profit coming out his business in 30 years, and 
that is--do the Devils make the profit? Do you know?
    Mr. Hindery. Sadly, the Devils make absolutely no profit, 
Senator, as you know.
    Senator Lautenberg. Well, it is then--so the same scorn 
that you applied to Mr. Dolan's business acumen applies to 
the--how about the Nets?
    Mr. Hindery. The Nets are marginally profitable, Senator.
    Senator Lautenberg. Well, my former business partners owned 
a big piece of that, as you know.
    Mr. Hindery. Yes, I know. They----
    Senator Lautenberg. And they always----
    Mr. Hindery.--the playoffs.
    Senator Lautenberg.--complained about not being able to 
make any money there.
    But that is not the issue. I think the issue is somewhat in 
definitions here. I would recommend that the operators use the 
terminology other than ``expanded basic.'' It is basic or it 
ain't. And if it is not, then call it something else, because I 
think there is a kind of a marketing disguise in there. Nothing 
evil, but it may be good marketing.
    Mr. Gleason, you said that you ``sympathize'' with the 
operators, your term. Do you believe what they said? That is a 
little bit different than ``sympathize'' with the impact of the 
programmers?
    Mr. Gleason. I sympathize with the large cable operators?
    Senator Lautenberg. Yes, you said that.
    Mr. Gleason. I do. I----
    Senator Lautenberg. Yes, but do you believe--you have heard 
two of the larger folks talk here about their business--do you 
believe what they said?
    Mr. Gleason. Yes.
    Senator Lautenberg. So it is not just sympathy. I mean, you 
believe----
    Mr. Gleason. Our business----
    Senator Lautenberg.--that the programmers are taking an 
inordinate share and exercising special muscle to get that.
    Mr. Gleason. I definitely agree with that, and I agree with 
Mr. Hindery, in that many of the cable channels that exercise 
those same kinds of controls are owned by larger cable 
operators and----
    Senator Lautenberg. You said that.
    Mr. Gleason.--I agree with Mr. Robbins that both Disney and 
Viacom also are in the same boat and behave the same way. But, 
to a certain degree, we are all treated with that same broad 
brush of tying and retransmission-consent tying and whatnot.
    The only assertion that I would make is that when it comes 
down to companies in the American Cable Association, we do not 
have the leverage that the big guys would have.
    Senator Lautenberg. Yes, I understand.
    I would ask Mr. Hindery what took so long--since I have a 
real parochial interest here in New Jersey with the YES 
Network--what took so long to get this problem ironed out, your 
agreement with Cablevision and----
    Mr. Hindery. I think what took so long, Senator--and you 
certainly were in the middle of it being from New Jersey--what 
took so long is YES came into the market and simply asked that 
it be treated similarly by Cablevision, as Cablevision treated 
its own services. Cablevision owns MSG and FOX Sports New York, 
which it mandates be carried in basic throughout the New York 
area. It paid itself for those services on basic and was 
proposing a different treatment for YES. It is that inequity 
that caused a year to go by.
    We had no interest----
    Senator Lautenberg. Can I preserve my time and just ask Mr. 
Dolan to respond?
    Mr. Hindery. Certainly, Senator.
    Mr. Dolan. Well, that is just not accurate, sir. I think 
Cablevision is doing more a la carte programming than most in 
the industry. I think we have had some kind of a leadership 
position in that.
    As to the particular programming to which Mr. Hindery 
refers, two thirds of our subscribers, up until this year, had 
the choice of buying MSG and the FOX network, our two sports 
channels, on an a la carte basis. Only one third had it 
embedded in expanded basic. I am sorry about those terms. And 
the reason for that is that our company has been assembled over 
a period of time through acquisitions, and we have different 
technological stages of development, et cetera. The transition 
is not easy. It is slow. It is painstaking.
    But today, all of our subscribers can buy any of those 
services a la carte.
    Senator Lautenberg. What would you describe as your basic-
basic price? I would ask, also, Mr. Robbins. How much do you 
charge for the most basic service?
    Mr. Dolan. The most basic, which is the tier in which all 
of the broadcast stations are carried, and we also add to that 
our own News 12 service, which, as you know, is 24-hour-7-day 
news for each of the areas that we serve, for which we spend 
more than $25 million a year. The price for that tier is $13. 
Then you advance to expanded basic, which in our market is 
called ``family cable,'' and that is $32. And that is where the 
price sensitivity is. That is the price that continues to 
increase, because embedded in it are so many services where the 
vendor will not permit us to carry it on a separate tier. If we 
are going to carry it at all, it has to be in that expanded 
basic. And he controls the price.
    Senator Lautenberg. Mr. Robbins?
    Mr. Robbins. Senator, our ``broadcast basic,'' as it is 
called, which carries the must-carry signals and the local 
broadcast signals----
    Senator Lautenberg. Right.
    Mr. Robbins.--ranges in price from $10 to $14 in different 
places around the country.
    Senator Lautenberg. And what is your expanded?
    Mr. Robbins. Our expanded ranges anywhere from probably $35 
to $40 around the country.
    Can I make one other point, just to set the record straight 
here? And that is that the most recent FCC report showed that 
cable operators had a financial interest in less than 25 
percent of the channels collectively, and that no single cable 
company had an ownership interest in more than 13 percent of 
the channels. I would also tell you that Cox's interest in 
programming is less than 8 percent of the channels available. I 
think that is a very important----
    Senator Lautenberg. And is that thrown in the expanded 
basic? Where you have an 8 percent equity----
    Mr. Robbins. I think you will find, around the country, our 
interest is in Discovery Communications. It is a quarter 
interest in Discovery Communications. And I would think that 
Discovery is carried on the expanded basic in virtually 100 
percent of----
    Senator Lautenberg. Do you insist that if someone wants 
your programming that they have to take other programming 
interests that you include in that package you sell them?
    Mr. Robbins. No, sir.
    Senator Lautenberg. So you can sell--is Discovery the 
channel that you talked about?
    Mr. Robbins. Yes. But we are----
    Senator Lautenberg. So you sell that independent of the 
others.
    Mr. Robbins. Yes, but we are a financial investor in 
Discovery. They handle their own distribution relationships. I 
do not know what they are.
    Senator Lautenberg. Yes, so they charge you back.
    Mr. Robbins. Yes, sir.
    Senator Lautenberg. They charge Cox back.
    Mr. Robbins. Yes, sir.
    Senator Lautenberg. Is that true--Mr. Dolan, what percent--
do you have interest in programming companies and programs?
    Mr. Dolan. Yes, sir.
    Senator Lautenberg. And do you get charged back? Is the 
process--their distribution separate from the management of 
your----
    Mr. Dolan. Yes. Our Rainbow Division does all of our 
programming.
    And you asked about expanded basic. We carry 47 channels in 
expanded basic. Six of those belong to us.
    Senator Lautenberg. And you pay for the service where 
Cablevision has an equity interest?
    Mr. Dolan. Yes, sir. Most-Favored-Nations provisions are a 
standard part of the contracts, and we charge ourselves what we 
charge others.
    Senator Lautenberg. Yes. I wanted----
    Senator Burns (presiding). Mr. Chairman--or, I mean, Mr. 
Lautenberg, you are out of time, and I am going to ask a 
question.
    Senator Lautenberg. Well, I thought that since we were 
running overtime, that it was generally applied to all 
Members----
    Senator Burns. Lindsey, hand me that gavel. I want to ask a 
question.
    Senator Lautenberg. Mr. Burns, you know, I am sure that 
Montana has an active interest and that you are just brimming 
over with the same kind of interest and curiosity that I am, so 
if you would indulge me just a minute more.
    Senator Burns. OK.
    Senator Lautenberg. In the past 6 years, cable rates have 
tripled the rate of inflation, but the companies argue in 
response that cable rates have grown slower in the 3-years 
since the 1999 sunset of expanded-basic-rate regulation. Does 
this mean that the American people can expect a sustained 
decrease in cable rates in the coming years?
    Mr. Dolan. In my opinion, sir, if we stay with the 
structure that we have now, it is inevitable.
    Senator Lautenberg. That rates will continue to come down.
    Mr. Dolan. Rates will continue to increase. As you 
mentioned earlier, ESPN has just raised their rates 20 percent 
again. We go out 7 years, and that service along, just one of 
the 47 that we carry in expanded basic, will cost us $14 and 
some cents. So you cannot possibly anticipate anything but a 
pattern of ever-increasing rates while you permit the vendors 
to dictate to the cable companies that they must be in expanded 
basic or you cannot have them at all.
    Senator Lautenberg. Mr. Chairman, Mr. Temporary Chairman, 
just one----
    Senator Burns. You had it right the first time.
    [Laughter.]
    Senator Lautenberg. I hope not. Excuse me. That was a 
mutter that was intended to be heard, but I guess nobody heard.
    How about advertising revenues that derive along with the 
programming that comes, where do those revenues go?
    Mr. Robbins. Well, in our case, advertising revenues 
represent 7 or 8 percent of our total revenues. They are an 
offset--we look at them as an offset against the cost of 
programming. And in the case of ESPN, as an example, 10 percent 
of the cost of that channel we are able to sell advertising 
time against. There are claims that that number is 20, 30 
percent. That is not the case, and we track it very, very 
carefully, Senator.
    I would also like to make sure that the record shows that--
it has been mentioned here earlier that we were in the sports-
programming business. We are, indeed, in Louisiana, and we 
offer that on a tier to give our customers the choice, which is 
what I am asking for from the high-priced service vendors.
    Senator Lautenberg. Mr. Hindery, the advertising revenues 
that are derived from YES Network, do you get to keep them, or 
is the policy as described by Mr. Robbins?
    Mr. Hindery. Virtually all cable programmers, Senator, 
share advertising revenues. We certainly do, and I do not know 
an exception to that rule. One of the conditions of carriage is 
that we give back minutes to the cable operator. Roughly 5 
minutes an hour to 6 minutes an hour is sold by the cable 
operator for giving us access.
    Senator Lautenberg. Thank you very much.
    Mr. Chairman, thank you.
    Senator Burns. Well, Mr. Gleason wants to respond.
    Mr. Gleason. One quick response to the advertising 
revenues. One important note to look at for a small cable 
operator, like ours and most of our members, is in most cases 
our systems are so small that it is uneconomical to insert 
local ads into those cable systems, so that those programming 
offsets that Cox sees and whatnot on local ad sales, we do not 
see. In fact, we just pay the full rate, and those local ad 
insertions go unused because of the size we are at.
    Senator Burns. Mr. Dolan, I really liked your idea. You 
ought to be in farming.
    [Laughter.]
    Mr. Dolan. I am sorry, sir, I should be what?
    Senator Burns. You should be in farming. Being as I feed 
cattle, I would sure like for everybody to buy a piece of beef 
before they can buy bread and milk.
    [Laughter.]
    Mr. Dolan. I think every----
    Senator Burns. That has not worked for us.
    Mr. Dolan. If we can avoid the marketplace and just have 
everybody buy what we are selling, we are in pretty good shape.
    Senator Burns. Well, but it has not worked for us, and 
basically that is--and that is kind of the situation we have 
got here.
    I want to ask, also along that line, do you think that 
there is a market for a packager of these things, of people to 
put together custom packages that could sell--you could 
repackage what Mr. Hindery here has to sell or any other 
programmer?
    Mr. Dolan. Sir, I think that is coming. We are now entering 
the era of what some people call ``plug and play,'' where we 
will have a box on top of our television set, and it will not 
belong to any one of the multichannel carriers; it will belong 
to the home, and the home will be able to accept into that box 
the input of all of the multichannel providers, and the public 
will be in a position to buy from each of them whatever that 
household wants and put their menu together from the collection 
of vendors. And then that----
    Senator Burns. Do you think that is happening in the 
satellite business today?
    Mr. Dolan. I think it will be a combination of satellite 
and cable. They are in-common multichannel vendors, and I do 
not think the public really cares whether the programming 
reaches them through the sky or through a wire; they just want 
it to reach them, and they want to be able to accept the parts 
of it that they prefer and reject what they do not want, and 
they will have their own budget and their own ideas about that.
    Senator Burns. Mr. Hindery, on your call for parity, are 
you saying that you should have open access to that cable 
system regardless of its capacity?
    Mr. Hindery. Oh, I do not say that at all, Senator. I think 
the prerogative of the cable operator to make editorial 
decisions as to what he or she carries is absolute. I do not 
question it, nor do I dispute it.
    Parity, for me, Senator, is a simple concept. It simply 
says that cable operators' programming or the cable industry's 
programming can be treated no more favorably than mine. It is a 
discrimination concept. I do not dispute the prerogative of any 
First Amendment carrier to make programming decisions.
    What I find concerning, and so deeply concerning, Senator, 
is when an independent programmer is left off the dial or put 
deep on the dial or put in a package that is just blatantly 
unfair, while the cable operator's vested interests are served. 
And that is coming into play in the Internet space, as well as 
in the video space. It is wrong. It is what Gerald Ford, 
President Ford, said in 1974, needed to be addressed when we 
got to this stage, and I think the time is here, Senator.
    Senator Burns. Well, 30 years makes a hell of a lot of 
difference, I will tell you that. As I understand it, though, 
DirecTV chose to carry YES Network on its satellite service, 
but Dish Network chose not to do so. Did Dish Network also 
unfairly discriminate against YES? Or was it simply a case of a 
multichannel video provider deciding that it was too expensive 
or that it did not want the product at all?
    Mr. Hindery. At the time that we first came into the 
market, Senator, you may recall, Dish and Direct had already 
announced their intended merger. They have different packaging 
and different programming mixes. We opted and stuck with 
Direct. We were forestalled from Dish for that year. It was a 
decision made by the Dish folks.
    At the time the merger broke up here a few months ago, we 
offered EchoStar/Dish the exact same deal, Senator, that 
DirecTV has. It is their prerogative to take it or not. There 
is no discrimination whatsoever. I, for one, have never come 
here--I do not believe in cable exclusivity, even when I had 
the privilege of running a cable company. And I think the 
greatest opportunity for consumers, to Senator Wyden's comment, 
who is no longer here, is when programmers have opportunities 
to go on satellite and cable.
    Senator Burns. And then I am going to ask one more question 
here. Mr. Robbins, I am also concerned, as Mr. Stevens is, 
about Universal Service, but we are going to bring the industry 
and the FCC and the Joint Board together and we are going to 
make some decisions. Now, some decisions are going to have to 
be made on Universal Service, and that is going to cause a 
little bit of concern in the industry how we attack that.
    I want to also ask Mr. Kimmelman and also even on your 
definition of ``parity.'' And you used in there a term, 
``market value.'' Who sets that market value?
    Mr. Hindery. I think that it is certainly not the 
Committee. I think it is--I think you can codify it, Senator, 
in a way that when a dispute arises, like in any antitrust or 
discrimination claim, the burden falls on the parties to prove 
that they, in fact, have been discriminated against. But it is 
not impractical to embed a concept of fair market value of 
programming. Many of the abuses that Mr. Gleason speaks to 
would be obviated by that. It is a very simple concept that it 
is embedded in this concept of parity. Regardless of who owns 
you, regardless of what your content is, so long as you get the 
fair market value of your programming, everything will calm 
down here and fairness will come back into the world for 
consumers.
    It is not impractical either at the FCC or at this 
Committee level, Senator, to talk about concepts of fair 
market-value programming. The burden, then, would fall on me to 
prove that I was not getting that, that I was being 
discriminated against. But it would give me an avenue, it would 
give the independent programmer an avenue, finally, to stop the 
sort of hypocrisy and vertical integration abuse that we 
promised you was not going to come in here.
    Senator Burns. Since I am in the auction business, let us 
just sell it all at auction. How is that?
    Mr. Hindery. It works pretty well in Montana, Senator, and 
has for a long, long time.
    Senator Burns. It works for a lot of products. Would you be 
willing to put your product on the auction block?
    Mr. Hindery. If his cow sits next to my cow, you got it, 
sir.
    [Laughter.]
    Senator Burns. Well, I mean, I would look at it that way, 
but----
    Mr. Hindery. I am----
    Senator Burns.--that is basically what you are saying.
    Mr. Hindery. I am in the cattle business, like you are, and 
it is one thing I kept from my old TCI days. And I will tell 
you, Senator, the fair market value of his programming and our 
programming, Discovery versus YES, go for it.
    Senator Burns. Well, that is what I think. You know, I have 
always looked at that about the same way. You know how to make 
a small fortune feeding cattle, do you not?
    Mr. Hindery. Oh, I do, sir.
    Senator Burns. Start with a big one.
    Senator Sununu?
    Oh, Senator Nelson, I am sorry.
    Senator Nelson. Well, to keep with the agricultural 
analogy----
    [Laughter.]
    Senator Nelson.--Mr. Chairman, it seems like we are arguing 
about whose cows are going to get fed the most here.
    Senator Burns. Or gored.
    Senator Nelson. Whichever way you would like to put it.
    By the way, Mr. Chairman, why did FOX not appear? And why 
did ESPN not appear? I heard----
    Senator Burns. I cannot answer that. It was the Chairman of 
the Committee that formed the witness list and brought 
everybody together, and I was not privy to that information. I 
am sorry.
    Senator Nelson. All right, Mr. Kimmelman, you have got to 
make sense out of all this for us. If we are up here trying to 
do right by the consumer, and we have got the competing demands 
here--on the one hand, we have higher programming costs, 
particularly sports programming; on the other hand, we have got 
a $70 billion investment to upgrade the cable network, which 
has to be passed on--where is the truth in all this?
    Mr. Kimmelman. Well, Senator Nelson, if you look at the 
chart I put into my testimony, it shows you the track record of 
cable deregulation since 1984, the brief period when Congress 
stepped in and re-regulated cable in 1992 to 1996, and then 
since then. You will see on that chart the only time that cable 
rates dip and stay flat is during regulation. You will see 
that, if you look at what the FCC data show and the GAO data 
show so far, that where you have two cable companies competing 
head to head offering infrastructure investment and 
approximately the same channels, prices are, on average, 17 
percent lower than where there is only one cable company but 
still two satellite companies.
    I would suggest, Senator Nelson, that there is a lot of 
matching up of costs that needs to be looked at with revenue 
streams that need to be looked at. And in reality, as we have 
suggested to this Committee before, we believe deregulation 
went too far too fast. Now, I do not see anyone interested in 
putting that genie back in the bottle, anymore than a number of 
others, so I believe that, going forward, it makes the most 
sense to look at the idea of some kind of a parity of 
unbundling in a way that is fair to both cable operators and 
fair to programmers, that eliminates discriminatory practices. 
Senator Burns is absolutely right. Fair market value is very, 
very hard to determine in this area.
    In the past, antitrust officials have established indices, 
including for programming prices, just to monitor over time. 
Now, that suggests that what was charged before was fair, which 
may or may not be the case. But it is a very imperfect art.
    But, unfortunately, the flip side is, unrestrained market 
activity in this realm has drastically driven up prices for 
consumers, has opened the door to various leveraging mechanisms 
for programmers who have very, very popular content, and the 
consumer is squeezed. We need something better than that.
    Senator Nelson. Mr. Hindery, your costs have been going up 
quite a bit, primarily because of what you have to pay 
ballplayers?
    Mr. Hindery. Yes, Senator. Right.
    Senator Nelson. I want to point out to you--I know you do 
not directly affect this, but in that industry there is a gross 
inequity. I am going to take this opportunity to get it out on 
the table, as I do wherever I can. With the costs that are paid 
to ballplayers and with their pensions, there is one group that 
has been cut out by Major League Baseball, and that is the old 
Negro League players. And I have been, because a lot of them 
are retired and living in Florida and now getting quite old 
without a pension, pushing this issue very hard. And there is a 
new COO of Major League Baseball, who has picked up the mantle, 
but he is getting swatted down by other people. And I would 
appreciate you getting into this issue on equity of giving 
those Negro League players, who were not allowed to play Major 
League Baseball. Even though, presumably, Major League Baseball 
was integrated, when Jackie Robinson played in 1947, it was 
not. And it was not fully integrated until the last team 
integrated in 1959, well over a decade later. And it is those 
Negro League players who continued to play who have no pension.
    Mr. Hindery. Senator, the deliciousness of Major League 
Baseball is found in its players of color. More than half of 
our players today are men of color. Nobody has been more 
sensitive to this issue than you. It is a compliment that it is 
a small issue in a national context. It is a wonderfully fair 
issue, otherwise. And my hope, and I know a lot of the people 
who have brought broadcast dollars to the industry, is that the 
veterans, those men who really did not receive the benefits of 
what we see today, and you have my word, Senator, that, on a 
personal level, I will get involved.
    Senator Nelson. Thank you very much.
    Mr. Hindery. You have been wonderful on that issue.
    Senator Nelson. Thank you, Mr. Chairman.
    Senator Burns. Oh, Senator Sununu. Sorry about that. I am 
taking a little nap here.

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

    Senator Sununu. That is quite all right, Mr. Chairman. 
Thank you.
    It seems to me we are dealing with some pretty important 
concepts here having to do with the cable television industry, 
principally the rates, making sure that we do not have 
government regulation or unfair competitive practices that 
affect rates and access adversely, and maybe we can sum up both 
of those issues or questions with what was referenced before by 
one of the panelists, or maybe many of you, fairness. We want 
to make sure this is a fair system. And this is something that 
touches just about every American's life at some level--
entertainment and television, it is something that is pretty 
pervasive in American culture.
    But I think it is important that we not get too carried 
away, that we retain our perspective. Because as I listen to 
the questions and the answers here, to a certain degree what I 
hear relatively wealthy firms and individuals arguing about are 
things like where to place The Weather Channel and the 
challenge of protecting the consumers' right or ability to 
access three or four channels of 24-hours-a-day sports 
coverage.
    And in one of the testimonies that was presented, there was 
lamentation that we have seen a reduction in the number of 
independent TV production studios since the early 1990s, as if 
the 1980s were a golden age of prime-time television content. 
So I think we need to maintain a little bit of perspective.
    But these are issues that do touch the public, and we are 
concerned about the fairness. But times have really changed an 
enormous amount over the last 20 years, and I think some of the 
testimony or suggestion that, the future of technology or the 
country or the rights of individuals are being quashed here by 
competitive forces or vertical integration or potential 
acquisitions--I think there is a little bit of hyperbole there, 
and I just want to make sure we keep that perspective.
    I do want to begin with the issue of fairness in a very 
specific case. Mr. Hindery mentioned discrimination. You are 
concerned about the discrimination of the cable providers. So I 
want to ask Mr. Dolan, in your dispute with YES Networks, were 
you discriminating, were you attempting to treat their product 
or content differently than you would treat content or a 
channel owned by your company?
    Mr. Dolan. No, sir. I think that whole idea diverts us from 
the real subject. We have pointed out that on expanded basic, 
which has been the issue here, we have 47----
    Senator Sununu. Yes, I will get to expanded basic, but 
there was at least a suggestion--we know there is a dispute 
here; it is no big secret--but there was a suggestion that 
discrimination was the issue. And you say no, you were not 
treating their product any differently than you were treating 
channels or products of your own. Mr. Hindery, do you disagree? 
If it was not the issue there.
    Mr. Dolan. If we were discriminating, we were 
discriminating against a vendor who wanted to have an 
outrageous increase in the price for his product from one year 
to the next.
    Senator Sununu. But were you offering or requiring to treat 
the product differently than you would treat your own----
    Mr. Dolan. No, sir. We said to that network----
    Senator Sununu.--product?
    Mr. Dolan.--``If you want to come in with that kind of 
price, we will carry you. We will offer you to all of our 
subscribers and let the subscriber decide whether or not they 
want to pay that price.''
    Senator Sununu. And I understand, there was an agreement 
struck and it is effectively a tiered structure, and----
    Mr. Dolan. And we----
    Senator Sununu.--terrific. I am in favor of you reaching an 
agreement. That is not the issue. Was there an attempt to 
discriminate, to treat YES differently than they were treating 
one of their own----
    Mr. Hindery. Absolutely, Senator. That was the--that much-
reported settlement between our two companies, the principal 
term of the settlement was the contractual commitment by 
Cablevision, from the first of April forward, the three 
services would be treated with complete parity. If Mr. Dolan 
says that there was no discrimination going on, this thing 
would have been settled a long time ago. But the Attorney 
General of the State of New York embedded in a contract the 
concept of parity upon evidence that, in fact, the offer made 
to us was not being made to his own services. It was--the 
fundamental principle of the settlement was contractual parity, 
and we got it. And it is disingenuous, with all respect, 
Senator, to suggest otherwise. I mean, there are countless 
articles and testimony to the contrary.
    Senator Sununu. Mr. Hindery, you suggested that 90 percent 
of homes were controlled by seven companies. Where did you get 
that number, and what does that mean?
    Mr. Hindery. Seven----
    Senator Sununu. And who controls my home?
    Mr. Hindery. I do not know which home you are talking 
about, Senator, the one here or the one in New Hampshire.
    Senator Sununu. New Hampshire.
    Mr. Hindery. I do not know precisely, Senator. Seven cable 
companies have access to 90 percent of Nation's homes without 
competition, wireline competition, for video services to those 
homes.
    Senator Sununu. So you are talking about the cable 
providers.
    Mr. Hindery. Seven cable companies have control--in a 
unique fashion, wireline video service to 90 percent of the 
Nation's homes, beginning with Comcast as the largest, post its 
acquisition of AT&T Broadband, including two of the gentlemen 
to my left.
    Senator Sununu. You are not suggesting--it sounded as if 
you were suggesting that they control 90 percent of the content 
that comes through the pipe.
    Mr. Hindery. Yes, I did not--the statement, I think, is 
quite clear, Senator; it is access.
    Senator Sununu. How many channels do I get for my $13 on 
basic, Mr. Dolan, Mr. Robbins?
    Mr. Robbins. Senator, it varies by system anywhere from 8 
to 12, I would suspect.
    Mr. Dolan. Well, in the New York area, we have 15 broadcast 
stations, so they are all included. There are various public-
service channels that are added to that. And then, as I 
mentioned before, we also include our News 12 24/7 service.
    Senator Sununu. Great. So your concern about retransmission 
consent, it really manifests itself in defining what is in the 
expanded basic, correct?
    Mr. Dolan. Well, yes, it does, because the broadcasters 
have the right--one, they have the right to require us to 
carry----
    Senator Sununu. How many of the channels in your expanded-
basic offering are there by virtue of the existence of the 
retransmission-consent requirements?
    Mr. Dolan. Well, that is an interesting question. I 
mentioned before that there are 47 channels in our expanded 
basic, and we own 6. Thirty-three of the balance are owned by 
media companies, mostly broadcasters.
    Senator Sununu. But how many are there--media companies 
exercising their powers through the retransmission-consent 
regulations?
    Mr. Dolan. A substantial number of them. I am not saying 
that the channels that they own are without merit. Many of them 
are very important channels, and that is part of the problem. 
But they are put in a position where they say to us, ``You 
cannot have the broadcast network that we represent unless you 
carry our cable service, and not only carry it, but you must 
carry it in expanded basic, and you must pay whatever we ask.''
    Senator Sununu. Mr. Kimmelman, you talked about getting rid 
of the retransmission-consent requirements or altering them 
where FOX is concerned, is that right?
    Mr. Kimmelman. Yes.
    Senator Sununu. And what is the rationale behind that?
    Mr. Kimmelman. Very simply this. In 1992, when Congress 
passed the Cable Act with must-carry and retransmission 
consent, the primary rationale for government intervention to 
require carriage of broadcast signals in a basic-cable tier was 
that cable had become the predominant mechanism for 
distribution of multichannel video--it was the predominant 
mechanism of getting your local stations, AB switches did not 
work, people's rabbit ears were not convenient--and that 
broadcasters had no other mechanism to reach the consumer. I am 
suggesting that----
    Senator Sununu. So why discriminate against FOX? Why not 
just get rid of it altogether?
    Mr. Kimmelman. Well, I think retransmission consent is 
appropriate to revisit. I am suggesting in the context of the 
News Corp deal where they purchased DirecTV and had nationwide 
distribution capabilities, that it is a unique opportunity for 
them that they would not have had in 1992----
    Senator Sununu. So your concerns about the use of 
retransmission consent carries even further than the 
acquisition.
    Mr. Kimmelman. Yes, sir.
    Senator Sununu. I know we all like to pick on the big guy. 
We all envision ourselves as the David to some Goliath out 
there. And, as policymakers, I want to make sure that we are 
not just setting up discriminatory rules on the basis of who 
your main competitor happens to be today and that in the long 
run those rules create a good environment.
    Mr. Gleason?
    Mr. Gleason. If I could just respond real quickly to the 
News Corp/DirecTV acquisition and the retransmission-consent 
issue. Really to break it down, particularly in a smaller-
operator, more rural-operator environment, as Senator Burns and 
you know, from New Hampshire, as well, I mean, largely what our 
customers rely on is local broadcast stations for much of their 
hometown content, so to speak. If the FOX affiliate in our 
markets--and we also have to recognize that DBS's largest 
concentration of subscribers is in rural areas--if News Corp is 
able to take FOX and say all of a sudden for their broadcast 
O&Os that they have and they say, ``You know what? Now to get 
FOX it is going to cost you 5 bucks a sub,'' and DirecTV is 
happy to pay it in their area, it goes from one pocket to the 
other, and the first thing you know is the rural operators----
    Senator Sununu. Would you be able to serve your customers 
better if all of the requirements under retransmission consent 
were eliminated?
    Mr. Gleason. I think so.
    Senator Sununu. You think so.
    Mr. Gleason. I mean, I--yes, I would think so because of--
what has happened with retransmission consent I do not think is 
what was ever intended. What was intended is exactly what Mr. 
Kimmelman said, is to give broadcasters a way to make sure they 
had adequate distribution as competing with cable. I do not 
think anybody intended for retransmission----
    Senator Sununu. You do not think greedy local cable 
providers would, sort of, misuse their power of decision to 
prevent local----
    Mr. Gleason. Well, I would argue----
    Senator Sununu.--communities from seeing important pieces 
of programming that----
    Mr. Gleason. Well, no. I mean, local broadcast content has 
always been important, particularly for rural operators, and I 
do not know of any rural operators that have told broadcasters 
that, ``We do not want to carry your product.'' I think what 
happened was, as the unintended consequence, is now we have 
reruns of soaps on the air because of retransmission consent, 
and I did not have any customers calling my office telling me, 
``I wanted to see a soap opera again.''
    Senator Sununu. I am not going to comment on that.
    [Laughter.]
    Senator Sununu. I do not want to alienate very important 
segments of the electorate----
    [Laughter.]
    Senator Sununu.--by criticizing anyone's viewing habits.
    I think that is it. Thank you, Mr. Chairman.
    Thank you to the panelists.
    Senator Burns. I thank Senator Sununu. You always ask good 
questions.
    I do not have any other questions. I have a comment, 
however.
    And, Mr. Gleason, I want to clear the record. It was not my 
suggestion that government should mandate that the basic tier 
of stations should include The Weather Channel.
    [Laughter.]
    Senator Burns. Although it is a good idea, but I do not 
want to make it mandatory. And I do not want to make it 
mandatory that you have to carry MTV, either. I mean, there is 
something we could do without pretty quick, as far as I am 
concerned, if I was on the purchasing end. I think I have made 
that statement before. I am pretty outspoken about that.
    But I want to thank the panel today. I want to thank you 
for your frankness and your openness. And this is not the last 
that we will hear of this subject. We know that. As long as we 
have Mr. Kimmelman around----
    [Laughter.]
    Senator Burns.--this will continue to be a raging debate, 
and he will always bring good, sound logic to the table, of 
which he has some distrust of the market. But, nonetheless, we 
appreciate his input, and all of you, today.
    And I am going to leave the record open. There may be 
questions by other Senators who could not attend today, and if 
they ask questions, we would ask you to respond both to them 
and the balance of the Committee.
    We thank you today, and we will call these hearings to a 
close.
    [Whereupon, at 12:15 p.m., the hearing was adjourned.]

                            A P P E N D I X

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina

    Thank you, Mr. Chairman. I appreciate your leadership in scheduling 
this hearing to focus on the effects of consolidation in the video 
marketplace, and more particularly, on the vexing problem of rising 
cable rates.
    Between 1996 and 2002 cable rates have increased 45 percent--nearly 
triple the 17 percent rate of inflation over the same period. While 
only part of these increases have come since rate deregulation in 1999, 
the fact remains that today's consumer is shouldering significant price 
increases each year in order to obtain video programming services. 
According to FCC's 2001 annual report on cable industry prices, cable 
prices rose by 7.5 percent, while inflation crept up by just over 3 
percent. While data for 2002 has not yet been released by the FCC, I 
fully expect that it will only confirm what consumers already know--
that cable price increases continue to outstrip the growth of the 
average consumer's paycheck.
    Faced with such criticism, the cable industry has pointed to the 
cost of sports programming as one of the main culprits driving higher 
monthly rates. Over the past decade professional sports costs have 
skyrocketed to dizzying heights. In 1996, the payroll for the entire 
New York Yankees was $52 million. Today, it is over $152 million. Not 
surprisingly, as the cost of professional sports has increased, owners 
have looked to television--and increasingly to cable--for greater 
revenues to cover costs. According to one analyst, the totals paid by 
broadcast and cable networks to air college and professional sports 
events has increased from $2.8 billion in the 1997-98 season to $4.9 
billion in the 2001-02 season.
    While these cost increases are indeed alarming, we should not 
assume that controlling the cost of sports programming will necessarily 
result in lower consumer cable rates. Indeed, despite significant 
inroads made by satellite providers over the last several years, cable 
operators continue to enjoy significant market power in many areas of 
the country. As a result, given the cable industry's desire to seek a 
return on their network investments--now nearing some $70 billion, it 
is important that Congress continue to carefully monitor developments 
in an increasingly concentrated video marketplace. For example, if 
operators are able to negotiate lower programming costs, those savings 
should be passed through to consumers in the form of lower prices and 
better services.
    Mr. Chairman, over the past several years, we have seen significant 
consolidation in the cable and satellite industries. At each turn, we 
have been met by promises that consumers would reap significant 
benefits from such mergers, and that the ``efficiencies'' and 
``synergies'' of such combinations would benefit consumers and keep 
prices in check. With the recent announcement of yet another media 
merger--this time between News Corp. and DirecTV--our regulators must 
carefully consider whether today's public promises will actually result 
in future benefits to video subscribers.
    As such, Mr. Chairman, I welcome today's hearing to examine in 
detail some of the fundamental reasons driving recent subscriber rate 
hikes and to explore ways of bringing the consumer's face back into the 
picture.
    I look forward to the testimony of the witnesses and to their 
responses to our questions.
                                 ______
                                 
 Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii

    I want to commend Chairman McCain for holding today's hearing on 
media ownership. It is particularly timely given the FCC's announcement 
that it will complete its review of six major rules affecting the media 
market on June 2. The New York Times has described the impending 
decision as possibly the most significant change governing media 
ownership in a generation. Unfortunately, the outcome could be an 
epitaph for the free press as we know it.
    If the FCC, as expected, jettisons the remaining rules limiting 
media companies from owning more larger numbers and combinations of 
television stations, radio stations and newspapers, we may soon face a 
media landscape where a few large conglomerates control the news and 
entertainment programming available to all Americans--whether they live 
in Hawaii, Alaska, South Carolina or Maine. While today's hearing will 
focus mainly on the national television ownership cap and the 
newspaper/broadcast cross-ownership rule, we should not lose sight that 
other rules are under review and that the cumulative impact will likely 
have many unforeseen consequences. We are fortunate to have before us 
today industry representatives who can help us comprehend the far-
reaching implications of this decision.
    We should also reflect on the effect that deregulation has had in 
other media markets. Since the national radio cap was lifted in 1996, 
the commitment to community based, local news has declined. Local 
artists have lost their ability to get air time and programming has 
become nationalized and homogenized. Similar effects are also evident 
in the television market, which has been marked by significant 
consolidation over the last few years. In addition, since the financial 
interest and syndication (Fin Syn) rules were lifted, independent 
programmers have been nearly shut out of the primetime schedule. In 
1992, sixteen new television series were produced independently. In 
2002, there was only one independently produced series selected by the 
networks. Despite these cautionary tales, additional deregulation could 
enable a single entity to own nearly every editorial voice in a local 
community, including two television stations, multiple radio stations, 
the local newspaper and a cable system. In Hawaii, such an outcome 
could mean that the entire state essentially has one source of news and 
entertainment.
    Press reports also have signaled the FCC's intention to raise the 
national television ownership cap from 35 percent to 45 percent. While 
raising the cap to 45 percent may sound like an incremental change, the 
significance is much greater given that the current rule discounts a 
company's actual ownership reach by 50 percent for all of its UHF 
stations. As a result, raising the cap to 45 percent could allow 
networks and other large owners to reach up to 90 percent of the 
country. The failure of the FCC to review the UHF discount is 
inconsistent with its mandate to determine whether all of its media 
rules ``are necessary in the public interest as a result of 
competition.'' In addition, relaxation of the cap would undermine our 
unique system of broadcasting, with its combination of national 
networks and local, independently-owned and operated broadcast outlets. 
Retaining the 35 percent cap would ensure that a proper balance of 
power is maintained between the national networks and their local 
affiliates, which in turn protects the public interest.
    I have joined many of my colleagues in asking the FCC to delay its 
decision to ensure that there is an opportunity for meaningful review 
and comment on any proposal to change these rules. In addition, I am 
troubled by recent reports of a quid pro quo arrangement where a 
company agrees to compromise on the national television ownership cap 
in order to receive favorable treatment on the newspaper/broadcast 
cross-ownership issue. It is imperative that rigorous analytical 
examination, and not behind-the-scenes deals, determine the outcome on 
these critical issues.
    A robust and antagonistic debate is a critical component of our 
democracy. While competition among five or six large companies might be 
enough to protect consumers in a market for widgets, I believe caution 
and prudence to be the better course for the marketplace of ideas.
    I want to thank the Chairman again for holding this important 
hearing. We look forward to hearing the testimony of our distinguished 
witnesses.
                                 ______
                                 
                                                       ESPN
                                          NewYork, NY, May 27, 2003
Hon. John McCain,
Chairman,
Committee on Commerce, Science, and Transportation,
Washington, DC.
                                      Re: Video Competition

Dear Mr. Chairman:

    Thank you for allowing us this opportunity to add to the record of 
the Senate Commerce Committee hearing of May 6, 2003 on competition in 
video programming and more particularly issues related to cable 
television. Our position on the matters addressed by your Committee in 
this hearing is very clear: there is no need for government 
intervention in this area. Today, cable and satellite customers do in 
fact have choices among competing service providers and do have access 
to various packages of services. Consumer interests are well served 
regardless of the provider, For about $40 a month for the most popular 
service offerings, cable and satellite TV provides the greatest value 
in today's entertainment marketplace. And, we are proud to say that 
ESPN is a major contributor to this success.
    ESPN was prominently mentioned in your hearing and we therefore 
would like to take this opportunity to focus on a few key points 
related to our business and our relationship with our distributors that 
we believe will be useful during the Committee's future deliberations 
on these issues.
Placing Blame on ESPN and Other Cable Programmers for Rising Cable 
        Rates Is Wrong.
    Like all cable programmers, ESPN obtains distribution through arm's 
length negotiations in which our rate provisions are clearly stated. 
Those negotiations reflect a very substantial exchange of value and 
inherently acknowledge the direct and indirect revenue cable operators 
derive from their association with ESPN. ESPN is the industry leader in 
acquiring new customers, maintaining customer satisfaction, and in 
driving local advertising sales revenue for operators. Taking all of 
that into account, ESPN*s average net cost in 2003 is just above $1 per 
sub per month and while our cost to our distributors has been growing, 
our license fee growth is clearly not the predominant cause of retail 
rate increases as alleged by your cable operator witnesses.
    By focusing only on the cost side and ignoring revenue directly and 
indirectly associated with ESPN services, operators are trying to use 
programmers in general and ESPN in particular as scapegoats to justify 
retail price increases in order to preserve their operating margins 
which typically run a very substantial 30 to 40%. Cable operator 
programming costs in total represent only about 30 to 35% of their 
overall costs, an amount well below the percentage paid by other 
content driven businesses for entertainment product. On average, 
operators pay only about $11 per sub per month to acquire all their 
expanded basic programming and they recoup over $4 per sub each month 
in local advertising sales. In addition, launch and marketing support 
payments to operators further reduce the cost of programming putting 
even less pressure on the amount that is covered by consumers in their 
monthly cable bills.
    Indeed, reports generated by the cable industry on their own 
financial results confirm that costs associated with infrastructure 
development and debt management are very significant. In many cases 
these costs exceed expenditures for programming. At a cost of over $75 
billion, the cable industry has added to the types of services it 
provides its customers (e.g., broadband, video on demand, cable modem 
internet access, high-definition television) and ESPN has been at the 
forefront of providing programming, services and marketing support for 
all of them. It is completely disingenuous, however, for operators to 
argue that their fastest growing, new revenue categories should be 
excluded from any analysis of the underlying economics of their 
business by focusing solely on the cost of programming in relation to 
retail rates. If it were not for the core video business that existed 
before this new investment in infrastructure upgrades, none of these 
new business opportunities would be available. They run over the same 
plant, they utilize the same infrastructure and they are natural and 
logical extensions of a mature, multichannel video business. And just 
like programming services, not every customer will want or use these 
services; despite the impact their development has on retail rates.
    The blame placed on programmers by operators is simply an attempt 
to gain leverage over entities that cable operators do not own. Despite 
having very healthy businesses with a growing customer base and an 
array of new service offerings, operators are asking Congress to 
improve their already healthy operating margins with no corresponding 
indication that consumers would at all benefit from any legislative or 
regulatory action.
A-la-carte Is Not Pro Consumer
    The most widely suggested ``solution'' to the rising cable rates 
issue is to require mandatory a-la-carte distribution of sports 
programming services like ESPN. But even the cable industry's own trade 
association, the National Cable & Telecommunications Association, has 
acknowledged in a "white paper" dated May 2003, that "mandatory 
unbundling is not a viable option," Mandatory a-la-carte distribution 
of popular program services introduces very substantial new costs and 
will take away significant national and local revenue. Subscribers who 
don't have set top boxes (more than half of the cable universe today) 
would be forced to pay an additional monthly fee (estimated to be $3.25 
per box) to receive ESPN and other popular services. Distribution of 
these services would drop significantly and the corresponding loss of 
advertising sales revenue would be substantial. Large, popular program 
services like ESPN and small niche programmers would all suffer. 
Indeed, many niche services would be unable to survive in such an 
environment. Ultimately, all consumers would have higher monthly bills 
and the wide array of programming choice offered by cable would 
diminish. In short, consumers would pay more and get less.
    If in fact a-la-carte distribution of program services was a viable 
business model, it would have been embraced by cable's primary 
competitor, the DBS industry, and indeed by operators themselves. 
Neither has done so, The satellite distribution business has realized 
substantial growth over the past several years by offering customers 
significantly larger bundles of program services at competitive prices 
to cable. By any measure, that has proven to be a successful strategy 
and has driven their market share from zero to approximately 20% in 
very short order. Cable operators themselves own a substantial number 
of programming services, including services with interests in national 
and regional sports. On the whole, operators have not offered a-la-
carte distribution of their own products. Indeed, other than in the New 
York metropolitan area, to the best of our knowledge regional sports 
networks, including those owned by major cable operators, are almost 
universally distributed on the expanded basic tier of service. In his 
testimony before your Committee, Mr. Robbins made a particular point of 
noting that his company, Cox, owns two regional sports networks. One of 
those is located in Louisiana and Mr. Robbins told the Committee that 
this service (which has a wholesale cost above $1 per sub per month) is 
offered ``on a tier'' to give his customers ``choice.'' It is our 
understanding, based on our review of channel lineups in the Cox 
Louisiana systems and given reports we get as a seller of programming 
to that Cox network, that as of the day of your hearing, the ``tier'' 
to which Mr. Robbins referred is the same expanded basic service level 
on which ESPN is distributed in those systems. In Cox's San Diego 
system, the Cox sports network is also, to the best of our knowledge, 
offered only on expanded basic.
    All this points to what is really going on with respect to the 
operator's position before your Committee. It is an attempt to get the 
government to take steps to hinder the business inspects of ESPN and 
gain leverage over all non-affiliated programmers. They are looking to 
improve their margins and gain a government-established competitive 
advantage for their own local and national sports services that compete 
with ESPN. It's that simple.
    We truly do not believe that operators want Congress to regulate 
their business. Cable television is an outstanding product at a 
terrific price. Compared to almost any other form of entertainment in 
America, the $40 the average consumer spends for expanded basic service 
and 24-hour a day access to dozens and dozens of general entertainment, 
news, sports, weather, movies and specialty programming services is a 
bargain. The ESPN services make a substantial contribution to this 
business and through new and innovative products and programming to its 
growth. We will continue to do so and we believe the competitive market 
and not government regulation is the best way to ensure that consumers 
continue to be well served.
    Thank you.
        Sincerely,
                                        George Bodenheimer,
                                                         President.

                                  
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